On February 4, 2020 Centene Corporation (NYSE: CNC) reported its financial results for the fourth quarter and year ended December 31, 2019, reporting diluted earnings per share (EPS) of $0.49 and $3.14, respectively, and Adjusted Diluted EPS of $0.73 and $4.42, respectively (Press release, Centene , FEB 4, 2020, View Source [SID1234553862]).
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2020 Outlook
The Company expects to provide consolidated 2020 annual guidance, including WellCare Health Plans, Inc. (WellCare), on Tuesday, March 3, 2020, with a conference call at 8:30 AM (Eastern Time) on Wednesday, March 4, 2020. The Company continues to expect the WellCare acquisition to be no less than break even accretion for the first full year after closing and mid-to-upper single digit accretion in the second full year. Additionally, excluding the effect of the WellCare acquisition, the Company’s stand-alone 2020 guidance is unchanged from the guidance provided at our December investor day.
"I am pleased with our performance in the fourth quarter and full year 2019, resulting in 24% full year top and bottom line growth. This caps off another successful year for Centene and provides strong, positive momentum as we head into 2020. Having recently closed our acquisition of WellCare, we look ahead to 2020 and beyond with great confidence in the opportunities that lie ahead. Our company will have even greater scale and diversification, serving 1 in every 15 Americans, maintaining our leadership in government-sponsored healthcare. We are happy to welcome our WellCare colleagues to Centene and look forward to delivering on our strategy," said Michael F. Neidorff, Centene’s Chairman, President and Chief Executive Officer.
On January 23, 2020, we acquired all of the issued and outstanding shares of WellCare. The transaction is valued at approximately $19.6 billion, including the assumption of debt. The Centene and WellCare combination creates a premier healthcare enterprise focused on government-sponsored healthcare programs.
Fourth Quarter and Full Year Highlights
December 31, 2019 managed care membership of 15.2 million, an increase of 1.1 million members, or 8%, over December 31, 2018.
Total revenues of $18.9 billion for the fourth quarter of 2019, representing 14% growth compared to the fourth quarter of 2018, and $74.6 billion for the full year 2019, representing 24% growth year-over-year.
Health benefits ratio (HBR) of 88.4% for the fourth quarter of 2019, compared to 86.8% in the fourth quarter of 2018, and 87.3% for the full year 2019, compared to 85.9% for the full year 2018.
Selling, general and administrative (SG&A) expense ratio of 9.6% for the fourth quarter of 2019, compared to 9.9% for the fourth quarter of 2018. SG&A expense ratio of 9.3% for the full year 2019, compared to 10.7% for the full year 2018.
Adjusted SG&A expense ratio of 9.5% for the fourth quarter of 2019, compared to 9.9% for the fourth quarter of 2018. Adjusted SG&A expense ratio of 9.2% for the full year 2019, compared to 10.0% for the full year 2018.
Diluted EPS for the fourth quarter of 2019 of $0.49, compared to $0.57 for the fourth quarter of 2018, a decrease of 14%. Diluted EPS for the full year 2019 of $3.14, compared to $2.26 for the full year 2018, an increase of 39%.
Adjusted Diluted EPS for the fourth quarter of 2019 of $0.73, compared to $0.69 for the fourth quarter of 2018, an increase of 6%. Adjusted Diluted EPS for the full year 2019 of $4.42, compared to $3.54 for the full year 2018, an increase of 25%.
Operating cash flow of $(651) million and $1.5 billion for the fourth quarter and full year 2019, respectively, representing 1.1x net earnings for the full year 2019. Operating cash flow for the fourth quarter of 2019 was negatively affected by the timing of payments from several of our customers, including state directed payments.
Other Events
In January 2020, Centene acquired all of the issued and outstanding shares of WellCare. The transaction is valued at approximately $19.6 billion, including the assumption of $1.95 billion of outstanding debt. The WellCare acquisition brings a high-quality Medicare platform and further extends our robust Medicaid offerings. In connection with the closing of the WellCare acquisition, Anthem, Inc. acquired WellCare’s Missouri Medicaid health plan, a WellCare Missouri Medicare Advantage health plan, and WellCare’s Nebraska Medicaid health plan. CVS Health Corporation acquired portions of Centene’s Illinois Medicaid and Medicare Advantage health plans. Centene also completed the exchange of substantially all of WellCare’s outstanding senior notes of approximately $1.95 billion aggregate principal amount of new notes issued by Centene and cash. Finally, the Centene board welcomed WellCare board members William Trubeck and James Dallas to Centene’s board of directors.
