01—Abstract
Summary
Summary of the 10-K filed February 22, 2010. Cited figures are marked; the original filing is the authoritative source.
Centene Corporation (NYSE: CNC) closed 2009 with revenues of $4.1 billiona, up roughly 22% year over year, and net earnings from continuing operations of $86.1 million, or $1.94 per diluted share.
Growth was driven primarily by membership gains: at-risk managed care membership reached approximately 1.46 million at December 31, 2009, up 38.1% from December 31, 2007. The Medicaid Managed Care segment generated most of the revenue, while the Specialty Services segment (behavioral health, Celtic individual health insurance, pharmacy benefits management, managed vision, and others) grew faster, with earnings from operations up 67% to $38.8 millionb. Consolidated earnings from operations rose only 5% to $138.1 million, because Medicaid Managed Care earnings fell 8% after a one-time Georgia rate increase was recognized in 2008.
The health benefits ratio rose to 83.5% from 82.5%, mainly due to H1N1 flu costs, a Texas CHIP rate cut, and higher Florida costs, partly offset by lower ABD costs. The balance sheet strengthened over the year. Stockholders' equity rose to $619.4 millionc, and operating cash flow was $248.2 million, or about 2.9 times net earnings.
Management also highlighted a January 2010 equity offering of 5.75 million shares at $19.25d that raised about $104.5 million, which was used in part to repay the $84.0 million drawn on the $300 million revolver. Key risks flagged in the filing include concentration in a few states (Texas, Georgia, and Ohio each exceeded 10% of revenue), dependence on state funding and contract renewals (many contracts expire in 2010), pending federal health care reform, and a roughly $34.9 million IRS challenge to a 2007 tax benefit tied to the FirstGuard abandonment. Other near-term items include the expected Mississippi start in 2010, the pending sale of the New Jersey plan (UHP), and a $100 million capital spend on the corporate headquarters development.
For investors, the central question is whether membership and specialty growth can keep translating into earnings growth while medical cost ratios stay in check. The 2009 results show revenue growth outpacing earnings growth, so margin discipline in Medicaid is the key watch item for 2010.
02—Key points
Key Highlights
- Total revenues rose 21.9% to $4.10 billion in 2009, and premium and service revenues reached $3.88 billion, up 18.4%.
- Net earnings from continuing operations were $86.1 million, and diluted EPS was $1.94, up from $1.90 in 2008.
- At-risk managed care membership grew to 1,455,600 at year-end 2009, up 21.7% year over year and 38.1% since 2007.
- The health benefits ratio increased to 83.5% from 82.5%, driven by H1N1 flu costs, a Texas CHIP rate decrease, and higher Florida costs; ABD margin improvement partly offset this.
- Operating cash flow was $248.2 million, or about 2.9 times net earnings, and year-end stockholders' equity was $619.4 million.
- Specialty Services earnings from operations rose 67% to $38.8 million, while Medicaid Managed Care earnings fell 8% to $99.3 million because of the 2008 Georgia one-time rate increase.
- A January 2010 stock offering raised about $104.5 million net, and the company used part of the proceeds to repay the $84 million revolver balance.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 22, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $4.10B$3.36B | +21.9% |
| Operating Expenses | $3.96B$3.23B | +22.6% |
| Operating Income | $138.13M$131.56M | +5.0% |
| Interest Expense | $16.32M$16.67M | −2.1% |
| Net Income | $83.67M$83.50M | +0.2% |
| EPS (Basic) | $0.48$0.48 | +0.5% |
| EPS (Diluted) | $0.47$0.47 | +0.5% |
| Shares Outstanding (Basic) | 172.14M173.10M | −0.6% |
| Shares Outstanding (Diluted) | 177.27M177.60M | −0.2% |
05—Questions
Frequently Asked Questions
How did Centene perform financially in 2009?
Centene grew revenue 21.9% to $4.1 billion and earned $86.1 million from continuing operations, or $1.94 per diluted share. Growth came mainly from membership gains in existing and new states, plus premium rate increases averaging about 2.9%. Earnings growth lagged revenue growth because the health benefits ratio rose to 83.5% and general and administrative expenses grew with the expansion.
What is driving Centene's growth, and how concentrated is its revenue?
Growth is driven by at-risk Medicaid, CHIP, and ABD membership, which reached about 1.46 million, along with acquisitions in Florida, South Carolina, and Massachusetts and the Celtic individual insurance acquisition in 2008. Revenue is concentrated: Georgia, Ohio, and Texas each accounted for more than 10% of 2009 revenue, and Texas is the largest membership market at about 455,000 members. Losing or failing to renew a major state contract would have a material impact.
What are the main risks to Centene's earnings?
The main risks are state budget pressure that could reduce premiums, contracts that expire or are reprocured in 2010 (for example, Indiana, Georgia, and Ohio), medical cost forecasting errors that affect the reserve for medical claims, pending federal health care reform, and an IRS challenge to a $34.9 million tax benefit. Because Centene's margins are narrow, small changes in the health benefits ratio can significantly affect results.
What should investors expect for 2010?
Management expects continued revenue and membership growth, including the full-year effect of the Massachusetts plan and Florida conversions, a start in Mississippi, and a South Carolina acquisition expected to add $55 to $65 million of 2010 revenue. Revenue will be reduced by pharmacy benefit carve-outs in two states, and the company expects about $40 million of capital expenditures excluding the headquarters development, which may require about $100 million more in 2010.
Is Centene's balance sheet and liquidity position solid?
Liquidity appears adequate. The company held about $986 million in cash and investments at year-end, with regulated subsidiaries holding most of it, and reported statutory capital of $453 million against a $287 million requirement. It had $175.5 million of revolver availability at year-end, and management believes existing resources are sufficient for at least 12 months. Debt was $307.7 million, with a debt-to-capital ratio of 33.2%.
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