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8-K

July 26, 2004

8-K: Current report filing

Published on July 26, 2004

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N E W S   R E L E A S E

 

Contact:

  

Karey L. Witty

    

Chief Financial Officer

    

(314) 725-4477

    

Lisa M. Wilson

    

Vice President, Investor Relations

    

(212) 759-3929

 

CENTENE CORPORATION REPORTS TWENTIETH CONSECUTIVE QUARTER OF

INCREASED PROFITABILITY

 

ST. LOUIS, MISSOURI (July 26, 2004) — Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended June 30, 2004.

 

Second Quarter Highlights

 

  • Revenues of $233.6 million, a 25.4% increase over the second quarter of 2003.

 

  • Earnings from operations of $15.9 million, a 54.2% increase over the second quarter of 2003.

 

  • Earnings per diluted share of $0.50.

 

  • Organic membership growth of 12.3% over the second quarter of 2003.

 

  • Medicaid Managed Care segment G&A expense ratio of 10.2% (GAAP) and 9.8% (non-GAAP), exclusive of the effect of the premium tax.

 

  • Operating cash flows of $30.1 million for the six months ended June 30, 2004.

 

  • Days in claims payable of 53.5.

 

  • Awarded contract to manage the Texas Children’s Health Insurance Program (CHIP) Exclusive Provider Organization (EPO) in 170 predominantly rural counties.

 

Michael F. Neidorff, Centene’s chairman and chief executive officer, said, “The second quarter of 2004 marked our twentieth consecutive quarter of increased profitability in which we achieved our stated financial objectives and our results are in-line with our expectations. Our Margin Protection Program™ that we began implementing over three years ago has produced consistent results, pricing cycle stability and ongoing financial savings for the states in which we operate. We believe that we have the operating systems, quality delivery systems and critical management team in place to be a leading total low-cost provider in Medicaid managed care.


I am pleased to report that we recently received a composite 4.5% rate increase in the State of Texas, subject to Centers for Medicare and Medicaid Services (CMS) approval, which will become effective on September 1, 2004. This rate increase, together with our Margin Protection Program™, will offset Centene’s medical service cost trends as we help the State by providing cost-effective healthcare to its Medicaid recipients. Our EPO contract, which we announced in May, gives us an additional opportunity to expand our footprint in the State and to reach more recipients who require quality healthcare.

 

In New Jersey, we received a 5.3% rate increase which with our previously approved Margin Protection Program™ enhances our operations in this state. Concurrent with the rate increase, New Jersey adopted an anticipated 1% premium tax. Furthermore, our growing expertise in serving the SSI population continues to provide confidence in our ability in this area as we consider expansion into other states.

 

Our membership growth remains strong and we continue to strive to add new members, both organically and through targeted acquisitions. In Ohio, our newest state, we are working to expand our provider network, which will lay the foundation for future market and service area expansion. Our growth in Indiana and Wisconsin is noteworthy, as expected.

 

As we progress in 2004 and beyond, we are confident that our strategic objectives will continue to produce predictable financial results and identify cost-savings in Medicaid managed care,” concluded Neidorff.

 

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The following table depicts membership in Centene’s managed care organizations by state at June 30, 2004 and 2003:

 

     2004

   2003

Indiana

   132,900    109,000

New Jersey

   54,000    52,700

Ohio

   23,800    —  

Texas

   155,300    131,400

Wisconsin

   167,300    145,600
    
  

TOTAL

   533,300    438,700
    
  

 

The following table depicts membership in Centene’s managed care organizations by member category at June 30, 2004 and 2003:

 

     2004

    2003

 

Medicaid

   460,300     361,700  

SCHIP

   63,200     68,800  

SSI

   9,800 (a)   8,200 (b)
    

 

TOTAL

   533,300     438,700  
    

 


(a) 4,400 at-risk; 5,400 ASO
(b) 4,300 at-risk; 3,900 ASO

 

Statement of Earnings Highlights

 

  • For the second quarter of 2004, revenues increased 25.4% to $233.6 million from $186.2 million in the second quarter of 2003.