In February 2020, Centene announced the appointment of Chris Koster to Senior Vice President, Secretary and General Counsel, effective February 19, 2020. Centene also announced the appointment of Keith Williamson, former Secretary and General Counsel, to President of the Centene Charitable Foundation.
In February 2020, Centene announced the appointment of Jennifer Gilligan to Senior Vice President, Investor Relations, effective upon Edmund Kroll’s retirement in April 2020.
In February 2020, Centene began operating in Illinois under the first phase of an expanded contract for the Medicaid Managed Care Program. The expanded contract includes children who are in need through the Department of Children and Family Services/Youth Care by the Illinois Department of Healthcare and Family Services and Foster Care.
In January 2020, Centene announced its subsidiary Social Health Bridge has launched a new community partnership with the NHP Foundation, and its affiliate, Operation Pathways, to bring affordable housing to the local Louisiana community. Launching in New Orleans, Louisiana, on-site staff will help residents access education health events, preventative and social determinants of health screenings, and community referral assistance on premise at the housing community.
In January 2020, Centene expanded its offerings in the Health Insurance Marketplace in ten existing markets: Arizona, Florida, Georgia, Kansas, North Carolina, Ohio, South Carolina, Tennessee, Texas and Washington.
In January 2020, Centene began operating under a one-year emergency contract extension in response to protested contract awards. Louisiana’s state procurement officer overturned the Louisiana Department of Health’s plan to award Medicaid contracts to four health plans, excluding Centene’s Louisiana subsidiary. According to the chief procurement officer, the state health department failed to follow state law or its own evaluation and bid guidelines in its award.
In December 2019, Centene issued approximately $1.0 billion of 4.75% Senior Notes due 2025 (the "Additional 2025 Notes"), $2.5 billion of new 4.25% Senior Notes due 2027 (the "2027 Notes") and $3.5 billion of new 4.625% Senior Notes due 2029 (the "2029 Notes"). Centene used the net proceeds of the 2027 Notes and the 2029 Notes and a portion of the Additional 2025 Notes to finance the cash consideration payable in connection with the WellCare acquisition and to pay related fees and expenses.
In November 2019, Centene announced its Texas subsidiary, Superior HealthPlan, was awarded by the Texas Health and Human Services Commission a contract to continue to provide healthcare services to enrollees in the state’s STAR+PLUS program. The contract is expected to be effective on September 1, 2020, and will allow Superior HealthPlan to offer coverage in two new service areas, for a total of nine service areas.
In October 2019, Centene announced that retired United States Air Force General Lori J. Robinson was elected to serve on Centene’s Board of Directors as a Class I director. General Robinson was appointed to the Nominating and Governance Committee and the Government and Regulatory Affairs Committee.
Accreditations & Awards
In January 2020, FORTUNE magazine named Centene to its 2020 list of Blue Ribbon Companies for appearing on at least four of the 10 most rigorous 2019 annual rankings.
In January 2020, FORTUNE magazine named Centene to its 2020 list of the World’s Most Admired Companies.
In December 2019, Centene’s Texas subsidiary, Superior HealthPlan, earned Accreditation from the National Committee for Quality Assurance (NCQA).
In November 2019, several Centene subsidiaries earned Accreditation from NCQA, including Cenpatico Behavioral Health, Pennsylvania Health and Wellness, and Western Sky Community Care.
Statement of Operations: Three Months Ended December 31, 2019
For the fourth quarter of 2019, total revenues increased 14% to $18.9 billion from $16.6 billion in the comparable period in 2018. The increase over the prior year was primarily due to growth in the Health Insurance Marketplace business, expansions and new programs in many of our states in 2019, particularly Arkansas, Illinois, Iowa, New Mexico and Pennsylvania, and our recent acquisitions in Spain. These increases were partially offset by the health insurer fee moratorium in 2019.
HBR of 88.4% for the fourth quarter of 2019 represents an increase from 86.8% in the comparable period in 2018. The year over year increase was attributable to the Health Insurance Marketplace business where margins have normalized, as expected, from favorable performance in 2018. The increase was also due to the health insurer fee moratorium and a moderate increase in flu related costs. HBR for the fourth quarter was higher than our expectations driven by higher than expected medical costs on our Marketplace business and slightly higher than projected flu costs. Overall, the Marketplace business performed well in 2019 with margins within our stated 5% – 10% range.
