Centene Corporation — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2015. Centene operates managed-care health plans and specialty healthcare businesses, with most revenue tied to government-sponsored programs. Figures are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Premium and service revenues | $5,184 | $3,741 | $9,945 | $7,093 |
| Total revenues | $5,506 | $4,024 | $10,637 | $7,484 |
| Earnings from operations | $173 | $93 | $302 | $163 |
| Net earnings attributable to Centene | $88 | $49 | $151 | $82 |
| Diluted EPS | $0.72 | $0.41 | $1.23 | $0.69 |
| Health Benefits Ratio (HBR) | 89.1% | 88.9% | 89.4% | 89.1% |
| General and administrative expense ratio | 8.5% | 8.6% | 8.5% | 8.7% |
Revenue growth reflected expanded or new programs, notably in Florida, Illinois, Louisiana, Mississippi, Ohio and Texas, and membership growth. Managed-care membership was 4.6 million at quarter-end, up 38% year over year. Management cited higher HBRs in certain new programs, higher-acuity membership and flu-related costs as pressures on medical costs. Management reported Q2 operating cash flow of $350 million; the cash-flow statement reports $395 million for the first six months, versus $412 million in the prior-year period.
At June 30, 2015, cash and cash equivalents were $1,967; current assets were $3,838 and current liabilities were $3,458, producing reported working capital of $380. Total debt was $1,144, including $150 outstanding under a $500 revolving credit facility. Debt-to-capital was 37.1%, compared with 33.5% at year-end 2014. Centene reported compliance with debt covenants and no availability restrictions under the revolver from the debt-to-EBITDA covenant. Cash increased $357 in the six-month period.
Material changes and unusual items
- Q2 premium and service revenues increased 38.6% year over year; operating earnings rose 86.0% and diluted EPS rose from $0.41 to $0.72. Six-month premium and service revenues increased 40.2% and diluted EPS increased from $0.69 to $1.23.
- Quarter-end membership increased by approximately 1.3 million year over year. Growth included Medicaid expansion and new contracts, with particularly substantial membership increases in Illinois, Louisiana and Mississippi.
- Six-month medical claims liabilities increased to $2,092 from $1,723 at December 31, 2014. Premium and related receivables increased to $1,248 from $912, partly reflecting growth and the timing of state payments and health-insurer-fee reimbursements.
- Debt increased to $1,144 from $879 at year-end, including issuance of an additional $200 of 4.75% senior notes and increased revolving-credit borrowings. Six-month financing included $750 of borrowings and $479 of debt repayments.
- Centene recorded a $10 gain from settling contingent consideration related to the CHS transaction and a $10 charitable-foundation contribution in Q1. Q2 included approximately $2 of Health Net merger-related expense, reducing diluted EPS by $0.01.
- The two-for-one stock split declared in February was reflected in all share and per-share figures.
Outlook, risks and contingencies
- Management expected available cash, operating cash flow and credit-facility capacity to fund general operations and capital expenditures for at least 12 months, excluding the proposed Health Net transaction. For the remainder of 2015, it expected approximately $305 of net capital contributions to insurance subsidiaries and $110 of capital expenditures.
- On July 2, 2015, Centene agreed to acquire Health Net in a transaction valued at approximately $6.8 billion, including assumed debt. Health Net shareholders were to receive 0.622 Centene share and $28.25 cash per share. The deal was expected to close in early 2016, subject to shareholder, antitrust and regulatory approvals and other conditions. Centene expected to fund the cash portion with existing cash and debt financing. Completion, financing, integration, synergies and potential dilution are uncertain.
- Other stated growth prospects included the expected third-quarter 2015 Agate Resources acquisition, subject to customary conditions, and anticipated contract expansions and starts. These were forward-looking expectations, not completed results.
- Kentucky Spirit litigation remains significant. A Kentucky appeals court ruled that the contract could not be terminated early and that the liquidated-damages provision applied. The state separately asserted $40 million in actual damages plus 8% prejudgment interest; the Commonwealth had also cited additional alleged expenditures. Centene disputed the claims, recorded no receivable or liability, and said it could not estimate the outcome. Resolution could materially affect results, cash flow or financial position.
- Key risks include government funding, premium rates and contract renewals; medical-cost and claims-reserve estimation; Marketplace pricing and risk-stabilization programs; regulatory and capital requirements; provider costs; and interest-rate exposure. A hypothetical immediate 1% rate increase was estimated to reduce fixed-income investment fair value by about $43 million, while the fair value of hedged debt would decrease by about $35 million.
Important facts for investors to verify
- Whether membership growth and new contracts translate into sustainable margins as HBRs and medical claims liabilities develop.
- State payment timing, receivable collections and the cash conversion of reported earnings.
- Health Net merger approvals, financing terms, integration costs, expected synergies and dilution; also the status and cost of the Agate transaction.
- Developments in the Kentucky Spirit litigation and any resulting liability or recovery.
- Compliance with debt covenants and regulated-subsidiary capital requirements, including the availability of cash held within regulated entities.