Centene Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited. Unless otherwise noted, financial amounts below are in millions of dollars.
Business context and reporting period
Centene provides Medicaid managed care and specialty healthcare services. At September 30, 2013, at-risk managed care membership was 2.61 million, up 4.4% from 2.50 million a year earlier. Growth reflected new and expanded state programs, including Kansas, and the AcariaHealth specialty pharmacy acquisition. Kentucky Spirit exited its Kentucky Medicaid contract on July 5, 2013; Centene also lost its Arizona acute-care contract effective September 30, 2013.
Financial performance and key metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Premium and service revenues | $2,734.1 | $2,212.5 | $7,910.7 | $5,937.5 |
| Total revenues | $2,803.7 | $2,448.1 | $8,175.5 | $6,271.0 |
| Operating earnings (loss) | $82.2 | $(27.6) | $189.4 | $(40.2) |
| Net earnings attributable to Centene | $49.4 | $3.8 | $111.9 | $(7.2) |
| Diluted EPS | $0.87 | $0.07 | $2.00 | $(0.14) |
| Health Benefits Ratio (HBR) | 87.7% | 93.3% | 88.9% | 91.7% |
| General and administrative expense ratio | 9.3% | 8.2% | 8.8% | 8.6% |
Q3 premium and service revenues grew 23.6%; nine-month growth was 33.2%. Management attributed growth principally to new contracts and market expansions, higher Texas membership and rates, pharmacy service expansions, and AcariaHealth. The HBR improvement reflected Texas rate increases and moderate utilization; the 2012 comparison was also burdened by Kentucky costs and its premium deficiency reserve. G&A rose with growth-related staffing and facilities, performance compensation, and acquisition costs.
For the nine-month period, operating cash flow was $211.7, versus $307.3 in 2012. Investing activities used $324.1, primarily for regulated-subsidiary investments, the AcariaHealth acquisition, and capital expenditures; financing activities provided $9.8. Cash and equivalents were $741.3 at September 30, down from $844.0 at year-end 2012. Q3 operating cash flow was $130.7.
At September 30, total debt was $521.0, including $517.9 of long-term debt. Centene had no revolver borrowings; availability under its $500.0 revolving facility was approximately $400.0, limited by the debt-to-EBITDA covenant. Debt to capital was 30.5%, or 27.4% excluding the $73.4 non-recourse mortgage note. Working capital was negative $18.5. Statutory capital and surplus at subsidiaries was $1,211.9 against minimum requirements of $667.4; estimated risk-based capital exceeded 350% of the Authorized Control Level.
Material changes and unusual items
- The 2012 comparison included a $41.5 Kentucky premium deficiency reserve, a $28.0 impairment charge, and a $17.9 gain on sale of a convertible-note investment. These items materially affect comparisons; management’s Q3 per-share bridge showed $0.88 in 2013 and $0.81 in 2012 excluding the specified Kentucky items, investment gain, and state tax benefit.
- AcariaHealth was acquired in April 2013 for total consideration of $142.5, funded with $75.4 of Centene stock and $67.1 cash. The purchase allocation included $91.3 of goodwill and $35.0 of identifiable intangibles.
- The company issued shares for the acquisition and separately sold shares for $15.2 to fund its acquisition escrow account. Goodwill is not tax deductible.
- Investment and other income, net of interest expense, was a $1.7 expense in Q3 2013 versus $18.4 income in Q3 2012, largely reflecting the prior-year convertible-note gain. Interest expense increased, partly due to additional senior notes issued in late 2012.
Outlook, risks, and contingencies
Centene did not provide a specific earnings or revenue forecast in the filing. For the remainder of 2013, it expected approximately $50 million of additional capital contributions to insurance subsidiaries and approximately $17 million of capital expenditures, funded by unregulated cash generation and revolver borrowings as needed. Management expected available cash, investments, operating cash flow, and credit-facility capacity to cover general operations and capital expenditures for at least 12 months from the filing date.
Management identified future growth opportunities including Florida Medicaid programs, Massachusetts CarePlus, Texas STAR+PLUS expansion, correctional healthcare contracts, and participation in federal and state health insurance exchanges, with enrollment or operations generally expected to begin in 2014, subject to awards, challenges, negotiations, approvals, and readiness. These are expectations, not assured results.
Kentucky litigation: The state alleges that Kentucky Spirit’s exit breached its contract and seeks substantial damages, including recovery under a $25.0 performance bond. Centene appealed a ruling that it lacked a contractual right to terminate early and is pursuing its own damages claims. The company could not estimate the outcome and recorded no related receivable or liability; resolution could materially affect results in the period determined.
Key risks include medical-cost and claims-reserve estimation, premium adequacy and payment timing, state and federal funding or regulatory changes, contract renewals and state concentration, new-market execution, exchange pricing and adverse selection, investment interest-rate and credit risk, and healthcare cost inflation. A hypothetical immediate 1% increase in rates was estimated to reduce fixed-income investment fair value by approximately $23.2 million.
Important facts for investors to verify
- Whether HBR and medical-cost trends remain favorable, particularly in newer markets, and whether the improvement is sustainable.
- The eventual financial and legal outcome of the Kentucky dispute, including potential exposure under the performance bond.
- Actual enrollment, profitability, and execution of announced 2014 contracts and health insurance exchange business.
- Liquidity and covenant headroom given negative working capital, planned capital contributions, and approximately $400 million of revolver availability.
- Whether acquisition integration and higher G&A costs are offset by durable earnings from AcariaHealth and specialty services.