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8-K

October 26, 2004

8-K: Current report filing

Published on October 26, 2004

Exhibit 99.1

 

LOGO

 

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 TWENTY-FIRST CONSECUTIVE QUARTER

OF INCREASED PROFITABILITY

 

ST. LOUIS, MISSOURI (October 25, 2004) — Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended September 30, 2004.

 

Third Quarter Highlights

 

  • Revenues of $253.7 million, a 27.7% increase over the third quarter of 2003.

 

  • Earnings from operations of $16.5 million, a 30.3% increase over the third quarter of 2003.

 

  • Earnings per diluted share of $0.52.

 

  • Organic membership growth of 32.3% over the third quarter of 2003, including the Texas Exclusive Provider Organization (EPO) contract.

 

  • Texas EPO start-up costs moved Medicaid Managed Care segment G&A expense ratio to 10.5% (GAAP) and 10.0%, exclusive of the effect of premium taxes (non-GAAP).

 

  • Operating cash flows of $57.5 million for the nine months ended September 30, 2004.

 

  • Days in claims payable of 57.3 and claims inventory of 141,200, also driven by Texas EPO contract.

 

  • Signed definitive agreement to purchase FirstGuard, serving over 136,000 members and marking Centene’s entry into Kansas and Missouri, two additional Medicaid-mandated states.

 

  • Realigned Specialty Companies into a subsidiary company named CenCorp Health Solutions™.

 

  • Announced plans to establish a claims processing facility in Great Falls, Montana to accommodate growth initiatives for 2005 and beyond.

 


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Michael F. Neidorff, Centene’s chairman and chief executive officer, said, “I am pleased to report another strong quarter, marking our 21st quarter of consecutive earnings growth. We remain focused on growing our business methodically and predictably while continuing to work with the states in which we operate to offer better member care while achieving costs savings for the states. We experienced strong growth in Indiana and Texas, while New Jersey and Ohio were relatively flat, as anticipated. We are pleased to have added the 94,500 SCHIP Exclusive Provider Organization members in Texas, effective September 1, 2004, ahead of schedule. In New Jersey, we anticipate marginal growth for the year and are working actively with the State to expand our SSI coverage into additional counties. As we continue to build our physician network and seek to enter new service areas in Ohio, we are confident in the growth opportunities within this State. In Wisconsin, the State has implemented new verification requirements for BadgerCare recipients, resulting in a decline in enrollment from the sequential quarter. In the past, we have experienced similar short-term variances in other markets, namely Indiana and Texas, and will work with the State of Wisconsin to re-qualify recipients. These temporary changes are part of the normal course of doing business and do not affect our prospects for ongoing organic growth of 10-12%.

 

A significant highlight during the quarter was the announcement of our definitive agreement to purchase FirstGuard, two health plan entities that serve 136,000 members in Kansas and Missouri, marking our entry into two additional Medicaid-mandated states. The organic growth opportunities are significant, given the 1.2 million Medicaid and 120,000 SSI eligibles in both states. We will also be able to leverage our local approach, and the acquisition will be accretive in 2005, consistent with our prior guidance. Subject to regulatory approvals, we expect the transaction to close by the first quarter of 2005.

 

In addition, our plans to establish a second claims processing center in Great Falls, Montana are underway. When completed, this facility will provide Centene with geographic diversity and redundancy capabilities, while enabling us to methodically plan for our growth initiatives for 2005 and beyond,” concluded Neidorff.

 

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

 

     2004

   2003

Indiana

   150,000    112,100

New Jersey

   53,200    52,700

Ohio

   23,500    —  

Texas

   250,200    152,100

Wisconsin

   164,700    150,200
    
  

TOTAL

   641,600    467,100
    
  

 

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

 

     2004

    2003

 

Medicaid (excluding SSI)

   479,500     389,200  

SCHIP

   152,100     68,600  

SSI

   10,000 (a)   9,300 (b)
    

 

TOTAL

   641,600     467,100  
    

 

 

(a) 4,500 at-risk, 5,500 ASO

 

(b) 4,300 at-risk; 5,000 ASO

 

Statement of Earnings Highlights

 

  • For the third quarter of 2004, revenues increased 27.7% to $253.7 million from $198.8 million in the third quarter of 2003.

