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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________________________________________
FORM 10-Q
____________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to
____________________________________________
Commission file number: 001-31826
____________________________________________
CENTENE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
42-1406317
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)
 
 
 
 
7700 Forsyth Boulevard
 
 
St. Louis,
Missouri
 
63105
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (314) 725-4477 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock $0.001 Par Value
CNC
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “small reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer
Accelerated filer
Non-accelerated filer  
Smaller reporting company
 
 
Emerging growth company 
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes       No  
As of July 12, 2019, the registrant had 413,605,377 shares of common stock outstanding.




CENTENE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

 
 
PAGE
 
 
 
 
Part I
 
 
Financial Information
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Part II
 
 
Other Information
 
Item 1.
Item 1A.
Item 2.
Item 6.
 


Table of Contents


CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

All statements, other than statements of current or historical fact, contained in this filing are forward-looking statements. 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 or 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 the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe-harbor provisions. In particular, these statements include, without limitation, statements about our future operating or financial performance, market opportunity, growth strategy, competition, expected activities in completed and future acquisitions, including statements about the impact of our proposed acquisition (the WellCare Transaction) of WellCare Health Plans, Inc. (WellCare), our recent acquisition (the Fidelis Care Acquisition) of substantially all the assets of New York State Catholic Health Plan, Inc., d/b/a Fidelis Care New York ( Fidelis Care), investments and the adequacy of our available cash resources. These statements may be found in the various sections of this filing, such as Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1. “Legal Proceedings,” and Part II, Item 1A. “Risk Factors.” 

These forward-looking statements reflect our current views with respect to future events and are based on numerous assumptions and assessments made by us in light of our experience and perception of historical trends, current conditions, business strategies, operating environments, future developments and other factors we believe 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, including economic, regulatory, competitive and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions.

All forward-looking statements included in this filing are based on information available to us on the date of this filing. Except as may be otherwise required by law, we undertake no obligation to update or revise the forward-looking statements included in this filing, whether as a result of new information, future events or otherwise, after the date of this filing. You should not place undue reliance on any forward-looking statements, as actual results may differ materially from projections, estimates, or other forward-looking statements due to a variety of important factors, variables and events including but not limited to:

the risk that regulatory or other approvals required for the WellCare Transaction may be delayed or not obtained or are obtained subject to conditions that are not anticipated that could require the exertion of management's time and our resources or otherwise have an adverse effect on us;
the possibility that certain conditions to the consummation of the WellCare Transaction will not be satisfied or completed on a timely basis and, accordingly, the WellCare Transaction may not be consummated on a timely basis or at all;
uncertainty as to the expected financial performance of the combined company following completion of the WellCare Transaction;
the possibility that the expected synergies and value creation from the WellCare Transaction will not be realized, or will not be realized within the expected time period;
the exertion of management's time and the Company's resources, and other expenses incurred and business changes required, in connection with any regulatory, governmental or third party consents or approvals for the WellCare Transaction;
the risk that unexpected costs will be incurred in connection with the completion and/or integration of the WellCare Transaction or that the integration of WellCare will be more difficult or time consuming than expected;
the risk that potential litigation in connection with the WellCare Transaction may affect the timing or occurrence of the WellCare Transaction, cause it not to close at all, or result in significant costs of defense, indemnification and liability;
unexpected costs, charges or expenses resulting from the WellCare Transaction;
the possibility that competing offers will be made to acquire WellCare;
the inability to retain key personnel;
disruption from the announcement, pendency and/or completion of the WellCare Transaction, including potential adverse reactions or changes to business relationships with customers, employees, suppliers or regulators, making it more difficult to maintain business and operational relationships;
the risk that, following the WellCare Transaction, the combined company may not be able to effectively manage its expanded operations;
our ability to accurately predict and effectively manage health benefits and other operating expenses and reserves;
competition;
membership and revenue declines or unexpected trends;

