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, 2013
OR

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to
____________________________________________
Commission file number: 001-31826
____________________________________________
CENTENE CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
42-1406317
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
 
 
7700 Forsyth Boulevard
 
St. Louis, Missouri
63105
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:
 
(314) 725-4477
 
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: x Yes o 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). x Yes o 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 x Accelerated filer o Non-accelerated filer o (do not check if a smaller reporting company) Smaller reporting company o

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

As of July 12, 2013, the registrant had 54,631,561 shares of common stock outstanding.




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

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


Table of Contents

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

All statements, other than statements of current or historical fact, contained in this filing are forward-looking statements.  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,” Part I, Item 1A. “Risk Factors,” and Part I, Item 3 “Legal Proceedings.”  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;
membership and revenue projections;
timing of regulatory contract approval;
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;
changes in expected contract start dates;
changes in expected closing dates for acquisitions;
inflation;
provider and state 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 Medicare or Medicaid managed care contracts by federal or state governments;
availability of debt and equity financing, on terms that are favorable to us; and
general economic and market conditions.



Table of Contents

PART I
FINANCIAL INFORMATION

ITEM 1. Financial Statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

 
June 30,
2013
 
December 31,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
688,712

 
$
843,952

Premium and related receivables
357,908

 
263,452

Short-term investments
131,330

 
139,118

Other current assets
164,410

 
127,080

Total current assets
1,342,360

 
1,373,602

Long-term investments
769,905

 
614,723

Restricted deposits
39,291

 
34,793

Property, software and equipment, net
388,965

 
377,726

Goodwill
344,822

 
256,288

Intangible assets, net
52,219

 
20,268

Other long-term assets
107,673

 
64,282

Total assets
$
3,045,235

 
$
2,741,682

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Medical claims liability
$
1,078,386

 
$
926,302

Premium deficiency reserve
1,016

 
41,475

Accounts payable and accrued expenses
216,330

 
191,343

Unearned revenue
21,811

 
34,597

Current portion of long-term debt
3,029

 
3,373

Total current liabilities
1,320,572

 
1,197,090

Long-term debt
548,473

 
535,481

Other long-term liabilities
53,916

 
55,344

Total liabilities
1,922,961

 
1,787,915

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

Common stock, $.001 par value; authorized 100,000,000 shares; 57,661,262 issued and 54,627,735 outstanding at June 30, 2013, and 55,339,160 issued and 52,329,248 outstanding at December 31, 2012
58

 
55

Additional paid-in capital
563,873

 
450,856

Accumulated other comprehensive income:
 
 
 
Unrealized (loss) gain on investments, net of tax
(4,061
)
 
5,189

Retained earnings
629,306

 
566,820

Treasury stock, at cost (3,033,527 and 3,009,912 shares, respectively)
(70,969
)
 
(69,864
)
Total Centene stockholders’ equity
1,118,207

 
953,056

Noncontrolling interest
4,067

 
711

Total stockholders’ equity
1,122,274

 
953,767

Total liabilities and stockholders’ equity
$
3,045,235

 
$
2,741,682


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

1

Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Premium
$
2,528,718

 
$
2,034,558

 
$
5,037,767

 
$
3,669,408

Service
105,599

 
27,041

 
138,793

 
55,659

Premium and service revenues
2,634,317

 
2,061,599

 
5,176,560

 
3,725,067

Premium tax
91,628

 
49,147

 
195,277

 
97,827

Total revenues
2,725,945

 
2,110,746

 
5,371,837

 
3,822,894

Expenses:
 
 
 
 
 
 
 
Medical costs
2,244,611

 
1,890,405

 
4,512,011

 
3,333,081

Cost of services
93,300

 
21,816

 
118,365

 
45,153

General and administrative expenses
230,248

 
168,062

 
440,596

 
331,249

Premium tax expense
90,760

 
49,176

 
193,735

 
97,926

Impairment loss

 
28,033

 

 
28,033

Total operating expenses
2,658,919

 
2,157,492

 
5,264,707

 
3,835,442

Earnings (loss) from operations
67,026

 
(46,746
)
 
107,130

 
(12,548
)
Other income (expense):
 
 
 
 
 
 
 
Investment and other income
4,286

 
4,045

 
8,757

 
9,336

Interest expense
(7,033
)
 
(4,739
)
 
(13,658
)
 
(9,538
)
Earnings (loss) before income tax expense (benefit)
64,279

 
(47,440
)
 
102,229

 
(12,750
)
Income tax expense (benefit)
25,268

 
(8,608
)
 
40,307

 
3,479

Net earnings (loss)
39,011

 
(38,832
)
 
61,922

 
(16,229
)
Noncontrolling interest
(473
)
 
(3,833
)
 
(564
)
 
(5,208
)
Net earnings (loss) attributable to Centene Corporation
$
39,484

 
$
(34,999
)
 
$
62,486

 
$
(11,021
)
 
 
 
 
 
 
 
 
Net earnings (loss) per common share attributable to Centene Corporation:
Basic earnings (loss) per common share
$
0.72

 
$
(0.68
)
 
$
1.17

 
$
(0.21
)
Diluted earnings (loss) per common share
$
0.70

 
$
(0.68
)
 
$
1.13

 
$
(0.21
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
Basic
54,529,036

 
51,515,895

 
53,449,077

 
51,320,784

Diluted
56,601,660

 
51,515,895

 
55,448,396

 
51,320,784


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

2

Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS
(In thousands)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Net earnings (loss)
$
39,011

 
$
(38,832
)
 
$
61,922

 
$
(16,229
)
Reclassification adjustment, net of tax
(27
)
 
(66
)
 
(162
)
 
(222
)
Change in unrealized (loss) gain on investments, net of tax
(8,934
)
 
(329
)
 
(9,088
)
 
303

Other comprehensive earnings (loss)
(8,961
)
 
(395
)
 
(9,250
)
 
81

Comprehensive earnings (loss)
30,050

 
(39,227
)
 
