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 March 31, 2014
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 April 11, 2014, the registrant had 57,680,118 shares of common stock outstanding.




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

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


Table of Contents

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

All statements, other than statements of current or historical fact, contained in this filing are forward-looking statements.  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 II, Item 1A. “Risk Factors,” and Part II, Item I “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 and accretion for acquisitions;
inflation;
provider and state contract changes;
new technologies;
advances in medicine;
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;
the outcome of pending legal proceedings;
availability of debt and equity financing, on terms that are favorable to us; and
general economic and market conditions.

Other Information
The discussion in Part I, Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Results of Operations" contains financial information for new and existing businesses. Existing businesses are primarily state markets, significant geographic expansion in an existing state or product that we have managed for four complete quarters. New businesses are primarily new state markets, significant geographic expansion in an existing state or product that conversely, we have not managed for four complete quarters.
Non-GAAP Financial Presentation
The Company is providing certain non-GAAP financial measures in this report as the Company believes that these figures are helpful in allowing individuals to more accurately assess the ongoing nature of the Company's operations and measure the Company's performance more consistently. The Company uses the presented non-GAAP financial measures internally to allow management to focus on period-to-period changes in the Company's core business operations. Therefore, the Company believes that this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.


Table of Contents

PART I
FINANCIAL INFORMATION

ITEM 1. Financial Statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
March 31,
2014
 
December 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents of continuing operations
$
1,218,004

 
$
974,304

Cash and cash equivalents of discontinued operations
52,788

 
63,769

Total cash and cash equivalents
1,270,792

 
1,038,073

Premium and related receivables
570,105

 
428,570

Short term investments
99,696

 
102,126

Other current assets
320,393

 
217,661

Other current assets of discontinued operations
20,863

 
13,743

Total current assets
2,281,849

 
1,800,173

Long term investments
840,152

 
791,900

Restricted deposits
57,826

 
46,946

Property, software and equipment, net
412,699

 
395,407

Goodwill
657,551

 
348,432

Intangible assets, net
85,134

 
48,780

Other long term assets
80,961

 
59,357

Long term assets of discontinued operations
30,275

 
38,305

Total assets
$
4,446,447

 
$
3,529,300

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Medical claims liability
$
1,298,513

 
$
1,111,709

Accounts payable and accrued expenses
614,541

 
375,862

Unearned revenue
74,260

 
38,191

Current portion of long term debt
6,110

 
3,065

Current liabilities of discontinued operations
28,019

 
30,294

Total current liabilities
2,021,443

 
1,559,121

Long term debt
810,970

 
665,697

Other long term liabilities
70,166

 
60,015

Long term liabilities of discontinued operations
1,009

 
1,028

Total liabilities
2,903,588

 
2,285,861

Commitments and contingencies


 


Redeemable noncontrolling interest
120,681

 

Stockholders’ equity:
 

 
 

Common stock, $.001 par value; authorized 100,000,000 shares; 61,044,175 issued and 57,657,040 outstanding at March 31, 2014, and 58,673,215 issued and 55,319,239 outstanding at December 31, 2013
61

 
59

Additional paid-in capital
739,972

 
594,326

Accumulated other comprehensive income:
 
 
 
Unrealized loss on investments, net of tax
(614
)
 
(2,620
)
Retained earnings
764,902

 
731,919

Treasury stock, at cost (3,387,135 and 3,353,976 shares, respectively)
(91,655
)
 
(89,643
)
Total Centene stockholders’ equity
1,412,666

 
1,234,041

Noncontrolling interest
9,512

 
9,398

Total stockholders’ equity
1,422,178

 
1,243,439

Total liabilities and stockholders’ equity
$
4,446,447

 
$
3,529,300


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 March 31,
 
2014
 
2013
Revenues:
 
 
 
Premium
$
3,070,887

 
$
2,388,639

Service
281,174

 
33,194

Premium and service revenues
3,352,061

 
2,421,833

Premium tax and health insurer fee
107,827

 
103,649

Total revenues
3,459,888

 
2,525,482

Expenses:
 
 
 
Medical costs
2,742,453

 
2,154,546

Cost of services
242,284

 
25,065

General and administrative expenses
295,512

 
203,296

Premium tax expense
78,278

 
102,975

Health insurer fee expense
31,327

 

Total operating expenses
3,389,854

 
2,485,882

Earnings from operations
70,034

 
39,600

Other income (expense):
 
 
 
Investment and other income
4,724

 
4,263

Interest expense
(7,023
)
 
(6,625
)
Earnings from continuing operations, before income tax expense
67,735

 
37,238

Income tax expense
34,555

 
14,690

Earnings from continuing operations, net of income tax expense
33,180

 
22,548

Discontinued operations, net of income tax expense (benefit) of $(8),and $348, respectively
(833
)
 
363

Net earnings
32,347

 
22,911

Noncontrolling interest
(636
)
 
(91
)
Net earnings attributable to Centene Corporation
$
32,983

 
$
23,002

 
 
 
 
Amounts attributable to Centene Corporation common shareholders:
 
 
 
Earnings from continuing operations, net of income tax expense
$
33,816

 
$
22,639

Discontinued operations, net of income tax expense (benefit)
(833
)
 
363

Net earnings
$
32,983

 
$
23,002

 
 
 
 
Net earnings (loss) per common share attributable to Centene Corporation:
Basic:
 
 
 
Continuing operations
$
0.59

 
$
0.43

Discontinued operations
(0.02
)
 