i

Table of Contents

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, collectively referred to as the Affordable Care Act (ACA) and any regulations enacted thereunder that may result from changing political conditions or judicial actions, including the ultimate outcome of the District Court decision in "Texas v. United States of America" regarding the constitutionality of the ACA;
rate cuts or other payment reductions or delays by governmental payors and other risks and uncertainties affecting our government businesses;
our 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 our 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 our 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 Fidelis Care Acquisition, will not be realized, or will not be realized within the expected time period;
the exertion of management’s time and our 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 acquisitions, including the Fidelis Care Acquisition;
disruption caused by significant completed and pending acquisitions, including, among others, 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 Fidelis Care Acquisition;
changes in expected closing dates, estimated purchase price and accretion for acquisitions;
the risk that acquired businesses, including Fidelis Care, will not be integrated successfully;
the risk that, following the Fidelis Care Acquisition, we may not be able to effectively manage our expanded operations;
restrictions and limitations in connection with our indebtedness;
our ability to maintain the Centers for Medicare and Medicaid Services (CMS) Star ratings and maintain or achieve improvement in other quality scores in each case that can impact revenue and future growth;
availability of debt and equity financing, on terms that are favorable to us;
inflation; and
foreign currency fluctuations.

This list of important factors is not intended to be exhaustive. We discuss certain of these matters more fully, as well as certain other factors that may affect our business operations, financial condition and results of operations, in our filings with the Securities and Exchange Commission (SEC), including the registration statement on Form S-4 filed by Centene with the SEC on May 23, 2019, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Item 1A. “Risk Factors” of Part II of this filing contains a further discussion of these and other important factors that could cause actual results to differ from expectations. Due to these important factors and risks, we cannot give assurances with respect to our future performance, including without limitation our ability to maintain adequate premium levels or our ability to control our future medical and selling, general and administrative costs.




ii

Table of Contents

Non-GAAP Financial Presentation

The Company is providing certain non-GAAP financial measures in this report, 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):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
GAAP net earnings
$
495

 
$
300

 
$
1,017

 
$
640

Amortization of acquired intangible assets
64

 
45

 
129

 
84

Acquisition related expenses
23

 
1

 
41

 
22

Other adjustments (1)

 
30

 

 
30

Income tax effects of adjustments (2)
(21
)
 
(16
)
 
(41
)
 
(30
)
Adjusted net earnings
$
561

 
$
360

 
$
1,146

 
$
746

 
 
 
 
 
 
 
 
GAAP diluted earnings per share (EPS)
$
1.18

 
$
0.75

 
$
2.42

 
$
1.70

Amortization of acquired intangible assets (3)
0.12

 
0.09

 
0.24

 
0.17

Acquisition related expenses (4)
0.04

 

 
0.07

 
0.05

Other adjustments (1)

 
0.06

 

 
0.06

Adjusted Diluted EPS
$
1.34

 
$
0.90

 
$
2.73

 
$
1.98

(1)
Other adjustments include the 2018 impact of retroactive changes to the California minimum medical loss ratio (MLR) of $30 million of expense. The adjustment is net of an income tax benefit of $0.02 per diluted share for both the three and six months ended June 30, 2018.
(2)
The income tax effects of adjustments are based on the effective income tax rates applicable to adjusted (non-GAAP) results.
(3)
The amortization of acquired intangible assets per diluted share 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.
(4)
Acquisition related expenses per diluted share 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.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
GAAP selling, general and administrative expenses
$
1,574

 
$
1,237

 
$
3,183

 
$
2,553

Acquisition related expenses
21

 
1

 
38

 
22

Adjusted selling, general and administrative expenses
$
1,553

 
$
1,236

 
$
3,145

 
$
2,531


iii

Table of Contents

PART I
FINANCIAL INFORMATION

ITEM 1. Financial Statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except shares in thousands and per share data in dollars)
 
June 30, 2019
 
December 31, 2018

(Unaudited)
 

ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,875

 
$
5,342

Premium and trade receivables
5,194

 
5,150

Short-term investments
765

 
722

Other current assets
762

 
784

Total current assets
13,596

 
11,998

Long-term investments
7,632

 
6,861

Restricted deposits
630

 
555

Property, software and equipment, net
1,878

 
1,706

Goodwill
7,126

 
7,015

Intangible assets, net
2,163

 
2,239

Other long-term assets
1,343

 
527

Total assets
$
34,368

 
$
30,901




 


LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY

 
 

Current liabilities:
 

 
 

Medical claims liability
$
7,447

 
$
6,831

Accounts payable and accrued expenses
4,032

 
4,051

Return of premium payable
834

 
666

Unearned revenue
253

 
385

Current portion of long-term debt
87

 
38

Total current liabilities
12,653

 
11,971

Long-term debt
7,047

 
6,648

Other long-term liabilities
2,398

 
1,259

Total liabilities
22,098

 
19,878

Commitments and contingencies


 


