Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended June 30, 2007. The revenues, general and administrative expenses and related financial ratios included in this release present premium taxes on a gross basis consistent with our past reporting practice.
|Q2 2007 Highlights|
|Total Revenues (in millions)||$||727.7|
|Diluted EPS (as reported)||$||0.40|
|Diluted EPS excluding FirstGuard activity||$||0.27|
Second Quarter Summary
- Quarter-end Medicaid Managed Care membership of 1.1 million
- Revenues of $727.7 million, a 46.9% increase over the 2006 second quarter.
- Earnings per diluted share of $0.27, excluding FirstGuard activity, compared to $0.11 in the 2006 second quarter.
- Health Benefits Ratio (HBR) for Centene’s Medicaid and SCHIP populations, which reflects medical costs as a percent of premium revenues, of 80.6%.
- Medicaid Managed Care G&A expense ratio of 14.0% and Specialty Services G&A ratio of 15.8%.
- Operating cash flows of $23.9 million.
- Days in claims payable of 46.8.
- In April 2007, we acquired PhyTrust of South Carolina, a physician-driven company that served over 31,100 members at June 30, 2007.
- In July 2007, we acquired a minority interest in Access Health Solutions, LLC (Access), the third largest Medicaid managed care entity in Florida. Access currently serves approximately 90,000 members.
Michael F. Neidorff, Centene’s Chairman and Chief Executive Officer, stated, “During the second quarter, overall results for revenue, membership growth and earnings were consistent with our expectations, and our Medicaid and SCHIP HBR improved by 170 basis points sequentially.
“In Texas, we continue to see growing membership in both SCHIP and SSI, with the Texas STAR Plus overall membership consistent with our expectations. To date, we have 31,400 Star Plus members under management. Recently, the state of Texas indicated its intent to delay the implementation of the Foster Care contract award, which we won in March. We now expect operations to commence in 2008. The state is currently working on its readiness review and we are supporting them in this process. We remain confident that our technology platform will enable us to provide the state more effective tracking of these members and offer a more consistent quality of healthcare for the recipients.
“In Georgia, membership was 281,400, within our guided range. While cost and utilization trends in the state are high, we began to see those trends moderate later in the quarter. We expect trends to continue to moderate as our medical management initiatives take hold and have implemented margin protection initiatives effective August 1 with the state.
“We will continue to focus our efforts on opportunities to effectively manage our costs as we build the business. There remain numerous avenues to grow on a sustainable basis in Medicaid managed care.” concluded Neidorff.
The following table depicts membership in Centene’s managed care organizations by state at June 30, 2007 and 2006:
|Kansas and Missouri||—||150,000|
The following table depicts membership in Centene’s managed care organizations by member category at June 30, 2007 and 2006:
|Kansas and Missouri Medicaid/SCHIP members||—||150,000|
|(a) 64,000 at-risk; 4,100 ASO|
|(b) 8,900 at-risk; 7,500 ASO|
Statement of Operations
- For the 2007 second quarter, revenues increased 46.9% to $727.7 million from $495.3 million in the 2006 second quarter.
- The HBR for Centene’s Medicaid and SCHIP populations, which reflects medical costs as a percent of premium revenues, was 80.6%, a decrease of 3.4% over 2006. The HBR for the three months ended June 30, 2006, includes approximately 2.2% ($9.7 million) for adverse medical cost development in estimated medical claims liabilities from the first quarter of 2006. The decrease in the current year is primarily attributable to the adverse development in the prior year and increased premium taxes. Sequentially, our Medicaid and SCHIP HBR decreased from 82.3% in the 2007 first quarter to 80.6% because of decreases in our Indiana, Texas, and Wisconsin markets, primarily related to inpatient and pharmacy cost trends. The 2007 second quarter reflects expected claims reserve development and is based on consistent reserving methodology.
- G&A expense as a percent of revenues for the Medicaid Managed Care segment was 14.0% in the second quarter of 2007 compared to 12.3% in the second quarter of 2006. The increase in the Medicaid Managed Care G&A expense ratio for the three months ended June 30, 2007 primarily reflects increased premium taxes. Premium taxes were $19.9 million in the 2007 second quarter and $6.9 million in the 2006 second quarter. This increase was offset by the leveraging of our expenses over higher revenues, especially in our Georgia health plan. The second quarter of 2006 included two months of Georgia implementation costs for which there was no associated revenue.
