Centene Corporation Reports 2013 First Quarter Results

April 23, 2013 at 6:00 AM EDT
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ST. LOUIS, April 23, 2013 /PRNewswire/ -- Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended March 31, 2013. 

Premium and Service Revenues (in millions)

$

2,542.2

Consolidated Health Benefits Ratio

90.4

%

General & Administrative expense ratio

8.3

%

Diluted earnings per share (EPS)

$

0.42

Cash flow from operations (in millions)

$

43.0

Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, stated, "This quarter is a positive step in our drive to deliver strong earnings while we continue to grow and diversify our sources of revenues.  Further, we believe we are well positioned for profitable growth in 2014 and beyond."

First Quarter Highlights

  • Quarter-end at-risk managed care membership of 2,686,100, an increase of 536,600 members, or 25% year over year.
  • Premium and service revenues of $2.5 billion, representing 53% growth year over year.
  • Health Benefits Ratio of 90.4%, compared to 88.2% in 2012. 
  • General and Administrative expense ratio of 8.3%, compared to 9.8% in 2012.
  • Operating cash flow of $43.0 million for the first quarter of 2013.
  • Diluted EPS of $0.42, compared to $0.45 in 2012.

Other Events

  • In April 2013, we completed the acquisition of AcariaHealth, a specialty pharmacy company, for approximately $146.2 million.  The transaction consideration was financed through a combination of approximately 2.1 million shares of Centene common stock and approximately $55.4 million of cash on hand.
  • In March 2013, our California subsidiary, California Health and Wellness Plan, was notified by the California Department of Health Care Services of its intent to award a contract, contingent upon successful completion of contract negotiations, to serve Medicaid beneficiaries in 18 rural counties.  Under the contract, California Health and Wellness Plan will serve members under the state's Medi-Cal Managed Care Rural Expansion program. Upon execution of a contract and regulatory approval, enrollment is expected to begin in the second half of 2013.
  • In March 2013, our joint venture subsidiary, Centurion, was notified by the Department of Corrections in Massachusetts that it had been awarded a contract to provide comprehensive healthcare services to individuals incarcerated in Massachusetts state correctional facilities.  Centurion is a joint venture between Centene and MHM Services Inc., a national leader in providing healthcare services to correctional systems.  Operations are expected to begin in the third quarter of 2013. 
  • In March 2013, we were notified by the Arizona Health Care Cost Containment System that our Arizona subsidiary, Bridgeway Health Solutions of Arizona, LLC (Bridgeway), was not awarded a contract to serve acute care members in Arizona for the five years beginning October 1, 2013.  The current contract termination is effective September 30, 2013.  Bridgeway currently serves 16,200 Medicaid acute care members in Yavapai County. 
  • In March 2013, Standard & Poor's reaffirmed our senior unsecured debt rating of BB and revised its outlook to stable from negative.

The following table sets forth the Company's membership by state for its managed care organizations:

March 31,

2013

2012

Arizona

23,300

23,100

Florida

214,600

199,500

Georgia

314,000

306,000

Illinois

18,000

17,400

Indiana

202,400

206,300

Kansas

133,700

—

Kentucky

132,700

145,700

Louisiana

162,900

51,300

Massachusetts

17,300

36,000

Mississippi

77,000

29,500

Missouri

57,900

—

Ohio

157,700

161,000

South Carolina

90,100

86,700

Texas

948,400

811,000

Washington

63,500

—

Wisconsin

72,600

76,000

Total

2,686,100

2,149,500

Membership by line of business:

March 31,

2013

2012

Medicaid

2,049,200

1,634,800

CHIP & Foster Care

267,900

218,800

ABD & Medicare

320,700

247,400

Hybrid Programs

24,600

41,500

Long-term Care

23,700

7,000

Total

2,686,100

2,149,500

Dual eligible membership (included in tables above):