 

  • The health benefits ratio (HBR), which reflects medical costs as a percent of premium revenues, was 80.7% (GAAP) compared to 82.0% (GAAP) for the same period in 2003. Excluding premium taxes imposed by the State of Texas beginning September 1, 2003, and the State of New Jersey beginning July 1, 2004, the HBR was 81.2% (non-GAAP) for the current quarter.

 

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  • Consolidated general and administrative (G&A) expenses as a percent of revenues increased to 12.7% (GAAP) in 2004 from 11.4% (GAAP) in the third quarter of 2003. Excluding the effect of premium taxes, the expense ratio was 12.2% (non-GAAP). The Medicaid Managed Care segment G&A ratio was 10.0% (non-GAAP) compared to 10.1% (non-GAAP) for the same prior year period and included $400,000 of start up costs associated with the Texas State Children’s Health Insurance Program Exclusive Provider Organization contract that was effective September 1, 2004. The Specialty Segment G&A ratio was 56.0%. The quarter’s results included approximately $445,000 in due diligence costs for a transaction that we decided not to pursue as well as costs associated with the closing of our clinic facilities in California and Texas.

 

  • Earnings from operations increased 30.3% to $16.5 million from $12.6 million in the third quarter of 2003.

 

  • Net earnings were $11.4 million, or $0.52 per diluted share, compared to $8.7 million, or $0.44 per diluted share, for the third quarter of 2003.

 

  • For the nine months ended September 30, 2004, revenues increased 26.8% to $712.9 million from $562.4 million for the same period in the prior year. The health benefits ratio was 80.9% (GAAP), with the Medicaid component at 80.3%, compared to 82.0% for the same period in 2003. General and administrative expenses as a percent of revenues for the Medicaid segment were 10.4% (GAAP) and 9.9% (non-GAAP) as compared to 10.3% (GAAP) in 2003. Earnings from operations increased 42.2% to $47.1 million from $33.1 million in 2003. Net earnings improved to $32.3 million, or $1.49 per diluted share.

 

Balance Sheet Highlights

 

At September 30, 2004, the Company had cash and investments of $323.6 million, a portion of which is restricted due to state regulatory requirements. Medical claims liabilities totaled $126.4 million, representing 57.3 days in claims payable versus 53.5 days from the previous quarter. This increase reflects higher claims inventory levels primarily resulting from transitioning the EPO members to Centene effective September 1, 2004.

 

Outlook

 

Karey L. Witty, Centene’s chief financial officer, commented, “Our fourth quarter 2004 revenue guidance is in the range of $265 million to $267 million, and we anticipate net earnings of $0.52

 

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to $0.53 per diluted share, based on 22.0 million fully diluted shares outstanding. This anticipates incurring approximately $900,000 in start-up costs during the fourth quarter in preparation for the FirstGuard closing. For 2005, we anticipate revenue in the range of $1.22 billion to $1.24 billion, and net earnings per diluted share of $2.39 to $2.47. Since the FirstGuard transaction is subject to regulatory approvals, our guidance excludes any impact related to the transaction. In addition, this guidance does not include the effects of any pending changes to the accounting treatment for stock options.” A review of the results for the third quarter and additional details on management’s outlook for the fourth quarter, together with preliminary views on 2005, will take place during the Company’s scheduled third quarter earnings call.

 

Conference Call

 

As previously announced, the Company will host a conference call tomorrow, October 26, 2004, at 8:30 a.m. (Eastern time) to review the financial results for the third quarter ended September 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 p.m. (Eastern time) on November 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 1093292.

 

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 “Third Quarter Highlights” and second, third and sixth bullets under “Statement of Earnings Highlights” and presented below in tables excludes the impact of the premium taxes enacted in September 2003

 

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by the State of Texas and in July 2004 by the State of New Jersey. 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 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 State Children’s Health Insurance Program (SCHIP). 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 treatment compliance. Information regarding Centene is available via the Internet at www.centene.com.