- Operating earnings were $16.9 million, including a $3.3 million gain on the sale of FirstGuard Missouri and $3.4 million of net expense for other FirstGuard activity. Excluding the gain and other FirstGuard activity, operating earnings were $17.0 million compared to $6.3 million in the 2006 second quarter.
- The second quarter results included a tax benefit from the stock abandonment of our Missouri health plan, a gain from the sale of our Missouri health plan, a contribution to our charitable foundation from the sale proceeds and additional FirstGuard activity. The net effect of these activities was $0.13 accretive to earnings per diluted share.
- Earnings per diluted share of $0.40. Earnings per diluted share of $0.27, excluding the FirstGuard activity, compared to $0.11 in the 2006 second quarter.
- For the six months ended June 30, 2007, revenues increased 47.2% to $1.4 billion from $950.4 million for the same period in the prior year. Medicaid Managed Care G&A expenses as a percent of revenues increased to 13.5% in the first six months of 2007 compared to 12.1% in the first six months of 2006. Earnings from operations, excluding the FirstGuard activity, increased to $32.8 million in the first six months of 2007 from $18.9 million in the first six months of 2006. Net earnings, excluding the FirstGuard activity, were $23.6 million or $0.53 per diluted share in the first six months of 2007.
Balance Sheet and Cash Flow
At June 30, 2007, the Company had cash and investments of $593.7 million, including $527.9 million held by its regulated entities and $65.8 million held by its unregulated entities. Medical claims liabilities totaled $295.3 million, representing 46.8 days in claims payable. Total debt was $201.1 million and debt to capitalization was 34.0%.
A reconciliation of the Company’s change in days in claims payable from the immediately preceding quarter-end is presented below:
|Days in claims payable, March 31, 2007||46.4|
|Remaining FirstGuard reserves||0.4|
|Days in claims payable, June 30, 2007||46.8|
The table below depicts the Company’s guidance for the 2007 third quarter and full year.
|Q3 2007 (1)||2007 (1)|
|Revenue (in millions)||$||740||$||750||$||2,900||$||2,940|
|Earnings per diluted share||$||0.35||$||0.38||$||1.36||$||1.45|
|(1) Excludes FirstGuard Activity|
Eric R. Slusser, Centene’s Chief Financial Officer, stated, “The 2007 third quarter and full year guidance reflects continued in-range HBR performance, reasonable rate increases, continued SSI earnings growth and rigorous G&A focus. The tightened ranges for 2007 revenue and earnings per share reflect the delay of the Texas Foster Care Program from the 2007 fourth quarter to 2008.”
As previously announced, the Company will host a conference call Tuesday, July 24, 2007, at 8:30 A.M. (Eastern Time) to review the financial results for the second quarter ended June 30, 2007, and to discuss its business outlook. Michael F. Neidorff, Eric R. Slusser and J. Per Brodin will host the conference call. Investors are invited to participate in the conference call by dialing 800-273-1254 in the U.S. and Canada, 706-679-8592 from abroad, or via a live internet broadcast on the Company's website at www.centene.com, under the Investor Relations section. A replay will be available for on-demand listening shortly after the completion of the call until 11:59 P.M. (Eastern Time) on August 7, 2007 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 1100685.
Non-GAAP Financial Presentation
The Company is providing certain non-GAAP financial measures in this release as the Company believes that these figures are helpful in allowing individuals to more accurately assess the ongoing nature of the Company's operations and measure the Company's performance more consistently.
The non-GAAP information presented above in the “highlights” table, third bullet under "Second Quarter Summary" and fourth through seventh bullets under "Statement of Operations" excludes the tax benefit related to the stock of our Kansas and Missouri health plans and other activity for the Kansas and Missouri health plans, collectively, FirstGuard Activity. This exclusion has been made in the non-GAAP financial measures as management believes that the tax benefit is an unusual event and the Kansas and Missouri health plans are not indicative of future company operations.
