Centene Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
Centene operates Medicaid Managed Care and Specialty Services businesses. At-risk managed care membership reached 1.616 million, up 141,900 (9.6%) year over year. Growth reflected new Illinois and Mississippi programs, Texas expansion, acquisitions, and membership growth. The filing is unaudited and states interim adjustments were normal and recurring.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Premium and service revenue | $1,265.3 | $1,081.5 | $3,722.5 | $3,154.3 |
| Total revenue, including premium tax | $1,302.0 | $1,121.9 | $3,833.4 | $3,267.4 |
| Operating earnings | $48.5 | $40.2 | $142.9 | $111.6 |
| Net earnings attributable to Centene | $29.0 | $22.7 | $81.1 | $69.4 |
| Diluted EPS from continuing operations | $0.55 | $0.44 | $1.55 | $1.30 |
| Health Benefits Ratio (HBR) | 83.0% | 84.2% | 83.0% | 84.0% |
| General and administrative expense ratio | 13.3% | 12.2% | 13.3% | 12.7% |
Q3 premium and service revenue rose 17.0% and operating earnings rose 20.6% year over year. For the first nine months, those measures increased 18.0% and 28.1%, respectively. The filing attributes lower HBR primarily to reduced utilization and contract enhancements; higher G&A ratios reflected expansion costs. Q3 total operating cash flow was reported as $36.5 million in the overview. Nine-month operating cash flow was $89.7 million, versus cash used of $25.7 million a year earlier.
At September 30, cash and cash equivalents were $451.7 million; short-term investments were $106.3 million, long-term investments $530.5 million, and restricted deposits $26.8 million. Total debt was $351.3 million, including $3.2 million current debt; debt-to-capital was 28.0%, down from 29.3% at year-end 2010. The company reported $350 million available under its revolver, with no borrowings outstanding. Current assets were $766.4 million and current liabilities $730.4 million.
Material changes and unusual items
- Q3 at-risk membership increased 9.6% year over year. ABD and Medicare membership rose to 171,700 from 94,500; Medicaid membership rose to 1,189,900 from 1,122,800.
- In May 2011, Centene redeemed $175 million of 7.25% notes due 2014 and issued $250 million of non-callable 5.75% notes due 2017, issued at a discount to yield 6%. Redemption premium and write-off of issuance costs resulted in an $8.5 million pretax extinguishment charge ($0.10 per diluted share). The company also entered into swaps that convert the new notes’ fixed-rate exposure to variable rates.
- Nine-month net earnings included no discontinued-operation earnings in 2011, versus $4.0 million in 2010. The 2011 debt extinguishment charge and different noncontrolling-interest results also affected year-over-year comparisons.
- Operating cash flow improved year over year, but state payment timing remained significant: receivables and unearned revenue together reduced nine-month operating cash flow by $78.5 million.
- Cash, investments and restricted deposits totaled $1.115 billion, compared with $1.074 billion at December 31, 2010. The filing says most are held in regulated subsidiaries and may be subject to distribution restrictions.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management expected available cash, investments, operating cash flow and the credit facility to fund operations and capital expenditures for at least 12 months from the filing date.
- Centene anticipated approximately $11 million of additional 2011 capital expenditures for systems and market expansion, plus approximately $2 million for the headquarters real estate development.
- Management described several growth opportunities: new Kentucky Medicaid operations expected in Q4 2011; expanded Arizona long-term-care services effective October 1, 2011; Louisiana Medicaid services expected to begin in Q1 2012; and Texas expanded services expected to begin late in Q1 2012. Timing and realization remain subject to implementation and other conditions.
- Two states’ 2011 rate increases remained subject to CMS approval; management expected approval in Q4 2011 but gave no assurance of approval by year-end. A state membership reconciliation review was ongoing; the company had accrued its estimated impact but warned future adjustments could materially adversely affect results.
- Major disclosed risks include state and federal Medicaid funding or rate reductions, contract nonrenewal or termination, regulatory and health-reform changes, medical-cost and claims-reserve estimation, payment delays, state eligibility-data revisions, and execution costs from expansion and new markets. The filing also identifies investment credit and interest-rate risk; a hypothetical immediate 1% rate increase would reduce fixed-income investment fair value by about $10 million.
- The company reported aggregate statutory capital and surplus of $586.9 million versus required minimums of $322.4 million, estimated risk-based capital above 350% of the Authorized Control Level, and compliance with applicable health-plan RBC requirements and credit-facility covenants.
- An IRS examination initially denied a $34.9 million tax benefit for 2007; Centene agreed to a settlement in October 2011, which it said had no material impact. Routine legal proceedings were not expected by management to have a material effect.
Most important facts for investors to verify
- Whether pending state rate increases and membership-reconciliation adjustments are approved or finalized, and their eventual revenue impact.
- Whether lower HBR levels persist, particularly given the higher nine-month ABD and Medicare HBR, and whether expansion-related G&A costs moderate.
- Actual enrollment, launch timing, and profitability of the Kentucky, Louisiana, Arizona and Texas contract expansions.
- Cash conversion and state payment timing, including the decline in unearned revenue and the extent to which regulated cash and investments are available to the parent.
- Debt, swap exposure, covenant compliance, and the effect of variable rates; the filing’s market-risk estimate is a sensitivity, not a forecast.