Centene Corporation — Q1 2012 Form 10-Q
Business context and period. The unaudited quarter ended March 31, 2012. Centene operates Medicaid Managed Care and Specialty Services businesses, primarily serving government-sponsored healthcare programs. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial and operating results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Premium and service revenues | $1,663.5 | $1,179.2 | +41.1% |
| Total revenues, including premium tax | $1,712.1 | $1,216.4 | +40.8% |
| Earnings from operations | $34.2 | $39.1 | -12.5% |
| Net earnings | $22.6 | $22.8 | -1.0% |
| Net earnings attributable to Centene | $24.0 | $23.7 | +1.0% |
| Diluted EPS attributable to Centene | $0.45 | $0.46 | -2.2% |
| Operating cash flow | $(32.1) | $94.0 | — |
- At-risk managed-care membership was 2,149,500, up 607,000, or 39.4%, year over year. Premium and service revenue growth reflected new and expanded contracts, pharmacy benefit additions, and membership growth.
- The Health Benefits Ratio (medical costs as a percentage of premium revenue, excluding premium taxes) rose to 88.2% from 84.9%. Management cited Kentucky’s high claims ratio, higher Texas costs and a prior rate decrease, higher South Carolina medical costs, and increased costs in individual health.
- General and administrative expense was $163.2, up 15.7%, while its ratio improved to 9.8% from 12.0%, reflecting revenue leverage and lower performance-based compensation. Operating earnings fell despite revenue growth.
- Medicaid Managed Care operating earnings declined to $14.0 from $28.1; Specialty Services operating earnings increased to $20.2 from $11.0.
- At March 31, cash and cash equivalents were $433.0, current assets $920.4, current liabilities $888.3, and working capital $32.1, down from $102.4 at year-end 2011. Cash and short-term investments totaled $559.2.
- Total debt was $350.4, including $250.0 of senior notes and $86.2 of mortgage notes; there were no revolver borrowings and $350.0 remained available under the $350.0 revolving facility. The reported debt-to-capital ratio was 26.4%.
- Investing activities used $120.9 of cash, including net investment purchases; capital expenditures were $15.0. Cash declined $140.7 during the quarter to $433.0.
Material changes, outlook, and risks
- Operating cash flow turned negative, versus $94.0 provided in Q1 2011. Management attributed the quarter’s cash use principally to a $71.2 delay in premium payments from one state customer and $49.6 of timing delays from other state customers, partly offset by higher medical claims liabilities. The filing cautions that state payment schedules can cause period-to-period cash-flow swings.
- Management expected available cash, investments, operating cash flow, and credit-facility availability to fund general operations and capital expenditures for at least 12 months from the filing date. It anticipated approximately $70 million of additional 2012 capital expenditures, primarily for systems and market expansion.
- Centene expected Washington and Missouri Medicaid operations to begin in Q3 2012 and the Louisiana membership rollout to be completed in Q2 2012. These are forward-looking expectations, not reported results.
- Ohio contract: In April 2012, after quarter-end, Centene was notified that its Ohio subsidiary was not awarded a contract to continue serving Medicaid members effective January 2013. Centene filed a protest. It planned an asset recoverability test and, absent a successful appeal, expected a material non-cash impairment charge during 2012. The affected subsidiary had $42.8 of goodwill and net intangible assets at March 31, 2012.
- Key disclosed risks include state contract loss or nonrenewal, Medicaid funding and rate reductions, medical-cost estimation and claims trends, delayed state payments, regulation and healthcare reform, and investment interest-rate and credit exposure. A hypothetical immediate 1% rise in market rates was estimated to reduce fixed-income investment fair value by about $13.7.
- State-regulated subsidiaries held $652.8 of statutory capital and surplus against aggregate minimum requirements of $374.7; management estimated risk-based capital above 350% of the Authorized Control Level. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether the Ohio contract protest succeeds, and the amount and timing of any impairment after the recoverability test.
- Whether elevated HBRs—especially in new markets and Texas—persist, and whether state premium rates keep pace with medical costs.
- Whether delayed state premium receipts reverse and operating cash flow improves in subsequent quarters.
- Whether planned Missouri and Washington launches, the Louisiana rollout, and the additional capital spending proceed on schedule and within expected costs.
- Whether liquidity remains adequate after considering regulated-subsidiary capital and dividend restrictions, debt covenants, and investment-market risks.