Document




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 23, 2018

CENTENE CORPORATION
(Exact Name of Registrant as Specified in Charter)

Delaware
 
001-31826
 
42-1406317
(State or Other Jurisdiction
of Incorporation)
 
(Commission File Number)
 
(IRS Employer
Identification No.)

7700 Forsyth Blvd.
St. Louis, Missouri
 
63105
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (314) 725-4477
(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o







ITEM 2.02 RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(a) On October 23, 2018, we issued a press release announcing our financial results for the third quarter September 30, 2018. The full text of the press release is included as Exhibit 99.1 to this report. The information contained in the website cited in the press release is not a part of this report.

The information contained in this Form 8-K and Exhibit 99.1 attached hereto shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section. Nor shall such information or exhibit be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as expressly set forth by specific reference in such a filing.

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(d) Exhibits
The following exhibit relating to Item 2.02 shall be deemed to be furnished and not filed:
99.1 Press release of Centene Corporation issued October 23, 2018, as to financial results for the third quarter ended September 30, 2018.








EXHIBIT INDEX
Exhibit Number
 
Description
99.1*
 

*
 
The press release is being furnished pursuant to Item 2.02, and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange of 1934, as amended.







SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
CENTENE CORPORATION
 
 
 
 
 
Date:
October 23, 2018
By:
 
/s/ Jeffrey A. Schwaneke
 
 
 
 
Jeffrey A. Schwaneke
Executive Vice President & Chief Financial Officer



Exhibit


Exhibit 99.1
            
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12507472&doc=3
N E W S R E L E A S E                                                                                
Contact:
Investor Relations Inquiries
 
Edmund E. Kroll, Jr.
 
Senior Vice President, Finance & Investor Relations
 
(212) 759-0382
 
 
 
Media Inquiries
 
Marcela Manjarrez-Hawn
 
Senior Vice President and Chief Communications Officer
 
(314) 445-0790

FOR IMMEDIATE RELEASE

CENTENE CORPORATION REPORTS 2018 THIRD QUARTER RESULTS AND INCREASES 2018 GUIDANCE
-- 2018 Third Quarter Diluted EPS of $0.09; Adjusted Diluted EPS of $1.79 --

ST. LOUIS, MISSOURI (October 23, 2018) -- Centene Corporation (NYSE: CNC) announced today its financial results for the third quarter ended September 30, 2018, reporting diluted earnings per share (EPS) of $0.09 and Adjusted Diluted EPS of $1.79.
 
In summary, the 2018 third quarter results were as follows:
Total revenues (in millions)
$
16,182

Health benefits ratio
86.3
%
SG&A expense ratio
12.6
%
GAAP diluted EPS
$
0.09

Adjusted Diluted EPS (1)
$
1.79

Total cash flow provided by operations (in millions)
$
548

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

Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, stated, "The Company continues to execute on its growth strategy. The operating metrics were strong, excluding some offsetting adjustments associated with expired contracts. Overall, we are very pleased with the results and have good momentum heading into the fourth quarter and 2019."

The third quarter results include the following items, which in the aggregate had no net effect on diluted EPS:

During the third quarter, the Company received 2014-2017 cost reconciliation information related to the California Medicaid in-home support services (IHSS) program, which ended December 31, 2017. As a result, the Company's third quarter results include an estimated pre-tax benefit of $140 million related to the IHSS program reconciliation. The 2014-2016 reconciliation is expected to be finalized by early 2019, with the final 2017 reconciliation to follow.

September 30, 2018 represented the previously announced expiration of the Company's contract to provide health care coordination services to the U.S. Department of Veterans Affairs under the Patient-Centered Community Care and Veterans Choice Programs. In connection with the conclusion of the contract, the Company recorded a pre-tax charge of $110 million for negotiated settlements and severance costs. The Company will continue to provide close out and transition services through 2021.


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The Company recorded pre-tax expense of $30 million associated with a contribution commitment to its charitable foundation. 

Third Quarter Highlights

September 30, 2018 managed care membership of 14.4 million, an increase of 2.1 million members, or 17%, over September 30, 2017.

Total revenues for the third quarter of 2018 of $16.2 billion, representing 36% growth, compared to the third quarter of 2017.

