2015.03.31 Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________________________________
FORM 10-Q
____________________________________________
(Mark One)
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[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2015
OR
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[ ] | 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)
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Delaware | 42-1406317 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification Number) |
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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 17, 2015, the registrant had 118,914,646 shares of common stock outstanding.
CENTENE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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| Part I | |
| Financial Information | |
Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
| Part II | |
| Other Information | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
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CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
All statements, other than statements of current or historical fact, contained in this filing are forward-looking statements. 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 1 “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 but not limited to:
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• | our ability to accurately predict and effectively manage health benefits and other operating expenses and reserves; |
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• | membership and revenue projections; |
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• | timing of regulatory contract approval; |
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• | changes in healthcare practices; |
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• | 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; |
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• | changes in expected contract start dates; |
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• | changes in expected closing dates, estimated purchase price and accretion for acquisitions; |
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• | foreign currency fluctuations; |
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• | provider and state contract changes; |
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• | reduction in provider payments by governmental payors; |
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• | disasters and numerous other factors affecting the delivery and cost of healthcare; |
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• | the expiration, cancellation or suspension of our Medicare or Medicaid managed care contracts by federal or state governments; |
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• | the outcome of pending legal proceedings; |
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• | availability of debt and equity financing, on terms that are favorable to us; and |
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• | general economic and market conditions. |
This list of important factors is not intended to be exhaustive. We discuss certain of these matters more fully, as well as certain risk factors that may affect our business operations, financial condition and results of operations, in our filings with the Securities and Exchange Commission, including our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
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.
Item 1A “Risk Factors” of Part II of this filing contains a further discussion of these and other important factors that could cause actual results to differ from expectations. We disclaim any current intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Due to these important factors and risks, we cannot give assurances with respect to our future premium levels or our ability to control our future medical costs.
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)
|
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,666 |
| | $ | 1,610 |
|
Premium and related receivables | 1,245 |
| | 912 |
|
Short term investments | 151 |
| | 177 |
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Other current assets | 528 |
| | 335 |
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Total current assets | 3,590 |
| | 3,034 |
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Long term investments | 1,527 |
| | 1,280 |
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Restricted deposits | 98 |
| | 100 |
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Property, software and equipment, net | 450 |
| | 445 |
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Goodwill | 786 |
| | 754 |
|
Intangible assets, net | 131 |
| | 120 |
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Other long term assets | 114 |
| | 91 |
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Total assets | $ | 6,696 |
| | $ | 5,824 |
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| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
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Current liabilities: | |
| | |
|
Medical claims liability | $ | 1,950 |
| | $ | 1,723 |
|
Accounts payable and accrued expenses | 1,002 |
| | 768 |
|
Return of premium payable | 269 |
| | 236 |
|
Unearned revenue | 117 |
| | 168 |
|
Current portion of long term debt | 5 |
| | 5 |
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Total current liabilities | 3,343 |
| | 2,900 |
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Long term debt | 1,123 |
| | 874 |
|
Other long term liabilities | 238 |
| | 159 |
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Total liabilities | 4,704 |
| | 3,933 |
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Commitments and contingencies |
|
| |
|
|
Redeemable noncontrolling interests | 155 |
| | 148 |
|
Stockholders’ equity: | |
| | |
