Centene Corporation (CNC) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. Centene provides managed-care and specialty healthcare services, principally to government-sponsored and commercial programs. Magellan Health was acquired on January 4, 2022, affecting year-over-year comparability.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $35,865 (+11%) | $32,406 | $108,986 (+17%) | $93,414 |
| Operating earnings | $476 (-13%) | $545 | $1,600 (+35%) | $1,181 |
| Net earnings attributable to Centene | $738 (+26%) | $584 | $1,415 (+89%) | $748 |
| Diluted GAAP EPS | $1.27 | $0.99 | $2.41 | $1.27 |
| Adjusted diluted EPS (non-GAAP) | $1.30 | $1.26 | $4.90 | $4.14 |
- Revenue mix and membership: Q3 revenue growth reflected Medicaid enrollment, Medicare growth, and Magellan, partly offset by the PANTHERx sale. Managed-care membership was 26.8 million, up 5% year over year. Q3 Medicare revenue rose 30%; Medicaid rose 8%; commercial revenue declined 2%.
- Medical and expense ratios: Q3 health benefits ratio (HBR) was 88.3%, versus 88.1%; the company attributed the increase mainly to more normalized Medicaid utilization. Q3 SG&A ratio was 8.4% versus 8.3%, and adjusted SG&A ratio was 8.3% versus 8.1%. Nine-month HBR improved to 87.4% from 87.7%; SG&A ratio increased to 8.2% from 7.9%.
- Cash flow: Operating cash flow was $7,837 for the first nine months, versus $3,530 in 2021; Q3 operating cash flow was $3.3 billion. The filing attributes the year-to-date increase partly to higher medical claims liabilities and early CMS payments, as well as earnings before noncash real-estate impairments. Investing activities used $3,142 and financing activities used $2,465.
- Balance sheet and liquidity: September 30 cash and cash equivalents were $14,987; working capital was $1.9 billion, down from $2.7 billion at year-end 2021. Total debt was $18,333, including $18,084 long-term debt; debt-to-capital was 41.8%, compared with 41.2% at year-end. Centene reported covenant compliance and said available cash, investments, operating cash flow, and its revolving credit facility should cover general operations and capital expenditures for at least 12 months.
Material changes, outlook, and risks
- GAAP earnings benefited from a $490 million PANTHERx divestiture gain and were affected by substantial real-estate and other impairment charges. Q3 impairment totaled $289 million; nine-month impairment was $1.739 billion, primarily from real-estate optimization. The pending Spanish and Central European divestiture generated a further $165 million impairment in Q3.
- Real-estate optimization has produced approximately $1.6 billion of 2022 impairments. Management expects about $100 million of additional charges and approximately $200 million in annualized lease-expense savings; the initiative represents an estimated 70% reduction in domestic leased space.
- Centene completed the PANTHERx sale and had agreements to sell Magellan Rx and its Spanish and Central European businesses. The latter transactions remained subject to closing conditions and/or regulatory approvals. A multi-year Express Scripts PBM contract is expected to commence in 2024.
- Management expected Medicaid eligibility redeterminations to begin in February 2023 after the COVID-19 public health emergency, while noting the emergency could be extended. Redeterminations, utilization trends, COVID-19, government reimbursement and rate actions, and quality ratings may affect results. Management said lower Medicare Star ratings for the 2023 rating year are expected to affect 2024 revenue; it expects improvement efforts to begin showing results in the 2025 revenue year.
- The company recorded a $1.25 billion reserve in 2021 for PBM-related state claims, settlements, and rebates. It reported no-fault agreements with 13 states, including Ohio, and continued discussions with other affected states. Additional claims or investigations may arise, and resolution could exceed the reserve or occur on unacceptable terms.
- Other notable exposures include medical-claims estimation uncertainty, especially from COVID-related utilization and claims-submission patterns, and interest-rate risk. A hypothetical immediate 1% rate increase was estimated to reduce the fair value of fixed-income investments by about $560 million. The company reported $1.534 billion of gross unrealized losses on investments at September 30, primarily attributed to interest-rate movements, and said it did not intend or expect to be required to sell the securities before recovery.
Key facts investors should verify
- How much earnings and cash flow depend on nonrecurring divestiture gains, impairment add-backs, CMS payment timing, and changes in claims liabilities; compare GAAP results with the company’s non-GAAP adjustments.
- Whether Medicaid redeterminations, utilization normalization, and Medicare Star ratings change membership, pricing, or medical margins as management anticipates.
- Whether the Magellan Rx and international divestitures close on expected terms and timing, and whether real-estate savings offset remaining impairment and transition costs.
- Whether the $1.25 billion PBM reserve proves adequate as state, federal, or shareholder claims and investigations develop.
- How stock and debt repurchases affect leverage, liquidity, and capital available for operations, given regulatory limits on subsidiary dividends and the company’s investment-market exposure.