Centene Corporation (NYSE: CNC) — 2011 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2011; fourth-quarter figures are included, but the filing is not a standalone Q4 report. Centene operates Medicaid Managed Care and Specialty Services businesses, with 1.816 million at-risk members at year-end.
Financial performance
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Premium and service revenues | $5.181 billion | $4.284 billion | +20.9% |
| Total revenues, including premium taxes | $5.341 billion | $4.448 billion | +20.1% |
| Earnings from operations | $190.3 million | $157.1 million | +21.2% |
| Continuing-operations earnings attributable to common shareholders | $111.2 million | $90.9 million | +22.3% |
| Diluted EPS from continuing operations | $2.12 | $1.80 | +17.8% |
| Operating cash flow | $261.7 million | $168.9 million | +$92.8 million |
| Year-end cash and cash equivalents | $573.7 million | $434.2 million | +$139.5 million |
- The health benefits ratio (medical costs as a share of premium revenue) was 85.2%, down from 85.5%; management cited lower utilization and contract enhancements. The G&A expense ratio increased to 11.3% from 11.2%, partly due to expansion costs.
- Medical costs rose 20.7% to $4.325 billion. Medical claims liability increased to $608.0 million from $456.8 million.
- At-risk membership grew 18.4%, to 1.816 million. Medicaid and CHIP HBR improved, while ABD/Medicare and Specialty Services HBRs increased.
- Q4 2011: revenue was $1.507 billion, common-shareholder earnings were $30.1 million, diluted EPS was $0.57, HBR was 85.9%, and G&A ratio was 11.0%.
Liquidity, debt and capital
- Cash, cash equivalents and short-term investments totaled $704.2 million; total cash, investments and restricted deposits were $1.237 billion. Working capital was $102.4 million, versus negative $108.4 million a year earlier.
- Total debt was $351.6 million; debt-to-capital was 27.3%, down from 29.3%. The $350 million revolving facility had no borrowings at year-end, subject to its covenants.
- In May 2011, Centene redeemed $175 million of 7.25% notes and issued $250 million of 5.75% senior notes due 2017. Debt-extinguishment expense was $8.5 million, or $0.10 per diluted share. A swap converts the new notes’ fixed rate to a floating rate.
- Operating cash flow was affected by state-payment timing, which reduced cash flow by $120.4 million; growth in medical claims liabilities partly offset the effect. Capital expenditures were $64.4 million, plus $4.6 million for the headquarters development.
- Regulated subsidiaries had $619.9 million of statutory capital and surplus against a $342.0 million minimum; management estimated risk-based capital above 350% of the Authorized Control Level. Subsidiary dividends remain subject to regulatory limits.
Material changes, outlook and risks
- Growth reflected new or expanded business in Illinois, Kentucky, Mississippi, Texas and Arizona, as well as acquisitions and membership conversion in prior periods. Medicaid Managed Care operating earnings rose 30.6%; Specialty Services operating earnings fell 6.6%, reflecting the loss-making Casenet software business and weaker individual health insurance results.
- Premium rate adjustments in 2011 produced a net 0.9% composite decrease across markets, despite strong membership growth. Management attributed the lower consolidated HBR to utilization and contract improvements.
- Management expected 2012 growth from the full-year contribution of 2011 launches, Louisiana operations beginning in February 2012, expanded Texas contracts expected to begin in 2012, and a Washington contract expected to start in the third quarter. No specific earnings or revenue guidance is provided. Expected 2012 capital expenditures were approximately $55 million, plus about $3 million for the real estate development.
- Near-term contract renewals or expirations include Wisconsin in February 2012, South Carolina in March, Georgia and Ohio in June, and Florida in August. Contracts may be rebid, terminated for cause or funding constraints, or renewed on less favorable terms.
- Principal risks include state and federal Medicaid funding or rate reductions; medical-cost and claims-reserve estimation uncertainty, particularly in new markets; healthcare cost inflation; contract renewals and regulation; and dependence on a handful of states. Texas represented 26% of 2011 revenue, Georgia 13%, and Ohio 10%.
- Healthcare reform implementation remained uncertain; Medicaid expansion was scheduled to begin in 2014 and an insurer assessment in 2014. The filing notes potential effects on rates, costs and operations. State minimum health-benefit ratio rules could also require rebates; Celtic expected minimal rebates based on 2011 results.
- Unusual items: the 2011 debt redemption charge reduced EPS by $0.10; 2010 included a $5.5 million Casenet impairment and a gain on sale of the New Jersey health-plan assets. A 2011 NAIC-related expense reclassification increased reported medical costs and reduced G&A, but did not affect earnings; comparative ratios were restated.
- The IRS settled its examination of 2006–2007 returns in 2011 without material financial-statement impact. The company said routine legal proceedings were not expected to have a material effect. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether 2012 contract renewals, expanded awards and new-state launches convert into profitable membership growth.
- Whether medical claims liability and the 85.2% annual HBR remain adequate as new markets mature and medical costs trend upward.
- How state premium rates, funding, and Medicaid-related policy changes affect margins, especially in Texas, Georgia and Ohio.
- Whether Specialty Services improves profitability, including the contribution and costs of Casenet and individual health insurance.
- Compliance with debt covenants and the effect of the floating-rate swap, while recognizing that much of the reported investment and statutory capital is held in regulated subsidiaries.