Centene Corporation — FY2019 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2019; quarterly figures below include the three months ended December 31, 2019. Centene operates managed-care health plans and specialty healthcare businesses, primarily serving government-sponsored programs. Managed Care represented 95% of 2019 external revenue. The company reported 15.2 million members at year-end.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $74.639 billion | $60.116 billion |
| Operating earnings | $1.781 billion | $1.458 billion |
| Net earnings attributable to Centene | $1.321 billion | $900 million |
| Diluted GAAP EPS | $3.14 | $2.26 |
| Adjusted diluted EPS (non-GAAP) | $4.42 | $3.54 |
| Health benefits ratio (HBR) | 87.3% | 85.9% |
| SG&A expense ratio | 9.3% | 10.7% |
| Operating cash flow | $1.483 billion | $1.234 billion |
Quarterly results: Q4 2019 revenue was $18.863 billion and net earnings attributable to Centene were $209 million, or $0.49 diluted EPS. Q4 2018 revenue was $16.559 billion and attributable net earnings were $241 million, or $0.57 diluted EPS.
Balance sheet and liquidity at December 31, 2019: Cash and cash equivalents were $12.123 billion; cash, investments and restricted deposits totaled $21.361 billion. Working capital was $7.391 billion. Total debt was $13.726 billion, versus $6.686 billion a year earlier; the reported debt-to-capital ratio rose to 52.0% from 37.8%. Medical claims liability was $7.473 billion. The company reported compliance with debt covenants and said available cash, investments, operating cash flow and credit-facility capacity were expected to cover general operations and capital expenditures for at least 12 months from the filing date.
Material changes versus 2018
- Revenue increased 24%, principally reflecting the Fidelis Care acquisition, Marketplace growth, and new or expanded state programs. Membership rose 8%, to 15.2 million.
- Net earnings attributable to Centene increased 47% and diluted GAAP EPS rose 39%. Adjusted diluted EPS increased 25%.
- HBR increased 140 basis points, reflecting normalized Marketplace margins, the 2019 health insurer fee moratorium, and a favorable California in-home support services reconciliation in 2018.
- SG&A ratio improved to 9.3% from 10.7%, partly because acquisition-related costs were lower. Adjusted SG&A ratio was 9.2%, compared with 10.0%.
- Operating cash flow increased to $1.483 billion. The $7.0 billion of senior notes issued in December 2019 to fund the WellCare transaction materially increased debt and year-end cash and investments.
- Specialty Services reported an operating loss of $25 million, compared with operating earnings of $148 million in 2018, including a non-cash impairment and the effect of transparent pharmacy pricing.
Outlook, risks and unusual items
- WellCare acquisition: Completed January 23, 2020, after year-end. The transaction was valued at approximately $19.6 billion including assumed debt; Centene issued about 171 million shares and paid approximately $6.1 billion in cash. Management expected the acquisition to be accretive to adjusted EPS in its second year, subject to assumptions, and identified integration, synergy realization, execution and financing risks. The filing’s unaudited pro forma 2019 figures show revenue of $102.379 billion and diluted EPS of $2.47, but are not a forecast and exclude anticipated synergies.
- Capital plans: Centene expected approximately $775 million of 2020 capital expenditures, excluding WellCare-related amounts, and no material net capital contributions to insurance subsidiaries. In February 2020, it issued $2.0 billion of 3.375% notes due 2030, intending to redeem $2.0 billion of notes due 2022 and 2024.
- Unusual items: 2019 included a $271 million non-cash goodwill and intangible impairment, substantially related to its USMM home-health business, and a $30 million debt-extinguishment loss. Adjusted EPS excludes these and other specified items; it is a non-GAAP measure.
- Key exposures: Government funding, rate-setting and contract renewals; medical-cost and claims-reserve estimation; Medicare Star ratings; ACA and other regulatory changes; Marketplace risk adjustment and pricing; acquisition integration and leverage; and privacy, cybersecurity, litigation and regulatory investigations.
- Quality and legal matters: Approximately 46% of Medicare members were in plans rated at least four stars for the 2021 bonus year, down from 86% for the 2020 bonus year. The filing describes pending legal and regulatory matters, including a California tax dispute, securities litigation, a federal investigation concerning the former VA contract, and an Ambetter class action. It states that accrued legal and regulatory reserves were not material, while noting outcomes remain uncertain.
- Management outlook: The company said it believed it was positioned to navigate healthcare-market changes, but emphasized uncertainty around government policy, the ACA, reimbursement, medical costs and acquisition results. No clear numeric 2020 revenue or EPS guidance is provided in the filing text.
Important facts for investors to verify
- WellCare’s realized contribution, integration costs, synergies, dilution and impact on leverage compared with management’s expectations.
- Whether HBR and Marketplace margins stabilize, and whether claims-reserve development remains favorable; a 1% change in estimated medical claims liability would affect 2019 net earnings by approximately $55 million.
- Effects of lower Medicare Star ratings on quality bonuses, membership and revenue, including the proportion of members in qualifying plans.
- Timing and collection of state receivables, including the effect on operating cash flow and liquidity.
- Progress and potential exposure in the disclosed legal and regulatory matters, and any changes to government contracts, funding or ACA requirements.