01—Abstract
Summary
Summary of the 10-K filed February 22, 2011. Cited figures are marked; the original filing is the authoritative source.
Centene Corporation (CNC) reported full-year 2010 results showing continued growth in its Medicaid-focused managed care business.
Total revenues from continuing operations were $4.45 billiona (up 8.4% year over year), and premium and service revenues reached $4.28 billion (up 10.5%), driven by at-risk membership growth to roughly 1.53 million (up 5.2%) and a net 2.3% premium rate increase. Earnings from continuing operations attributable to Centene were $90.9 million, or $1.80 per diluted share, down from $1.94 in 2009, as the health benefits ratio rose to 83.8% from 83.5% and the effective tax rate climbed to 39.7% from 36.2%. Net earnings attributable to Centene, including the gain on the sale of the New Jersey plan (UHP), were $94.8 million, or $1.88 per diluted share.
Operating cash flow weakened to $168.9 millionb from $248.2 million in 2009, which management attributed to lower prepayments from states. The company strengthened its balance sheet through a 5.75 million share offering in early 2010 (net proceeds about $104.5 million), leaving stockholders' equity at $797.1 million. It also replaced its $300 million revolver with a $350 million facility in January 2011 and entered several new contracts, including Mississippi, Indiana HIP, and an Illinois program expected to start in 2011.
Investors should weigh the growth against several pressures disclosed in the filing: concentration in Texas, Georgia, and Ohio (each a major share of revenue), exposure to state budget pressures and contract rebids (including the lost Southeast Wisconsin BadgerCare contract), and uncertainty from the 2010 health care reform law, which faces active legal challenges and a future industry fee. The company also disclosed a pending IRS dispute over a $34.9 millionc tax benefit tied to the FirstGuard stock abandonment, which management believes will be upheld.
02—Key points
Key Highlights
- Revenue growth: Total revenues rose 8.4% to $4.45 billion; premium and service revenues rose 10.5% to $4.28 billion, supported by membership growth of 5.2% to 1.53 million at-risk members.
- Earnings pressure: Diluted EPS from continuing operations fell to $1.80 from $1.94, as the health benefits ratio rose to 83.8% and the effective tax rate increased to 39.7%.
- Reported EPS: Diluted net EPS of $1.88 was roughly flat with 2010, helped by a $3.9 million after-tax gain from the sale of the New Jersey health plan (UHP).
- Cash flow decline: Operating cash flow fell to $168.9 million from $248.2 million, largely due to reduced state prepayments recorded as unearned revenue.
- Balance sheet: Equity rose to $797.1 million after a $104.5 million net equity offering; the January 2011 refinancing replaced the $300 million revolver with a $350 million facility.
- Customer concentration: Texas (30%), Georgia (17%), and Ohio (13%) each accounted for more than 10% of 2010 revenue, creating significant state-level dependence.
- Regulatory and legal risk: Health reform litigation (a Florida court ruled the law unconstitutional in January 2011), a future industry fee, and a pending $34.9 million IRS tax dispute add uncertainty.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 22, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $4.45B$4.10B | +8.4% |
| Operating Expenses | $4.29B$3.96B | +8.2% |
| Operating Income | $157.07M$138.13M | +13.7% |
| Interest Expense | $17.99M$16.32M | +10.3% |
| Net Income | $94.84M$83.67M | +13.3% |
| EPS (Basic) | $0.49$0.48 | +0.5% |
| EPS (Diluted) | $0.47$0.47 | −0.5% |
| Shares Outstanding (Basic) | 195.02M172.14M | +13.3% |
| Shares Outstanding (Diluted) | 201.79M177.27M | +13.8% |
05—Questions
Frequently Asked Questions
How much did Centene's revenue and earnings grow in 2010?
Total revenues increased 8.4% to $4.45 billion, and premium and service revenues increased 10.5% to $4.28 billion. However, diluted EPS from continuing operations fell to $1.80 from $1.94, because medical costs rose faster than premiums and the effective tax rate increased.
Why did the health benefits ratio increase?
The consolidated health benefits ratio rose to 83.8% from 83.5%. Management attributed the increase mainly to higher costs in its Florida and Texas health plans, including a shift in Texas member mix toward less favorable categories, partly offset by improvements in Georgia from provider network and utilization initiatives.
What are the main risks to Centene's revenue?
Most revenue comes from state Medicaid, CHIP, and ABD premiums, which states can reduce amid budget pressure. Contracts are typically one to two years and can be rebid or terminated, as happened with the Southeast Wisconsin BadgerCare contract. Texas, Georgia, and Ohio together account for a large share of revenue, so losses or rate cuts in those states would materially affect results.
How does health care reform affect Centene?
The 2010 Patient Protection and Affordable Care Act could expand Medicaid eligibility and create opportunities for managed care, but it also introduces an annual industry fee starting in 2014, possible state rate reductions, and minimum health benefit ratios for its Celtic individual insurance subsidiary. Court challenges are ongoing, and management says the ultimate impact cannot yet be predicted.
Is Centene's balance sheet strong enough to fund growth?
Centene raised about $104.5 million of net equity in early 2010 and reported $455 million of cash and short-term investments. Its debt-to-capital ratio improved to 29.3% from 33.2%, and it expects its available cash, operating cash flow, and credit facility to cover operations and capital spending for at least 12 months. Its subsidiaries held $516.1 million of statutory capital, above the $308.0 million minimum.
06—Continue