Centene Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Centene provides managed care and specialty healthcare services, primarily in government-sponsored and commercial programs. Year-over-year comparisons, especially for the six-month period, are affected by the March 2016 Health Net acquisition; 2016 includes Health Net only from its acquisition date.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $11.954 billion | $10.897 billion | $23.678 billion | $17.850 billion |
| Operating earnings | $438 million | $377 million | $678 million | $397 million |
| Net earnings attributable to Centene | $254 million | $170 million | $393 million | $154 million |
| Diluted EPS | $1.44 | $0.97 | $2.23 | $1.01 |
| Adjusted diluted EPS (non-GAAP) | $1.59 | $1.29 | $2.71 | $2.11 |
- Q2 revenue rose 10% and diluted EPS rose 48%; six-month revenue rose 33% and diluted EPS rose 121%. Acquisition effects contribute to the six-month growth.
- Q2 health benefits ratio (HBR) was 86.3%, versus 86.6%; six-month HBR was 87.0%, versus 87.4%. Management attributed the improvement mainly to Health Insurance Marketplace growth, which has a lower HBR.
- Q2 SG&A ratio was 9.3%, versus 9.2%; adjusted SG&A ratio was 9.3%, versus 9.0%. Six-month SG&A ratio was 9.5%, versus 10.0%, while adjusted SG&A ratio was 9.3%, versus 8.7%.
- Six-month operating cash flow was $942 million, compared with cash used of $223 million in 2016. Q2 operating cash flow was reported in MD&A as negative $306 million, primarily due to the timing of state capitation payments and higher receivables.
- Cash and cash equivalents were $4.425 billion at June 30, up from $3.930 billion at year-end. Working capital was $682 million, versus negative $258 million at year-end.
- Total debt was $4.720 billion, including $150 million drawn on the revolving credit facility. Debt-to-capital was 42.5%, down from 44.1% at year-end. Centene reported compliance with debt covenants.
Material changes, outlook and risks
- Managed care membership was 12.219 million, up 7% year over year. Health Insurance Marketplace membership increased to 1.085 million from 617,700.
- Q2 included a $48 million pretax benefit from reconciliation of the 2016 ACA risk-adjustment program. The comparable 2016 quarter included a $70 million pretax benefit from 2015 risk-adjustment and reinsurance reconciliations. The 2017 six-month results also included a $47 million estimated assessment related to the Penn Treaty liquidation.
- The 2017 health insurer fee was suspended, reducing both revenue and expense compared with 2016. Management noted the fee was expected to resume in 2018; changes to healthcare law and ACA implementation remained uncertain.
- Management expected approximately $117 million in net capital contributions to insurance subsidiaries and approximately $300 million in additional capital expenditures during the remainder of 2017. It expected available cash, investments, operating cash flow and credit-facility capacity to fund operations and capital expenditures for at least 12 months from the filing date. No numerical full-year earnings or EPS guidance is provided in the supplied filing text.
- Growth opportunities include new and expanded state programs and planned 2018 Marketplace expansion. Risks include contract procurement and renewal, government funding and payment delays, medical-cost estimation, Marketplace pricing and regulatory changes, and Health Net integration and synergy execution. State rules restrict subsidiary dividends; $2.219 billion of capital and surplus was unavailable for dividends without approval.
- Contingencies include a California gross-premiums-tax lawsuit, a federal securities class action concerning Health Net acquisition disclosures, and a Department of Justice investigative demand regarding Medicare risk-adjustment claims. The filing says accrued legal and regulatory amounts were not material, but adverse outcomes could be material; exposure for the investigative demand could not be determined.
Most important facts for investors to verify
- Whether the $48 million ACA risk-adjustment benefit and favorable prior-year claims development are representative of recurring results; the filing reports $352 million of favorable prior-year incurred-claims development for the six months.
- How Marketplace membership, pricing, risk-adjustment settlements and potential ACA changes affect future margins and cash collections.
- Whether Health Net integration produces expected efficiencies while managing the company’s debt and acquisition-related obligations.
- Developments in the California tax case, securities litigation and Medicare risk-adjustment investigation, for which outcomes or potential exposure remain uncertain.
- The timing of state capitation payments and the associated effect on quarterly operating cash flow; the filing reports strong six-month cash generation but negative Q2 operating cash flow.