10-QPeriod: Q3 FY2012

CENTENE CORP Quarterly Report for Q3 Ended Sep 30, 2012

Filed October 23, 2012For Securities:CNC

Summary

Centene Corporation's (CNC) Q3 2012 10-Q filing reveals a period of significant growth accompanied by operational challenges. The company experienced substantial revenue increases, driven by aggressive expansion into new states and increased membership, particularly within its Medicaid Managed Care segment. However, this growth came at the cost of a significantly higher Health Benefits Ratio (HBR), largely due to a substantial premium deficiency reserve established for its Kentucky operations and increased medical costs in new expansion areas. Key financial highlights include strong top-line growth and improved G&A expense ratios. However, the company reported a net loss for the nine-month period ended September 30, 2012, a stark contrast to the prior year's profit, primarily impacted by the Kentucky reserve, an impairment loss on goodwill and intangibles, and increased medical costs. Despite these challenges, Centene demonstrated robust operating cash flow and maintains a solid liquidity position with ample availability under its revolving credit facility, positioning it to fund ongoing growth initiatives.

Financial Highlights

50 data points
Beta

Revenue

$2.31B

Net Income

$3.82M

0.2% Net Margin

EPS (Diluted)

$0.02

Total Assets

$2.69B

Cash & Equivalents

$796.62M

Free Cash Flow

$304.02M

Financial Statements
Beta
Revenue$2.31B
Operating Expenses$2.48B
Operating Income-$27.64M
Interest Expense$4.86M
Net Income$3.82M
EPS (Basic)$0.02
EPS (Diluted)$0.02
Shares Outstanding (Basic)206.34M
Shares Outstanding (Diluted)215.22M

Key Highlights

  • 1Revenue surged by 74.9% year-over-year for the three months ended September 30, 2012, fueled by significant membership growth and expansion into new states.
  • 2The Health Benefits Ratio (HBR) increased to 93.3% for Q3 2012 from 85.0% in Q3 2011, primarily due to a $63 million premium deficiency reserve for Kentucky and increased medical costs in new markets.
  • 3Net earnings for the nine months ended September 30, 2012, were a loss of $7.2 million, a significant decline from a profit of $81.1 million in the same period last year, impacted by a $28 million impairment loss and the Kentucky reserve.
  • 4General and Administrative (G&A) expenses as a percentage of revenue improved to 8.2% in Q3 2012 from 11.3% in Q3 2011, demonstrating operational leverage.
  • 5Operating cash flow for the first nine months of 2012 was $307.3 million, a substantial increase from $89.7 million in the prior year, indicating strong cash generation from operations.
  • 6At-risk managed care membership grew by 54.9% year-over-year to 2,503,000 members as of September 30, 2012, driven by new state contracts and expansions.
  • 7The company recorded a $17.9 million pre-tax gain in other income related to the retirement of a convertible note investment.

Frequently Asked Questions

Centene's revenue growth was primarily driven by significant increases in membership and expansion into new states, particularly in its Medicaid Managed Care segment. This included new contracts and expansions in Texas, Arizona, Kentucky, Louisiana, Missouri, and Washington.

The HBR increased to 93.3% primarily due to a $63 million premium deficiency reserve recorded for Centene's Kentucky health plan contract, which covers expected losses from October 2012 through July 2013. Additionally, increased medical costs in newly expanded areas also contributed to the higher ratio.

Centene has notified Kentucky that it intends to terminate its Medicaid managed care contract effective July 5, 2013. This led to the recognition of a $63 million premium deficiency reserve in Q3 2012, negatively impacting earnings for the period. The company is also pursuing a formal dispute for damages incurred and has filed a lawsuit seeking declaratory relief.

The $28 million impairment loss on goodwill and intangible assets in the Specialty Services segment was primarily due to a high level of medical costs in the individual health insurance business of its subsidiary, Celtic Insurance Company. This was compounded by the U.S. Supreme Court upholding the Patient Protection and Affordable Care Act, which limits profitability in this business line due to new regulations like minimum medical loss ratios and increased competition.