0.01

Basic earnings per common share
$
0.57

 
$
0.44

 
 
 
 
Diluted:
 
 
 
Continuing operations
$
0.57

 
$
0.41

Discontinued operations
(0.01
)
 
0.01

Diluted earnings per common share
$
0.56

 
$
0.42

 
 
 
 
Weighted average number of common shares outstanding:
Basic
57,483,876

 
52,357,119

Diluted
59,361,266

 
54,266,928


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 March 31,
 
2014
 
2013
Net earnings
$
32,347

 
$
22,911

Reclassification adjustment, net of tax
(45
)
 
(29
)
Change in unrealized loss on investments, net of tax
2,051

 
(260
)
Other comprehensive earnings
2,006

 
(289
)
Comprehensive earnings
34,353

 
22,622

Comprehensive earnings attributable to the noncontrolling interest
(636
)
 
(91
)
Comprehensive earnings attributable to Centene Corporation
$
34,989

 
$
22,713


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)

Three Months Ended March 31, 2014

 
Centene Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
$.001 Par
Value
Shares
 
Amt
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
$.001 Par
Value
Shares
 
Amt
 
Non
controlling
Interest
 
Total
Balance, December 31, 2013
58,673,215

 
$
59

 
$
594,326

 
$
(2,620
)
 
$
731,919

 
3,353,976

 
$
(89,643
)
 
$
9,398

 
$
1,243,439

Comprehensive Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings

 

 

 

 
32,983

 

 

 
114

 
33,097

Change in unrealized investment loss, net of $1,129 tax

 

 

 
2,006

 

 

 

 

 
2,006

Total comprehensive earnings
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
35,103

Common stock issued for acquisition
2,243,217

 
2

 
132,369

 

 

 

 

 

 
132,371

Common stock issued for employee benefit plans
127,743

 

 
1,668

 

 

 

 

 

 
1,668

Common stock repurchases

 

 

 

 

 
33,159

 
(2,012
)
 

 
(2,012
)
Stock compensation expense

 

 
11,297

 

 

 

 

 

 
11,297

Excess tax benefits from stock compensation

 

 
312

 

 

 

 

 

 
312

Balance, March 31, 2014
61,044,175

 
$
61

 
$
739,972

 
$
(614
)
 
$
764,902

 
3,387,135

 
$
(91,655
)
 
$
9,512

 
$
1,422,178

 
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)
 
Three Months Ended March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net earnings
$
32,347

 
$
22,911

Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization
20,318

 
15,691

Stock compensation expense
11,297

 
8,375

Deferred income taxes
(7,873
)
 
986

Changes in assets and liabilities
 

 
 

Premium and related receivables
(119,207
)
 
(56,734
)
Other current assets
3,411

 
(50,537
)
Other assets
(14,425
)
 
5

Medical claims liabilities
196,221

 
117,385

Unearned revenue
34,662

 
3,578

Accounts payable and accrued expenses
90,481

 
(22,745
)
Other operating activities
5,213

 
4,078

Net cash provided by operating activities
252,445

 
42,993

Cash flows from investing activities:
 

 
 

Capital expenditures
(18,116
)
 
(10,654
)
Purchases of investments
(167,373
)
 
(358,131
)
Sales and maturities of investments
111,994

 
212,508

Investments in acquisitions, net of cash acquired
(76,989
)
 

Net cash used in investing activities
(150,484
)
 
(156,277
)
Cash flows from financing activities:
 

 
 

Proceeds from exercise of stock options
1,464

 
1,408

Proceeds from borrowings
645,000

 

Payment of long-term debt
(519,413
)
 
(776
)
Excess tax benefits from stock compensation
312

 
515

Common stock repurchases
(2,012
)
 
(565
)
Contribution from noncontrolling interest
5,407

 
202

Debt issue costs

 
(661
)
Net cash provided by financing activities
130,758

 
123

Net increase (decrease) in cash and cash equivalents
232,719

 
(113,161
)
Cash and cash equivalents, beginning of period
1,038,073

 
843,952

Cash and cash equivalents, end of period
$
1,270,792

 
$
730,791

Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
1,648

 
$
1,410

Income taxes paid
21,265

 
2,205

Equity issued in connection with acquisition
132,371

 

 
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, 2013.  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, 2013 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 2013 amounts in the notes to the consolidated financial statements have been reclassified to conform to the 2014 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.

2. Acquisition: U.S. Medical Management

In January 2014, the Company acquired 68% of U.S. Medical Management, LLC (USMM), a management services organization and provider of in-home health services for high acuity populations, for $214,907 in total consideration. The transaction consideration was financed through a combination of $132,686 of Centene common stock and $82,221 of cash.

The Company's preliminary allocation of fair value resulted in goodwill of $309,014 and other identifiable intangible assets of $40,170. Approximately 70% of the goodwill is deductible for income tax purposes. The Company has not finalized the allocation of the fair value of assets and liabilities. The acquisition is recorded in the Specialty Services segment.

In connection with the acquisition, the Company entered into call and put agreements with the noncontrolling interest holder to purchase the noncontrolling interest at a later date. Under these agreements, the Company may purchase or be required to purchase up to the total remaining interests in USMM over a period beginning in 2015 and continuing through 2017. Under certain circumstances, the agreements may be extended through 2020. At the Company’s sole option, up to 50% of the consideration to be issued for the purchase of the additional interests under these agreements may be funded with shares of the Company's common stock.

