Centene Corporation Reports $0.44 Earnings Per Diluted Share for the Third Quarter 2010; $0.48 From Operations Excluding a $0.04 Charge for Net Investment Writedowns

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Oct 26, 2010, 06:00 ET

ST. LOUIS, Oct. 26 /PRNewswire-FirstCall/ -- Centene Corporation (NYSE: CNC) today announced net earnings from continuing operations for the quarter ended September 30, 2010, of $22.4 million, or $0.44 per diluted share; $0.48 from operations excluding a $0.04 charge for net investment writedowns. The discussions below, with the exception of cash flow information, are in the context of continuing operations and all financial ratios exclude premium taxes.

Third Quarter Highlights

Quarter-end managed care at-risk membership of 1,470,800, an increase of 84,400 members, or 6.1% year over year.
Premium and Service Revenues of $1.082 billion, representing 9.5% year over year growth.
Health Benefits Ratio (HBR) of 84.2%, compared to 83.7% in the prior year.
General and Administrative (G&A) expense ratio of 12.2%, compared to 13.2% in the prior year.
Earnings from operations of $40.2 million, compared to $38.0 million in the prior year.
Earnings from continuing operations, net of income tax expense, of $22.4 million.
Diluted earnings per share from continuing operations of $0.44, including a $0.07 charge per diluted share related to an impairment of an investment in a software company and realized security gains of $0.03 per diluted share recognized during the third quarter of 2010.
Cash flows from operations of $72.6 million, which is 3.2 times net earnings from continuing operations.
Days in claims payable of 47.1, including pharmacy claims payable.

Other Events

In April 2010, we began offering an individual insurance product, under the names of Commonwealth Choice and CeltiCare Direct, for residents of Boston and surrounding cities who do not qualify for other state funded insurance programs.
In July 2010, we closed on the acquisition of certain assets of NovaSys Health, LLC, a leading third party administrator in Arkansas that complements our existing Celtic business.
In August 2010, we announced the acquisition in Florida of certain assets in non-reform counties of Citrus Health Care, Inc., a Medicaid and long-term care health plan. We expect the transaction to close at year end.
In September 2010, Celtic Insurance Company, Inc. was awarded a contract with the Texas Department of Insurance to provide affordable health insurance plans for Texas small businesses under the new Healthy Texas initiative. We expect operations to commence during the fourth quarter of 2010.
In September 2010, our new subsidiary, IlliniCare Health Plan, was selected as one of two vendors to provide managed care services to older adults and adults with disabilities under the Integrated Care Program in six counties of Illinois. We expect operations to commence in the first half of 2011.
In October 2010, one of our highly regarded health programs, Start Smart for Your Baby®, won the Platinum Award for Consumer Empowerment at the URAC Quality Summit. Also in October, Absolute Total Care, our South Carolina health plan, received the prestigious New Health Plan accreditation from the National Committee for Quality Assurance (NCQA), a private, not-for-profit organization that sets standards for monitoring and improving healthcare quality.

Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, stated, "A strong operational quarter and exceptional new business activity set the stage for meaningful 2011 performance."

The following table depicts membership in Centene's managed care organizations, by state:


	September 30,
		2010	2009
Arizona		19,300	17,400
Florida		116,300	84,400
Georgia		300,900	303,400
Indiana		213,300	200,700
Massachusetts		34,400	500
Ohio		161,800	151,200
South Carolina		90,600	46,100
Texas		428,100	450,200
Wisconsin		106,100	132,500
Total at-risk membership		1,470,800	1,386,400
Non-risk membership		35,900	63,200
Total		1,506,700	1,449,600

The following table depicts membership in Centene's managed care organizations, by member category:


	September 30,
		2010	2009
Medicaid		1,122,800	1,040,000
CHIP & Foster Care		219,100	263,400
ABD & Medicare		94,500	82,500
Other State programs		34,400	500
Total at-risk membership		1,470,800	1,386,400
Non-risk membership		35,900	63,200
Total		1,506,700	1,449,600

