10-QPeriod: Q1 FY2006

CENTENE CORP Quarterly Report for Q1 Ended Mar 31, 2006

Filed April 25, 2006For Securities:CNC

Summary

Centene Corporation's Q1 2006 filing shows a significant increase in total revenues, driven primarily by growth in its Medicaid Managed Care segment. Total revenues rose by 37% year-over-year to $455.1 million, fueled by membership growth and premium rate increases. However, net earnings experienced a notable decline of 39.2% to $8.8 million, resulting in a diluted EPS of $0.20, down from $0.32 in the prior year period. This earnings decrease is largely attributable to higher medical costs, particularly within the Medicaid and SCHIP programs, and increased general and administrative expenses, impacted by strategic acquisitions like US Script and AirLogix, as well as new market entries and accounting standard adoptions. The company's balance sheet reflects substantial growth in goodwill and intangible assets, largely due to recent acquisitions. Cash flow from operations decreased year-over-year, impacted by a larger increase in receivables and lower net earnings. Management's discussion highlights continued expansion efforts and acquisitions aimed at diversifying revenue streams and increasing market share within government-subsidized healthcare programs. Investors should monitor the company's ability to manage rising medical costs and integrate acquisitions effectively.

Key Highlights

  • 1Total revenues increased by 37% to $455.1 million, primarily driven by the Medicaid Managed Care segment's membership growth and premium rate adjustments.
  • 2Net earnings decreased by 39.2% to $8.8 million compared to the prior year's quarter, with diluted EPS falling to $0.20 from $0.32.
  • 3Medical costs rose significantly, with the Medicaid and SCHIP Health Benefits Ratio (HBR) increasing to 82.8% from 80.6% year-over-year, indicating pressure on profitability from healthcare service expenses.
  • 4General and administrative expenses increased by 53.6%, influenced by new market implementations, stock compensation expense due to SFAS 123R adoption, and premium taxes.
  • 5The company completed the acquisition of US Script, Inc., a pharmacy benefits manager, and AirLogix, Inc., a disease management provider, in the latter half of 2005 and early 2006, respectively, contributing to revenue growth but also impacting expenses.
  • 6Cash flow from operating activities decreased to $9.3 million from $19.9 million, reflecting higher receivables and lower net earnings.
  • 7The company repurchased 129,700 shares of common stock for $3.1 million under its authorized stock repurchase program during the quarter.

Frequently Asked Questions

Centene's revenue growth is primarily driven by its Medicaid Managed Care segment. This growth is a result of increased membership in existing markets, strategic acquisitions, and favorable premium rate adjustments.

The decrease in net earnings is mainly due to a substantial increase in medical costs, particularly within the Medicaid and SCHIP programs, and higher general and administrative expenses. These increases were impacted by factors such as higher utilization trends, pharmacy costs, expansion into new markets, acquisition integration costs, and the adoption of new accounting standards (SFAS 123R).

The acquisitions of US Script (pharmacy benefits manager) and AirLogix (disease management provider) contributed to the significant increase in Specialty Services revenue and overall revenue growth. However, they also led to an increase in operating expenses, including 'Cost of Services' and 'General and Administrative Expenses', and resulted in the recognition of significant goodwill and intangible assets on the balance sheet.

As of March 31, 2006, Centene reported total assets of $737.8 million and total liabilities of $373.6 million. The company had working capital of $46.3 million. Cash and cash equivalents, along with short-term investments, totaled $189.7 million, indicating sufficient liquid assets to manage short-term obligations, supported by an available credit facility of $73.0 million.