Centene Corporation (NYSE: CNC) today announced its net earnings from continuing operations for the quarter ended September 30, 2008 were $18.3 million, or $0.41 per diluted share, compared to $16.5 million, or $0.37 per diluted share in the 2007 third quarter. The current quarter results include a loss on investments of $5.2 million pre-tax, or $0.07 per diluted share. Excluding this loss, net earnings were $0.48 per diluted share. Unless specifically noted, the discussions below are in the context of continuing operations and all financial ratios are calculated using revenues excluding premium taxes and investment income.
Third Quarter Highlights
- Quarter-end Medicaid Managed Care membership of 1.2 million.
- Revenues of $897.1 million, or $873.5 million net of premium taxes, an 19.8% increase over the 2007 third quarter.
- Health Benefits Ratio (HBR), which reflects medical costs as a percent of premium revenues, of 82.4%, compared to 83.4% in the 2007 third quarter.
- General and administrative (G&A) expense ratio of 14.0%, compared to 13.7% in the 2007 third quarter.
- Cash flow from operations of $39.8 million.
- Days in claims payable of 49.6.
- Received notification of a ruling by the Eighth Circuit of The United States Court of Appeals upholding the dismissal of a Consolidated Class Action Lawsuit.
- Stock repurchase program extended through October 31, 2009. Repurchased 245,740 shares of our common stock during the third quarter for approximately $5 million.
- Completed the previously announced acquisition of Celtic Insurance Company, or Celtic, a health insurance carrier focused on the individual health insurance market, effective July 1, 2008.
- Commenced a new acute care contract in the Yavapai Service Area of Arizona, effective October 1, 2008.
- Appointed Donald G. Imholz as Senior Vice President and Chief Information Officer.
Michael F. Neidorff, Centene’s Chairman and Chief Executive Officer, stated, “We are pleased with the continued progress that our results show this quarter. It is gratifying to see the operating traction that our team has gained over the past two quarters and we are working hard to ensure that this positive momentum will be maintained in 2009 and beyond,” concluded Neidorff.
The following table depicts membership in Centene’s managed care organizations, by state, at September 30, 2008 and 2007:
|(a) Reflects the conversion of South Carolina membership from non-risk in 2007 to full risk in 2008.|
The following table depicts membership in Centene’s managed care organizations, by member category, at September 30, 2008 and 2007:
|(a) 1,226,000 at-risk; 3,700 ASO|
|(b) 1,104,700 at-risk; 32,600 ASO|
Statement of Operations
- For the 2008 third quarter, revenues, net of premium taxes, increased 19.8% to $873.5 million from $729.2 million in the 2007 third quarter. The increase was primarily driven by membership growth, especially related to the new Foster Care contract in Texas, premium rate increases and the recent acquisition of Celtic which closed on July 1, 2008.
- The consolidated HBR, which reflects medical costs as a percent of premium revenues, was 82.4%, a decrease from 83.4% in the 2007 third quarter. The decrease is primarily due to overall increased premium yield, a moderating medical cost trend and the acquisition of Celtic. Sequentially, our consolidated HBR decreased from 83.3% in the 2008 second quarter to 82.4% due to the medical management efforts in Ohio, moderating medical cost trends and the affect of the acquisition of Celtic, which operates at a lower HBR than our existing business.
- Consolidated G&A expense as a percent of premium and service revenues was 14.0% in the third quarter of 2008, an increase from 13.7% in the third quarter of 2007. The increase was due to the acquisition of Celtic which operates at a higher G&A ratio.
- Other income in the third quarter included a loss on investments of $5.2 million, or $0.07 per diluted share. As previously disclosed in an October 14, 2008, press release and 8-K filing, the loss was primarily due to investments in the Reserve Primary money market fund whose Net Asset Value fell below $1.00 per share due to its holdings of securities by Lehman Brothers Holdings, Inc. The impairment losses represent less than 1% of Centene’s investment portfolio as of September 30, 2008. While the ultimate amount of loss may change, we currently expect to recover 95% of our investment in the Reserve Primary fund and have more than sufficient liquidity to fund our operations in the near term.