Statement of Operations

Premium and service revenues increased 9.5% for the three months ended September 30, 2010 over 2009 as a result of membership growth and net premium rate increases. This increase was moderated by the removal of pharmacy services in two states in 2010. These pharmacy carve outs had the effect of reducing 2010 third quarter revenue by approximately $48 million.
The consolidated HBR for the three months ended September 30, 2010 of 84.2% was an increase of 0.5% over the comparable period in 2009. A reconciliation of the change in HBR from the prior year is presented below:


Third Quarter 2009	83.7	%
Florida health plan performance	0.9
Net changes in other markets	(0.4)
Third Quarter 2010	84.2	%

Consolidated G&A expense as a percent of premium and service revenues was 12.2% in the third quarter of 2010, a decrease from 13.2% in the third quarter of 2009. The decrease in G&A ratio is primarily a result of leveraging our expenses over higher revenues and decreased variable compensation expense during the quarter ended September 30, 2010.
Earnings per diluted share from continuing operations were $0.44, compared to $0.51 in the third quarter of 2009, including a $0.07 charge per diluted share related to an impairment of an investment in a software company and realized security gains of $0.03 per diluted share recognized during the third quarter of 2010. Earnings per diluted share also reflect an increase in diluted shares outstanding resulting from the first quarter 2010 stock offering.

Balance Sheet and Cash Flow

At September 30, 2010, we had cash and investments of $928.1 million, including $895.4 million held by our regulated entities and $32.7 million held by our unregulated entities. Medical claims liabilities totaled $457.1 million, representing 47.1 days in claims payable, a decrease of 1.1 days from June 30, 2010. Total debt was $264.2 million and debt to capitalization was 24.7%.

Cash flow from operations for the quarter ended September 30, 2010 was $72.6 million. Cash flow from operations for the nine months ended September 30, 2010 was $(25.7) million and was impacted by 1) $38.7 million decrease in unearned revenue due to advance payments received in December 2009 for January 2010 premium payments and 2) $68.1 million increase in premium and related receivables primarily for September premium payments deferred by one state until October 2010.

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


Days in claims payable, June 30, 2010	48.2
Timing of claims payments	(0.9)
Impact of decrease in membership	(0.3)
Pharmacy payment timing	0.1
Days in claims payable, September 30, 2010	47.1

Outlook

The table below depicts our guidance from continuing operations for 2010:


	Full Year 2010
	Low	High
Premium and Service revenues (in millions)	$ 4,250	$ 4,350
Earnings per diluted share (EPS)	$ 1.76	$ 1.80
HBR %	83.5%	84.5%
G&A %	12.4%	12.9%

Diluted Shares Outstanding (in thousands)	50,500

Based upon known rate adjustments and discussions with our states that finalize rates in the second half of the year, we estimate our 2010 composite premium rate increase to be between 1.5% and 2.5%.

Conference Call

As previously announced, we will host a conference call Tuesday, October 26, 2010, at 8:30 A.M. (Eastern Time) to review the financial results for the third quarter ended September 30, 2010, and to discuss our 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 877-887-1134 in the U.S. and Canada; +1-412-317-0794 from abroad; or via a live, audio webcast on our 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, October 25, 2011, at the aforementioned URL, or by dialing 877-344-7529 in the U.S. and Canada, or +1-412-317-0088 from abroad and entering the playback conference number 444970.

About Centene Corporation

Centene Corporation, a Fortune 500 company, is a leading multi-line healthcare enterprise that provides programs and related services to the rising number of under-insured and uninsured individuals. Many receive benefits provided under Medicaid, including the State Children's Health Insurance Program (CHIP), as well as Aged, Blind or Disabled (ABD), Foster Care and long-term care, in addition to other state-sponsored programs, and Medicare (Special Needs Plans). Centene's CeltiCare subsidiary offers states unique, "exchange based" and other cost-effective coverage solutions for low-income populations. The Company operates local health plans and offers a range of health insurance solutions. It also contracts with other healthcare and commercial organizations to provide specialty services including behavioral health, life and health management, managed vision, telehealth services, and pharmacy benefits management.

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.

