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Centene Corporation Reports 2007 First Quarter Results

Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended March 31, 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.

Q1 2007 Highlights
Total Revenues (in millions) $670.8 
Medicaid/SCHIP HBR 82.3%
Diluted EPS (as reported) $0.85 
Diluted EPS excluding FirstGuard activity $0.26 

First Quarter Summary

  • Quarter-end Medicaid Managed Care membership of 1.1 million
  • Revenues of $670.8 million, a 47.4% increase over the 2006 first quarter.
  • Earnings per diluted share of $0.26, excluding FirstGuard activity, compared to $0.20 in the 2006 first quarter. Total earnings per diluted share of $0.85 include a $0.67 FirstGuard tax benefit offset by $0.08 of other FirstGuard activity. The 2007 first quarter results also include $0.01 of South Carolina start-up costs.
  • Health Benefits Ratio (HBR) for Centenes Medicaid and SCHIP populations, which reflects medical costs as a percent of premium revenues, of 82.3%.
  • Medicaid Managed Care G&A expense ratio of 13.0% and Specialty Services G&A ratio of 15.8%.
  • Operating cash flows of $36.0 million.
  • Days in claims payable of 46.4.

Other Events

  • Commenced operations in Texas under a new contract to provide managed care for SSI recipients in the San Antonio and Corpus Christi markets with 28,700 members at March 31.
  • Commenced operations in three of the four new regions awarded in the Ohio Medicaid ABD contract with 10,700 members at March 31.
  • Received notice of contract award of the Texas Comprehensive Health Care for Foster Care. Operations are scheduled to commence in the fourth quarter of 2007.
  • Sold the assets of our FirstGuard Missouri health plan, effective February 1, 2007.
  • Issued $175.0 million senior unsecured notes to refinance our revolving credit facility balance.
  • In April 2007, we acquired PhyTrust of South Carolina, a physician-driven company that serves over 30,000 members.

Michael F. Neidorff, Centenes Chairman and Chief Executive Officer, stated, During the first quarter of 2007 we performed within our range of expectations including a predictable level of seasonality. We commenced the Texas STAR Plus roll-out with initial membership ahead of our expectations; in Ohio, the ABD roll-out is on track. We were pleased during the quarter to announce the receipt of the Texas Foster Care contract award to serve approximately 30,000 foster care recipients in the state. We are currently in the process of building the technology infrastructure required to offer this innovative product and look forward to working with the state for a 4th quarter implementation. Although this contract has an initial overall dilutive effect on the current year, the impact on future years will produce a significant return on investment to Centene. We are also optimistic that we will be able to offer this product in other markets.

Based upon ongoing initiatives to focus on profitability and to enter into disciplined contracts with providers, membership declines in Indiana and Wisconsin were as expected. During the quarter, the termination of certain physician contracts associated with a high-cost hospital system in Wisconsin led to the resulting membership decline and in Indiana, we focused on a smaller group of doctors as part of our state-wide contract award.

In Georgia, our membership was consistent with our expectations. During the first quarter, the state imposed member recertification requirements commencing on January 1, 2007, which resulted in the loss of our own Peach State members. Regarding claims processing, effective February 28, 2007, we have met the states requirements, and have substantially reduced claims backlog.

Weve continued to see the benefits of the medical management enhancements we put in place to effectively control costs. It is important to us that we continue to build the business with sustainable processes, concluded Neidorff.

The following table depicts membership in Centenes managed care organizations by state at March 31, 2007 and 2006:

Georgia 291,300 
Indiana 176,700  193,000 
New Jersey 59,100  57,500 
Ohio 118,300  59,000 
Texas 318,500  237,500 
Wisconsin 139,400  175,100 
Subtotal 1,103,300  722,100 
Kansas and Missouri 152,700 
Total 1,103,300  874,800 

The following table depicts membership in Centenes managed care organizations by member category at March 31, 2007 and 2006:

Medicaid 839,600  574,300 
SCHIP 211,200  132,000 
SSI 52,500  (a) 15,800  (b)
Subtotal 1,103,300  722,100 
Kansas and Missouri Medicaid/SCHIP members 152,700 
Total 1,103,300  874,800 

