2013.09.30 Form 10-Q

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 September 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 October 11, 2013, the registrant had 54,768,884 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 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;
•
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 1, 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 such as 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)

 
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
741,281

 
$
843,952

Premium and related receivables
355,947

 
263,452

Short-term investments
122,631

 
139,118

Other current assets
148,576

 
127,080

Total current assets
1,368,435

 
1,373,602

Long-term investments
816,910

 
614,723

Restricted deposits
40,911

 
34,793

Property, software and equipment, net
390,200

 
377,726

Goodwill
347,548

 
256,288

Intangible assets, net
50,541

 
20,268

Other long-term assets
124,492

 
64,282

Total assets
$
3,139,037

 
$
2,741,682

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Medical claims liability
$
1,071,672

 
$
926,302

Premium deficiency reserve
—

 
41,475

Accounts payable and accrued expenses
270,381

 
191,343

Unearned revenue
41,873

 
34,597

Current portion of long-term debt
3,046

 
3,373

Total current liabilities
1,386,972

 
1,197,090

Long-term debt
517,931

 
535,481

Other long-term liabilities
49,043

 
55,344

Total liabilities
1,953,946

 
1,787,915

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

Common stock, $.001 par value; authorized 100,000,000 shares; 57,872,798 issued and 54,767,551 outstanding at September 30, 2013, and 55,339,160 issued and 52,329,248 outstanding at December 31, 2012
58

 
55

Additional paid-in capital
578,188

 
450,856

Accumulated other comprehensive income:
 
 
 
Unrealized (loss) gain on investments, net of tax
(1,845
)
 
5,189

Retained earnings
678,679

 
566,820

Treasury stock, at cost (3,105,247 and 3,009,912 shares, respectively)
(75,541
)
 
(69,864
)
Total Centene stockholders’ equity
1,179,539

 
953,056

Noncontrolling interest
5,552

 
711

Total stockholders’ equity
1,185,091

 
953,767

Total liabilities and stockholders’ equity
$
3,139,037

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Premium
$
2,621,651

 
$
2,184,061

 
$
7,659,418

 
$
5,853,469

Service
112,497

 
28,403

 
251,290

 
84,062

Premium and service revenues
2,734,148

 
2,212,464

 
7,910,708

 
5,937,531

Premium tax
69,504

 
235,657

 
264,781

 
333,484

Total revenues
2,803,652

 
2,448,121

 
8,175,489

 
6,271,015

Expenses:
 
 
 
 
 
 
 
Medical costs
2,298,881

 
2,036,999

 
6,810,892

 
5,370,080

Cost of services
100,479

 
21,744

 
218,844

 
66,897

General and administrative expenses
253,608

 
181,073

 
694,204

 
512,322

Premium tax expense
68,453

 
235,946

 
262,188

 
333,872

Impairment loss
—

 
—

 
—

 
28,033

Total operating expenses
2,721,421

 
2,475,762

 
7,986,128

 
6,311,204

Earnings (loss) from operations
82,231

 
(27,641
)
 
189,361

 
(40,189
)
Other income (expense):
 
 
 
 
 
 
 
Investment and other income
4,946

 
23,244

 
13,703

 
32,580

Interest expense
(6,603
)
 
(4,855
)
 
(20,261
)
 
(14,393
)
Earnings (loss) before income tax expense (benefit)
80,574

 
(9,252
)
 
182,803

 
(22,002
)
Income tax expense (benefit)
31,660

 
(9,547
)
 
71,967

 
(6,068
)
Net earnings (loss)
48,914

 
295

 
110,836

 
(15,934
)
Noncontrolling interest
(459
)
 
(3,524
)
 
(1,023
)
 
(8,732
)
Net earnings (loss) attributable to Centene Corporation
$
49,373

 
$
3,819

 
$
111,859

 
$
(7,202
)
 
 
 
 
 
 
 
 
Net earnings (loss) per common share attributable to Centene Corporation:
Basic earnings (loss) per common share
$
0.90