March 31,

2013

2012

ABD

80,300

60,600

Long-term Care

16,100

6,400

Medicare

5,300

3,100

Total

101,700

70,100

Statement of Operations: Three Months Ended March 31, 2013


  • For the first quarter of 2013, Premium and Service Revenues increased 53% to $2.5 billion from $1.7 billion in the first quarter of 2012.  The increase was primarily driven by the Texas, Mississippi, and Louisiana expansions, pharmacy carve-in in Texas and Louisiana, and the additions of the Kansas, Missouri and Washington contracts.
  • Consolidated HBR of 90.4% for the first quarter of 2013 represents an increase from 88.2% in the comparable period in 2012 and a decrease from 91.3% in the fourth quarter of 2012.  The increase compared to last year primarily reflects a higher level of flu costs of approximately $0.20 per diluted share during the first quarter of 2013 as well as a higher level of medical costs in new business. 
  • The following table compares the results for new business and existing business for the quarter ended March 31:

2013

2012

Premium and Service Revenue


New business

35

%

20

%

Existing business

65

%

80

%




HBR


New business

94.1

%

90.7

%

Existing business

88.4

%

87.6

%

Total

90.4

%

88.2

%
  • Consolidated G&A expense ratio for the first quarter of 2013 was 8.3%, compared to 9.8% in the prior year.  The year over year decrease reflects the leveraging of expenses over higher revenues, partially offset by increased performance based compensation.
  • Earnings from operations were $40.1 million in the first quarter of 2013 compared to $34.2 million in the first quarter of 2012.  Net earnings attributable to Centene Corporation were $23.0 million in the first quarter of 2013, compared to $24.0 million in the first quarter of 2012. 
  • Diluted EPS was $0.42 in the first quarter of 2013, including medical costs associated with flu of $0.20 higher than experienced in 2012.

Balance Sheet and Cash Flow

At March 31, 2013, the Company had cash, investments and restricted deposits of $1,664.5 million, including $45.5 million held by its unregulated entities.  Medical claims liabilities totaled $1,067.0 million, representing 42.4 days in claims payable.  Total debt was $536.2 million which reflects no borrowings on the $350 million revolving credit facility at quarter end.  Debt to capitalization was 31.9% at March 31, 2013, excluding the $74.7 million non-recourse mortgage note.  Cash flow from operations for the three months ended March 31, 2013, was $43.0 million.

A reconciliation of the Company's change in days in claims payable from the immediately preceding quarter-end is presented below:


Days in claims payable, December 31, 2012

41.1

Timing of claim payments

1.3

Days in claims payable, March 31, 2013

42.4


Outlook

The table below depicts the Company's annual guidance for 2013.

Full Year 2013


Low

High 

Premium and Service Revenues (in millions)

$

10,100

$

10,400

Diluted EPS

$

2.60

$

2.90

Consolidated Health Benefits Ratio

88.0

%

89.0

%

General & Administrative expense ratio

8.8

%

9.3

%

Diluted Shares Outstanding (in thousands)

56,000

56,500







Included in our updated guidance above are the additions of the AcariaHealth acquisition, including the absorption of the associated transaction costs, the long-term care award in Florida, the new Medicaid contract in California, and the Massachusetts contract through our Centurion joint venture subsidiary.






Conference Call

As previously announced, the Company will host a conference call Tuesday, April 23, 2013, at 8:30 A.M. (Eastern Time) to review the financial results for the first quarter ended March 31, 2013, and to discuss its business outlook.  Michael F. Neidorff and William N. Scheffel will host the conference call.  Investors and other interested parties are invited to listen to the conference call by dialing 1-877-270-2148 in the U.S. and Canada; +1-412-902-6510 from abroad; or via a live, audio webcast on the Company's website at www.centene.com, under the Investors section.  A webcast replay will be available for on-demand listening shortly after the completion of the call for the next twelve months or until 11:59 p.m. (Eastern Time) on Tuesday, April 22, 2014, at the aforementioned URL. In addition, a digital audio playback will be available until 9:00 a.m. (Eastern Time) on Wednesday, May 1, 2013, by dialing 1-877-344-7529 in the U.S. and Canada, or +1-412-317-0088 from abroad, and entering access code 10026527.