(a) 48,400 at-risk; 4,100 ASO

(b) 8,600 at-risk; 7,200 ASO

Statement of Operations

  • For the 2007 first quarter, revenues increased 47.4% to $670.8 million from $455.1 million in the 2006 first quarter.
  • The HBR for Centenes Medicaid and SCHIP populations, which reflects medical costs as a percent of premium revenues, was 82.3% for the three months ending March 31, 2007, compared to 82.8% for the same period in 2006. The decrease is primarily attributable to the effect of increased premium taxes. Sequentially, our Medicaid/SCHIP HBR increased from 82.1% in the 2006 fourth quarter to 82.3% because of utilization seasonality. The HBR for the three months ended March 31, 2007, did not include any overall adverse medical cost development related to prior periods.
  • G&A expense as a percent of revenues for the Medicaid Managed Care segment was 13.0% in the first quarter of 2007 compared to 11.9% in the first quarter of 2006. The increase in the Medicaid Managed Care G&A expense ratio for the three months ended March 31, 2007, primarily reflects increased premium taxes. Premium taxes were $18.2 million in the 2007 first quarter and $4.3 million in the 2006 first quarter. This increase was offset by the leveraging of our expenses over higher revenues especially in our Georgia health plan. The first quarter of 2006 included $4.5 million of Georgia implementation costs for which there was no associated revenue until June 1, 2006. The first quarter of 2007 includes $0.7 million of South Carolina start-up costs.
  • Operating earnings were $17.2 million, including a $4.2 million gain on the sale of FirstGuard Missouri and $2.9 million of net expense for FirstGuard activity. Excluding the gain and other FirstGuard activity, operating earnings were $15.8 million compared to $12.6 million in the 2006 first quarter.
  • The first quarter results included a tax benefit from the stock of our Kansas health plan, a gain from the sale of our Missouri health plan and additional FirstGuard activity. The net effect of these FirstGuard activities was $0.59 accretive to earnings per diluted share; $0.67 accretion per diluted share for the FirstGuard tax benefit, offset by net costs of $0.08 per diluted share for other FirstGuard activity.
  • Earnings per diluted share of $0.85. Earnings per diluted share of $0.26 excluding the FirstGuard activity, compared to $0.20 in the 2006 first quarter.

Balance Sheet and Cash Flow

At March 31, 2007, the Company had cash and investments of $562.8 million, including $491.0 million held by its regulated entities and $71.8 million held by its unregulated entities. Medical claims liabilities totaled $276.0 million, representing 46.4 days in claims payable. Total debt was $201.4 million and debt to capitalization was 35.3%.

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

Days in claims payable, December 31, 2006 46.4 
Increase in claims inventory 1.7 
Increase for new SSI markets 0.2 
Georgia and FirstGuard claims (1.9)
Days in claims payable, March 31, 2007 46.4 


The tables below depict the Companys guidance for the 2007 second quarter and full year.

J. Per Brodin, Centenes Chief Financial Officer, stated, The 2007 guidance reflects our recently announced award with Texas to provide care under the Comprehensive Health Care for Children in Foster Care and the commencement of operations in South Carolina.

Q2 2007
Revenue (in millions) $ 720  $ 730 
Earnings per diluted share:
Base earnings $ 0.31  $ 0.34 
South Carolina/Texas Foster Care (0.06) (0.06)
Net $ 0.25  $ 0.28 
Revenue (in millions) $ 2,920  $ 3,000 
Earnings per diluted share:
Base earnings $ 2.10  $ 2.20 
FirstGuard activity (0.59) (0.59)
South Carolina/Texas Foster Care (0.15) (0.12)
Net $ 1.36  $ 1.49 

Conference Call

As previously announced, the Company will host a conference call Tuesday, April 24, 2007, at 8:30 A.M. (Eastern Time) to review the financial results for the first quarter ended March 31, 2007, and to discuss its business outlook. Michael F. Neidorff 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, 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 May 23, 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 3639977.

