Centene Corporation (CNC) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are U.S. dollars; financial figures are in millions unless otherwise stated. Comparisons are with 2021.
Business context and period highlights
Centene provides managed care and specialty healthcare services, primarily through government-sponsored and commercial programs. It reported 26.4 million managed care members at quarter-end, up 7% year over year. Growth reflected Medicaid enrollment during the suspension of eligibility redeterminations, Medicare growth, new contracts and acquisitions, including Magellan, acquired January 4, 2022.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $35,936 | $31,025 | $73,121 | $61,008 |
| Operating earnings (loss) | $(129) | $(418) | $1,124 | $636 |
| Net earnings (loss) attributable to Centene | $(172) | $(535) | $677 | $164 |
| Diluted EPS | $(0.29) | $(0.92) | $1.15 | $0.28 |
| Adjusted diluted EPS (non-GAAP) | $1.77 | $1.25 | $3.60 | $2.88 |
Q2 revenue increased 16%; six-month revenue increased 20%. Q2 results included a $1.45 billion real estate impairment charge; Q2 2021 included a $1.25 billion PBM legal settlement reserve. Adjusted earnings exclude specified items and are not a substitute for GAAP results.
- Medical costs and ratios: Q2 health benefits ratio (HBR) was 86.7%, versus 88.3%; the six-month ratio was 87.0%, versus 87.6%. Management attributed improvement to Marketplace pricing and utilization trends and favorable 2021 risk-adjustment results.
- Operating expense ratios: Q2 SG&A ratio was 8.2%, versus 7.4% (adjusted: 8.2%, versus 7.3%). For the first half, SG&A ratio was 8.1%, versus 7.7% (adjusted: 7.9%, versus 7.4%). Acquisitions, risk-adjustment work, Medicare commissions and variable compensation contributed to increases.
- Cash flow: Operating cash flow was $4.505 billion for the first half, versus $1.728 billion. Investing activities used $3.145 billion and financing activities used $984 million. Management cited earnings before the non-cash impairment and higher medical claims liabilities, partly reflecting timing of state-directed payments, as cash-flow drivers.
- Balance sheet and debt: June 30 cash and cash equivalents were $13.435 billion; working capital was $3.3 billion. Total debt was $18.756 billion, including $300 million current debt; debt-to-capital was 41.5%. The company reported compliance with debt covenants and said available liquidity should fund operations and capital expenditures for at least 12 months.
- Capital and investments: First-half capital expenditures were $524 million. Centene held $1.8 billion of short-term and $14.9 billion of long-term investments, including restricted deposits. A hypothetical immediate 1% increase in rates would reduce fixed-income investment fair value by approximately $554 million.
Material changes, outlook and risks
- Real estate optimization reduced the domestic leased footprint by approximately 70%; the $1.45 billion impairment comprised owned real estate and related fixed assets and leased-property assets. Centene expects about $200 million of additional charges and approximately $200 million in annualized lease expense savings.
- After quarter-end, Centene completed the PANTHERx sale for approximately $1.4 billion and estimated an after-tax gain of approximately $400 million, subject to adjustments. It signed agreements to sell Magellan Rx and its Spanish and Central European businesses; the latter was estimated to generate an after-tax loss of $125–$150 million and remained subject to approvals. Management said it intended to use most divestiture proceeds for share repurchases and the remainder to reduce debt.
- The board increased the share repurchase authorization by $3 billion, bringing the program to $4 billion, and authorized a separate $1 billion debt repurchase program. Approximately $3.456 billion remained available under the stock program at June 30. The company repurchased $344 million of shares during Q2 and made an additional $106 million of purchases in July.
- Management expected Medicaid eligibility redeterminations to begin in November 2022, though timing could shift; the end of the public health emergency and coverage transitions could affect membership. Other cited pressures include possible state rate actions, an Ohio pharmacy-services carve-out, expiration of enhanced Marketplace premium tax credits, COVID-related utilization uncertainty and Medicare Star-rating changes.
- The company recorded a $368 million net pre-tax benefit for the first half from 2021 ACA risk-adjustment transfers after related MLR impacts. Claims estimates remain uncertain, including because of COVID-era utilization and claim-submission patterns.
- Centene’s $1.25 billion 2021 reserve for PBM-related claims covered agreements with 11 states, including Ohio. Further state, federal or shareholder claims or investigations may arise; Centene cautioned that resolution could exceed the reserve. The filing also describes other legal and regulatory proceedings and related uncertainties.
Important facts for investors to verify
- Whether the $200 million annualized real estate savings are achieved, and the amount and timing of additional optimization charges.
- Medical-cost trends, claims-reserve development and the durability of the favorable risk-adjustment benefit and Marketplace performance.
- Medicaid redetermination timing and its effects on membership, revenue and state rates; also monitor Marketplace tax-credit policy and Medicare Star ratings.
- Closing conditions, proceeds and final gains or losses for Magellan Rx and international divestitures, and the allocation of proceeds between buybacks and debt reduction.
- Potential additional PBM-related claims or investigations and whether the existing reserve proves adequate.
- Capital deployment, leverage and regulated-subsidiary dividend restrictions; a significant portion of cash and investments is subject to regulatory or contractual constraints.