Centene 10-Q 2022-06-30

Filed 2022-07-26. 7 sections, 194K characters. Original on sec.gov · Markdown · JSON

Cover and table of contents

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, 2022

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)

Delaware42-1406317
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification Number)
7700 Forsyth Boulevard
St. Louis,Missouri63105
(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 ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock $0.001 Par ValueCNCNew 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", "smaller 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 15, 2022, the registrant had 580,070,624 shares of common stock outstanding.

CENTENE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PAGE
Part I
Financial Information
Item 1.Financial Statements1
Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 20211
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)2
Consolidated Statements of Comprehensive Earnings (Loss) for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)3
Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (unaudited)6
Notes to the Consolidated Financial Statements (unaudited)7
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations21
Item 3.Quantitative and Qualitative Disclosures About Market Risk35
Item 4.Controls and Procedures35
Part II
Other Information
Item 1.Legal Proceedings36
Item 1A.Risk Factors36
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds37
Item 6.Exhibits38
Signatures39

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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 and its subsidiaries (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, value creation strategy, competition, expected activities in connection with completed and future acquisitions and dispositions, including statements about the impact of our recently completed acquisition of Magellan Health, Inc. (the Magellan Acquisition), other recent and future acquisitions and dispositions, our 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," and Part II, Item 1. "Legal Proceedings."

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:

  • 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 ongoing impact of COVID-19;

  • the risk that the election of new directors, changes in senior management, and any inability to retain key personnel may create uncertainty or negatively impact our ability to execute quickly and effectively;

  • uncertainty as to the expected financial performance of the combined company following the recent completion of the Magellan Acquisition;

  • the possibility that the expected synergies and value creation from the Magellan Acquisition or the acquisition of WellCare Health Plans, Inc. (the WellCare Acquisition) or other acquired businesses will not be realized, or will not be realized within the respective expected time periods;

  • disruption from the integration of the Magellan Acquisition or the WellCare Acquisition, unexpected costs, or similar risks from other acquisitions or dispositions we may announce or complete from time to time, 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 the closing conditions, including applicable regulatory approvals, for the pending dispositions of Magellan Rx and our Spanish and Central European businesses, may be delayed or not obtained;

  • impairments to real estate, investments, goodwill and intangible assets;

  • a downgrade of the credit rating of our indebtedness;

  • 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 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, the new administration or judicial actions;

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  • 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;

  • tax matters;

  • disasters or major epidemics;

  • 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 legal or regulatory proceedings or matters, including, but not limited to, our ability to resolve claims and/or allegations made by states with regard to past practices, including at Envolve Pharmacy Solutions, Inc. (Envolve), as our pharmacy benefits manager (PBM) subsidiary, within the reserve estimate we recorded in 2021 and on other acceptable terms, or at all, or whether additional claims, reviews or investigations relating to our PBM business will be brought by states, the federal government or shareholder litigants, or government investigations;

  • the timing and extent of benefits from strategic value creation initiatives, including the possibility that these initiatives will not be successful, or will not be realized within the expected time periods;

  • challenges to our contract awards;

  • cyber-attacks or other privacy or data security incidents;

  • 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 or dispositions;

  • any changes in expected closing dates, estimated purchase price and accretion for acquisitions or dispositions;

  • 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;

  • the 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. 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.

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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 and divestiture 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,
2022202120222021
GAAP net earnings (loss) attributable to Centene$(172)$(535)$677$164
Amortization of acquired intangible assets199188398383
Acquisition and divestiture related expenses224011987
Other adjustments (1)1,4451,3141,4471,416
Income tax effects of adjustments (2)(452)(270)(519)(353)
Adjusted net earnings$1,042$737$2,122$1,697
GAAP diluted earnings (loss) per share attributable to Centene$(0.29)$(0.92)$1.15$0.28
Amortization of acquired intangible assets0.340.330.680.65
Acquisition and divestiture related expenses0.040.070.200.15
Other adjustments (1)2.452.232.452.40
Income tax effects of adjustments (2)(0.77)(0.46)(0.88)(0.60)
Adjusted diluted earnings per share (EPS)$1.77$1.25$3.60$2.88

(1) Other adjustments include the following pre-tax items:

2022:

(a) for the three months ended June 30, 2022: real estate impairments of $1,454 million, or $2.46 per share ($1.80 after-tax), gain on debt extinguishment of $13 million, or $0.02 per share, and costs related to the PBM legal settlement of $4 million, or $0.01 per share;

(b) for the six months ended June 30, 2022: real estate impairments of $1,454 million, or $2.46 per share ($1.80 after-tax), gain on debt extinguishment of $13 million, or $0.02 per share, and costs related to the PBM legal settlement of $6 million, or $0.01 per share.

2021:

(a) for the three months ended June 30, 2021: PBM legal settlement expense of $1,250 million, or $2.12 per share ($1.78 after-tax), a reduction to the previously reported gain on divestiture of certain products of our Illinois health plan of $62 million, or $0.10 per share, severance costs of $2 million, or $0.00 per share, and the $0.01 per share impact of 8 million diluted shares in the calculation of adjusted diluted EPS;

(b) for the six months ended June 30, 2021: PBM legal settlement expense of $1,250 million, or $2.12 per share ($1.78 after-tax), a reduction to the previously reported gain on divestiture of certain products of our Illinois health plan of $62 million, or $0.10 per share, severance costs of $58 million, or $0.10 per share, and debt extinguishment costs of $46 million, or $0.08 per share.

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(2) The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment. The three and six months ended June 30, 2022 also include an $18 million, or $0.03 per share, increase to the tax benefit on the previously reported non-cash impairment of our equity method investment in RxAdvance.

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
GAAP selling, general and administrative expenses$2,800$2,139$5,545$4,373
Less:
Acquisition and divestiture related expenses223912185
Restructuring costs—2—58
Costs related to the PBM legal settlement2—4—
Real estate optimization4—4—
Adjusted selling, general and administrative expenses$2,772$2,098$5,416$4,230
Note: Beginning in 2022, we have included a separate line item for depreciation expense on the Consolidated Statements of Operations, which was previously included in selling, general and administrative (SG&A) expenses. Prior period SG&A expenses have been conformed to the current presentation.

