UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
                                            


FORM 10-Q
 


 
(Mark One)
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   

For the quarterly period ended June 30, 2010
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)
   
7711 Carondelet Avenue
 
St. Louis, Missouri
63105
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:
 
(314) 725-4477
 
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: T Yes £ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). T Yes £ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer T Accelerated filer £ Non-accelerated filer £ (do not check if a smaller reporting company) Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  Yes  £    No  T

As of July 16, 2010, the registrant had 51,669,507 shares of common stock outstanding.





 
 
 
 
CENTENE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

   
PAGE
     
Part I
Financial Information
Item 1.
 
 
1
 
2
 
3
 
4
 
5
Item 2.
10
Item 3.
16
Item 4.
16
Part II
Other Information
Item 1A.
17
Item 2.
24
Item 6.
25
26

 
 
 

 
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

All statements, other than statements of current or historical fact, contained in this filing are forward-looking statements.  We have attempted to identify these statements by terminology including “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “seek,” “target,” “goal,” “may,” “will,” “should,” “can,” “continue” and other similar words or expressions in connection with, among other things, any discussion of future operating or financial performance.  In particular, these statements include statements about our market opportunity, our growth strategy, competition, expected activities and future acquisitions, investments and the adequacy of our available cash resources.  These statements may be found in the various sections of this filing, including those entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Part II, Item 1A.  “Risk Factors.”  Readers are cautioned that matters subject to forward-looking statements involve known and unknown risks and uncertainties, 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 and 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.  Actual results may differ from projections or estimates due to a variety of important factors, including:

·  
our ability to accurately predict and effectively manage health benefits and other operating expenses;
·  
competition;
·  
changes in healthcare practices;
·  
changes in federal or state laws or regulations, including the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act and any regulations enacted thereunder;
·  
inflation;
·  
provider contract changes;
·  
new technologies;
·  
reduction in provider payments by governmental payors;
·  
major epidemics;
·  
disasters and numerous other factors affecting the delivery and cost of healthcare;
·  
the expiration, cancellation or suspension of our Medicaid managed care contracts by state governments;
·  
availability of debt and equity financing, on terms that are favorable to us; and
·  
general economic and market conditions.



 
 

PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements.

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
   
June 30,
2010
   
December 31,
 2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents of continuing operations, including $5,154 and $8,667, respectively, from consolidated variable interest entities
  $ 264,723     $ 400,951  
Cash and cash equivalents of discontinued operations
    877       2,801  
Total cash and cash equivalents
    265,600       403,752  
Premium and related receivables, net of allowance for uncollectible accounts of $1,336 and $1,338, respectively, including $7,266 and $11,313, respectively, from consolidated variable interest entities
    164,420       103,456  
Short-term investments, at fair value (amortized cost $29,542 and $39,230, respectively)
    29,660       39,554  
Other current assets, including $3,918 and $4,507, respectively, from consolidated variable interest entities
    83,843       64,866  
Current assets of discontinued operations other than cash
    2,314       4,506  
Total current assets
    545,837       616,134  
Long-term investments, at fair value (amortized cost $522,589 and $514,256, respectively)
    537,399       525,497  
Restricted deposits, at fair value (amortized cost $20,485 and $20,048, respectively)
    20,570       20,132  
Property, software and equipment, net of accumulated depreciation of $118,995 and $103,883, respectively, including $138,998 and $89,219, respectively, from consolidated variable interest entities
    313,839       230,421  
Goodwill
    244,304       224,587  
Intangible assets, net
    24,589       22,479  
Other long-term assets
    35,557       36,829  
Long-term assets of discontinued operations
    11,442       26,285  
Total assets
  $ 1,733,537     $ 1,702,364  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Medical claims liability
  $ 455,375     $ 470,932  
Accounts payable and accrued expenses, including $30,366 and $14,020, respectively, from consolidated variable interest entities
    167,613       132,001  
Unearned revenue
    5,695       91,644  
Current portion of long-term debt
    771       646  
Current liabilities of discontinued operations
    7,365       20,685  
Total current liabilities
    636,819       715,908  
Long-term debt
    252,028       307,085  
Other long-term liabilities
    64,870       59,561  
Long-term liabilities of discontinued operations
    652       383  
Total liabilities
    954,369       1,082,937  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Common stock, $.001 par value; authorized 100,000,000 shares; 51,654,541 issued and 49,210,505 outstanding at June 30, 2010, and 45,593,383 shares issued and 43,179,373 shares outstanding at December 31, 2009
    52       46  
Additional paid-in capital
    395,926       281,806  
Accumulated other comprehensive income:
               
Unrealized gain on investments, net of tax
    9,400       7,348  
Retained earnings
    405,682       358,907  
Treasury stock, at cost (2,444,036 and 2,414,010 shares, respectively)
    (47,830 )     (47,262 )
Total Centene Corporation stockholders’ equity
    763,230       600,845  
Noncontrolling interest
    15,938       18,582  
Total stockholders’ equity
    779,168       619,427  
Total liabilities and stockholders’ equity
  $ 1,733,537     $ 1,702,364  

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 thousands, except share data)
(Unaudited)
 
    Three Months Ended June 30,  
Six Months Ended June 30,
 
 
2010
 
2009
 
2010
 
2009
 
Revenues:
                       
