Centene Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; this is an annual filing, not a standalone fourth-quarter report. Comparisons below are primarily with fiscal 2019. Centene provides managed-care and specialty healthcare services, principally through government-sponsored programs. Managed Care generated 96% of external revenue. Year-end membership was 25.5 million.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $111.1 billion | $74.6 billion |
| Operating earnings | $3.08 billion | $1.78 billion |
| Net earnings attributable to Centene | $1.81 billion | $1.32 billion |
| Diluted GAAP EPS | $3.12 | $3.14 |
| Adjusted diluted EPS (non-GAAP) | $5.00 | $4.42 |
| Health benefits ratio (HBR) | 86.2% | 87.3% |
| SG&A expense ratio | 9.5% | 9.3% |
| Adjusted SG&A expense ratio (non-GAAP) | 8.9% | 9.2% |
| Cash from operations | $5.50 billion | $1.48 billion |
Revenue rose 49%, principally reflecting the January 2020 WellCare acquisition, Medicaid and Marketplace growth, and reinstatement of the health insurer fee (HIF). Net earnings attributable to Centene rose 37%, while GAAP diluted EPS was slightly lower, partly reflecting the higher share count after the acquisition. Adjusted EPS increased 13%. The HBR improved 110 basis points, largely because of lower utilization during the pandemic; the SG&A ratio increased, while its adjusted counterpart declined.
Operating cash flow increased substantially, supported by earnings and growth-related increases in medical claims liabilities and other liabilities. Investing activities used $6.96 billion, including acquisition spending and investment portfolio additions; financing activities provided $260 million. Cash, cash equivalents and restricted cash declined $1.17 billion during the year. At year-end, cash and cash equivalents were $10.8 billion, working capital was $1.8 billion, and total debt was $16.78 billion. Debt-to-capital was 39.3%, down from 52.0% in 2019; the company reported compliance with debt covenants.
Material changes and unusual items
- Centene acquired WellCare on January 23, 2020, in a transaction valued at approximately $19.6 billion, including assumed debt. It issued about 171 million shares and paid $6.1 billion in cash. WellCare contributed $30.7 billion of revenue from acquisition date through year-end. Acquisition-related expenses were $602 million.
- Membership grew by 10.3 million, or 67%, to 25.5 million. Growth reflected WellCare, pandemic-related suspension of Medicaid eligibility redeterminations, and expansion in several markets. Medicaid membership increased 1.7 million between March 31 and December 31, 2020.
- The HIF was reinstated in 2020, resulting in $1.48 billion of HIF expense; it was repealed beginning in 2021. Its absence in 2019 and presence in 2020 affected year-over-year comparisons.
- Centene recorded a $398 million pretax net benefit from the ACA risk-corridor settlement, collected in 2020. It also recorded a $104 million pretax gain on the Illinois divestiture, a $72 million noncash impairment of a care-management software business, and $61 million of debt-extinguishment costs.
- Acquired intangible amortization was $719 million, compared with $258 million in 2019. The company reported $18.7 billion of goodwill and $8.4 billion of net intangible assets at year-end.
Outlook, risks and contingencies
Management said pandemic effects on membership, utilization, government program administration, rates and risk-sharing remained uncertain. Lower medical utilization benefited 2020 results, although utilization was normalizing and COVID-19 treatment costs continued. Management stated that the net pandemic effect slightly benefited 2020 results; it did not provide a clear numerical 2021 earnings forecast in the supplied filing text.
- Management expected Medicaid eligibility redeterminations to resume May 1, 2021, potentially reducing membership. It also anticipated lower Marketplace membership in Florida from price competition and possible pressure on Medicare quality bonuses: approximately 30% of Medicare members were in plans rated four stars or higher for the 2022 bonus year, versus 46% for 2021.
- Centene expected approximately $860 million of 2021 capital expenditures and approximately $1.7 billion of net dividends from regulated subsidiaries. It said available liquidity, operating cash flow and revolving-credit availability should fund operations and capital expenditures for at least 12 months from the filing date.
- In January 2021, Centene agreed to acquire Magellan Health for $95 per share in cash, with an enterprise value of approximately $2.2 billion. Closing was expected in the second half of 2021, subject to approvals and other conditions; Centene intended to fund it primarily with debt.
- Key risks include medical-cost and claims-reserve estimation, retroactive risk-adjustment settlements and audits, government contract renewals and funding, regulation and ACA developments, Medicare Star ratings, provider relationships, cybersecurity and privacy, acquisition integration, and substantial indebtedness. State rules restrict dividends from regulated subsidiaries; $5.9 billion of subsidiary capital or net worth was unavailable for dividends at year-end.
- Legal and regulatory matters are routine; the company said accrued amounts were not material, but noted outcomes could be adverse. A California tax case was on appeal after the trial court granted Centene’s subsidiary summary judgment. The filing also disclosed a January 2021 third-party data-transfer provider incident involving unauthorized access to certain sensitive customer data; investigation was ongoing, and Centene did not then expect a material adverse effect.
Important facts for investors to verify
- How much of 2020’s lower HBR and strong operating cash flow reflected temporary pandemic utilization patterns, and how claims costs develop as care normalizes.
- Whether medical claims liabilities and ACA risk-adjustment accruals prove adequate. Year-end medical claims liability was $12.44 billion; the filing identifies these estimates as critical audit matters.
- Whether Medicaid redeterminations, Medicare Star ratings, Marketplace competition and the HIF repeal affect 2021 membership, revenue and margins as management expected.
- WellCare integration progress, realized synergies, acquisition-related costs and the financing and returns associated with the planned Magellan acquisition.
- Debt maturities, borrowing costs, covenant headroom, and the amount of regulated-subsidiary cash that can be upstreamed to the parent.
- Non-GAAP adjustments: adjusted EPS excludes acquired-intangible amortization, acquisition costs and other items; reconcile these measures to GAAP results when assessing underlying performance.