Centene Corporation — 2017 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017. Centene provides managed-care and specialty healthcare services, primarily to government-sponsored and commercial programs for under-insured and uninsured populations. Year-end membership was 12.2 million. Managed Care generated 95% of external revenue and Specialty Services 5%. Results include a full year of Health Net, acquired in March 2016, so year-over-year comparisons are affected by acquisition timing.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $48.382 billion | $40.607 billion | +19% |
| Net earnings attributable to Centene from continuing operations | $828 million | $559 million | +48% |
| Diluted EPS from continuing operations | $4.69 | $3.41 | +38% |
| Adjusted diluted EPS (non-GAAP) | $5.03 | $4.43 | +14% |
| Adjusted EBITDA (non-GAAP) | $1.906 billion | $1.804 billion | +6% |
| Operating cash flow | $1.489 billion | $1.851 billion | Down $362 million |
| Health benefits ratio (HBR) | 87.3% | 86.5% | Up 80 basis points |
| SG&A expense ratio | 9.7% | 9.8% | Down 10 basis points |
| Adjusted SG&A expense ratio (non-GAAP) | 9.5% | 9.0% | Up 50 basis points |
Operating earnings were $1.199 billion, down 5% from 2016. At December 31, cash and cash equivalents were $4.072 billion; reported cash, investments and restricted deposits totaled $10.050 billion. Total debt was approximately $4.699 billion, and the debt-to-capital ratio was 40.6%, down from 44.1%. Working capital was negative $629 million, compared with negative $258 million a year earlier. The $1.5 billion revolving facility had $150 million drawn; Centene reported compliance with its covenants. Regulated subsidiaries held $5.153 billion of statutory capital and surplus against $2.251 billion in required minimums, though that required amount was unavailable for dividends without regulatory approval.
The filing’s quarterly table reports fourth-quarter 2017 revenue of $12.806 billion, earnings from continuing operations attributable to common shareholders of $230 million, and diluted EPS of $1.30.
Material changes versus the prior comparable period
- Revenue growth reflected a full year of Health Net, Marketplace membership growth, and new or expanded state programs. Membership rose 7% to 12.2 million; Marketplace membership increased to 959,600 from 537,200.
- HBR increased, reflecting the absence of a $195 million California minimum-MLR revenue benefit recorded in 2016, California Medicaid Expansion rate reductions, higher flu costs, and start-up effects from new or expanded plans. Lower-HBR Marketplace growth partly offset these pressures.
- Managed Care operating earnings declined to $917 million from $1.077 billion, while Specialty Services operating earnings rose to $282 million from $183 million. The 2017 health-insurer-fee moratorium reduced both fee revenue and expense relative to 2016.
- Operating cash flow decreased despite higher earnings. Management attributed 2017 cash generation in part to increased medical claims liabilities associated with Marketplace growth and new Nebraska and Nevada plans; state payment timing also affects cash flows.
Outlook, commentary, risks and unusual items
- Management expected available cash, investments, operating cash flow and credit-facility capacity to fund operations and capital expenditures for at least 12 months from the filing date. For 2018 it expected approximately $706 million of capital expenditures and $325 million of net capital contributions to insurance subsidiaries.
- The proposed Fidelis Care asset acquisition, signed in September 2017 for $3.75 billion subject to adjustments, was expected to close in the second quarter of 2018 pending conditions and New York approvals. Planned funding was approximately $2.3 billion of new equity and $1.6 billion of new debt; the transaction had not closed as of the report.
- The 2017 results included a $56 million Penn Treaty guaranty-association assessment and a $22 million charge related to uncertainty over collection of cost-sharing-reduction receivables. The Tax Cuts and Jobs Act produced a provisional $125 million tax benefit, or $0.71 per diluted share, primarily from remeasuring deferred tax liabilities. Adjusted EPS excludes specified items and is a non-GAAP measure.
- Centene reported a 3.5-star parent Medicare rating for the 2018 rating year, down from 4.0; management said it was appealing. The change could affect 2019 quality bonus payments and plan revenue. Management expected a return to 4.0 stars in future periods, but that outcome is uncertain.
- Key risks include government funding, rates, contract renewals and regulatory changes; medical-cost and claims-reserve estimation; Marketplace pricing and potential adverse selection following repeal of the individual mandate beginning in 2019; cyber and privacy incidents; acquisition financing and integration; and litigation or government investigations. Disclosed matters include California tax litigation, securities and derivative actions, and Department of Justice information demands concerning Medicare risk-adjustment submissions and VA contract claims. The filing says outcomes and potential liabilities for certain matters cannot currently be determined.
Important facts for investors to verify
- Whether 2017 HBR deterioration and the higher adjusted SG&A ratio persist, and whether new or expanded plans reach targeted profitability.
- Medical claims liability adequacy: the year-end estimate was $4.286 billion, and management disclosed meaningful sensitivity to claims-completion and cost-trend assumptions.
- Fidelis Care closing status, final purchase-price adjustments, financing mix, regulatory conditions and realized integration benefits.
- Effects of the 3.5-star parent rating on bonus revenue and the outcome of Centene’s appeal.
- Cash-flow sustainability, negative working capital, restricted subsidiary capital, and debt and covenant capacity after planned acquisition financing and investment spending.
- Developments in the disclosed lawsuits and government investigations, including whether any result in material costs, penalties or operational changes.