Centene Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 2013. This is an annual report, not a standalone Q4 filing. Centene operates Medicaid Managed Care and Specialty Services businesses, primarily under government contracts. Year-end at-risk membership was 2.56 million, up 41% from 2011.
Financial performance and liquidity
- Revenue: Premium and service revenue was $8.239 billion, up 59%; total revenue, including premium-tax pass-throughs, was $8.668 billion, up 62.3%.
- Profit: Operating loss was $27.1 million versus operating earnings of $190.3 million in 2011. Consolidated net loss was $11.3 million; net earnings attributable to Centene were $1.9 million, or diluted EPS of $0.03, versus $111.2 million and $2.12 in 2011.
- Medical costs and margins: Health benefits ratio (medical costs as a percentage of premium revenue) increased to 91.6% from 85.2%. General and administrative expense ratio improved to 8.6% from 11.3%. The filing attributes the higher medical ratio principally to Kentucky, Texas expansion areas, individual health policies, and fourth-quarter flu costs.
- Cash flow: Operating cash flow was $278.7 million, compared with $261.7 million in 2011. Investing activities used $187.9 million and financing activities provided $179.5 million. Cash and cash equivalents rose to $844.0 million.
- Liquidity and debt: Working capital was $176.5 million. Cash, cash equivalents and short-term investments totaled about $983.1 million; long-term investments and restricted deposits totaled $649.5 million. Total debt was $538.9 million, including $535.5 million of long-term debt. The $350 million revolver had no borrowings outstanding at year-end; the company reported covenant compliance. Debt-to-capital was 36.1%, up from 27.3%.
Changes versus 2011 and notable items
- Revenue growth reflected new and expanded contracts, including Louisiana, Missouri and Washington, Texas expansion and pharmacy-benefit additions. Membership grew by 744,300 year over year.
- Medicaid Managed Care recorded an $83.2 million operating loss, compared with $153.0 million of operating earnings in 2011. Specialty Services operating earnings increased to $56.1 million from $37.3 million.
- Centene recorded a $41.5 million premium deficiency reserve for the Kentucky contract, covering January 1 through July 5, 2013, and reported a $142.2 million pretax operating loss in its Kentucky health plan.
- A $28.0 million impairment charge reduced goodwill and intangible assets in the Celtic individual-health-insurance reporting unit. Centene also recognized a $17.9 million pretax gain on settlement of convertible notes and a $5.8 million state income-tax benefit.
- Prior-year medical claims estimates developed favorably by $53.4 million overall; excluding the effect of retroactively assigned Kentucky members, the favorable development was $61.7 million. Medical claims liability ended the year at $926.3 million.
Outlook, risks and contingencies
- Management expected a full-year 2013 contribution from 2012 contract starts and cited expected growth from Kansas, Florida long-term-care enrollment, Ohio and Illinois dual-eligible programs, and New Hampshire. These are plans and anticipated starts, not quantified earnings guidance.
- Centene forecast approximately $75 million of 2013 capital expenditures and about $450 million of capital contributions to insurance subsidiaries. Management expected available resources and financing to cover operations, planned investment and capital needs for at least 12 months from the filing date.
- A definitive agreement to acquire AcariaHealth for $152 million was announced in January 2013, with approximately 60% expected to be funded with Centene stock and the remainder from cash and credit facilities; closing was subject to regulatory approval and other conditions.
- The Kentucky contract exit is disputed: Centene asserted a contractual termination effective July 5, 2013, sought damages, and filed suit. The court retained jurisdiction but stayed proceedings pending an administrative determination. The $41.5 million reserve depends in part on the expected termination; the company warned that a different outcome could require a higher reserve.
- Key risks include state and federal Medicaid funding and rate changes, contract renewal and procurement outcomes, medical-cost and claims-reserve estimation, new-market execution, regulatory requirements, and reliance on a limited number of states. Texas represented 36% of 2012 consolidated revenue. Healthcare reform implementation and the ACA’s 2014 industry assessment could affect costs and profitability.
- Financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting as of year-end.
Investor verification priorities
- Review the Kentucky dispute, contract termination timing, reserve assumptions and any subsequent administrative or court decisions.
- Assess whether 2012 medical-cost pressures—especially in Kentucky, Texas expansion areas and Celtic—persisted, and whether the 91.6% health benefits ratio normalized.
- Verify the quality and timing of state premium receipts, claims development and the large year-end medical claims liability.
- Track contract awards, enrollment ramps and state funding exposure, particularly in Texas and newly launched markets.
- Confirm the financing, regulatory approval, closing and integration results of the AcariaHealth acquisition, alongside planned capital contributions and leverage capacity.