01—Abstract
Summary
Summary of the 10-K filed February 24, 2006. Cited figures are marked; the original filing is the authoritative source.
Centene Corporation (NYSE: CNC) reported a strong 2005, with total revenues rising 50% to $1.51 billiona and net earnings up 25% to $55.6 million, or $1.24 diluted EPS (up 22%).
Growth was driven mainly by Medicaid Managed Care membership, which reached 871,900 at year-end, up 78% over two years, supported by mandatory managed care enrollment in Indiana, the SummaCare asset purchase in Ohio, and the SCHIP contract in Texas. Operating earnings rose 23% to $79.2 millionb, but margins were pressured by a higher Medicaid and SCHIP health benefits ratio (81.7%, up from 80.4%), including a $9.5 million Aurora Health Care settlement and new-market cost trends. The company is diversifying into specialty services through the July 2005 AirLogix disease management acquisition and the January 2006 US Script PBM acquisition (approximately $40 million plus up to $10 million in earn-outs).
Specialty Services remains small, at about $97.7 millionc of segment revenue, but management views it as a route to revenue diversification beyond Medicaid. Balance sheet strength improved, with stockholders' equity of $352 million and goodwill of $157 million, though debt rose to $93 million, mostly from the revolving credit facility, which was expanded to $200 million in September 2005. Investors should weigh the company's concentration risk.
Indiana, Kansas, Texas and Wisconsin each account for 12% to 23% of revenue, and nearly all revenue depends on state Medicaid premiums that are fixed for one-year periods. Federal proposals to cut Medicaid funding by $10 billiond over five years, along with possible changes to funding mechanisms, are key risks. The Georgia contract, which begins membership operations in 2006, and the Texas SCHIP expansion are the main near-term growth drivers.
02—Key points
Key Highlights
- Revenue grew 50.4% to $1.51 billion in 2005, driven by a 78% increase in Medicaid membership over two years to 871,900 members.
- Net earnings rose 25.5% to $55.6 million; diluted EPS rose 21.6% to $1.24.
- Medicaid and SCHIP health benefits ratio rose to 81.7% from 80.4%, reflecting a $9.5 million Aurora settlement and cost trends in new markets such as Indiana.
- Acquired US Script PBM (January 2006, ~$40M) and AirLogix disease management (July 2005, ~$36.2M) to diversify beyond Medicaid.
- Revolving credit facility expanded to $200M in September 2005; $93.1M total debt at year-end, with $109M drawn as of February 2006.
- Stockholders' equity increased to $352M; the company holds $183.5M in statutory capital against $87.7M required and authorized a 4M-share buyback through 2007 (no shares repurchased in 2005).
- Revenue concentration is high: Indiana (18%), Kansas (12%), Texas (22%) and Wisconsin (23%) of 2005 revenue, and Medicaid funding cuts are a material risk.
03—Questions
Frequently Asked Questions
How profitable is Centene's core Medicaid business, and what is driving margin pressure?
Medicaid and SCHIP health benefits ratio (medical costs as a percentage of premiums) rose to 81.7% in 2005 from 80.4% in 2004. Drivers include a $9.5 million Aurora Health Care lawsuit settlement (adding 0.3 points) and higher cost trends in newly expanded markets such as Indiana (adding 1.2 points). The Medicaid Managed Care G&A ratio improved to 10.5% from 10.7%, partly offsetting the increase.
How dependent is Centene on state government contracts?
Almost all revenue comes from state Medicaid, SCHIP and SSI contracts, which generally run one to two years and can be terminated for non-performance or loss of state funding. Four states (Indiana, Kansas, Texas and Wisconsin) each provided more than 10% of 2005 revenue. Premium rates are fixed by contract for one-year periods, so unexpected cost increases cannot be passed through until renewal.
What are the main growth drivers for 2006?
Growth drivers include the Georgia Medicaid contract (membership operations begin in 2006), the full-year contribution from the January 2006 US Script PBM acquisition, and continued Specialty Services expansion (Cenpatico behavioral health contracts in Arizona and Kansas). Management also plans to move its pharmacy network to US Script and expects a roughly $0.15 reduction in 2006 diluted EPS from expensing stock options under SFAS 123R.
Is Centene's balance sheet strong enough to fund acquisitions and growth?
Centene ended 2005 with $204 million in cash and short-term investments and total stockholders' equity of $352 million. Debt rose to $93 million, and $76 million of the $200 million credit facility remained available as of February 2006. Management believes existing liquidity and operating cash flow are sufficient for at least 12 months. Operating cash flow fell to $74 million from $99 million in 2004, reflecting higher receivables and the Aurora settlement payment.
04—Continue