This release includes earnings per diluted share excluding certain charges for net investment writedowns, which is a non-GAAP financial measure. Management believes that this non-GAAP financial measure provides information that is useful to investors in understanding period-over-period operating results and enhances the ability of investors to analyze Centene's business trends and to understand Centene's performance. This non-GAAP financial measure should not be considered in isolation, or as a substitute for the corresponding GAAP financial measure and may not be comparable to similar measures used by other companies.

[Tables Follow] CENTENE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited)
	September 30, 2010			December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents of continuing operations, including $5,389 and $8,667, respectively, from consolidated variable interest entities	$	397,519	$	400,951
Cash and cash equivalents of discontinued operations		147		2,801
Total cash and cash equivalents		397,666		403,752
Premium and related receivables, net of allowance for uncollectible accounts of $1,336 and $1,338, respectively, including $3,208 and $11,313, respectively, from consolidated variable interest entities		182,379		103,456
Short-term investments, at fair value (amortized cost $30,667 and $39,230, respectively)		30,857		39,554
Other current assets, including $2,023 and $4,507, respectively, from consolidated variable interest entities		63,408		64,866
Current assets of discontinued operations other than cash		1,678		4,506
Total current assets		675,988		616,134
Long-term investments, at fair value (amortized cost $463,877 and $514,256, respectively)		479,164		525,497
Restricted deposits, at fair value (amortized cost $20,527 and $20,048, respectively)		20,589		20,132
Property, software and equipment, net of accumulated depreciation of $127,969 and $103,883, respectively, including $138,008 and $89,219, respectively, from consolidated variable interest entities		311,195		230,421
Goodwill		247,757		224,587
Intangible assets, net		24,608		22,479
Other long-term assets, including $2,806 and $30, respectively, from consolidated variable interest entities		28,398		36,829
Long-term assets of discontinued operations		7,478		26,285
Total assets	$	1,795,177	$	1,702,364
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Medical claims liability	$	457,085	$	470,932
Accounts payable and accrued expenses, including $20,926 and $14,020, respectively, from consolidated variable interest entities		145,877		132,001
Unearned revenue		52,936		91,644
Current portion of long-term debt		663		646
Current liabilities of discontinued operations		4,531		20,685
Total current liabilities		661,092		715,908
Long-term debt		263,513		307,085
Other long-term liabilities		66,355		59,561
Long-term liabilities of discontinued operations		285		383
Total liabilities		991,245		1,082,937

Commitments and contingencies

Stockholders' equity:
Common stock, $.001 par value; authorized 100,000,000 shares; 51,716,723 issued and 49,265,875 outstanding at September 30, 2010, and 45,593,383 shares issued and 43,179,373 shares outstanding at December 31, 2009		52		46
Additional paid-in capital		400,213		281,806
Accumulated other comprehensive income:
Net unrealized gain on investments, net of tax		9,661		7,348
Retained earnings		428,344		358,907
Treasury stock, at cost (2,450,848 and 2,414,010 shares, respectively)		(47,976)		(47,262)
Total Centene Corporation stockholders' equity		790,294		600,845
Noncontrolling interest		13,638		18,582
Total stockholders' equity		803,932		619,427
Total liabilities and stockholders' equity	$	1,795,177	$	1,702,364

CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share data) (Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Revenues:
Premium	$	1,060,559	$	960,009	$	3,085,802	$	2,754,713
Service		20,954		27,300		68,543		72,740
Premium and service revenues		1,081,513		987,309		3,154,345		2,827,453
Premium tax		40,348		50,925		113,009		182,685
Total revenues		1,121,861		1,038,234		3,267,354		3,010,138
Expenses:
Medical costs		893,281		803,062		2,592,324		2,298,108
Cost of services		14,646		15,843		47,505		46,364
General and administrative expenses		132,095		130,024		401,072		381,524
Premium tax		41,591		51,295		114,885		183,785
Total operating expenses		1,081,613		1,000,224		3,155,786		2,909,781
Earnings from operations		40,248		38,010		111,568		100,357
Other income (expense):
Investment and other income		713		3,750		11,912		11,781
Interest expense		(4,858)		(4,064)		(12,540)		(12,210)
Earnings from continuing operations, before income tax expense		36,103		37,696		110,940		99,928
Income tax expense		13,163		12,426		42,942		35,060
Earnings from continuing operations, net of income tax expense		22,940		25,270		67,998		64,868
Discontinued operations, net of income tax expense (benefit) of $26, $(792), $4,376 and $(1,148), respectively		260		(1,460)		3,954		(2,394)
Net earnings		23,200		23,810		71,952		62,474
Noncontrolling interest		538		2,542		2,515		2,518
Net earnings attributable to Centene Corporation	$	22,662	$	21,268	$	69,437	$	59,956