Health benefits ratio (HBR) of 86.3% for the third quarter of 2018, compared to 88.0% in the third quarter of 2017.

Selling, general and administrative (SG&A) expense ratio of 12.6% for the third quarter of 2018, compared to 9.0% for the third quarter of 2017.

Adjusted SG&A expense ratio of 10.0% for the third quarter of 2018, compared to 8.9% for the third quarter of 2017.

Diluted EPS for the third quarter of 2018 of $0.09, compared to $1.16 for the third quarter of 2017.

Adjusted Diluted EPS for the third quarter of 2018 of $1.79, compared to $1.35 for the third quarter of 2017.

Operating cash flow of $548 million for the third quarter of 2018.

Other Events

In October 2018, CMS published updated Medicare Star quality ratings for the 2019 rating year. Our Star ratings returned to a 4.0 Star parent rating. The 2019 rating year will positively affect quality bonus payments for Medicare Advantage plans in 2020.

In October 2018, Centurion was awarded a contract to provide comprehensive healthcare services to detainees of the Metropolitan Detention Center located in Albuquerque, New Mexico. The contract is expected to commence in January 2019 with a base term of four years.

In October 2018, we announced that we are expanding our offerings in the 2019 Health Insurance Marketplace. We are entering Pennsylvania, North Carolina, South Carolina and Tennessee in 2019, and expanding our footprint in six existing markets: Florida, Georgia, Indiana, Kansas, Missouri and Texas.

In October 2018, our Arizona subsidiary, Health Net Access, began providing physical and behavioral health care services through the Arizona Health Care Cost Containment System Complete Care program in the Central region and the Southern region.

In October 2018, our Mississippi subsidiary, Magnolia Health, entered into a new agreement to continue providing services to Medicaid recipients enrolled in the Mississippi Coordinated Access Network.

In August 2018, Centurion was awarded a contract to provide comprehensive healthcare services to detainees of Volusia County detention facilities located near Daytona, Florida. The contract is expected to commence on January 1, 2019.

In July 2018, we announced a joint venture with Ascension to establish a Medicare Advantage plan. The plan is expected to be implemented in multiple geographic markets beginning in 2020.

Accreditations & Awards

In October 2018, Louisiana Healthcare Connections was awarded the Working Well in Louisiana Worksite Wellness Recognition of Excellence.

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In September 2018, Centene was named a Leading Disability Employer by the National Organization on Disability for its employment practices for people with disabilities. Also, in July 2018, Centene was named to the 2018 list of the Best Places to Work for People with Disabilities, presented by the American Association of People with Disabilities and the U.S. Business Leadership Network.

In September 2018, our Missouri Health Insurance Marketplace plan, Ambetter from Home State Health, earned Accreditation from NCQA.

In August 2018, FORTUNE magazine announced Centene's position of #49 on the Fortune 100 Fastest Growing Companies for 2018.

Membership

The following table sets forth our membership by line of business:
 
September 30
 
2018
 
2017
Medicaid:
 
 
 
TANF, CHIP & Foster Care
7,260,500

 
5,809,400

ABD & LTSS
964,200

 
850,300

Behavioral Health
455,900

 
467,400

Total Medicaid
8,680,600

 
7,127,100

Commercial
2,062,500

 
1,657,800

Medicare (1)
417,400

 
331,000

Correctional
150,900

 
158,000

Total at-risk membership
11,311,400

 
9,273,900

TRICARE eligibles
2,858,900

 
2,823,200

Non-risk membership
219,000

 
213,900

Total
14,389,300

 
12,311,000

 
 
 
 
(1) Membership includes Medicare Advantage, Medicare Supplement, Special Needs Plans, and Medicare-Medicaid Plans (MMP).
    
The following table sets forth additional membership statistics, which are included in the membership information above:
 
September 30
 
2018
 
2017
Dual-eligible (2)
590,300

 
475,300

Health Insurance Marketplace
1,529,400

 
1,024,000

Medicaid Expansion
1,237,800

 
1,105,000

 
 
 
 
(2) Membership includes dual-eligible ABD & LTSS and dual-eligible Medicare membership in the table above.


