Centene Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless otherwise stated. Centene provides managed healthcare programs and specialty services, principally for government-sponsored and commercial markets. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $18.444 billion | $13.194 billion; up 40% |
| Premium and service revenue | $16.838 billion | $12.556 billion; up 34% |
| Earnings from operations | $685 million | $540 million; up 27% |
| Net earnings attributable to Centene | $522 million | $340 million; up 54% |
| Diluted EPS | $1.24 | $0.96 |
| Adjusted diluted EPS (non-GAAP) | $1.39 | $1.09 |
| Operating cash flow | $1.316 billion | $1.846 billion |
| Cash and cash equivalents at quarter-end | $6.345 billion | $5.342 billion at December 31, 2018 |
| Total debt at quarter-end | $6.815 billion | $6.686 billion at December 31, 2018 |
The health benefits ratio (medical costs as a percentage of applicable premium revenue) was 85.7%, versus 84.3%. The SG&A expense ratio improved to 9.6% from 10.5%; adjusted SG&A ratio was 9.5% versus 10.3%. The cost-of-services ratio rose to 85.7% from 83.2%.
At March 31, 2019, current assets were $13.616 billion and current liabilities were $13.143 billion, leaving working capital of $473 million. Long-term debt was $6.775 billion. Debt to capital was 36.9%, down from 37.8% at year-end 2018. Centene reported compliance with its debt covenants and said available cash, investments, operating cash flow and revolving-credit availability were expected to cover general operations and capital expenditures for at least 12 months.
Material changes and drivers
- Revenue growth reflected the July 2018 Fidelis Care acquisition, new and expanded state programs, and Health Insurance Marketplace growth. Managed-care membership increased 14% year over year to 14.7 million.
- Reported total revenue included approximately $500 million of California and $435 million of New York pass-through payments, with corresponding premium-tax expense. Revenue comparisons were also affected by the 2019 health insurer fee moratorium; Centene recorded no health insurer fee expense in Q1 2019, versus $171 million in Q1 2018.
- The higher HBR was partly attributable to Fidelis Care and the health insurer fee moratorium, which together accounted for 130 basis points of the increase, according to management.
- Operating cash flow declined year over year, in part because premium and trade receivables increased by $662 million, primarily due to a delayed payment from a state customer. The filing notes that state payment timing can materially affect quarterly cash flows.
- Prior-year claims development reduced medical costs by $494 million in Q1 2019, compared with a $263 million reduction in Q1 2018. Management says these estimates are subject to ongoing actuarial review.
Outlook, transactions and risks
- For the remainder of 2019, Centene expected approximately $197 million of net capital contributions to insurance subsidiaries and approximately $530 million of additional capital expenditures, primarily for systems and expansions.
- The proposed WellCare acquisition, announced March 26, 2019, was valued at approximately $17.3 billion including WellCare debt. Centene expected closing in the first half of 2020, subject to shareholder, antitrust, state regulatory and other approvals. The consideration includes 3.38 Centene shares and $120 cash per WellCare share. Centene reported an $8.4 billion financing commitment and intended primarily to use debt to fund the cash component.
- Centene noted that the WellCare transaction may not close, could involve substantial integration and financing costs, and may not deliver expected synergies or accretion. The filing describes potentially material termination fees, including a $547 million fee in specified regulatory-failure circumstances.
- Beginning in Q2 2019, management expected lower Specialty Services earnings and corresponding higher Managed Care earnings as the company moved to transparent pharmacy pricing and transitioned to the RxAdvance platform.
- Key risks include medical-cost and claims-reserve estimation, government reimbursement and contract changes, ACA and Marketplace uncertainty, regulatory approvals and compliance, acquisition integration, leverage and financing, investment and interest-rate exposure, and litigation. The filing identifies California tax litigation, securities and derivative actions, government inquiries, and an Ambetter class action; accrued legal and regulatory amounts were described as not material, but outcomes could be adverse.
Important facts for investors to verify
- Whether the higher HBR and the favorable prior-year claims development persist as additional claims experience emerges.
- Collection timing for the $662 million increase in premium and trade receivables and the effect of state payment timing on cash generation.
- WellCare transaction approvals, financing terms, closing timetable, expected integration costs and realized benefits.
- How the 2019 health insurer fee moratorium and pass-through premium-tax items affect comparability of reported revenue, expenses and earnings.
- Developments in government contracts, ACA and Marketplace risk-adjustment obligations, and the disclosed legal and regulatory matters.
Adjusted EPS and adjusted SG&A are non-GAAP measures; Centene presents them as supplements, not substitutes, for GAAP results.