On April 28, 2020 Centene Corporation (NYSE: CNC) reported its financial results for the first quarter ended March 31, 2020, reporting diluted earnings per share (EPS) of $0.08 and Adjusted Diluted EPS of $0.86 (Press release, Centene , APR 28, 2020, View Source [SID1234556725]).
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(1) A full reconciliation of Adjusted SG&A expense ratio and Adjusted Diluted EPS are shown on page seven of this release.
Both diluted EPS and Adjusted Diluted EPS have been negatively impacted by $0.05 due to lower investment income and incremental senior note interest expense. Taking into account the $0.05 per diluted share, our Adjusted Diluted EPS was in line with our expectations and the guidance of high $0.80 to low $0.90 range provided on March 4, 2020.
"We all recognize the unprecedented nature of the COVID-19 pandemic and the significant impact from both a health and economic perspective. This is not a business as usual environment and economic recovery will be choppy. In this challenging landscape that we all face, Centene has the team, systems, expertise and financial strength to rise to the occasion," said Michael F. Neidorff, Chairman, President and Chief Executive Officer of Centene. "We are confident in our approach to navigate the crisis while executing on our priorities and remain highly committed to meeting the needs of our members, providers and our state customers."
First Quarter Highlights
On January 23, 2020, Centene acquired all of the issued and outstanding shares of WellCare Health Plans, Inc. (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. Our consolidated financial statements as of and for the three months ended March 31, 2020 reflect WellCare operations beginning January 23, 2020.
March 31, 2020 managed care membership of 23.8 million, an increase of 9.0 million members, or 61%, over March 31, 2019.
Total revenues of $26.0 billion for the first quarter of 2020, representing 41% growth compared to the first quarter of 2019.
Health benefits ratio (HBR) of 88.0% for the first quarter of 2020, compared to 85.7% in the first quarter of 2019.
Selling, general and administrative (SG&A) expense ratio of 9.9% for the first quarter of 2020, compared to 9.6% for the first quarter of 2019.
Adjusted SG&A expense ratio of 8.6% for the first quarter of 2020, compared to 9.5% for the first quarter of 2019.
Diluted EPS for the first quarter of 2020 of $0.08, compared to $1.24 for the first quarter of 2019, reflecting an increase of acquisition related expenses due to the closing of the WellCare acquisition.
Adjusted Diluted EPS for the first quarter of 2020 of $0.86, compared to $1.39 for the first quarter of 2019. Both diluted EPS and Adjusted Diluted EPS for the first quarter of 2020 have been negatively impacted by $0.05 due to lower investment income and incremental senior note interest expense. The $0.05 of lower investment and other income resulted from a sharp decrease in interest rates, which caused a fair value decrease to our exchange traded fund portfolio, as well as incremental interest expense associated with our decision to defer the redemption of the 2022 senior debt securities.
Share repurchases of 9 million shares of Centene common stock for $500 million through the Company’s stock repurchase program during the three months ended March 31, 2020, using divestiture proceeds.
Operating cash flow of $(240) million for the first quarter 2020. Operating cash flow was negatively affected by a delay in premium payments from the state of New York of approximately $700 million and growth in our Medicare Prescription Drug Plan (PDP) business, which used working capital.
Other Events
In April 2020, Centene’s subsidiary, Centurion, was awarded a contract by the Kansas Department of Administration to provide healthcare services in the Department of Corrections’ facilities. The two-year contract is expected to commence on July 1, 2020 and includes two, two-year renewal options.
In April 2020, Centurion began providing medical services, behavioral healthcare, and substance abuse treatment within four prisons and six community corrections centers across the state of Delaware.
In February 2020, Centene issued $2.0 billion 3.375% Senior Notes due 2030. The Company used a portion of the net proceeds to redeem all of its outstanding $1.0 billion 6.125% Senior Notes due 2024, including the call premiums, accrued interest and costs and expenses related to the redemption and termination of the $1.0 billion interest rate swap associated with the notes. The Company also intended to use remaining proceeds to redeem its $1.0 billion 4.75% Senior Notes due 2022, and related interest and premiums. However, as a result of the spread of COVID-19 and the resulting disruption and volatility in the global capital markets, the Company has deferred the redemption of the 2022 notes at this time.
Accreditations
In March 2020, Centene’s Iowa subsidiary, Iowa Total Care, earned Accreditation from the National Committee for Quality Assurance (NCQA).
In February 2020, Centene’s subsidiary, Envolve People Care, earned Accreditation from NCQA.
In January 2020, Centene’s subsidiary, Sunshine Health Plan, earned Accreditation from NCQA.
COVID-19 Pandemic
In March and April 2020, Centene announced a series of actions in support of various populations impacted by the COVID-19 crisis. A detailed list of specific actions taken by the Company in response to the pandemic is shown on page 16 of this release.
(1) Membership includes Medicare Advantage, Medicare Supplement, Special Needs Plans, and Medicare-Medicaid Plans (MMP).
(2) Membership includes dual-eligible ABD & LTSS and dual-eligible Medicare membership in the table above.
Revenues
The following table sets forth supplemental revenue information for the three months ended March 31, 2020 ($ in millions):
(3) Medicare includes Medicare Advantage, Medicare Supplement, Special Needs Plans, and MMP.
n.m.: not meaningful
Statement of Operations: Three Months Ended March 31, 2020
For the first quarter of 2020, total revenues increased 41% to $26.0 billion from $18.4 billion in the comparable period in 2019. The increase over the prior year was due to the acquisition of WellCare, growth in the Health Insurance Marketplace business, expansions and new programs in many of our states throughout 2019 and 2020, particularly Iowa and Pennsylvania, and the reinstatement of the health insurer fee in 2020, partially offset by the divestiture of our Illinois health plan and the timing of pass through payments from the state of New York.