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Preferred stock, $0.001 par value; authorized 10,000,000 shares; no shares issued or outstanding at March 31, 2015 and December 31, 2014 | — |
| | — |
|
Common stock, $.001 par value; authorized 200,000,000 shares; 124,562,959 issued and 118,886,912 outstanding at March 31, 2015, and 124,274,864 issued and 118,433,416 outstanding at December 31, 2014 | — |
| | — |
|
Additional paid-in capital | 870 |
| | 840 |
|
Accumulated other comprehensive loss | (1 | ) | | (1 | ) |
Retained earnings | 1,066 |
| | 1,003 |
|
Treasury stock, at cost (5,676,047 and 5,841,448 shares, respectively) | (98 | ) | | (98 | ) |
Total Centene stockholders’ equity | 1,837 |
| | 1,744 |
|
Noncontrolling interest | — |
| | (1 | ) |
Total stockholders’ equity | 1,837 |
| | 1,743 |
|
Total liabilities and stockholders’ equity | $ | 6,696 |
| | $ | 5,824 |
|
The accompanying notes to the consolidated financial statements are an integral part of these statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share data)
(Unaudited)
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| | | | | | | |
| Three Months Ended March 31, |
| 2015 | | 2014 |
Revenues: | | | |
Premium | $ | 4,299 |
| | $ | 3,071 |
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Service | 462 |
| | 281 |
|
Premium and service revenues | 4,761 |
| | 3,352 |
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Premium tax and health insurer fee | 370 |
| | 108 |
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Total revenues | 5,131 |
| | 3,460 |
|
Expenses: | | | |
Medical costs | 3,861 |
| | 2,743 |
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Cost of services | 402 |
| | 242 |
|
General and administrative expenses | 403 |
| | 296 |
|
Premium tax expense | 281 |
| | 78 |
|
Health insurer fee expense | 55 |
| | 31 |
|
Total operating expenses | 5,002 |
| | 3,390 |
|
Earnings from operations | 129 |
| | 70 |
|
Other income (expense): | | | |
Investment and other income | 9 |
| | 5 |
|
Interest expense | (10 | ) | | (7 | ) |
Earnings from continuing operations, before income tax expense | 128 |
| | 68 |
|
Income tax expense | 63 |
| | 35 |
|
Earnings from continuing operations, net of income tax expense | 65 |
| | 33 |
|
Discontinued operations, net of income tax expense of $0 and $0, respectively | (1 | ) | | (1 | ) |
Net earnings | 64 |
| | 32 |
|
(Earnings) loss attributable to noncontrolling interests | (1 | ) | | 1 |
|
Net earnings attributable to Centene Corporation | $ | 63 |
| | $ | 33 |
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| | | |
Amounts attributable to Centene Corporation common shareholders: |
Earnings from continuing operations, net of income tax expense | $ | 64 |
| | $ | 34 |
|
Discontinued operations, net of income tax expense (benefit) | (1 | ) | | (1 | ) |
Net earnings | $ | 63 |
| | $ | 33 |
|
| | | |
Net earnings (loss) per common share attributable to Centene Corporation: |
Basic: | | | |
Continuing operations | $ | 0.54 |
| | $ | 0.30 |
|
Discontinued operations | (0.01 | ) | | (0.01 | ) |
Basic earnings per common share | $ | 0.53 |
| | $ | 0.29 |
|
| | | |
Diluted: | | | |
Continuing operations | $ | 0.52 |
| | $ | 0.29 |
|
Discontinued operations | (0.01 | ) | | (0.01 | ) |
Diluted earnings per common share | $ | 0.51 |
| | $ | 0.28 |
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| | | |
Weighted average number of common shares outstanding: |
Basic | 118,783,755 |
| | 114,967,752 |
|
Diluted | 122,572,366 |
| | 118,722,532 |
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The accompanying notes to the consolidated financial statements are an integral part of these statements.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS
(In millions)
(Unaudited)
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| | | | | | | |
| Three Months Ended March 31, |
| 2015 | | 2014 |
Net earnings | $ | 64 |
| | $ | 32 |
|
Change in unrealized gain on investments, net of tax | 5 |
| | 2 |
|
Foreign currency translation adjustments | (5 | ) | | — |
|
Other comprehensive earnings | — |
| | 2 |
|
Comprehensive earnings | 64 |
| | 34 |
|
Comprehensive (earnings) loss attributable to noncontrolling interests | (1 | ) | | 1 |
|
Comprehensive earnings attributable to Centene Corporation | $ | 63 |
| | $ | 35 |
|
The accompanying notes to the consolidated financial statements are an integral part of this statement.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In millions, except share data)
(Unaudited)
Three Months Ended March 31, 2015
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2014 | 124,274,864 |
| | $ | — |
| | $ | 840 |
| | $ | (1 | ) | | $ | 1,003 |
| | 5,841,448 |
| | $ | (98 | ) | | $ | (1 | ) | | $ | 1,743 |
|
Comprehensive Earnings: | | | | | | | | | | | | | | | | | |
Net earnings | — |
| | — |
| | — |
| | — |
| | 63 |
| | — |
| | — |
| | — |
| | 63 |
|
Change in unrealized investment loss, net of $3 tax | — |
| | — |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | — |
| | 5 |
|
Foreign currency translation | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
| | — |
| | — |
| | (5 | ) |
Total comprehensive earnings | | | | | | | | | |
| | | | | | | | 63 |
|
Common stock issued for acquisition | — |
| | — |
| | 9 |
| | — |
| | — |
| | (247,580 | ) | | 4 |
| | — |
| | 13 |
|
Common stock issued for employee benefit plans | 288,095 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
Common stock repurchases | — |
| | — |
| | — |
| | — |
| | — |
| | 82,179 |
| | (4 | ) | | — |
| | (4 | ) |
Stock compensation expense | — |
| | — |
| | 16 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 16 |
|
Excess tax benefits from stock compensation | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
Reclassification to redeemable noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
Balance, March 31, 2015 | 124,562,959 |
| | $ | — |
| | $ | 870 |
| | $ | (1 | ) | | $ | 1,066 |
| | 5,676,047 |
| | $ | (98 | ) | | $ | — |
| | $ | 1,837 |
|
The accompanying notes to the consolidated financial statements are an integral part of this statement.
CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2015 | | 2014 |
Cash flows from operating activities: | | | |
Net earnings | $ | 64 |
| | $ | 32 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities |
Depreciation and amortization | 27 |
| | 20 |
|
Stock compensation expense | 16 |
| | 11 |
|
Deferred income taxes | (6 | ) | | (8 | ) |
Gain on settlement of contingent consideration | (10 | ) | | — |
|
Changes in assets and liabilities | |
| | |
|
Premium and related receivables | (334 | ) | | (119 | ) |
Other current assets | (3 | ) | | 3 |
|
Other assets | (13 | ) | | (14 | ) |
Medical claims liabilities | 227 |
| | 196 |
|
Unearned revenue | (51 | ) | | 35 |
|
Accounts payable and accrued expenses | 58 |
| | 91 |
|
Other long term liabilities | 68 |
| | 4 |
|
Other operating activities | 2 |
| | 1 |
|
Net cash provided by operating activities | 45 |
| | 252 |
|
Cash flows from investing activities: | |
| | |
|
Capital expenditures | (27 | ) | | (18 | ) |
Purchases of investments | (307 | ) | | (167 | ) |
Sales and maturities of investments | 111 |
| | 112 |
|
Proceeds from asset sale | 7 |
| | — |
|
Investments in acquisitions, net of cash acquired | (9 | ) | | (77 | ) |
Net cash used in investing activities | (225 | ) | | (150 | ) |
Cash flows from financing activities: | |
| | |
|
Proceeds from exercise of stock options | 2 |
| | 2 |
|
Proceeds from borrowings | 500 |
| | 645 |
|
Payment of long term debt | (253 | ) | | (519 | ) |
Excess tax benefits from stock compensation | 3 |
| | — |
|
Common stock repurchases | (4 | ) | | (2 | ) |
Contribution from noncontrolling interest | — |
| | 5 |
|
Debt issue costs | (4 | ) | | — |
|
Payment of contingent consideration obligation | (8 | ) | | — |
|
Net cash provided by financing activities | 236 |
| | 131 |
|
Net increase in cash and cash equivalents | 56 |
| | 233 |
|
Cash and cash equivalents, beginning of period | 1,610 |
| | 1,038 |
|
Cash and cash equivalents, end of period | $ | 1,666 |
| | $ | 1,271 |
|
Supplemental disclosures of cash flow information: | |
| | |
|
Interest paid | $ | 2 |
| | $ | 2 |
|
Income taxes paid | $ | 24 |
| | $ | 21 |
|
Equity issued in connection with acquisitions | $ | 13 |
| | $ | 132 |
|
The accompanying notes to the consolidated financial statements are an integral part of these statements.
CENTENE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
(Unaudited)
1. Basis of Presentation
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, 2014. 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, 2014 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 2014 amounts in the notes to the consolidated financial statements have been reclassified to conform to the 2015 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.
On February 2, 2015, the Board of Directors declared a two-for-one split of Centene's common stock in the form of a 100% stock dividend distributed February 19, 2015 to stockholders of record on February 12, 2015. All share and per share information presented in this Form 10-Q has been adjusted for the two-for-one stock split.
Recently Adopted Accounting Pronouncement
In April 2015, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update which changes the presentation of debt issuance costs in financial statements. Under the new standard, debt issuance costs are presented in the balance sheet as a direct deduction of the related debt liability rather than as an asset. Amortization of the cost is reported as interest expense. The new standard is effective for annual and interim periods beginning after December 15, 2015 and early adoption is permitted. The Company has elected to adopt this guidance in the current fiscal quarter and applied the new standard retrospectively to all prior periods. The reclassification of debt issuance costs impacted the Consolidated Balance Sheets by decreasing both Other Long Term Assets and Long Term Debt by $14 million at December 31, 2014 and $17 million at March 31, 2015. These reclassifications have no effect on net earnings or stockholders' equity as previously reported.
2. Acquisitions and Redeemable Noncontrolling Interest
Acquisitions
Community Health Solutions of America, Inc.