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Revenues

The following table sets forth supplemental revenue information for the three months ended September 30, ($ in millions):
 
2018
 
2017
 
% Change 2017-2018
Medicaid
$
10,909

 
$
8,090

 
35
%
Commercial
3,125

 
2,004

 
56
%
Medicare (1)
1,363

 
1,138

 
20
%
Other
785

 
666

 
18
%
Total Revenues
$
16,182

 
$
11,898

 
36
%
 
 
 
 
 
 
(1) Medicare includes Medicare Advantage, Medicare Supplement, Special Needs Plans, and MMP.

Statement of Operations: Three Months Ended September 30, 2018

For the third quarter of 2018, total revenues increased 36% to $16.2 billion, from $11.9 billion in the comparable period in 2017. The increase over the prior year was due to the acquisition of Fidelis Care, growth in the Health Insurance Marketplace business in 2018, expansions and new programs in many of our states in 2018, other acquisitions and the reinstatement of the health insurer fee in 2018. These increases were partially offset by the impact of the removal of the IHSS program from California's Medicaid contract in January 2018.

Sequentially, total revenues increased 14% over the second quarter of 2018 primarily due to the acquisition of Fidelis Care, partially offset by decreased revenues for the federal services business and approximately $500 million of revenue received in the second quarter of 2018 associated with pass through payments from the State of California, which were recorded in premium tax revenue and premium tax expense.

HBR of 86.3% for the third quarter of 2018 represents a decrease from 88.0% in the comparable period in 2017. The benefit of the recognition of the previously mentioned IHSS program reconciliation reduced the HBR by approximately 100 basis points. The remaining HBR decrease compared to last year was driven by membership growth in the Health Insurance Marketplace business and the reinstatement of the health insurer fee in 2018. This was partially offset by the acquisition of Fidelis Care, which operates at a higher HBR.

HBR increased sequentially from 85.7% in the second quarter of 2018. The increase was primarily attributable to normal seasonality in the commercial business and the acquisition of Fidelis Care, partially offset by the previously mentioned IHSS program reconciliation.

The SG&A expense ratio was 12.6% for the third quarter of 2018, compared to 9.0% in the third quarter of 2017. The year-over-year increase was primarily due to $399 million of acquisition related expenses associated with the closing of the Fidelis Care acquisition, which increased the ratio by approximately 260 basis points. The Adjusted SG&A expense ratio was 10.0% for the third quarter of 2018, compared to 8.9% in the third quarter of 2017. Both ratios increased by approximately 70 basis points related to costs associated with the previously mentioned Veterans Affairs contract expiration and the commitment to our charitable foundation. The remaining increases were due to growth in the Health Insurance Marketplace business, which operates at a higher SG&A expense ratio, partially offset by the acquisition of Fidelis Care, which operates at a lower SG&A expense ratio.

Balance Sheet

At September 30, 2018, the Company had cash, investments and restricted deposits of $14.3 billion, including $482 million held by unregulated entities. Medical claims liabilities totaled $7.0 billion, representing 51 days in claims payable. Total debt was $6.4 billion, which includes $100 million of borrowings on our $1.5 billion revolving credit facility at quarter-end. The debt to capitalization ratio was 36.9% at September 30, 2018, excluding the $99 million non-recourse mortgage note and construction loan.


4



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, June 30, 2018
44

 
Impact of Fidelis Care acquisition
4

 
Timing of claims payments & business expansion
2

 
Impact of IHSS program reconciliation
1

 
Days in claims payable, September 30, 2018
51

 
 
 
 

The increase in days in claims payable is primarily due to the acquisition of Fidelis Care. The four day Fidelis Care impact was primarily due to longer payment terms and timing of payments.