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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, 2022December 31, 2021
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents$13,435$13,118
Premium and trade receivables14,15312,238
Short-term investments1,7941,539
Other current assets3,0241,602
Total current assets32,40628,497
Long-term investments13,67114,043
Restricted deposits1,2251,068
Property, software and equipment, net2,5573,391
Goodwill20,31019,771
Intangible assets, net7,6717,824
Other long-term assets3,2203,781
Total assets$81,060$78,375
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims liability$16,581$14,243
Accounts payable and accrued expenses9,3038,493
Return of premium payable2,3792,328
Unearned revenue523434
Current portion of long-term debt300267
Total current liabilities29,08625,765
Long-term debt18,45618,571
Deferred tax liability7461,407
Other long-term liabilities6,2095,610
Total liabilities54,49751,353
Commitments and contingencies
Redeemable noncontrolling interests13382
Stockholders’ equity:
Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at June 30, 2022 and December 31, 2021——
Common stock, $0.001 par value; authorized 800,000 shares; 606,444 issued and 581,124 outstanding at June 30, 2022, and 602,704 issued and 582,479 outstanding at December 31, 202111
Additional paid-in capital19,89919,672
Accumulated other comprehensive earnings (loss)(913)77
Retained earnings8,8168,139
Treasury stock, at cost (25,320 and 20,225 shares, respectively)(1,514)(1,094)
Total Centene stockholders’ equity26,28926,795
Nonredeemable noncontrolling interest141145
Total stockholders’ equity26,43026,940
Total liabilities, redeemable noncontrolling interests and stockholders’ equity$81,060$78,375

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

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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,
2022202120222021
Revenues:
Premium$31,510$27,627$63,399$54,560
Service2,4581,2354,8012,416
Premium and service revenues33,96828,86268,20056,976
Premium tax1,9682,1634,9214,032
Total revenues35,93631,02573,12161,008
Expenses:
Medical costs27,31224,38955,15047,780
Cost of services2,0991,1074,0872,155
Selling, general and administrative expenses2,8002,1395,5454,373
Depreciation expense164134320267
Amortization of acquired intangible assets199188398383
Premium tax expense2,0412,2365,0474,164
Impairment1,450—1,450—
Legal settlement—1,250—1,250
Total operating expenses36,06531,44371,99760,372
Earnings (loss) from operations(129)(418)1,124636
Other income (expense):
Investment and other income423994142
Debt extinguishment13—16(46)
Interest expense(162)(163)(322)(333)
Earnings (loss) before income tax(236)(542)912399
Income tax expense (benefit)(65)(7)231237
Net earnings (loss)(171)(535)681162
(Earnings) loss attributable to noncontrolling interests(1)—(4)2
Net earnings (loss) attributable to Centene Corporation$(172)$(535)$677$164
Net earnings (loss) per common share attributable to Centene Corporation:
Basic earnings (loss) per common share$(0.29)$(0.92)$1.16$0.28
Diluted earnings (loss) per common share$(0.29)$(0.92)$1.15$0.28

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this filing. The discussion contains forward-looking statements that involve known and unknown risks and uncertainties.

EXECUTIVE OVERVIEW

General

We are a leading healthcare enterprise that is committed to helping people live healthier lives. We take a local approach - with local brands and local teams - to provide fully integrated, high-quality, and cost-effective services to government-sponsored and commercial healthcare programs, focusing on under-insured and uninsured individuals.

Results of operations depend on our ability to manage expenses associated with health benefits (including estimated costs incurred) and selling, general and administrative (SG&A) costs. We measure operating performance based upon two key ratios. The health benefits ratio (HBR) represents medical costs as a percentage of premium revenues, excluding premium tax revenues that are separately billed, and reflects the direct relationship between the premiums received and the medical services provided. The SG&A expense ratio represents SG&A costs as a percentage of premium and service revenues, excluding premium taxes separately billed.

Value Creation Plan

As introduced in June 2021, our Value Creation Plan is designed to drive margin expansion by leveraging our scale and generating sustainable profitable growth. In addition to creating shareholder value, this plan is an ongoing effort to modernize and improve how we work in order to propel our organization to new levels of success and elevate the member and provider experiences. The three major pillars of the Value Creation Plan are: SG&A expense savings, gross margin expansion, and strategic capital management. The first pillar, SG&A expense savings, includes initiatives targeting improving productivity, driving efficiencies, and reducing costs throughout the organization, including real estate optimization. The second pillar, gross margin expansion, relates to initiatives including bid discipline, clinical initiatives, quality improvement, and pharmacy cost management. The third pillar, strategic capital management, focuses on value-creating capital deployment activities such as stock repurchases, portfolio optimization, and debt and investment management.

From an operational perspective, we continue to move forward with our value creation plan, including the streamlining of certain operations, such as key call centers and utilization management, evaluating our real estate footprint and seeking opportunities for platform consolidation. We are assessing our portfolio and are focused on making strategic decisions and investments to create additional value in the short term and to seek opportunities that position the organization for long-term strength, profitability, growth, and innovation.

In the second quarter of 2022, following a strategic review of our real estate portfolio and the adoption of a more modern, flexible work environment, we initiated a reduction of our real estate footprint and incurred a charge of $1.45 billion related to the impairment of leased and owned real estate and related fixed assets. We incurred impairments of $706 million related to owned real estate, $521 million related to leased real estate, and $223 million related to associated fixed assets. We anticipate additional future charges of approximately $200 million related to real estate optimization. This represents an approximate 70% decrease in domestic leased space and is expected to result in annualized lease expense savings of approximately $200 million.

Additionally, during the second quarter of 2022, our Board of Directors authorized a $3.0 billion increase to our stock repurchase program and a new $1.0 billion debt repurchase program. During 2022, we have repurchased $450 million of our common stock through our stock repurchase program, entered into definitive agreements to sell Magellan Rx as well as our ownership stakes in our Spanish and Central European businesses as part of our ongoing portfolio review, and completed the divestiture of PANTHERx Rare (PANTHERx). We intend to utilize the majority of the proceeds from these divestitures to repurchase additional shares and the balance to reduce debt.

COVID-19 Trends and Uncertainties

The impact of COVID-19 on our business in both the short-term and long-term is uncertain and difficult to predict. The outlook for the remainder of 2022 depends on future developments, including but not limited to: the length and severity of the outbreak

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(including new variants, which may be more contagious, more severe or less responsive to treatment or vaccines), the effectiveness of containment actions, the timing and effectiveness of vaccinations and achievement of herd immunity, and the timing and rate at which members return to accessing healthcare. The pandemic and these future developments have impacted and will continue to affect our membership and medical utilization. From the onset of the pandemic in March 2020, our Medicaid membership has increased by 2.9 million members (excluding the new North Carolina membership). The public health emergency (PHE) extension for COVID-19 has been extended to October 2022 with redeterminations eligible to begin in November 2022. However, the PHE may be extended beyond October 2022. Our Ambetter product covers the majority of our Medicaid states, and we believe we are among the best positioned in the healthcare market to capture those transitioning coverage through redeterminations. Our execution plan is well-thought out and we remain agile in working with our state partners and are prepared to support our members and promote continuity of coverage when redeterminations resume.

We continue to watch external trends closely, as COVID-19 costs could increase based upon macro trends. New variants and additional waves of the pandemic could create new dynamics and uncertainties around our expectations.