Amounts attributable to Centene Corporation common stockholders:
Earnings from continuing operations, net of income tax expense	$	22,402	$	22,728	$	65,483	$	62,350
Discontinued operations, net of income tax expense (benefit)		260		(1,460)		3,954		(2,394)
Net earnings	$	22,662	$	21,268	$	69,437	$	59,956

Net earnings (loss) per common share attributable to Centene Corporation:
Basic:
Continuing operations	$	0.46	$	0.53	$	1.35	$	1.45
Discontinued operations		—		(0.04)		0.08		(0.06)
Earnings per common share	$	0.46	$	0.49	$	1.43	$	1.39
Diluted:
Continuing operations	$	0.44	$	0.51	$	1.30	$	1.41
Discontinued operations		—		(0.03)		0.08		(0.05)
Earnings per common share	$	0.44	$	0.48	$	1.38	$	1.36

Weighted average number of shares outstanding:
Basic		49,238,406		43,001,870		48,552,135		43,023,431
Diluted		50,938,357		44,291,604		50,192,190		44,247,153

CENTENE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
	Nine Months Ended September 30,
	2010		2009
Cash flows from operating activities:
Net earnings	$	71,952	$	62,474
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation and amortization		38,620		30,800
Stock compensation expense		10,224		11,428
(Gain) loss on sale of investments, net		(6,331)		261
(Gain) on sale of UHP		(8,201)		-
Impairment of investment		5,531		-
Deferred income taxes		7,012		4,516
Changes in assets and liabilities:
Premium and related receivables		(68,125)		(381)
Other current assets		(2,932)		(2,595)
Other assets		(990)		(593)
Medical claims liabilities		(29,304)		31,612
Unearned revenue		(38,708)		54,725
Accounts payable and accrued expenses		(3,174)		(17,656)
Other operating activities		(1,267)		2,386
Net cash (used in) provided by operating activities		(25,693)		176,977
Cash flows from investing activities:
Capital expenditures		(91,960)		(42,696)
Purchases of investments		(382,730)		(647,086)
Proceeds from asset sales		13,420		-
Sales and maturities of investments		452,128		546,640
Investments in acquisitions, net of cash acquired		(26,847)		(31,533)
Net cash used in investing activities		(35,989)		(174,675)
Cash flows from financing activities:
Proceeds from exercise of stock options		2,394		1,717
Proceeds from borrowings		53,812		468,500
Proceeds from stock offering		104,534		-
Payment of long-term debt		(97,467)		(456,059)
Distributions (to) from noncontrolling interest		(7,387)		4,324
Excess tax benefits from stock compensation		424		43
Common stock repurchases		(714)		(5,539)
Debt issuance costs		-		(405)
Net cash provided by financing activities		55,596		12,581
Net (decrease) increase in cash and cash equivalents		(6,086)		14,883
Cash and cash equivalents, beginning of period		403,752		379,099
Cash and cash equivalents, end of period	$	397,666	$	393,982

Supplemental disclosures of cash flow information:
Interest paid	$	9,501	$	8,556
Income taxes paid	$	44,407	$	43,308

Supplemental disclosure of non-cash investing and financing activities:
Contribution from noncontrolling interest	$	306	$	5,491
Capital expenditures	$	15,291	$	10,106

