Centene Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Dollar amounts are in millions unless noted. Centene provides managed-care and specialty healthcare services, primarily for government-sponsored and commercial programs.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $13,194 | $11,724 | +13% |
| Premium and service revenue | $12,556 | $11,165 | +12% |
| Operating earnings | $540 | $240 | +125% |
| Net earnings attributable to Centene | $340 | $139 | +145% |
| Diluted EPS | $1.91 | $0.79 | +142% |
| Adjusted diluted EPS (non-GAAP) | $2.17 | $1.12 | +94% |
| Operating cash flow | $1,846 | $1,248 | +$598 |
Medical costs were $10,039, up 8%; the health benefits ratio (medical costs as a percentage of premium revenue, excluding separately billed taxes and fees) improved to 84.3% from 87.6%. The SG&A expense ratio increased to 10.5% from 9.8%; adjusted SG&A ratio was 10.3% versus 9.3%. Operating margin, calculated as operating earnings divided by total revenue, was approximately 4.1%, versus 2.0%.
Cash and cash equivalents were $5,668 at March 31, 2018, versus $4,072 at December 31, 2017. Current assets of $10,976 exceeded current liabilities of $10,890, producing $86 of working capital, compared with negative $629 at year-end. Long-term debt was $5,172 and total debt was $5,176, up from $4,699 at year-end; debt-to-capital was 40.6%, unchanged. The $1,500 revolving facility had $675 outstanding, with no availability limitation from the leverage covenant. Cash used in investing was $764, including $218 of capital expenditures; financing provided $513.
Changes and operating drivers
- Managed-care membership increased 6% year over year to 12.8 million. Marketplace membership rose to 1.6 million from 1.2 million; total at-risk membership was 9.8 million.
- Revenue growth reflected Marketplace expansion, new and expanded state programs, and the return of the health insurer fee. California revenue was pressured by removal of in-home support services from its Medicaid contracts. Management reported a net 0% composite premium-rate adjustment across markets.
- Lower HBR was attributed to Marketplace growth and lower Medicaid medical costs, partly offset by higher initial costs in new or expanded plans and flu-related costs. SG&A growth reflected expansion and acquisition costs; the 2017 comparison included a $47 Penn Treaty assessment that did not recur.
- The health insurer fee generated $171 of expense in Q1 2018; none was recorded in Q1 2017 under the 2017 moratorium. The 2018 effective tax rate was 34.1%, compared with 39.7%, reflecting the lower corporate tax rate, partly offset by the fee’s tax treatment.
Outlook, transactions and risks
- Management expected approximately $196 of net capital contributions to insurance subsidiaries and $590 of additional capital expenditures during the remainder of 2018. It stated available cash, investments, operating cash flow and revolver capacity should fund operations and capital spending for at least 12 months.
- The proposed $3.75 billion Fidelis Care asset acquisition was expected to close around July 1, 2018, subject to remaining approvals and closing conditions. New York health and financial-services approvals were received in April; Attorney General approval remained outstanding. Expected funding was approximately $2.3 billion of new equity, including share consideration, and $1.6 billion of new long-term debt. A planned $340 contribution to New York over five years was expected to have a present value of about $325 and be expensed in SG&A upon closing.
- Q1 acquisitions included Community Medical Group and an additional 61% of Interpreta; Centene also invested 25% in RxAdvance. The MHM and remaining Centurion interests were acquired in April, after quarter-end.
- Management highlighted the reduced 2018 Medicare Star rating: a California plan fell from 4.0 to 3.5 stars, lowering the parent rating to 3.5. This could affect 2019 quality bonus payments and expansion; management was pursuing quality improvements.
- Material uncertainties include medical-cost and claims-reserve estimation, government rates and contract renewals, Marketplace pricing and ACA changes, acquisition financing/integration, regulatory constraints on subsidiary dividends, and interest-rate and investment risks. A hypothetical immediate 1% rate increase was estimated to reduce fixed-income investment fair value by $189.
- Legal matters include a California taxpayer action concerning premium taxes, securities and shareholder derivative litigation related to Health Net accounting disclosures, DOJ information demands concerning Medicare and VA claims, and an Ambetter class action alleging network, coverage and grievance issues. The company said accrued legal and regulatory amounts were not material; outcomes and possible losses were uncertain, and adverse outcomes could be material.
Key facts investors should verify
- Whether Fidelis Care closed on expected terms and how its equity, debt, regulatory undertakings and $340 contribution affected earnings, dilution and leverage.
- Whether improved HBR and higher operating earnings persisted as new programs matured, medical claims developed, and Marketplace mix and medical utilization changed.
- Cash-flow quality: operating cash flow benefited from higher claims liabilities, risk-adjustment payables and advance capitation receipts, which can vary with payment timing.
- Progress on SG&A ratio, acquisition integration, planned capital spending and the impact of the 3.5-star Medicare rating on 2019 revenue.
- Developments in the disclosed legal and regulatory proceedings, government contract awards, and any resulting financial exposure or operational changes.