As a result of the put option agreement, the noncontrolling interest is considered redeemable and is classified in the Redeemable Noncontrolling Interest section of our consolidated balance sheet. The noncontrolling interest was initially measured at fair value using the binomial lattice mode as of the acquisition date. The Company has elected to accrete changes in the redemption value through additional paid-in capital over the period from the date of issuance to the earliest redemption date following the effective interest method.

A reconciliation of the changes in the Redeemable Noncontrolling Interest is as follows:
Balance, December 31, 2013
 
$

Fair value of noncontrolling interest at acquisition
 
116,024

Contribution from noncontrolling interest
 
5,407

Net earnings attributable to noncontrolling interest
 
(750
)
Balance, March 31, 2014
 
$
120,681



6

Table of Contents

3. Discontinued Operations: Kentucky Spirit Health Plan

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.  As of July 6, 2013, our subsidiary, Kentucky Spirit Health Plan (KSHP), ceased serving Medicaid members in Kentucky. Accordingly, the results of operations of KSHP are presented as discontinued operations for all periods presented. The assets, liabilities and results of operations of KSHP are classified as discontinued operations for all periods presented beginning in 2011. KSHP was previously reported in the Managed Care segment.

During the three months ended March 31, 2014, the Company received $8,000 of dividends from KSHP. KSHP had remaining statutory capital of approximately $71,500 at March 31, 2014, which, subject to future dividends, will be transferred to unregulated cash upon regulatory approval.

Operating results for the discontinued operations are as follows:
 
 
Three Months Ended March 31,
 
 
2014
 
2013
Revenues
 
$

 
$
120,410

Earnings (loss) before income taxes
 
$
(841
)
 
$
711

Net earnings (loss)
 
$
(833
)
 
$
363


The net loss from discontinued operations for the three months ended March 31, 2014 includes $894 of health insurer fee expense based on 2013 premium.

Assets and liabilities of the discontinued operations are as follows:
 
 
March 31, 2014
 
December 31, 2013
 
Current assets
 
$
73,651

 
$
77,512

 
Long term investments and restricted deposits
 
30,275

 
38,305

 
Assets of discontinued operations
 
$
103,926

 
$
115,817

 
 
 
 
 
 
 
Medical claims liability
 
$
21,939

 
$
27,637

 
Accounts payable and accrued expenses
 
6,080

 
2,657

 
Other liabilities
 
1,009

 
1,028

 
Liabilities of discontinued operations
 
$
29,028

 
$
31,322

 


7

Table of Contents

4. 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:
 
March 31, 2014
 
December 31, 2013
 
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
$
280,182

 
$
215

 
$
(5,711
)
 
$
274,686

 
$
246,085

 
$
245

 
$
(7,494
)
 
$
238,836

Corporate securities
305,315

 
3,367

 
(150
)
 
308,532

 
293,912

 
2,782

 
(608
)
 
296,086

Restricted certificates of deposit
5,892

 

 

 
5,892

 
5,891

 

 

 
5,891

Restricted cash equivalents
37,516

 

 

 
37,516

 
26,642

 

 

 
26,642

Municipal securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General obligation
45,283

 
492

 
(150
)
 
45,625

 
54,003

 
555

 
(136
)
 
54,422

Pre-refunded
6,409

 
40

 
(4
)
 
6,445

 
10,835

 
82

 

 
10,917

Revenue
65,728

 
515

 
(133
)
 
66,110

 
68,801

 
545

 
(292
)
 
69,054

Variable rate demand notes
14,030

 

 

 
14,030

 
28,575

 

 

 
28,575

Asset backed securities
150,717

 
583

 
(282
)
 
151,018

 
138,803

 
579

 
(332
)
 
139,050

Mortgage backed securities
48,284

 
369

 

 
48,653

 
33,974

 

 
(83
)
 
33,891

Cost and equity method investments
23,716

 

 

 
23,716

 
22,239

 

 

 
22,239

Life insurance contracts
15,451

 

 

 
15,451

 
15,369

 

 

 
15,369

Total
$
998,523

 
$
5,581

 
$
(6,430
)
 
$
997,674

 
$
945,129

 
$
4,788

 
$
(8,945
)
 
$
940,972


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.  The Company's mortgage backed securities are issued by the Federal National Mortgage Association and carry guarantees by the U.S. government. As of March 31, 2014, 55% 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, 69% were rated AA-/Aa3 or higher, and 93% were rated A-/A3 or higher.  At March 31, 2014, the Company held certificates of deposit, life insurance contracts and cost and equity method investments which did not carry a credit rating.


8

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:
 
March 31, 2014
 
December 31, 2013
 
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
$
(4,665
)
 
$
188,344

 
$
(1,046
)
 
$
26,547

 
$
(6,188
)
 
$
172,365

 
$
(1,307
)
 
$
26,454

Corporate securities
(116
)
 
24,091

 
(34
)
 
5,185

 
(400
)
 
52,725

 
(207
)
 
5,020

Municipal securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General obligation
(73
)
 
3,452

 
(77
)
 
2,398

 
(72
)
 
3,480

 
(63
)
 
2,426

Pre-refunded
(4
)
 
1,047

 

 

 

 

 

 

Revenue
(43
)
 
11,539

 
(90
)
 
3,391

 
(292
)
 
27,789

 

 

Asset backed securities
(282
)
 
45,121

 

 

 
(333
)
 
37,689

 

 

Mortgage backed securities

 

 

 

 
(83
)
 