The Company uses the presented non-GAAP financial measures internally to focus management on period-to-period changes in the Company's core business operations. Therefore, the Company believes that this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.
The following table reconciles the Company’s Statement of Operations for the second quarter of 2007 on a GAAP basis to a non-GAAP basis. The non-GAAP basis excludes the FirstGuard Activity (in thousands, except share data).
|Three Months Ended |
June 30, 2007
|Cost of services||16,670||—||16,760|
|General and administrative expenses||122,596||3,715||118,881|
|Gain on sale of FirstGuard Missouri||(3,254||)||(3,254||)||—|
|Total operating expenses||710,874||177||710,697|
|Earnings (loss) from operations||16,864||(170||)||17,034|
|Investment and other income, net||1,735||(640||)||2,375|
|Earnings (loss) before income taxes||18,599||(810||)||19,409|
|Income tax (benefit) expense||817||(6,557||)||7,374|
|Diluted earnings per common share||$||0.40||$||0.27|
Premium Tax Presentation
The Company reports premium taxes as a component of revenues and general and administrative expenses (gross basis). The following table shows the Company’s Medicaid/SCHIP HBR and the Medicaid Managed Care G&A ratio on a gross basis as reported as well as on a net basis with premium taxes recorded as a reduction of revenues for analytical purposes.
|Medicaid/SCHIP HBR||Medicaid Managed Care G&A Ratio|
|Current (Gross)||Net||Current (Gross)||Net|
|Year to Date||$||38,090||81.5||84.0||13.5||11.0|
About Centene Corporation
Centene Corporation is a leading multi-line healthcare enterprise that provides programs and related services to individuals receiving benefits under Medicaid, including the State Children’s Health Insurance Program (SCHIP) and Supplemental Security Income (SSI). The Company operates health plans in Georgia, Indiana, New Jersey, Ohio, South Carolina, Texas and Wisconsin. In addition, the Company contracts with other healthcare and commercial organizations to provide specialty services including behavioral health, health management, long-term care, managed vision, nurse triage, pharmacy benefits management and treatment compliance. Information regarding Centene is available via the Internet at www.centene.com.
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.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|Cash and cash equivalents||$||236,443||$||271,047|
|Premium and related receivables||113,491||91,664|
|Short-term investments, at fair value (amortized cost $43,636 and $67,199, respectively)||43,360||66,921|
|Other current assets||46,257||22,189|
|Total current assets||439,551||451,821|
|Long-term investments, at fair value (amortized cost $288,993 and $146,980, respectively)||287,719||145,417|
|Restricted deposits, at fair value (amortized cost $26,328 and $25,422, respectively)||26,220||25,265|
|Property, software and equipment, net||131,829||110,688|
|Other intangible assets, net||14,472||16,202|
|LIABILITIES AND STOCKHOLDERS’ EQUITY|
|Medical claims liabilities||$||295,340||$||280,441|
|Accounts payable and accrued expenses||111,697||72,723|
|Current portion of long-term debt||972||971|
|Total current liabilities||450,028||387,951|
|Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding 43,664,105 and 43,369,918 shares, respectively||44||44|
|Additional paid-in capital||217,705||209,340|
|Accumulated other comprehensive income:|
|Unrealized loss on investments, net of tax||(1,046||)||(1,251||)|
|Total stockholders’ equity||391,033||326,423|
|Total liabilities and stockholders’ equity||$||1,050,002||$||894,980|
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
For the Three Months
|For the Six Months |
Ended June 30,
|Cost of services||16,670||14,317||32,300||29,905|
|General and administrative expenses||122,596||74,441||229,462||139,663|
|Gain on sale of FirstGuard Missouri||(3,254||)||—||(7,472||)||—|