 
$
0.07

 
$
2.08

 
$
(0.14
)
Diluted earnings (loss) per common share
$
0.87

 
$
0.07

 
$
2.00

 
$
(0.14
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
Basic
54,679,660

 
51,584,860

 
53,863,779

 
51,393,345

Diluted
56,933,056

 
53,806,197

 
55,956,421

 
51,393,345


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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net earnings (loss)
$
48,914

 
$
295

 
$
110,836

 
$
(15,934
)
Reclassification adjustment, net of tax
(94
)
 
(1,023
)
 
(621
)
 
(1,495
)
Change in unrealized (loss) gain on investments, net of tax
2,310

 
1,883

 
(6,413
)
 
2,436

Other comprehensive earnings (loss)
2,216

 
860

 
(7,034
)
 
941

Comprehensive earnings (loss)
51,130

 
1,155

 
103,802

 
(14,993
)
Comprehensive earnings (loss) attributable to the noncontrolling interest
(459
)
 
(3,524
)
 
(1,023
)
 
(8,732
)
Comprehensive earnings (loss) attributable to Centene Corporation
$
51,589

 
$
4,679

 
$
104,825

 
$
(6,261
)

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)

Nine Months Ended September 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)
—

 
—

 
—

 
—

 
111,859

 
—

 
—

 
(1,023
)
 
110,836

Change in unrealized investment (loss) gain, net of $(3,999) tax
—

 
—

 
—

 
(7,034
)
 
—

 
—

 
—

 
—

 
(7,034
)
Total comprehensive earnings
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
103,802

Common stock issued for acquisition
1,716,690

 
2

 
75,423

 
—

 
—

 
—

 
—

 
—

 
75,425

Common stock issued for stock offering
342,640

 
—

 
15,225

 
—

 
—

 
—

 
—

 
—

 
15,225

Common stock issued for employee benefit plans
474,308

 
1

 
8,284

 
—

 
—

 
—

 
—

 
—

 
8,285

Common stock repurchases
—

 
—

 
—

 
—

 
—

 
95,335

 
(5,677
)
 
—

 
(5,677
)
Stock compensation expense
—

 
—

 
27,252

 
—

 
—

 
—

 
—

 
—

 
27,252

Excess tax benefits from stock compensation
—

 
—

 
1,148

 
—

 
—

 
—

 
—

 
—

 
1,148

Contribution from noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,864

 
5,864

Balance, September 30, 2013
57,872,798

 
$
58

 
$
578,188

 
$
(1,845
)
 
$
678,679

 
3,105,247

 
$
(75,541
)
 
$
5,552

 
$
1,185,091

 
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)
 
Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$
110,836

 
$
(15,934
)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities
Depreciation and amortization
50,220

 
49,892

Stock compensation expense
27,252

 
18,417

Impairment loss
—

 
28,033

Gain on sale of investment in convertible note
—

 
(17,880
)
Deferred income taxes
1,626

 
(19,318
)
Changes in assets and liabilities
 

 
 

Premium and related receivables
(58,587
)
 
(139,414
)
Other current assets
(19,133
)
 
(23,487
)
Other assets
(65,397
)
 
1,918

Medical claims liabilities
103,895

 
374,046

Unearned revenue
7,976

 
122,077

Accounts payable and accrued expenses
48,840

 
(59,872
)
Other operating activities
4,142

 
(11,196
)
Net cash provided by operating activities
211,670

 
307,282

Cash flows from investing activities:
 

 
 

Capital expenditures
(46,383
)
 
(70,601
)
Purchases of investments
(666,016
)
 
(501,958
)
Sales and maturities of investments
451,034

 
434,009

Investments in acquisitions, net of cash acquired
(62,773
)
 
—

Net cash used in investing activities
(324,138
)
 
(138,550
)
Cash flows from financing activities:
 

 
 

Proceeds from exercise of stock options
7,674

 
11,686

Proceeds from borrowings
30,000

 
215,000

Payment of long-term debt
(40,842
)
 
(177,422
)
Proceeds from stock offering
15,225

 
—

Excess tax benefits from stock compensation
1,140

 
6,049

Common stock repurchases
(5,677
)
 
(2,154
)
Contribution from noncontrolling interest
5,864

 
1,032

Debt issue costs
(3,587
)
 
—

Net cash provided by financing activities
9,797

 
54,191

Net increase (decrease) in cash and cash equivalents
(102,671
)
 
222,923

Cash and cash equivalents, beginning of period
843,952

 
573,698

Cash and cash equivalents, end of period
$
741,281

 
$
796,621

Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
16,738

 
$
12,127

Income taxes paid
40,921

 
34,001

Equity issued in connection with acquisition
75,425

 
—

 
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 $142,495 in total consideration. The transaction consideration was financed through a combination of $75,425 of Centene common stock and $67,070 of cash on hand. The Company subsequently sold 342,640 shares of common stock for $15,225 related to funding the escrow account for the acquisition.