Premium
$
1,025,928
 
$
909,698
 
$
2,025,243
 
$
1,794,704
 
Service
 
24,682
   
21,591
   
47,589
   
45,440
 
Premium and service revenues
 
1,050,610
   
931,289
   
2,072,832
   
1,840,144
 
Premium tax
 
26,162
   
108,180
   
72,661
   
131,760
 
Total revenues
 
1,076,772
   
1,039,469
   
2,145,493
   
1,971,904
 
Expenses:
                       
Medical costs
 
859,335
   
755,706
   
1,699,043
   
1,495,046
 
Cost of services
 
15,707
   
14,559
   
32,859
   
30,521
 
General and administrative expenses
 
133,470
   
129,221
   
268,977
   
251,500
 
Premium tax
 
26,551
   
108,548
   
73,294
   
132,490
 
Total operating expenses
 
1,035,063
   
1,008,034
   
2,074,173
   
1,909,557
 
Earnings from operations
 
41,709
   
31,435
   
71,320
   
62,347
 
Other income (expense):
                       
Investment and other income
 
4,142
   
4,418
   
11,199
   
8,031
 
Interest expense
 
(3,869
)
 
(4,160
)
 
(7,682
)
 
(8,146
)
Earnings from continuing operations, before income tax expense
 
41,982
   
31,693
   
74,837
   
62,232
 
Income tax expense
 
17,254
   
11,789
   
29,779
   
22,634
 
Earnings from continuing operations, net of income tax expense
 
24,728
   
19,904
   
45,058
   
39,598
 
Discontinued operations, net of income tax (benefit) expense of $(90), $(196), $4,350 and $(356), respectively
 
(226
)
 
(485
)
 
3,694
   
(934
)
Net earnings
 
24,502
   
19,419
   
48,752
   
38,664
 
Noncontrolling interest (loss)
 
1,729
   
(811
)
 
1,977
   
(24
)
Net earnings attributable to Centene Corporation
$
22,773
 
$
20,230
 
$
46,775
 
$
38,688
 
                         
Amounts attributable to Centene Corporation common stockholders:
                       
Earnings from continuing operations, net of income tax expense
$
22,999
 
$
20,715
 
$
43,081
 
$
39,622
 
Discontinued operations, net of income tax (benefit) expense
 
(226
)
 
(485
)
 
3,694
   
(934
)
Net earnings
$
22,773
 
$
20,230
 
$
46,775
 
$
38,688
 
                         
Net earnings (loss) per common share attributable to Centene Corporation:
                       
Basic:
                       
Continuing operations
$
0.46
 
$
0.48
 
$
0.89
 
$
0.92
 
Discontinued operations
 
—  
   
(0.01
)
 
0.08
   
(0.02
)
Earnings per common share
$
0.46
 
$
0.47
 
$
0.97
 
$
0.90
 
Diluted:
                       
Continuing operations
$
0.45
 
$
0.47
 
$
0.86
 
$
0.90
 
Discontinued operations
 
—  
   
(0.01
)
 
0.08
   
(0.02
)
Earnings per common share
$
0.45
 
$
0.46
 
$
0.94
 
$
0.88
 
                         
Weighted average number of shares outstanding:
                       
Basic
 
49,135,552
   
43,001,157
   
48,203,312
   
43,034,390
 
Diluted
 
50,866,318
   
44,242,339
   
49,807,084
   
44,240,071
 

The accompanying notes to the consolidated financial statements are an integral part of these statements.
 
 
 
2

CENTENE CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
Six Months Ended June 30, 2010
 ­
   
Centene Stockholders’ Equity
               
   
Common Stock
                       
Treasury Stock
               
   
$.001 Par
Value
Shares
   
Amt
   
Additional
Paid-in
Capital
   
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
$.001 Par
Value
Shares
 
Amt
 
Non
controlling
Interest
   
Total
 
Balance, December 31, 2009
 
45,593,383
   
$
46
   
$
281,806
   
$
7,348 
 
$
358,907
 
2,414,010
 
$
(47,262)
 
$
18,582
   
$
619,427
 
Consolidation of Syncare LLC
 
—  
     
—  
     
—  
     
—  
   
—  
 
—  
   
—  
   
219
     
219
 
Comprehensive Earnings:
                                                           
Net earnings
 
—  
     
—  
     
—  
     
—  
   
46,775
 
—  
   
—  
   
1,977
     
48,752
 
Change in unrealized investment gain, net of $1,261 tax
 
—  
     
—  
     
—  
     
2,052
   
—  
 
—  
   
—  
   
—  
     
2,052
 
Total comprehensive earnings
                                                       
50,804
 
Common stock issued for stock offering
 
5,750,000
     
6
     
104,528
     
—  
   
—  
       
—  
   
—  
     
104,534
 
Common stock issued for employee benefit plans
 
311,158
     
—  
     
2,198
     
—  
   
—  
       
—  
   
—  
     
2,198
 
Common stock repurchases
 
—  
     
—  
     
—  
     
—  
   
—  
 
30,026
   
(568)
   