|Total operating expenses||710,874||488,987||1,364,558||931,469|
|Earnings from operations||16,864||6,306||34,015||18,902|
|Other income (expense):|
|Investment and other income||5,948||3,891||10,449||7,431|
|Earnings before income taxes||18,599||7,741||37,119||21,879|
|Income tax (benefit) expense||817||2,776||(18,874||)||8,148|
|Earnings per share:|
|Basic earnings per common share||$||0.41||$||0.12||$||1.29||$||0.32|
|Diluted earnings per common share||$||0.40||$||0.11||$||1.25||$||0.31|
|Weighted average number of shares outstanding:|
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|Six Months Ended June 30,|
|Cash flows from operating activities:|
|Adjustments to reconcile net earnings to net cash provided by operating activities —|
|Depreciation and amortization||12,991||9,541|
|Stock compensation expense||7,837||7,154|
|Deferred income taxes||(327||)||(287||)|
|Gain on sale of FirstGuard Missouri||(7,472||)||—|
|Changes in assets and liabilities —|
|Premium and related receivables||(21,823||)||(45,710||)|
|Other current assets||(24,583||)||1,859|
|Medical claims liabilities||15,035||16,690|
|Accounts payable and accrued expenses||11,832||10,658|
|Other operating activities||3,119||224|
|Net cash provided by operating activities||59,874||14,442|
|Cash flows from investing activities:|
|Purchases of property, software and equipment||(29,352||)||(23,472||)|
|Purchases of investments||(290,962||)||(113,665||)|
|Sales and maturities of investments||196,407||97,445|
|Proceeds from asset sales||14,102||—|
|Acquisitions, net of cash acquired||(5,336||)||(60,710||)|
|Net cash used in investing activities||(115,141||)||(100,402||)|
|Cash flows from financing activities:|
|Proceeds from exercise of stock options||2,651||3,761|
|Proceeds from borrowings||191,000||71,967|
|Payment of long-term debt||(165,484||)||(4,487||)|
|Excess tax benefits from stock compensation||797||1,977|
|Common stock repurchases||(3,231||)||(3,180||)|
|Debt issue costs||(5,070||)||—|
|Net cash provided by financing activities||20,663||70,038|
|Net decrease in cash and cash equivalents||(34,604||)||(15,922||)|
|Cash and cash equivalents, beginning of period||271,047||147,358|
|Cash and cash equivalents, end of period||$||236,443||$||131,436|
|Income taxes paid||$||6,049||$||1,645|
SUPPLEMENTAL FINANCIAL DATA
|Medicaid Managed Care:|
|Kansas and Missouri||—||—||138,900||144,600|
|Kansas and Missouri Medicaid and SCHIP members||—||—||138,900||144,600|
|(a) Includes behavioral health contracts only.|
|REVENUE PER MEMBER(b)||$||198.98||$||185.90||$||173.75||$||169.98|
|Period-end inventory per member||0.26||0.30||0.23||0.20|
|(b) Revenue per member and claims information are presented for the Medicaid Managed Care segment.|
|DAYS IN CLAIMS PAYABLE (c)||46.8||46.4||46.4||45.3|
|(c) Days in Claims Payable is a calculation of Medical Claims Liabilities at the end of the period divided by average claims expense per calendar day for such period.|
|CASH AND INVESTMENTS (in millions)|
DEBT TO CAPITALIZATION (d)
(d)Debt to Capitalization is calculated as follows: total debt divided by (total debt + equity).
HEALTH BENEFITS RATIO BY CATEGORY:
|Three Months Ended |
|Six Months Ended |
|Medicaid and SCHIP||80.6||%||84.0||%||81.5||%||83.4||%|
GENERAL AND ADMINISTRATIVE EXPENSE RATIO BY BUSINESS SEGMENT:
|Three Months Ended |
|Six Months Ended |
|Medicaid Managed Care||14.0||%||12.3||%||13.5||%||12.1||%|
MEDICAL CLAIMS LIABILITIES (In thousands)
Four rolling quarters of the changes in medical claims liabilities are summarized as follows:
|Balance, June 30, 2006||$||187,204|
|Incurred related to:|
|Paid related to:|
|Balance, June 30, 2007||$||295,340|
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” claims 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.
Edmund E. Kroll, 212-759-0382
Senior Vice President, Finance & Investor Relations
Eric R. Slusser, 314-725-4477
Executive Vice President and Chief Financial Officer