Centene Corporation — Q2 2010 Form 10-Q
Business and period. Centene is a managed healthcare company operating Medicaid Managed Care and Specialty Services businesses. This unaudited report covers the quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods. At-risk managed-care membership was 1,531,800, up 18.8% year over year.
Key financial results
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Premium and service revenue | $1,050.6 million | $931.3 million | $2,072.8 million | $1,840.1 million |
| Total revenue, including premium taxes | $1,076.8 million | $1,039.5 million | $2,145.5 million | $1,971.9 million |
| Earnings from operations | $41.7 million | $31.4 million | $71.3 million | $62.3 million |
| Continuing-operations earnings, net of tax | $24.7 million | $19.9 million | $45.1 million | $39.6 million |
| Net earnings attributable to Centene | $22.8 million | $20.2 million | $46.8 million | $38.7 million |
| Diluted EPS attributable to Centene | $0.45 | $0.46 | $0.94 | $0.88 |
- Q2 premium and service revenue increased 12.8%; operating earnings rose 32.7%. Reported total revenue rose only 3.6%, in part because provider pass-through premium-tax revenue was substantially lower than in 2009.
- Q2 health benefits ratio (medical costs as a percentage of premium revenue, excluding premium taxes) was 83.8%, versus 83.1%; the general and administrative expense ratio improved to 12.7% from 13.9%.
- Six-month diluted EPS from continuing operations was $0.86, down from $0.90. Six-month total diluted EPS rose to $0.94 from $0.88, including the UHP disposal gain.
- Six-month operating cash flow was negative $98.3 million, versus positive $62.1 million a year earlier. Management cited payment timing, including lower unearned revenue and higher premium receivables; its Q2 overview separately reports operating cash flow of negative $59.8 million.
Financial position and liquidity
- At June 30, 2010, cash and cash equivalents were $265.6 million; total cash, investments and restricted deposits were $852.4 million, compared with $986.1 million at year-end 2009. Some funds are held in regulated subsidiaries or restricted deposits.
- Total debt was $252.8 million, down from $307.7 million at December 31, 2009. The debt-to-capital ratio fell to 24.5% from 33.2%. Debt included $175 million of 7.25% senior notes and $61.7 million drawn on a joint-venture construction loan.
- No borrowings were outstanding under the $300 million revolver; $42 million of letters of credit left $258 million available. Centene reported compliance with debt covenants. Working capital remained negative at $91.0 million.
- Management expected available cash, investments, operating cash flows and borrowing capacity to fund general operations, the NovaSys acquisition and capital expenditures for at least 12 months from the filing date.
Changes, outlook and notable items
- Growth reflected membership gains, a full-period contribution from Massachusetts, Florida membership conversion, and the June acquisition of South Carolina assets from Carolina Crescent Health Plan. Pharmacy-service carve-outs in two states reduced revenue by about $48 million in Q2 and $83 million in the first half.
- Management estimated 2010 composite premium-rate increases of 1%–3%, based on known adjustments and preliminary state discussions; first-half adjustments had produced a net 0.1% composite decrease. It expected operating cash flow to improve in the second half as state premium-payment timing normalized.
- Centene completed the sale of certain UHP assets in March, recording an $8.2 million pretax gain, or $3.9 million after tax ($0.08 per diluted share), partly offset by exit costs. About $10 million of UHP statutory capital was expected to transfer to unregulated cash, subject to regulatory approval.
- The first-quarter stock offering of 5.75 million shares generated approximately $104.5 million net proceeds; funds supported repayment of revolving debt, the South Carolina acquisition and capital expenditures. Centene acquired Carolina Crescent assets for $16.9 million cash plus contingent consideration.
- A $1.7 million deferred tax asset write-off related to Georgia legislation contributed to higher effective tax rates. A $3.0 million gain from Reserve Primary Fund distributions benefited first-half other income.
- Management did not expect the 2010 impact of federal healthcare reform to be material, but identified potentially significant longer-term effects, including Medicaid expansion and an insurer assessment. Growth prospects included Mississippi operations then expected to start in Q4 2010, conditional contract awards in Arizona, Texas and Indiana, and the July 2010 NovaSys acquisition.
- Centene lost the Southeast Wisconsin BadgerCare Plus contract; affected members were to transition by November 1, 2010. The company expected to retain other Wisconsin members. Key risks include state funding and rate reductions, contract renewals and awards, medical-cost estimation, regulatory changes, and investment market risk. A hypothetical immediate 1% rise in interest rates was estimated to reduce fixed-income investment fair value by about $14.8 million.
Important facts for investors to verify
- Whether the elevated health benefits ratio in newer markets and higher-cost membership categories persists, and whether state rates adequately cover medical-cost trends.
- Actual second-half operating cash flow versus management’s normalization expectation, including state payment timing and receivable collection.
- Revenue, membership and transition effects of the Wisconsin contract loss, and execution and economics of the Mississippi, Arizona, Texas and Indiana opportunities.
- Availability of regulated-subsidiary capital and the timing of UHP capital release; reported consolidated cash is not all freely transferable.
- Capital spending and construction-loan requirements for the headquarters project, alongside acquisition funding and remaining revolver capacity.