Centene Corporation — FY2010 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2010. Centene operates Medicaid Managed Care and Specialty Services businesses, serving approximately 1.53 million at-risk members across its markets. University Health Plans (New Jersey) was sold in the first quarter; its results are presented as discontinued operations. Unless noted, financial results below refer to continuing operations.
Key financial metrics
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Premium and service revenue | $4.284 billion | $3.878 billion | +10.5% |
| Total revenue, including premium taxes | $4.448 billion | $4.103 billion | +8.4% |
| Operating earnings | $157.1 million | $138.1 million | +13.7% |
| Continuing earnings attributable to Centene common shareholders | $90.9 million | $86.1 million | +5.6% |
| Diluted continuing EPS | $1.80 | $1.94 | -7.2% |
| Net earnings attributable to Centene, including discontinued operations | $94.8 million | $83.7 million | +13.3% |
| Cash provided by operating activities | $168.9 million | $248.2 million | Down $79.3 million |
- Health benefits ratio (medical costs as a share of premium revenue, excluding premium taxes) was 83.8%, versus 83.5% in 2009. General and administrative expense ratio improved to 12.8% from 13.3%.
- At-risk membership rose 5.2% to 1,533,500. Membership gains and net premium rate adjustments of 2.3% supported revenue growth; pharmacy benefit carve-outs reduced 2010 revenue by approximately $185 million.
- At December 31, cash, cash equivalents and short-term investments were $455.2 million; long-term investments and restricted deposits were $618.6 million combined. Working capital was negative $108.4 million, compared with negative $99.8 million a year earlier.
- Total debt was $330.6 million; the reported debt-to-capital ratio was 29.3%, or 23.9% excluding the $80 million non-recourse mortgage. The existing $300 million revolver had $198.4 million of availability after borrowings and letters of credit.
- Regulated subsidiaries had $516.1 million of statutory capital and surplus against $308.0 million of required minimums; estimated risk-based capital exceeded 350% of the Authorized Control Level.
Material changes versus the prior comparable period
- Membership growth reflected Florida and South Carolina acquisitions and Florida member conversions, partly offset by losses in Texas CHIP and Wisconsin. The Texas rural CHIP product lost approximately 50,000 members after the state added a second vendor; Centene also lost a southeast Wisconsin BadgerCare Plus contract effective November 2010.
- Medicaid Managed Care revenue increased 8.0% and operating earnings rose 17.9%. Specialty Services revenue grew 6.0%, but operating earnings increased only 2.9%, with higher medical costs and lower-margin service growth among the factors.
- The overall health benefits ratio edged higher: improvement in Georgia was offset primarily by Florida and Texas performance. G&A leverage improved the expense ratio.
- Operating cash flow fell from $248.2 million to $168.9 million, including the effects of increased premium receivables and lower growth in unearned revenue and medical claims liability than in 2009. Cash flow in both years benefited from state prepayments.
- Diluted continuing EPS declined despite higher continuing earnings, alongside a larger weighted-average share count following the 5.75 million-share offering in early 2010.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or revenue guidance. It expected available cash, investments, operating cash flow and credit-facility availability to fund general operations and capital expenditures for at least 12 months. Planned 2011 capital spending was approximately $55 million for systems and market expansion, plus approximately $10 million for the real-estate development.
- Growth initiatives included new Mississippi and Healthy Indiana managed-care contracts beginning in January 2011, an additional Texas STAR+PLUS contract beginning in February 2011, and expected Illinois operations in the first half of 2011. A new $350 million, five-year unsecured revolver replaced the prior facility in January 2011.
- Key risks include state and federal Medicaid funding or rate reductions, contract non-renewal or termination, medical-cost and IBNR estimation uncertainty, provider-network and regulatory challenges, and implementation of the 2010 health-care reform laws. Texas, Georgia and Ohio each generated more than 10% of 2010 revenue and together represented approximately 60%.
- Health-care reform was expected to expand Medicaid eligibility beginning in 2014, but the filing noted uncertainty over implementation, litigation and possible legislative changes. Management also identified a prospective insurer assessment and commercial individual-market medical-loss-ratio rules as potential impacts.
- Unusual items included a $5.5 million impairment charge related to Casenet; a $3.3 million gain from Reserve Primary Fund distributions; and a $2.5 million net gain on investment sales. The UHP asset sale generated an $8.2 million pretax gain, or $3.9 million after tax, included in discontinued operations.
- The IRS challenged a $34.9 million tax benefit relating to the 2007 abandonment of FirstGuard stock. Centene was pursuing an appeal and stated that it believed its position would more likely than not be upheld. Centene’s legal challenge to Wisconsin’s contract award decision remained pending; outcome and timing were uncertain.
- Centene reported effective disclosure controls and internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether medical-cost trends, especially in Florida and Texas, and the adequacy of claims reserves support the reported 83.8% health benefits ratio.
- Actual membership, rates and profitability following the Texas CHIP and Wisconsin contract changes, and progress on announced 2011 contract launches.
- How much of operating cash flow and liquidity is affected by state payment timing, regulated-subsidiary restrictions and negative working capital.
- Terms, covenant headroom and utilization of the replacement $350 million revolver, and the effect of debt maturities and planned capital expenditures.
- Outcome of the IRS tax appeal and Wisconsin litigation, and the financial effect of health-care reform implementation or changes.