Centene Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; comparative periods ended June 30, 2013. Amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
Centene operates Managed Care and Specialty Services businesses, primarily serving government-sponsored healthcare programs. At-risk managed care membership rose 23% year over year to 3.165 million. Growth reflected expansions and new contracts in multiple states, Health Insurance Marketplace participation, AcariaHealth and the January 2014 acquisition of a 68% interest in U.S. Medical Management (USMM). Kentucky Spirit Health Plan is reported as discontinued operations.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Premium and service revenue | $3.741 billion | $2.519 billion | $7.093 billion | $4.941 billion |
| Total revenue, including premium tax and health insurer fee | $4.024 billion | $2.611 billion | $7.484 billion | $5.136 billion |
| Earnings from operations | $92.7 million | $68.7 million | $162.7 million | $108.3 million |
| Net earnings attributable to Centene | $48.9 million | $39.5 million | $81.8 million | $62.5 million |
| Diluted EPS | $0.82 | $0.70 | $1.37 | $1.13 |
| Health Benefits Ratio (HBR) | 88.9% | 88.4% | 89.1% | 89.3% |
| General and administrative expense ratio | 8.6% | 8.9% | 8.7% | 8.6% |
Q2 diluted EPS from continuing operations was $0.79, versus $0.71 a year earlier. Management said the ACA health insurer fee reduced Q2 EPS by $0.16 and six-month EPS by $0.32; the filing reports Q2 EPS of $0.95 excluding the Q2 fee impact.
Cash flow and liquidity: Six-month operating cash flow was $411.9 million, versus $80.9 million in 2013; management attributed much of the 2014 inflow to increased medical claims liabilities. Investing activities used $389.6 million and financing activities provided $198.4 million. Cash and cash equivalents totaled $1.259 billion at June 30. Working capital was $207.2 million, down from $241.1 million at year-end 2013.
Debt and capital: Total debt was $891.0 million, including $884.9 million of long-term debt. Centene issued $300 million of 4.75% senior notes due 2022 in April; it had $70 million outstanding on its $500 million revolving facility. Debt-to-capital was 37.5%, versus 35.0% at December 31, 2013. Subsidiaries held $1.300 billion of statutory capital and surplus against $756.1 million of required minimums; dividends and transfers are subject to regulatory limits.
Material changes versus the prior comparable period
- Q2 premium and service revenue increased 48.5%; total revenue rose 54.1%. Six-month premium and service revenue rose 43.6%.
- Q2 operating earnings increased 34.8% and Centene-attributable net earnings increased 23.8%. Six-month operating earnings rose 50.2% and net earnings rose 31.0%.
- Q2 HBR increased 0.5 percentage point, reflecting a higher-acuity membership mix. Six-month HBR improved 0.2 point, with lower first-quarter utilization in certain markets, partly offset by higher acuity.
- Specialty Services grew significantly, aided by AcariaHealth, Centurion contracts and USMM; Q2 segment operating earnings increased 24.7%. Managed Care Q2 operating earnings increased 40.0%.
- Medical claims liabilities increased to $1.394 billion from $1.112 billion at year-end. Total assets rose to $4.683 billion from $3.529 billion, including goodwill growth associated mainly with USMM.
Outlook, commentary, risks and unusual items
- Management expected to contribute approximately $285 million of additional capital to insurance subsidiaries and spend approximately $60 million on capital expenditures during the remainder of 2014. It expected available cash, investments, operating cash flow and credit-facility capacity to fund operations and planned transactions for at least 12 months.
- For full-year 2014, Centene expected $125.3 million of non-deductible health insurer fee expense. Reimbursement agreements had been signed by 14 of 17 applicable states as of June 30; reimbursement timing and the associated tax gross-up affected reported results.
- Subsequent to quarter-end, Centene completed the Louisiana Bayou Health contract assignment, with expected purchase consideration of $110 million to $140 million, partly in cash and stock. It also acquired a 50% interest in Spain’s Ribera Salud for approximately $16 million and issued approximately $65 million of letters of credit in connection with that investment. A Michigan Fidelis acquisition was expected to close in the first half of 2015, subject to conditions and regulatory approval.
- The Kentucky Spirit dispute remains a material contingency. Kentucky alleged damages, citing $28 million to $40 million of state expenditures plus interest and $92 million to $134 million in associated CMS expenditures. Centene disputes the claims and has its own claims; it recorded no receivable or liability because the outcome could not be estimated. Resolution could materially affect results, cash flow or financial position.
- Other principal risks include medical-cost and claims-reserve estimation, government funding and contract renewals, rate adequacy and Marketplace adverse selection, extensive regulation, provider costs, acquisition integration, investment and interest-rate exposure, and restricted access to regulated subsidiary capital. A hypothetical 1% rate increase was estimated to reduce fixed-income investment fair value by $28.6 million.
Important facts for investors to verify
- Whether medical-cost trends, higher-acuity membership and claims-reserve development remain consistent with the reported HBR and estimates.
- The timing and collectability of state reimbursements for the health insurer fee, and its full-year effect on earnings and effective taxes.
- The status and potential financial exposure of the Kentucky litigation, including any developments in the appeal and damage claims.
- Execution, retained membership and final consideration for the Louisiana transaction, plus integration and performance of USMM and other growth initiatives.
- Regulatory capital needs, permitted subsidiary dividends, revolving-credit covenant compliance and the effect of additional borrowing on leverage and interest expense.