We are confident we have the team, systems, expertise and financial strength to continue to effectively navigate this challenging pandemic landscape.

Regulatory Trends and Uncertainties

The United States government, policymakers, and healthcare experts continue to discuss and debate various elements of the United States healthcare model. We remain focused on the promise of delivering access to high-quality, affordable healthcare to all of our members and believe we are well positioned to meet the needs of the changing healthcare landscape.

In contrast to previous executive and legislative efforts to restrict or limit certain provisions of the Affordable Care Act (ACA), the American Rescue Act, enacted on March 11, 2021, contained provisions aimed at leveraging Medicaid and the Health Insurance Marketplace to expand health insurance coverage and affordability to consumers. The American Rescue Act authorized an additional $1.9 trillion in federal spending to address the COVID-19 PHE, and contained several provisions designed to increase coverage of certain healthcare services, expand eligibility and benefits, incentivize state Medicaid expansion, and adjust federal financing for state Medicaid programs, the ultimate impact of which remain uncertain. The American Rescue Act enhanced eligibility for the advance premium tax credit for certain enrollees in the Health Insurance Marketplace currently expires on December 31, 2022, and if it is not extended, our Health Insurance Marketplace membership would likely be reduced.

Recently, the Biden Administration has made efforts to address the family glitch in the ACA, which relates to determining who is eligible for premium subsidies. We see this as a significant step in making Marketplace more affordable for working families.

We have more than three decades of experience, spanning seven presidents from both sides of the aisle, in delivering high-quality healthcare services on behalf of states and the federal government to under-insured and uninsured families, commercial organizations and military families. This expertise has allowed us to deliver cost effective services to our government sponsors and our members. While healthcare experts maintain focus on personalized healthcare technology, we continue to make strategic decisions to accelerate development of new software platforms and analytical capabilities. We continue to believe we have both the capacity and capability to successfully navigate industry changes to the benefit of our members, customers and shareholders.

Second Quarter 2022 Highlights

Our financial performance for the second quarter of 2022 is summarized as follows:

  • Managed care membership of 26.4 million, an increase of 1.8 million members, or 7% year-over-year.

  • Total revenues of $35.9 billion, representing 16% growth year-over-year.

  • Premium and service revenues of $34.0 billion, representing 18% growth year-over-year.

  • HBR of 86.7%, compared to 88.3% for the second quarter of 2021.

  • SG&A expense ratio of 8.2%, compared to 7.4% for the second quarter of 2021.

  • Adjusted SG&A expense ratio of 8.2%, compared to 7.3% for the second quarter of 2021.

  • Operating cash flows of $3.4 billion for the second quarter of 2022.

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  • Diluted loss per share of $(0.29), compared to $(0.92) for the second quarter of 2021. The second quarter loss was driven by a pre-tax real estate impairment charge of $1.45 billion ($1.80 per share after-tax), related to the reduction in our real estate footprint. The diluted loss per share in 2021 was driven by the recording of a legal settlement reserve estimate of $1.25 billion ($1.78 per share after-tax).

  • Adjusted diluted earnings per share (EPS) of $1.77, compared to $1.25 for the second quarter of 2021.

A reconciliation from GAAP diluted earnings (loss) per share to adjusted diluted EPS is highlighted below, and additional detail is provided above under the heading "Non-GAAP Financial Presentation":

Three Months Ended June 30,
20222021
GAAP diluted earnings (loss) per share attributable to Centene$(0.29)$(0.92)
Amortization of acquired intangible assets0.340.33
Acquisition and divestiture related expenses0.040.07
Other adjustments (1)2.452.23
Income tax effects of adjustments (2)(0.77)(0.46)
Adjusted diluted EPS$1.77$1.25

(1) Other adjustments include the following pre-tax items:

(a) for the three months ended June 30, 2022: real estate impairments of $1,454 million, or $2.46 per share ($1.80 after-tax), gain on debt extinguishment of $13 million, or $0.02 per share, and costs related to the pharmacy benefits management (PBM) legal settlement of $4 million, or $0.01 per share;

(b) for the three months ended June 30, 2021: PBM legal settlement expense of $1,250 million, or $2.12 per share ($1.78 after-tax), a reduction to the previously reported gain on divestiture of certain products of our Illinois health plan of $62 million, or $0.10 per share, severance costs of $2 million, or $0.00 per share, and the $0.01 impact of 8 million diluted shares in the calculation of adjusted diluted EPS.

(2) The income tax effects of adjustments are based on the effective income tax rates applicable to each adjustment. The three and six months ended June 30, 2022 also include a $0.03 per share increase to the tax benefit on the previously reported non-cash impairment of our equity method investment in RxAdvance.

The following items contributed to our results of operations in the current year:

*•*Circle Health. In July 2021, we acquired the remaining interest in our equity method investment in Circle Health, one of the U.K.'s largest independent operators of hospitals.

*•*Commercial. In 2022, we introduced Ambetter into five new states, as well as expanded coverage to 274 new counties across 13 existing states. We now serve members in 27 states across the country in 1,480 counties. Additionally, we introduced three new Ambetter product offerings to address growing needs of our members: Ambetter Value, Ambetter Select, and Ambetter Virtual Access.

*•*Eligibility Redeterminations. Revenue growth was driven by organic Medicaid growth due to the ongoing suspension of eligibility redeterminations as well as Medicare membership growth during the annual enrollment period.

*•*Hawaii. In July 2021, we began operating under two new statewide contracts in Hawaii to continue administering covered services to eligible Medicaid and Children's Health Insurance Program (CHIP) members for medically necessary medical, behavioral health, and long-term services and support and to continue administering services through the Community Care Services program in partnership with the Hawaii Department of Human Services' Med-QUEST Division.

  • Magellan Health, Inc. (Magellan). In January 2022, we acquired all of the issued and outstanding shares of Magellan for approximately $2.6 billion.

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*•*Medicare Advantage. We experienced strong Medicare membership growth during the 2022 annual enrollment period. In 2022, we introduced WellCare into three new states, as well as expanded coverage to 327 new counties across existing states. We now serve members in 36 states across the country in 1,575 counties.

*•*North Carolina. In July 2021, WellCare of North Carolina commenced operations under a new statewide contract in North Carolina providing Medicaid managed care services. In addition, we also began operating under a new contract to provide Medicaid managed care services in three regions in North Carolina through our provider-led North Carolina joint venture, Carolina Complete Health.

In addition, we have been negatively impacted by the previously disclosed carve out of California pharmacy services effective January 2022, which occurred in connection with the state’s transition of pharmacy services from managed care to fee for service, and the decrease in the number of our Medicare members in a 4.0 star or above plan for the 2022 bonus year.