In July 2014, the Company completed a transaction whereby Community Health Solutions of America, Inc. assigned its contract with the Louisiana Department of Health and Hospitals under the Bayou Health Shared Savings Program to the Company's subsidiary, Louisiana Healthcare Connections (LHC). The fair value of consideration transferred included the present value of the estimated contingent consideration, subject to membership retained by LHC in the first quarter of 2015. The fair value of contingent consideration was $18 million at December 31, 2014. During the three months ended March 31, 2015, the Company determined the amount of the actual contingent consideration to be $8 million. A gain of $10 million related to the settlement of the obligation was recorded in General and Administrative expense.
LiveHealthier, Inc.
In January 2015, the Company acquired the remaining 79% of LiveHealthier, Inc. (LiveHealthier) for $28 million, bringing its total ownership to 100%. LiveHealthier is a provider of technology and service-based health management solutions. The fair value of consideration of $28 million consists of cash paid of $11 million, Centene common stock issued at closing of $13 million, and the present value of contingent consideration of $4 million to be paid in cash over a three year period. The contingent consideration will not exceed $9 million.
The Company's preliminary allocation of fair value resulted in goodwill of $29 million and other identifiable intangible assets of $16 million. The Company has not finalized the allocation of the fair value of assets and liabilities. The goodwill is not deductible for income tax purposes. The acquisition is recorded in the Managed Care segment.
Redeemable Noncontrolling Interest
In January 2015, the Company sold 25% of its ownership in Celtic Insurance Company for $7 million. No gain or loss was recognized on the sale of the ownership interest. Celtic Insurance Company is included in the Managed Care segment. In connection with the sale of the ownership interest, the Company entered into a put agreement with the noncontrolling interest holder, allowing the noncontrolling interest holder to put its interest back to the Company beginning in 2022. As a result of put option agreements, noncontrolling interest is considered redeemable and is classified in the Redeemable Noncontrolling Interest section of the consolidated balance sheets.
A reconciliation of the changes in the Redeemable Noncontrolling Interests is as follows ($ in millions):
|
| | | |
Balance, December 31, 2014 | $ | 148 |
|
Fair value of redeemable noncontrolling interest sold | 7 |
|
Reclassification to redeemable noncontrolling interest | (1 | ) |
Net earnings attributable to redeemable noncontrolling interests | 1 |
|
Balance, March 31, 2015 | $ | 155 |
|
3. Short term and Long term Investments, Restricted Deposits
Short term and long term investments and restricted deposits by investment type consist of the following ($ in millions):
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2015 | | December 31, 2014 |
| 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 | $ | 451 |
| | $ | 2 |
| | $ | (1 | ) | | $ | 452 |
| | $ | 393 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 392 |
|
Corporate securities | 618 |
| | 4 |
| | (1 | ) | | 621 |
| | 556 |
| | 2 |
| | (2 | ) | | 556 |
|
Restricted certificates of deposit | 6 |
| | — |
| | — |
| | 6 |
| | 6 |
| | — |
| | — |
| | 6 |
|
Restricted cash equivalents | 77 |
| | — |
| | — |
| | 77 |
| | 79 |
| | — |
| | — |
| | 79 |
|
Municipal securities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
General obligation | 97 |
| | 1 |
| | — |
| | 98 |
| | 54 |
| | — |
| | — |
| | 54 |
|
Pre-refunded | 4 |
| | — |
| | — |
| | 4 |
| | 5 |
| | — |
| | — |
| | 5 |
|
Revenue | 158 |
| | — |
| | — |
| | 158 |
| | 101 |
| | 1 |
| | — |
| | 102 |
|
Variable rate demand notes | 27 |
| | — |
| | — |
| | 27 |
| | 14 |
| | — |
| | — |
| | 14 |
|
Asset backed securities | 170 |
| | — |
| | — |
| | 170 |
| | 180 |
| | — |
| | — |
| | 180 |
|
Mortgage backed securities | 81 |
| | 2 |
| | — |
| | 83 |
| | 84 |
| | 1 |
| | — |
| | 85 |
|
Cost and equity method investments | 64 |
| | — |
| | — |
| | 64 |
| | 68 |
| | — |
| | — |
| | 68 |
|
Life insurance contracts | 16 |
| | — |
| | — |
| | 16 |
| | 16 |
| | — |
| | — |
| | 16 |
|
Total | $ | 1,769 |
| | $ | 9 |
| | $ | (2 | ) | | $ | 1,776 |
| | $ | 1,556 |
| | $ | 5 |
| | $ | (4 | ) | | $ | 1,557 |
|
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, 2015, 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 91% were rated A-/A3 or higher. At March 31, 2015, the Company held certificates of deposit, life insurance contracts and cost and equity method investments which did not carry a credit rating.