Other Information

The discussion in the third bullet under the heading "Statement of Operations: Three Months Ended March 31, 2013" contains financial information for new and existing businesses.  Existing businesses are primarily state markets, significant geographic expansion in an existing state or product that we have managed for four complete quarters. New businesses are primarily new state markets, significant geographic expansion in an existing state or product that conversely, we have not managed for four complete quarters.

About Centene Corporation

Centene Corporation, a Fortune 500 company, is a leading multi-line healthcare enterprise that provides programs and related services to the rising number of under-insured and uninsured individuals. Many receive benefits provided under Medicaid, including the State Children's Health Insurance Program (CHIP), as well as Aged, Blind or Disabled (ABD), Foster Care and Long-term Care (LTC), in addition to other state-sponsored/hybrid programs, and Medicare (Special Needs Plans).  The Company operates local health plans and offers a range of health insurance solutions. It also contracts with other healthcare and commercial organizations to provide specialty services including behavioral health, care management software, correctional systems healthcare, life and health management, managed vision, pharmacy benefits management and telehealth services.

The information provided in this press release contains forward-looking statements that relate to future events and future financial performance of Centene. Subsequent events and developments may cause the Company's estimates to change. The Company disclaims any obligation to update this forward-looking financial information in the future. Readers are cautioned that matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, regulatory, competitive and other factors that may cause Centene's or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Actual results may differ from projections or estimates due to a variety of important factors, including Centene's ability to accurately predict and effectively manage health benefits and other operating expenses and reserves, competition, membership and revenue projections, timing of regulatory contract approval, changes in healthcare practices, changes in federal or state laws or regulations, changes in expected contract start dates, inflation, provider and state contract changes, new technologies, reduction in provider payments by governmental payors, major epidemics, disasters and numerous other factors affecting the delivery and cost of healthcare, as well as those factors disclosed in the Company's publicly filed documents. The expiration, cancellation or suspension of Centene's Medicaid Managed Care contracts, or the loss of any appeal of or protest to any such expiration, cancellation or suspension, by state governments would also negatively affect Centene.

 [Tables Follow]

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)





March 31,

2013

December 31,

2012

ASSETS


Current assets:


Cash and cash equivalents

$

730,791

$

843,952

Premium and related receivables

320,371

263,452

Short-term investments

146,107

139,118

Other current assets

178,002

127,080

Total current assets

1,375,271

1,373,602

Long-term investments

748,307

614,723

Restricted deposits

39,344

34,793

Property, software and equipment, net

382,853

377,726

Goodwill

256,288

256,288

Intangible assets, net

19,287

20,268

Other long-term assets

65,807

64,282

Total assets

$

2,887,157

$

2,741,682




LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities:


Medical claims liability

$

1,067,032

$

926,302

Premium deficiency reserve

18,130

41,475

Accounts payable and accrued expenses

180,338

191,343

Unearned revenue

38,175

34,597

Current portion of long-term debt

3,419

3,373

Total current liabilities

1,307,094

1,197,090

Long-term debt

532,734

535,481

Other long-term liabilities

60,799

55,344

Total liabilities

1,900,627

1,787,915

Commitments and contingencies


Stockholders' equity:


Common stock, $.001 par value; authorized 100,000,000 shares; 55,432,271 issued and 52,410,000 outstanding at March 31, 2013, and 55,339,160 issued and 52,329,248 outstanding at December 31, 2012

55

55

Additional paid-in capital

461,360

450,856

Accumulated other comprehensive income:


Unrealized gain on investments, net of tax

4,900

5,189

Retained earnings

589,822

566,820

Treasury stock, at cost (3,022,271 and 3,009,912 shares, respectively)

(70,429)

(69,864)

Total Centene stockholders' equity

985,708

953,056

Noncontrolling interest

822

711

Total stockholders' equity

986,530

953,767

Total liabilities and stockholders' equity

$

2,887,157

$

2,741,682

 

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

(Unaudited)



Three Months Ended March 31,

2013

2012

Revenues:


Premium

$

2,509,049

$

1,634,850

Service

33,194

28,618

Premium and service revenues

2,542,243

1,663,468

Premium tax

103,649

48,680

Total revenues

2,645,892

1,712,148

Expenses:


Medical costs

2,267,400

1,442,676

Cost of services

25,065

23,337

General and administrative expenses

210,348

163,187

Premium tax expense

102,975

48,750

Total operating expenses

2,605,788

1,677,950

Earnings from operations

40,104

34,198

Other income (expense):


Investment and other income

4,471

5,291

Interest expense

(6,625)

(4,799)

Earnings before income tax expense

37,950

34,690

Income tax expense

15,039

12,087

Net earnings

22,911

22,603

Noncontrolling interest

(91)

(1,375)

Net earnings attributable to Centene Corporation

$

23,002

$

23,978




Net earnings per common share attributable to Centene Corporation:

Basic earnings per common share

$

0.44

$

0.47

Diluted earnings per common share

$

0.42

$

0.45




Weighted average number of common shares outstanding:


Basic

52,357,119

51,125,674

Diluted

54,266,928

53,509,243

 

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



Three Months Ended March 31,

2013

2012

Cash flows from operating activities:


Net earnings

$

22,911

$

22,603

Adjustments to reconcile net earnings to net cash provided by operating activities


Depreciation and amortization

15,691

16,613

Stock compensation expense

8,375

6,375

Deferred income taxes

986

5,855

Changes in assets and liabilities


Premium and related receivables

(56,734)

(120,784)

Other current assets

(50,537)

(10,723)

Other assets

5

524

Medical claims liabilities

117,385

100,769

Unearned revenue

3,578

8,576

Accounts payable and accrued expenses

(22,745)

(60,826)

Other operating activities

4,078

(1,078)

Net cash provided by (used in) operating activities

42,993

(32,096)

Cash flows from investing activities:


Capital expenditures

(10,654)

(14,980)

Purchases of investments

(358,131)

(255,212)

Sales and maturities of investments

212,508

149,341

Net cash used in investing activities

(156,277)

(120,851)

Cash flows from financing activities:


Proceeds from exercise of stock options

1,408

9,079

Payment of long-term debt

(776)

(795)

Excess tax benefits from stock compensation

515

5,472

Common stock repurchases

(565)

(1,509)

Contribution from noncontrolling interest

202

—

Debt issue costs

(661)

—

Net cash provided by financing activities

123

12,247

Net decrease in cash and cash equivalents

(113,161)

(140,700)

Cash and cash equivalents, beginning of period

843,952

573,698

Cash and cash equivalents, end of period

$

730,791

$

432,998

Supplemental disclosures of cash flow information:


Interest paid

$

1,410

$

1,589

Income taxes paid

$

2,205

$

20,514

 

CENTENE CORPORATION

SUPPLEMENTAL FINANCIAL DATA











Q1

Q4

Q3

Q2

Q1

2013

2012

2012

2012

2012

AT-RISK MEMBERSHIP








Managed Care:








Arizona

23,300

23,500

23,800

24,000

23,100

Florida

214,600

214,000

209,600

204,100

199,500

Georgia

314,000

313,700

312,400

313,300

306,000

Illinois

18,000

18,000

17,900

17,800

17,400

Indiana

202,400

204,000

205,400

205,000

206,300

Kansas

133,700

—

—

—

—

Kentucky

132,700

135,800

145,400

143,500

145,700

Louisiana

162,900

165,600

167,200

168,700

51,300

Massachusetts

17,300

21,500

28,000

41,400

36,000

Mississippi

77,000

77,200

30,600

30,100

29,500

Missouri

57,900

59,600

53,900

—

—

Ohio

157,700

157,800

173,800

166,800

161,000

South Carolina

90,100

90,100

89,400

87,800

86,700

Texas

948,400

949,900

930,700

919,200

811,000

Washington

63,500

57,200

42,000

—

—

Wisconsin

72,600

72,400

72,900

75,800

76,000

TOTAL

2,686,100

2,560,300

2,503,000

2,397,500

2,149,500










Medicaid

2,049,200

1,977,200

1,939,400

1,848,500

1,634,800

CHIP & Foster Care

267,900

237,700

229,600

222,600

218,800

ABD & Medicare

320,700

307,800

289,800

269,900

247,400

Hybrid Programs

24,600

29,100

35,700

48,100

41,500

Long-term Care

23,700

8,500

8,500

8,400

7,000

TOTAL

2,686,100

2,560,300

2,503,000

2,397,500

2,149,500










Specialty Services(a):








Cenpatico Behavioral Health








Arizona

156,200

157,900

162,000

159,900

162,100

Kansas

—

49,800

48,500

44,300

46,000

TOTAL

156,200

207,700

210,500

204,200

208,100










(a) Includes external membership only.










