Centene Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014. Centene operates managed-care plans and specialty healthcare businesses, primarily serving government-sponsored programs. Unless stated otherwise, financial amounts below are in millions.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Premium and service revenues | $4,761 | $3,352; up 42.0% |
| Total revenues, including premium tax and health insurer fee | $5,131 | $3,460; up 48.3% |
| Earnings from operations | $129 | $70; up 84.3% |
| Net earnings attributable to Centene | $63 | $33 |
| Diluted EPS | $0.51 total; $0.52 continuing operations | $0.28 total; $0.29 continuing operations |
| Operating cash flow | $45 | $252 |
| Cash and cash equivalents | $1,666 | $1,610 at December 31, 2014 |
| Total debt | $1,128 | $879 at December 31, 2014 |
The health benefits ratio (medical costs as a percentage of premium revenue, excluding premium tax and health insurer fee revenue) was 89.8%, versus 89.3%. The general and administrative expense ratio improved to 8.5% from 8.8%. Management attributed the higher HBR primarily to higher-acuity membership and increased flu-related costs.
At March 31, current assets were $3,590 and current liabilities were $3,343, giving working capital of $247, compared with $134 at year-end. Long-term debt was $1,123. The debt-to-capital ratio was 38.0%, up from 33.5%. The $500 million revolving facility had $125 million drawn; the company reported covenant compliance and no borrowing-availability restriction from its debt-to-EBITDA ratio.
Material changes and drivers
- Managed-care membership rose 44% year over year to 4.40 million, including 4.25 million at-risk members. Growth reflected new and expanded state programs, notably Florida, Illinois, Louisiana and Ohio, as well as Marketplace and other program expansion.
- Premium and service revenue growth reflected a full quarter of business launched or expanded in 2014. Management reported a net 0% composite premium rate adjustment across markets.
- Operating earnings increased as business expanded. Managed Care operating earnings were $95 million, versus $44 million; Specialty Services operating earnings were $34 million, versus $26 million.
- Operating cash flow fell to $45 million from $252 million. A $334 million increase in premium and related receivables and a $51 million decrease in unearned revenue weighed on cash generation. Management cited state payment timing, including a one-time change in payment terms at one state and delayed separate reimbursement of the health insurer fee.
- Investing activities used $225 million, principally reflecting investment purchases, capital expenditure and the LiveHealthier acquisition; financing activities provided $236 million. Centene issued $200 million of additional 4.75% senior notes in January and ended the quarter with higher debt.
Outlook, commentary and risks
- No specific earnings or EPS guidance is provided in the filing. Management expected a full-year 2015 contribution from recently launched and expanded programs. It also cited anticipated contract starts and acquisitions, including Agate Resources, expected to close in Q3 2015 subject to customary conditions and regulatory approval.
- For the remainder of 2015, Centene expected approximately $390 million of net capital contributions to insurance subsidiaries and approximately $117 million of additional capital expenditure. It expected available cash, investments, operating cash flow and credit-facility capacity to fund general operations and capital expenditure for at least 12 months from the filing date.
- Regulated subsidiaries held aggregate statutory capital and surplus of $1,624 million against stated minimum requirements of $871 million. Centene contributed $301 million of statutory capital during Q1 and estimated RBC above 350% of the Authorized Control Level, excluding the interim health insurer fee impact.
- The Affordable Care Act health insurer fee generated $55 million of nondeductible expense and $88 million of related premium tax and health insurer fee revenue in Q1 2015; management said it had no diluted EPS impact for the quarter. The effective tax rate was 49.2%, compared with 51.5%.
- Unusual items included a $10 million gain from settling contingent consideration related to the CHS transaction and a $10 million charitable foundation contribution. LiveHealthier was acquired for stated consideration of $28 million, including cash, stock and contingent consideration; its preliminary allocation included $29 million of goodwill and $16 million of identifiable intangible assets.
- Kentucky litigation: The Kentucky Court of Appeals ruled that Kentucky Spirit lacked a contractual right to terminate early and that a liquidated-damages provision applied. A state cabinet determination asserted $40 million of actual damages plus 8% prejudgment interest; the Commonwealth also cited additional alleged state and CMS expenditures. Centene disputes the claims, intends to seek further review, recorded no receivable or liability, and said the outcome cannot be estimated and could materially affect results, cash flow or financial position.
- Key broader risks include medical-cost and claims-reserve estimation, government funding and contract renewal, premium adequacy and Marketplace risk adjustment, regulation, provider contracting, acquisition execution, state dividend restrictions, investment-rate exposure and cybersecurity/privacy events. A hypothetical immediate 1% rise in interest rates was estimated to reduce fixed-income investment fair value by about $46 million.
Important facts for investors to verify
- Whether the higher HBR, especially for new business and Marketplace membership, remains consistent with pricing and reserve assumptions.
- Whether the Q1 receivables and state payment timing normalize, and whether operating cash flow catches up with earnings.
- Progress on the Kentucky litigation, including appeals, potential damages and any eventual recognition of a liability or recovery.
- Execution, regulatory approvals and financial effects of expected contract starts and acquisitions, including Agate Resources.
- Ability to fund planned subsidiary capital contributions and investment while maintaining debt covenants and liquidity.
- Whether reported fee reimbursements, statutory capital and RBC estimates remain adequate as membership and regulatory requirements change.