Redeemable noncontrolling interests
22

 
10

Stockholders’ equity:
 

 
 

Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at June 30, 2019 and December 31, 2018

 

Common stock, $0.001 par value; authorized 800,000 shares; 419,319 issued and 413,527 outstanding at June 30, 2019, and 417,695 issued and 412,478 outstanding at December 31, 2018

 

Additional paid-in capital
7,531

 
7,449

Accumulated other comprehensive earnings (loss)
119

 
(56
)
Retained earnings
4,680

 
3,663

Treasury stock, at cost (5,792 and 5,217 shares, respectively)
(176
)
 
(139
)
Total Centene stockholders’ equity
12,154

 
10,917

Noncontrolling interest
94

 
96

Total stockholders’ equity
12,248

 
11,013

Total liabilities, redeemable noncontrolling interests and stockholders’ equity
$
34,368

 
$
30,901

The accompanying notes to the consolidated financial statements are an integral part of these statements. 

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Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except shares in thousands and per share data in dollars)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:

 

 

 

Premium
$
16,554

 
$
12,113

 
$
32,757

 
$
24,016

Service
745

 
762

 
1,380

 
1,415

Premium and service revenues
17,299

 
12,875

 
34,137

 
25,431

Premium tax and health insurer fee
1,057

 
1,306

 
2,663

 
1,944

Total revenues
18,356

 
14,181

 
36,800

 
27,375

Expenses:
 
 
 
 
 
 
 
Medical costs
14,354

 
10,380

 
28,236

 
20,419

Cost of services
615

 
658

 
1,159

 
1,201

Selling, general and administrative expenses
1,574

 
1,237

 
3,183

 
2,553

Amortization of acquired intangible assets
64

 
45

 
129

 
84

Premium tax expense
1,106

 
1,189

 
2,765

 
1,735

Health insurer fee expense

 
183

 

 
354

Total operating expenses
17,713

 
13,692

 
35,472

 
26,346

Earnings from operations
643

 
489

 
1,328

 
1,029

Other income (expense):

 

 
 
 
 
Investment and other income
120

 
65

 
219

 
106

Interest expense
(101
)
 
(80
)
 
(200
)
 
(148
)
Earnings from operations, before income tax expense
662

 
474

 
1,347

 
987

Income tax expense
170

 
175

 
336

 
350

Net earnings
492

 
299

 
1,011

 
637

Loss attributable to noncontrolling interests
3

 
1

 
6

 
3

Net earnings attributable to Centene Corporation
$
495

 
$
300

 
$
1,017

 
$
640



 

 

 

Net earnings per common share attributable to Centene Corporation:
Basic earnings per common share
$
1.20

 
$
0.77

 
$
2.46

 
$
1.73

Diluted earnings per common share
$
1.18

 
$
0.75

 
$
2.42

 
$
1.70



 

 

 

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
413,370

 
391,037

 
413,144

 
369,440

Diluted
419,671

 
398,902

 
419,707

 
377,142

 
 
 
 
 
 
 
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.

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Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net earnings
$
492

 
$
299

 
$
1,011

 
$
637

Reclassification adjustment, net of tax
1

 

 
1

 

Change in unrealized gain (loss) on investments, net of tax
80

 
(11
)
 
174

 
(63
)
Foreign currency translation adjustments

 
(2
)
 

 
(1
)
Other comprehensive earnings (loss)
81

 
(13
)
 
175

 
(64
)
Comprehensive earnings
573

 
286

 
1,186

 
573

Comprehensive loss attributable to noncontrolling interests
3

 
1

 
6

 
3

Comprehensive earnings attributable to Centene Corporation
$
576

 
$
287

 
$
1,192

 
$
576


The accompanying notes to the consolidated financial statements are an integral part of these statements.


3

Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except shares in thousands and per share data in dollars)
(Unaudited)
Three and Six Months Ended June 30, 2019
 
Centene Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
$0.001 Par
Value
Shares
 
Amt
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Earnings (Loss)
 
Retained
Earnings
 
$.001 Par
Value
Shares
 
Amt
 
Non-
controlling
Interest
 
Total
Balance, December 31, 2018
417,695

 
$

 
$
7,449

 
$
(56
)
 
$
3,663

 
5,217

 
$
(139
)
 
$
96

 
$
11,013

Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings (loss)

 

 

 

 
522

 

 

 
(2
)
 
520

Other comprehensive earnings, net of $30 tax

 

 

 
94

 

 

 

 