—  
     
(568
)
Issuance of stock warrants
 
—  
     
—  
     
296
     
—  
   
—  
       
—  
   
—  
     
296
 
Stock compensation expense
 
—  
     
—  
     
6,888
     
—  
   
—  
 
—  
   
—  
   
—  
     
6,888
 
Excess tax benefits from stock compensation
 
—  
     
—  
     
210
     
—  
   
—  
 
—  
   
—  
   
—  
     
210
 
Distributions to noncontrolling interest
 
—  
     
—  
     
—  
     
—  
   
—  
 
—  
   
—  
   
(4,840)
     
(4,840
)
Balance, June 30, 2010
 
51,654,541
   
$
52
   
$
395,926
   
$
9,400
 
$
405,682
 
2,444,036
 
$
(47,830)
 
$
15,938
   
$
779,168
 

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


 
3

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Six Months Ended June 30,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Net earnings
  $ 48,752     $ 38,664  
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
               
Depreciation and amortization
    24,918       20,892  
Stock compensation expense
    6,888       7,611  
(Gain) loss on sale of investments, net
    (3,987 )     450  
(Gain) on sale of UHP
    (8,201 )      
Deferred income taxes
    4,928       1,512  
Changes in assets and liabilities:
               
Premium and related receivables
    (57,718     (23,327 )
Other current assets
    948       1,357  
Other assets
    1,719       (608 )
Medical claims liabilities
    (28,868 )     17,093  
Unearned revenue
    (85,950 )     44,129  
Accounts payable and accrued expenses
    (3,536     (49,377 )
Other operating activities
    1,851       3,723  
Net cash (used in) provided by operating activities
    (98,256     62,119  
Cash flows from investing activities:
               
Capital expenditures
    (63,602 )     (29,833 )
Purchases of investments
    (306,124 )     (415,052 )
Proceeds from asset sales
    13,420        
Sales and maturities of investments
    291,735       377,320  
Investments in acquisitions, net of cash acquired
    (21,473 )     (7,621 )
Net cash used in investing activities
    (86,044 )     (75,186 )
Cash flows from financing activities:
               
Proceeds from exercise of stock options
    1,759       1,109  
Proceeds from borrowings
    42,161       288,000  
Proceeds from stock offering
    104,534        
Payment of long-term debt
    (97,193 )     (264,135 )
Distributions to noncontrolling interest
    (4,840 )     (707 )
Excess tax benefits from stock compensation
    295       15  
Common stock repurchases
    (568 )     (5,447 )
Debt issue costs
          (368 )
Net cash provided by financing activities
    46,148       18,467  
Net (decrease) increase in cash and cash equivalents
    (138,152     5,400  
Cash and cash equivalents, beginning of period
    403,752       379,099  
Cash and cash equivalents, end of period
  $ 265,600     $ 384,499  
                 
Supplemental disclosures of cash flow information:
               
Interest paid
  $ 7,320     $ 7,658  
Income taxes paid
  $ 27,940     $ 31,512  
                 
Supplemental disclosure of non-cash investing and financing activities:
               
Contribution from noncontrolling interest
  $ 306     $ 5,107  
 
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.

 
4

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
(Unaudited)
1. 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 for the fiscal year ended December 31, 2009 filed on Form 10-K on February 22, 2010.  The unaudited interim financial statements herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the December 31, 2009, 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 2009 amounts in the consolidated financial statements have been reclassified to conform to the 2010 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.
 
2. Recent Accounting Pronouncements

In June 2009, new guidance was issued related to the consolidation of variable interest entities to require an analysis to determine whether a variable interest gives the Company a controlling financial interest in a variable interest entity. This guidance requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This guidance was effective for fiscal years beginning after November 15, 2009, and early adoption was prohibited.  The adoption of this guidance did not have an impact on the consolidated financial statements and related disclosures.

The Company has determined that all other recently issued accounting guidance will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.

3. Discontinued Operations: University Health Plans, Inc.

In March 2010, the Company completed the sale of certain assets of the New Jersey health plan, University Health Plans, Inc., or UHP, and recorded a pre-tax gain of $8,201.  Goodwill and intangible assets associated with the New Jersey operations disposed of as a part of the sale were $3,720.  The assets, liabilities and results of operations of UHP were classified as discontinued operations for all periods presented beginning in December 2008 and were previously reported in the Medicaid Managed Care segment.  The total revenue associated with UHP included in results from discontinued operations was zero and $35,119 for the three months ended June 30, 2010 and 2009, respectively.   The total revenue associated with UHP included in results from discontinued operations was $21,993 and $72,086 for the six months ended June 30, 2010 and 2009, respectively.  UHP had statutory capital of approximately $10,000 at June 30, 2010, which will be transferred to unregulated cash upon receiving regulatory approval.

During the three and six months ending June 30, 2010, the Company incurred additional exit costs related to lease termination costs and employee retention programs and made related payments.  In total, the Company has incurred exit costs totaling $5,459.  The change in the exit cost liability for UHP is summarized as follows:

   
Three Months Ended June 30, 2010
   
Six Months Ended June 30, 2010
 
   
Employee Benefits
   
Lease Termination
   
Total
   
Employee Benefits
   
Lease Termination
   
Total
 
Beginning Balance
  $ 1,951     $ 1,136     $ 3,087     $ 2,726     $ 267     $ 2,993  
Incurred
                      73       1,136       1,209  
Paid
    (559 )     (67 )     (626 )     (1,407 )     (334 )     (1,741 )
Ending Balance
  $ 1,392     $ 1,069     $ 2,461     $ 1,392     $ 1,069     $ 2,461  

4. Acquisitions

In June 2010, the Company acquired certain assets of Carolina Crescent Health Plan, South Carolina’s largest non-profit Medicaid managed care organization.  The Company paid $16,949 in cash and recorded $1,044 of contingent consideration, subject to adjustment.  Goodwill of $14,394 and other identifiable intangible assets of $3,599 were recorded in the Medicaid Managed Care segment.

