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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, 2020
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 17, 2020, the registrant had 579,469,539 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.
 




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). Centene Corporation (Centene, the Company, our or we) intends 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 recently completed acquisition (the WellCare Acquisition) of WellCare Health Plans, Inc. (WellCare), other recent and future acquisitions, 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 impact of COVID-19 on global markets, economic conditions, the healthcare industry and our results of operations, which is unknown, and the response by governments and other third parties;
uncertainty as to our expected financial performance during the period of integration of the WellCare Acquisition;
the possibility that the expected synergies and value creation from the WellCare Acquisition will not be realized, or will not be realized within the expected time period;
the risk that unexpected costs will be incurred in connection with the integration of the WellCare Acquisition or that the integration of WellCare will be more difficult or time consuming than expected;
unexpected costs, charges or expenses resulting from the WellCare Acquisition;
the inability to retain key personnel;
disruption from the integration of the WellCare Acquisition, 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 we may not be able to effectively manage our expanded operations;
our ability to accurately predict and effectively manage health benefits and other operating expenses and reserves, including fluctuations in medical utilization rates due to the impact of COVID-19;
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 (ACA) and the Health Care and Education Affordability Reconciliation Act, collectively referred to as the ACA and any regulations enacted thereunder that may result from changing political conditions or judicial actions, including the ultimate outcome 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;

i


our ability to adequately price products on the Health Insurance Marketplaces and other commercial and Medicare products;
tax matters;
disasters or major epidemics;
the outcome of legal and regulatory proceedings;
changes in expected contract start dates;
provider, state, federal, foreign 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 businesses we may acquire in the future, 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;
disruption caused by significant completed and pending acquisitions, including, among others, the WellCare 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;
changes in expected closing dates, estimated purchase price and accretion for acquisitions;
the risk that acquired businesses will not be integrated successfully;
restrictions and limitations in connection with our indebtedness;
our ability to maintain or achieve improvement in 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 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


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,
 
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
GAAP net earnings
$
1,206

 
$
495

 
$
1,252

 
$
1,017

Amortization of acquired intangible assets
197

 
64

 
363

 
129

Acquisition related expenses
71

 
23

 
384

 
41

Other adjustments (1)
(11
)
 

 
12

 

Income tax effects of adjustments (2)
(53
)
 
(21
)
 
(125
)
 
(41
)
Adjusted net earnings
$
1,410

 
$
561

 
$
1,886

 
$
1,146

 
 
 
 
 
 
 
 
GAAP diluted earnings per share (EPS)
$
2.05

 
$
1.18

 
$
2.20

 
$
2.42

Amortization of acquired intangible assets (3)
0.25

 
0.12

 
0.48

 
0.24

Acquisition related expenses (4)
0.10

 
0.04

 
0.58

 
0.07

Other adjustments (1)

 

 
0.05

 

Adjusted Diluted EPS
$
2.40

 
$
1.34

 
$
3.31

 
$
2.73

(1)
Other adjustments for the three months ended June 30, 2020 include an adjustment to the gain related to the divestiture of certain products of our Illinois health plan of $11 million, or $0.00 per diluted share, net of an income tax expense of $0.02. Other adjustments include the following items for the six months ended June 30, 2020: (a) gain related to the divestiture of certain products of our Illinois health plan of $104 million, or $0.11 per diluted share, net of an income tax expense of $0.08; (b) non-cash impairment of our third-party care management software business of $72 million, or $0.10 per diluted share, net of an income tax benefit of $0.03; and (c) debt extinguishment costs of $44 million, or $0.06 per diluted share, net of an income tax benefit of $0.02.
(2)
The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment.
(3)
The amortization of acquired intangible assets per diluted share is net of an income tax benefit of $0.09 and $0.04 for the three months ended June 30, 2020, and 2019, respectively, and $0.16 and $0.07 for the six months ended June 30, 2020 and 2019, respectively.
(4)
Acquisition related expenses per diluted share are net of an income tax benefit of $0.02 and $0.01 for the three months ended June 30, 2020 and 2019, respectively, and $0.09 and $0.03 for the six months ended June 30, 2020 and 2019, respectively.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
GAAP selling, general and administrative expenses
$
2,255

 
$
1,574

 
$
4,639

 
$
3,183

Acquisition related expenses
70

 
21

 
365

 
38

Adjusted selling, general and administrative expenses
$
2,185

 
$
1,553

 
$
4,274

 
$
3,145


iii


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, 2020
 
December 31, 2019

(Unaudited)
 

ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
12,798

 
$
12,123

Premium and trade receivables
10,339

 
6,247

Short-term investments
1,558

 
863

Other current assets
2,127

 
1,090

Total current assets
26,822

 
20,323

Long-term investments
10,231

 
7,717

Restricted deposits
1,050

 
658

Property, software and equipment, net
2,544

 
2,121

Goodwill
17,434

 
6,863

Intangible assets, net
8,702

 
2,063

Other long-term assets
1,564

 
1,249

Total assets
$
68,347

 
$
40,994




 


LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY

 
 

Current liabilities:
 

 
 

Medical claims liability
$
11,418

 
$
7,473

Accounts payable and accrued expenses
8,704

 
4,164

Return of premium payable
1,242

 
824

Unearned revenue
448

 
383

Current portion of long-term debt
106

 
88

Total current liabilities
21,918

 
12,932

Long-term debt
16,708

 
13,638

Other long-term liabilities
4,516

 
1,732

Total liabilities
43,142

 
28,302

Commitments and contingencies


 


Redeemable noncontrolling interests
33

 
33

Stockholders’ equity:
 

 
 

Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at June 30, 2020 and December 31, 2019

 

Common stock, $0.001 par value; authorized 800,000 shares; 595,160 issued and 579,345 outstanding at June 30, 2020, and 421,508 issued and 415,048 outstanding at December 31, 2019

 

Additional paid-in capital
19,333

 
7,647

Accumulated other comprehensive earnings
245

 
134

Retained earnings
6,236

 
4,984

Treasury stock, at cost (15,815 and 6,460 shares, respectively)
(758
)
 
(214
)
Total Centene stockholders’ equity
25,056

 
12,551

Nonredeemable Noncontrolling interest
116

 
108

Total stockholders’ equity
25,172

 
12,659

Total liabilities, redeemable noncontrolling interests and stockholders’ equity
$
68,347

 
$
40,994

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

1


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,
 
2020
 
2019
 
2020
 
2019
Revenues:

 

 
 
 
 
Premium
$
24,745

 
$
16,554

 
$
47,959

 
$
32,757

Service
979

 
745

 
1,937

 
1,380

Premium and service revenues
25,724

 
17,299

 
49,896

 
34,137

Premium tax and health insurer fee
1,988

 
1,057

 
3,841

 
2,663

Total revenues
27,712

 
18,356

 
53,737

 
36,800

Expenses:
 
 
 
 
 
 
 
Medical costs
20,307

 
14,354

 
40,727

 
28,236

Cost of services
833

 
615

 
1,658

 
1,159

Selling, general and administrative expenses
2,255

 
1,574

 
4,639

 
3,183

Amortization of acquired intangible assets
197

 
64

 
363

 
129

Premium tax expense
1,723

 
1,106

 
3,348

 
2,765

Health insurer fee expense
379

 

 
724

 

Impairment

 

 
72

 

Total operating expenses
25,694

 
17,713

 
51,531

 
35,472

Earnings from operations
2,018

 
643

 
2,206

 
1,328

Other income (expense):

 

 
 
 
 
Investment and other income
113

 
120

 
280

 
219

Debt extinguishment costs

 

 
(44
)
 

Interest expense
(187
)
 
(101
)
 
(367
)
 
(200
)
Earnings from operations, before income tax expense
1,944

 
662

 
2,075

 
1,347

Income tax expense
742

 
170

 
827

 
336

Net earnings
1,202

 
492

 
1,248

 
1,011

Loss attributable to noncontrolling interests
4

 
3

 
4

 
6

Net earnings attributable to Centene Corporation
$
1,206

 
$
495

 
$
1,252

 
$
1,017



 

 
 
 
 
Net earnings per common share attributable to Centene Corporation:
 
 
 
 
Basic earnings per common share
$
2.08

 
$
1.20

 
$
2.23

 
$
2.46

Diluted earnings per common share
$
2.05

 
$
1.18

 
$
2.20

 
$
2.42



 

 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
Basic
579,189

 
413,370

 
561,623

 
413,144

Diluted
587,498

 
419,671

 
569,559

 
419,707


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

2


CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Net earnings
$
1,202

 
$
492

 
$
1,248

 
$
1,011

Reclassification adjustment, net of tax
1

 
1

 
1

 
1

Change in unrealized gain on investments, net of tax
248

 
80

 
114

 
174

Defined benefit pension plan net gain, net of tax

 

 
2

 

Foreign currency translation adjustments
1

 

 
(6
)
 

Other comprehensive earnings
250

 
81

 
111

 
175

Comprehensive earnings
1,452

 
573

 
1,359

 
1,186

Comprehensive loss attributable to noncontrolling interests
4

 
3

 
4

 
6

Comprehensive earnings attributable to Centene Corporation
$
1,456

 
$
576

 
$
1,363

 
$
1,192


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


3


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, 2020
 
Centene Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
$0.001 Par
Value
Shares
 
Amt
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive Income
(Loss)
 