We expect the following items to impact to our future results of operations:

  • In July 2022, as part of our previously announced review of strategic alternatives for our international portfolio, we signed a definitive agreement to sell our ownership stakes in our Spanish and Central European businesses, including Ribera Salud, Torrejón Salud, and Pro Diagnostics Group. The transaction is expected to close by the end of 2022.

  • In July 2022, we completed the previously announced sale of PANTHERx. The divestiture illustrates our continued progress on the Value Creation Plan.

  • In July 2022, we announced our subsidiary, Delaware First Health, was awarded contracts for the statewide Medicaid Managed Care programs. The new contracts are anticipated to begin January 1, 2023.

  • In July 2022, our subsidiary, Home State Health, commenced the MO HealthNet Managed Care General Plan and Specialty Plan contracts. Under the General Plan, Home State will continue serving multiple MO HealthNet programs including Children's Health Insurance (CHIP) members and the state's newly implemented Medicaid expansion population, across all regions of Missouri. Additionally, as the sole provider of the newly awarded Specialty Plan, Home State now serves approximately 50,000 foster children and children receiving adoption subsidy assistance.

  • In May 2022, we signed a definitive agreement to sell Magellan Rx as part of our ongoing portfolio review. The transaction is expected to close by the end of 2022.

  • In March 2022, we announced our subsidiary, Managed Health Services, was selected by the Indiana Department of Administration to continue serving Hoosier Healthwise and Health Indiana Plan members with Medicaid and Medicaid alternative managed care and care coordination services. The new contract is anticipated to begin January 1, 2023.

  • In February 2022, our Louisiana subsidiary, Louisiana Healthcare Connections, was awarded a Medicaid contract by the Louisiana Department of Health to continue administering quality, integrated healthcare services to members across the state. The contract is expected to commence in January 2023.

  • In January 2022, our Nevada subsidiary, SilverSummit Healthplan, Inc., commenced the contract awarded from the Nevada Department of Health and Human Services - Health Care Financing and Policy to continue providing managed care services for its Medicaid Managed Care program in both Clark and Washoe Counties.

  • In October 2021, Centers for Medicare and Medicaid Services (CMS) published updated Medicare Star quality ratings for the 2022 rating year. Over 50% of our Medicare members are in a 4.0 star or above plan for the 2023 bonus year, compared to approximately 30% for the 2022 bonus year. This increase in Star quality ratings is primarily due to certain disaster relief provisions, which we do not expect to be applicable in future years. As a result, we expect to experience a meaningful decrease to our Star ratings for the 2023 Star rating year, which impacts the 2024 bonus year, followed by a subsequent increase to our Star ratings for the 2024 Star rating year, which impacts the 2025 bonus year.

*•*In August 2021, we announced that our North Carolina subsidiaries, Carolina Complete Health and WellCare of North Carolina, will coordinate physical and/or other health services with Local Management Entities/Managed Care Organizations under the state's new Tailored Plans. The Tailored Plans, which are expected to launch in December 2022, are integrated health plans designed for individuals with significant behavioral health needs and intellectual/developmental disabilities.

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  • In August 2021, our Ohio subsidiary, Buckeye Health Plan, was awarded a Medicaid contract by the Ohio Department of Medicaid to continue servicing members with quality healthcare, coordinated services, and benefits. The contract is expected to commence in December 2022.

  • We expect Medicaid eligibility redeterminations to begin in November 2022, although it could be extended into early 2023.

  • We will be negatively impacted by the anticipated carve out of Ohio pharmacy services in the second half of 2022 in connection with the state's transition of pharmacy services from managed care to a single PBM.

  • We may be negatively impacted by potential Medicaid state rate actions and risk corridor mechanisms as a result of the COVID-19 pandemic.

  • We may be negatively impacted by the expiration of the enhanced Advanced Premium Tax Credits (eAPTC) which, if not extended by the end of September, will expire in December 2022.

MEMBERSHIP

From June 30, 2021 to June 30, 2022, we increased our managed care membership by 1.8 million, or 7%. The following table sets forth our membership by line of business:

June 30, 2022December 31, 2021June 30, 2021
Traditional Medicaid (1)13,758,00013,328,40012,492,600
High Acuity Medicaid (2)1,688,0001,686,1001,531,000
Total Medicaid15,446,00015,014,50014,023,600
Commercial Marketplace2,033,3002,140,5002,040,900
Commercial Group448,700462,100479,500
Total Commercial2,482,0002,602,6002,520,400
Medicare (3)1,483,9001,252,2001,182,900
Medicare PDP4,165,5004,070,5004,064,500
Total at-risk membership (4)23,577,40022,939,80021,791,400
TRICARE eligibles2,862,4002,874,7002,881,400
Total26,439,80025,814,50024,672,800
(1) Membership includes TANF, Medicaid Expansion, CHIP, Foster Care and Behavioral Health. (2) Membership includes ABD, IDD, LTSS and MMP Duals. (3) Membership includes Medicare Advantage and Medicare Supplement. (4) Membership includes 1,252,600, 1,178,000, and 1,131,900 dual-eligible beneficiaries for the periods ending June 30, 2022, December 31, 2021, and June 30, 2021, respectively.

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RESULTS OF OPERATIONS

The following discussion and analysis is based on our Consolidated Statements of Operations, which reflect our results of operations for the three and six months ended June 30, 2022 and 2021, prepared in accordance with generally accepted accounting principles in the United States.

Summarized comparative financial data for the three and six months ended June 30, 2022 and 2021 is as follows ($ in millions, except per share data in dollars):

Three Months Ended June 30,Six Months Ended June 30,
20222021% Change20222021% Change
Premium$31,510$27,62714%$63,399$54,56016%
Service2,4581,23599%4,8012,41699%
Premium and service revenues33,96828,86218%68,20056,97620%
Premium tax1,9682,163(9)%4,9214,03222%
Total revenues35,93631,02516%73,12161,00820%
Medical costs27,31224,38912%55,15047,78015%
Cost of services2,0991,10790%4,0872,15590%
Selling, general and administrative expenses2,8002,13931%5,5454,37327%
Depreciation expense16413422%32026720%
Amortization of acquired intangible assets1991886%3983834%
Premium tax expense2,0412,236(9)%5,0474,16421%
Impairment1,450—n.m.1,450—n.m.
Legal settlement—1,250n.m.—1,250n.m.
Earnings (loss) from operations(129)(418)69%1,12463677%
Investment and other income42398%94142(34)%
Debt extinguishment13—n.m.16(46)135%
Interest expense(162)(163)1%(322)(333)3%
Earnings (loss) before income tax(236)(542)56%912399129%
Income tax expense (benefit)(65)(7)n.m.231237(3)%
Net earnings (loss)(171)(535)68%681162320%
(Earnings) loss attributable to noncontrolling interests(1)—n.m.(4)2(300)%
Net earnings (loss) attributable to Centene Corporation$(172)$(535)68%$677$164313%
Diluted earnings (loss) per common share attributable to Centene Corporation$(0.29)$(0.92)68%$1.15$0.28311%
n.m.: not meaningful

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Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Total Revenues

The following table sets forth supplemental revenue information for the three months ended June 30, ($ in millions):

20222021% Change
Medicaid$22,458$20,7978%
Commercial4,5564,11011%
Medicare (1)5,6394,46426%
Other3,2831,65498%
Total Revenues$35,936$31,02516%
(1) Medicare includes Medicare Advantage, Medicare Supplement and Medicare PDP.

