10-QPeriod: Q3 FY2018

CENTENE CORP Quarterly Report for Q3 Ended Sep 30, 2018

Filed October 23, 2018For Securities:CNC

Summary

Centene Corporation (CNC) reported significant revenue growth in the third quarter and first nine months of 2018, primarily driven by the substantial acquisition of Fidelis Care. Total revenues increased by 36% year-over-year for the quarter and 22% for the nine-month period. Despite this revenue expansion, net earnings attributable to Centene Corporation declined significantly, primarily due to acquisition-related expenses, particularly the $324 million charitable contribution commitment related to the Fidelis Care acquisition, and costs associated with the expiration of the Veterans Affairs contract. The company's balance sheet shows a considerable increase in total assets, growing from $21.9 billion at year-end 2017 to $31.2 billion by September 30, 2018, largely due to the acquisition. This is reflected in higher goodwill, intangible assets, and investments. The acquisition also led to an increase in both current and long-term liabilities. Managed care membership also saw a significant increase of 17% year-over-year, reaching 14.4 million members.

Financial Highlights

53 data points
Beta

Revenue

$16.18B

96.2% Gross Margin

Net Income

$19.00M

0.1% Net Margin

EPS (Diluted)

$0.05

Total Assets

$31.16B

Cash & Equivalents

$6.85B

Free Cash Flow

$421.00M

Financial Statements
Beta
Revenue$16.18B
Cost of Revenue$622.00M
Gross Profit$15.56B
SG&A Expenses$1.93B
Operating Expenses$16.14B
Operating Income$41.00M
Interest Expense$97.00M
Net Income$19.00M
EPS (Basic)$0.05
EPS (Diluted)$0.05
Shares Outstanding (Basic)410.59M
Shares Outstanding (Diluted)419.04M

Key Highlights

  • 1Acquisition of Fidelis Care significantly boosted total revenues, up 36% year-over-year for Q3 and 22% for the first nine months.
  • 2Despite revenue growth, net earnings attributable to Centene Corporation decreased significantly, down 91% year-over-year for Q3, largely impacted by acquisition-related expenses.
  • 3Total assets grew substantially to $31.2 billion from $21.9 billion, driven by the Fidelis Care acquisition, leading to increases in goodwill and intangible assets.
  • 4Managed care membership increased by 17% year-over-year, reaching 14.4 million as of September 30, 2018.
  • 5The SG&A expense ratio increased to 12.6% in Q3 2018 from 9.0% in Q3 2017, heavily influenced by acquisition-related expenses.
  • 6Cash flow from operations showed a strong increase, providing $1.87 billion in the first nine months of 2018 compared to $1.04 billion in the prior year.
  • 7The company issued approximately $2.8 billion in new equity and $1.8 billion in new long-term debt to fund the Fidelis Care acquisition.

Frequently Asked Questions

The primary driver was the acquisition of Fidelis Care, which closed on July 1, 2018. This acquisition significantly increased revenues and total assets but also led to substantial acquisition-related expenses that impacted net earnings.

GAAP diluted EPS decreased significantly to $0.09 in Q3 2018 from $1.16 in Q3 2017. While the acquisition contributed to revenue growth, significant acquisition-related expenses, including a large charitable contribution commitment, and other charges negatively impacted GAAP EPS. Adjusted Diluted EPS showed growth, increasing to $1.79 from $1.35, excluding certain items.

Centene experienced strong membership growth, with managed care membership increasing by 17% year-over-year to 14.4 million as of September 30, 2018. The company expects continued growth through organic expansions, new programs, and future acquisitions.

Centene funded the Fidelis Care acquisition through a combination of new equity issuance ($2.8 billion) and new long-term debt ($1.8 billion). The company reported a significant increase in cash from operations and maintains compliance with its revolving credit facility covenants, indicating sufficient liquidity to meet its obligations.