Centene Corporation Reports 2010 First Quarter Earnings

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Apr 27, 2010, 06:00 ET

ST. LOUIS, April 27 /PRNewswire-FirstCall/ -- Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended March 31, 2010. The results of operations for our New Jersey health plan, University Health Plans, are classified as discontinued operations. The discussions below, with the exception of cash flow information, are in the context of continuing operations and all financial ratios exclude premium taxes.

First Quarter Highlights

Quarter-end managed care at-risk membership of 1,468,600, an increase of 221,300 members year over year.
Premium and Service Revenues of $1.022 billion, representing 12.5% year over year growth.
Health Benefits Ratio (HBR) of 84.0%.
General and Administrative (G&A) expense ratio of 13.3%.
Days in claims payable of 47.7, including pharmacy claims payable.
Diluted earnings per share from continuing operations of $0.41.

Other Events

During the first quarter of 2010, we completed the sale of 5.75 million shares of common stock, including the underwriters' overallotment option, for a public offering price of $19.25 per share. Net proceeds from the sale of the shares were $104.6 million.
In February 2010, we announced a definitive agreement to acquire certain Medicaid assets in South Carolina. The transaction is expected to close in the second quarter of 2010 and add revenues of approximately $60 million and diluted earnings per share of $0.02 to $0.03 for 2010.
In March 2010, we completed the previously announced sale of our New Jersey health plan, University Health Plans, and recorded a pre-tax gain on sale of $8.2 million, or $0.08 per diluted share, in discontinued operations during the first quarter of 2010.
In March 2010, we announced that our specialty company, Cenpatico Behavioral Health, retained its existing service area contract and was also awarded an expanded contract by the Arizona Department of Health Services to manage behavioral healthcare services for an additional four counties. The expanded contract is expected to take effect July 1, 2010, and add revenues of approximately $20 million for 2010.
In March 2010, Moody's Investors Service upgraded our senior unsecured debt rating and our corporate family rating to Ba2 from Ba3.
In April 2010, we announced that our Celtic Group subsidiary, CeltiCare Health Plan of Massachusetts, renewed its contract to serve Commonwealth Care members as the low cost provider in Massachusetts.
In April 2010, we announced that our Wisconsin subsidiary was not awarded the Southeast Wisconsin BadgerCare Plus Managed Care contract. The loss of the contract award will reduce revenues by approximately $25 million in 2010.
In April 2010, Fortune Magazine announced that Centene ranked #486 in the magazine's annual ranking of the world's largest companies by revenue, up from #609 last year. The ranking placed Centene in the Fortune 500 for the first time.

Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, stated, "We are pleased to have maintained our positive operating momentum as 2010 begins and we are dedicated to maintaining our discipline and focus in the future."

The following table depicts membership in Centene's managed care organizations, by state, at March 31, 2010 and 2009:

	March 31,
	2010	2009
Arizona	19,000	15,500
Florida	105,900	29,100
Georgia	301,000	289,300
Indiana	211,400	179,100
Massachusetts	26,900	—
Ohio	156,000	137,000
South Carolina	53,900	48,500
Texas	459,600	421,100
Wisconsin	134,900	127,700
Total at-risk membership	1,468,600	1,247,300
Non-risk membership	62,200	96,000
Total	1,530,800	1,343,300

The following table depicts membership in Centene's managed care organizations, by member category, at March 31, 2010 and 2009:

	March 31,
	2010	2009
Medicaid	1,088,300	921,100
CHIP & Foster Care	266,300	256,900
ABD & Medicare	87,100	69,300
Other State programs	26,900	—
Total at-risk membership	1,468,600	1,247,300
Non-risk membership	62,200	96,000
Total	1,530,800	1,343,300

Statement of Operations

Premium and service revenues increased 12.5% in the three months ended March 31, 2010 over 2009 as a result of membership growth in all of our states. This increase was moderated by the removal of pharmacy services in two states beginning in 2010. These pharmacy carve outs had the effect of reducing 2010 revenue by approximately $35 million.
The consolidated HBR for the three months ended March 31, 2010 of 84.0% was an increase of 0.5% over the comparable period in 2009. A reconciliation of the change in HBR from the prior year same period is presented below:


	First Quarter 2009	83.5%
	Improvements in existing markets	(0.5)
	New markets reserved at higher rates	1.0
	First Quarter 2010	84.0%

The increase in the first quarter of 2010 over the comparable period in 2009 was primarily due to higher HBR in our new markets, partially offset by improvements in our existing markets.