Outlook

The Company's full updated annual guidance for 2018 is as follows:
 
 
Full Year 2018
 
 
 
Low
 
High 
 
Total revenues (in billions)
 
$
59.8

 
$
60.3

 
GAAP diluted EPS
 
$
4.34

 
$
4.50

 
Adjusted Diluted EPS (1)
 
$
6.90

 
$
7.10

 
HBR
 
85.9
%
 
86.3
%
 
SG&A expense ratio
 
10.5
%
 
10.9
%
 
Adjusted SG&A expense ratio (2)
 
9.7
%
 
10.1
%
 
Effective tax rate
 
34.0
%
 
36.0
%
 
Diluted shares outstanding (in millions)
 
198.8

 
199.8

 
 
 
 
 
 
 
(1)
Adjusted Diluted EPS excludes amortization of acquired intangible assets of $0.81 to $0.83 per diluted share, acquisition related expenses of $1.63 to $1.65 per diluted share and California minimum MLR changes of $0.12 per diluted share.

(2)
Adjusted SG&A expense ratio excludes acquisition related expenses of $420 million to $425 million.

Conference Call

As previously announced, the Company will host a conference call Tuesday, October 23, 2018, at approximately 8:30 AM (Eastern Time) to review the financial results for the third quarter ended September 30, 2018. 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: 8785154 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, October 22, 2019, at the aforementioned URL. In addition, a digital audio playback will be available until 9:00 AM (Eastern Time) on Tuesday, October 30, 2018, by dialing 1-877-344-7529 in the U.S. and Canada, or +1-412-317-0088 from abroad, and entering access code 10123967.

5



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, 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):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
GAAP net earnings
$
19

 
$
205

 
$
659

 
$
598

Amortization of acquired intangible assets
65

 
38

 
149

 
117

Acquisition related expenses
401

 
7

 
423

 
13

California minimum medical loss ratio changes (1)

 

 
30

 

Penn Treaty assessment expense (2)

 
9

 

 
56

Income tax effects of adjustments (3)
(110
)
 
(20
)
 
(140
)
 
(68
)
Adjusted net earnings
$
375

 
$
239

 
$
1,121

 
$
716

(1)
The impact of retroactive minimum MLR changes under California’s Medicaid expansion program.

(2)
Additional expense for the Company's estimated share of guaranty association assessment resulting from the liquidation of Penn Treaty for the nine months ended September 30, 2017.

(3)
The income tax effects of adjustments are based on the effective income tax rates applicable to adjusted (non-GAAP) results.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Annual Guidance
 December 31, 2018
 
2018
 
2017
 
2018
 
2017
 
GAAP diluted EPS
$
0.09

 
$
1.16

 
$
3.37

 
$
3.39

 
$4.34 - $4.50
Amortization of acquired intangible assets (1)
0.24

 
0.14

 
0.59

 
0.42

 
$0.81 - $0.83
Acquisition related expenses (2)
1.46

 
0.02

 
1.65

 
0.05

 
$1.63 - $1.65
California minimum medical loss ratio changes (3)

 

 
0.12

 

 
$0.12
Penn Treaty assessment expense (4)

 
0.03

 

 
0.20

 
Adjusted Diluted EPS
$
1.79

 
$
1.35

 
$
5.73

 
$
4.06

 
$6.90 - $7.10
(1)
The amortization of acquired intangible assets per diluted share presented above is net of an income tax benefit of $0.07 and $0.07 for the three months ended September 30, 2018 and 2017, respectively, and $0.17 and $0.24 for the nine months ended September 30, 2018 and 2017, respectively; and an estimated $0.24 to $0.25 for the year ended December 31, 2018.
 
(2)
The acquisition related expenses per diluted share presented above are net of an income tax benefit of $0.46 and $0.02 for the three months ended September 30, 2018 and 2017, respectively, and $0.51 and $0.03 for the nine months ended September 30, 2018 and 2017, respectively; and an estimated $0.50 to $0.51 for the year ended December 31, 2018.


6



(3)
The impact of retroactive changes to the California minimum MLR per diluted share presented above is net of an income tax benefit of $0.04 for the nine months ended September 30, 2018; and an estimated $0.03 for the year ended December 31, 2018.