- Earnings per diluted share from continuing operations were $0.41, or $0.48 excluding the previously mentioned loss on investments, compared to $0.37 in the 2007 third quarter.
Balance Sheet and Cash Flow
At September 30, 2008, the Company had cash and investments of $754.8 million, including $728.0 million held by its regulated entities and $26.8 million held by its unregulated entities. Medical claims liabilities totaled $379.8 million, representing 49.6 days in claims payable, an increase of 0.5 days from September 30, 2007 and an increase of 1.1 days from June 30, 2008. Total debt was $250.0 million and debt to capitalization was 34.4%. Year to date cash flow from operations was $126.5 million.
A reconciliation of the Company’s change in days in claims payable from the immediately preceding quarter-end is presented below:
|Days in claims payable, June 30, 2008||48.5|
|Days in claims payable, September 30, 2008||49.6|
The table below depicts the Company’s annual guidance for 2008:
|Full Year 2008|
|Revenue (in millions)1||$||3,390||$||3,410|
|Earnings per diluted share||$||1.87||$||1.92|
1 Revenue net of premium tax
Eric R. Slusser, Centene's Chief Financial Officer, stated, “Despite the effects of the $0.07 loss on investments in the third quarter, Centene will not revise the lower end of its previous 2008 earnings per diluted share guidance range. We are tightening the previous range and currently expect 2008 EPS to range from $1.87 to $1.92 and revenue guidance of $3.39 to $3.41 billion, net of premium taxes. We continue to expect the 2008 consolidated HBR to range from 82% to 84%.”
Stock Repurchase Authorization
On October 27, 2008, the Company’s Board of Directors extended the expiration date of the Company’s stock repurchase program to October 31, 2009. The program would have expired October 31, 2008. The program authorizes the repurchase of up to 4,000,000 shares of the Company’s common stock from time to time on the open market or through privately negotiated transactions.
As previously announced, the Company will host a conference call Tuesday, October 28, 2008, at 8:30 A.M. (Eastern Time) to review the financial results for the third quarter ended September 30, 2008, and to discuss its business outlook. Michael F. Neidorff and Eric R. Slusser 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 November 11, 2008 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 63471844.
Non-GAAP Financial Presentation
The Company is providing certain non-GAAP financial measures in this release as the Company believes 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. Specifically, the Company has presented diluted earnings per share for the third quarter of 2008 excluding the effects of a $0.07 loss on investments recorded in the quarter.
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 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.
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), Foster Care, Supplemental Security Income (SSI) and Medicare (Special Needs Plans). The Company operates health plans in Arizona, 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, individual health insurance, life and 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||$||275,284||$||268,584|
|Premium and related receivables||150,351||90,072|
|Short-term investments, at fair value (amortized cost $160,199 and $46,392, respectively)||160,376||46,269|
|Other current assets||48,109||41,414|
|Total current assets||634,120||446,339|
|Long-term investments, at fair value (amortized cost $288,140 and $314,681, respectively)||288,212||317,041|
|Restricted deposits, at fair value (amortized cost $30,630 and $27,056, respectively)||30,919||27,301|
|Property, software and equipment, net of accumulated depreciation of $68,834 and $54,584, respectively||170,038||138,139|
|Other intangible assets, net||19,886||13,205|
|LIABILITIES AND STOCKHOLDERS’ EQUITY|
|Medical claims liabilities||$||379,845||$||335,856|
|Accounts payable and accrued expenses||200,766||105,096|
|Current portion of long-term debt||276||971|
|Current liabilities of discontinued operations||255||861|
|Total current liabilities||596,765||486,800|
|Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding 43,159,927 and 43,667,837 shares, respectively||43||44|
|Additional paid-in capital||223,369||221,693|