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 ($ in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2015 | | December 31, 2014 |
| 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 | $ | (1 | ) | | $ | 80 |
| | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 72 |
| | $ | (2 | ) | | $ | 180 |
|
Corporate securities | (1 | ) | | 185 |
| | — |
| | 1 |
| | (2 | ) | | 311 |
| | — |
| | 1 |
|
Municipal securities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
General obligation | — |
| | 22 |
| | — |
| | 4 |
| | — |
| | 4 |
| | — |
| | 3 |
|
Revenue | — |
| | 72 |
| | — |
| | 3 |
| | — |
| | 16 |
| | — |
| | 3 |
|
Pre-refunded | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Asset backed securities | — |
| | 40 |
| | — |
| | 10 |
| | — |
| | 70 |
| | — |
| | 10 |
|
Mortgage backed securities | — |
| | — |
| | — |
| | — |
| | — |
| | 18 |
| | — |
| | — |
|
Total | $ | (2 | ) | | $ | 399 |
| | $ | — |
| | $ | 34 |
| | $ | (2 | ) | | $ | 491 |
| | $ | (2 | ) | | $ | 198 |
|
As of March 31, 2015, the gross unrealized losses were generated from 90 positions out of a total of 363 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.
During the quarter ended March 31, 2015, the company recognized $1 million of income from equity method investments.
The contractual maturities of short term and long term investments and restricted deposits are as follows ($ in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2015 | | December 31, 2014 |
| 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 | $ | 151 |
| | $ | 151 |
| | $ | 90 |
| | $ | 90 |
| | $ | 176 |
| | $ | 177 |
| | $ | 92 |
| | $ | 92 |
|
One year through five years | 1,316 |
| | 1,322 |
| | 8 |
| | 8 |
| | 1,121 |
| | 1,121 |
| | 8 |
| | 8 |
|
Five years through ten years | 120 |
| | 120 |
| | — |
| | — |
| | 121 |
| | 120 |
| | — |
| | — |
|
Greater than ten years | 84 |
| | 85 |
| | — |
| | — |
| | 38 |
| | 39 |
| | — |
| | — |
|
Total | $ | 1,671 |
| | $ | 1,678 |
| | $ | 98 |
| | $ | 98 |
| | $ | 1,456 |
| | $ | 1,457 |
| | $ | 100 |
| | $ | 100 |
|
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.
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.
4. Fair Value Measurements
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon observable or unobservable inputs used to estimate fair value. 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, 2015, for assets and liabilities measured at fair value on a recurring basis ($ in millions):
|
| | | | | | | | | | | | | | | |
| Level I | | Level II | | Level III | | Total |
Assets | | | | | | | |
Cash and cash equivalents | $ | 1,666 |
| | $ | — |
| | $ | — |
| | $ | 1,666 |
|
Investments available for sale: | |
| | |
| | |
| | |
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 434 |
| | $ | 3 |
| | $ | — |
| | $ | 437 |
|
Corporate securities | — |
| | 621 |
| | — |
| | 621 |
|
Municipal securities: | |
| | |
| | |
| | |
General obligation | — |
| | 98 |
| | — |
| | 98 |
|
Pre-refunded | — |
| | 4 |
| | — |
| | 4 |
|
Revenue | — |
| | 158 |
| | — |
| | 158 |
|
Variable rate demand notes | — |
| | 27 |
| | — |
| | 27 |
|
Asset backed securities | — |
| | 170 |
| | — |
| | 170 |
|
Mortgage backed securities | — |
| | 83 |
| | — |
| | 83 |
|
Total investments | $ | 434 |
| | $ | 1,164 |
| | $ | — |
| | $ | 1,598 |
|
Restricted deposits available for sale: | |
| | |
| | |
| | |
|
Cash and cash equivalents | $ | 77 |
| | $ | — |
| | $ | — |
| | $ | 77 |
|
Certificates of deposit | 6 |
| | — |
| | — |
| | 6 |
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies | 15 |
| | — |
| | — |
| | 15 |
|
Total restricted deposits | $ | 98 |
| | $ | — |
| | $ | — |
| | $ | 98 |
|
Other long term assets: Interest rate swap agreements | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 16 |
|
Total assets at fair value | $ | 2,198 |
| | $ | 1,180 |
| | $ | — |
| | $ | 3,378 |
|
Liabilities | | | | | | | |
Other long term liabilities: Interest rate swap agreements | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
|
Total liabilities at fair value | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
|