HBR increased sequentially from 88.2% in the third quarter of 2019. The increase was primarily attributable to normal seasonality in the Health Insurance Marketplace business.
The SG&A expense ratio was 9.6% for the fourth quarter of 2019, compared to 9.9% in the fourth quarter of 2018. The Adjusted SG&A expense ratio was 9.5% for the fourth quarter of 2019, compared to 9.9% in the fourth quarter of 2018. The SG&A and Adjusted SG&A expense ratios both benefited from the leveraging of expenses over higher revenues and lower variable compensation costs in 2019. The decrease to the SG&A expense ratio was partially offset by an increase in acquisition related expenses over the fourth quarter of 2018.
During the fourth quarter of 2019, Centene redeemed the outstanding principal balance on its $1,400 million 5.625% Senior Notes due February 15, 2021, plus applicable premium for early redemption and accrued and unpaid interest through the redemption date. Centene recognized a pre-tax loss on extinguishment of $30 million on the redemption of the $1,400 million 5.625% Senior Notes, including the call premium, the write-off of unamortized debt issuance costs and a loss on the termination of the $600 million interest rate swap agreement associated with the notes.
The effective tax rate was 22.3% for the fourth quarter of 2019, compared to 32.5% in the fourth quarter of 2018. The decrease in the effective tax rate was due to the impact of the health insurer fee moratorium.
Statement of Operations: Year Ended December 31, 2019
For the full year 2019, total revenues increased 24% to $74.6 billion from $60.1 billion in the comparable period of 2018. The increase over the prior year was primarily due to the acquisition of Fidelis Care, growth in the Health Insurance Marketplace business, and expansions and new programs in many of our states in 2018 and 2019, particularly Arkansas, Illinois, Iowa, New Mexico and Pennsylvania. These increases were partially offset by the health insurer fee moratorium in 2019. Total revenues also increased due to at-risk, state directed and pass through payments of approximately $825 million from the State of California and pass through payments of approximately $531 million from the State of New York.
HBR of 87.3% for the full year 2019 represents an increase from 85.9% in the comparable period in 2018. The HBR increase compared to last year was driven by the Health Insurance Marketplace business where margins have normalized, as expected, from the favorable performance in 2018 and the health insurer fee moratorium. Also, the 2018 HBR benefited from the recognition of the IHSS program reconciliation.
The SG&A expense ratio was 9.3% for the full year 2019, compared to 10.7% for the full year 2018. The year-over-year decrease was primarily due to $336 million of lower acquisition related expenses. The Adjusted SG&A expense ratio was 9.2% for the full year 2019, compared to 10.0% for the full year 2018. The SG&A and Adjusted SG&A expense ratios both decreased due to the acquisition of Fidelis Care, which operates at a lower SG&A expense ratio, the Veterans Affairs contract expiration in 2018, and lower variable compensation costs in 2019.
For the full year 2019, the effective tax rate was 26.5%, consistent with our previous guidance.
Balance Sheet
At December 31, 2019, the Company had cash, investments and restricted deposits of $21.4 billion, including $7.2 billion held by unregulated entities, reflecting the net proceeds from our $7.0 billion senior note issuance in advance of the closing of the WellCare acquisition. Medical claims liabilities totaled $7.5 billion. Total debt was $13.7 billion, which includes $93 million of borrowings on our $2.0 billion revolving credit facility at quarter end. The debt to capitalization ratio was 51.7% at December 31, 2019, excluding $194 million of non-recourse debt. Excluding non-recourse debt and the senior notes issued to fund the WellCare acquisition in advance of closing, our debt to capital was 34.3%.
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, September 30, 2019
Days in claims payable, December 31, 2019
State directed payments that we receive at the end of each quarter are recorded as a component of medical claims liability until paid. We have received state directed payments at the end of most quarters, which has increased our medical claims liability and our days in claims payable. In the fourth quarter of 2019, we did not have any material state directed payments included in our medical claims liability, which decreased our days in claims payable by two days.
Outlook
The Company expects to provide consolidated 2020 annual guidance, including the WellCare acquisition, on Tuesday, March 3, 2020, with a conference call at 8:30 AM (Eastern Time) on Wednesday, March 4, 2020. The Company continues to expect the WellCare acquisition to be no less than break even accretion for the first full year after closing and mid-to-upper single digit accretion in the second full year. Additionally, excluding the effect of the WellCare acquisition, the Company’s stand-alone 2020 guidance is unchanged from the guidance provided at our December investor day.