5. Variable Interest Entities

Centene Center, LLC

In June 2009, the Company executed an agreement as a 50% joint venture partner in a real estate development entity, Centene Center LLC, or Centene Center, associated with the construction of a real estate development to include the Company’s corporate headquarters.  Centene Center is a variable interest entity, or VIE, and the Company concluded it was the primary beneficiary.  Accordingly, the Company’s consolidated financial statements include the accounts of Centene Center.

As part of financing the real estate development, Centene Center executed a $95,000 construction loan due June 1, 2011, which may be extended for two additional one year terms.  The Company and its development partner have guaranteed up to $65,000 each associated with this construction loan until substantial completion of the real estate development when the guarantee is reduced to 50% of the outstanding loan balance.  As of June 30, 2010, $61,719 was outstanding under this loan and Centene Center has capitalized $1,089 of interest in 2010.

Access Health Solutions, LLC

The Company maintains a 49% ownership interest in Access Health Solutions, LLC, or Access, a Medicaid managed care entity in Florida.  The Company also has rights to acquire the remaining assets and ownership interests in Access.  As a result of these rights, the Company determined that Access is a VIE and the Company is the primary beneficiary.  The Company records its investment in Access as a consolidated subsidiary in its financial statements.

Syncare, LLC

During the first quarter of 2010, one of the Company’s employees became the owner of Syncare, LLC, or Syncare, a disease management company providing services to private and public insurers.  Additionally, the Company is a guarantor on a $300 loan that was utilized to purchase the business and is a guarantor of Syncare’s $100 business loan.  As a result, the Company determined that Syncare, LLC is a VIE and the Company is the primary beneficiary.  The Company has presented Syncare as a consolidated entity effective February 1, 2010.

Summary

The carrying amounts of the consolidated assets and liabilities related to the Company’s interests in Centene Center, Access and Syncare, are as follows:
 
 
   
June 30, 2010
   
December 31, 2009
 
Cash and cash equivalents
  $ 5,154     $ 8,667  
Premium and related receivables
    7,266       11,313  
Other current assets
    3,918       4,507  
Property, software and equipment
    138,998       89,219  
                 
Accounts payable and accrued expenses
  $ 30,366     $ 14,020  
Long-term debt
    61,819       32,559  

The assets of each VIE can only be used to settle obligations of each respective VIE.  With respect to the long-term debt balances, creditors have recourse to the Company through the guarantees discussed above.
 
 
5

 
6. Investments and Restricted Deposits

Short-term and long-term investments and restricted deposits by investment type consist of the following:

   
June 30, 2010
   
December 31, 2009
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
U.S. Treasury securities
  $ 29,211     $ 564     $     $ 29,775     $ 27,080     $ 213     $ (5 )   $ 27,288  
Corporate securities
    187,763       3,137       (28 )     190,872       165,720       581       (940 )     165,361  
State and municipal securities
    320,699       11,095       (22 )     331,772       333,955       11,628       (31 )     345,552  
Cost method investments and equity securities
    7,862                   7,862       9,751       312       (170 )     9,893  
Reserve Primary fund
                            2,444                   2,444  
Life insurance contracts
    14,241                   14,241       14,650                   14,650  
Asset backed securities
    12,840       267             13,107       19,934       61             19,995  
Total
  $ 572,616     $ 15,063     $ (50 )   $ 587,629     $ 573,534     $ 12,795     $ (1,146 )   $ 585,183  
 
The Company’s investments are classified as available for sale with the exception of life insurance contracts and certain cost method investments.  The Company’s investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets with the focus on high credit quality securities rated A or higher.  Additionally, the Company limits the size of investment in any single issuer.

The Company monitors investments for other than temporary impairment.  Certain investments have experienced a decline in fair value due to changes in credit quality, market interest rates and/or general economic conditions.  Based on management’s intent and ability to hold these investments until their anticipated recovery, no other than temporary impairment has been recorded.  Investments in a gross unrealized loss position are as follows:
 
 
June 30, 2010
 
December 31, 2009
 
 
Less Than 12 Months
 
12 Months or More
 
Less Than 12 Months
 
12 Months or More
 
 
Unrealized Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
U.S. Treasury securities
  $     $     $     $     $ (5 )   $ 785     $     $  
Corporate securities
    (28 )     8,289                   (901 )     99,418       (39     892  
State and municipal securities
    (22 )     2,002                   (31 )     9,683              
Equity securities
                            (84 )     527       (86     629  
Total
  $ (50 )   $ 10,291     $     $     $ (1,021 )   $ 110,413     $ (125 )   $ 1,521  

The contractual maturities of short-term and long-term investments and restricted deposits as of June 30, 2010, are as follows:

   
Investments
   
Restricted Deposits
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
One year or less
  $ 29,542     $ 29,660     $ 19,747     $ 19,778  
One year through five years
    476,481       491,248       738       792  
Five years through ten years
    26,917       26,940              
Greater than ten years
    19,191       19,211              
Total
  $ 552,131     $ 567,059     $ 20,485     $ 20,570  

The contractual maturities of short-term and long-term investments and restricted deposits as of December 31, 2009, are as follows:

   
Investments
   
Restricted Deposits
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
One year or less
  $ 39,230     $ 39,554     $ 17,737     $ 17,758  
One year through five years
    456,041       467,112       2,311       2,374  
Five years through ten years
    28,597       28,780              
Greater than ten years
    29,618       29,605              
Total
  $ 553,486     $ 565,051     $ 20,048     $ 20,132  

Actual maturities may differ from contractual maturities due to call or prepayment options.  Asset backed securities are included in the one year through five years category, while equity securities and life insurance contracts are included in the five years through ten years category.   The Company has an option to redeem at amortized cost substantially all of the securities included in the greater than ten years category listed above.
 
The Company’s gross recorded realized gains and losses on investments were as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2010
 
2009
 
2010
 
2009
 
Gains
  $ 683     $ 173     $ 3,717     $ 553  
Losses
    (245 )     (164 )     (245 )     (983 )


Investment and other income in the first quarter of 2010 included a realized gain related to the Reserve Primary money market fund.   During 2008, we recorded a loss of $4,457 related to our investment in the Reserve Primary money market fund whose Net Asset Value fell below $1.00 per share. In January 2010, we received a distribution from the fund of $5,405 and recorded a gain of $2,961 in the first quarter of 2010, representing distributions received in excess of our adjusted basis.
 
7. Fair Value Measurements
 
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the extent to which the fair value estimates are based upon observable or unobservable inputs.  Level inputs are as follows:
 
 
Level Input:
 
  
 
Input Definition:
 
Level I
  
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
   
Level II
  
Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
   
Level III
  
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
 
 
The following table summarizes fair value measurements by level at June 30, 2010, for assets and liabilities measured at fair value on a recurring basis:
 
   
Level I
   
Level II
   
Level III
   
Total
 
Cash and cash equivalents
  $ 264,723                 $ 264,723  
                                 
Investments available for sale:
                               
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 18,592     $ 3,312     $     $ 21,904  
Corporate securities
          177,221             177,221  
State and municipal securities
          331,773             331,773  
Asset backed securities
          13,107             13,107  
Total investments
  $ 18,592     $ 525,413     $     $ 544,005  
                                 
Restricted deposits available for sale:
                               
Cash and cash equivalents
  $ 6,294     $     $     $ 6,294  
Certificates of deposit
    6,404                   6,404  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
    7,872                   7,872  
Total restricted deposits
  $ 20,570     $     $     $ 20,570  
                                 
Total assets at fair value
  $ 303,885     $ 525,413     $     $ 829,298  
 
The following table summarizes fair value measurements by level at December 31, 2009, for assets and liabilities measured at fair value on a recurring basis:
 
   
Level I
   
Level II
   
Level III
   
Total
 
Cash and cash equivalents
  $ 400,951                 $ 400,951  
                                 
Investments available for sale:
                               
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 16,635     $ 2,764     $     $ 19,399  
Corporate securities
          152,919             152,919  
State and municipal securities
          345,552             345,552  
Equity securities
    3,585                   3,585  
Asset backed securities
          19,995             19,995  
Total investments
  $ 20,220     $ 521,230     $     $ 541,450  
                                 
Restricted deposits available for sale:
                               
Cash and cash equivalents
  $ 7,285     $     $     $ 7,285  
Certificates of deposit
    4,958                   4,958  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
    7,889                   7,889  
Total restricted deposits
  $ 20,132     $     $     $ 20,132  
                                 
Total assets at fair value
  $ 441,303     $ 521,230     $     $ 962,533  

The Company periodically transfers U.S. Treasury securities between Level I and Level II fair value measurements dependent upon the level of trading activity for the specific securities at the measurement date.  The Company utilizes matrix pricing services to estimate fair value for securities which are not actively traded on the measurement date.  We designate these securities as Level II fair value measurements.  The aggregate carrying amount of the Company’s life insurance contracts and cost-method investments, which approximates fair value, was $23,054 and $23,601 as of June 30, 2010, and December 31, 2009, respectively.
 
8. Debt

Debt consists of the following:
   
June 30, 2010
   
December 31, 2009
 
$175,000 senior notes
  $ 175,000     $ 175,000  
$300,000 revolving credit agreement
          84,000  
Joint venture construction loan
    61,719       32,559  
Mortgage note payable
    9,700       9,900  
Capital leases and other
    6,380       6,272  
     Total debt
    252,799       307,731  
Less current maturities
    (771 )     (646 )
     Long-term debt
  $ 252,028     $ 307,085  

During the first quarter of 2010, the Company completed the sale of 5.75 million shares of common stock for $19.25 per share.  A portion of the proceeds was used to repay the outstanding indebtedness under our $300,000 revolving credit agreement ($84,000 as of December 31, 2009).