CENTENE CORPORATION CONTINUING OPERATIONS SUPPLEMENTAL FINANCIAL DATA
	Q3		Q2		Q1		Q4		Q3
	2010		2010		2010		2009		2009
MEMBERSHIP
Managed Care:
Arizona	19,300		19,300		19,000		18,100		17,400
Florida	116,300		113,100		105,900		102,600		84,400
Georgia	300,900		295,600		301,000		309,700		303,400
Indiana	213,300		212,700		211,400		208,100		200,700
Massachusetts	34,400		30,100		26,900		27,800		500
Ohio	161,800		159,300		156,000		150,800		151,200
South Carolina	90,600		92,600		53,900		48,600		46,100
Texas	428,100		475,500		459,600		455,100		450,200
Wisconsin	106,100		133,600		134,900		134,800		132,500
Total at-risk membership	1,470,800		1,531,800		1,468,600		1,455,600		1,386,400
Non-risk membership	35,900		50,900		62,200		63,700		63,200
TOTAL	1,506,700		1,582,700		1,530,800		1,519,300		1,449,600

Medicaid	1,122,800		1,135,500		1,088,300		1,081,400		1,040,000
CHIP & Foster Care	219,100		272,400		266,300		263,600		263,400
ABD & Medicare	94,500		93,800		87,100		82,800		82,500
Other State programs	34,400		30,100		26,900		27,800		500
Total at-risk membership	1,470,800		1,531,800		1,468,600		1,455,600		1,386,400
Non-risk membership	35,900		50,900		62,200		63,700		63,200
TOTAL	1,506,700		1,582,700		1,530,800		1,519,300		1,449,600

Specialty Services(a):
Cenpatico Behavioral Health
Arizona	121,300		119,700		119,300		120,100		117,300
Kansas	39,800		39,100		39,800		41,400		41,000
Bridgeway Health Solutions
Long-term Care	3,000		2,800		2,700		2,600		2,500
TOTAL	164,100		161,600		161,800		164,100		160,800

(a) Includes external membership only.

REVENUE PER MEMBER PER MONTH(b)	$	216.96	$	208.58	$	215.95(c)	$	226.42	$	222.77

CLAIMS(b)
Period-end inventory	469,000		480,400		341,400		423,400		414,900
Average inventory	307,500		306,900		283,900		279,000		227,100
Period-end inventory per member	0.32		0.31		0.23		0.29		0.30
(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.


	Q3		Q2		Q1		Q4		Q3
	2010		2010		2010		2009		2009

DAYS IN CLAIMS PAYABLE
Medical	46.0		47.2		46.6		48.1		47.1
Pharmacy	1.1		1.0		1.1		2.0		1.8
TOTAL	47.1		48.2		47.7		50.1		48.9
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	$	895.4	$	813.0	$	917.9	$	949.9	$	911.4
Unregulated		32.7		39.4		51.3		36.2		27.6
TOTAL	$	928.1	$	852.4	$	969.2	$	986.1	$	939.0

DEBT TO CAPITALIZATION	24.7%		24.5%		23.7%		33.2%		31.9%
Debt to Capitalization is calculated as follows: total debt divided by (total debt + total equity).

OPERATING RATIOS:
	Three Months Ended September 30,		Nine Months Ended September 30,
	2010	2009	2010	2009
Health Benefits Ratios:
Medicaid and CHIP	83.2%	84.7%	84.0%	84.4%
ABD and Medicare	85.9	81.1	84.3	81.7
Specialty Services	87.9	80.5	83.4	79.6
Total	84.2	83.7	84.0	83.4

Total General & Administrative Expense Ratio	12.2%	13.2%	12.7%	13.5%

MEDICAL CLAIMS LIABILITY (In thousands) The changes in medical claims liability are summarized as follows:
Balance, September 30, 2009	$	426,700
Incurred related to:
Current period		3,518,220
Prior period		(60,481)
Total incurred		3,457,739
Paid related to:
Current period		3,069,850
Prior period		357,504
Total paid		3,427,354
Balance, September 30, 2010	$	457,085

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 September 30, 2009.

SOURCE Centene Corporation