Conference Call
As previously announced, the Company will host a conference call Tuesday, February 4, 2020, at approximately 8:30 AM (Eastern Time) to review the financial results for the fourth quarter and year ended December 31, 2019. Michael Neidorff and Jeffrey Schwaneke will host the conference call.
Investors and other interested parties are invited to listen to the conference call by dialing 1-877-883-0383 in the U.S. and Canada; +1-412-902-6506 from abroad, including the following Elite Entry Number: 6744563 to expedite caller registration; 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 PM (Eastern Time) on Tuesday, February 9, 2021, at the aforementioned URL. In addition, a digital audio playback will be available until 9:00 AM (Eastern Time) on Tuesday, February 11, 2020, by dialing 1-877-344-7529 in the U.S. and Canada, or +1-412-317-0088 from abroad, and entering access code 10138090.
Non-GAAP Financial Presentation
The Company is providing certain non-GAAP financial measures in this release as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company’s operations and measure the Company’s performance more consistently across periods. The Company uses the presented non-GAAP financial measures internally to allow management to focus on period-to-period changes in the Company’s core business operations. Therefore, the Company believes that this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.
Specifically, the Company believes the presentation of non-GAAP financial information that excludes amortization of acquired intangible assets and acquisition related expenses, as well as other items, allows investors to develop a more meaningful understanding of the Company’s performance over time. The tables below provide reconciliations of non-GAAP items ($ in millions, except per share data):
The amortization of acquired intangible assets per diluted share presented above is net of an income tax benefit of $0.04 and $0.04 for the three months ended December 31, 2019 and 2018, respectively, and $0.14 and $0.12 for the year ended December 31, 2019 and 2018, respectively.
The acquisition related expenses per diluted share presented above are net of an income tax benefit of $0.02 and $0.00 for the three months ended December 31, 2019 and 2018, respectively, and $0.06 and $0.25 for the year ended December 31, 2019 and 2018, respectively. Acquisition related expenses for 2019 include net carrying costs on the $7.0 billion senior notes issued in preparation of the WellCare acquisition of approximately $13 million, or $0.02 per diluted share, net of an income tax benefit of approximately $0.01.
The non-cash impairment is net of an income tax benefit of $0.08 for the year ended December 31, 2019. Debt extinguishment costs are net of an estimated income tax benefit of $0.02 for the three months and year ended December 31, 2019. The California Minimum MLR adjustment is net of an income tax benefit of $0.02 for the year ended December 31, 2018
To provide clarity on the way management defines certain key metrics and ratios, the Company is providing a description of how the metric or ratio is calculated as follows:
Health Benefits Ratio (HBR) (GAAP) = Medical costs divided by premium revenues.
SG&A Expense Ratio (GAAP) = Selling, general and administrative expenses divided by premium and service revenues.
Adjusted SG&A Expenses (non-GAAP) = Selling, general and administrative expenses, less acquisition related expenses.
Adjusted SG&A Expense Ratio (non-GAAP) = Adjusted selling, general and administrative expenses divided by premium and service revenues.
Adjusted Net Earnings (non-GAAP) = Net earnings less amortization of acquired intangible assets, less acquisition related expenses, less the goodwill and intangible impairment, less debt extinguishment costs, less the 2018 impact of retroactive changes to the California minimum MLR, net of the income tax effect of the adjustments.
Adjusted Diluted EPS (non-GAAP) = Adjusted net earnings divided by weighted average common shares outstanding on a fully diluted basis.
Debt to Capitalization Ratio (GAAP) = Total debt, divided by total debt plus total stockholder’s equity.
Debt to Capitalization Ratio Excluding Non-Recourse Debt (non-GAAP) = Total debt less non-recourse debt, divided by total debt less non-recourse debt plus total stockholder’s equity.
Average Medical Claims Expense (GAAP) = Medical costs for the period, divided by number of days in such period. Average Medical Claims Expense is most often calculated for the quarterly reporting period.
Days in Claims Payable (GAAP) = Medical claims liabilities, divided by average medical claims expense. Days in Claims Payable is most often calculated for the quarterly reporting period.
In addition, the following terms referenced in this press release and other Company filings are defined as follows:
State Directed Payments: Payments directed by a state that have minimal risk, but are administered as a premium adjustment. These payments are recorded as premium revenue and medical costs at close to a 100% HBR. The Company has little visibility to the timing of these payments until they are paid by a state.
Pass Through Payments: Non-risk supplemental payments from a state that the Company is required to pass through to designated contracted providers. These payments are recorded as premium tax revenue and premium tax expense.