Consolidated G&A expense as a percent of premium and service revenues was 13.3% in the first quarter of 2010, a decrease from 13.5% in the first quarter of 2009. The decrease reflects the leveraging of our expenses over higher revenues, partially offset by a $4.6 million increase in contributions to the Company's charitable foundation.
Other income for the quarter includes a $3.0 million gain on distributions received from the Reserve Primary Fund in excess of our adjusted basis. An offsetting $3.0 million contribution was made to the Company's charitable foundation and is included in G&A expense discussed above.
Earnings per diluted share from continuing operations were $0.41, compared to $0.43 in the first quarter of 2009, and reflect the approximate 10% increase in diluted shares outstanding resulting from the stock offering.

Balance Sheet and Cash Flow

At March 31, 2010, the Company had cash and investments of $969.2 million, including $917.9 million held by its regulated entities and $51.3 million held by its unregulated entities. Medical claims liabilities totaled $444.8 million, representing 47.7 days in claims payable, a decrease of 2.4 days from December 31, 2009. Total debt was $232.7 million and debt to capitalization was 23.7%. Year to date cash flow from operations was $(38.5) million, reflecting a $73.3 million decrease in unearned revenue from December 31, 2009 as a result of the prepayment of monthly premiums. In 2010, only two monthly premium payments were received during the quarter from Ohio and Florida.

A reconciliation of the Company's change in days in claims payable from the immediately preceding quarter-end is presented below:



Days in claims payable, December 31, 2009	50.1
Additional processing days at quarter end	(1.5)
Pharmacy carve out	(0.9)
Days in claims payable, March 31, 2010	47.7

Outlook

The table below depicts the Company's annual guidance from continuing operations for 2010:

	Full Year 2010
	Low	High
Premium and Service revenues (in millions)	$4,300	$4,400
Earnings per diluted share (EPS)	$1.73	$1.83
HBR %	84.0%	86.0%
G&A %	12.4%	12.9%

Diluted Shares Outstanding (in thousands)	50,500

The Company is increasing its earnings guidance by $0.03 to reflect the first quarter performance and results of the RFP's in Arizona and Wisconsin. The Company is adjusting its revenue guidance to reflect a shift in the start date of our Mississippi operations to October 1, 2010. Our current guidance excludes the previously announced South Carolina transaction, which is expected to add approximately $60 million of revenue and $0.02 to $0.03 diluted earnings per share in 2010, as the transaction has not yet closed.

Conference Call

As previously announced, the Company will host a conference call Tuesday, April 27, 2010, at 8:30 A.M. (Eastern Time) to review the financial results for the first quarter ended March 31, 2010, and to discuss its business outlook. Michael F. Neidorff and William N. Scheffel will host the conference call. Investors and other interested parties are invited to listen to the conference call by dialing 800-273-1254 in the U.S. and Canada; 973-638-3440 from abroad, or via a live, audio webcast on the Company's website at www.centene.com, under the Investors section. A replay will be available for on-demand listening shortly after the completion of the call for the next twelve months or until 11:59 PM (Eastern Time) on Tuesday, May 11, 2011, at the aforementioned URL, or by dialing 800-642-1687 in the U.S. and Canada, or 706-645-9291 from abroad and entering access code 63527302.

About Centene Corporation

Centene Corporation, a Fortune 500 company, is a multi-line healthcare enterprise operating in two segments: Medicaid Managed Care and Specialty Services. Our Medicaid Managed Care segment provides Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State Children's Health Insurance Program, or CHIP, Foster Care, Medicare Special Needs Plans and the Supplemental Security Income Program, also known as the Aged, Blind or Disabled Program, or collectively ABD. Our Specialty Services segment offers products for behavioral health, health insurance exchanges, individual health insurance, life and health management, long-term care programs, managed vision, telehealth services, and pharmacy benefits management to state programs, healthcare organizations, employer groups and other commercial organizations, as well as to our own subsidiaries.