Total revenues increased 16% in the three months ended June 30, 2022 over the corresponding period in 2021, driven by organic Medicaid growth, primarily due to the ongoing suspension of eligibility redeterminations, 25% membership growth in the Medicare business (19% growth since December 31, 2021), our recent acquisitions of Magellan and Circle Health, and the commencement of our contracts in North Carolina.

Operating Expenses

Medical Costs

The HBR for the three months ended June 30, 2022, was 86.7%, compared to 88.3% in the same period in 2021. The HBR for the second quarter of 2022 was positively impacted by favorable performance in Marketplace driven by pricing actions and a return to more normalized utilization compared to the second quarter of 2021. Additionally, the second quarter of 2021 was negatively impacted by unfavorable 2020 risk adjustment, while the second quarter of 2022 was favorably impacted by 2021 risk adjustment.

Cost of Services

Cost of services increased by $992 million in the three months ended June 30, 2022, compared to the corresponding period in 2021, primarily attributable to newly acquired businesses, including Magellan and Circle Health. The cost of service ratio for the three months ended June 30, 2022, was 85.4%, compared to 89.6% in the same period in 2021. The decrease in the cost of service ratio was driven by the acquisition of the Circle Health business, which operates at a lower cost of service ratio.

Selling, General & Administrative Expenses

The SG&A expense ratio was 8.2% for the second quarter of 2022, compared to 7.4% in the second quarter of 2021. The adjusted SG&A expense ratio was 8.2% for the second quarter of 2022, compared to 7.3% in the second quarter of 2021. The increases were due to the additions of the Magellan and Circle Health businesses, which operate at higher SG&A expense ratios due to the nature of their respective businesses along with increased costs associated with risk adjustment improvement efforts, Medicare broker commissions and variable compensation. These impacts were partially offset by the leveraging of expenses over higher revenues as a result of increased membership.

Impairment

During the second quarter of 2022, we recorded an impairment charge of $1.45 billion related to the reduction of our real estate footprint consisting of leased and owned real estate assets and related fixed assets.

Legal Settlement

During the second quarter of 2021, we recorded a legal settlement reserve estimate of $1.25 billion (inclusive of the Ohio and Mississippi settlements) related to services provided by Envolve Pharmacy Solutions, Inc. (Envolve), our PBM subsidiary, essentially during 2017 and 2018.

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Other Income (Expense)

The following table summarizes the components of other income (expense) for the three months ended June 30, ($ in millions):

20222021
Investment and other income$42$39
Debt extinguishment13—
Interest expense(162)(163)
Other income (expense), net$(107)$(124)

Investment and other income. Investment and other income increased by $3 million in the three months ended June 30, 2022 compared to the corresponding period in 2021.

Debt extinguishment. In May 2022, we recognized a $13 million pre-tax gain on the extinguishment of debt related to the refinancing of debt for our of Circle Health subsidiary.

Interest expense. Interest expense decreased by $1 million in the three months ended June 30, 2022 compared to the corresponding period in 2021.

Income Tax Expense

For the three months ended June 30, 2022, we recorded income tax benefit of $65 million on pre-tax loss of $236 million, or an effective tax rate of 27.7%. For the second quarter of 2022, our effective tax rate on adjusted earnings was 27.1%. For the three months ended June 30, 2021, we recorded an income tax benefit of $7 million on a pre-tax loss of $542 million, or an effective tax rate of 1.3%. The effective tax rate for the second quarter of 2021 reflects the partial non-deductibility of the legal settlement reserve. For the second quarter of 2021, our effective tax rate on adjusted earnings was 26.3%.

Segment Results

The following table summarizes our consolidated operating results by segment for the three months ended June 30, ($ in millions):

20222021% Change
Total Revenues
Managed Care$33,189$29,59012%
Specialty Services5,9754,55931%
Eliminations(3,228)(3,124)(3)%
Consolidated Total$35,936$31,02516%
Earnings from Operations
Managed Care$(130)$(415)69%
Specialty Services1(3)133%
Consolidated Total$(129)$(418)69%

Managed Care

Total revenues increased 12% in the three months ended June 30, 2022, compared to the corresponding period in 2021. The increase was due to organic Medicaid growth, partially due to the ongoing suspension of eligibility redeterminations, membership growth in the Medicare business, our recent acquisition of Circle Health, and the commencement of our contracts in North Carolina. Earnings from operations increased $285 million between years primarily as a result of Medicaid and Medicare membership growth, 2021 risk adjustment in 2022, lower traditional utilization in the Marketplace business, profitability growth in the PDP business, offset by the $1.45 billion pre-tax real estate impairment. 2021 was negatively impacted by a legal settlement reserve estimate of $1.25 billion related to services provided by Envolve.

Specialty Services

Total revenues increased 31% in the three months ended June 30, 2022, compared to the corresponding period in 2021, resulting primarily from our recent acquisition of Magellan as well as from our specialty pharmacy businesses. Earnings from operations increased $4 million in the three months ended June 30, 2022, compared to the corresponding period in 2021.

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Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Total Revenues

The following table sets forth supplemental revenue information for the six months ended June 30, ($ in millions):

20222021% Change
Medicaid$46,534$40,98814%
Commercial8,6888,0088%
Medicare (1)11,3968,80329%
Other6,5033,209103%
Total Revenues$73,121$61,00820%
(1) Medicare includes Medicare Advantage, Medicare Supplement and Medicare PDP.

Total revenues increased 20% in the six months ended June 30, 2022 over the corresponding period in 2021 primarily due to Medicaid membership growth resulting from the ongoing suspension of eligibility redeterminations, membership growth in the Medicare business, our recent acquisitions of Magellan and Circle Health, and the commencement of our contracts in North Carolina, and additional premium tax revenue and retroactive state directed payments.

Operating Expenses

Medical Costs

The HBR for the six months ended June 30, 2022 was 87.0%, compared to 87.6% in the same period in 2021. The HBR for 2022 was positively impacted by favorable performance in Marketplace driven by pricing actions and a return to more normalized utilization compared to the second quarter of 2021. Additionally, the second quarter of 2021 was negatively impacted by unfavorable 2020 risk adjustment, while the second quarter of 2022 was favorably impacted by 2021 risk adjustment.