 
94

Common stock issued for employee benefit plans
1,363

 

 
4

 

 

 

 

 

 
4

Common stock repurchases

 

 

 

 

 
536

 
(35
)
 

 
(35
)
Stock compensation expense

 

 
38

 

 

 

 

 

 
38

Balance, March 31, 2019
419,058

 
$

 
$
7,491

 
$
38

 
$
4,185

 
5,753

 
$
(174
)
 
$
94

 
$
11,634

Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings

 

 

 

 
495

 

 

 

 
495

Other comprehensive earnings, net of $25 tax

 

 

 
81

 

 

 

 

 
81

Common stock issued for employee benefit plans
261

 

 
6

 

 

 

 

 

 
6

Common stock repurchases

 

 

 

 

 
39

 
(2
)
 

 
(2
)
Stock compensation expense

 

 
34

 

 

 

 

 

 
34

Balance, June 30, 2019
419,319

 
$

 
$
7,531

 
$
119

 
$
4,680

 
5,792

 
$
(176
)
 
$
94

 
$
12,248

 
The accompanying notes to the consolidated financial statements are an integral part of this statement.

4

Table of Contents


CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except shares in thousands and per share data in dollars)
(Unaudited)
Three and Six Months Ended June 30, 2018
 
Centene Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
$0.001 Par
Value
Shares
 
Amt
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Earnings (Loss)
 
Retained
Earnings
 
$.001 Par
Value
Shares
 
Amt
 
Non-
controlling
Interest
 
Total
Balance, December 31, 2017
360,758

 
$

 
$
4,349

 
$
(3
)
 
$
2,748

 
13,884

 
$
(244
)
 
$
14

 
$
6,864

Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings

 

 

 

 
340

 

 

 
1

 
341

Other comprehensive loss, net of ($16) tax

 

 

 
(51
)
 

 

 

 

 
(51
)
Common stock issued for acquisitions

 

 
210

 

 

 
(6,351
)
 
114

 

 
324

Common stock issued for employee benefit plans
529

 

 
4

 

 

 

 

 

 
4

Common stock repurchases

 

 

 

 

 
165

 
(9
)
 

 
(9
)
Stock compensation expense

 

 
33

 

 

 

 

 

 
33

Cumulative-effect of accounting guidance

 

 

 

 
16

 

 

 

 
16

Purchase of noncontrolling interests

 

 
(4
)
 

 

 

 

 

 
(4
)
Acquisition resulting in noncontrolling interests

 

 

 

 

 

 

 
62

 
62

Balance, March 31, 2018
361,287

 
$

 
$
4,592

 
$
(54
)
 
$
3,104

 
7,698

 
$
(139
)
 
$
77

 
$
7,580

Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings

 

 

 

 
300

 

 

 

 
300

Other comprehensive loss, net of ($3) tax

 

 

 
(13
)
 

 

 

 

 
(13
)
Common stock issued for acquisitions

 

 
121

 

 

 
(3,437
)
 
62

 

 
183

Common stock issued for stock offering
53,209

 

 
2,780

 

 

 

 

 

 
2,780

Common stock issued for employee benefit plans
330

 

 
4

 

 

 

 

 

 
4

Common stock repurchases

 

 

 

 

 
71

 
(4
)
 

 
(4
)
Stock compensation expense

 

 
35

 

 

 

 

 

 
35

Cumulative-effect of accounting guidance

 

 

 

 
(1
)
 

 

 

 
(1
)
Purchase of noncontrolling interests

 

 
(177
)
 

 

 

 

 

 
(177
)
Acquisition resulting in noncontrolling interests

 

 

 

 

 

 

 
10

 
10

Balance, June 30, 2018
414,826

 
$

 
$
7,355

 
$
(67
)
 
$
3,403

 
4,332

 
$
(81
)
 
$
87

 
$
10,697


The accompanying notes to the consolidated financial statements are an integral part of this statement.