33,891

 

 

Total
$
(5,183
)
 
$
273,594

 
$
(1,247
)
 
$
37,521

 
$
(7,368
)
 
$
327,939

 
$
(1,577
)
 
$
33,900


As of March 31, 2014, the gross unrealized losses were generated from 64 positions out of a total of 327 positions.  The change 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:
 
March 31, 2014
 
December 31, 2013
 
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
$
99,194

 
$
99,696

 
$
47,398

 
$
47,400

 
$
101,537

 
$
102,126

 
$
40,633

 
$
40,637

One year through five years
680,134

 
682,289

 
10,412

 
10,426

 
609,755

 
610,589

 
6,301

 
6,309

Five years through ten years
144,676

 
140,756

 

 

 
157,003

 
151,221

 

 

Greater than ten years
16,709

 
17,107

 

 

 
29,900

 
30,090

 

 

Total
$
940,713

 
$
939,848

 
$
57,810

 
$
57,826

 
$
898,195

 
$
894,026

 
$
46,934

 
$
46,946

 
Actual maturities may differ from contractual maturities due to call or prepayment options.  Asset backed and mortgage 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.

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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.

5. 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 March 31, 2014, for assets and liabilities measured at fair value on a recurring basis:  
 
Level I
 
Level II
 
Level III
 
Total
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,218,004

 
$

 
$

 
$
1,218,004

Investments available for sale:
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
243,022

 
$
17,246

 
$

 
$
260,268

Corporate securities

 
308,532

 

 
308,532

Municipal securities:
 

 
 

 
 

 
 
General obligation

 
45,625

 

 
45,625

Pre-refunded

 
6,445

 

 
6,445

Revenue

 
66,110

 

 
66,110

Variable rate demand notes

 
14,030

 

 
14,030

Asset backed securities

 
151,018

 

 
151,018

Mortgage backed securities

 
48,653

 

 
48,653

Total investments
$
243,022

 
$
657,659

 
$

 
$
900,681

Restricted deposits available for sale:
 

 
 

 
 

 
 

Cash and cash equivalents
$
37,516

 
$

 
$

 
$
37,516

Certificates of deposit
5,892

 

 

 
5,892

U.S. Treasury securities and obligations of U.S. government corporations and agencies
14,418

 

 

 
14,418

Total restricted deposits
$
57,826

 
$

 
$

 
$
57,826

Other long-term assets: Interest rate swap contract
$

 
$
8,638

 
$

 
$
8,638

Total assets at fair value
$
1,518,852

 
$
666,297

 
$

 
$
2,185,149


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The following table summarizes fair value measurements by level at December 31, 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
$
974,304

 
$

 
$

 
$
974,304

Investments available for sale:
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
212,185

 
$
12,238

 
$

 
$
224,423

Corporate securities

 
296,086

 

 
296,086

Municipal securities:
 

 
 

 
 

 
 
General obligation

 
54,422

 

 
54,422

Pre-refunded

 
10,917

 

 
10,917

Revenue

 
69,054

 

 
69,054

Variable rate demand notes

 
28,575

 

 
28,575

Asset backed securities

 
139,050

 

 
139,050

Mortgage backed securities

 
33,891

 

 
33,891

Total investments
$
212,185

 
$
644,233

 
$

 
$
856,418

Restricted deposits available for sale:
 

 
 

 
 

 
 

Cash and cash equivalents
$
26,642

 
$

 
$

 
$
26,642

Certificates of deposit
5,891

 

 

 
5,891

U.S. Treasury securities and obligations of U.S. government corporations and agencies
14,413

 

 

 
14,413

Total restricted deposits
$
46,946

 
$

 
$

 
$
46,946

Other long-term assets: Interest rate swap contract
$

 
$
9,576

 
$

 
$
9,576

Total assets at fair value
$
1,233,435

 
$
653,809

 
$

 
$
1,887,244

 
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 March 31, 2014, there were $13,765 transfers from Level I to Level II and $1,737 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 $39,167 and $37,608 as of March 31, 2014 and December 31, 2013, respectively.

6. Debt
 
Debt consists of the following:
 
March 31, 2014
 
December 31, 2013
Senior notes, at par
$
425,000

 
$
425,000

Unamortized premium on senior notes
5,609

 
6,052

Interest rate swap fair value
8,638

 
9,576

Senior notes
439,247

 
440,628

Revolving credit agreement
295,000

 
150,000

Mortgage notes payable
72,115

 
72,785

Capital leases and other
10,718

 
5,349

Total debt
817,080

 
668,762

Less current portion
(6,110
)
 
(3,065
)
 Long-term debt
$
810,970

 
$
665,697



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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 March 31, 2014, the fair value of the interest rate swap increased the fair value of the notes by $8,638 and the variable interest rate of the swap was 3.74%.

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 March 31, 2014, the total net unamortized debt premium on the $250,000 Notes and $175,000 Add-on Notes was $5,609.  

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), certain financial conditions are not met, or the Company does not carry $100,000 of unrestricted cash. As of March 31, 2014, the Company had $295,000 borrowings outstanding under the agreement with a weighted average interest rate of 2.58%.

The agreement contains non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios, maximum debt-to-EBITDA ratios and minimum tangible net worth. The Company is required to not exceed a maximum debt-to-EBITDA ratio of 3.0 to 1.0. As of March 31, 2014, there were no limitations on the availability under the revolving credit agreement as a result of the debt-to-EBITDA ratio.