Cost of Services

Cost of services increased by $1.9 billion in the six months ended June 30, 2022, compared to the corresponding period in 2021, primarily attributable to newly acquired businesses, including Magellan and Circle Health. The cost of service ratio for the six months ended June 30, 2022, was 85.1%, compared to 89.2% in the same period in 2021. The decrease in the cost of service ratio was driven by the acquisition of the Circle Health business, which operates at a lower cost of service ratio.

Selling, General & Administrative Expenses

The SG&A expense ratio for the six months ended June 30, 2022 was 8.1%, compared to 7.7% for the corresponding period in 2021. The adjusted SG&A expense ratio for the six months ended June 30, 2022 was 7.9%, compared to 7.4% for the six months ended June 30, 2021. The increases were due to the additions of the Magellan and Circle Health businesses, which operate at higher SG&A ratios due to the nature of their respective businesses along with increased risk adjustment costs, Medicare broker commissions and variable compensation. These impacts were partially offset by the leveraging of expenses over high revenues as a result of increased membership as well as reduced restructuring charges compared to 2021.

Impairment

During the second quarter of 2022, we recorded an impairment charge of $1.45 billion related to the reduction of our real estate footprint consisting of leased and owned real estate assets and related fixed assets.

Legal Settlement

During the second quarter of 2021, we recorded a legal settlement reserve estimate of $1.25 billion (inclusive of the Ohio and Mississippi settlements) related to services provided by Envolve, our PBM subsidiary, essentially during 2017 and 2018.

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Other Income (Expense)

The following table summarizes the components of other income (expense) for the six months ended June 30, ($ in millions):

20222021
Investment and other income$94$142
Debt extinguishment16(46)
Interest expense(322)(333)
Other income (expense), net$(212)$(237)

Investment and other income. Investment and other income decreased by $48 million in the six months ended June 30, 2022 compared to the corresponding period in 2021, driven by decreases in the performance of our deferred compensation investment fund portfolio, which fluctuate with their underlying investments. The losses from our deferred compensation portfolio were substantially offset by decreases in deferred compensation expense, recorded in SG&A expense. These decreases were partially offset by higher interest rates.

Debt extinguishment. In May 2022, we recognized a $13 million pre-tax gain on the extinguishment of debt related to the refinancing of debt for our of Circle Health subsidiary. The 2022 debt extinguishment also includes an immaterial gain related to the redemption of Magellan’s outstanding senior notes in January 2022. In February 2021, we tendered or redeemed all of our outstanding $2.2 billion 4.75% Senior Notes, due 2025 and recognized a pre-tax loss on extinguishment of approximately $46 million. The loss includes the call premium and the write-off of unamortized premium and debt issuance costs.

Interest expense. Interest expense decreased by $11 million in the six months ended June 30, 2022, compared to the corresponding period in 2021, driven by our 2022 and 2021 refinancing actions.

Income Tax Expense

For the six months ended June 30, 2022, we recorded income tax expense of $231 million on pre-tax earnings of $912 million, or an effective tax rate of 25.3%. For the six months ended June 30, 2022, our effective tax rate on adjusted earnings was 26.1%. For the six months ended June 30, 2021, we recorded income tax expense of $237 million on pre-tax earnings of $399 million, or an effective tax rate of 59.4%, which reflects the partial non-deductibility of the legal settlement reserve.

Segment Results

The following table summarizes our consolidated operating results by segment for the six months ended June 30, ($ in millions):

20222021% Change
Total Revenues
Managed Care$67,710$58,19316%
Specialty Services12,0908,82637%
Eliminations(6,679)(6,011)(11)%
Consolidated Total$73,121$61,00820%
Earnings from Operations
Managed Care$1,107$541105%
Specialty Services1795(82)%
Consolidated Total$1,124$63677%

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Managed Care

Total revenues increased 16% in the six months ended June 30, 2022, compared to the corresponding period in 2021, driven by organic Medicaid growth, partially due to the ongoing suspension of eligibility redeterminations, membership growth in the Medicare business, our recent acquisition of Circle Health, the commencement of our contracts in North Carolina, along with premium tax revenue and retroactive state directed payments. Earnings from operations increased $566 million between years primarily as a result of Medicaid and Medicare membership growth, 2021 risk adjustment in 2022, lower traditional utilization in the Marketplace business, profitability growth in the PDP business, and the acquisition of Circle Health, partially offset by the $1.45 billion pre-tax real estate impairment. 2021 was negatively impacted by the legal settlement reserve estimate of $1.25 billion related to services provided by Envolve and higher utilization in the Marketplace business in 2021.

Specialty Services

Total revenues increased 37% in the six months ended June 30, 2022, compared to the corresponding period in 2021, resulting primarily from our recent acquisition of Magellan as well as from our specialty pharmacy businesses, increased services associated with membership growth in the Managed Care segment, and new contracts in our correctional business. Earnings from operations decreased $78 million in the six months ended June 30, 2022, compared to the corresponding period in 2021, primarily due to declining operations in our PBM business, the shift of margin to our managed care segment for our internal dental and vision businesses, as well as a non-recurring item in our federal services business. Decreases in operations were partially offset by the Magellan Acquisition.

LIQUIDITY AND CAPITAL RESOURCES

Shown below is a condensed schedule of cash flows used in the discussion of liquidity and capital resources ($ in millions).

Six Months Ended June 30,
20222021
Net cash provided by operating activities$4,505$1,728
Net cash used in investing activities(3,145)(1,420)
Net cash used in financing activities(984)(46)
Effect of exchange rate changes on cash and cash equivalents(9)(24)
Net increase in cash, cash equivalents, and restricted cash and cash equivalents$367$238

Cash Flows Provided by Operating Activities

Normal operations are funded primarily through operating cash flows and borrowings under our revolving credit facility. Operating activities provided cash of $4.5 billion in the six months ended June 30, 2022 compared to providing cash of $1.7 billion in the comparable period in 2021. Cash flows provided by operations in 2022 was driven by net earnings before the non-cash real estate impairment charge and an increase in medical claims liabilities partially due to timing of state directed payments.

Cash flows provided by operations in 2021 were due to net earnings before the legal settlement reserve, an increase in state risk adjustments and risk sharing mechanism payables, partially offset by the timing of payments from our state customers.

Cash Flows Used in Investing Activities

Investing activities used cash of $3.1 billion in the six months ended June 30, 2022, and $1.4 billion in the comparable period in 2021. Cash flows used in investing activities in 2022 primarily consisted of our acquisition of Magellan and net additions to the investment portfolio of our regulated subsidiaries (including transfers from cash and cash equivalents to long-term investments).