5

Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net earnings
$
1,011

 
$
637

Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization
313

 
215

Stock compensation expense
72

 
67

Deferred income taxes
(10
)
 
4

Changes in assets and liabilities
 

 
 

Premium and trade receivables
234

 
(553
)
Other assets
(47
)
 
2

Medical claims liabilities
558

 
717

Unearned revenue
(138
)
 
202

Accounts payable and accrued expenses
(616
)
 
(865
)
Other long-term liabilities
869

 
865

Other operating activities, net
(13
)
 
29

Net cash provided by operating activities
2,233

 
1,320

Cash flows from investing activities:
 

 
 

Capital expenditures
(336
)
 
(362
)
Purchases of investments
(1,280
)
 
(1,375
)
Sales and maturities of investments
719

 
721

Acquisitions, net of cash acquired
(32
)
 
(237
)
Net cash used in investing activities
(929
)
 
(1,253
)
Cash flows from financing activities:
 

 
 

Proceeds from the issuance of common stock

 
2,780

Proceeds from long-term debt
5,617

 
5,146

Payments of long-term debt
(5,353
)
 
(3,471
)
Common stock repurchases
(37
)
 
(13
)
Purchase of noncontrolling interest

 
(63
)
Other financing activities, net
9

 
(1
)
Net cash provided by financing activities
236

 
4,378

Effect of exchange rate changes on cash, cash equivalents and restricted cash
2

 

Net increase in cash, cash equivalents and restricted cash and cash equivalents
1,542

 
4,445

Cash, cash equivalents, and restricted cash and cash equivalents, beginning of period
5,350

 
4,089

Cash, cash equivalents, and restricted cash and cash equivalents, end of period
$
6,892

 
$
8,534

Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
132

 
$
130

Income taxes paid
$
381

 
$
195

Equity issued in connection with acquisitions
$

 
$
507

 
 
 
 
The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the Consolidated Balance Sheets to the totals above:
 
June 30,
 
2019
 
2018
Cash and cash equivalents
$
6,875

 
$
6,707

Restricted cash and cash equivalents, included in restricted deposits
17

 
1,827

Total cash, cash equivalents, and restricted cash and cash equivalents
$
6,892

 
$
8,534


The accompanying notes to the consolidated financial statements are an integral part of these statements.

6

Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   
1. Organization and Operations

Basis of Presentation

The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements included in the Form 10-K for the fiscal year ended December 31, 2018. The unaudited interim financial statements herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, footnote disclosures that would substantially duplicate the disclosures contained in the December 31, 2018 audited financial statements have been omitted from these interim financial statements, where appropriate. In the opinion of management, these financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of the interim periods presented.

Certain 2018 amounts in the consolidated financial statements and notes to the consolidated financial statements have been reclassified to conform to the 2019 presentation. These reclassifications have no effect on net earnings or stockholders' equity as previously reported.

On December 12, 2018, our Board of Directors declared a two-for-one split of our common stock in the form of a 100% stock dividend distributed on February 6, 2019 to stockholders of record as of December 24, 2018. All historical share and per share information presented in this Form 10-Q has been adjusted for the two-for-one stock split.

Recently Adopted Accounting Guidance

In February 2016, the FASB issued an ASU that introduces a lessee model that requires the majority of leases to be recognized on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification 606, the FASB's new revenue recognition standard, and addresses other concerns related to the current lessee model. The standard also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. The Company adopted the new guidance in the first quarter of 2019 using the modified retrospective transition approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allows an entity to not reassess lease classification for existing leases. The impact of the new guidance is further discussed in Note 8. Leases.

In August 2017, the FASB issued an ASU that amends the hedge accounting model to enable entities to better align the economics of risk management activities and financial reporting. In addition, the new standard enhances the understandability of hedge results and simplifies the application of hedge accounting in certain situations. The Company adopted the new guidance in the first quarter of 2019. The new guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In March 2017, the FASB issued an ASU that changes the period over which premiums on callable debt securities are amortized. The new standard requires the premiums on callable debt securities to be amortized to the earliest call date rather than to the contractual maturity date of the instrument. The new guidance more closely aligns the amortization period of premiums to expectations incorporated in the market pricing on the underlying securities. The Company adopted the new guidance in the first quarter of 2019. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.


7

Table of Contents


2. Acquisitions

WellCare Transaction

On March 26, 2019, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Wellington Merger Sub I, Inc., a direct, wholly owned subsidiary of the Company (Merger Sub I), Wellington Merger Sub II, Inc., a direct, wholly owned subsidiary of the Company (Merger Sub II), and WellCare, providing for (i) the merger of Merger Sub I with and into WellCare (the First Merger), with WellCare continuing as the surviving corporation of the First Merger and a direct, wholly owned subsidiary of the Company (the Surviving Corporation), and (ii) immediately after the effective time of the First Merger (the First Effective Time), the merger of the Surviving Corporation with and into Merger Sub II (the Second Merger), with Merger Sub II continuing as the surviving corporation of the Second Merger and a direct, wholly owned subsidiary of the Company. At the First Effective Time, each share of common stock of WellCare issued and outstanding immediately prior to the First Effective Time will be automatically canceled and converted into the right to receive 3.38 of validly issued, fully paid and nonassessable shares of Centene common stock and $120.00 in cash, without interest. The WellCare transaction is valued at approximately $17.3 billion, including existing WellCare debt (based on the Centene closing stock price on March 25, 2019).

