Centene Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Centene operates Medicaid Managed Care and Specialty Services businesses, primarily serving members through state and government-sponsored health programs.
Key financial results
Amounts in millions, except per-share data, ratios and membership. Comparisons are year over year unless noted.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Premium and service revenue | $1,278.0 (+21.6%) | $1,050.6 | $2,457.2 (+18.5%) | $2,072.8 |
| Total revenue, including premium tax | $1,315.0 | $1,076.8 | $2,531.4 | $2,145.5 |
| Operating earnings | $55.3 (+32.6%) | $41.7 | $94.4 (+32.4%) | $71.3 |
| Net earnings attributable to Centene | $28.4 (+24.6%) | $22.8 | $52.1 (+11.4%) | $46.8 |
| Diluted EPS from continuing operations | $0.54 | $0.45 | $1.00 | $0.86 |
| Health Benefits Ratio (HBR) | 83.0% | 83.8% | 83.0% | 83.9% |
| G&A expense ratio | 13.0% | 12.7% | 13.4% | 13.0% |
For Q2, medical costs were $1,035.7 million and G&A expense was $166.4 million. Six-month net cash provided by operations was $53.2 million, compared with $98.3 million used in the first half of 2010. Management separately reported Q2 operating cash flow of negative $40.8 million.
At June 30, cash was $474.5 million; cash, cash equivalents and short-term investments totaled $553.2 million; total cash, investments and restricted deposits were $1,098.4 million. Working capital was $24.8 million, versus negative $108.4 million at December 31, 2010. Total debt was $339.6 million, including $336.5 million long-term debt; the debt-to-capital ratio was 28.1%. The $350 million revolving facility was undrawn, with $350 million available. Regulated subsidiaries held $569.9 million in statutory capital and surplus against $324.0 million of required minimums; estimated RBC exceeded 350% of the Authorized Control Level.
Business developments and changes versus prior period
- At-risk managed-care membership reached 1,580,500, up 45,900 from June 2010. Growth reflected new and expanded programs, acquisitions, membership gains and prior premium increases. Major additions included Mississippi operations, Illinois’s Integrated Care Program, and increased Florida and Texas membership.
- Q2 revenue growth included $100.4 million recognized for Mississippi services covering January through June 2011, including $52.8 million attributable to Q1. A contract-effectiveness amendment led to recognition of the prior-period revenue and related medical costs in Q2; management said the Q1 Mississippi operations contributed approximately $0.07 per diluted share to Q2 earnings.
- Medicaid Managed Care Q2 operating earnings rose 51.7% to $42.5 million. Specialty Services revenue rose 30.5%, but segment operating earnings fell 6.7% to $12.8 million. For the first half, Specialty Services earnings declined 3.2%, including a loss in the care-management software business.
- Consolidated HBR improved year over year, primarily from lower utilization and contract enhancements, while G&A ratios increased with expansion costs. HBR was higher in ABD/Medicare and Specialty Services than a year earlier.
- In May, Centene issued $250 million of 5.75% senior notes due 2017, yielding 6%, and redeemed $175 million of 7.25% notes due 2014 at 103.625%. The redemption and related write-off generated an $8.5 million pretax charge, about $0.10 per diluted share. Proceeds also repaid approximately $50 million of revolver borrowings.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected operating cash flow to moderate for the remainder of 2011 and said available cash, investments, operating cash flow and credit capacity should fund general operations and capital expenditures for at least 12 months.
- Management anticipated approximately $30 million of additional 2011 capital expenditures for systems, market expansion and a data center, plus approximately $6 million related to the headquarters real-estate development.
- Growth opportunities announced after quarter-end included Arizona long-term-care services expected to begin October 2011, a Kentucky Medicaid contract expected to start in Q4 2011, and a Louisiana contract with services expected to begin in Q1 2012. These are forward-looking plans, not reported results for the quarter.
- A state review identified additional retroactive membership deletions. Centene increased its accrual for estimated revenue adjustments, but the final effect remained subject to rate-adequacy considerations; the filing cautions that future membership reconciliations could materially adversely affect results.
- Principal risks include state and federal Medicaid funding or rate reductions, contract loss or nonrenewal, medical-cost and claims-reserve estimation, changes in healthcare regulation and reform, and limits on dividends from regulated subsidiaries. The filing also notes investment and interest-rate risks: a hypothetical immediate 1% rate increase would reduce fixed-income investment fair value by approximately $9.8 million; the estimated debt fair-value decrease was approximately $13.8 million.
- Centene and the IRS reached a tentative settlement concerning the 2006–2007 tax years and a disputed $34.9 million tax benefit; management did not expect a material financial-statement impact. The company reported routine legal proceedings without expected material effects and stated disclosure controls were effective.
Important facts for investors to verify
- Whether the retroactive membership deletions result in further revenue adjustments, and how state rate-adequacy calculations affect the ultimate amount.
- Whether Mississippi’s retroactive contract accounting and new program ramp-ups translate into recurring earnings and cash flow.
- Claims development and HBR trends, especially in ABD/Medicare and Specialty Services, alongside rising administrative and expansion costs.
- State contract renewals, new-contract implementation and regulatory funding or rate decisions; also the status and outcome of the Wisconsin contract appeal.
- Debt covenants, availability under the revolver, regulated-subsidiary capital and dividend restrictions, and the final IRS settlement terms.