52,672

 
(16,148
)
Comprehensive earnings (loss) attributable to the noncontrolling interest
(473
)
 
(3,833
)
 
(564
)
 
(5,208
)
Comprehensive earnings (loss) attributable to Centene Corporation
$
30,523

 
$
(35,394
)
 
$
53,236

 
$
(10,940
)

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


3

Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)

Six Months Ended June 30, 2013

 
Centene Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
$.001 Par
Value
Shares
 
Amt
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
$.001 Par
Value
Shares
 
Amt
 
Non
controlling
Interest
 
Total
Balance, December 31, 2012
55,339,160

 
$
55

 
$
450,856

 
$
5,189

 
$
566,820

 
3,009,912

 
$
(69,864
)
 
$
711

 
$
953,767

Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings (loss)

 

 

 

 
62,486

 

 

 
(564
)
 
61,922

Change in unrealized investment (loss) gain, net of $(5,258) tax

 

 

 
(9,250
)
 

 

 

 

 
(9,250
)
Total comprehensive earnings
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
52,672

Common stock issued for acquisition
1,716,690

 
2

 
75,436

 

 

 

 

 

 
75,438

Common stock issued for stock offering
342,640

 
1

 
15,238

 

 

 

 

 

 
15,239

Common stock issued for employee benefit plans
262,772

 

 
4,275

 

 

 

 

 

 
4,275

Common stock repurchases

 

 

 

 

 
23,615

 
(1,105
)
 

 
(1,105
)
Stock compensation expense

 

 
16,955

 

 

 

 

 

 
16,955

Excess tax benefits from stock compensation

 

 
1,113

 

 

 

 

 

 
1,113

Contribution from noncontrolling interest

 

 

 

 

 

 

 
3,920

 
3,920

Balance, June 30, 2013
57,661,262

 
$
58

 
$
563,873

 
$
(4,061
)
 
$
629,306

 
3,033,527

 
$
(70,969
)
 
$
4,067

 
$
1,122,274

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



4

Table of Contents

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$
61,922

 
$
(16,229
)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities
Depreciation and amortization
32,928

 
33,266

Stock compensation expense
16,955

 
11,993

Impairment loss

 
28,033

Deferred income taxes
10,715

 
9,364

Changes in assets and liabilities
 

 
 

Premium and related receivables
(71,230
)
 
(232,745
)
Other current assets
(35,879
)
 
(34,105
)
Other assets
(38,191
)
 
1,520

Medical claims liabilities
111,625

 
251,050

Unearned revenue
(12,068
)
 
19,885

Accounts payable and accrued expenses
(1,488
)
 
(77,010
)
Other operating activities
5,650

 
(4,922
)
Net cash provided by (used in) operating activities
80,939

 
(9,900
)
Cash flows from investing activities:
 

 
 

Capital expenditures
(30,057
)
 
(57,442
)
Purchases of investments
(537,590
)
 
(406,901
)
Sales and maturities of investments
358,971

 
253,719

Investments in acquisitions, net of cash acquired
(66,832
)
 

Net cash used in investing activities
(275,508
)
 
(210,624
)
Cash flows from financing activities:
 

 
 

Proceeds from exercise of stock options
3,867

 
10,320

Proceeds from borrowings
30,000

 
75,000

Payment of long-term debt
(10,118
)
 
(21,601
)
Proceeds from stock offering
15,239

 

Excess tax benefits from stock compensation
1,113

 
5,810

Common stock repurchases
(1,105
)
 
(1,791
)
Contribution from noncontrolling interest
3,920

 
982

Debt issue costs
(3,587
)
 

Net cash provided by financing activities
39,329

 
68,720

Net decrease in cash and cash equivalents
(155,240
)
 
(151,804
)
Cash and cash equivalents, beginning of period
843,952

 
573,698

Cash and cash equivalents, end of period
$
688,712

 
$
421,894

Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
15,170

 
$
10,312

Income taxes paid
21,694

 
32,394

Equity issued in connection with acquisition
75,438

 

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

5

Table of Contents

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 included in the Form 10-K for the fiscal year ended December 31, 2012.  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, 2012 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 2012 amounts in the notes to the consolidated financial statements have been reclassified to conform to the 2013 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.

2. Acquisition: AcariaHealth, Inc.

In April 2013, the Company acquired 100% of AcariaHealth, Inc., a specialty pharmacy company, for $146,567 in total consideration. The transaction consideration was financed through a combination of $75,438 of Centene common stock and $71,129 of cash on hand. The Company subsequently sold 342,640 shares of common stock for $15,239 related to funding the escrow account for the acquisition.

The Company's initial allocation of fair value resulted in goodwill of $88,535 and other identifiable intangible assets of $35,000. The goodwill is not deductible for income tax purposes. The Company has not yet finalized the allocation of the fair value of assets and liabilities; the total consideration remains subject to finalization of working capital adjustments in accordance with the purchase agreement. The acquisition is recorded in the Specialty Services segment.


6

Table of Contents

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

Short-term and long-term investments and restricted deposits by investment type consist of the following:
 
June 30, 2013
 
December 31, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized Losses
 
Fair
Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
249,551

 
$
310

 
$
(7,697
)
 
$
242,164

 
$
117,434

 
$
594

 
$
(221
)
 
$
117,807

Corporate securities
327,048

 
2,601

 
(1,808
)
 
327,841

 
315,807

 
5,101

 
(198
)
 
320,710

Restricted certificates of deposit
5,892

 

 

 
5,892

 
5,890

 

 

 
5,890

Restricted cash equivalents
18,430

 

 

 
18,430

 
14,460

 

 

 
14,460

Municipal securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General obligation
80,442

 
511

 
(323
)
 
80,630

 
88,690

 
1,173

 
(26
)
 
89,837

Pre-refunded
13,336

 
244

 
(6
)
 
13,574

 
5,337

 
85

 

