Centene Corporation (NYSE: CNC) — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Although the request references 2013 Q4, this filing reports full-year results and includes unaudited fourth-quarter data. Centene operates Managed Care and Specialty Services businesses, primarily serving government-sponsored health programs. Kentucky Spirit’s operations are presented as discontinued operations after it stopped serving members in July 2013.
Financial and operating performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Premium and service revenues | $10.526 billion | $7.682 billion |
| Total revenues, including premium tax | $10.863 billion | $8.110 billion |
| Earnings from operations | $277.4 million | $108.0 million |
| Continuing-operations earnings attributable to Centene common shareholders | $161.2 million | $88.5 million |
| Net earnings attributable to Centene | $165.1 million | $1.9 million |
| Diluted EPS from continuing operations | $2.87 | $1.65 |
| Health Benefits Ratio (HBR) | 88.6% | 89.6% |
| General and administrative expense ratio | 8.8% | 8.8% |
| Operating cash flow | $382.5 million | $278.7 million |
| Cash and cash equivalents, consolidated | $1.038 billion | $844.0 million |
| Working capital | $241.1 million | $176.5 million |
| Total debt | $668.8 million | $538.9 million |
At year-end, at-risk managed care membership was 2.723 million, up 12.3% from 2.425 million. Texas accounted for 37% of 2013 consolidated revenue. The 2013 composite premium-rate adjustment was 2.7%.
Fourth-quarter 2013 total revenue was $2.932 billion; continuing-operations earnings attributable to common shareholders were $48.0 million, diluted EPS from continuing operations was $0.84, HBR was 88.1%, and the G&A ratio was 8.9%.
At December 31, 2013, the company had a $500 million revolving credit facility with $150 million drawn and reported compliance with its covenants. Debt-to-capital was 35.0%. Statutory capital and surplus at regulated subsidiaries was $1.280 billion against $686.4 million in required minimums; estimated risk-based capital was above 350% of the Authorized Control Level.
Material changes versus prior year
- Premium and service revenue rose 37.0%, primarily from market and contract expansions, new state operations, pharmacy services, rate increases, and the AcariaHealth acquisition.
- Operating earnings increased 156.9%; management attributed much of the Managed Care segment improvement to better Texas performance. The HBR improved by 100 basis points. G&A remained 8.8% of premium and service revenue despite higher costs supporting growth and acquisition activity.
- Net earnings attributable to Centene increased from $1.9 million to $165.1 million, but the comparison is affected by the $86.7 million discontinued-operations loss in 2012. Continuing-operations earnings attributable to common shareholders increased 82.1%.
- Operating cash flow rose 37%. Investing cash outflow increased to $342.1 million, including investment portfolio additions, capital expenditures, and acquisition-related spending.
- AcariaHealth was acquired in April 2013 for $142.5 million. The acquisition added $92.1 million of goodwill, which is not tax deductible. The company also exited the Kentucky Medicaid contract and recognized Kentucky Spirit as discontinued operations.
Outlook, risks, contingencies and unusual items
- Outlook: Management expected full-year effects from businesses launched in 2013 and growth from 2014 Marketplace, Medicaid and correctional-services contracts. It forecast approximately $350 million of capital contributions to insurance subsidiaries and approximately $95 million of capital expenditures in 2014. Management stated available liquidity and expected operating cash flow and credit availability would fund general operations and planned spending for at least 12 months from the filing date. No earnings or EPS guidance is provided in the supplied filing text.
- 2014 developments: Centene acquired a majority interest in U.S. Medical Management for approximately $200 million, funded with cash and 2,243,217 shares. The filing also describes a planned Fidelis SecureCare of Michigan acquisition, subject to closing conditions and regulatory approval.
- Kentucky litigation: The Commonwealth alleges Kentucky Spirit’s contract exit was a material breach and seeks substantial damages, including recourse to a $25 million performance bond. Centene contests the claims and is pursuing its own damages case. The company could not estimate the outcome and recorded neither a receivable nor a liability for potential damages at year-end; resolution could materially affect results, cash flow or financial position.
- Key business risks: Government funding, premium rates, eligibility and contract renewals; medical-cost and claims-reserve estimation; implementation and pricing of ACA Marketplace business and the insurance industry assessment; regulatory compliance; provider contracting; state concentration; acquisition integration; cybersecurity and privacy; and access to regulated-subsidiary dividends.
- Other notable items: The 2012 comparison included a $28.0 million goodwill and intangible-asset impairment and a $17.9 million gain on retirement of a convertible-note investment. 2013 investment and other income was lower in part because those 2012 gains did not recur. A 1% change in estimated medical claims liability would have affected 2013 net earnings by approximately $7.0 million, according to the filing.
Important facts for investors to verify
- Review the Kentucky litigation’s subsequent developments, potential exposure, and any impact on the performance bond.
- Track medical claims reserve development, including the $1.112 billion year-end medical claims liability and changes in claims payable days.
- Assess whether new Marketplace and expanded state contracts achieve adequate pricing and membership, especially given adverse-selection and ACA risk-adjustment uncertainties.
- Confirm 2014 execution and funding for the planned subsidiary capital contributions, capital expenditures, and acquisitions.
- Monitor Texas concentration, state contract renewals, and whether rate increases keep pace with medical-cost trends.