The following table summarizes fair value measurements by level at December 31, 2014, for assets and liabilities measured at fair value on a recurring basis ($ in millions):
|
| | | | | | | | | | | | | | | |
| Level I | | Level II | | Level III | | Total |
Assets | | | | | | | |
Cash and cash equivalents | $ | 1,610 |
| | $ | — |
| | $ | — |
| | $ | 1,610 |
|
Investments available for sale: | |
| | |
| | |
| | |
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies | $ | 360 |
| | $ | 17 |
| | $ | — |
| | $ | 377 |
|
Corporate securities | — |
| | 556 |
| | — |
| | 556 |
|
Municipal securities: | |
| | |
| | |
| | |
General obligation | — |
| | 54 |
| | — |
| | 54 |
|
Pre-refunded | — |
| | 5 |
| | — |
| | 5 |
|
Revenue | — |
| | 102 |
| | — |
| | 102 |
|
Variable rate demand notes | — |
| | 14 |
| | — |
| | 14 |
|
Asset backed securities | — |
| | 180 |
| | — |
| | 180 |
|
Mortgage backed securities | — |
| | 85 |
| | — |
| | 85 |
|
Total investments | $ | 360 |
| | $ | 1,013 |
| | $ | — |
| | $ | 1,373 |
|
Restricted deposits available for sale: | |
| | |
| | |
| | |
|
Cash and cash equivalents | $ | 79 |
| | $ | — |
| | $ | — |
| | $ | 79 |
|
Certificates of deposit | 6 |
| | — |
| | — |
| | 6 |
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies | 15 |
| | — |
| | — |
| | 15 |
|
Total restricted deposits | $ | 100 |
| | $ | — |
| | $ | — |
| | $ | 100 |
|
Other long term assets: Interest rate swap agreements | $ | — |
| | $ | 11 |
| | $ | — |
| | $ | 11 |
|
Total assets at fair value | $ | 2,070 |
| | $ | 1,024 |
| | $ | — |
| | $ | 3,094 |
|
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, 2015, there were less than $1 million of transfers from Level I to Level II and $14 million 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 $80 million and $84 million as of March 31, 2015 and December 31, 2014, respectively.
5. Health Insurance Marketplace
The Affordable Care Act (ACA) established risk spreading premium stabilization programs effective January 1, 2014 for the Health Insurance Marketplace product. These programs, commonly referred to as the “three Rs,” include a permanent risk adjustment program, a transitional reinsurance program, and a temporary risk corridor program. Additionally, the ACA established a minimum annual medical loss ratio for the Health Insurance Marketplace. Each of the three R programs are taken into consideration to determine if the Company’s estimated annual medical costs are less than the minimum loss ratio and require an adjustment to Premium revenue to meet the minimum medical loss ratio.
The Company's receivables (payables) for each of these programs are as follows ($ in millions):
|
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
Risk adjustment | $ | (72 | ) | | $ | (44 | ) |
Reinsurance | 15 |
| | 11 |
|
Risk corridor | (23 | ) | | (9 | ) |
Minimum medical loss ratio | (16 | ) | | (6 | ) |
6. Debt
Debt consists of the following ($ in millions):
|
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
$425 million 5.75% Senior notes, due June 1, 2017 | $ | 429 |
| | $ | 429 |
|
$500 million 4.75% Senior notes, due May 15, 2022 | 500 |
| | 300 |
|
Fair value of interest rate swap agreements | 14 |
| | 11 |
|
Senior notes | 943 |
| | 740 |
|
Revolving credit agreement | 125 |
| | 75 |
|
Mortgage notes payable | 69 |
| | 70 |
|
Capital leases | 8 |
| | 8 |
|
Debt issuance costs | (17 | ) | | (14 | ) |
Total debt | 1,128 |
| | 879 |
|
Less current portion | (5 | ) | | (5 | ) |
Long term debt | $ | 1,123 |
| | $ | 874 |
|
Senior Notes
In January 2015, the Company issued an additional $200 million of 4.75% Senior Notes ($200 Million Add-on Notes) at par. The $200 million Add-on Notes were offered as additional debt securities under the indenture governing the $300 Million of 4.75% Senior Notes issued in April 2014. In connection with the January 2015 issuance, the Company entered into interest rate swap agreements for a notional amount of $200 million at a floating rate of interest based on the three month LIBOR plus 2.88%. 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 $200 Million Add-on Notes.