9. Income Taxes

Excluding the effects of noncontrolling interests, the effective tax rate for the three months ended June 30, 2010 would be 42.9% compared to 36.3% in 2009, and the effective tax rate for the six months ended June 30, 2010 would be 40.9% compared to 36.4% in 2009.  The increase in the effective tax rate was primarily driven by recently enacted legislation in the state of Georgia which replaced the state income tax with a premium tax for Medicaid managed care organizations effective July 1, 2010.  As a result of the new legislation, the Company is unable to realize any future tax benefit from deferred tax assets recorded related to Georgia state net operating loss carry forwards.  Accordingly, a deferred tax asset of $1.7 million, or approximately $0.03 per share, was written off during the second quarter.

 
7

 
10. Earnings Per Share

The following table sets forth the calculation of basic and diluted net earnings (loss) per common share:

   
Three Months Ended June 30,
 
Six Months Ended June 30,
 
   
2010
   
2009
 
2010
   
2009
 
Net earnings (loss) attributable to Centene Corporation common stockholders:
                             
Earnings from continuing operations, net of tax
 
$
22,999
   
$
20,715
 
$
43,081
   
$
39,622
 
Discontinued operations, net of tax
   
(226
)
   
(485
)
 
3,694
     
(934
)
Net earnings
 
$
22,773
   
$
20,230
 
$
46,775
   
$
38,688
 
Shares used in computing per share amounts:
                             
Weighted average number of common shares outstanding
   
49,135,552
     
43,001,157
   
48,203,312
     
43,034,390
 
Common stock equivalents (as determined by applying the treasury stock method)
   
1,730,766
     
1,241,182
   
1,603,772
     
1,205,681
 
Weighted average number of common shares and potential dilutive common shares outstanding
   
50,866,318
     
44,242,339
   
49,807,084
     
44,240,071
 
                               
Net earnings (loss) per share attributable to Centene Corporation common stockholders:
                             
Basic:
                             
  Continuing operations
 
$
0.46
   
$
0.48
 
$
0.89
   
$
0.92
 
  Discontinued operations
   
     
(0.01
)
 
0.08
     
(0.02
)
  Earnings per common share
 
$
0.46
   
$
0.47
 
$
0.97
   
$
0.90
 
                               
Diluted:
                             
  Continuing operations
 
$
0.45
   
$
0.47
 
$
0.86
   
$
0.90
 
  Discontinued operations
   
     
(0.01
)
 
0.08
     
(0.02
)
  Earnings per common share
 
$
0.45
   
$
0.46
 
$
0.94
   
$
0.88
 
                               
The calculation of diluted earnings per common share for the three and six months ended June 30, 2010 excludes the impact of 1,913,073 and 1,864,028 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.  The calculation of diluted earnings per common share for the three and six months ended June 30, 2009 excludes the impact of 2,538,599 and 2,537,990 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.

11. Stockholders’ Equity

During the first quarter of 2010, the Company completed the sale of 5.75 million shares of common stock for $19.25 per share. Net proceeds from the sale of the additional shares were approximately $104,500.  A portion of the proceeds was used to repay the outstanding indebtedness under our $300,000 revolving credit loan facility ($84,000 as of December 31, 2009).  The Company has used the remaining proceeds to fund our acquisition in South Carolina as well as capital expenditures.

On October 26, 2009, the Company’s Board of Directors extended the Company’s stock repurchase program.  The program authorizes the repurchase of up to 4,000,000 shares of the Company’s common stock from time to time on the open market or through privately negotiated transactions.  No duration has been placed on the repurchase program and the Company reserves the right to discontinue the repurchase program at any time.  The Company has not made any repurchases under this plan during 2010.

As a component of the employee stock compensation plan, employees can use shares of stock which have vested to satisfy personal tax withholding obligations.  During the six months ended June 30, 2010, the Company purchased 30,026 vested shares from employees at an aggregate cost of $568.  These shares are included in the Company’s treasury stock.
 
12. Segment Information
 
Centene operates in two segments: Medicaid Managed Care and Specialty Services.  The Medicaid Managed Care segment consists of Centene’s health plans including all of the functions needed to operate them.  The health plans in Florida, Georgia, Indiana, Ohio, South Carolina, Texas and Wisconsin are included in the Medicaid Managed Care segment.  The Specialty Services segment consists of Centene’s specialty companies which offer products for behavioral health, health insurance exchanges, individual health insurance, life and health management, long-term care programs, managed vision, telehealth services and pharmacy benefits management.  The health plans in Arizona, operated by our long-term care company, and Massachusetts, operated by our individual health insurance provider, are included in the Specialty Services segment.

Segment information for the three months ended June 30, 2010 follows:
 
   
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
 
Revenue from external customers
  $ 900,463     $ 150,147     $     $ 1,050,610  
Revenue from internal customers
    15,101       122,963       (138,064 )      
Total premium and service revenues
  $ 915,564     $ 273,110     $ (138,064 )   $ 1,050,610  
                                 
Earnings from operations
  $ 28,043     $ 13,666     $     $ 41,709  

Segment information for the three months ended June 30, 2009 follows:
 
   
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
 
Revenue from external customers
  $ 815,790     $ 115,499     $     $ 931,289  
Revenue from internal customers
    16,450       132,096       (148,546 )      
Total premium and service revenues
  $ 832,240     $ 247,595     $ (148,546 )   $ 931,289  
                                 