REVENUE PER MEMBER PER MONTH(b)

$

304

$

292

$

283

$

279

$

269










CLAIMS(b)








Period-end inventory

1,020,100

641,000

826,800

1,195,000

735,000

Average inventory

587,800

555,200

547,400

640,600

457,400

Period-end inventory per member

0.38

0.25

0.33

0.50

0.34

(b) Revenue per member and claims information are presented for the Managed Care at-risk members.










NUMBER OF EMPLOYEES

7,100

6,800

6,400

6,200

5,700




















 

Q1

Q4

Q3

Q2

Q1

2013

2012

2012

2012

2012










DAYS IN CLAIMS PAYABLE(c)

42.4

41.1

42.8

41.4

44.7

(c) Days in Claims Payable is a calculation of Medical Claims Liabilities at the end of the period divided by average claims expense per calendar day for such period, excluding the Kentucky premium deficiency reserve liability.











CASH AND INVESTMENTS (in millions)






Regulated

$

1,619.0

$

1,595.3

$

1,493.8

$

1,198.2

$

1,166.9

Unregulated

45.5

37.3

36.0

40.6

35.5

TOTAL

$

1,664.5

$

1,632.6

$

1,529.8

$

1,238.8

$

1,202.4










DEBT TO CAPITALIZATION

35.2

%

36.1

%

29.2

%

30.1

%

26.4

%

DEBT TO CAPITALIZATION EXCLUDING NON-RECOURSE DEBT(d)

31.9

%

32.7

%

25.0

%

25.9

%

21.8

%

Debt to Capitalization is calculated as follows: total debt divided by (total debt + total equity).

(d) The non-recourse debt represents the Company's mortgage note payable ($74.7 million at March 31, 2013).

 

Operating Ratios:





Three Months Ended March 31,

2013

2012

Health Benefits Ratios:


Medicaid and CHIP

92.4

%

87.5

%

ABD and Medicare

88.0

89.3

Specialty Services

82.9

89.7

Total

90.4

88.2




Total General & Administrative Expense Ratio

8.3

%

9.8

%

 

MEDICAL CLAIMS LIABILITY (In thousands)

     The changes in medical claims liability are summarized as follows:





Balance, March 31, 2012

$

708,754

Incurred related to:

Current period

8,273,161

Prior period

(2,400)

Total incurred

8,270,761

Paid related to:

Current period

7,200,834

Prior period

693,519

Total paid

7,894,353

Less: Premium Deficiency Reserve

18,130

Balance, March 31, 2013

$

1,067,032

Centene's claims reserving process utilizes a consistent actuarial methodology to estimate Centene's ultimate liability.  Any reduction in the "Incurred related to: Prior period" amount may be offset as Centene actuarially determines "Incurred related to: Current period."  As such, only in the absence of a consistent reserving methodology would favorable development of prior period claims liability estimates reduce medical costs.  Centene believes it has consistently applied its claims reserving methodology in each of the periods presented.

The amount of the "Incurred related to: Prior period" above represents favorable development and includes the effects of reserving under moderately adverse conditions, new markets where we use a conservative approach in setting reserves during the initial periods of operations, receipts from other third party payors related to coordination of benefits and lower medical utilization and cost trends for dates of service prior to March 31, 2012. Excluding the impact of medical costs related to retroactive assignment of members in our Kentucky health plan, the amount of "Incurred related to: Prior period" shown in the table above would have been favorable development of $14.5 million.

SOURCE Centene Corporation

Investor Relations Inquiries, Edmund E. Kroll, Senior Vice President, Finance & Investor Relations, (212) 759-0382, Media Inquiries, Deanne Lane, Vice President, Media Affairs, (314) 725-4477