Centene Corporation — Q2 2012 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2012. Centene operates Medicaid Managed Care and Specialty Services businesses. Growth came from new and expanded state contracts, pharmacy benefit additions, and increased membership. At-risk membership was 2.398 million, up 51.7% year over year.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenues | $2,110.7 million | $1,315.0 million | $3,822.9 million | $2,531.4 million |
| Premium and service revenues | $2,061.6 million | $1,278.0 million | $3,725.1 million | $2,457.2 million |
| Operating earnings (loss) | $(46.7) million | $55.3 million | $(12.5) million | $94.4 million |
| Net earnings (loss) attributable to Centene | $(35.0) million | $28.4 million | $(11.0) million | $52.1 million |
| Diluted EPS | $(0.68) | $0.54 | $(0.21) | $1.00 |
| Health Benefits Ratio | 92.9% | 84.8% | 90.8% | 84.9% |
| General and administrative expense ratio | 8.2% | 11.2% | 8.9% | 11.6% |
For Q2, medical costs rose 78.5%, exceeding premium revenue growth of 62.9%; management attributed the higher benefits ratio to Texas expansion-area costs, Kentucky claims experience, and individual-policy costs. Excluding those identified factors, Q2 HBR would have been 88.5%. G&A grew in dollars but fell as a share of revenue, reflecting scale and lower performance-based compensation.
Cash flow and liquidity. Operating cash flow was $(9.9) million for the first six months, versus $53.2 million generated in the prior-year period. Investing cash outflow was $210.6 million, financing inflow was $68.7 million, and cash declined $151.8 million to $421.9 million. The company cited delayed Georgia premium payments and other state-payment timing; Georgia receivables were approximately $221 million at quarter-end. Working capital was $39.2 million, down from $102.4 million at year-end 2011.
At June 30, cash and cash equivalents were $421.9 million; short-term investments were $152.5 million; long-term investments were $630.9 million; and restricted deposits were $33.5 million. Total debt was $408.8 million, including $55 million drawn on a $350 million revolving facility, with $295 million available. Debt-to-capital was 30.1% (25.9% excluding non-recourse mortgage debt). Statutory capital and surplus was $761.2 million against required minimums of $446.8 million; management estimated RBC above 350% of the Authorized Control Level.
Material changes and unusual items
- Premium and service revenue increased 61.3% in Q2 and 51.6% for the first six months, reflecting membership and contract expansion. Operating results deteriorated sharply as medical costs outpaced revenue growth.
- Centene recorded a $28.0 million non-cash impairment charge in Specialty Services: $25.7 million of goodwill and $2.3 million of intangible assets related to Celtic. Management cited elevated individual-policy claims and lower expected future growth and profitability following the Supreme Court’s decision upholding the Affordable Care Act.
- Q2 diluted loss per share included an impairment impact of approximately $0.52. The filing states that $26.6 million of the impairment was not deductible for income tax purposes.
- Six-month operating cash flow was pressured by a $232.7 million increase in premium and related receivables, partly offset by increased medical claims liabilities. Management attributed the receivable build principally to delayed state payments.
Outlook, commentary, and risks
Management said available cash, investments, operating cash flow, and the revolving facility should be sufficient for general operations and capital expenditures for at least 12 months. It expected approximately $35 million of additional 2012 capital expenditures and approximately $350 million of capital contributions in the second half of 2012, funded through unregulated cash generation and revolver borrowings. The $55 million revolver balance was repaid in July 2012.
Growth plans included contracts commencing in Washington and Missouri in July 2012, Ohio statewide service expected in January 2013, and Kansas and New Hampshire operations expected in Q1 2013. The Ohio award was subject to litigation and a temporary restraining order; $42.8 million of associated goodwill and intangible assets remained recorded pending resolution. The filing text does not provide a clear numerical value for revised fiscal 2012 earnings guidance.
Principal risks include medical-cost estimation and control, delayed or inadequate state premium payments, state budget and reimbursement pressure, contract renewal and regulatory risks, Affordable Care Act effects on individual insurance profitability, execution of rapid expansion, investment-market exposure, and access to financing. A putative securities class action filed in June alleged misleading statements principally regarding 2012 earnings guidance; Centene said it believed the case lacked merit and intended to defend it. Management reported no premium deficiency reserves were required at June 30.
Important facts for investors to verify
- Whether medical-cost trends in Texas, Kentucky, and Celtic improved after quarter-end, and whether the reported HBR pressures persisted.
- Timing and collection of the Georgia and other state receivables, and the resulting effect on operating cash flow and liquidity.
- Any subsequent revision or clarification of fiscal 2012 guidance; the filing text does not state a clear revised numerical forecast.
- Final resolution and implementation timing of the Ohio contract award, and any impairment implications for the related $42.8 million carrying value.
- Whether planned second-half capital contributions, expansion spending, and new contract launches were completed as expected.