The indentures governing both the $425 million notes due 2017 and the $500 million notes due 2022 contain non-financial and financial covenants, including requirements of a minimum fixed charge coverage ratio.
Interest Rate Swaps
The Company uses interest rate swap agreements to convert a portion of its interest rate exposure from fixed rates to floating rates to more closely align interest expense with interest income received on its cash equivalent and variable rate investment balances. The Company has $750 million of notional amount of interest rate swap agreements consisting of $250 million which are scheduled to expire on June 1, 2017 and $500 million that are scheduled to expire May 15, 2022. Under the Swap Agreements, the Company receives a fixed rate of interest and pays an average variable rate of the three month LIBOR plus 2.85% adjusted quarterly. At March 31, 2015, the weighted average rate was 3.10%.
The Swap Agreements are formally designated and qualify as fair value hedges and are recorded at fair value in the Consolidated Balance Sheet in other assets or other liabilities. Gains and losses due to changes in fair value of the interest rate swap agreements completely offset changes in the fair value of the hedged portion of the underlying debt. Therefore, no gain or loss has been recognized due to hedge ineffectiveness. Offsetting changes in fair value of both the interest rate swaps and the hedged portion of the underlying debt both were recognized in interest expense in the Consolidated Statement of Operations. The Company does not hold or issue any derivative instrument for trading or speculative purposes.
Revolving Credit Agreement
The Company has an unsecured $500 million 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 million of unrestricted cash. As of March 31, 2015, the Company had $125 million of borrowings outstanding under the agreement with a weighted average interest rate of 2.51%.
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, 2015, 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 $30 million as of March 31, 2015, which were not part of the revolving credit facility. The Company also had letters of credit for $52 million (valued at March 31, 2015 conversion rate), or €48 million, representing its proportional share of the letters of credit issued to support Ribera Salud’s outstanding debt which are a part of the revolving credit facility. Collectively, the letters of credit bore interest at 1.73% as of March 31, 2015. The Company had outstanding surety bonds of $196 million as of March 31, 2015.
7. Earnings Per Share
The following table sets forth the calculation of basic and diluted net earnings per common share ($ in millions, except per share data):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2015 | | 2014 |
Earnings attributable to Centene Corporation: | | | |
Earnings from continuing operations, net of tax | $ | 64 |
| | $ | 34 |
|
Discontinued operations, net of tax | (1 | ) | | (1 | ) |
Net earnings | $ | 63 |
| | $ | 33 |
|
| | | |
Shares used in computing per share amounts: | |
| | |
Weighted average number of common shares outstanding | 118,783,755 |
| | 114,967,752 |
|
Common stock equivalents (as determined by applying the treasury stock method) | 3,788,611 |
| | 3,754,780 |
|
Weighted average number of common shares and potential dilutive common shares outstanding | 122,572,366 |
| | 118,722,532 |
|
| | | |
Net earnings (loss) per common share attributable to Centene Corporation: | | | |
Basic: | | | |
Continuing operations | $ | 0.54 |
| | $ | 0.30 |
|
Discontinued operations | (0.01 | ) | | (0.01 | ) |
Basic earnings per common share | $ | 0.53 |
| | $ | 0.29 |
|
| | | |
Diluted: | | | |
Continuing operations | $ | 0.52 |
| | $ | 0.29 |
|
Discontinued operations | (0.01 | ) | | (0.01 | ) |
Diluted earnings per common share | $ | 0.51 |
| | $ | 0.28 |
|
The calculation of diluted earnings per common share for the three months ended March 31, 2015 and 2014 excludes the impact of 26,376 shares and 45,912 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.
