01—Abstract
Summary
Summary of the 10-K filed February 23, 2007. Cited figures are marked; the original filing is the authoritative source.
Centene Corporation (NYSE: CNC) reported a net loss of $43.6 milliona, or $1.01 per diluted share, for fiscal 2006, compared with net earnings of $55.6 million, or $1.24 per diluted share, in 2005.
The swing was driven by non-cash charges tied to its FirstGuard health plans: an $81.1 millionb goodwill impairment (about $87.1 million including other intangibles) and $13.4 million of exit costs, which together reduced diluted EPS by roughly $2.04 pre-tax. Excluding these items, the underlying business grew strongly. Total revenue rose 51% to $2.28 billion, and year-end Medicaid Managed Care membership reached 1.26 million, up 63% over two years (45% excluding Kansas and Missouri).
Operating cash flow was a healthy $195.0 millionc. The core risk for investors is concentration and government funding exposure. Virtually all revenue comes from state Medicaid, SCHIP and SSI programs, and five states (Georgia, Indiana, Kansas, Texas and Wisconsin) each generated more than 10% of revenue.
Kansas was lost when its contract expired on December 31, 2006, and the Missouri plan was sold effective February 1, 2007. Federal SCHIP authorization expires in fiscal 2007, and the Deficit Reduction Act of 2005 cuts Medicaid spending. Georgia and New Jersey face SCHIP funding shortfalls, and several state contracts expire in mid-2007.
Medical cost pressure is also visible: the Medicaid and SCHIP health benefits ratio rose to 82.6%d from 81.8%, and general and administrative expenses rose sharply, partly due to premium taxes that will be netted out of revenue beginning in 2007 under EITF 06-3. Balance sheet capacity has tightened somewhat.
Long-term debt more than doubled to $174.6 million, stockholders' equity fell to $326.4 million from $352.0 million, and the company faces a securities class action and a related derivative suit. Management expects cash, investments and the $300 million credit facility, of which $135.4 million was available at year end, to fund operations for at least 12 months, and anticipates roughly $30 to $40 million of cash proceeds in 2007 from the FirstGuard sale and related tax benefits.
02—Key points
Key Highlights
- Net loss of $43.6 million ($1.01 per diluted share) in 2006, versus net earnings of $55.6 million ($1.24 per diluted share) in 2005, due mainly to an $81.1 million goodwill impairment on FirstGuard.
- Total revenue grew 51.3% to $2.28 billion, driven by Medicaid membership growth, a 5.6% composite premium rate increase, and acquisitions in Specialty Services (US Script, Cardium, OptiCare).
- Medicaid Managed Care membership reached 1,262,200 at December 31, 2006, up from 871,900 a year earlier; Georgia (308,800 members) became a major market after launching in June 2006.
- Medicaid and SCHIP health benefits ratio rose to 82.6% from 81.8%, reflecting maternity, neonatal, physician and pharmacy cost trends, a key margin pressure point.
- Five states (Georgia, Indiana, Kansas, Texas, Wisconsin) each accounted for more than 10% of revenue, and the Kansas contract ended December 31, 2006, creating concentration and renewal risk.
- Operating cash flow was $195.0 million, while long-term debt rose to $174.6 million and stockholders' equity declined to $326.4 million; $135.4 million remained available under the $300 million revolver.
- Legal and regulatory overhang includes two consolidated securities class actions and a derivative suit, plus SCHIP reauthorization uncertainty and federal Medicaid spending cuts under the Deficit Reduction Act of 2005.
03—Questions
Frequently Asked Questions
Why did Centene report a net loss in 2006 after a profitable 2005?
The loss came mainly from non-cash charges related to the FirstGuard health plans in Kansas and Missouri. Centene recorded an $81.1 million goodwill impairment after Kansas declined to renew its Medicaid contract, plus about $6.0 million of other intangible asset impairments and $13.4 million of exit costs. Excluding these items, the company remained profitable, though its health benefits ratio and G&A costs also rose.
How dependent is Centene on government funding?
Almost all revenue comes from Medicaid, SCHIP and SSI programs, which are funded jointly by federal and state governments. Risks include the Deficit Reduction Act of 2005 cutting roughly $5 billion from Medicaid, uncertainty over SCHIP reauthorization when federal authority expires in fiscal 2007, SCHIP shortfalls in Georgia and New Jersey, and the possibility that states can cancel contracts for lack of funding.
What is the outlook for the FirstGuard divestiture and the Kansas and Missouri exits?
The Kansas contract ended December 31, 2006, and the Missouri operating assets were sold effective February 1, 2007. Management expects roughly $30 to $40 million of cash in 2007 from the Missouri sale and a tax benefit tied to FirstGuard Kansas stock. Those two states accounted for 138,900 members and $317.0 million of 2006 revenue, so their exit materially reduces the revenue base.
Is Centene's balance sheet and liquidity adequate for its growth plans?
Management states that cash, investments, operating cash flow and the revolving credit facility will be sufficient for at least 12 months. At year end, cash and equivalents were $271.0 million, the revolver had $149.0 million drawn with $135.4 million available, and the company was in compliance with its covenants. Debt rose to $174.6 million, and the company planned about $60 million of 2007 capital expenditures, with roughly $20 million more for Clayton, Missouri property.
What legal risks could affect Centene's stock?
Two securities class actions were consolidated in the Eastern District of Missouri, alleging misleading statements between April 25 and July 17, 2006. A related shareholder derivative suit was also filed. Centene believes the claims lack merit and has moved to dismiss, but the outcome is uncertain and litigation could be costly and distracting for management.
04—Continue