Cash flows used in investing activities in 2021 primarily consisted of the net additions to the investment portfolio of our regulated subsidiaries (including transfers from cash and cash equivalents to long-term investments) and capital expenditures.

We spent $524 million and $437 million in the six months ended June 30, 2022 and 2021, respectively, on capital expenditures for system enhancements, market growth, and our corporate and regional buildings.

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As of June 30, 2022, our investment portfolio consisted primarily of fixed-income securities with an average duration of 3.6 years. We had unregulated cash and cash equivalents of $782 million at June 30, 2022, including $299 million in our international subsidiaries (a material portion of which is expected to be used to satisfy contractual obligations), compared to $2.7 billion at December 31, 2021, including $430 million in our international subsidiaries. Unregulated cash was substantially reduced in January 2022 upon the closing of the Magellan Acquisition for the purchase price payment and corresponding closing costs. Unregulated cash and investments include private equity investments and company owned life insurance contracts.

Cash Flows Used in Financing Activities

Financing activities used cash of $984 million in the six months ended June 30, 2022, compared to using cash of $46 million in the comparable period in 2021. Financing activities in 2022 were driven by the redemption of Magellan's outstanding debt of $535 million acquired in the transaction using Magellan's cash on hand and stock repurchases of $344 million. In 2021, net financing activities were driven by to costs associated with our debt refinancing, offset by increased borrowings.

Liquidity Metrics

In June 2022, our Board of Directors approved an increase to the existing stock repurchase program for Centene’s common stock by $3.0 billion. We have approximately $3.5 billion remaining under the program for repurchases as of June 30, 2022.

From time to time, we raise capital through the issuance of debt in the form of senior notes or make decisions to repurchase shares or reduce debt as part of our capital allocation strategy. As of June 30, 2022, we had an aggregate principal amount of $16.0 billion of senior notes issued and outstanding. The indentures governing our various maturities of senior notes contain restrictive covenants. As of June 30, 2022, we were in compliance with all covenants. Refer to Note 8. Debt for further information regarding the issuance and redemption of senior notes and Note 10. Stockholders' Equity for information on stock repurchases.

The credit agreement underlying our Revolving Credit Facility and Term Loan Facility contains customary covenants as well as financial covenants including a minimum fixed charge coverage ratio and a maximum debt-to-EBITDA ratio. Our maximum debt-to-EBITDA ratio under the credit agreement may not exceed 4.0 to 1.0. As of June 30, 2022, we had $129 million of borrowings outstanding under our Revolving Credit Facility, $2.2 billion of borrowings under our Term Loan Facility, and we were in compliance with all covenants. As of June 30, 2022, there were no limitations on the availability of our Revolving Credit Facility as a result of the debt-to-EBITDA ratio.

We had outstanding letters of credit of $172 million as of June 30, 2022, which were not part of our revolving credit facility. The letters of credit bore weighted interest of 0.6% as of June 30, 2022. In addition, we had outstanding surety bonds of $1.4 billion as of June 30, 2022.

At June 30, 2022, we had working capital, defined as current assets less current liabilities, of $3.3 billion, compared to $2.7 billion at December 31, 2021. The increase as of June 30, 2022 was driven by the reclassification of PANTHERx assets and liabilities held for sale. We manage our short-term and long-term investments with the goal of ensuring that a sufficient portion is held in investments that are highly liquid and can be sold to fund short-term requirements as needed.

At June 30, 2022, our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 41.5%, compared to 41.2% at December 31, 2021. Excluding $181 million of non-recourse debt, our debt to capital ratio was 41.3% as of June 30, 2022, compared to $184 million and 40.9% at December 31, 2021. We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility.

2022 Expectations

During the remainder of 2022, we expect to receive net dividends from our insurance subsidiaries of approximately $610 million and spend approximately $550 million in additional capital expenditures primarily associated with system enhancements and the completion of our office in Charlotte, North Carolina. In July 2022, we made $106 million in additional purchases through our stock repurchase program and intend to utilize the majority of the proceeds from the recently completed PANTHERx sale to repurchase additional shares and the balance to reduce debt.

If the previously announced divestitures of Magellan Rx or our Spanish and Central European operations close in 2022, we would have additional proceeds to utilize for additional share repurchases and debt reduction.

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Based on our operating plan, we expect that our available cash, cash equivalents and investments, cash from our operations and cash available under our Revolving Credit Facility will be sufficient to finance our general operations and capital expenditures for at least 12 months from the date of this filing. While we are currently in a strong liquidity position and believe we have adequate access to capital, we may elect to increase borrowings on our Revolving Credit Facility. From time to time we may elect to raise additional funds for these and other purposes, either through issuance of debt or equity, the sale of investment securities or otherwise, as appropriate. In addition, we may strategically pursue refinancing or redemption opportunities to extend maturities and/or improve terms of our indebtedness if we believe such opportunities are favorable to us.

We intend to continue to evaluate strategic actions in connection with our Value Creation Plan, targeting initiatives to improve productivity, efficiencies and reduced organizational costs, as well as capital deployment activities, including stock repurchases, portfolio optimization and the evaluation of refinancing opportunities. In addition to creating shareholder value, this plan encompasses a larger organizational mission to enhance our member and provider experience, improve outcomes for our members, and to initiate new ways of doing business that make Centene a great partner in all aspects of our operations.

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REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS

Our operations are conducted through our subsidiaries. As managed care organizations, most of our subsidiaries are subject to state regulations and other requirements that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing, payment and amount of dividends and other distributions that may be paid to us. Generally, the amount of dividend distributions that may be paid by a regulated subsidiary without prior approval by state regulatory authorities is limited based on the entity's level of statutory net income and statutory capital and surplus.

Our regulated subsidiaries are required to maintain minimum capital requirements prescribed by various regulatory authorities in each of the states in which we operate. During the six months ended June 30, 2022, we received dividends of $500 million from and made $428 million of capital contributions to our regulated subsidiaries. For our subsidiaries that file with the National Association of Insurance Commissioners (NAIC), the aggregate risk-based capital (RBC) level as of December 31, 2021, which was the most recent date for which reporting was required, was in excess of 350% of the Authorized Control Level. We intend to continue to maintain an aggregate RBC level in excess of 350% of the Authorized Control Level during 2022.

Under the California Knox-Keene Health Care Service Plan Act of 1975, as amended (Knox-Keene), certain of our California subsidiaries must comply with tangible net equity (TNE) requirements. Under these Knox-Keene TNE requirements, actual net worth less certain unsecured receivables and intangible assets must be more than the greater of (i) a fixed minimum amount, (ii) a minimum amount based on premiums or (iii) a minimum amount based on healthcare expenditures, excluding capitated amounts.