 

The information provided in the paragraphs following the bullet listing under “Third 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 October 25, 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

 

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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)

 

    

September 30,

2004


  

December 31,

2003


     (Unaudited)     
ASSETS              

Current assets:

             

Cash and cash equivalents

   $ 88,687    $ 64,346

Premium and related receivables, net of allowances of $470 and $607, respectively

     22,739      20,308

Short-term investments, at fair value (amortized cost $43,640 and $15,192, respectively)

     43,568      15,160

Deferred income taxes

     3,143      2,732

Other current assets

     12,561      7,755
    

  

Total current assets

     170,698      110,301

Long-term investments, at fair value (amortized cost $170,061 and $183,749, respectively)

     170,126      184,811

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

     21,202      20,364

Property, software and equipment

     28,831      23,106

Goodwill

     17,142      13,066

Other intangible assets

     6,808      6,294

Other assets

     6,346      4,750
    

  

Total assets

   $ 421,153    $ 362,692
    

  

LIABILITIES AND STOCKHOLDERS’ EQUITY              

Current liabilities:

             

Medical claims liabilities

   $ 126,394    $ 106,569

Accounts payable and accrued expenses

     21,907      17,965

Unearned revenue

     3,670      3,673

Current portion of long-term debt and notes payable

     288      579
    

  

Total current liabilities

     152,259      128,786

Long-term debt

     7,400      7,616

Other liabilities

     5,571      6,175
    

  

Total liabilities

     165,230      142,577

Stockholders’ equity:

             

Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding 20,520,026 and 20,131,924 shares, respectively

     21      20

Additional paid-in capital

     161,613      157,380

Accumulated other comprehensive income:

             

Unrealized gain on investments, net of tax

     12      740

Retained earnings

     94,277      61,975
    

  

Total stockholders’ equity

     255,923      220,115
    

  

Total liabilities and stockholders’ equity

   $ 421,153    $ 362,692
    

  

 

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CENTENE CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except share data)

 

    

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
     2004

    2003

    2004

    2003

 
     (Unaudited)     (Unaudited)  

Revenues:

                                

Premiums

   $ 251,536     $ 196,173     $ 705,556     $ 555,285  

Services

     2,207       2,580       7,320       7,134  
    


 


 


 


Total revenues

     253,743       198,753       712,876       562,419  
    


 


 


 


Expenses:

                                

Medical costs

     202,974       160,812       570,720       460,123  

Cost of services

     2,111       2,681       6,149       6,269  

General and administrative expenses

     32,187       22,620       88,915       62,904  
    


 


 


 


Total operating expenses

     237,272       186,113       665,784       529,296  
    


 


 


 


Earnings from operations

     16,471       12,640       47,092       33,123  

Other income (expense):

                                

Investment and other income

     1,683       1,245       4,529       3,476  

Interest expense

     (126 )     (71 )     (317 )     (102 )
    


 


 


 


Earnings before income taxes

     18,028       13,814       51,304       36,497  

Income tax expense

     6,677       5,110       19,002       13,805  

Minority interest

     —         —         —         881  
    


 


 


 


Net earnings

   $ 11,351     $ 8,704     $ 32,302     $ 23,573  
    


 


 


 


Earnings per share:

                                

Basic earnings per common share

   $ 0.55     $ 0.47     $ 1.59     $ 1.38  

Diluted earnings per common share

   $ 0.52     $ 0.44     $ 1.49     $ 1.28  

Weighted average number of shares outstanding:

                                

Basic

     20,486,429       18,430,713       20,346,902       17,094,621  

Diluted

     21,820,090       19,842,145       21,682,060       18,439,050  

 

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CENTENE CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

    

Nine Months Ended

September 30,


 
     2004

    2003

 
     (Unaudited)  

Cash flows from operating activities:

                

Net earnings

   $ 32,302     $ 23,573  

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

                

Depreciation and amortization

     7,219       4,299  

Stock compensation expense

     44       232  

Minority interest

     —         (881 )

Gain on sale of investments

     (212 )     (1,188 )

Changes in assets and liabilities —

                

Premium and related receivables

     (2,431 )     (4,132 )

Other current assets

     (4,803 )     (849 )

Deferred income taxes

     (303 )     452  

Other assets

     (1,873 )     363  

Medical claims liabilities

     19,825       558  

Accounts payable and accrued expenses

     5,184       (396 )

Other operating activities

     2,523       293  
    


 


Net cash provided by operating activities

     57,475       22,324  
    


 


Cash flows from investing activities:

                

Purchase of property, software and equipment

     (9,487 )     (16,242 )