(4)
The Penn Treaty assessment expense per diluted share presented above is net of an income tax benefit of $0.02 and $0.12 for the three and nine months ended September 30, 2017, respectively.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
GAAP SG&A expenses
$
1,934

 
$
1,030

 
$
4,487

 
$
3,186

 
Acquisition related expenses
399

 
7

 
421

 
13

 
Penn Treaty assessment expense

 
9

 

 
56

 
Adjusted SG&A expenses
$
1,535

 
$
1,014

 
$
4,066

 
$
3,117

 

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About Centene Corporation

Centene Corporation, a Fortune 100 company, is a diversified, multi-national healthcare enterprise that provides a portfolio of services to government sponsored and commercial healthcare programs, focusing on under-insured and uninsured individuals. Many receive benefits provided under Medicaid, including the State Children’s Health Insurance Program (CHIP), as well as Aged, Blind or Disabled (ABD), Foster Care and Long-Term Services and Supports (LTSS), in addition to other state-sponsored programs, Medicare (including the Medicare prescription drug benefit commonly known as “Part D”), dual eligible programs and programs with the U.S. Department of Defense. Centene also provides healthcare services to groups and individuals delivered through commercial health plans. Centene operates local health plans and offers a range of health insurance solutions. It also contracts with other healthcare and commercial organizations to provide specialty services including behavioral health management, care management software, correctional healthcare services, dental benefits management, commercial programs, home-based primary care services, life and health management, vision benefits management, pharmacy benefits management, specialty pharmacy and telehealth services.

Centene uses its investor relations website to publish important information about the Company, including information that may be deemed material to investors. Financial and other information about Centene is routinely posted and is accessible on Centene’s investor relations website, http://www.centene.com/investors.

Forward-Looking Statements

The company and its representatives may from time to time make written and oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act (PSLRA) of 1995, including statements in this and other press releases, in presentations, filings with the Securities and Exchange Commission (SEC), reports to stockholders and in meetings with investors and analysts. In particular, the information provided in this press release may contain certain forward-looking statements with respect to the financial condition, results of operations and business of Centene and certain plans and objectives of Centene with respect thereto, including but not limited to the expected benefits of the acquisition of Health Net, Inc. (Health Net) (Health Net Acquisition) and the acquisition of New York State Catholic Health Plan, Inc., d/b/a Fidelis Care New York (Fidelis Care) (Fidelis Care Acquisition). These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Without limiting the foregoing, forward-looking statements often use words such as "believe", "anticipate", "plan", "expect", "estimate", "intend", "seek", "target", "goal", "may", "will", "would", "could", "should", "can", "continue" and other similar words and expressions (and the negative thereof). We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in PSLRA. A number of factors, variables or events could cause actual plans and results to differ materially from those expressed or implied in forward-looking statements. Such factors include, but are not limited to, Centene's ability to accurately predict and effectively manage health benefits and other operating expenses and reserves; competition; membership and revenue declines or unexpected trends; changes in healthcare practices, new technologies and advances in medicine; increased healthcare costs; changes in economic, political or market conditions; changes in federal or state laws or regulations, including changes with respect to income tax reform or government healthcare programs as well as changes with respect to the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act and any regulations enacted thereunder that may result from changing political conditions; rate cuts or other payment reductions or delays by governmental payors and other risks and uncertainties affecting Centene's government businesses; Centene's ability to adequately price products on federally facilitated and state-based Health Insurance Marketplaces; tax matters; disasters or major epidemics; the outcome of legal and regulatory proceedings; changes in expected contract start dates; provider, state, federal and other contract changes and timing of regulatory approval of contracts; the expiration, suspension or termination of Centene's contracts with federal or state governments (including but not limited to Medicaid, Medicare, TRICARE or other customers); the difficulty of predicting the timing or outcome of pending or future litigation or government investigations; challenges to Centene's contract awards; cyber-attacks or other privacy or data security incidents; the possibility that the expected synergies and value creation from acquired businesses, including, without limitation, the Health Net Acquisition and the Fidelis Care Acquisition, will not be realized, or will not be realized within the expected time period; the exertion of management's time and Centene's resources, and other expenses incurred and business changes required in connection with complying with the undertakings in connection with any regulatory, governmental or third party consents or approvals for the Health Net Acquisition or the Fidelis Care Acquisition; disruption caused by significant completed and pending acquisitions, including the Health Net Acquisition and the Fidelis Care Acquisition, making it more difficult to maintain business and operational relationships; the risk that unexpected costs will be incurred in connection with the completion and/or integration of acquisition transactions, including among others, the Health Net Acquisition and the Fidelis Care Acquisition; changes in expected closing dates, estimated purchase price and accretion for acquisitions; the risk that acquired businesses, including Health Net and Fidelis Care, will not be integrated successfully; the risk that, following the Fidelis Care Acquisition, Centene may not be able to effectively manage its expanded operations; restrictions and limitations in connection with Centene's indebtedness; Centene's ability to achieve improvement in the Centers for Medicare and Medicaid Services (CMS) Star ratings and maintain or achieve improvement in other quality scores