Under the New York State Department of Health Codes, Rules and Regulations Title 10, Part 98, our New York subsidiary must comply with contingent reserve requirements. Under these requirements, net worth based upon admitted assets must equal or exceed a minimum amount based on annual net premium income.

The NAIC has adopted rules which set minimum RBC requirements for insurance companies, managed care organizations and other entities bearing risk for healthcare coverage. As of June 30, 2022, each of our health plans was in compliance with the RBC requirements enacted in those states.

As a result of the above requirements and other regulatory requirements, certain of our subsidiaries are subject to restrictions on their ability to make dividend payments, loans or other transfers of cash to their parent companies. Such restrictions, unless amended or waived or unless regulatory approval is granted, limit the use of any cash generated by these subsidiaries to pay our obligations. The maximum amount of dividends that can be paid by our insurance company subsidiaries without prior approval of the applicable state insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

INVESTMENTS AND DEBT

As of June 30, 2022, we had short-term investments of $1.8 billion and long-term investments of $14.9 billion, including restricted deposits of $1.2 billion. The short-term investments generally consist of highly liquid securities with maturities between three and 12 months. The long-term investments consist of municipal, corporate and U.S. Treasury securities, government sponsored obligations, life insurance contracts, asset-backed securities and equity securities and have maturities greater than one year. Restricted deposits consist of investments required by various state statutes to be deposited or pledged to state agencies. Due to the nature of the states’ requirements, these investments are classified as long-term regardless of the contractual maturity date. Substantially all of our investments are subject to interest rate risk and will decrease in value if market rates increase. Assuming a hypothetical and immediate 1% increase in market interest rates at June 30, 2022, the fair value of our fixed income investments would decrease by approximately $554 million.

For a discussion of the interest rate risk that our investments are subject to, refer to our 10-K for the fiscal year ended December 31, 2021, Part 1, Item 1A, "Risk Factors – Our investment portfolio may suffer losses which could materially and adversely affect our results of operations or liquidity."

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures - We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the filing of this Form 10-Q, management evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2022. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2022.

Changes in Internal Control Over Financial Reporting - No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

On January 4, 2022, we acquired Magellan. Management is currently in the process of evaluating the internal controls and procedures of Magellan and plans to integrate Magellan's internal control over financial reporting with our existing internal control over financial reporting. This integration may lead to changes in the internal control over financial reporting for us or the acquired Magellan business in future periods. Management expects the integration process to continue throughout the year and be completed during 2022.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

A description of the legal proceedings to which the Company and its subsidiaries are a party is contained in Note 13. Contingencies to the consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.

Item 1A. Risk Factors.

In addition to the risk factors set forth in Part I - Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the "2021 Form 10-K"), investors should carefully consider the following risk factor, which has been updated to reflect the impairment charges related to our real estate portfolio evaluation. This risk should be read in conjunction with the risk factors set forth in the 2021 Form 10-K and the other information contained in this report and our other filings with the Securities and Exchange Commission.

An impairment charge with respect to our real estate portfolio, recorded goodwill and intangible assets could have a material impact on our results of operations.

In connection with the evaluation of our real estate portfolio, we are downsizing our leased space and have evaluated whether the carrying value of our owned real estate may be impaired. As a result, we have incurred a charge of $744 million related to leased real estate and associated fixed asset impairments and a charge of $706 million related to owned real estate impairments in the second quarter of 2022. We anticipate additional future charges of approximately $200 million related to real estate optimization. We also periodically evaluate our goodwill and other intangible assets to determine whether all or a portion of their carrying values may be impaired, in which case a charge to earnings may be necessary. Changes in business strategy, government regulations or economic or market conditions have resulted and may result in impairments of our real estate portfolio, goodwill and other intangible assets at any time in the future. Our judgments regarding the existence of impairment indicators are based on, among other things, legal factors, market conditions, and operational performance. For example, the non-renewal of our health plan contracts with the state in which they operate may be an indicator of impairment. If an event or events occur that would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill and other intangible assets, such revision could result in a non-cash impairment charge that could have a material impact on our results of operations in the period in which the impairment occurs.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In June 2022, our Board of Directors approved an additional $3.0 billion to the Company's existing stock repurchase program for its common stock for a total $4.0 billion. During the second quarter, we purchased 4.2 million shares of Centene common stock for $344 million through our stock repurchase program. We have approximately $3.5 billion remaining under the program for repurchases as of June 30, 2022. The stock repurchase program is effected primarily through regular open-market purchases (which may include repurchase plans designed to comply with Rule 10b5-1 and accelerated share repurchases), the amounts and timing of which are subject to our discretion as part of our capital allocation strategy, and may be based upon general market conditions and the prevailing price and trading volumes of our common stock. No duration has been placed on the repurchase program.

Issuer Purchases of Equity Securities Second Quarter 2022 (shares in thousands)
PeriodTotal Number of Shares Purchased (1)Average Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsApproximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs ($ in millions) (2)
April 1, 2022 - April 30, 202221$86.63—$800
May 1, 2022 - May 31, 20222,45282.042,438600
June 1, 2022 - June 30, 20221,77582.491,7503,456
Total4,248$82.254,188$3,456
(1) Shares acquired represent shares relinquished to the Company by certain employees for payment of taxes or option cost upon vesting of restricted stock units or option exercise. (2) In June 2022, the Company's Board of Directors approved a $3.0 billion increase to the Company's existing stock repurchase program for its common stock. A remaining amount of approximately $3.5 billion is available under the program as of June 30, 2022.

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Item 6. Exhibits.

EXHIBIT NUMBERDESCRIPTION
3.1Amended and Restated Certificate of Incorporation of Centene Corporation, dated April 27, 2021 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 30, 2021).
3.2Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Centene Corporation, dated April 26, 2022 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 28, 2022).
3.3Amended and Restated By-laws of Centene Corporation, effective April 26, 2022 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 28, 2022).
10.1*Executive Employment Agreement between Centene Corporation and Sarah M. London, dated April 27, 2022.
10.2*Executive Employment Agreement between Centene Corporation and Brent Layton, dated April 27, 2022.
10.3*Executive Employment Agreement between Centene Corporation and Andrew Asher, dated April 28, 2022.
31.1Certification of Chief Executive Officer pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934, as amended.
31.2Certification of Executive Vice President and Chief Financial Officer pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934, as amended.
32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101The following materials from the Centene Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Earnings; (iv) the Consolidated Statements of Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows and (vi) related notes.
104Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.
* Indicates a management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of July 26, 2022.

CENTENE CORPORATION
By:/s/ SARAH M. LONDON
Chief Executive Officer (principal executive officer)
By:/s/ ANDREW L. ASHER
Executive Vice President and Chief Financial Officer (principal financial officer)
By:/s/ KATIE N. CASSO
Senior Vice President, Corporate Controller and Chief Accounting Officer (principal accounting officer)