10-QPeriod: Q2 FY2016

CENTENE CORP Quarterly Report for Q2 Ended Jun 30, 2016

Filed July 26, 2016For Securities:CNC

Summary

Centene Corporation reported strong revenue growth in the second quarter and first half of 2016, primarily driven by the significant acquisition of Health Net, Inc. This acquisition, completed in March 2016, dramatically increased the company's membership and operational scale. While revenues surged due to the integration of Health Net, the company also incurred substantial acquisition-related expenses and increased its debt load to finance the transaction. Despite the integration complexities and increased leverage, Centene demonstrated improved operational efficiency, with a lower health benefits ratio compared to the prior year, partially due to Health Net's more favorable business mix. The company's strategic focus on expanding its government-sponsored healthcare programs, coupled with the significant growth from the Health Net acquisition, positions it for continued expansion, although near-term financial results reflect the costs and integration efforts associated with this major strategic move.

Financial Highlights

51 data points
Beta

Revenue

$10.90B

Net Income

$170.00M

1.6% Net Margin

EPS (Diluted)

$0.48

Total Assets

$19.50B

Cash & Equivalents

$2.71B

Free Cash Flow

-$468.00M

Financial Statements
Beta
Revenue$10.90B
SG&A Expenses$949.00M
Operating Expenses$10.52B
Operating Income$377.00M
Interest Expense$52.00M
Net Income$170.00M
EPS (Basic)$0.50
EPS (Diluted)$0.48
Shares Outstanding (Basic)341.12M
Shares Outstanding (Diluted)349.70M

Key Highlights

  • 1Total revenues for the three months ended June 30, 2016, were $10.9 billion, a 98% increase year-over-year, largely due to the Health Net acquisition.
  • 2Managed care membership grew to 11.4 million as of June 30, 2016, a 148% increase year-over-year, reflecting the impact of the Health Net acquisition.
  • 3The Health Benefits Ratio (HBR) improved to 86.6% for Q2 2016 from 89.1% in Q2 2015, attributed partly to Health Net's lower HBR due to its mix of commercial and Medicare business.
  • 4General and Administrative (G&A) expenses increased significantly by 117% year-over-year for Q2 2016, primarily due to acquisition-related expenses for Health Net.
  • 5Diluted EPS for Q2 2016 was $0.98, up from $0.72 in Q2 2015, with adjusted diluted EPS (excluding acquisition expenses) at $1.29.
  • 6The company significantly increased its long-term debt, with total debt rising from $1.2 billion at the end of 2015 to $3.6 billion by June 30, 2016, largely to fund the Health Net acquisition.
  • 7Operating cash flow for the first six months of 2016 was negative $225 million, compared to positive $395 million in the same period of 2015, impacted by increased receivables due to state payment timing.

Frequently Asked Questions

The primary driver was the acquisition of Health Net, Inc., which was completed on March 24, 2016. This acquisition significantly expanded Centene's operational scale and membership base.

The acquisition led to a substantial increase in revenues and membership. However, it also resulted in increased expenses, including acquisition-related costs and higher interest expenses due to new debt financing. The integration of Health Net's operations is ongoing and is a key focus for the company.

As of June 30, 2016, Centene had negative working capital of $961 million, primarily due to the current portion of long-term debt. The company manages liquidity through operating cash flows, a $1 billion revolving credit facility, and its investment portfolio, which is maintained with a focus on liquidity and capital preservation.

Key risks include reductions in government funding for programs like Medicaid and Medicare, challenges in accurately estimating and managing medical costs, the impact of healthcare reform legislation (ACA), regulatory changes, increased competition, and the successful integration of the Health Net acquisition, which significantly increased the company's debt levels and operational complexity.