 
5,422

Revenue
93,823

 
508

 
(615
)
 
93,716

 
84,726

 
1,331

 
(30
)
 
86,027

Variable rate demand notes
24,375

 

 

 
24,375

 
37,685

 

 

 
37,685

Asset backed securities
102,366

 
628

 
(261
)
 
102,733

 
83,295

 
1,197

 
(17
)
 
84,475

Cost and equity method investments
15,969

 

 

 
15,969

 
11,298

 

 

 
11,298

Life insurance contracts
15,202

 

 

 
15,202

 
15,023

 

 

 
15,023

Total
$
946,434

 
$
4,802

 
$
(10,710
)
 
$
940,526

 
$
779,645

 
$
9,481

 
$
(492
)
 
$
788,634


The Company’s investments are classified as available-for-sale with the exception of life insurance contracts and certain cost and equity 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.  The Company limits the size of investment in any single issuer other than U.S. treasury securities and obligations of U.S. government corporations and agencies.  As of June 30, 2013, 45% of the Company’s investments in securities recorded at fair value that carry a rating by S&P or Moody’s were rated AAA/Aaa, 63% were rated AA-/Aa3 or higher, and 94% were rated A-/A3 or higher.  At June 30, 2013, the Company held certificates of deposit, life insurance contracts and cost and equity method investments which did not carry a credit rating.


7

Table of Contents

The fair value of available-for-sale investments with gross unrealized losses by investment type and length of time that individual securities have been in a continuous unrealized loss position were as follows:
 
June 30, 2013
 
December 31, 2012
 
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 and obligations of U.S. government corporations and agencies
$
(7,697
)
 
$
197,695

 
$

 
$

 
$
(219
)
 
$
56,033

 
$
(2
)
 
$
202

Corporate securities
(1,799
)
 
130,007

 
(9
)
 
41

 
(198
)
 
44,758

 

 

Municipal securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General obligation
(323
)
 
20,482

 

 

 
(26
)
 
8,464

 

 

Pre-refunded
(6
)
 
682

 

 

 

 

 

 

Revenue
(603
)
 
36,632

 
(12
)
 
1,811

 
(30
)
 
3,325

 

 

Asset backed securities
(261
)
 
32,967

 

 

 
(17
)
 
9,321

 

 

Total
$
(10,689
)
 
$
418,465

 
$
(21
)
 
$
1,852

 
$
(490
)
 
$
121,901

 
$
(2
)
 
$
202


As of June 30, 2013, the gross unrealized losses were generated from 111 positions out of a total of 356 positions.  The decline in fair value of fixed income securities is a result of movement in interest rates subsequent to the purchase of the security.

For each security in an unrealized loss position, the Company assesses whether it intends to sell the security or if it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes.  If the security meets this criterion, the decline in fair value is other-than-temporary and is recorded in earnings.  The Company does not intend to sell these securities prior to maturity and it is not likely that the Company will be required to sell these securities prior to maturity; therefore, there is no indication of other than temporary impairment for these securities.

The contractual maturities of short-term and long-term investments and restricted deposits are as follows:
 
June 30, 2013
 
December 31, 2012
 
Investments
 
Restricted Deposits
 
Investments
 
Restricted Deposits
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
One year or less
$
130,505

 
$
131,330

 
$
39,174

 
$
39,183

 
$
138,011

 
$
139,118

 
$
34,403

 
$
34,435

One year through five years
575,864

 
575,090

 
108

 
108

 
474,068

 
481,381

 
358

 
358

Five years through ten years
170,418

 
164,182

 

 

 
94,006

 
93,878

 

 

Greater than ten years
30,365

 
30,633

 

 

 
38,799

 
39,464

 

 

Total
$
907,152

 
$
901,235

 
$
39,282

 
$
39,291

 
$
744,884

 
$
753,841

 
$
34,761

 
$
34,793

 
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 cost and equity method investments 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 continuously 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.  The Company recognizes an impairment loss for cost and equity method investments when evidence demonstrates that it is other-than-temporarily impaired.  Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.


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Investment amortization of $5,190 and $5,918 was recorded in the six months ended June 30, 2013 and 2012, respectively.

4. 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, 2013, for assets and liabilities measured at fair value on a recurring basis:  
 
Level I
 
Level II
 
Level III
 
Total
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
688,712

 

 

 
$
688,712

Investments available for sale:
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
201,291

 
$
25,904

 

 
$
227,195

Corporate securities

 
327,841

 

 
327,841

Municipal securities:
 

 
 

 
 

 
 
General obligation

 
80,630

 

 
80,630

Pre-refunded

 
13,574

 

 
13,574

Revenue

 
93,716

 

 
93,716

Variable rate demand notes

 
24,375

 

 
24,375

Asset backed securities

 
102,733

 

 
102,733

Total investments
$
201,291

 
$
668,773

 

 
$
870,064

Restricted deposits available for sale:
 

 
 

 
 

 
 

Cash and cash equivalents
$
18,430

 

 

 
$
18,430

Certificates of deposit
5,892

 

 

 
5,892

U.S. Treasury securities and obligations of U.S. government corporations and agencies
14,969

 

 

 
14,969

Total restricted deposits
$
39,291

 

 

 
$
39,291

Other long-term assets: Interest rate swap contract

 
$
9,954

 

 
$
9,954

Total assets at fair value
$
929,294

 
$
678,727

 

 
$
1,608,021



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The following table summarizes fair value measurements by level at December 31, 2012, for assets and liabilities measured at fair value on a recurring basis: 
 
Level I
 
Level II
 
Level III
 
Total
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
843,952

 

 

 
$
843,952

Investments available for sale:
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
57,114

 
$
46,250

 

 
$
103,364

Corporate securities

 
320,710

 

 
320,710

Municipal securities:
 

 
 

 
 

 
 
General obligation

 
89,837

 

 
89,837

Pre-refunded

 
5,422

 

 
5,422

Revenue

 
86,027

 