8



in each case that can impact revenue and future growth; availability of debt and equity financing, on terms that are favorable to Centene; inflation; foreign currency fluctuations; and risks and uncertainties discussed in the reports that Centene has filed with the SEC. These forward-looking statements reflect Centene's current views with respect to future events and are based on numerous assumptions and assessments made by Centene in light of its experience and perception of historical trends, current conditions, business strategies, operating environments, future developments and other factors it believes appropriate. By their nature, forward-looking statements involve known and unknown risks and uncertainties and are subject to change because they relate to events and depend on circumstances that will occur in the future. The factors described in the context of such forward-looking statements in this press release could cause Centene's plans with respect to the Health Net Acquisition, the Fidelis Care Acquisition, actual results, performance or achievements, industry results and developments to differ materially from those expressed in or implied by such forward-looking statements. Although it is currently believed that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct and persons reading this press release are therefore cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this press release. Centene does not assume any obligation to update the information contained in this press release (whether as a result of new information, future events or otherwise), except as required by applicable law. This list of important factors is not intended to be exhaustive. We discuss certain of these matters more fully, as well as certain other risk factors that may affect Centene's business operations, financial condition and results of operations, in Centene's filings with the SEC, including the annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.



[Tables Follow]


9



CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except shares in thousands and per share data in dollars)
 
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,847

 
$
4,072

Premium and trade receivables
4,647

 
3,413

Short-term investments
594

 
531

Other current assets
1,000

 
687

Total current assets
13,088

 
8,703

Long-term investments
6,272

 
5,312

Restricted deposits
550

 
135

Property, software and equipment, net
1,584

 
1,104

Goodwill
6,803

 
4,749

Intangible assets, net
2,423

 
1,398

Other long-term assets
437

 
454

Total assets
$
31,157

 
$
21,855

 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
 
 
 

Current liabilities:
 

 
 

Medical claims liability
$
6,983

 
$
4,286

Accounts payable and accrued expenses
4,550

 
4,165

Return of premium payable
918

 
549

Unearned revenue
286

 
328

Current portion of long-term debt
4

 
4

Total current liabilities
12,741

 
9,332

Long-term debt
6,379

 
4,695

Other long-term liabilities
1,276

 
952

Total liabilities
20,396

 
14,979

Commitments and contingencies
 
 
 
Redeemable noncontrolling interests
11

 
12

Stockholders’ equity:
 

 
 

Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at September 30, 2018 and December 31, 2017

 

Common stock, $0.001 par value; authorized 400,000 shares; 207,550 issued and 205,354 outstanding at September 30, 2018, and 180,379 issued and 173,437 outstanding at December 31, 2017

 

Additional paid-in capital
7,395

 
4,349

Accumulated other comprehensive loss
(79
)
 
(3
)
Retained earnings
3,422

 
2,748

Treasury stock, at cost (2,196 and 6,942 shares, respectively)
(85
)
 
(244
)
Total Centene stockholders’ equity
10,653

 
6,850

Noncontrolling interest
97

 
14

Total stockholders’ equity
10,750

 
6,864

Total liabilities, redeemable noncontrolling interests and stockholders’ equity
$
31,157

 
$
21,855







10



CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data in dollars)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Premium
$
14,623

 
$
10,850

 
$
38,639

 
$
32,393

Service
732

 
571

 
2,147

 
1,634

Premium and service revenues
15,355

 
11,421

 
40,786

 
34,027

Premium tax and health insurer fee
827

 
477

 
2,771

 
1,549

Total revenues
16,182

 
11,898

 
43,557

 
35,576

Expenses:
 