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 "First Quarter Summary" and fourth and sixth bullets under "Statement of Operations" excludes the tax benefit related to the stock of our Kansas health plan and other activity for the Kansas and Missouri health plans. 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 Companys Statement of Operations for the first 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

March 31, 2007



Total revenues $670,835  $(6,601) $664,234 

Medical costs 535,406  (6,886) 528,520 
Cost of services 15,630  15,630 
General and administrative expenses 106,866  (2,583) 104,283 
Gain on sale of FirstGuard Missouri (4,218) 4,218 
Total operating expenses 653,684  (5,251) 648,433 
Earnings from operations 17,151  (1,350) 15,801 
Investment and other income, net 1,369  1,516  2,885 
Earnings before income taxes 18,520  166  18,686 
Income tax (benefit) expense (19,691) 26,780  7,089 
Net earnings $38,211  $(26,614) $11,597 
Diluted earnings per common share $0.85  $0.26 

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 Childrens Health Insurance Program (SCHIP) and Supplemental Security Income (SSI). The Company operates health plans in Georgia, Indiana, New Jersey, Ohio, Texas and Wisconsin. In addition, the Company contracts with other healthcare and commercial organizations to provide specialty services including behavioral health, disease management, long-term care, managed vision, nurse triage, pharmacy benefits management and treatment compliance. Information regarding Centene is available via the Internet at

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.



(In thousands, except share data)

March 31,


December 31,


Current assets:
Cash and cash equivalents $311,905  $271,047 
Premium and related receivables 78,076  91,664 
Short-term investments, at fair value (amortized cost $43,309 and $67,199, respectively) 43,054  66,921 
Other current assets 48,499  22,189 
Total current assets 481,534  451,821 
Long-term investments, at fair value (amortized cost $183,388 and $146,980, respectively) 182,267  145,417 
Restricted deposits, at fair value (amortized cost $25,662 and $25,422, respectively) 25,562  25,265 
Property, software and equipment, net 121,403  110,688 
Goodwill 130,484  135,877 
Other intangible assets, net 16,011  16,202 
Other assets 14,116  9,710 
Total assets $971,377  $894,980 
Current liabilities:
Medical claims liabilities $275,965  $280,441 
Accounts payable and accrued expenses 75,842  72,723 
Unearned revenue 38,613  33,816 
Current portion of long-term debt 965  971 
Total current liabilities 391,385  387,951 
Long-term debt 200,404  174,646 
Other liabilities 10,124  5,960 
Total liabilities 601,913  568,557 
Stockholders equity:
Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding 43,448,324 and 43,369,918 shares, respectively 44  44 
Additional paid-in capital 213,797  209,340 
Accumulated other comprehensive income:
Unrealized loss on investments, net of tax (925) (1,251)
Retained earnings 156,548  118,290 
Total stockholders equity 369,464  326,423 
Total liabilities and stockholders equity $971,377  $894,980 



(In thousands, except share data)

Three Months Ended
March 31,
Premium $649,243  $435,562 
Service 21,592  19,516 
Total revenues 670,835  455,078 
Medical costs 535,406  361,672 
Cost of services 15,630  15,588 
General and administrative expenses 106,866  65,222 
Gain on sale of FirstGuard Missouri (4,218)
Total operating expenses 653,684  442,482 
Earnings from operations 17,151  12,596 
Other income (expense):
Investment and other income 4,501  3,540 
Interest expense (3,132) (1,998)
Earnings before income taxes 18,520  14,138 
Income tax (benefit) expense (19,691) 5,372 
Net earnings $38,211  $8,766 
Earnings per share:
Basic earnings per common share $0.88  $0.20 
Diluted earnings per common share $0.85  $0.20 
Weighted average number of shares outstanding:
Basic 43,433,319  42,987,892 
Diluted 44,923,340  44,750,271 



(In thousands)