Earnings from operations
  $ 21,347     $ 10,088     $     $ 31,435  

 
8

 
Segment information for the six months ended June 30, 2010 follows:
 
   
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
 
Revenue from external customers
  $ 1,780,442     $ 292,390     $     $ 2,072,832  
Revenue from internal customers
    30,227       247,949       (278,176 )      
Total premium and service revenues
  $ 1,810,669     $ 540,339     $ (278,176 )   $ 2,072,832  
                                 
Earnings from operations
  $ 46,743     $ 24,577     $     $ 71,320  

Segment information for the six months ended June 30, 2009 follows:
 
   
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
 
Revenue from external customers
  $ 1,611,692     $ 228,452     $     $ 1,840,144  
Revenue from internal customers
    32,124       266,172       (298,296 )      
Total premium and service revenues
  $ 1,643,816     $ 494,624     $ (298,296 )   $ 1,840,144  
                                 
Earnings from operations
  $ 38,090     $ 24,257     $     $ 62,347  

13. Comprehensive Earnings

Differences between net earnings and total comprehensive earnings resulted from changes in unrealized gains (losses) on investments available for sale, as follows:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net earnings
  $ 24,502     $ 19,419     $ 48,752     $ 38,664  
                                 
Reclassification adjustment, net of tax
    323       (76 )     135       (138 )
Change in unrealized gains on investments, net of tax
    1,874       21       1,917       2,067  
Total change
    2,197       (55 )     2,052       1,929  
                                 
Comprehensive earnings
    26,699       19,364       50,804       40,593  
Comprehensive earnings (losses) attributable to the noncontrolling interests
    1,729       (811 )     1,977       (24 )
Comprehensive earnings attributable to Centene Corporation
  $ 24,970     $ 20,175     $ 48,827     $ 40,617  

 
9


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 both known and unknown risks and uncertainties, including those set forth under Part II, Item 1A. “Risk Factors” of this Form 10-Q.
 
OVERVIEW

We are a multi-line healthcare enterprise operating in two segments: Medicaid Managed Care and Specialty Services.  Our Medicaid Managed Care segment provides Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State Children’s Health Insurance Program, or CHIP, Foster Care, Medicare Special Needs Plans and the Supplemental Security Income Program, also known as the Aged, Blind or Disabled Program, or collectively ABD.  Our health plans in Florida, Georgia, Indiana, Ohio, South Carolina, Texas and Wisconsin are included in the Medicaid Managed Care segment.  Our Specialty Services segment offers products for behavioral health, health insurance exchanges, individual health insurance, life and health management, long-term care programs, managed vision, telehealth services, and pharmacy benefits management to state programs, healthcare organizations, employer groups and other commercial organizations, as well as to our own subsidiaries.  Our health plans in Arizona, operated by our long-term care company, and Massachusetts, operated by our individual health insurance provider, are included in the Specialty Services segment.

Our financial performance for the second quarter of 2010 is summarized as follows:

—  
Quarter-end at-risk managed care membership of 1,531,800.
—  
Premium and service revenues of $1.051 billion.
—  
Health Benefits Ratio of 83.8%.
—  
General and Administrative expense ratio of 12.7%.
—  
Diluted net earnings per share of $0.45.
—  
Total operating cash flow of $(59.8) million.

We completed the sale of certain assets of University Health Plans, Inc., or UHP, our New Jersey health plan, during the first quarter of 2010.  The results of operations for UHP are classified as discontinued operations for all periods presented.  Unless specifically noted, these discussions are in the context of continuing operations and, therefore, exclude UHP.
 
The following items contributed to our revenue and membership growth over the last year:

—  
In June 2010, we completed the acquisition of certain assets of Carolina Crescent Health Plan.  We now serve 92,600 at-risk members in South Carolina as of June 30, 2010.
—  
In July 2009, we began operating in Massachusetts to manage healthcare services for members under the state’s Commonwealth Care program and in October 2009 under the Commonwealth Care Bridge program.  At June 30, 2010, we served 30,100 members operating as CeltiCare Health Plan of Massachusetts.
—  
In February 2009, we began converting non-risk managed care membership in Florida from Access Health Solutions LLC, or Access, to our subsidiary, Sunshine State Health Plan on an at-risk basis.  Additionally, we also completed an acquisition of certain assets in Florida, adding to our membership.  At June 30, 2010, we served 113,100 members on an at-risk basis while Access served 46,800 members on a non-risk basis.

We expect our revenue and membership base to continue to grow in 2010 and beyond.  We expect the following items to contribute to our growth potential:

—  
The impact of a full year of our health plan in Massachusetts, continued membership conversion in Florida, the acquisition in South Carolina and the full year impact in 2010 of membership growth experienced during 2009.
—  
In November 2009, we were selected to provide managed care services in Mississippi to Medicaid recipients through the Mississippi Coordinated Access Network (MississippiCan) program.  We are working with the State and currently expect a fourth quarter 2010 start date.
—  
In March 2010, our specialty company, Cenpatico Behavioral Health, was awarded its existing service areas and was also awarded an expanded contract by the Arizona Department of Health Services to manage behavioral healthcare services for an additional four counties including Santa Cruz, Greenlee, Graham and Cochise.  The expanded contract is subject to the resolution of an outstanding appeal by the current incumbent.
—  
In May 2010, our Texas health plan was awarded a new ABD contract in the Dallas service area subject to execution of a final contract.  The new contract is expected to commence during the first quarter of 2011.
—  
In June 2010, our Indiana health plan was selected to negotiate a statewide managed care contract effective January 1, 2011. Upon successful execution of the contract, we will continue to serve Hoosier Healthwise members and begin serving Healthy Indiana Plan members.
—  
In July 2010, we closed on the acquisition of certain assets of NovaSys Health, LLC, a leading third party administrator in Arkansas that will complement our existing Celtic business.
 