Retained
Earnings
 
$.001 Par
Value
Shares
 
Amt
 
Non-redeemable
Non-
controlling
Interest
 
Total
Balance, December 31, 2019
421,508

 
$

 
$
7,647

 
$
134

 
$
4,984

 
6,460

 
$
(214
)
 
$
108

 
$
12,659

Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings (loss)

 

 

 

 
46

 

 

 
(3
)
 
43

Other comprehensive loss, net of ($40) tax

 

 

 
(139
)
 

 

 

 

 
(139
)
Common stock issued for acquisitions
171,225

 

 
11,526

 

 

 

 

 

 
11,526

Common stock issued for employee benefit plans
2,448

 

 
5

 

 

 

 

 

 
5

Common stock repurchases
(291
)
 

 
(17
)
 

 

 
9,308

 
(541
)
 

 
(558
)
Stock compensation expense

 

 
117

 

 

 

 

 

 
117

Contribution from noncontrolling interest

 

 

 

 

 

 

 
2

 
2

Other

 

 
1

 

 

 

 

 

 
1

Balance, March 31, 2020
594,890

 
$

 
$
19,279

 
$
(5
)
 
$
5,030

 
15,768

 
$
(755
)
 
$
107

 
$
23,656

Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings (loss)

 

 

 

 
1,206

 

 

 
(6
)
 
1,200

Other comprehensive earnings, net of $76 tax

 

 

 
250

 

 

 

 

 
250

Common stock issued for employee benefit plans
269

 

 
7

 

 

 

 

 

 
7

Common stock repurchases
1

 

 

 

 

 
47

 
(3
)
 

 
(3
)
Stock compensation expense

 

 
47

 

 

 

 

 

 
47

Contribution from noncontrolling interest

 

 

 

 

 

 

 
15

 
15

Balance, June 30, 2020
595,160

 
$

 
$
19,333

 
$
245

 
$
6,236

 
15,815

 
$
(758
)
 
$
116

 
$
25,172

 

4


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 Income
(Loss)
 
Retained
Earnings
 
$.001 Par
Value
Shares
 
Amt
 
Non-redeemable
 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.

5


CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions, unaudited)
 
Six Months Ended June 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net earnings
$
1,248

 
$
1,011

Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization
618

 
313

Stock compensation expense
164

 
72

Impairment
72

 

Loss on debt extinguishment
44

 

Deferred income taxes
17

 
(10
)
Gain on divestiture
(104
)
 

Other adjustments, net
2

 

Changes in assets and liabilities
 

 
 

Premium and trade receivables
(1,159
)
 
234

Other assets
202

 
(47
)
Medical claims liabilities
146

 
558

Unearned revenue
(127
)
 
(138
)
Accounts payable and accrued expenses
1,309

 
(616
)
Other long-term liabilities
1,028

 
869

Other operating activities, net
14

 
(13
)
Net cash provided by operating activities
3,474

 
2,233

Cash flows from investing activities:
 

 
 

Capital expenditures
(412
)
 
(336
)
Purchases of investments
(1,849
)
 
(1,280
)
Sales and maturities of investments
1,768

 
719

Acquisitions, net of cash acquired
(3,000
)
 
(32
)
Divestiture proceeds, net of divested cash
466

 

Other investing activities, net
(5
)
 

Net cash used in investing activities
(3,032
)
 
(929
)
Cash flows from financing activities:
 

 
 

Proceeds from long-term debt
2,630

 
5,617

Payments of long-term debt
(1,598
)
 
(5,353
)
Common stock repurchases
(561
)
 
(37
)
Payments for debt extinguishment
(21
)
 

Debt issuance costs
(93
)
 

Other financing activities, net
22

 
9

Net cash provided by financing activities
379

 
236

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

 
2

Net increase in cash, cash equivalents and restricted cash and cash equivalents
824

 
1,542

Cash, cash equivalents, and restricted cash and cash equivalents, beginning of period
12,131

 
5,350

Cash, cash equivalents, and restricted cash and cash equivalents, end of period
$
12,955

 
$
6,892

Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
360

 
$
132

Income taxes paid
$
75

 
$
381

Equity issued in connection with acquisitions
$
11,526

 
$

 
 
 
 
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,
 
2020
 
2019
Cash and cash equivalents
$
12,798

 
$
6,875

Restricted cash and cash equivalents, included in restricted deposits
157

 
17

Total cash, cash equivalents, and restricted cash and cash equivalents
$
12,955

 
$
6,892


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

6


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, 2019. 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, 2019 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 2019 amounts in the consolidated financial statements and notes to the consolidated financial statements have been reclassified to conform to the 2020 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.

On January 23, 2020, the Company acquired all of the issued and outstanding shares of WellCare Health Plans, Inc. (WellCare) (the WellCare Acquisition). The acquisition was accounted for as a business combination. See Note 2. Acquisitions for further details.