The Company's allocation of fair value resulted in goodwill of $91,260 and other identifiable intangible assets of $35,000. The goodwill is not deductible for income tax purposes. 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:
 
September 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
$
247,051

 
$
308

 
$
(6,196
)
 
$
241,163

 
$
117,434

 
$
594

 
$
(221
)
 
$
117,807

Corporate securities
327,083

 
3,115

 
(650
)
 
329,548

 
315,807

 
5,101

 
(198
)
 
320,710

Restricted certificates of deposit
5,891

 
—

 
—

 
5,891

 
5,890

 
—

 
—

 
5,890

Restricted cash equivalents
22,608

 
—

 
—

 
22,608

 
14,460

 
—

 
—

 
14,460

Municipal securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General obligation
61,101

 
544

 
(169
)
 
61,476

 
88,690

 
1,173

 
(26
)
 
89,837

Pre-refunded
14,329

 
164

 
(1
)
 
14,492

 
5,337

 
85

 
—

 
5,422

Revenue
76,753

 
534

 
(538
)
 
76,749

 
84,726

 
1,331

 
(30
)
 
86,027

Variable rate demand notes
65,955

 
—

 
—

 
65,955

 
37,685

 
—

 
—

 
37,685

Asset backed securities
128,343

 
656

 
(256
)
 
128,743

 
83,295

 
1,197

 
(17
)
 
84,475

Cost and equity method investments
18,538

 
—

 
—

 
18,538

 
11,298

 
—

 
—

 
11,298

Life insurance contracts
15,289

 
—

 
—

 
15,289

 
15,023

 
—

 
—

 
15,023

Total
$
982,941

 
$
5,321

 
$
(7,810
)
 
$
980,452

 
$
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 September 30, 2013, 47% 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, 66% were rated AA-/Aa3 or higher, and 94% were rated A-/A3 or higher.  At September 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:
 
September 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
$
(6,196
)
 
$
196,888

 
$
—

 
$
—

 
$
(219
)
 
$
56,033

 
$
(2
)
 
$
202

Corporate securities
(641
)
 
79,753

 
(9
)
 
42

 
(198
)
 
44,758

 
—

 
—

Municipal securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General obligation
(119
)
 
9,264

 
(50
)
 
2,453

 
(26
)
 
8,464

 
—

 
—

Pre-refunded
(1
)
 
489

 
—

 
—

 
—

 
—

 
—

 
—

Revenue
(531
)
 
28,866

 
(7
)
 
1,807

 
(30
)
 
3,325

 
—

 
—

Asset backed securities
(256
)
 
35,140

 
—

 
—

 
(17
)
 
9,321

 
—

 
—

Total
$
(7,744
)
 
$
350,400

 
$
(66
)
 
$
4,302

 
$
(490
)
 
$
121,901

 
$
(2
)
 
$
202


As of September 30, 2013, the gross unrealized losses were generated from 89 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:
 
September 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
$
121,753

 
$
122,631

 
$
36,600

 
$
36,606

 
$
138,011

 
$
139,118

 
$
34,403

 
$
34,435

One year through five years
588,145

 
589,585

 
4,302

 
4,305

 
474,068

 
481,381

 
358

 
358

Five years through ten years
169,250

 
164,201

 
—

 
—

 
94,006

 
93,878

 
—

 
—

Greater than ten years
62,891

 
63,124

 
—

 
—

 
38,799

 
39,464

 
—

 
—

Total
$
942,039

 
$
939,541

 
$
40,902

 
$
40,911

 
$
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.