Purchase of investments

     (207,385 )     (291,462 )

Sales and maturities of investments

     188,918       202,306  

Acquisitions, net of cash acquired

     (7,005 )     (3,218 )
    


 


Net cash used in investing activities

     (34,959 )     (108,616 )
    


 


Cash flows from financing activities:

                

Reduction of long-term debt and notes payable

     (507 )     (24 )

Extinguishment of acquired liabilities

     —         (1,218 )

Proceeds from stock options and employee stock purchase plan

     2,332       803  

Net proceeds from issuance of common stock

     —         81,403  

Proceeds from borrowings

     —         8,581  

Cash paid for fractional share impact of stock split

     —         (3 )
    


 


Net cash provided by financing activities

     1,825       89,542  
    


 


Net increase in cash and cash equivalents

     24,341       3,250  
    


 


Cash and cash equivalents, beginning of period

     64,346       59,656  
    


 


Cash and cash equivalents, end of period

   $ 88,687     $ 62,906  
    


 


Interest paid

   $ 324     $ 85  

Income taxes paid

   $ 18,844     $ 13,479  

 

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CENTENE CORPORATION

 

SUPPLEMENTAL FINANCIAL DATA

 

    

Q3

2004


  

Q2

2004


  

Q1

2004


  

Q4

2003


MEMBERSHIP

                           

Indiana

     150,000      132,900      125,400      119,400

New Jersey

     53,200      54,000      54,000      54,000

Ohio

     23,500      23,800      23,800      —  

Texas

     250,200      155,300      154,000      158,400

Wisconsin

     164,700      167,300      165,200      157,800
    

  

  

  

TOTAL

     641,600      533,300      522,400      489,600
    

  

  

  

Medicaid

     479,500      460,300      446,900      411,800

SCHIP

     152,100      63,200      65,900      68,400

SSI

     10,000      9,800      9,600      9,400
    

  

  

  

TOTAL

     641,600      533,300      522,400      489,600
    

  

  

  

REVENUE PER MEMBER

   $ 144.70    $ 145.31    $ 145.19    $ 142.38

CLAIMS

                           

Period-end inventory

     141,200      89,700      102,300      131,000

Average inventory

     96,800      98,800      107,400      102,500

Period-end inventory per member

     0.22      0.17      0.20      0.27

DAYS IN CLAIMS PAYABLE (a)

     57.3      53.5      55.4      59.0

(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)

     18.2%      18.2%      17.9%      18.1%

 

(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).

 

HEALTH BENEFITS RATIO BY CATEGORY:

 

     Three Months Ended
September 30,


   

Nine Months Ended

September 30,


 
     2004

    2003

    2004

    2003

 

Medicaid and SCHIP

   80.1 %   81.3 %   80.3 %   82.0 %

SSI

   92.8     102.9     96.6     103.5  

Total (GAAP)

   80.7     82.0     80.9     82.9  

Total (non-GAAP)

   81.2     82.1     81.3     82.9  

 

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GENERAL AND ADMINISTRATIVE EXPENSE RATIO BY BUSINESS SEGMENT:

 

     Three Months Ended September 30,

    Nine Months Ended September 30,

 
     2004

    2003

    2004

    2003

 
     GAAP

    Non-GAAP*

    GAAP

    Non-GAAP*

    GAAP

    Non-GAAP*

    GAAP

    Non-GAAP*

 

Medicaid Managed Care

   10.5 %   10.0 %   10.2 %   10.1 %   10.4 %   9.9 %   10.3 %   10.3 %

Specialty Services

   56.0     56.0     32.0     32.0     51.8     51.8     31.0     31.0  

Total

   12.7     12.2     11.4     11.2     12.5     12.0     11.2     11.1  

 

* Excluding effect of premium taxes.

 

MEDICAL CLAIMS LIABILITIES

(In thousands)

 

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

 

     2004

 

Balance, September 30, 2003

   $ 91,739  

Incurred related to:

        

Current period

     750,116  

Prior period

     (13,330 )
    


Total incurred

     736,786  
    


Paid related to:

        

Current period

     630,164  

Prior period

     71,967  
    


Total paid

     702,131  
    


Balance, September 30, 2004

   $ 126,394  
    


 

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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