Letters of Credit & Surety Bonds

The Company had outstanding letters of credit of $28,757 as of March 31, 2014, which were not part of the revolving credit facility.  The letters of credit bore interest at 0.47% as of March 31, 2014. The Company had outstanding surety bonds of $158,568 as of March 31, 2014.

7. Stockholders' Equity

In January 2014, the Company completed the acquisition of 68% of U.S. Medical Management. and as a result, issued 2,243,217 shares of Centene common stock to the selling stockholders.


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8. Earnings (Loss) Per Share

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

 
Three Months Ended March 31,
 
2014
 
2013
Earnings attributable to Centene Corporation:
 
 
 
Earnings from continuing operations, net of tax
$
33,816

 
$
22,639

Discontinued operations, net of tax
(833
)
 
363

Net earnings
$
32,983

 
$
23,002

 
 
 
 
Shares used in computing per share amounts:
 

 
 
Weighted average number of common shares outstanding
57,483,876

 
52,357,119

Common stock equivalents (as determined by applying the treasury stock method)
1,877,390

 
1,909,809

Weighted average number of common shares and potential dilutive common shares outstanding
59,361,266

 
54,266,928

 
 
 
 
Net earnings (loss) per common share attributable to Centene Corporation:
 
 
 
Basic:
 
 
 
Continuing operations
$
0.59

 
$
0.43

Discontinued operations
(0.02
)
 
0.01

Basic earnings per common share
$
0.57

 
$
0.44

 
 
 
 
Diluted:
 
 
 
Continuing operations
$
0.57

 
$
0.41

Discontinued operations
(0.01
)
 
0.01

Diluted earnings per common share
$
0.56

 
$
0.42


The calculation of diluted earnings per common share for the three months ended March 31, 2014 and 2013 excludes the impact of 22,956 shares and 23,351 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.

9. Segment Information

Centene operates in two segments: Managed Care and Specialty Services.  The 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 auxiliary healthcare services and products.
 
Segment information for the three months ended March 31, 2014, follows:
 
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
2,969,721

 
$
382,340

 
$

 
$
3,352,061

Premium and service revenues from internal customers
12,825

 
638,916

 
(651,741
)
 

Total premium and service revenues
$
2,982,546

 
$
1,021,256

 
$
(651,741
)
 
$
3,352,061

Earnings from operations
$
44,130

 
$
25,904

 
$

 
$
70,034



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Segment information for the three months ended March 31, 2013, follows:
 
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
2,296,449

 
$
125,384

 
$

 
$
2,421,833

Premium and service revenues from internal customers
10,053

 
527,453

 
(537,506
)
 

Total premium and service revenues
$
2,306,502

 
$
652,837

 
$
(537,506
)
 
$
2,421,833

Earnings from operations
$
9,259

 
$
30,341

 
$

 
$
39,600


10. 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.  The Commonwealth has alleged that Kentucky Spirit's exit constitutes a material breach of contract.  The Commonwealth seeks to recover substantial damages and to enforce its rights under Kentucky Spirit's $25,000 performance bond. In March 2014, Kentucky Spirit received a demand letter from the Commonwealth seeking approximately $46,000 to reimburse the Commonwealth for its alleged incurred and expected losses, expenses, transition costs and other damages for the period July 6, 2013 until July 5, 2014. The letter states that the Commonwealth is seeking damages only on behalf of the Commonwealth, not the federal Centers for Medicare and Medicaid Services (CMS). The letter alleges that the total increased costs to the Commonwealth’s Medicaid program due to Kentucky Spirit’s exit is approximately $154,000. Kentucky Spirit disputes the Commonwealth's alleged damages, is pursuing its own 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 March 31, 2014.  While uncertain, the ultimate resolution of the pending litigation could have a material effect on the financial position, cash flow or results of operations of the Company in the period it is resolved or becomes known.

Excluding the Kentucky matters discussed above, the Company is 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, results of operations or cash flows.

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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

In 2013, we classified the operations for Kentucky Spirit Health Plan (KSHP) as discontinued operations for all periods presented in our consolidated financial statements. The following discussion and analysis, with the exception of cash flow information, is presented in the context of continuing operations unless otherwise identified.

Key financial metrics for the first quarter of 2014 are summarized as follows:
Quarter-end at-risk managed care membership of 2,885,700, an increase of 332,300 members, or 13% year over year.
Premium and service revenues of $3.4 billion, representing 38% growth year over year.
Health Benefits Ratio of 89.3%, compared to 90.2% in 2013.
General and Administrative expense ratio of 8.8%, compared to 8.4% in 2013.
Operating cash flow of $252.4 million for the first quarter of 2014.
Diluted earnings per share of $0.57, or $0.79 excluding $0.16 of net cost associated with the health insurer fee and $0.06 of U.S. Medical Management acquisition transaction costs, compared to $0.41 in 2013.

A reconciliation of our diluted earnings per share from continuing operations for the first quarters of 2014 and 2013 is shown below:
 
2014
 
2013
Net earnings per diluted share
$
0.57

 
$
0.41

Net cost associated with the health insurer fee
0.16

 

U.S. Medical Management acquisition transaction costs
0.06

 

Total, excluding above items
$
0.79

 
$
0.41


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

AcariaHealth. In April 2013, we completed the acquisition of AcariaHealth, a specialty pharmacy company.