 
86,027

Variable rate demand notes

 
37,685

 

 
37,685

Asset backed securities

 
84,475

 

 
84,475

Total investments
$
57,114

 
$
670,406

 

 
$
727,520

Restricted deposits available for sale:
 

 
 

 
 

 
 

Cash and cash equivalents
$
14,460

 

 

 
$
14,460

Certificates of deposit
5,890

 

 

 
5,890

U.S. Treasury securities and obligations of U.S. government corporations and agencies
14,443

 

 

 
14,443

Total restricted deposits
$
34,793

 

 

 
$
34,793

Other long-term assets: Interest rate swap contract

 
$
16,304

 

 
$
16,304

Total assets at fair value
$
935,859

 
$
686,710

 

 
$
1,622,569

 
The Company periodically transfers U.S. Treasury securities and obligations of U.S. government corporations and agencies 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’s policy regarding the timing of transfers between Level I and Level II is to measure and record the transfers at the end of the reporting period.  At June 30, 2013, there were no transfers from Level I to Level II and $28,403 of transfers from Level II to Level I.  The Company utilizes matrix pricing services to estimate fair value for securities which are not actively traded on the measurement date.  The Company designates these securities as Level II fair value measurements.  The aggregate carrying amount of the Company’s life insurance contracts and other non-majority owned investments, which approximates fair value, was $31,171 and $26,321 as of June 30, 2013 and December 31, 2012, respectively.

5. Debt
 
Debt consists of the following:
 
June 30, 2013
 
December 31, 2012
Senior notes, at par
$
425,000

 
$
425,000

Unamortized premium on senior notes
6,938

 
7,823

Interest rate swap fair value
9,954

 
16,304

Senior notes
441,892

 
449,127

Revolving credit agreement
30,000

 

Mortgage notes payable
74,100

 
84,081

Capital leases and other
5,510

 
5,646

Total debt
551,502

 
538,854

Less current portion
(3,029
)
 
(3,373
)
 Long-term debt
$
548,473

 
$
535,481



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Senior Notes

In May 2011, the Company issued $250,000 non-callable 5.75% Senior Notes due June 1, 2017 (the $250,000 Notes) at a discount to yield 6%. In connection with the May 2011 issuance, the Company entered into an interest rate swap for a notional amount of $250,000. Gains and losses due to changes in the fair value of the interest rate swap completely offset changes in the fair value of the hedged portion of the underlying debt and are recorded as an adjustment to the $250,000 Notes. At June 30, 2013, the fair value of the interest rate swap increased the fair value of the notes by $9,954 and the variable interest rate of the swap was 3.78%.

In November 2012, the Company issued an additional $175,000 non-callable 5.75% Senior Notes due June 1, 2017 ($175,000 Add-on Notes) at a premium to yield 4.29%. The indenture governing the $250,000 Notes and the $175,000 Add-on Notes contains non-financial and financial covenants, including requirements of a minimum fixed charge coverage ratio. Interest is paid semi-annually in June and December. At June 30, 2013, the total net unamortized debt premium on the $250,000 Notes and $175,000 Add-on Notes was $6,938.  

Revolving Credit Agreement

In May 2013, the Company entered into a new unsecured $500,000 revolving credit facility and terminated its previous $350,000 revolving credit facility. Borrowings under the agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate. The agreement has a maturity date of June 1, 2018, provided it will mature 90 days prior to the maturity date of the Company's 5.75% Senior Notes due 2017 if such notes are not refinanced (or extended) or certain financial conditions are not met including $100,000 of unregulated cash on the balance sheet. As of June 30, 2013, the Company had $30,000 in borrowings outstanding under the agreement.

The agreement contains non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios, minimum debt-to-EBITDA ratios and minimum tangible net worth. The Company is required to maintain a minimum debt-to-EBITDA ratio of 3.50 as of June 30, 2013, 3.25 as of September 30, 2013 and 3.0 as of December 31, 2013 and thereafter. As of June 30, 2013, the Company's availability under the new revolving credit agreement would have been limited to approximately $377,000 as a result of the debt-to-EBITDA ratio.

Mortgage Notes Payable

The Company had a mortgage note of $8,700 at December 31, 2012 collateralized by an office building and parking garage. In June 2013, the Company paid the balance of this mortgage note.

Letters of Credit

The Company had outstanding letters of credit of $12,324 as of June 30, 2013, which were not part of the revolving credit facility.  The letters of credit bore interest at 1.06% as of June 30, 2013.

6. Stockholders' Equity

In April 2013, the Company completed the acquisition of AcariaHealth, Inc. and as a result, issued 1,716,690 shares of Centene common stock to the selling stockholders. Additionally, the Company filed an equity shelf registration statement related to funding the escrow account for the acquisition and sold 342,640 shares of Centene common stock for $15,239.


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7. Earnings (Loss) Per Share

The following table sets forth the calculation of basic and diluted net earnings per common share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Net earnings (loss) attributable to Centene Corporation
$
39,484

 
$
(34,999
)
 
$
62,486

 
$
(11,021
)
 
 
 
 
 
 
 
 
Shares used in computing per share amounts:
 

 
 

 
 
 
 
Weighted average number of common shares outstanding
54,529,036

 
51,515,895

 
53,449,077

 
51,320,784

Common stock equivalents (as determined by applying the treasury stock method)
2,072,624

 

 
1,999,319

 

Weighted average number of common shares and potential dilutive common shares outstanding
56,601,660

 
51,515,895

 
55,448,396

 
51,320,784

 
 
 
 
 
 
 
 
Net earnings (loss) per share attributable to Centene Corporation:
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
0.72

 
$
(0.68
)
 
$
1.17

 
$
(0.21
)
Diluted earnings (loss) per common share
$
0.70

 
$
(0.68
)
 
$
1.13

 
$
(0.21
)

The calculation of diluted earnings per common share for the three and six months ended June 30, 2013 excludes the impact of 35,094 shares and 68,809 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units. The calculation of diluted earnings (loss) per common share for the three and six months ended June 30, 2012 excludes the impact of 4,530,436 shares and 4,693,165 shares (before application of the treasury stock method), respectively, related to stock options, restricted stock and restricted stock units as the Company incurred losses during the period and the shares would be anti-dilutive.