|Accumulated other comprehensive income:|
|Unrealized gain on investments, net of tax||349||1,571|
|Total stockholders’ equity||477,574||415,047|
|Total liabilities and stockholders’ equity||$||1,358,053||$||1,119,122|
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
|Three Months Ended |
|Nine Months Ended |
|Cost of services||12,854||13,622||43,467||45,922|
|General and administrative expenses||122,627||100,235||335,109||288,709|
|Total operating expenses||864,269||725,977||2,476,395||2,088,107|
|Earnings from operations||32,868||23,911||97,448||53,746|
|Other income (expense):|
|Investment and other income||2,165||6,352||15,534||18,957|
|Earnings before income taxes||30,656||26,092||100,546||61,187|
|Income tax expense||12,395||9,628||38,709||22,951|
|Net earnings from continuing operations||18,261||16,464||61,837||38,236|
|Discontinued operations, net of income tax (benefit) expense of $(8), $(323), $145 and $(32,520), respectively|
|Net earnings per share:|
|Basic earnings per common share||$||0.42||$||0.37||$||1.43||$||1.65|
|Diluted earnings per common share||$||0.41||$||0.36||$||1.39||$||1.61|
|Weighted average number of shares outstanding:|
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|Nine Months Ended September 30,|
|Cash flows from operating activities:|
|Adjustments to reconcile net earnings to net cash provided by operating activities|
|Depreciation and amortization||26,018||20,381|
|Stock compensation expense||11,576||11,753|
|Deferred income taxes||13,987||(859||)|
|Loss on sale of investments, net||4,923||161|
|Gain on sale of FirstGuard Missouri||—||(7,472||)|
|Changes in assets and liabilities —|
|Premium and related receivables||(50,797||)||6,855|
|Other current assets||(6,422||)||(15,540||)|
|Medical claims liabilities||28,109||36,312|
|Accounts payable and accrued expenses||74,723||27,981|
|Other operating activities||967||3,505|
|Net cash provided by operating activities||126,514||164,752|
|Cash flows from investing activities:|
|Purchases of property, software and equipment||(52,588||)||(41,774||)|
|Purchases of investments||(372,221||)||(464,378||)|
|Sales and maturities of investments||356,367||341,450|
|Proceeds from asset sales||—||14,102|
|Investments in acquisitions and equity method investee, net of cash acquired||(83,509||)||(26,425||)|
|Net cash used in investing activities||(151,951||)||(177,025||)|
|Cash flows from financing activities:|
|Proceeds from exercise of stock options||4,770||3,737|
|Proceeds from borrowings||152,005||202,000|
|Payments of long-term debt||(109,410||)||(176,729||)|
|Excess tax benefits from stock compensation||3,016||1,028|
|Common stock repurchases||(18,244||)||(8,581||)|
|Debt issue costs||—||(5,181||)|
|Net cash provided by financing activities||32,137||16,274|
|Net increase (decrease) in cash and cash equivalents||6,700||4,001|
|Cash and cash equivalents, beginning of period||268,584||271,047|
|Cash and cash equivalents, end of period||$||275,284||$||275,048|
|Supplemental cash flow information:|
|Income taxes paid||$||28,370||$||6,965|
CONTINUING OPERATIONS SUPPLEMENTAL FINANCIAL DATA
|SCHIP & Foster Care||271,700||267,000||216,000||224,400||223,500|
|SSI & Medicare||70,300||73,700||77,900||74,100||72,200|
(a) Includes behavioral health contracts only.
REVENUE PER MEMBER(b)
|Period-end inventory per member||0.26||0.28||0.34||0.28||0.24|
(b) Revenue per member and claims information are presented for the Medicaid Managed Care segment.
DAYS IN CLAIMS PAYABLE(c)
(c) Days in Claims Payable is a calculation of Medical Claims Liabilities at the end of the period divided by average claims expense per calendar day for such period.
|CASH AND INVESTMENTS (in millions)|
DEBT TO CAPITALIZATION(d)
(d) Debt to Capitalization is calculated as follows: total debt divided by (total debt + equity).
|Three Months Ended |
|Nine Months Ended |
|Health Benefits Ratios|
|Medicaid and SCHIP||81.3||%||81.3||%||80.9||%||82.9||%|
|SSI and Medicare||89.7||92.4||92.3||90.8|
|General & Administrative Expense Ratio||14.0||%||13.7||%||13.4||%||13.9||%|
MEDICAL CLAIMS LIABILITIES (In thousands)
Four rolling quarters of the changes in medical claims liabilities are summarized as follows:
|Balance, September 30, 2007||$||315,311|
|Incurred related to:|
|Paid related to:|
|Balance, September 30, 2008||$||379,845|
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