California. In November 2013, our California subsidiary, California Health and Wellness Plan (CHWP), began operating under a new contract with the California Department of Health Care Services to serve Medicaid beneficiaries in 18 rural counties under the state's Medi-Cal Managed Care Rural Expansion program and Medi-Cal beneficiaries in Imperial County. In January 2014, CHWP also began serving members under the state's Medicaid expansion program.

Florida. In August 2013, our Florida subsidiary, Sunshine Health, began operating under a contract with the Florida Agency for Health Care Administration to serve members of the Medicaid managed care Long Term Care (LTC) program. Enrollment began in August 2013 and has been implemented by region through March 2014.

Health Insurance Marketplaces (HIM). In January 2014, we began serving members enrolled in Health Insurance Marketplaces in certain regions of 9 states: Arkansas, Florida, Georgia, Indiana, Massachusetts, Mississippi, Ohio, Texas and Washington.

Illinois. In March 2014, our Illinois subsidiary, IlliniCare Health Plan, began operating under a new contract as part of the Illinois Medicare-Medicaid Alignment Initiative serving dual-eligible members in Cook, DuPage, Lake, Kane, Kankakee and Will counties (Greater Chicago region).


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Massachusetts. 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 is a joint venture between Centene and MHM Services Inc. In January 2014, our CeltiCare subsidiary began operating under a new contract with the Massachusetts Executive Office of Health and Human Services to participate in the MassHealth CarePlus program in all five regions.

Minnesota. In January 2014, Centurion began operating under a new agreement with the Minnesota Department of Corrections to provide managed healthcare services to offenders in the state's correctional facilities.

New Hampshire. In December 2013, our subsidiary, New Hampshire Healthy Families, began operating under a new contract with the Department of Health and Human Services to serve Medicaid beneficiaries.

Ohio. In July 2013, our Ohio subsidiary, Buckeye Community Health Plan (Buckeye), began operating under a new and expanded contract with Ohio Department of Job and Family Services (ODJFS) to serve Medicaid members 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 January 2014, Buckeye also began serving members under the state's Medicaid expansion program.

Tennessee. In September 2013, our joint venture subsidiary, Centurion, began operating under a new contract to provide comprehensive healthcare services to individuals incarcerated in Tennessee state correctional facilities.

U.S. Medical Management. In January 2014, we acquired a majority interest in U.S. Medical Management, LLC, a management services organization and provider of in-home health services for high acuity populations.

Washington. In January 2014, we began serving additional Medicaid members under the state's Medicaid expansion program.

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

We expect to realize the full year benefit in 2014 of business commenced during 2013 in California, Florida, Massachusetts, New Hampshire, Ohio, and Tennessee and the acquisition of AcariaHealth as discussed above.

In April 2014, we signed a definitive agreement to purchase a noncontrolling interest in Ribera Salud S.A., a Spanish health management group. Centene will be a joint shareholder with Ribera Salud S.A.'s remaining investor, Banco Sabadell, the fourth largest private bank in Spain. The transaction is expected to close in 2014, subject to closing conditions and regulatory approval.

In February 2014, our Mississippi subsidiary, Magnolia Health Plan, was awarded a statewide managed care contract to continue serving members enrolled in the Mississippi Coordinated Access Network (MississippiCAN) program, as one of two contractors. Under the new contract, Magnolia will continue providing outpatient, behavioral health, pharmacy, vision and dental services, and will also begin providing non-emergency transportation as of July 1, 2014. 

In December 2013, we signed a definitive agreement to purchase a majority stake in Fidelis SecureCare of Michigan, Inc. (Fidelis), a subsidiary of Fidelis SeniorCare, Inc. The transaction is expected to close in the fourth quarter of 2014, subject to certain closing conditions including regulatory approvals, and will involve cash purchase price payments contingent on the performance of the plan over the course of 2015. Fidelis was recently selected by the Michigan Department of Community Health to provide integrated healthcare services to members who are dually eligible for Medicare and Medicaid in Macomb and Wayne counties. Enrollment is expected to commence in the fourth quarter of 2014.

In November 2013, our South Carolina subsidiary, Absolute Total Care, was selected by the South Carolina Department of Health and Human Services to serve dual-eligible members as part of the state's pilot program to provide integrated and coordinated care for individuals who are eligible for both Medicare and Medicaid. Operations are expected to commence in the second half of 2014.

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In September 2013, the Florida Agency for Health Care Administration provided notice of intent to award a contract to our subsidiary, Sunshine Health, in 9 of 11 regions of the Managed Medical Assistance (MMA) program. The MMA program includes TANF recipients as well as ABD and dual-eligible members. The award is subject to challenge and contract readiness periods, with enrollment expected to begin in the second quarter of 2014 and continue through October 2014. In addition, we were recommended as the sole provider under a contract award for the Child Welfare Specialty Plan (Foster Care), which is expected to commence in the second quarter of 2014.

In September 2013, we were awarded a contract in Texas from the Texas Health and Human Services Commission to expand our operations and serve STAR+PLUS members in two Medicaid Rural Service Areas. Enrollment is expected to begin in the second 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 2014.