 

  • The health benefits ratio (HBR), which reflects medical services costs as a percent of premium revenues, was 81.0% (GAAP) compared to 83.3% (GAAP) for the same period in 2003. Excluding the premium tax imposed by the State of Texas on September 1, 2003, the HBR was 81.4% (non-GAAP) for the current quarter. This was in line with the Company’s targeted range of 81.5% to 83.5%, due

 

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primarily to the ongoing successful implementation of our Margin Protection Program and disease management efforts aimed at reducing inappropriate utilization to promote better health outcomes and reduce costs.

 

  • Consolidated general and administrative (G&A) expenses as a percent of revenues increased to 12.1% (GAAP) in 2004 from 11.2% (GAAP) in the second quarter of 2003. Excluding the effect of the premium tax, the expense ratio was 11.7% (non-GAAP). The Medicaid Managed Care segment G&A ratio was 9.8% (non-GAAP) compared to 10.3% (GAAP) for the same prior year period.

 

  • Earnings from operations increased 54.2% to $15.9 million from $10.3 million in 2003.

 

  • Net earnings improved to $10.8 million, or $0.50 per diluted share, compared to $7.7 million, or $0.43 per diluted share, for the second quarter of 2003.

 

  • For the six months ended June 30, 2004, revenues increased 26.3% to $459.1 million from $363.7 million for the same period in the prior year. The health benefits ratio was 81.0% (GAAP), with the Medicaid component at 80.4%, compared to 82.4% for the same period in 2003. General and administrative expenses as a percent of revenues for the Medicaid segment declined slightly to 10.3% (GAAP) and 9.9% (non-GAAP) as compared to 10.4% (GAAP) in 2003. Earnings from operations increased 49.5% to $30.6 million from $20.5 million in 2003. Net earnings improved to $21.0 million, or $0.97 per diluted share.

 

Balance Sheet and Cash Flow Highlights

 

At June 30, 2004, the Company had cash and investments of $298.4 million, a portion of which is restricted due to state regulatory requirements. Medical claims liabilities totaled $110.1 million, representing 53.5 days in claims payable. Cash flows from operating activities were $30.1 million for the six months ended June 30, 2004.

 

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Outlook

 

Karey L. Witty, Centene’s chief financial officer, commented, “We are updating our guidance and anticipate 2004 revenue in the range of $962 to $970 million and net earnings of $1.99 to $2.02 per share. This does not include the potential impact of any acquisitions we may undertake during 2004.”

 

Conference Call

 

As previously announced, the Company will host a conference call tomorrow, July 27, 2004, at 8:30 a.m. (Eastern Time) to review the financial results for the second quarter ended June 30, 2004, and to discuss its business outlook. Michael F. Neidorff and Karey L. Witty 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 PM Eastern time on August 10, 2004 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 8350703.

 

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 pro forma (non-GAAP) information presented above in the fifth bullet under “Second Quarter Highlights,” second, third and sixth bullet under “Statement of Earnings Highlights” and presented below in tables excludes the impact of a premium tax enacted in September 2003. This assumption has been made in the non-GAAP financial measures as management believes that this assumption generally provides a more consistent measure of the Company’s performance.

 

The Company uses the presented non-GAAP financial measures internally to focus management on period-to-period changes in the Company’s core business. Therefore, the Company believes

 

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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.

 

About Centene Corporation

 

Centene Corporation provides multi-line managed care programs and related services to individuals receiving benefits under Medicaid, including Supplemental Security Income (SSI), and the Children’s Health Insurance Program (CHIP). The Company operates health plans in Indiana, New Jersey, Ohio, Texas and Wisconsin. In addition, the Company contracts with other healthcare organizations to provide specialty services including behavioral health, nurse triage and pharmacy compliance. Information regarding Centene is available via the Internet at www.centene.com.

 

The information provided in the paragraphs following the bullet listing under “Second Quarter Highlights,” and the paragraph under “Outlook” above contain forward-looking statements that relate to future events and future financial performance of Centene. These forward-looking statements represent the Company’s estimates as of July 26, 2004. 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]

 

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CENTENE CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

     June 30,
2004


    December 31,
2003


     (Unaudited)      
ASSETS               

Current assets:

              

Cash and cash equivalents

   $ 80,478     $ 64,346

Premium and related receivables, net of allowances of $568 and $607, respectively

     21,297       20,308

Short-term investments, at fair value (amortized cost $31,223 and $15,192, respectively)

