Centene Corporation (CNC) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Centene provides managed care and specialty healthcare services, principally for government-sponsored and commercial programs. It reported two segments: Managed Care and Specialty Services. On January 4, 2022, Centene acquired Magellan Health for $2.561 billion in total consideration; the purchase-price allocation remained preliminary at quarter-end.
Financial and operating results
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $37.185 billion | $29.983 billion; up 24% |
| Premium and service revenue | $34.232 billion | $28.114 billion; up 22% |
| Operating earnings | $1.253 billion | $1.054 billion; up 19% |
| Net earnings attributable to Centene | $849 million | $699 million; up 21% |
| Diluted EPS | $1.44 | $1.19 |
| Adjusted net earnings / adjusted diluted EPS | $1.080 billion / $1.83 | $960 million / $1.63 |
| Health benefits ratio (HBR) | 87.3% | 86.8% |
| SG&A expense ratio / adjusted SG&A ratio | 8.0% / 7.7% | 7.9% / 7.6% |
| Operating cash flow | $1.151 billion | $43 million |
Revenue growth reflected Medicaid and Medicare membership growth, acquisitions, new and expanded contracts, and $1.9 billion of additional premium-tax revenue and retroactive state-directed payments. Managed Care operating earnings increased to $1.237 billion from $956 million. Specialty Services revenue rose 43%, but operating earnings fell to $16 million from $98 million, largely because of a non-recurring prior-year federal-services item.
Medical costs were $27.838 billion, up 19%. Management attributed the higher HBR primarily to a return toward more normalized traditional Medicaid utilization, partly offset by pricing actions and lower Marketplace utilization. SG&A ratio increases reflected the acquired businesses’ cost profiles, partly offset by revenue growth and expense leverage.
Balance sheet, cash flow and debt
- Cash and cash equivalents were $11.237 billion, down from $13.118 billion at year-end. Total assets were $82.901 billion and total liabilities were $55.471 billion.
- Working capital was $1.4 billion, versus $2.7 billion at December 31, 2021. The company reported $18.932 billion of total debt, including $292 million current and $18.640 billion long-term; debt to capital was 40.9%.
- Operating cash flow was $1.151 billion; investing used $2.401 billion, including the Magellan acquisition; financing used $498 million. Cash, cash equivalents and restricted cash declined by $1.715 billion during the quarter.
- Centene reported compliance with its debt covenants and no revolving-credit availability restrictions from its debt-to-EBITDA ratio. It expected available cash, investments, operating cash flow and revolving-credit capacity to fund operations and capital expenditures for at least 12 months from the filing date.
Material changes and unusual items
- Magellan contributed to Specialty Services growth and added acquired assets and liabilities; its fair-value allocation, including $1.099 billion of estimated goodwill, was preliminary. Centene recorded $97 million of acquisition-related expenses.
- Q1 adjusted results exclude acquired-intangible amortization, acquisition expenses and other adjustments. The 2021 comparison also included debt-extinguishment and restructuring costs.
- Other comprehensive loss was $562 million, primarily reflecting a $544 million after-tax decline in unrealized investment gains. Management attributed unrealized investment losses mainly to interest-rate movements and reported no impairment for the securities in loss positions.
- Centene’s Q1 cash flow benefited from changes in medical claims liabilities and payables; receivables increased by $3.099 billion and were a cash-flow use.
Outlook, risks and contingencies
- Management expected approximately $900 million of net dividends from insurance subsidiaries and approximately $800 million of additional capital expenditures during the rest of 2022. It planned to build cash during 2022 and stated it intended to pursue capital deployment activities in the second half, subject to timing of health-plan dividends. No specific full-year EPS guidance is provided in the filing text.
- Management expected Medicaid eligibility redeterminations to begin in August 2022 following the anticipated end of the COVID-19 public health emergency in July. Redeterminations, utilization patterns, new COVID-19 variants, and state rate or risk-corridor actions could affect membership and results.
- Centene expected a negative impact from the Ohio pharmacy-services carve-out in the second half of 2022. It also cautioned that Medicare Star ratings may decrease for the 2023 rating year, affecting the 2024 bonus year; the filing cites disaster-relief provisions as a reason current ratings may not persist.
- Centene had recorded a $1.25 billion reserve in Q2 2021 for PBM-related claims and potential claims, including settlements with nine states. Further claims, reviews or investigations may arise, and the company stated it could not guarantee resolution within the reserve. Other disclosed matters include regulatory and litigation exposure and data-breach lawsuits.
- Risks include medical-cost estimation uncertainty, acquisition integration and realization of synergies, government contract and regulatory changes, competition, credit-rating changes, investment interest-rate risk and legal proceedings. A hypothetical immediate 1% rise in interest rates would reduce fixed-income investment fair value by approximately $380 million.
Most important facts for investors to verify
- Whether Medicaid redeterminations beginning in August 2022 affect membership, revenue and medical-cost trends as anticipated.
- Whether medical utilization and pricing support adequate margins, given the HBR increase to 87.3%.
- Progress integrating Magellan, final purchase accounting, acquisition costs and expected synergies.
- Resolution and adequacy of the $1.25 billion PBM reserve, including any additional claims or investigations.
- Effects of the Ohio pharmacy carve-out and Medicare Star-rating changes on future earnings.
- Cash generation, working-capital movements, debt levels and the timing of planned capital deployment.