The information provided in this press release contains forward-looking statements that relate to future events and future financial performance of Centene. Subsequent events and developments may cause the Company's estimates to change. The Company disclaims any obligation to update this forward-looking financial information in the future. Readers are cautioned that matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, regulatory, competitive and other factors that may cause Centene's or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Actual results may differ from projections or estimates due to a variety of important factors, including Centene's ability to accurately predict and effectively manage health benefits and other operating expenses, competition, changes in healthcare practices, changes in federal or state laws or regulations, inflation, provider contract changes, new technologies, reduction in provider payments by governmental payors, major epidemics, disasters and numerous other factors affecting the delivery and cost of healthcare. The expiration, cancellation or suspension of Centene's Medicaid Managed Care contracts by state governments would also negatively affect Centene.

(Tables Follow)


CENTENE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited)
	March 31, 2010			December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents of continuing operations, including $5,918 and $8,667, respectively, from consolidated variable interest entities	$	350,075	$	400,951
Cash and cash equivalents of discontinued operations		14		2,801
Total cash and cash equivalents		350,089		403,752
Premium and related receivables, net of allowance for uncollectible accounts of $1,338 and $1,338, respectively, including $6,565 and $11,313, respectively, from consolidated variable interest entities		110,120		103,456
Short-term investments, at fair value (amortized cost $39,953 and $39,230, respectively)		40,220		39,554
Other current assets, including $5,023 and $4,507, respectively, from consolidated variable interest entities		69,136		64,866
Current assets of discontinued operations other than cash		2,337		4,506
Total current assets		571,902		616,134
Long-term investments, at fair value (amortized cost $547,148 and $514,256, respectively)		558,270		525,497
Restricted deposits, at fair value (amortized cost $20,532 and $20,048, respectively)		20,618		20,132
Property, software and equipment, net of accumulated depreciation of $111,938 and $103,883, respectively, including $110,764 and $89,219, respectively, from consolidated variable interest entities		269,492		230,421
Goodwill		229,512		224,587
Intangible assets, net		22,008		22,479
Other long-term assets		35,416		36,829
Long-term assets of discontinued operations		23,453		26,285
Total assets	$	1,730,671	$	1,702,364
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Medical claims liability	$	444,826	$	470,932
Accounts payable and accrued expenses, including $23,122 and $14,020, respectively, from consolidated variable interest entities		200,615		132,001
Unearned revenue		18,362		91,644
Current portion of long-term debt		660		646
Current liabilities of discontinued operations		20,650		20,685
Total current liabilities		685,113		715,908
Long-term debt		232,064		307,085
Other long-term liabilities		63,575		59,561
Long-term liabilities of discontinued operations		385		383
Total liabilities		981,137		1,082,937

Commitments and contingencies

Stockholders' equity:
Common stock, $.001 par value; authorized 100,000,000 shares; 51,490,256 issued and 49,049,990 outstanding at March 31, 2010, and 45,593,383 shares issued and 43,179,373 shares outstanding at December 31, 2009		51		46
Additional paid-in capital		390,878		281,806
Accumulated other comprehensive income:
Unrealized gain on investments, net of tax		7,203		7,348
Retained earnings		382,909		358,907
Treasury stock, at cost (2,440,266 and 2,414,010 shares, respectively)		(47,742)		(47,262)
Total Centene stockholders' equity		733,299		600,845
Noncontrolling interest		16,235		18,582
Total stockholders' equity		749,534		619,427
Total liabilities and stockholders' equity	$	1,730,671	$	1,702,364


CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share data) (Unaudited)
	Three Months Ended March 31,
	2010		2009
Revenues:
Premium	$	999,315	$	885,006
Service		22,907		23,849
Premium and service revenues		1,022,222		908,855
Premium tax		46,499		23,580
Total revenues		1,068,721		932,435
Expenses:
Medical costs		839,708		739,340
Cost of services		17,152		15,962
General and administrative expenses		135,507		122,279
Premium tax		46,743		23,942
Total operating expenses		1,039,110		901,523
Earnings from operations		29,611		30,912
Other income (expense):
Investment and other income		7,057		3,613
Interest expense		(3,813)		(3,986)
Earnings from continuing operations, before income tax expense		32,855		30,539
Income tax expense		12,525		10,845
Earnings from continuing operations, net of income tax expense		20,330		19,694
Discontinued operations, net of income tax expense (benefit) of $4,440 and $(160), respectively		3,920		(449)
Net earnings		24,250		19,245
Noncontrolling interest		248		787
Net earnings attributable to Centene Corporation	$	24,002	$	18,458

Amounts attributable to Centene Corporation common shareholders:
Earnings from continuing operations, net of income tax expense	$	20,082	$	18,907
Discontinued operations, net of income tax expense (benefit)		3,920		(449)
Net earnings	$	24,002	$	18,458

Net earnings (loss) per share attributable to Centene Corporation:
Basic:
Continuing operations	$	0.43	$	0.44
Discontinued operations		0.08		(0.01)
Earnings per common share	$	0.51	$	0.43
Diluted:
Continuing operations	$	0.41	$	0.43
Discontinued operations		0.08		(0.01)
Earnings per common share	$	0.49	$	0.42

Weighted average number of shares outstanding:
Basic		47,260,714		43,067,992
Diluted		48,761,528		44,238,863


CENTENE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
	Three Months Ended March 31,
	2010		2009

Cash flows from operating activities:
Net earnings	$	24,250	$	19,245
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		12,527		10,233
Stock compensation expense		3,460		3,789
(Gain) loss on sale of investments, net		(3,547)		439
(Gain) on sale of UHP		(8,201)		-
Deferred income taxes		950		2,282
Changes in assets and liabilities
Premium and related receivables		(4,457)		(39,396)
Other current assets		(1,375)		(1,397)
Other assets		1,937		(497)
Medical claims liabilities		(33,129)		2,165
Unearned revenue		(73,282)		44,507
Accounts payable and accrued expenses		40,433		(18,674)
Other operating activities		1,934		722
Net cash (used in) provided by operating activities		(38,500)		23,418
Cash flows from investing activities:
Capital expenditures		(23,099)		(11,157)
Purchases of investments		(146,935)		(292,964)
Proceeds from asset sales		13,420		-
Sales and maturities of investments		117,469		224,312
Investments in acquisitions, net of cash acquired		(2,019)		(5,191)
Net cash used in investing activities		(41,164)		(85,000)
Cash flows from financing activities:
Proceeds from exercise of stock options		519		890
Proceeds from borrowings		22,030		108,000
Proceeds from stock offering		104,557		-
Payment of long-term debt		(97,136)		(82,573)
Distributions to noncontrolling interest		(3,585)		(1,181)
Excess tax benefits from stock compensation		96		(17)
Common stock repurchases		(480)		(407)
Net cash provided by financing activities		26,001)		24,712
Net decrease in cash and cash equivalents		(53,663)		(36,870)
Cash and cash equivalents, beginning of period		403,752		379,099
Cash and cash equivalents, end of period	$	350,089	$	342,229

Supplemental disclosures of cash flow information:
Interest paid	$	345	$	724
Income taxes paid	$	8,272	$	18,602

Supplemental disclosure of non-cash investing and financing activities:
Contribution from noncontrolling interest	$	306	$	-


CENTENE CORPORATION CONTINUING OPERATIONS SUPPLEMENTAL FINANCIAL DATA
	Q1			Q4		Q3		Q2		Q1
	2010			2009		2009		2009		2009
MEMBERSHIP
Managed Care:
Arizona	19,000			18,100		17,400		16,200		15,500
Florida	105,900			102,600		84,400		22,300		29,100
Georgia	301,000			309,700		303,400		292,800		289,300
Indiana	211,400			208,100		200,700		196,100		179,100
Massachusetts	26,900			27,800		500		—		—
Ohio	156,000			150,800		151,200		141,200		137,000
South Carolina	53,900			48,600		46,100		46,000		48,500
Texas	459,600			455,100		450,200		443,200		421,100
Wisconsin	134,900			134,800		132,500		131,200		127,700
Total at-risk membership	1,468,600			1,455,600		1,386,400		1,289,000		1,247,300
Non-risk membership	62,200			63,700		63,200		114,000		96,000
TOTAL	1,530,800			1,519,300		1,449,600		1,403,000		1,343,300