HBR of 88.0% for the first quarter of 2020 represents an increase from 85.7% in the comparable period in 2019. The year-over-year increase was attributable to the Health Insurance Marketplace business where margins continue to normalize, as expected and consistent with the previous guidance shared. The increase also includes the acquisition of WellCare and new or expanded markets, which initially operate at a higher HBR. These increases were partially offset by the reinstatement of the health insurer fee.
The SG&A expense ratio was 9.9% for the first quarter of 2020, compared to 9.6% in the first quarter of 2019. The increase to the SG&A expense ratio was driven by higher acquisition related expenses due to the closing of the WellCare acquisition, partially offset by the addition of the WellCare business, which operates at a lower SG&A ratio.
The Adjusted SG&A expense ratio was 8.6% for the first quarter of 2020, compared to 9.5% in the first quarter of 2019. The Adjusted SG&A expense ratio benefited from the addition of the WellCare business, which operates at a lower SG&A ratio, and the leveraging of expenses over higher revenues.
During the first quarter of 2020, the Company recorded $72 million of non-cash impairment of its third-party care management software business.
During the first quarter of 2020, the Company recognized a $93 million gain in investment and other income related to the divestiture of certain products of the Company’s Illinois health plan as part of the previously announced divestiture agreements associated with the WellCare Acquisition.
During the first quarter of 2020, the Company issued $2.0 billion 3.375% Senior Notes due 2030 (the 2030 Notes). The Company used a portion of the net proceeds from the 2030 Notes to redeem all of its outstanding $1.0 billion 6.125% Senior Notes due 2024. The Company recognized a pre-tax loss on extinguishment of approximately $44 million, including the call premium, the write-off of unamortized debt issuance costs, and a loss on the termination of the $1.0 billion interest rate swap associated with the notes.
The effective tax rate was 64.9% for the first quarter of 2020, compared to 24.2% in the first quarter of 2019. The increase in the effective tax rate was driven by the reinstatement of the health insurer fee in 2020, the non-deductibility of certain acquisition related expenses, and the tax impact associated with the Illinois divestiture. For the first quarter of 2020, our effective tax rate on adjusted earnings was 24.8%.
Balance Sheet
At March 31, 2020, the Company had cash, investments and restricted deposits of $22.2 billion and maintained $2.0 billion of cash and cash equivalents held by unregulated entities. Medical claims liabilities totaled $11.4 billion. Total debt was $17.3 billion, which included $588 million of borrowings on our $2.0 billion revolving credit facility at quarter end. The debt to capitalization ratio was 41.9% at March 31, 2020, excluding $202 million of non-recourse debt. Our debt to capital ratio would have been 38.9% at March 31, 2020, when netting unregulated cash and cash equivalents with debt, and excluding non-recourse debt.
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, December 31, 2019
Timing of claims payments
Days in claims payable, March 31, 2020 (1)
(1) A pro-forma adjustment has been made to medical costs to include a full quarter of WellCare medical costs. Using actual medical costs, days in claims payable was 51.
Adjusted Diluted EPS excludes estimated amortization of acquired intangible assets of $0.98 to $1.00 per diluted share, acquisition related expenses of $0.62 to $0.66 per diluted share, the gain on the sale of the Illinois health plan of approximately $0.10 per diluted share, debt extinguishment costs of approximately $0.07 per diluted share, non-cash asset impairment of $0.10 per diluted share.
A rollforward of total revenues and Adjusted Diluted EPS from our previous guidance to our current guidance is shown in the tables below (total revenues in billions):
Conference Call
As previously announced, the Company will host a conference call Tuesday, April 28, 2020, at approximately 8:30 AM (Eastern Time) to review the financial results for the first quarter ended March 31, 2020. 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: 7601227 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, April 27, 2021, at the aforementioned URL. In addition, a digital audio playback will be available until 9:00 AM (Eastern Time) on Tuesday, May 5, 2020, by dialing 1-877-344-7529 in the U.S. and Canada, or +1-412-317-0088 from abroad, and entering access code 10141297.
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 following adjustments for the three months ended March 31, 2020: (a) divestiture gain of $93 million, or $0.10 per diluted share, (b) non-cash impairment of $72 million, or $0.10 per diluted share, and (c) debt extinguishment costs of $44 million, or $0.06 per diluted share.
The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment.
The amortization of acquired intangible assets per diluted share presented above is net of an income tax benefit of $0.07 and $0.04 for the three months ended March 31, 2020 and 2019, respectively, and an estimated $0.30 to $0.32 for the year ended December 31, 2020.
The acquisition related expenses per diluted share presented above are net of an income tax benefit of $0.08 and $0.01 for the three months ended March 31, 2020 and 2019, respectively, and an estimated $0.09 to $0.10 for the year ended December 31, 2020.
Other adjustments include the following items:
(1) gain related to the divestiture of certain products of the Company’s Illinois health plan of $0.10 per diluted share, net of income tax expense of $0.07 for the three months ended March 31, 2020, and an estimated $0.10 per diluted share, net of income tax expense of $0.06 for the year ended December 31, 2020;
(2) non-cash impairment of our third party-care management software system of $0.10 per diluted share, net of an income tax benefit of $0.03 for the three months ended March 31, 2020, and an estimated $0.10 per diluted share, net of an income tax benefit of $0.03 for the year ended December 31, 2020; and
(3) debt extinguishment costs of $0.06 per diluted share, net of an income tax benefit of $0.02 for the three months ended March 31, 2020, and an estimated $0.07 per diluted share, net of an income tax benefit of $0.02 for the year ended December 31, 2020.
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, as well as adjustments for other items, 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.