On July 23, 2019 Centene Corporation (NYSE: CNC) reported its financial results for the second quarter ended June 30, 2019, diluted earnings per share (EPS) of $1.18, and Adjusted Diluted EPS of $1.34 (Press release, CENTENE, JUL 23, 2019, View Source [SID1234537688]).

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In summary, the 2019 second quarter results were as follows:

(1) A full reconciliation of Adjusted Diluted EPS is shown beginning on page five of this release.

Diluted and Adjusted Diluted EPS for the second quarter of 2019 benefited from solid operating performance across our business segments, the net impact of the reconciliation of the 2018 risk adjustment program exceeding our expectations by $0.05 per diluted share and a gain related to the acquisition of Ribera Salud of $0.03 per diluted share.

Michael F. Neidorff, Centene’s Chairman, President and Chief Executive Officer, stated, "Our strong second quarter results demonstrate Centene’s favorable financial and operating momentum. Our pending WellCare acquisition will bolster and diversify our product offerings, significantly increase our scale and provide access to new markets – enhancing Centene’s long-term growth outlook."

Second Quarter Highlights

June 30, 2019 managed care membership of 15.0 million, an increase of 2.2 million members, or 17%, over June 30, 2018.
Total revenues for the second quarter of 2019 of $18.4 billion, representing 29% growth compared to the second quarter of 2018.
Health benefits ratio (HBR) of 86.7% for the second quarter of 2019, compared to 85.7% in the second quarter of 2018.
Selling, general and administrative (SG&A) expense ratio of 9.1% for the second quarter of 2019, compared to 9.6% for the second quarter of 2018.
Adjusted SG&A expense ratio of 9.0% for the second quarter of 2019, compared to 9.6% for the second quarter of 2018.
Diluted EPS for the second quarter of 2019 of $1.18, compared to $0.75 for the second quarter of 2018, an increase of 57%.
Adjusted Diluted EPS for the second quarter of 2019 of $1.34, compared to $0.90 for the second quarter of 2018, an increase of 49%.
Operating cash flow of $917 million for the second quarter of 2019, representing 1.9x net earnings.
Other Events

In July 2019, our Oregon subsidiary, Trillium Community Health Plan, was notified by the Oregon Health Authority (OHA) of its intent to award Trillium an expanded contract to serve as a coordinated care organization for six counties in the state. Pending successful completion of OHA’s readiness review and additional contract negotiations, the contract is scheduled to begin on January 1, 2020.
In June 2019, our Spanish subsidiary, Primero Salud, acquired additional ownership in Ribera Salud, increasing our ownership in the Spanish healthcare company from 50% to 90%.
In June 2019, all proposals regarding the pending acquisition of WellCare Health Plans, Inc. (WellCare) were approved by Centene and WellCare shareholders.
Accreditations & Awards

In July 2019, FORTUNE announced Centene’s position of #168 in its annual ranking of the largest companies globally by revenue.
In July 2019, Centene was recognized with a 100 percent score on the Disability Equality Index (DEI) as one of the Best Places to Work for People with Disabilities.
In May 2019, FORTUNE announced Centene’s position of #51 in its annual ranking of America’s largest companies by revenue.
In May 2019, Centene and several of its subsidiaries earned Accreditation from NCQA, including California Health & Wellness and Health Net Community Solutions.
Membership

Medicare includes Medicare Advantage, Medicare Supplement, Special Needs Plans, and MMP.

Statement of Operations: Three Months Ended June 30, 2019

For the second quarter of 2019, total revenues increased 29% to $18.4 billion from $14.2 billion in the comparable period in 2018. The increase over the prior year was primarily due to the acquisition of Fidelis Care, growth in the Health Insurance Marketplace business, expansions and new programs in many of our states in 2018 and 2019, particularly Arkansas, New Mexico, and Pennsylvania. These increases were partially offset by the health insurer fee moratorium in 2019.
Sequentially, total revenues decreased 1% from the first quarter of 2019 primarily due to significant pass through payments from the States of California and New York in the first quarter.
HBR of 86.7% for the second quarter of 2019 represents an increase from 85.7% in the comparable period in 2018. The increase was primarily attributable to the Health Insurance Marketplace business where margins have normalized, as expected, from the favorable performance in 2018. The increase was also due to the health insurer fee moratorium and the acquisition of Fidelis Care, which operates at a higher HBR.
HBR increased sequentially from 85.7% in the first quarter of 2019. The increase was primarily due to the normal seasonality in the Health Insurance Marketplace business.
The SG&A expense ratio was 9.1% for the second quarter of 2019, compared to 9.6% in the second quarter of 2018. The Adjusted SG&A expense ratio was 9.0% for the second quarter of 2019, compared to 9.6% in the second quarter of 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 effective tax rate was 25.7% for the second quarter of 2019, compared to 36.9% in the second quarter of 2018. The decrease in the effective tax rate was due to the impact of the health insurer fee moratorium.
Balance Sheet

At June 30, 2019, the Company had cash, investments and restricted deposits of $15.9 billion, including $801 million held by unregulated entities. Medical claims liabilities totaled $7.4 billion. The Company’s days in claims payable was 47 days, which is a decrease of one day over the first quarter of 2019. Total debt was $7.1 billion, which includes $513 million of borrowings on our $2.0 billion revolving credit facility at quarter end. The debt to capitalization ratio was 36.3% at June 30, 2019, excluding $158 million of non-recourse debt.

Outlook

The Company’s annual guidance for 2019 has been updated to reflect the second quarter performance and the reinvestment of $0.05 per diluted share in Centene Forward related initiatives in the second half of 2019.

Adjusted Diluted EPS excludes amortization of acquired intangible assets of $0.46 to $0.47 per diluted share and acquisition related expenses of $0.13 to $0.15 per diluted share.

Adjusted SG&A expense ratio excludes acquisition related expenses of $73 million to $84 million.

Conference Call

As previously announced, the Company will host a conference call Tuesday, July 23, 2019, at approximately 8:30 AM (Eastern Time) to review the financial results for the second quarter ended June 30, 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: 9467577 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, July 21, 2020, at the aforementioned URL. In addition, a digital audio playback will be available until 9:00 AM (Eastern Time) on Tuesday, July 30, 2019, by dialing 1-877-344-7529 in the U.S. and Canada, or +1-412-317-0088 from abroad, and entering access code 10132753.

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):

Other adjustments include the 2018 impact of retroactive changes to the California minimum medical loss ratio (MLR) of $30 million of expense.

The income tax effects of adjustments are based on the effective income tax rates applicable to adjusted (non-GAAP) results.

The amortization of acquired intangible assets per diluted share presented above is net of an income tax benefit of $0.04 and $0.02 for the three months ended June 30, 2019 and 2018, respectively, and $0.07 and $0.05 for the six months ended June 30, 2019 and 2018, respectively, and an estimated $0.14 for the year ended December 31, 2019.

The acquisition related expenses per diluted share presented above are net of an income tax benefit of $0.01 for the three months ended June 30, 2019, and $0.03 and $0.01 for the six months ended June 30, 2019 and 2018, respectively, and an estimated $0.05 for the year ended December 31, 2019.

Other adjustments include the 2018 impact of retroactive changes to the California MLR, which is net of an income tax benefit of $0.02 per diluted share for both the three and six months ended June 30, 2018.