 
 
 
 
 
 
Medical costs
12,626

 
9,543

 
33,045

 
28,278

Cost of services
622

 
437

 
1,823

 
1,334

Selling, general and administrative expenses
1,934

 
1,030

 
4,487

 
3,186

Amortization of acquired intangible assets
65

 
38

 
149

 
117

Premium tax expense
716

 
510

 
2,451

 
1,643

Health insurer fee expense
178

 

 
532

 

Total operating expenses
16,141

 
11,558

 
42,487

 
34,558

Earnings from operations
41

 
340

 
1,070

 
1,018

Other income (expense):
 
 
 
 
 
 
 
Investment and other income
80

 
51

 
186

 
137

Interest expense
(97
)
 
(65
)
 
(245
)
 
(189
)
Earnings from operations, before income tax expense
24

 
326

 
1,011

 
966

Income tax expense
8

 
125

 
358

 
381

Net earnings
16

 
201

 
653

 
585

Loss attributable to noncontrolling interests
3

 
4

 
6

 
13

Net earnings attributable to Centene Corporation
$
19

 
$
205

 
$
659

 
$
598

 
 
 
 
 
 
 
 
Net earnings per common share attributable to Centene Corporation:
Basic earnings per common share
$
0.09

 
$
1.19

 
$
3.44

 
$
3.47

Diluted earnings per common share
$
0.09

 
$
1.16

 
$
3.37

 
$
3.39

 
 
 
 
 
 
 
 



11



CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net earnings
$
653

 
$
585

Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization
354

 
264

Stock compensation expense
105

 
99

Deferred income taxes
(103
)
 
(32
)
Changes in assets and liabilities
 

 
 

Premium and trade receivables
(696
)
 
(749
)
Other assets
65

 
(39
)
Medical claims liabilities
1,380

 
406

Unearned revenue
(150
)
 
255

Accounts payable and accrued expenses
35

 
205

Other long-term liabilities
199

 
45

Other operating activities, net
26

 

Net cash provided by operating activities
1,868

 
1,039

Cash flows from investing activities:
 

 
 

Capital expenditures
(489
)
 
(301
)
Purchases of investments
(2,691
)
 
(1,693
)
Sales and maturities of investments
1,575

 
1,308

Acquisitions, net of cash acquired
(1,958
)
 

Net cash used in investing activities
(3,563
)
 
(686
)
Cash flows from financing activities:
 

 
 

Proceeds from the issuance of common stock
2,779

 

Proceeds from long-term debt
5,480

 
1,170

Payments of long-term debt
(3,692
)
 
(1,124
)
Common stock repurchases
(17
)
 
(18
)
Purchase of noncontrolling interest
(63
)
 
(33
)
Debt issuance costs
(25
)
 

Other financing activities, net
(2
)
 
2

Net cash provided by (used in) financing activities
4,460

 
(3
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash

 
1

Net increase in cash, cash equivalents and restricted cash
2,765

 
351

Cash, cash equivalents, and restricted cash and cash equivalents, beginning of period
4,089

 
3,936

Cash, cash equivalents, and restricted cash and cash equivalents, end of period
$
6,854

 
$
4,287

Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
213

 
$
210

Income taxes paid
$
340

 
$
358

Equity issued in connection with acquisitions
$
507

 
$




12



CENTENE CORPORATION
SUPPLEMENTAL FINANCIAL DATA
 
Q3
 
Q2
 
Q1
 
Q4
 
Q3
 
2018
 
2018
 
2018
 
2017
 
2017
MANAGED CARE MEMBERSHIP BY LINE OF BUSINESS
Medicaid:
 
 
 
 
 
 
 
 
 