8
Table of Contents

Investment amortization of $7,612 and $8,676 was recorded in the nine months ended September 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 September 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
$
741,281

 
$
—

 
$
—

 
$
741,281

Investments available for sale:
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. government corporations and agencies
$
213,772

 
$
14,979

 
$
—

 
$
228,751

Corporate securities
—

 
329,548

 
—

 
329,548

Municipal securities:
 

 
 

 
 

 
 
General obligation
—

 
61,476

 
—

 
61,476

Pre-refunded
—

 
14,492

 
—

 
14,492

Revenue
—

 
76,749

 
—

 
76,749

Variable rate demand notes
—

 
65,955

 
—

 
65,955

Asset backed securities
—

 
128,743

 
—

 
128,743

Total investments
$
213,772

 
$
691,942

 
$
—

 
$
905,714

Restricted deposits available for sale:
 

 
 

 
 

 
 

Cash and cash equivalents
$
22,608

 
$
—

 
$
—

 
$
22,608

Certificates of deposit
5,891

 
—

 
—

 
5,891

U.S. Treasury securities and obligations of U.S. government corporations and agencies
12,412

 
—

 
—

 
12,412

Total restricted deposits
$
40,911

 
$
—

 
$
—

 
$
40,911

Other long-term assets: Interest rate swap contract
$
—

 
$
10,596

 
$
—

 
$
10,596

Total assets at fair value
$
995,964

 
$
702,538

 
$
—

 
$
1,698,502



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Table of Contents

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 September 30, 2013, there were $101 transfers from Level I to Level II and $26,571 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 $33,827 and $26,321 as of September 30, 2013 and December 31, 2012, respectively.

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

 
$
425,000

Unamortized premium on senior notes
6,495

 
7,823

Interest rate swap fair value
10,596

 
16,304

Senior notes
442,091

 
449,127

Revolving credit agreement
—

 
—

Mortgage notes payable
73,447

 
84,081

Capital leases and other
5,439

 
5,646

Total debt
520,977

 
538,854

Less current portion
(3,046
)
 
(3,373
)
 Long-term debt
$
517,931

 
$
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 September 30, 2013, the fair value of the interest rate swap increased the fair value of the notes by $10,596 and the variable interest rate of the swap was 3.76%.

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 September 30, 2013, the total net unamortized debt premium on the $250,000 Notes and $175,000 Add-on Notes was $6,495.  

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 carrying $100,000 of unrestricted cash on deposit. As of September 30, 2013, the Company had no borrowings outstanding under the agreement.

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 not to exceed a maximum debt-to-EBITDA ratio of 3.25 as of September 30, 2013 and 3.0 as of December 31, 2013 and thereafter. As of September 30, 2013, the Company's availability under the new revolving credit agreement would have been limited to approximately $400,000 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 $28,682 as of September 30, 2013, which were not part of the revolving credit facility.  The letters of credit bore interest at 0.52% as of September 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 $15,225.


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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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net earnings (loss) attributable to Centene Corporation
$
49,373

 
$
3,819

 
$
111,859

 
$
(7,202
)
 
 
 
 
 
 
 
 
Shares used in computing per share amounts:
 

 
 

 
 
 
 
Weighted average number of common shares outstanding
54,679,660

 
51,584,860

 
53,863,779

 
51,393,345

Common stock equivalents (as determined by applying the treasury stock method)
2,253,396

 
2,221,337

 
2,092,642

 
—

Weighted average number of common shares and potential dilutive common shares outstanding
56,933,056

 
53,806,197

 
55,956,421

 
51,393,345

 
 
 
 
 
 
 
 
Net earnings (loss) per share attributable to Centene Corporation:
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
0.90

 
$
0.07

 
$
2.08

 
$
(0.14
)
Diluted earnings (loss) per common share
$
0.87

 
$
0.07

 
$
2.00

 
$
(0.14
)

The calculation of diluted earnings per common share for the three and nine months ended September 30, 2013 excludes the impact of 14,532 shares and 76,957 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 months ended September 30, 2012 excludes the impact of 44,642 shares related to anti-dilutive stock options, restricted stock and restricted stock units. The calculation for the nine months ended September 30, 2012 excludes the impact of 4,638,757 shares (before application of the treasury stock method) 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 auxiliary healthcare services and products. 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, which is primarily a long-term care operation, 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 September 30, 2013, follows:
 