8. 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 Specialty Services segment consists of Centene’s specialty companies offering products for behavioral health, care management software, correctional systems healthcare, health insurance exchanges, individual health insurance, life and health management, managed vision, pharmacy benefits management, specialty pharmacy and telehealth services.  The health plan in Massachusetts, operated by our individual health insurance business, is included in the Specialty Services segment.

In January 2013, the Company reclassified the health plan in Arizona, operated by its long-term care company, to the Medicaid Managed Care segment. As a result, the financial results of the Arizona health plan have been reclassified from the Specialty Services segment to the Medicaid Managed Care segment for all periods presented.
 
Segment information for the three months ended June 30, 2013, follows:
 
Medicaid
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
2,440,156

 
$
194,161

 
$

 
$
2,634,317

Premium and service revenues from internal customers
10,702

 
555,506

 
(566,208
)
 

Total premium and service revenues
$
2,450,858

 
$
749,667

 
$
(566,208
)
 
$
2,634,317

Earnings from operations
$
41,028

 
$
25,998

 
$

 
$
67,026



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Segment information for the three months ended June 30, 2012, follows:
 
Medicaid
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
1,914,662

 
$
146,937

 
$

 
$
2,061,599

Premium and service revenues from internal customers
22,761

 
439,826

 
(462,587
)
 

Total premium and service revenues
$
1,937,423

 
$
586,763

 
$
(462,587
)
 
$
2,061,599

Earnings (loss) from operations
$
(30,993
)
 
$
(15,753
)
 
$

 
$
(46,746
)

Segment information for the six months ended June 30, 2013, follows:
 
Medicaid
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
4,857,015

 
$
319,545

 
$

 
$
5,176,560

Premium and service revenues from internal customers
21,165

 
1,118,401

 
(1,139,566
)
 

Total premium and service revenues
$
4,878,180

 
$
1,437,946

 
$
(1,139,566
)
 
$
5,176,560

Earnings from operations
$
48,526

 
$
58,604

 
$

 
$
107,130


Segment information for the six months ended June 30, 2012, follows:
 
Medicaid
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
3,435,893

 
$
289,174

 
$

 
$
3,725,067

Premium and service revenues from internal customers
37,613

 
763,905

 
(801,518
)
 

Total premium and service revenues
$
3,473,506

 
$
1,053,079

 
$
(801,518
)
 
$
3,725,067

Earnings (loss) from operations
$
(17,501
)
 
$
4,953

 
$

 
$
(12,548
)

9. Contingencies
In October 2012, the Company notified the Kentucky Cabinet for Health and Family Services (Cabinet) that it was exercising a contractual right that it believes allows the Company to terminate its Medicaid managed care contract with the Commonwealth of Kentucky (Commonwealth) effective July 5, 2013.  The Company also filed a lawsuit in Franklin Circuit Court against the Commonwealth seeking a declaration of the Company's right to terminate the contract on July 5, 2013.  In April 2013, the Commonwealth answered that lawsuit and filed counterclaims against the Company seeking declaratory relief and damages.  In May 2013, the Franklin Circuit Court ruled that Kentucky Spirit does not have a contractual right to terminate the contract early.  Kentucky Spirit has appealed that ruling to the Kentucky Court of Appeals. 

The Company also filed a formal dispute with the Cabinet for damages incurred under the contract, which was later appealed to and denied by the Finance and Administration Cabinet.  In response, the Company filed a lawsuit in April 2013, in Franklin Circuit Court seeking damages against the Commonwealth for losses sustained due to the Commonwealth's alleged breaches. This lawsuit was subsequently consolidated with the original lawsuit for declaratory relief and continues to proceed.

Kentucky Spirit's efforts to resolve issues with the Commonwealth were unsuccessful and on July 5, 2013, Kentucky Spirit proceeded with its previously announced exit.  By letter dated July 11, 2013, the Commonwealth alleged that Kentucky Spirit's exit constitutes a material breach of contract.  The letter states that, unless Kentucky Spirit cures the alleged material breach within thirty days, the Commonwealth will seek to recover substantial damages and to enforce its rights under Kentucky Spirit's $25,000 performance bond.  Any claim for damages by the Commonwealth may include the costs of transition and the additional costs to the Commonwealth to cover Kentucky Spirit's former members through July 5, 2014. Kentucky Spirit is pursuing its litigation claims for damages against the Commonwealth and will vigorously defend against any allegations that it has breached the contract.

The resolution of the Kentucky litigation matters may result in a range of possible outcomes.  If the Company prevails on its claims, Kentucky Spirit would be entitled to damages under its lawsuit.  If the Commonwealth prevails, a liability to the Commonwealth could be recorded.  The Company is unable to estimate the ultimate outcome resulting from the Kentucky litigation.  As a result, the Company has not recorded any receivable or any liability for potential damages under the contract as of June 30, 2013.  While uncertain, the ultimate resolution of the pending litigation could have a material effect on the results of operations of the Company in the period it is resolved or becomes known.

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Excluding the Kentucky matters discussed above, the Company is also routinely subjected to legal proceedings in the normal course of business.  While the ultimate resolution of such matters in the normal course of business is uncertain, the Company does not expect the results of any of these matters individually, or in the aggregate, to have a material effect on its financial position or results of operations.



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

OVERVIEW
Key financial metrics for the second quarter of 2013 are summarized as follows:
Quarter-end at-risk managed care membership of 2,696,900, an increase of 299,400 members, or 12% year over year.
Premium and service revenues of $2.6 billion, representing 28% growth year over year.
Health Benefits Ratio of 88.8%, compared to 92.9% in 2012.
General and Administrative expense ratio of 8.7%, compared to 8.2% in 2012.
Operating cash flow of $37.9 million for the second quarter of 2013.
Diluted earnings per share of $0.70, including AcariaHealth transaction costs of $0.07 per diluted share.