TANF, CHIP & Foster Care
7,260,500

 
5,852,000

 
5,776,600

 
5,807,300

 
5,809,400

ABD & LTSS
964,200

 
874,200

 
866,000

 
846,200

 
850,300

Behavioral Health
455,900

 
454,600

 
454,500

 
463,700

 
467,400

Total Medicaid
8,680,600

 
7,180,800

 
7,097,100

 
7,117,200

 
7,127,100

Commercial
2,062,500

 
2,051,700

 
2,161,200

 
1,558,300

 
1,657,800

Medicare (1)
417,400

 
343,800

 
343,400

 
333,700

 
331,000

Correctional
150,900

 
157,900

 
157,300

 
157,500

 
158,000

Total at-risk membership
11,311,400

 
9,734,200

 
9,759,000

 
9,166,700

 
9,273,900

TRICARE eligibles
2,858,900

 
2,851,500

 
2,851,500

 
2,824,100

 
2,823,200

Non-risk membership
219,000

 
218,100

 
218,900

 
216,300

 
213,900

Total
14,389,300

 
12,803,800

 
12,829,400

 
12,207,100

 
12,311,000

 
 
 
 
 
 
 
 
 
 
(1) Membership includes Medicare Advantage, Medicare Supplement, Special Needs Plans, and MMP.
 
 
 
 
 
 
 
 
 
 
NUMBER OF EMPLOYEES
45,400

 
41,200

 
34,800

 
33,700

 
32,400

 
 
 
 
 
 
 
 
 
 
DAYS IN CLAIMS PAYABLE (2)
51

 
44

 
43

 
41

 
42

(2) Days in claims payable is a calculation of medical claims liabilities at the end of the period divided by average claims expense per calendar day for such period.
 
 
 
 
 
 
 
 
 
 
CASH, INVESTMENTS AND RESTRICTED DEPOSITS (in millions)
Regulated
$
13,782

 
$
11,455

 
$
11,398

 
$
9,740

 
$
9,633

Unregulated
481

 
3,543

 
452

 
310

 
308

Total
$
14,263

 
$
14,998

 
$
11,850

 
$
10,050

 
$
9,941

 
 
 
 
 
 
 
 
 
 
DEBT TO CAPITALIZATION
37.3
%
 
37.0
%
 
40.6
%
 
40.6
%
 
41.5
%
DEBT TO CAPITALIZATION EXCLUDING NON-RECOURSE DEBT (3)
36.9
%
 
36.7
%
 
40.3
%
 
40.3
%
 
41.2
%
(3) The non-recourse debt represents the Company's mortgage note payable ($59 million at September 30, 2018) and construction loan payable ($40 million at September 30, 2018).
Debt to capitalization is calculated as follows: total debt divided by (total debt + total equity).

OPERATING RATIOS
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
HBR
86.3
%
 
88.0
%
 
85.5
%
 
87.3
%
SG&A expense ratio
12.6
%
 
9.0
%
 
11.0
%
 
9.4
%
Adjusted SG&A expense ratio
10.0
%
 
8.9
%
 
10.0
%
 
9.2
%



13



MEDICAL CLAIMS LIABILITY

The changes in medical claims liability are summarized as follows (in millions):
Balance, September 30, 2017
 
$
4,333

Reinsurance recoverable
 
17

Balance, September 30, 2017, net
 
4,316

Acquisitions
 
1,319

Incurred related to:
 
 
Current period
 
42,991

Prior period
 
(373
)
Total incurred
 
42,618

Paid related to:
 
 
Current period
 
37,528

Prior period
 
3,772

Total paid
 
41,300

Balance, September 30, 2018, net
 
6,953

Plus: Reinsurance recoverable
 
30

Balance, September 30, 2018
 
$
6,983


Centene's claims reserving process utilizes a consistent actuarial methodology to estimate Centene's ultimate liability. Any reduction in the “Incurred related to: Prior period” amount may be offset as Centene actuarially determines “Incurred related to: Current period.” As such, only in the absence of a consistent reserving methodology would favorable development of prior period claims liability estimates reduce medical costs. Centene believes it has consistently applied its claims reserving methodology. Additionally, approximately $7 million was recorded as a decrease to premium revenues resulting from development within “Incurred related to: Prior period” due to minimum HBR and other return of premium programs.

The amount of the “Incurred related to: Prior period” above represents favorable development and includes the effects of reserving under moderately adverse conditions, new markets where we use a conservative approach in setting reserves during the initial periods of operations, receipts from other third party payors related to coordination of benefits and lower medical utilization and cost trends for dates of service September 30, 2017, and prior.

14