01—Abstract
Summary
Summary of the 10-K filed February 21, 2012. Cited figures are marked; the original filing is the authoritative source.
Centene Corporation (NYSE: CNC) reported a strong 2011 in its 10-K filed February 21, 2012.
Total revenues rose 20.1% to $5.34 billiona, premium and service revenues grew 20.9% to $5.18 billion, and net earnings attributable to Centene were $111.2 million, or $2.12 diluted EPS from continuing operations. Growth was driven by a 18.4% increase in at-risk managed care membership to 1,816,000, fueled by new contracts in Illinois, Kentucky, Mississippi, Texas, and Arizona. Medicaid Managed Care earnings from operations rose 30.6% to $153.0 million, while Specialty Services earnings fell 6.6% to $37.3 million due to start-up losses in care management software and lower individual health insurance earnings.
Profitability improved on the medical cost line. The health benefits ratio fell to 85.2% from 85.5%, mainly from lower utilization and contract enhancements, while the G&A ratio edged up to 11.3% from 11.2% on business expansion costs. Operating cash flow was $261.7 millionb, or 2.4 times net earnings, though this was depressed by roughly $120 million of timing-related unearned revenue shifts.
The company ended the year with $1.24 billionc in cash and investments, stockholders' equity of $936 million, and total debt of about $352 million, with a debt-to-capital ratio of 27.3%. Key risks for investors center on state budget pressure and contract renewal cycles. Medicaid, CHIP, and ABD funding cuts could materially reduce profitability, and several state contracts expire in 2012, including Wisconsin and South Carolina.
Federal health reform (the 2010 ACA) adds both Medicaid expansion opportunities beginning in 2014 and uncertainty from pending Supreme Court review, a proposed insurer excise tax, and possible state rate reductions. The company also faces concentration risk, with Texas, Georgia, and Ohio accounting for 26%d, 13%, and 10% of total revenues respectively.
02—Key points
Key Highlights
- Total revenues increased 20.1% to $5.34 billion in 2011; premium and service revenues rose 20.9% to $5.18 billion, driven by membership growth.
- At-risk managed care membership reached 1.816 million at year-end 2011, up 18.4% year over year, with new operations in Illinois, Kentucky, and Mississippi.
- Net earnings attributable to Centene were $111.2 million ($2.12 diluted EPS from continuing operations), up from $94.8 million in 2010, despite $8.5 million of debt extinguishment costs.
- Health benefits ratio improved to 85.2% from 85.5%, while G&A expense ratio rose slightly to 11.3% from 11.2% due to expansion costs.
- Operating cash flow was $261.7 million, but was reduced by about $120 million of timing effects from state premium payments; the company has no history of paying cash dividends.
- Concentration risk remains high: Texas (26%), Georgia (13%), and Ohio (10%) represented the largest shares of 2011 total revenues, and several state contracts expire in 2012.
- Medicaid Managed Care earnings from operations grew 30.6% to $153.0 million, while Specialty Services earnings declined 6.6% to $37.3 million due to care management software start-up losses.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 21, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $5.21B$4.45B | +17.2% |
| Operating Expenses | $5.01B$4.29B | +16.7% |
| Operating Income | $203.80M$157.07M | +29.8% |
| Interest Expense | $20.32M$17.99M | +12.9% |
| Net Income | $111.22M$94.84M | +17.3% |
| EPS (Basic) | $0.56$0.49 | +13.8% |
| EPS (Diluted) | $0.53$0.47 | +12.8% |
| Shares Outstanding (Basic) | 200.80M195.02M | +3.0% |
| Shares Outstanding (Diluted) | 209.90M201.79M | +4.0% |
05—Questions
Frequently Asked Questions
How strong was Centene's 2011 growth and what drove it?
Revenue growth was driven mainly by membership gains. At-risk membership rose 282,500 members (18.4%) to 1.816 million, from new contracts in Illinois, Kentucky, Mississippi, expanded Texas STAR+PLUS ABD coverage, and Arizona long-term care. Premium and service revenues grew 20.9%, though net premium rates actually declined about 0.9% across markets.
Is Centene's profitability improving?
Yes, at the core level. The health benefits ratio fell 30 basis points to 85.2%, helped by lower utilization and contract enhancements, and Medicaid Managed Care earnings from operations rose 30.6%. Offsetting this, G&A rose to 11.3% of revenue on expansion costs, and Specialty Services earnings fell 6.6%.
What are the biggest risks to Centene's earnings?
The main risks are reductions in state Medicaid, CHIP, and ABD funding or premium rates, non-renewal of state contracts (several expire in 2012, including Wisconsin Network Health and South Carolina), and medical cost misestimation. Federal health reform adds uncertainty through a potential insurer excise tax from 2014, possible state rate cuts as states fund Medicaid expansion, and pending Supreme Court review.
How healthy is Centene's balance sheet and liquidity?
Liquidity appears adequate. The company held $704 million in cash and short-term investments at year-end, had a $350 million undrawn revolver, and reported a debt-to-capital ratio of 27.3% (22.6% excluding a non-recourse mortgage). Most investments are in high-quality fixed income, with 99% rated A- or higher. Regulated subsidiaries held $620 million in statutory capital against a $342 million requirement.
Does Centene pay dividends or repurchase shares?
No. Centene has never declared a cash dividend and intends to retain earnings for growth. A 4 million share repurchase authorization exists, but no shares were repurchased under the program in 2011; the only repurchases were 216,895 shares withheld for employee tax obligations.
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