In April 2010, we were notified by the Wisconsin Department of Health Services that our Wisconsin subsidiary, Managed Health Services (MHS), was not awarded the Southeast Wisconsin BadgerCare Plus Managed Care contract. The change is effective November 1, 2010; after a two-month transition period (September through October), MHS will no longer serve BadgerCare Plus Standard and Benchmark members in Milwaukee, Washington, Ozaukee, Waukesha and Kenosha counties.   MHS will continue to serve more than 6,000 Wisconsin Core Plan and SSI members in this region and more than 71,000 members in other regions of the state.

In March 2010, the Patient Protection and Affordable Care Act and the accompanying Health Care and Education Affordability Reconciliation Act were enacted.  We are currently evaluating the provisions of the Acts and do not expect material effects on our results of operations, liquidity and cash flows in 2010.  The Acts contain provisions we expect will have a significant effect on our business in coming years including expanding Medicaid eligibility beginning in 2014 to recipients with incomes below 133% of the federal poverty level, retaining the CHIP program in its current form, and requiring state-based Exchanges similar to our experience in Massachusetts in the future.  The Acts allow States to receive the same level of rebates from pharmaceutical companies whether or not the States participate in managed care.  The Acts also impose an excise tax on health insurers beginning in 2014 based upon relative market share.
 
MEMBERSHIP

From June 30, 2009, to June 30, 2010, we increased our at-risk managed care membership by 18.8%.  The following table sets forth our membership by state for our managed care organizations:

   
June 30,
   
December 31,
 
   
2010
   
2009
   
2009
 
Arizona
    19,300       16,200       18,100  
Florida
    113,100       22,300       102,600  
Georgia
    295,600       292,800       309,700  
Indiana
    212,700       196,100       208,100  
Massachusetts
    30,100             27,800  
Ohio
    159,300       141,200       150,800  
South Carolina
    92,600       46,000       48,600  
Texas
    475,500       443,200       455,100  
Wisconsin
    133,600       131,200       134,800  
Total at-risk membership
    1,531,800       1,289,000       1,455,600  
Non-risk membership
    50,900       114,000       63,700  
Total
    1,582,700       1,403,000       1,519,300  
 
 
10

 
The following table sets forth our membership by line of business:
 
   
June 30,
   
December 31,
 
   
2010
   
2009
   
2009
 
Medicaid
    1,135,500       958,600       1,081,400  
CHIP & Foster Care
    272,400       261,400       263,600  
ABD & Medicare
    93,800       69,000       82,800  
Other State programs
    30,100             27,800  
Total at-risk membership
    1,531,800       1,289,000       1,455,600  
Non-risk membership
    50,900       114,000       63,700  
Total
    1,582,700       1,403,000       1,519,300  

The following table provides supplemental information of other membership categories:

   
June 30,
   
December 31,
 
   
2010
   
2009
   
2009
 
Cenpatico Behavioral Health:
                 
Arizona
    119,700       110,500       120,100  
Kansas
    39,100       41,100       41,400  
Bridgeway:
                       
Long-term Care
    2,800       2,400       2,600  

RESULTS OF CONTINUING 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, 2010 and 2009, 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, is as follows ($ in millions):

   
Three Months Ended June 30,
   
Six months Ended June 30,
 
   
2010
   
2009
   
% Change 2009-2010
   
2010
   
2009
   
% Change 2009-2010
 
Premium
  $ 1,025.9     $ 909.7       12.8 %   $ 2,025.2     $ 1,794.7       12.8 %
Service
    24.7       21.6       14.3 %     47.6       45.4       4.7 %
Total premium and service revenues
    1,050.6       931.3       12.8 %     2,072.8       1,840.1       12.6 %
Premium tax
    26.2       108.2       (75.8 )%     72.7       131.8       (44.9 )%
Total revenues
    1,076.8       1,039.5       3.6 %     2,145.5       1,971.9       8.8 %
Medical costs
    859.3       755.7       13.7 %     1,699.0       1,495.1       13.6 %
Cost of services
    15.7       14.6       7.9 %     32.9       30.5       7.7 %
General and administrative expenses
    133.5       129.2       3.3 %     269.0       251.5       6.9 %
Premium tax expense
    26.6       108.5       (75.5 )%     73.3       132.5       (44.7 )%
Earnings from operations
    41.7       31.5       32.7 %     71.3       62.3       14.4 %
Investment and other income, net
    0.3       0.2       5.8 %     3.5       (0.1 )     %
Earnings from continuing operations, before income tax expense
    42.0       31.7       32.5 %     74.8       62.2       20.3 %
Income tax expense
    17.3       11.8       46.4 %     29.7       22.6       31.6 %
Earnings from continuing operations, net of income tax expense
    24.7       19.9