The following items contributed to our revenue and membership growth over the last year:

AcariaHealth, Inc. In April 2013, we completed the acquisition of AcariaHealth Inc. (AcariaHealth), a specialty pharmacy company, for $146.6 million. The transaction consideration was financed through a combination of Centene common stock and cash on hand.

Kansas. In January 2013, our subsidiary, Sunflower State Health Plan, began operating under a statewide contract to serve members in the state's KanCare program, which includes TANF, ABD (dual and non-dual), foster care, LTC and CHIP beneficiaries.

Louisiana. In February 2012, Louisiana Healthcare Connections (LHC), began operating under a new contract in Louisiana to provide healthcare services to Medicaid enrollees participating in the Bayou Health program. LHC completed its three-phase membership roll-out for the three geographical service areas during the second quarter of 2012. In November 2012, the covered services provided by LHC expanded to include pharmacy benefits.

Mississippi. In December 2012, our subsidiary, Magnolia Health Plan, began operating under an expanded contract to provide managed care services statewide to certain Medicaid members as well as providing behavioral health services.

Missouri. In July 2012, Home State Health Plan began operating under a new contract with the Office of Administration for Missouri to serve Medicaid beneficiaries in the Eastern, Central, and Western Managed Care Regions of the state.

Texas. In March 2012, we began operating under contracts in Texas that expanded our operations through new service areas including the 10 county Hidalgo Service Area and the Medicaid Rural Service Areas of West Texas, Central Texas and North-East Texas, as well as the addition of STAR+PLUS in the Lubbock Service Area.  The expansion also added the management of outpatient pharmacy benefits in all service areas and products, as well as inpatient facility services for the STAR+PLUS program.

Washington. In July 2012, we began operating under a new contract with the Washington Health Care Authority to serve Medicaid beneficiaries in the state, operating as Coordinated Care. 

We expect the following items to contribute to our future growth potential:

We expect to realize the full year benefit in 2013 of business commenced during 2012 in Louisiana, Mississippi, Missouri, Texas and Washington as discussed above.

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Table of Contents

In July 2013, our Ohio subsidiary, Buckeye Community Health Plan (Buckeye), began operating under a new and expanded contract with the Ohio Department of Job and Family Services (ODJFS) to serve Medicaid members in Ohio. Under the new state contract, Buckeye operates statewide through Ohio's three newly aligned regions (West, Central/Southeast, and Northeast). Buckeye also began serving members under the ABD Children program in July 2013.

In July 2013, our joint venture subsidiary, Centurion, began operating under a new contract with the Department of Corrections in Massachusetts to provide comprehensive healthcare services to individuals incarcerated in Massachusetts state correctional facilities. Centurion was notified by the Department of Corrections in Tennessee in June 2013 that it had been awarded a contract to provide comprehensive healthcare services to individuals incarcerated in Tennessee state correctional facilities. Operations in Tennessee are expected to begin in the third quarter of 2013. Centurion is a joint venture between Centene and MHM Services Inc.

In May 2013, our California subsidiary, California Health and Wellness Plan, was notified by the California Department of Health Care Services (DHCS) and the Imperial County Board of Supervisors of their intent to award a contract, contingent upon successful completion of contract negotiations, to serve Medi-Cal beneficiaries in Imperial County. Upon execution of a contract and regulatory approval, enrollment is expected to begin in the fourth quarter of 2013.

In March 2013, our California subsidiary, California Health and Wellness Plan, was notified by the California DHCS of its intent to award a contract, contingent upon successful completion of contract negotiations, to serve Medicaid beneficiaries in 18 rural counties. Under the contract, California Health and Wellness Plan will serve members under the state's Medi-Cal Managed Care Rural Expansion program. Upon execution of a contract and regulatory approval, enrollment is expected to begin in the fourth quarter of 2013.

In January 2013, our Florida subsidiary, Sunshine State Health Plan, was notified by the Florida Agency for Health Care Administration that it has been recommended for a contract award in 10 of 11 regions of the Medicaid Managed Care Long Term Care program. Upon execution of a contract and regulatory approval, enrollment will be implemented by region, beginning in August 2013 and continuing through March 2014.

In November 2012, our Illinois subsidiary, IlliniCare Health Plan, was selected to serve dual-eligible members in Cook, DuPage, Lake, Kane, Kankakee and Will counties (Greater Chicago region) as part of the Illinois Medicare-Medicaid Alignment Initiative. Enrollment is expected to begin in the first half of 2014.

In August 2012, we were notified by the ODJFS that Buckeye, our Ohio subsidiary, was selected to serve Medicaid members in a dual-eligible demonstration program in three of Ohio's pre-determined seven regions: Northeast (Cleveland), Northwest (Toledo) and West Central (Dayton). This three-year program, which is part of the state of Ohio's Integrated Care Delivery System (ICDS) expansion, will serve those who have both Medicare and Medicaid eligibility. Enrollment is expected to begin in the first half of 2014.

In May 2012, we announced that the Governor and Executive Council of New Hampshire had given approval for the Department of Health and Human Services to contract with our subsidiary, Granite State Health Plan, to serve Medicaid beneficiaries in New Hampshire. Operations are currently expected to commence in the fourth quarter of 2013.

As of July 6, 2013, our subsidiary, Kentucky Spirit Health Plan, has discontinued serving Medicaid members in Kentucky. We expect to begin presenting Kentucky as a discontinued operation upon completion of all significant operating cash flows.
In March 2013, we were notified by the Arizona Health Care Cost Containment System that our Arizona subsidiary, Bridgeway Health Solutions of Arizona, LLC (Bridgeway), was not awarded a contract to serve acute care members in Arizona for the five years beginning October 1, 2013. The current contract termination is effective September 30, 2013. Bridgeway currently serves 16,100 Medicaid acute care members in Yavapai County. 