     31,185       15,160

Deferred income taxes

     3,290       2,732

Other current assets

     8,809       7,755
    


 

Total current assets

     145,059       110,301

Long-term investments, at fair value (amortized cost $167,907 and $183,749, respectively)

     165,714       184,811

Restricted deposits, at fair value (amortized cost $21,176 and $20,201, respectively)

     21,037       20,364

Property, software and equipment

     26,008       23,106

Goodwill

     18,430       13,066

Other intangible assets

     7,035       6,294

Other assets

     6,532       4,750
    


 

Total assets

   $ 389,815     $ 362,692
    


 

LIABILITIES AND STOCKHOLDERS’ EQUITY               

Current liabilities:

              

Medical claims liabilities

   $ 110,105     $ 106,569

Accounts payable and accrued expenses

     20,673       17,965

Unearned revenue

     3,650       3,673

Current portion of long-term debt and notes payable

     288       579
    


 

Total current liabilities

     134,716       128,786

Long-term debt

     7,472       7,616

Other liabilities

     5,426       6,175
    


 

Total liabilities

     147,614       142,577

Stockholders’ equity:

              

Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding 20,433,040 and 20,131,924 shares, respectively

     20       20

Additional paid-in capital

     160,724       157,380

Accumulated other comprehensive income:

              

Unrealized (loss) gain on investments, net of tax

     (1,469 )     740

Retained earnings

     82,926       61,975
    


 

Total stockholders’ equity

     242,201       220,115
    


 

Total liabilities and stockholders’ equity

   $ 389,815     $ 362,692
    


 

 

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CENTENE CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except share data)

 

    

Three Months Ended

June 30,


   

Six Months Ended

June 30,


 
     2004

    2003

    2004

    2003

 
     (Unaudited)     (Unaudited)  

Revenues:

                                

Premiums

   $ 231,330     $ 182,900     $ 454,020     $ 359,112  

Services

     2,278       3,332       5,113       4,554  
    


 


 


 


Total revenues

     233,608       186,232       459,133       363,666  
    


 


 


 


Expenses:

                                

Medical costs

     187,298       152,404       367,746       299,311  

Cost of services

     2,022       2,613       4,038       3,588  

General and administrative expenses

     28,351       20,879       56,728       40,284  
    


 


 


 


Total operating expenses

     217,671       175,896       428,512       343,183  
    


 


 


 


Earnings from operations

     15,937       10,336       30,621       20,483  

Other income (expense):

                                

Investment and other income

     1,336       1,257       2,846       2,231  

Interest expense

     (101 )     (4 )     (191 )     (31 )
    


 


 


 


Earnings before income taxes

     17,172       11,589       33,276       22,683  

Income tax expense

     6,359       4,462       12,325       8,695  

Minority interest

     —         581       —         881  
    


 


 


 


Net earnings

   $ 10,813     $ 7,708     $ 20,951     $ 14,869  
    


 


 


 


Earnings per share:

                                

Basic earnings per common share

   $ 0.53     $ 0.47     $ 1.03     $ 0.91  

Diluted earnings per common share

   $ 0.50     $ 0.43     $ 0.97     $ 0.83  

Weighted average number of shares outstanding:

                                

Basic

     20,360,733       16,484,945       20,276,371       16,409,291  

Diluted

     21,687,188       17,803,016       21,610,713       17,829,558  

 

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

    

Six Months Ended

June 30,


 
     2004

    2003

 
     (Unaudited)  

Cash flows from operating activities:

                

Net earnings

   $ 20,951     $ 14,869  

Adjustments to reconcile net earnings to net cash provided by operating activities —

                

Depreciation and amortization

     4,701       2,761  

Stock compensation expense

     32       108  

Minority interest

     —         (881 )

Gain on sale of investments

     (103 )     (777 )

Changes in assets and liabilities —

                

Premium and related receivables

     (989 )     1,205  

Other current assets

     (1,051 )     (2,065 )

Deferred income taxes

     (914 )     836  

Other assets

     (330 )     286  

Medical claims liabilities

     3,536       (4,081 )

Accounts payable and accrued expenses

     5,254       (3,248 )

Unearned revenue

     (23 )     30  

Other operating activities

     (950 )     352  
    


 


Net cash provided by operating activities

     30,114       9,395  
    


 