Medicaid	1,088,300			1,081,400		1,040,000		958,600		921,100
CHIP & Foster Care	266,300			263,600		263,400		261,400		256,900
ABD & Medicare	87,100			82,800		82,500		69,000		69,300
Other State programs	26,900			27,800		500		—		—
Total at-risk membership	1,468,600			1,455,600		1,386,400		1,289,000		1,247,300
Non-risk membership	62,200			63,700		63,200		114,000		96,000
TOTAL	1,530,800			1,519,300		1,449,600		1,403,000		1,343,300

Specialty Services(a):
Cenpatico Behavioral Health
Arizona	119,300			120,100		117,300		110,500		104,700
Kansas	39,800			41,400		41,000		41,100		40,600
Bridgeway Health Solutions
Long-term Care	2,700			2,600		2,500		2,400		2,300
TOTAL	161,800			164,100		160,800		154,000		147,600

(a) Includes external membership only.

REVENUE PER MEMBER PER MONTH(b)	$	215.95	(c)	$	226.42	$	222.77	$	219.75	$	220.29

CLAIMS(b)
Period-end inventory	341,400			423,400		414,900		362,200		325,000
Average inventory	283,900			279,000		227,100		234,500		267,600
Period-end inventory per member	0.23			0.29		0.30		0.28		0.26
(b) Revenue per member and claims information are presented for the Managed Care at-risk members.
(c) Reduction in revenue per member per month is a result of the pharmacy carve-outs in 2010.



	Q1	Q4	Q3	Q2	Q1
	2010	2009	2009	2009	2009

DAYS IN CLAIMS PAYABLE
Medical	46.6	48.1	47.1	47.5	45.3
Pharmacy	1.1	2.0	1.8	1.5	1.8
TOTAL	47.7	50.1	48.9	49.0	47.1
Days in Claims Payable is a calculation of Medical Claims Liabilities at the end of the period divided by average claims expense per calendar day for such period.

CASH AND INVESTMENTS (in millions)
Regulated	$917.9	$949.9	$911.4	$825.8	$816.8
Unregulated	51.3	36.2	27.6	27.0	28.9
TOTAL	$969.2	$986.1	$939.0	$852.8	$845.7

DEBT TO CAPITALIZATION	23.7%	33.2%	31.9%	33.0%	34.6%
Debt to Capitalization is calculated as follows: total debt divided by (total debt + total equity).


Operating Ratios:
	Three Months Ended March 31,
	2010		2009
Health Benefits Ratios:
Medicaid and CHIP	85.6	%	84.8	%
ABD and Medicare	80.3		81.4
Specialty Services	80.6		78.3
Total	84.0		83.5

General & Administrative Expense Ratios	13.3		13.5


MEDICAL CLAIMS LIABILITY (In thousands) The changes in medical claims liability are summarized as follows:
Balance, March 31, 2009	$	387,242
Incurred related to:
Current period		3,313,053
Prior period		(49,162)
Total incurred		3,263,891
Paid related to:
Current period		2,874,916
Prior period		331,391
Total paid		3,206,307
Balance, March 31, 2010	$	444,826

Centene's claims reserving process utilizes a consistent actuarial methodology to estimate Centene's ultimate liability. Any reduction in the "Incurred related to: Prior period" amount may be offset as Centene actuarially determines "Incurred related to: Current period." As such, only in the absence of a consistent reserving methodology would favorable development of prior period claims liability estimates reduce medical costs. Centene believes it has consistently applied its claims reserving methodology in each of the periods presented.

The amount of the "Incurred related to: Prior period" above includes the effects of reserving under moderately adverse conditions, new markets where we use a conservative approach in setting reserves during the initial periods of operations, increased receipts from other third party payors related to coordination of benefits and lower medical utilization and cost trends for dates of service prior to March 31, 2009.

SOURCE Centene Corporation