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Table of Contents

MEMBERSHIP

From June 30, 2012 to June 30, 2013, we increased our at-risk managed care membership by 299,400, or 12.5%.  The following table sets forth our membership by state for our managed care organizations:
 
June 30,
2013
 
December 31,
2012
 
June 30,
2012
Arizona
23,200

 
23,500

 
24,000

Florida
216,200

 
214,000

 
204,100

Georgia
316,600

 
313,700

 
313,300

Illinois
18,000

 
18,000

 
17,800

Indiana
200,000

 
204,000

 
205,000

Kansas
137,500

 

 

Kentucky
133,500

 
135,800

 
143,500

Louisiana
153,700

 
165,600

 
168,700

Massachusetts
15,200

 
21,500

 
41,400

Mississippi
77,300

 
77,200

 
30,100

Missouri
58,800

 
59,600

 

Ohio
156,700

 
157,800

 
166,800

South Carolina
88,800

 
90,100

 
87,800

Texas
960,400

 
949,900

 
919,200

Washington
67,600

 
57,200

 

Wisconsin
73,400

 
72,400

 
75,800

Total
2,696,900

 
2,560,300

 
2,397,500


The following table sets forth our membership by line of business:
 
June 30,
2013
 
December 31,
2012
 
June 30,
2012
Medicaid
2,051,700

 
1,977,200
 
1,848,500
CHIP & Foster Care
275,900

 
237,700
 
222,600
ABD & Medicare
322,500

 
307,800
 
269,900
Hybrid Programs
22,400

 
29,100
 
48,100
Long-term Care
24,400

 
8,500
 
8,400
Total
2,696,900

 
2,560,300
 
2,397,500
 
The following table identifies our dual eligible membership by line of business. The membership tables above include these members.
 
June 30,
2013
 
December 31,
2012
 
June 30,
2012
ABD
81,800

 
72,800
 
62,000
Long-term Care
16,600

 
7,700
 
7,600
Medicare
5,700

 
5,100
 
3,600
Total
104,100

 
85,600
 
73,200


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Table of Contents

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, 2013 and 2012, 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, 2013 and 2012 is as follows ($ in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
% Change 2012-2013
 
2013
 
2012
 
% Change 2012-2013
Premium
$
2,528.7

 
$
2,034.5

 
24.3
 %
 
$
5,037.7

 
$
3,669.4

 
37.3
 %
Service
105.6

 
27.1

 
290.5
 %
 
138.8

 
55.7

 
149.4
 %
Premium and service revenues
2,634.3

 
2,061.6

 
27.8
 %
 
5,176.5

 
3,725.1

 
39.0
 %
Premium tax
91.6

 
49.1

 
86.4
 %
 
195.3

 
97.8

 
99.6
 %
Total revenues
2,725.9

 
2,110.7

 
29.1
 %
 
5,371.8

 
3,822.9

 
40.5
 %
Medical costs
2,244.6

 
1,890.4

 
18.7
 %
 
4,512.0

 
3,333.1

 
35.4
 %
Cost of services
93.3

 
21.9

 
327.7
 %
 
118.4

 
45.2

 
162.1
 %
General and administrative expenses
230.2

 
168.0

 
37.0
 %
 
440.6

 
331.2

 
33.0
 %
Premium tax expense
90.8

 
49.1

 
84.6
 %
 
193.7

 
97.9

 
97.8
 %
Impairment loss

 
28.0

 
(100.0
)%
 

 
28.0

 
(100.0
)%
Earnings (loss) from operations
67.0

 
(46.7
)
 
(243.4
)%
 
107.1

 
(12.5
)
 
(953.8
)%
Investment and other income, net
(2.7
)
 
(0.7
)
 
295.8
 %
 
(4.9
)
 
(0.2
)
 
2,326.2
 %
Earnings (loss) before income tax expense (benefit)
64.3

 
(47.4
)
 
(235.5
)%
 
102.2

 
(12.7
)
 
(901.8
)%
Income tax expense (benefit)
25.3

 
(8.6
)
 
(393.5
)%
 
40.3

 
3.5

 
1,058.6
 %
Net earnings (loss)
39.0

 
(38.8
)
 
(200.5
)%
 
61.9

 
(16.2
)
 
(481.6
)%
Noncontrolling interest
(0.5
)
 
(3.8
)
 
(87.7
)%
 
(0.6
)
 
(5.2
)
 
(89.2
)%
Net earnings (loss) attributable to Centene Corporation
$
39.5

 
$
(35.0
)
 
(212.8
)%
 
$
62.5

 
$
(11.0
)
 
(667.0
)%
Diluted earnings (loss) per common share attributable to Centene Corporation
$
0.70

 
$
(0.68
)
 
(202.9
)%
 
$
1.13

 
$
(0.21
)
 
(638.1
)%

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Premium and Service Revenues

Premium and service revenues increased 27.8% in the three months ended June 30, 2013 over the corresponding period in 2012 primarily as a result of the Mississippi expansion, pharmacy carve-in in Louisiana, the additions of the Kansas, Missouri and Washington contracts, rate increases in several of our markets, the acquisition of AcariaHealth and increased membership in Texas.

Operating Expenses

Medical Costs

Results of operations depend on our ability to manage expenses associated with health benefits and to accurately estimate costs incurred. The Health Benefits Ratio, or HBR, represents medical costs as a percentage of premium revenues (excluding premium taxes) and reflects the direct relationship between the premium received and the medical services provided. The table below depicts the HBR for our membership by member category for the three months ended June 30,:


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Table of Contents

 
2013
 
2012
Medicaid and CHIP
89.0
%
 
92.4
%
ABD and Medicare
89.0

 
93.0

Specialty Services
82.0

 
98.0

Total
88.8

 
92.9


The consolidated HBR for the three months ended June 30, 2013 was 88.8%, compared to 92.9% in the same period in 2012.  The HBR decreased compared to last year primarily as a result of improvements in the performance of the Texas and individual health business from 2012, as well as the effect of the premium deficiency reserve recorded for Kentucky in 2012.