Medicaid
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
2,510,221

 
$
223,927

 
$
—

 
$
2,734,148

Premium and service revenues from internal customers
9,885

 
542,238

 
(552,123
)
 
—

Total premium and service revenues
$
2,520,106

 
$
766,165

 
$
(552,123
)
 
$
2,734,148

Earnings from operations
$
68,083

 
$
14,148

 
$
—

 
$
82,231



12
Table of Contents

Segment information for the three months ended September 30, 2012, follows:
 
Medicaid
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
2,072,079

 
$
140,385

 
$
—

 
$
2,212,464

Premium and service revenues from internal customers
25,138

 
442,388

 
(467,526
)
 
—

Total premium and service revenues
$
2,097,217

 
$
582,773

 
$
(467,526
)
 
$
2,212,464

Earnings (loss) from operations
$
(55,239
)
 
$
27,598

 
$
—

 
$
(27,641
)

Segment information for the nine months ended September 30, 2013, follows:
 
Medicaid
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
7,367,236

 
$
543,472

 
$
—

 
$
7,910,708

Premium and service revenues from internal customers
31,050

 
1,660,639

 
(1,691,689
)
 
—

Total premium and service revenues
$
7,398,286

 
$
2,204,111

 
$
(1,691,689
)
 
$
7,910,708

Earnings from operations
$
116,609

 
$
72,752

 
$
—

 
$
189,361


Segment information for the nine months ended September 30, 2012, follows:
 
Medicaid
Managed Care
 
Specialty
Services
 
Eliminations
 
Consolidated
Total
Premium and service revenues from external customers
$
5,507,972

 
$
429,559

 
$
—

 
$
5,937,531

Premium and service revenues from internal customers
62,751

 
1,206,293

 
(1,269,044
)
 
—

Total premium and service revenues
$
5,570,723

 
$
1,635,852

 
$
(1,269,044
)
 
$
5,937,531

Earnings (loss) from operations
$
(72,740
)
 
$
32,551

 
$
—

 
$
(40,189
)

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.  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.  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 September 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.


13
Table of Contents

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.



14
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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 third quarter of 2013 are summarized as follows:
•
Quarter-end at-risk managed care membership of 2,612,500, an increase of 109,500 members, or 4% year over year.
•
Premium and service revenues of $2.7 billion, representing 24% growth year over year.
•
Health Benefits Ratio of 87.7%, compared to 93.3% in 2012.
•
General and Administrative expense ratio of 9.3%, compared to 8.2% in 2012.
•
Operating cash flow of $130.7 million for the third quarter of 2013.
•
Diluted earnings per share of $0.87, compared to $0.07 in 2012.

We have provided additional detail below on our quarterly results to further understand the changes in quarterly earnings per diluted share as compared to the third quarter 2012. During the third quarter 2013, we recorded net earnings of $0.87 per diluted share compared to $0.07 in the corresponding period in 2012 reflecting the following:

 
2013
 
2012
Net earnings per diluted share
$
0.87

 
$
0.07

Loss from Kentucky operations & premium deficiency reserve
0.01

 
1.03

Gains on sales of investments
—

 
(0.21
)
State tax benefit
—

 
(0.08
)
Total, excluding above items
$
0.88

 
$
0.81


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 $142.5 million. The transaction consideration was financed through a combination of Centene common stock and cash on hand.

•
Florida. In August 2013, our Florida subsidiary, Sunshine State Health Plan, began operating under a contract with the Florida Agency for Health Care Administration to serve members of the Medicaid Managed Care Long Term Care program. Enrollment began in August 2013 and will be implemented by region and continue through March 2014.

•
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, our subsidiary, 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.

•
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.


15
Table of Contents

•
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, our subsidiary, 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.

•
Ohio. 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.

•
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.

•
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.

•
In October 2013, Centurion executed an agreement with the Minnesota Department of Corrections to provide managed healthcare services to offenders in the state's correctional facilities. Operations are expected to begin in the first quarter of 2014.