Cash flows from investing activities:

                

Purchase of property, software and equipment

     (5,082 )     (2,550 )

Purchase of investments

     (154,342 )     (103,310 )

Sales and maturities of investments

     151,077       83,196  

Acquisitions, net of cash acquired

     (7,005 )     (2,295 )
    


 


Net cash used in investing activities

     (15,352 )     (24,959 )
    


 


Cash flows from financing activities:

                

Reduction of long-term debt and notes payable

     (435 )     —    

Extinguishment of acquired liabilities

     —         (1,218 )

Proceeds from stock options and employee stock purchase plan

     1,805       548  
    


 


Net cash provided by (used in) financing activities

     1,370       (670 )
    


 


Net increase (decrease) in cash and cash equivalents

     16,132       (16,234 )
    


 


Cash and cash equivalents, beginning of period

     64,346       59,656  
    


 


Cash and cash equivalents, end of period

   $ 80,478     $ 43,422  
    


 


Interest paid

   $ 181     $ 42  

Income taxes paid

   $ 11,034     $ 8,580  

 

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CENTENE CORPORATION

 

SUPPLEMENTAL FINANCIAL DATA

 

     Q2     Q1     Q4     Q3  
     2004

    2004

    2003

    2003

 

MEMBERSHIP

                                

Indiana

     132,900       125,400       119,400       112,100  

New Jersey

     54,000       54,000       54,000       52,700  

Ohio

     23,800       23,800       —         —    

Texas

     155,300       154,000       158,400       152,100  

Wisconsin

     167,300       165,200       157,800       150,200  
    


 


 


 


TOTAL

     533,300       522,400       489,600       467,100  
    


 


 


 


Medicaid

     460,300       446,900       411,800       389,200  

SCHIP

     63,200       65,900       68,400       68,600  

SSI

     9,800       9,600       9,400       9,300  
    


 


 


 


TOTAL

     533,300       522,400       489,600       467,100  
    


 


 


 


REVENUE PER MEMBER

   $ 145.31     $ 145.19     $ 142.38     $ 143.98  

CLAIMS

                                

Period-end inventory

     89,700       102,300       131,000       59,400  

Average inventory

     98,800       107,400       102,500       75,600  

Period-end inventory per member

     0.17       0.20       0.27       0.13  

DAYS IN CLAIMS PAYABLE (a)

     53.5       55.4       59.0       52.5  

(a)      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.

         

ANNUALIZED RETURN ON EQUITY (b)(c)

     18.2 %     17.9 %     18.1 %     21.3 %

(b) 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).
(c) Reflects a 3,450,000 share follow-on offering completed August 13, 2003

 

HEALTH BENEFITS RATIO BY CATEGORY:

 

    

Three Months
Ended

June 30,


   

Six Months
Ended

June 30,


 
     2004

    2003

    2004

    2003

 

Medicaid and SCHIP

   80.3 %   82.4 %   80.4 %   82.4 %

SSI

   97.8     103.3     98.5     103.7  

Total (GAAP)

   81.0     83.3     81.0     83.3  

Total (non-GAAP)

   81.4     83.3     81.4     83.3  

 

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GENERAL AND ADMINISTRATIVE EXPENSE RATIO BY BUSINESS SEGMENT:

 

     Three Months Ended June 30,

    Six Months Ended June 30,

 
     2004

    2003

    2004

    2003

 
     GAAP

    Non-GAAP*

          GAAP

    Non-GAAP*

       

Medicaid Managed Care

   10.2 %   9.8 %   10.3 %   10.3 %   9.9 %   10.4 %

Specialty Services

   46.4     46.4     32.2     49.7     49.7     30.2  

Total

   12.1     11.7     11.2     12.4     11.9     11.1  

* Excluding effect of premium tax.

 

MEDICAL CLAIMS LIABILITIES

(In thousands)

 

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

 

     2004

 

Balance, June 30, 2003

   $ 87,101  

Incurred related to:

        

Current period

     709,548  

Prior period

     (14,920 )
    


Total incurred

     694,628  
    


Paid related to:

        

Current period

     605,549  

Prior period

     66,075  
    


Total paid

     671,624  
    


Balance, June 30, 2004

   $ 110,105  
    


 

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.

 

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