Centene Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016. Figures are in U.S. dollars. Centene provides managed-care and specialty healthcare services, primarily to government-sponsored and commercial programs.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Total revenues | $11.724 billion | $6.953 billion | Up 69% |
| Premium and service revenues | $11.165 billion | $6.411 billion | Up 74% |
| Operating earnings | $240 million | $20 million | Improved substantially |
| Net earnings attributable to Centene | $139 million | Loss of $16 million | GAAP diluted EPS was $0.79 versus loss of $0.13 |
| Adjusted diluted EPS | $1.12 | $0.74 | Non-GAAP measure |
| Health benefits ratio (HBR) | 87.6% | 88.7% | Lower year over year |
| SG&A expense ratio | 9.8% | 11.3% | Excluding specified items: 9.3% versus 8.3% |
| Operating cash flow | $1.248 billion | $196 million | Increase included working-capital and payment-timing effects |
Growth primarily reflected the Health Net acquisition and new or expanded programs. The comparison is materially affected by timing: Q1 2016 included Health Net results only from its March 24, 2016 acquisition date, while Q1 2017 included the full quarter. Management attributed the lower HBR largely to Health Net’s business mix and Marketplace growth. The higher adjusted SG&A ratio, excluding the stated items, was attributed primarily to Health Net’s commercial and Medicare mix.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $4.839 billion; short-term investments were $725 million and long-term investments were $4.636 billion.
- Total debt was $4.647 billion, including $100 million drawn on a $1.0 billion revolving credit facility. The reported debt-to-capital ratio was 43.3%, down from 44.1% at year-end 2016. Centene reported compliance with debt covenants.
- Working capital was $206 million, compared with negative $258 million at December 31, 2016. Operating cash flow was also supported by higher medical claims liabilities, unearned revenue from advance capitation payments, and other liability movements; these timing-related sources may not recur at the same level.
- Regulated subsidiaries had $4.691 billion of statutory capital and surplus against $2.231 billion of required minimums. The filing states that $2.231 billion was unavailable for dividends or return of capital to the parent, limiting access to some subsidiary funds.
- Investing cash use was $329 million, including investment purchases and $83 million of capital expenditures. Financing cash use was $10 million.
Material items, outlook and risks
- Penn Treaty assessment: Centene recorded a $47 million SG&A charge for its estimated share of guaranty-association assessments following the court-ordered liquidation of the unaffiliated insurer. Adjusted EPS excludes this expense.
- Other adjustments: Adjusted EPS also excludes acquired-intangible amortization and Health Net acquisition-related expenses; adjusted results are non-GAAP and should be considered alongside GAAP results.
- Membership and growth: Managed-care membership was 12.145 million, up about 5% year over year. Marketplace membership was 1.189 million versus 683,000; total at-risk membership was 9.341 million. Management cited the full-year Health Net contribution and recently launched or awarded programs as growth drivers, subject to contract start dates, approvals and readiness reviews.
- 2017 expectations: The filing does not provide a full-year earnings or EPS forecast. Management expected approximately $160 million of net capital contributions to insurance subsidiaries and approximately $415 million of additional capital expenditures for the rest of 2017. It expected available cash, investments, operating cash flow and revolver capacity to fund operations and capital expenditures for at least 12 months from the filing date.
- Regulatory outlook: The administration and Congress were considering ACA changes, but the outcome and impact were uncertain. Centene noted Marketplace pricing, enrollment, risk-adjustment and funding uncertainty; the transitional reinsurance and risk-corridor programs had ended after 2016. The 2017 health insurer fee was suspended, and no fee expense was recorded in Q1.
- Contingencies: Materially adverse outcomes were possible in a California tax case involving whether Health Net California owed gross-premiums tax, a securities class action concerning Health Net-acquired liabilities, and a DOJ investigative demand regarding Medicare risk-adjustment submissions. The filing said potential liability for the DOJ matter could not then be determined; accrued legal and regulatory amounts were not material overall.
- Other risks: Key exposures include medical-cost and claims-reserve estimation, government funding and contract changes, ACA developments, acquisition integration and expected synergies, regulatory approvals, provider costs, investment and interest-rate risks, cybersecurity, and leverage. A hypothetical immediate 1% rate increase was estimated to reduce fixed-income investment fair value by about $167 million; the fair value of debt was estimated to decrease by about $139 million.
Investor verification points
- Assess the comparability of Q1 growth and earnings given Health Net’s partial-period inclusion in Q1 2016, and reconcile GAAP earnings with adjusted EPS.
- Review whether HBR, Marketplace pricing and enrollment, risk-adjustment balances, and medical claims reserves develop as expected; prior-year claims incurred included $235 million of favorable development.
- Distinguish recurring operating cash generation from cash-flow effects of advance state payments and liability growth.
- Monitor the Penn Treaty assessment, the California tax dispute, the securities litigation and DOJ investigation for changes in exposure or accruals.
- Track contract commencements, regulatory approvals, ACA policy changes, integration costs, planned capital spending, and the availability of regulated-subsidiary cash.