Recently Adopted Accounting Guidance

In June 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) which changes how entities measure credit losses for most financial assets and certain other investments that are not measured at fair value through net income. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The amended guidance requires the measurement of all expected credit losses for financial assets (or groups of financial assets) and available for sale debt securities held at the reporting date over the remaining life based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted the new guidance in the first quarter of 2020. The majority of the Company’s receivables and other financial instruments are with government entities and, therefore, the adoption did not have a material impact on its receivables and other financial instruments. The Company evaluated its investment portfolio under the new available-for-sale debt securities impairment model guidance. The vast majority of the Company’s investment portfolio are low risk, investment grade securities. The impact of the Company’s evaluation of the investment portfolio resulted in an immaterial decrease to retained earnings at January 1, 2020. The Company evaluates available-for-sale debt securities on a regular basis and records an allowance for credit losses, if necessary. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The new guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In August 2018, the FASB issued an ASU which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this ASU require an entity that is the customer in a hosting arrangement to follow the guidance on internal-use software to determine which implementation costs to capitalize and which costs to expense. The standard also requires an entity that is the customer to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. The new guidance requires an entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. The guidance is effective for annual and interim periods beginning after December 15, 2019. The Company adopted the new guidance in the first quarter of 2020. The new guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.


7


Recent Accounting Guidance Not Yet Adopted

In December 2019, the FASB issued an ASU which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740. The ASU also clarifies and amends certain areas of ASC Topic 740 to improve consistent application of and simplify the generally accepted accounting principles within Topic 740. The guidance is effective for annual and interim periods beginning after December 15, 2020. The Company is currently evaluating the potential impact of the ASU on the Company’s consolidated financial position, results of operations and cash flows.

2. Acquisitions

WellCare Acquisition

On January 23, 2020, the Company acquired all of the issued and outstanding shares of WellCare. The transaction was valued at $19,555 million, including the assumption of debt. The WellCare Acquisition brings a high-quality Medicare platform and further extends the Company’s robust Medicaid offerings. The WellCare Acquisition also enables the Company to provide access to more comprehensive and differentiated solutions across more markets with a continued focus on affordable, high-quality, culturally-sensitive healthcare services. With the WellCare Acquisition, the Company further broadened its product offerings by adding a Medicare prescription drug plan to its existing business lines. 

Total consideration paid for the acquisition was $17,605 million, consisting of Centene common shares valued at $11,431 million (based on Centene’s stock price of $66.76), $6,079 million in cash, and $95 million related to the fair value of replacement equity awards associated with pre-combination service. Each WellCare share was converted into 3.38 of validly issued, fully paid, non-assessable shares of Centene common stock and $120.00 in cash. In total, 171 million shares of Centene common stock were issued to the WellCare stockholders. The cash portion of the acquisition was funded through the issuance of long-term debt as further discussed in Note 7. Debt. The Company also recognized $71 million and $384 million of acquisition related costs, primarily related to WellCare, that were in the Consolidated Statements of Operations for the three and six months ended June 30, 2020, respectively.

The acquisition of WellCare 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 assessment of fair value on all assets acquired and liabilities assumed is preliminary and, accordingly, the Company has recorded provisional amounts which are subject to adjustment. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date.


8


The Company’s preliminary allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date of January 23, 2020 is as follows ($ in millions):
Assets acquired and liabilities assumed
 
 
Cash and cash equivalents
 
$
2,947

Premium and related receivables
 
3,437

Short-term investments
 
355

Other current assets
 
1,116

Long-term investments
 
2,716

Restricted deposits
 
320

Property, software and equipment
 
259

Intangible assets (a)
 
7,000

Other long-term assets
 
313

Total assets acquired
 
18,463

 
 
 
Medical claims liability
 
4,073

Accounts payable and accrued expenses
 
3,100

Return of premium payable
 
238

Unearned revenue
 
183

Long-term debt (b)
 
2,055

Deferred tax liabilities (c)
 
1,534

Other long-term liabilities
 
312

Total liabilities assumed
 
11,495

 
 
 
Total identifiable net assets
 
6,968

Goodwill (d)
 
10,637

Total assets acquired and liabilities assumed
 
$
17,605



The Company has made the following preliminary fair value adjustments based on information reviewed through June 30, 2020. 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 will be 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, will be considered in estimating the fair value. The identifiable intangible assets include purchased contract rights, trade names, provider contracts and developed technologies. The Company has estimated the preliminary fair value of intangible assets to be $7,000 million with a weighted average life of 13 years.

The preliminary fair values and weighted average useful lives for identifiable intangible assets acquired are as follows:
 
 
Fair Value
 
Weighted Average Useful Life (in years)
Purchased contract rights
 
$
5,200

 
 
Trade names
 
800

 
 
Provider contracts
 
700

 
 
Developed technologies
 
300

 
 
Total intangible assets acquired
 
$
7,000