MEMBERSHIP

From March 31, 2013 to March 31, 2014, we increased our at-risk managed care membership by 332,300, or 13%.  The following table sets forth our membership by state for our managed care organizations:
 
March 31,
2014
 
December 31,
2013
 
March 31,
2013
Arizona
7,100

 
7,100

 
23,300

Arkansas
16,400

 

 

California
118,100

 
97,200

 

Florida
230,300

 
222,000

 
214,600

Georgia
331,400

 
318,700

 
314,000

Illinois
22,400

 
22,300

 
18,000

Indiana
198,700

 
195,500

 
202,400

Kansas
145,000

 
139,900

 
133,700

Louisiana
149,800

 
152,300

 
162,900

Massachusetts
50,800

 
22,600

 
17,300

Minnesota
9,400

 

 

Mississippi
85,400

 
78,300

 
77,000

Missouri
58,100

 
59,200

 
57,900

New Hampshire
37,100

 
33,600

 

Ohio
181,800

 
173,200

 
157,700

South Carolina
96,300

 
91,900

 
90,100

Tennessee
21,100

 
20,700

 

Texas
904,000

 
935,100

 
948,400

Washington
151,700

 
82,100

 
63,500

Wisconsin
70,800

 
71,500

 
72,600

Total
2,885,700

 
2,723,200

 
2,553,400


At March 31, 2014, we served 99,700 Medicaid members in Medicaid expansion programs in California, Massachusetts, Ohio and Washington included in the table above.


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Table of Contents

The following table sets forth our membership by line of business:
 
March 31,
2014
 
December 31,
2013
 
March 31,
2013
Medicaid
2,169,100

 
2,054,700

 
1,951,300

CHIP & Foster Care
269,200

 
275,100

 
265,400

ABD & Medicare
300,500

 
305,300

 
288,400

HIM
39,700

 

 

Hybrid Programs
14,400

 
19,000

 
24,600

LTC
51,800

 
37,800

 
23,700

Correctional services
41,000

 
31,300

 

Total
2,885,700

 
2,723,200

 
2,553,400

 
The following table identifies our dual eligible membership by line of business. The membership tables above include these members.
 
March 31,
2014
 
December 31,
2013
 
March 31,
2013
ABD
72,800

 
71,700
 
70,000
LTC
41,300

 
28,800
 
16,100
Medicare
6,500

 
6,500
 
5,300
Total
120,600

 
107,000
 
91,400

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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 months ended March 31, 2014 and 2013, prepared in accordance with generally accepted accounting principles in the United States. 

Summarized comparative financial data for the three months ended March 31, 2014 and 2013 is as follows ($ in millions):
 
Three Months Ended March 31,
 
2014
 
2013
 
% Change 2013-2014
Premium
$
3,070.9

 
$
2,388.6

 
28.6
 %
Service
281.2

 
33.2

 
n.m.

Premium and service revenues
3,352.1

 
2,421.8

 
38.4
 %
Premium tax and health insurer fee
107.8

 
103.7

 
4.0
 %
Total revenues
3,459.9

 
2,525.5

 
37.0
 %
Medical costs
2,742.5

 
2,154.5

 
27.3
 %
Cost of services
242.3

 
25.1

 
n.m.

General and administrative expenses
295.5

 
203.3

 
45.4
 %
Premium tax expense
78.3

 
103.0

 
(24.0
)%
Health insurer fee expense
31.3

 

 
n.m.

Earnings from operations
70.0

 
39.6

 
76.9
 %
Investment and other income, net
(2.3
)
 
(2.4
)
 
2.7
 %
Earnings from continuing operations, before income tax expense
67.7

 
37.2

 
81.9
 %
Income tax expense
34.6

 
14.7

 
135.2
 %
Earnings from continuing operations, net of income tax
33.1

 
22.5

 
47.2
 %
Discontinued operations, net of income tax expense (benefit) of $(0.0) and $0.3 respectively
(0.8
)
 
0.4

 
(329.5
)%
Net earnings
32.3

 
22.9

 
41.2
 %
Noncontrolling interest
(0.7
)
 
(0.1
)
 
n.m.

Net earnings attributable to Centene Corporation
$
33.0

 
$
23.0

 
43.4
 %
 
 
 
 
 
 
Amounts attributable to Centene Corporation common shareholders:

 
 
Earnings from continuing operations, net of income tax expense
$
33.8

 
$
22.6

 
49.4
 %
Discontinued operations, net of income tax expense
(0.8
)
 
0.4

 
(329.5
)%
Net earnings
$
33.0

 
$
23.0

 
43.4
 %
 
 
 
 
 
 
Diluted earnings per common share attributable to Centene Corporation:
Continuing operations
$
0.57

 
$
0.41

 
39.0
 %
Discontinued operations
(0.01
)
 
0.01

 
(200.0
)%
Total diluted earnings per common share
$
0.56

 
$
0.42

 
33.3
 %

n.m.: not meaningful.


19

Table of Contents

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Premium and Service Revenues

Premium and service revenues increased 38.4% in the three months ended March 31, 2014 over the corresponding period in 2013 primarily as a result of expansions in Florida and Ohio, the additions of the California, New Hampshire and three Centurion contracts, our participation in the Health Insurance Marketplaces, and the acquisitions of AcariaHealth and U.S. Medical Management. During the three months ended March 31, 2014, we received premium rate adjustments which yielded a net (0.1)% composite change across all of our markets.

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 Tax and Health Insurer Fee revenues) 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 March 31,:

 
2014
 
2013
Medicaid, CHIP, Foster Care & HIM
86.9
%
 
90.8
%
ABD, LTC & Medicare
92.9

 
90.0

Specialty Services
87.7

 
83.4

Total
89.3

 
90.2


The consolidated HBR for the three months ended March 31, 2014, was 89.3%, compared to 90.2% in the same period in 2013.  The HBR improvement compared to 2013 reflects a lower level of flu costs compared to prior year and reduced utilization in certain markets in the first quarter of 2014 associated with inclement weather.

