10-QPeriod: Q2 FY2019

CENTENE CORP Quarterly Report for Q2 Ended Jun 30, 2019

Filed July 23, 2019For Securities:CNC

Summary

Centene Corporation (CNC) reported solid growth in its second quarter and first half of 2019, driven by strategic acquisitions and organic membership expansion. Total revenues significantly increased year-over-year, reflecting the successful integration of Fidelis Care and growth across its Medicaid, Medicare, and Health Insurance Marketplace segments. The company's focus on expanding its national footprint and diversifying its service offerings continues to yield positive results in revenue generation. Despite topline growth, investors should note a slight increase in the Health Benefits Ratio (HBR), primarily attributed to the normalization of margins in the Health Insurance Marketplace and the inclusion of Fidelis Care, which operates at a higher HBR. However, this was partially offset by improved Selling, General, and Administrative (SG&A) expense ratios, also influenced by the Fidelis Care acquisition. The company is actively managing its expenses and demonstrating operational efficiency. The upcoming acquisition of WellCare remains a key strategic initiative, with shareholder approvals secured and integration planning underway, signaling a significant potential for future value creation, albeit with associated integration risks and financing considerations.

Financial Highlights

54 data points
Beta

Revenue

$18.36B

96.6% Gross Margin

Net Income

$495.00M

2.7% Net Margin

EPS (Diluted)

$1.18

Total Assets

$34.37B

Cash & Equivalents

$6.89B

Free Cash Flow

$757.00M

Financial Statements
Beta
Revenue$18.36B
Cost of Revenue$615.00M
Gross Profit$17.74B
SG&A Expenses$1.57B
Operating Expenses$17.71B
Operating Income$643.00M
Interest Expense$101.00M
Net Income$495.00M
EPS (Basic)$1.20
EPS (Diluted)$1.18
Shares Outstanding (Basic)413.37M
Shares Outstanding (Diluted)419.67M

Key Highlights

  • 1Total revenues increased by 29% year-over-year for the three months ended June 30, 2019, reaching $18.4 billion, driven by acquisitions and membership growth.
  • 2Managed care membership grew by 17% year-over-year to 15.0 million as of June 30, 2019, indicating successful expansion efforts.
  • 3Diluted Earnings Per Share (EPS) saw a substantial increase to $1.18 in Q2 2019, up from $0.75 in Q2 2018, demonstrating improved profitability.
  • 4The company announced a definitive merger agreement to acquire WellCare Health Plans for approximately $17.3 billion, a move expected to significantly expand its market presence.
  • 5The Health Benefits Ratio (HBR) slightly increased to 86.7% from 85.7% year-over-year, primarily due to the integration of Fidelis Care and normalization in the Health Insurance Marketplace.
  • 6Selling, General & Administrative (SG&A) expense ratio improved to 9.1% from 9.6% year-over-year, reflecting effective cost management.
  • 7Operating cash flows were strong at $917 million for the quarter, indicating healthy cash generation from core operations.

Frequently Asked Questions

Centene's revenue growth was primarily driven by the acquisition of Fidelis Care, significant membership growth across its Medicaid, Medicare, and Health Insurance Marketplace businesses, and the expansion of services in various states. The company also benefited from new programs and contract wins initiated in late 2018 and early 2019.

Centene has entered into a definitive merger agreement to acquire WellCare for approximately $17.3 billion. Both companies' shareholders have approved the transaction, which is conditioned on regulatory approvals and expected to close by the first half of 2020. This acquisition is expected to significantly expand Centene's scale and market presence. Investors should monitor regulatory review and integration planning.

The HBR increased slightly due to the normalization of margins in the Health Insurance Marketplace business, as expected, and the inclusion of Fidelis Care, which historically operates with a higher HBR. While an increase in HBR can indicate higher medical costs relative to premiums, it is being managed alongside revenue growth and operational efficiencies.

Centene's debt-to-capital ratio was 36.8% at June 30, 2019. The company intends to fund the cash portion of the WellCare acquisition primarily through debt financing. The WellCare transaction is expected to significantly increase the combined company's total debt and debt-to-equity ratio, which will be a key area for investors to monitor regarding financial flexibility and future borrowing costs.