•
In September 2013, the Florida Agency for Health Care Administration provided notice of intent to award a contract to our subsidiary, Sunshine State Health Plan, 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 tentatively awarded a contract with the Massachusetts Executive Office of Health and Human Services to participate in the MassHealth CarePlus program in all five regions, with operations expected to begin in January 2014. Under the contract, our subsidiary, CeltiCare, will provide comprehensive healthcare services for eligible non-pregnant Medicaid adults. Services will include medical, behavioral health, dental, vision, pharmacy, therapies and transportation.

•
In September 2013, we were tentatively 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. Upon successful negotiations, execution of a contract and regulatory approval, enrollment is expected to begin in the second half of 2014.

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Table of Contents


•
In September 2013, we received approval from the Centers for Medicare & Medicaid Services (CMS) to operate health insurance exchanges in Arkansas, Florida, Georgia, Indiana, Mississippi, Ohio and Texas. We also received approval from Massachusetts and Washington to participate in their state-based exchanges. Enrollment began in October 2013 and coverage is expected to commence in January 2014.

•
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 November 2012, our Illinois subsidiary, IlliniCare Health Plan, was selected, contingent upon successful completion of contract negotiations, 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. Upon execution of a contract and regulatory approval, enrollment is expected to begin in 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.

•
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, 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. As a result, our contract terminated on September 30, 2013. Bridgeway served 16,700 Medicaid acute care members in Yavapai County at September 30, 2013. 


17
Table of Contents


MEMBERSHIP

From September 30, 2012 to September 30, 2013, we increased our at-risk managed care membership by 109,500, or 4.4%.  The following table sets forth our membership by state for our managed care organizations:
 
September 30,
2013
 
December 31,
2012
 
September 30,
2012
Arizona
23,700

 
23,500

 
23,800

Florida
217,800

 
214,000

 
209,600

Georgia
314,100

 
313,700

 
312,400

Illinois
22,800

 
18,000

 
17,900

Indiana
198,400

 
204,000

 
205,400

Kansas
137,700

 
—

 
—

Kentucky
—

 
135,800

 
145,400

Louisiana
152,600

 
165,600

 
167,200

Massachusetts
23,200

 
21,500

 
28,000

Mississippi
76,900

 
77,200

 
30,600

Missouri
58,200

 
59,600

 
53,900

Ohio
170,900

 
157,800

 
173,800

South Carolina
89,400

 
90,100

 
89,400

Tennessee
20,400

 
—

 
—

Texas
957,300

 
949,900

 
930,700

Washington
77,100

 
57,200

 
42,000

Wisconsin
72,000

 
72,400

 
72,900

Total
2,612,500

 
2,560,300

 
2,503,000


The following table sets forth our membership by line of business:
 
September 30,
2013
 
December 31,
2012
 
September 30,
2012
Medicaid
1,953,300

 
1,977,200

 
1,939,400

CHIP & Foster Care
274,900

 
237,700

 
229,600

ABD & Medicare
302,000

 
307,800

 
289,800

Hybrid Programs
19,600

 
29,100

 
35,700

Long-term Care
31,600

 
8,500

 
8,500

Correctional services
31,100

 
—

 
—

Total
2,612,500

 
2,560,300

 
2,503,000

 
The following table identifies our dual eligible membership by line of business. The membership tables above include these members.
 
September 30,
2013
 
December 31,
2012
 
September 30,
2012
ABD
72,000

 
72,800
 
69,800
Long-term Care
19,600

 
7,700
 
7,800
Medicare
6,100

 
5,100
 
4,000
Total
97,700

 
85,600
 
81,600


18
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 nine months ended September 30, 2013 and 2012, prepared in accordance with generally accepted accounting principles in the United States. 