Revenue and HBR results for new business and existing business are listed below to assist in understanding our results of operations. Existing businesses are primarily state markets or significant geographic expansion in an existing state or product that we have managed for four complete quarters. New businesses are primarily new state markets or significant geographic expansion in an existing state or product that conversely, we have not managed for four complete quarters. The following table compares the results for new business and existing business for the three months ended March 31,:
 
2014
 
2013
Premium and Service Revenue
 
 
 
New business
20
%
 
37
%
Existing business
80
%
 
63
%
 
 
 
 
HBR
 
 
 
New business
93.1
%
 
93.7
%
Existing business
88.3
%
 
88.2
%
Cost of Services

Cost of services increased by $217.2 million in the three months ended March 31, 2014, compared to the corresponding period in 2013.  This was primarily due to the acquisition of AcariaHealth and U.S. Medical Management.

General & Administrative Expenses

General and administrative expenses, or G&A, increased by $92.2 million in the three months ended March 31, 2014, compared to the corresponding period in 2013.  This was primarily due to expenses for additional staff and facilities to support our membership growth, the addition of the AcariaHealth business as well as U.S. Medical Management acquisition transaction costs.


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Table of Contents

The consolidated G&A expense ratio for the three months ended March 31, 2014 and 2013 was 8.8% and 8.4%, respectively.  The year over year increase reflects U.S. Medical Management transaction costs and the addition of the AcariaHealth business, partially offset by the leveraging of expenses over higher revenue in 2014

Health Insurer Fee Expense

During the three months ended March 31, 2014, we recorded $31.3 million of non-deductible expense for the Affordable Care Act (ACA) annual health insurer fee. In addition, we received signed agreements from 13 of 17 applicable states as of March 31, 2014, which provide for the reimbursement of the ACA insurer fee including the related gross-up for the associated income tax effects. As a result, we recorded $29.4 million of revenue in Premium Tax and Health Insurer Fee revenue associated with the accrual for the reimbursement of the fee. The net effect of the health insurer fee reduced our diluted earnings per share by $0.16 during the first quarter of 2014 due to the timing of the recognition of the revenue associated with the reimbursement from our state customers. During the year ended December 31, 2014, we expect to record $125.3 million of non-deductible expense for the health insurer fee expense.

Other Income (Expense)

The following table summarizes the components of other income (expense) for the three months ended March 31, ($ in millions): 
 
2014
 
2013
Investment income
$
4.7

 
$
4.3

Interest expense
(7.0
)
 
(6.6
)
Other income (expense), net
$
(2.3
)
 
$
(2.3
)

The increase in investment income in 2014 reflects an increase in investment balances over 2013. Interest expense increased in 2014 compared to 2013, reflecting increased revolver borrowings.

Income Tax Expense

Excluding the effects of noncontrolling interest, our effective tax rate for the three months ended March 31, 2014 and 2013, was a tax expense of 50.5% and 39.4%, respectively. The increase is due to the non-deductibility of the health insurer fee for income tax purposes. The loss of deduction from the health insurer fee increased our effective tax rate by 960 basis points.

Segment Results

The following table summarizes our consolidated operating results by segment for the three months ended March 31, ($ in millions):
 
2014
 
2013
 
% Change 2013-2014
Premium and Service Revenues
 
 
 
 
 
Managed Care
$
2,982.5

 
$
2,306.5

 
29.3
 %
Specialty Services
1,021.3

 
652.8

 
56.4
 %
Eliminations
(651.7
)
 
(537.5
)
 
21.3
 %
Consolidated Total
$
3,352.1

 
$
2,421.8

 
38.4
 %
Earnings from Operations
 

 
 

 
 

Managed Care
$
44.1

 
$
9.3

 
376.6
 %
Specialty Services
25.9

 
30.3

 
(14.6
)%
Consolidated Total
$
70.0

 
$
39.6

 
76.9
 %

Managed Care

Premium and service revenues increased 29.3% in the three months ended March 31, 2014, primarily as a result of expansions in Florida and Ohio and the additions of the California and New Hampshire contracts. Earnings from operations increased $34.8 million between years primarily reflecting a lower level of flu costs compared to prior year and reduced utilization in certain markets in the first quarter of 2014 associated with inclement weather.

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Table of Contents


Specialty Services

Premium and service revenues increased 56.4% in the three months ended March 31, 2014, due to the acquisitions of AcariaHealth and U.S. Medical Management, services associated with membership growth in the Medicaid segment, and the addition of three Centurion contracts.  Earnings from operations decreased $4.4 million in the three months ended March 31, 2014, reflecting lower margins in our pharmacy business.

LIQUIDITY AND CAPITAL RESOURCES

Shown below is a condensed schedule of cash flows used in the discussion of liquidity and capital resources ($ in millions).
 
Three Months Ended March 31,
 
2014
 
2013
Net cash provided by operating activities
$
252.4

 
$
43.0

Net cash used in investing activities
(150.5
)
 
(156.3
)
Net cash provided by financing activities
130.8

 
0.1

Net increase (decrease) in cash and cash equivalents
$
232.7

 
$
(113.2
)

Cash Flows Provided by Operating Activities

Normal operations are funded primarily through operating cash flows and borrowings under our revolving credit facility.  Operating activities provided cash of $252.4 million in the three months ended March 31, 2014, compared to $43.0 million in the comparable period in