Centene Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparison is Q1 2010 unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are generally in millions.
Business context and results
Centene operates Medicaid Managed Care and Specialty Services businesses. At-risk managed-care membership was 1.543 million, up 4.8% year over year. Growth reflected new and expanded programs and acquisitions, including activity in Florida, South Carolina and Texas.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Premium and service revenues | $1,179.2 | $1,022.2 | +15.4% |
| Total revenues | $1,216.4 | $1,068.7 | +13.8% |
| Earnings from operations | $39.1 | $29.6 | +32.0% |
| Continuing-operations earnings attributable to Centene | $23.7 | $20.1 | +18.2% |
| Net earnings attributable to Centene | $23.7 | $24.0 | -1.1% |
| Diluted EPS from continuing operations | $0.46 | $0.41 | +12.2% |
| Total diluted EPS | $0.46 | $0.49 | -6.1% |
Revenue growth came from membership gains and prior-year premium rate increases; Q1 2011 rate adjustments produced a net 0% composite change across markets. Medicaid Managed Care operating earnings rose 50.1% to $28.1 million. Specialty Services operating earnings were nearly flat at $11.0 million, up 1.1%.
Margins, cash flow and financial position
- The health benefits ratio (medical costs as a percentage of premium revenue, excluding premium taxes) improved to 83.0% from 84.0%, primarily due to lower utilization. Medicaid and CHIP HBR fell to 82.4% from 85.6%; ABD and Medicare increased to 85.1% from 80.3%.
- General and administrative expenses increased 20.0% to $162.6 million; the G&A ratio rose to 13.8% from 13.3%, partly because Mississippi start-up costs were recorded without corresponding recognized revenue.
- Operating cash flow was $94.0 million, compared with cash use of $38.5 million in Q1 2010. The filing attributes period-to-period cash flow partly to payment timing; unearned revenue was $127.5 million at quarter-end.
- Cash and cash equivalents were $492.0 million. Cash, short-term investments, long-term investments and restricted deposits totaled $1,128.0 million, of which $1,096.3 million was held in regulated entities. Working capital was negative $73.2 million, improved from negative $108.4 million at year-end; management attributed the deficit partly to investments classified as long-term.
- Total debt was $305.4 million, including $175.0 million of senior notes, $35.0 million drawn on the revolver and $89.0 million of mortgage notes. Debt to capital was 26.9%, down from 29.3% at December 31, 2010. The new $350 million, five-year unsecured revolver had $315 million available; the company reported covenant compliance.
- Subsidiaries held $541.3 million of statutory capital and surplus against required minimums of $318.5 million; estimated risk-based capital exceeded 350% of the Authorized Control Level.
Material changes, outlook and risks
- Mississippi approval contingency: Centene served 33,100 MississippiCan members from January 1, 2011, but the contract remained subject to CMS approval. It did not recognize $54.5 million of related revenue or medical costs, delaying approximately $0.07 per diluted share of earnings. The filing says these amounts would be recognized retroactively to January 1 when final approval is obtained.
- Outlook: Management expected operating cash flow to moderate during the rest of 2011 and stated that available cash, investments, operating cash flow and credit availability should fund general operations and capital spending for at least 12 months from the filing date.
- Management anticipated approximately $45 million of additional 2011 capital expenditures for the data center, systems and market expansions, plus approximately $10 million for the headquarters development. Illinois Integrated Care Program operations were expected to begin in Q2 2011.
- Wisconsin’s Southeast BadgerCare Plus contract was lost effective November 2010; a legal challenge remained pending before the state court of appeals, with outcome and timing unknown.
- Key stated risks include state and federal Medicaid funding or rate reductions, contract loss or nonrenewal, medical-cost and claims-reserve estimation, healthcare reform implementation, regulatory and audit actions, provider availability, investment and interest-rate exposure, and execution and integration of acquisitions and new-market launches. The filing does not provide formal earnings guidance.
Most important facts for investors to verify
- Whether CMS approved MississippiCan and whether the deferred revenue, medical costs and approximately $0.07 per diluted share were subsequently recognized.
- Whether the improved HBR persists, particularly given the higher ABD and Medicare HBR, and how medical claims estimates develop.
- Whether state premium rates keep pace with healthcare costs and whether Medicaid funding, contract renewals or regulatory changes affect membership and margins.
- How operating cash flow evolves as unusually favorable state-payment timing normalizes, and whether planned capital spending remains on budget.
- The outcome of the Wisconsin contract appeal and the availability and covenant terms of the revolving credit facility.