Centene Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; compared with the corresponding 2012 periods. Unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context
Centene operates Medicaid Managed Care and Specialty Services businesses. At-risk managed care membership reached 2.697 million, up 12.5% year over year. Growth reflected new and expanded state contracts, rate changes, pharmacy benefit expansions, and the April acquisition of AcariaHealth, a specialty pharmacy company.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Premium and service revenue | $2,634.3 | $2,061.6 | $5,176.6 | $3,725.1 |
| Total revenue, including premium tax | $2,725.9 | $2,110.7 | $5,371.8 | $3,822.9 |
| Operating earnings (loss) | $67.0 | $(46.7) | $107.1 | $(12.5) |
| Net earnings attributable to Centene | $39.5 | $(35.0) | $62.5 | $(11.0) |
| Diluted EPS | $0.70 | $(0.68) | $1.13 | $(0.21) |
| Health Benefits Ratio | 88.8% | 92.9% | 89.6% | 90.8% |
| G&A expense ratio | 8.7% | 8.2% | 8.5% | 8.9% |
- Q2 premium and service revenue rose 27.8%; first-half revenue rose 39.0%. The lower Q2 HBR reflected improved Texas and individual health results and the prior-year Kentucky premium deficiency reserve. First-half HBR improvement also reflected lower prior-year costs in Texas, Kentucky, and individual health, partly offset by higher first-quarter flu costs.
- Q2 diluted EPS included AcariaHealth transaction costs of $0.07 per share. Q2 2012 included a $28.0 impairment charge related to Celtic’s individual health business; no impairment loss was recorded in 2013.
- Operating cash flow was $37.9 in Q2 and $80.9 for the first half, compared with first-half cash used of $9.9 in 2012. The company attributed first-half cash generation in part to increased medical claims liabilities and cautioned that state payment timing affects operating cash flow.
- Cash and cash equivalents were $688.7 at June 30, versus $844.0 at year-end 2012. Working capital was $21.8, down from $176.5. Total debt was $551.5; debt-to-capital was 32.9% (29.8% excluding the $74.1 non-recourse mortgage note).
- The new unsecured revolving facility is $500.0, with $30.0 drawn; covenant limitations left approximately $377.0 available. Centene reported compliance with covenants. Total assets were $3,045.2 and total equity was $1,122.3 at quarter-end.
Material changes and outlook
- Centene acquired AcariaHealth for $146.6: $75.4 in Centene shares and $71.1 in cash. The initial purchase allocation included $88.5 of goodwill and $35.0 of identifiable intangible assets; the allocation remained subject to finalization.
- In May, Centene replaced its $350.0 revolving facility with a $500.0 facility, maturing in 2018 subject to specified conditions tied to the 2017 senior notes and unregulated cash. The facility includes leverage, coverage, and tangible-net-worth covenants.
- Management expected approximately $100 of additional capital contributions to insurance subsidiaries and $40 of additional capital expenditures during the rest of 2013, funded by unregulated cash generation and revolver borrowings. It stated available resources were sufficient for general operations and capital expenditures for at least 12 months from the filing date. No EPS or revenue guidance was provided in the supplied filing text.
- Management cited anticipated growth from Ohio contract expansion and other awarded or prospective programs, subject to execution, contract completion, and regulatory approval. Kentucky Spirit exited its Kentucky Medicaid contract on July 5, 2013; Arizona acute-care operations were scheduled to end September 30, 2013 after a contract non-award.
Risks, contingencies, and unusual items
- Kentucky litigation: A court ruled against Kentucky Spirit’s claimed early termination right, and the company appealed. Kentucky Spirit exited on July 5, 2013; the Commonwealth alleged material breach and threatened substantial damages and enforcement of a $25.0 performance bond. Centene recorded no receivable or liability and said the outcome could materially affect results when resolved; it could not estimate the outcome.
- Key risks include state and federal Medicaid funding or rate changes, contract loss or nonrenewal, medical-cost estimation and claims-liability uncertainty, regulatory and capital requirements, and the ability to integrate acquisitions and manage growth. Centene also disclosed interest-rate exposure: a hypothetical immediate 1% rate increase would reduce fixed-income investment fair value by approximately $24.4.
- Aggregate statutory capital and surplus at regulated subsidiaries was $1,179.0 versus $674.2 in required minimums; estimated risk-based capital exceeded 350% of the Authorized Control Level. Regulatory restrictions limit subsidiary dividends and distributions.
Important facts for investors to verify
- Whether the improved HBR and operating profitability persist, particularly as membership expands and medical claims estimates develop.
- The eventual financial and legal outcome of the Kentucky dispute, including any damages, bond enforcement, or potential liability.
- AcariaHealth’s final purchase accounting, integration costs, and contribution to Specialty Services earnings.
- Actual revolver availability and covenant headroom, alongside the company’s planned capital contributions and spending.
- Execution and timing of announced contract starts, awards, and transitions, including Kentucky’s exit and Arizona’s contract end.