In June 2019, the Company and WellCare announced the transaction was approved by both the Centene and WellCare shareholders. The transaction is expected to close by the first half of 2020 and is conditioned on clearance under the Hart-Scott Rodino Act, receipt of required state regulatory approvals and other customary closing conditions.

Fidelis Care Acquisition

On July 1, 2018, the Company acquired substantially all of the assets of Fidelis Care for approximately $3.6 billion of cash consideration, including a working capital adjustment. The Fidelis Care acquisition expanded the Company's scale and presence to New York State.

The acquisition of Fidelis Care was accounted for as a business combination using the acquisition method of accounting that requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The valuation of all assets acquired and liabilities assumed was finalized in the second quarter of 2019.

The Company's allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date of July 1, 2018 is as follows ($ in millions):
Assets acquired and liabilities assumed
 
 
Cash and cash equivalents
 
$
2,001

Premium and related receivables
 
442

Other current assets
 
32

Restricted deposits
 
495

Property, software and equipment, net
 
48

Intangible assets (a)
 
956

Other long-term assets
 
2

Total assets acquired
 
3,976

 
 
 
Medical claims liability
 
1,218

Accounts payable and accrued expenses
 
238

Return of premium payable
 
123

Unearned revenue
 
115

Other long-term liabilities
 
324

Total liabilities assumed
 
2,018

 
 
 
Total identifiable net assets
 
1,958

Goodwill (b)
 
1,663

Total assets acquired and liabilities assumed
 
$
3,621



8

Table of Contents

Significant fair value adjustments are noted as follows:

(a)
The identifiable intangible assets acquired are to be measured at fair value as of the completion of the acquisition. The fair value of intangible assets is determined primarily using variations of the "income approach," which is based on the present value of the future after tax cash flows attributable to each identified intangible asset. Other valuation methods, including the market approach and cost approach, were also considered in estimating the fair value. The Company has estimated the fair value of intangible assets to be $956 million with a weighted average life of 13 years. The identifiable intangible assets include customer relationships, trade names, provider contracts and developed technology.

The fair values and weighted average useful lives for identifiable intangible assets acquired are as follows:
 
 
Fair Value
 
Weighted Average Useful Life (in years)
Customer relationships
 
$
711

 
11
Trade name
 
196

 
20
Provider contracts
 
33

 
15
Developed technologies
 
16

 
2
Total intangible assets acquired
 
$
956

 
13

(b)
The acquisition resulted in $1.7 billion of goodwill related primarily to synergies expected from the acquisition and the assembled workforce of Fidelis Care. All of the goodwill has been assigned to the Managed Care segment. The goodwill is deductible for income tax purposes.

3. Short-term and Long-term Investments, Restricted Deposits

Short-term and long-term investments and restricted deposits by investment type consist of the following ($ in millions):
 
June 30, 2019
 
December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized Losses
 
Fair
Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
228

 
$
1

 
$

 
$
229

 
$
362

 
$
1

 
$
(2
)
 
$
361

Corporate securities
3,583

 
87

 
(5
)
 
3,665

 
3,190

 
8

 
(52
)
 
3,146

Restricted certificates of deposit
477

 

 

 
477

 
433

 

 

 
433

Restricted cash equivalents
17

 

 

 
17

 
8

 

 

 
8

Municipal securities
2,290

 
60

 
(1
)
 
2,349

 
2,196

 
9

 
(18
)
 
2,187

Asset-backed securities
709

 
6

 
(1
)
 
714

 
686

 
1

 
(4
)
 
683

Residential mortgage-backed securities
453

 
7

 
(3
)
 
457

 
452

 
1

 
(9
)
 
444

Commercial mortgage-backed securities
402

 
10

 
(1
)
 
411

 
366

 
1

 
(6
)
 
361

Private equity investments
567

 

 

 
567

 
387

 

 

 
387

Life insurance contracts
141

 

 

 
141

 
128