Three Months Ended March 31,
Cash flows from operating activities:
Net earnings $38,211  $8,766 
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization 6,274  4,520 
Stock compensation expense 3,871  3,417 
Deferred income taxes (1,398) 232 
Gain on sale of FirstGuard Missouri (4,218)
Changes in assets and liabilities
Premium and related receivables 13,588  (15,812)
Other current assets (26,336) (2,894)
Other assets (636) (158)
Medical claims liabilities (4,340) 2,278 
Unearned revenue 4,796  (934)
Accounts payable and accrued expenses 1,309  9,937 
Other operating activities 4,859  (9)
Net cash provided by operating activities 35,980  9,343 
Cash flows from investing activities:
Purchase of property, software and equipment (14,794) (14,136)
Purchase of investments (135,866) (53,194)
Sales and maturities of investments 122,835  33,827 
Proceeds from asset sales 10,848 
Acquisitions, net of cash acquired (400) (39,912)
Net cash used in investing activities (17,377) (73,415)
Cash flows from financing activities:
Proceeds from exercise of stock options 868  2,139 
Proceeds from borrowings 191,000  37,000 
Payment of long-term debt (165,248) (2,285)
Excess tax benefits from stock compensation 417  1,454 
Common stock repurchases (644) (3,082)
Debt issue costs (4,138)
Net cash provided by financing activities 22,255  35,226 
Net increase (decrease) in cash and cash equivalents 40,858  (28,846)
Cash and cash equivalents, beginning of period 271,047  147,358 
Cash and cash equivalents, end of period $311,905  $118,512 
Interest paid $2,999  $2,037 
Income taxes paid $5,801  $911 



Medicaid Managed Care:
Georgia 291,300  308,800  252,600  216,000 
Indiana 176,700  183,100  198,100  193,000 
New Jersey 59,100  58,900  59,100  59,000 
Ohio 118,300  109,200  88,300  73,100 
Texas 318,500  298,500  259,900  235,800 
Wisconsin 139,400  164,800  167,100  174,600 
Subtotal 1,103,300  1,123,300  1,025,100  951,500 
Kansas and Missouri 138,900  144,600  150,000 
Medicaid 839,600  887,300  818,000  755,400 
SCHIP 211,200  216,200  189,100  179,700 
SSI 52,500  19,800  18,000  16,400 
Subtotal 1,103,300  1,123,300  1,025,100  951,500 
Kansas and Missouri Medicaid and SCHIP members 138,900  144,600  150,000 
Specialty Services(a):
Arizona 93,600  94,500  94,500  93,600 
Kansas 36,600  36,600  37,500  39,400 
(a) Includes behavioral health contracts only.





Period-end inventory





Average inventory 239,400  195,700  188,600  150,100 
Period-end inventory per member 0.30  0.23  0.20  0.17 
(b) Revenue per member and claims information are presented for the Medicaid Managed Care segment.
DAYS IN CLAIMS PAYABLE (c) 46.4  46.4  45.3  42.6 
(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.





Unregulated 71.8  28.9  29.0  25.5 





ANNUALIZED RETURN ON EQUITY (d) 43.9% 17.5% (83.8)% 5.4%
(d) Annualized Return on Equity is calculated as follows: (net income for quarter x 4) divided by ((beginning of period equity + end of period equity) divided by 2).
DEBT TO CAPITALIZATION (e) 35.3% 35.0% 35.6% 30.7%
(e) Debt to Capitalization is calculated as follows: total debt divided by (total debt + equity).


Three Months Ended March 31,
Medicaid and SCHIP 82.3% 82.8%
SSI 86.3  87.6 
Specialty Services 79.3  84.1 


Three Months Ended March 31,
Medicaid Managed Care 13.0% 11.9%
Specialty Services 15.8  22.3 


Four rolling quarters of the changes in medical claims liabilities are summarized as follows:

Balance, March 31, 2006


Acquisitions 1,788 
Incurred related to:
Current period 1,993,912 
Prior period


Total incurred 1,993,545 
Paid related to:
Current period 1,721,354 
Prior period 170,806 
Total paid 1,892,160 
Balance, March 31, 2007


Centenes claims reserving process utilizes a consistent actuarial methodology to estimate Centenes 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.

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