10-QPeriod: Q2 FY2012

CENTENE CORP Quarterly Report for Q2 Ended Jun 30, 2012

Filed July 24, 2012For Securities:CNC

Summary

Centene Corporation (CNC) reported a significant increase in revenues driven by substantial membership growth of 51.7% year-over-year, reaching 2.4 million members by June 30, 2012. This growth was primarily fueled by new contracts and expansions in states like Texas, Louisiana, and Kentucky, alongside the company's existing strong presence in Arizona, Georgia, and Indiana. However, this top-line growth was overshadowed by a substantial increase in medical costs, leading to a consolidated Health Benefits Ratio (HBR) of 92.9% for the quarter, up from 84.8% in the prior year. This surge in medical costs, attributed to expansion areas, retroactive member assignments, and issues with recently acquired individual health policies, resulted in a net loss for the quarter. Furthermore, the company recognized a significant impairment loss of $28 million in the second quarter of 2012, primarily impacting goodwill and intangible assets within the Specialty Services segment. This impairment was driven by higher-than-expected medical costs in its individual health insurance business and the evolving regulatory landscape following the Supreme Court's affirmation of the Affordable Care Act. Despite the operational challenges and the net loss, the company maintained a strong liquidity position and expects continued membership growth in the upcoming periods.

Financial Highlights

50 data points
Beta

Revenue

$1.97B

Net Income

-$35.00M

-1.8% Net Margin

EPS (Diluted)

$-0.17

Total Assets

$2.45B

Cash & Equivalents

$421.89M

Free Cash Flow

-$20.27M

Financial Statements
Beta
Revenue$1.97B
Operating Expenses$2.16B
Operating Income-$46.75M
Interest Expense$4.74M
Net Income-$35.00M
EPS (Basic)$-0.17
EPS (Diluted)$-0.17
Shares Outstanding (Basic)206.06M
Shares Outstanding (Diluted)206.06M

Key Highlights

  • 1Total revenues increased by 60.5% to $2.11 billion for the three months ended June 30, 2012, compared to the prior year, driven by a 61.3% increase in premium and service revenues.
  • 2At-risk managed care membership grew by 51.7% year-over-year to 2,397,500 members as of June 30, 2012.
  • 3The Health Benefits Ratio (HBR) significantly deteriorated to 92.9% for the three months ended June 30, 2012, from 84.8% in the same period of 2011, indicating higher medical costs relative to revenue.
  • 4The company reported a net loss of $38.8 million for the three months ended June 30, 2012, a significant decline from a net earning of $28.1 million in the prior year.
  • 5An impairment loss of $28 million was recorded in the second quarter of 2012 related to goodwill and intangible assets in the Specialty Services segment.
  • 6General and administrative expenses decreased as a percentage of revenue, improving from 11.2% to 8.2% for the three months ended June 30, 2012.
  • 7Cash used in operating activities for the six months ended June 30, 2012, was $9.9 million, a decrease from $53.2 million provided in the comparable 2011 period, largely due to timing of state payments.

Frequently Asked Questions

Centene's revenue growth is primarily driven by significant increases in its at-risk managed care membership, which saw a 51.7% year-over-year increase, reaching nearly 2.4 million members by June 30, 2012. This growth is a result of new contracts and expansions in various states, including Texas, Louisiana, and Kentucky, as well as continued performance in established markets like Arizona and Georgia.

The net loss was primarily due to a significant increase in medical costs, which led to a substantial rise in the Health Benefits Ratio (HBR) to 92.9%. Specific factors contributing to these higher costs include increased medical expenses in newly expanded service areas, retroactive assignment of members in Kentucky, and higher costs associated with individual health policies from acquired businesses. Additionally, the company recorded a $28 million impairment loss on goodwill and intangible assets.

The $28 million impairment loss, recognized in the Specialty Services segment, reflects a reassessment of future growth and profitability expectations. This was driven by high medical costs in the individual health insurance business and the implications of the Supreme Court's decision upholding the Affordable Care Act, which has introduced regulatory changes impacting profitability in this segment. This charge indicates a write-down of the value of certain intangible assets and goodwill.

Centene's liquidity is managed through operating cash flows and its revolving credit facility. While operating activities used $9.9 million in cash for the first six months of 2012, the company has significant investments and receivables, and expects to fund operations and capital expenditures through existing cash, cash equivalents, investments, operations, and its credit facility. The company reported working capital of $39.2 million at June 30, 2012, and its debt-to-capital ratio was 30.1%.