Summarized comparative financial data for the three and nine months ended September 30, 2013 and 2012 is as follows ($ in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
% Change 2012-2013
 
2013
 
2012
 
% Change 2012-2013
Premium
$
2,621.7

 
$
2,184.1

 
20.0
 %
 
$
7,659.4

 
$
5,853.5

 
30.9
 %
Service
112.5

 
28.4

 
296.1
 %
 
251.3

 
84.0

 
198.9
 %
Premium and service revenues
2,734.2

 
2,212.5

 
23.6
 %
 
7,910.7

 
5,937.5

 
33.2
 %
Premium tax
69.5

 
235.6

 
(70.5
)%
 
264.8

 
333.5

 
(20.6
)%
Total revenues
2,803.7

 
2,448.1

 
14.5
 %
 
8,175.5

 
6,271.0

 
30.4
 %
Medical costs
2,298.9

 
2,037.0

 
12.9
 %
 
6,810.9

 
5,370.1

 
26.8
 %
Cost of services
100.5

 
21.7

 
362.1
 %
 
218.8

 
66.9

 
227.1
 %
General and administrative expenses
253.6

 
181.1

 
40.1
 %
 
694.2

 
512.3

 
35.5
 %
Premium tax expense
68.5

 
235.9

 
(71.0
)%
 
262.2

 
333.9

 
(21.5
)%
Impairment loss
—

 
—

 
—
 %
 
—

 
28.0

 
(100.0
)%
Earnings (loss) from operations
82.2

 
(27.6
)
 
n.m.

 
189.4

 
(40.2
)
 
n.m.

Investment and other income, net
(1.6
)
 
18.4

 
(109.0
)%
 
(6.6
)
 
18.2

 
(136.1
)%
Earnings (loss) before income tax expense (benefit)
80.6

 
(9.2
)
 
n.m.

 
182.8

 
(22.0
)
 
n.m.

Income tax expense (benefit)
31.7

 
(9.5
)
 
n.m.

 
72.0

 
(6.1
)
 
n.m.

Net earnings (loss)
48.9

 
0.3

 
n.m.

 
110.8

 
(15.9
)
 
n.m.

Noncontrolling interest
(0.5
)
 
(3.5
)
 
(87.0
)%
 
(1.0
)
 
(8.7
)
 
(88.3
)%
Net earnings (loss) attributable to Centene Corporation
$
49.4

 
$
3.8

 
n.m.

 
$
111.8

 
$
(7.2
)
 
n.m.

Diluted earnings (loss) per common share attributable to Centene Corporation
$
0.87

 
$
0.07

 
n.m.

 
$
2.00

 
$
(0.14
)
 
n.m.

n.m.: not meaningful.

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

Premium and Service Revenues

Premium and service revenues increased 23.6% in the three months ended September 30, 2013 over the corresponding period in 2012 primarily as a result of the addition of the Kansas contract on January 1, 2013, increased membership and premium rates in Texas, expansions in Mississippi and Florida and the acquisition of AcariaHealth, partially offset by decreased revenue in Kentucky as a result of our exit.

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 September 30,:


19
Table of Contents

 
2013
 
2012
Medicaid and CHIP
84.5
%
 
91.4
%
ABD and Medicare
92.2

 
97.5

Specialty Services
86.8

 
87.2

Total
87.7

 
93.3


The consolidated HBR for the three months ended September 30, 2013, was 87.7%, compared to 93.3% in the same period in 2012.  Excluding our Kentucky health plan operations, the third quarter 2012 HBR was 88.7%. The HBR improvement compared to three months ended September 30, 2012, reflects the rate increase in Texas as well as a continued level of moderate utilization.

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 September 30,:
 
2013
 
2012
Premium and Service Revenue
 
 
 
New business
14
%
 
32
%
Existing business
86
%
 
68
%
 
 
 
 
HBR
 
 
 
New business
96.5
%
 
106.5
%
Existing business
86.3
%
 
87.0
%
Cost of Services

Cost of services increased by $78.7 million in the three months ended September 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 $72.5 million in the three months ended September 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 September 30, 2013 and 2012 was 9.3% and 8.2%, respectively.  The year over year increase reflects an increase in performance based compensation expense in 2013 and higher start-up costs, partially offset by the leveraging of expenses over higher revenue in 2013.  

Other Income (Expense)

The following table summarizes the components of other income (expense) for the three months ended September 30, ($ in millions): 
 
2013
 
2012
Investment income
$
4.9

 
$
3.9

Gain on sale of investments
—

 
1.5

Gain on sale of investment in convertible note
—

 
17.9

Interest expense