Cost of Services

Cost of services increased by $71.5 million in the three months ended June 30, 2013, compared to the corresponding period in 2012.  This was primarily due to the acquisition of AcariaHealth.

General & Administrative Expenses

General and administrative expenses, or G&A, increased by $62.2 million in the three months ended June 30, 2013, compared to the corresponding period in 2012.  This was primarily due to expenses for additional staff and facilities to support our membership growth as well as performance based compensation.

The consolidated G&A expense ratio for the three months ended June 30, 2013 and 2012 was 8.7% and 8.2%, respectively.  The year over year increase reflects an increase in performance based compensation expense in 2013 of approximately 70 basis points and the AcariaHealth transaction costs, partially offset by the leveraging of expenses over higher revenue in 2013.  

Impairment Loss

During the second quarter of 2012, our subsidiary, Celtic Insurance Company, experienced a high level of medical costs for individual health policies, especially for recently issued policies related to members converted from another insurer throughout the first quarter of 2012. We conducted an impairment analysis of the identifiable intangible assets and goodwill of the Celtic reporting unit, resulting in goodwill and intangible asset impairments of $28.0 million, recorded as impairment loss in the consolidated statement of operations. The impaired identifiable intangible assets of $2.3 million and goodwill of $25.7 million were reported under the Specialty Services segment, of which $26.6 million of the impairment loss was not deductible for income tax purposes.

Other Income (Expense)

The following table summarizes the components of other income (expense) for the three months ended June 30, ($ in millions): 
 
2013
 
2012
Investment income
$
4.3

 
$
4.0

Interest expense
(7.0
)
 
(4.7
)
Other income (expense), net
$
(2.7
)
 
$
(0.7
)

The increase in investment income in 2013 reflects an increase in investment balances over 2012. Interest expense increased in 2013 compared to 2012, reflecting the addition of $175 million of Senior Notes in the fourth quarter of 2012.

Income Tax Expense

Excluding the effects of noncontrolling interest, our effective tax rate for the three months ended June 30, 2013 was a tax expense of 39.0% compared to a tax benefit of 19.7% in the corresponding period in 2012. The change in the effective tax rate primarily relates to the impact of Celtic's non-deductible goodwill impairment in 2012 resulting in a reduced tax benefit on a pre-tax loss.


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Table of Contents

Segment Results

In January 2013, we reclassified the health plan in Arizona, operated by our long-term care company, to the Medicaid Managed Care segment. As a result, the financial results of the Arizona health plan have been reclassified from the Specialty Services segment to the Medicaid Managed Care segment for all periods presented. The following table summarizes our operating results by segment for the three months ended June 30, (in millions):

 
2013
 
2012
 
% Change 2012-2013
Premium and Service Revenues
 
 
 
 
 
Medicaid Managed Care
$
2,450.9

 
$
1,937.4

 
26.5
 %
Specialty Services
749.6

 
586.8

 
27.8
 %
Eliminations
(566.2
)
 
(462.6
)
 
22.4
 %
Consolidated Total
$
2,634.3

 
$
2,061.6

 
27.8
 %
Earnings (Loss) from Operations
 

 
 

 
 

Medicaid Managed Care
$
41.0

 
$
(31.0
)
 
(232.4
)%
Specialty Services
26.0

 
(15.7
)
 
(265.0
)%
Consolidated Total
$
67.0

 
$
(46.7
)
 
(243.4
)%

Medicaid Managed Care

Premium and service revenues increased 26.5% in the three months ended June 30, 2013, primarily as a result of the Mississippi expansion, pharmacy carve-in in Louisiana, the additions of the Kansas, Missouri and Washington contracts, increased membership in Texas and rate increases in several of our markets. Earnings from operations increased $72.0 million between years primarily as a result of improvements in the performance of the Texas business from 2012 and the effect of the premium deficiency reserve recorded for Kentucky in 2012.

Specialty Services

Premium and service revenues increased 27.8% in the three months ended June 30, 2013, due to the carve-in of pharmacy services in Louisiana, the associated services provided to the increased membership in the Medicaid segment and the acquisition of AcariaHealth.  Earnings from operations increased $41.7 million in the three months ended June 30, 2013, reflecting improvement in our individual health insurance business and growth in our pharmacy business. Earnings from operations in 2012 were negatively impacted by a $28.0 impairment loss in our individual insurance business.

Earnings (Loss) Per Share and Shares Outstanding

Our earnings (loss) per share calculation for the three months ended June 30, 2012 reflects lower diluted weighted average shares outstanding resulting from the exclusion of the effect of outstanding stock awards which would be anti-dilutive to earnings per share.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Premium and Service Revenues

Premium and service revenues increased 39.0% in the six months ended June 30, 2013 over the corresponding period in 2012 primarily as a result of the Texas, Mississippi and Louisiana expansions, pharmacy carve-in in Texas and Louisiana, the additions of the Kansas, Missouri and Washington contracts, rate increases in several of our markets and the acquisition of AcariaHealth. During the six months ended June 30, 2013, we received premium rate adjustments which yielded a net 0.5% composite change across all of our markets.


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Table of Contents

Operating Expenses

Medical Costs

Results of operations depend on our ability to manage expenses associated with health benefits and to accurately estimate costs incurred. The Health Benefits Ratio, or HBR, represents medical costs as a percentage of premium revenues (excluding premium taxes) and reflects the direct relationship between the premium received and the medical services provided. The table below depicts the HBR for our membership by member category for the six months ended June 30:

 
2013
 
2012
Medicaid and CHIP
90.7
%
 
90.2
%
ABD and Medicare
88.5

 
91.4

Specialty Services
82.5

 
93.9

Total
89.6