8. 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, 2015, follows ($ in millions):
|
| | | | | | | | | | | | | | | |
| Managed Care | | Specialty Services | | Eliminations | | Consolidated Total |
Premium and service revenues from external customers | $ | 4,243 |
| | $ | 518 |
| | $ | — |
| | $ | 4,761 |
|
Premium and service revenues from internal customers | 24 |
| | 1,075 |
| | (1,099 | ) | | — |
|
Total premium and service revenues | $ | 4,267 |
| | $ | 1,593 |
| | $ | (1,099 | ) | | $ | 4,761 |
|
Earnings from operations | $ | 95 |
| | $ | 34 |
| | $ | — |
| | $ | 129 |
|
Segment information for the three months ended March 31, 2014, follows ($ in millions):
|
| | | | | | | | | | | | | | | |
| Managed Care | | Specialty Services | | Eliminations | | Consolidated Total |
Premium and service revenues from external customers | $ | 2,970 |
| | $ | 382 |
| | $ | — |
| | $ | 3,352 |
|
Premium and service revenues from internal customers | 13 |
| | 639 |
| | (652 | ) | | — |
|
Total premium and service revenues | $ | 2,983 |
| | $ | 1,021 |
| | $ | (652 | ) | | $ | 3,352 |
|
Earnings from operations | $ | 44 |
| | $ | 26 |
| | $ | — |
| | $ | 70 |
|
9. Contingencies
On July 5, 2013, the Company's subsidiary, Kentucky Spirit Health Plan, Inc. (Kentucky Spirit), terminated its contract with the Commonwealth of Kentucky (the Commonwealth). Kentucky Spirit believes it had a contractual right to terminate the contract and filed a lawsuit in Franklin Circuit Court seeking a declaration of this right. 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 million performance bond. The Commonwealth's attorneys have asserted that the Commonwealth's expenditures due to Kentucky Spirit's departure range from $28 million to $40 million plus interest, and that the associated CMS expenditures range from $92 million to $134 million. Kentucky Spirit disputes the Commonwealth's alleged damages, and is pursuing its own litigation claims for damages against the Commonwealth.
On February 6, 2015, the Kentucky Court of Appeals affirmed a Franklin Circuit Court ruling that Kentucky Spirit does not have a contractual right to terminate the contract early. The Court of Appeals also found that the contract’s liquidated damages provision “is applicable in the event of a premature termination of the Contract term.” Kentucky Spirit intends to seek Kentucky Supreme Court review of the finding that its departure constituted a breach of contract. The Commonwealth may seek review of the ruling that the liquidated damages provision is applicable in the event of a premature termination.
Kentucky Spirit also filed a lawsuit in April 2013, amended in October 2014, in Franklin Circuit Court seeking damages against the Commonwealth for losses sustained due to the Commonwealth's alleged breaches. On December 9, 2014, the Franklin Circuit Court denied the Commonwealth's motion for partial summary judgment on Kentucky Spirit's damages claims. On March 15, 2015, the Franklin Circuit Court denied the Commonwealth's motion to stay discovery and ordered that discovery proceed on those claims.
On March 9, 2015, the Secretary of the Kentucky Cabinet for Health and Family Services (CHFS) issued a determination letter finding that Kentucky Spirit owed the Commonwealth $40 million in actual damages plus prejudgment interest at 8 percent. On March 18, 2015, in a letter to the Kentucky Finance and Administration Cabinet, Kentucky Spirit contested CHFS' jurisdiction to make such a determination. Depending on the response from the Finance and Administration Cabinet, Kentucky Spirit may bring the matter to the Franklin Circuit Court.
The resolution of the Kentucky litigation matters may result in a range of possible outcomes. If Kentucky Spirit prevails on its claims, it would be entitled to damages. 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, 2015. 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 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, results of operations or cash flows.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this filing. The discussion contains forward-looking statements that involve known and unknown risks and uncertainties, 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.
On February 2, 2015, the Board of Directors declared a two-for-one split of Centene's common stock in the form of a 100% stock dividend distributed February 19, 2015 to stockholders of record on February 12, 2015. All share and per share information presented in this Form 10-Q has been adjusted for the two-for-one stock split.
Key financial metrics for the first quarter of 2015 are summarized as follows:
| |
• | Quarter-end managed care membership of 4.4 million, an increase of 1.4 million members, or 44% year over year. |
| |
• | Premium and service revenues of $4.8 billion, representing 42% growth year over year. |
| |
• | Health Benefits Ratio of 89.8%, compared to 89.3% in 2014. |
| |
• | General and Administrative expense ratio of 8.5%, compared to 8.8% in 2014. |
| |
• | Operating cash flows of $45 million for the first quarter of 2015. |
| |
• | Diluted net earnings per share of $0.52, compared to $0.29 in 2014. |
The following items contributed to our revenue and membership growth over the last year:
| |
• | Florida. In May 2014, our Florida subsidiary, Sunshine Health, began operating under a new contract 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. In addition, we began operating as the sole provider under a new statewide contract for the Child Welfare Specialty Plan (Foster Care). Enrollment for both the MMA program and Foster Care began in May 2014 and was implemented by region through August 2014. |
| |
• | Health Insurance Marketplaces (HIM). In January 2015, we expanded our participation in Health Insurance Marketplaces to include members in certain regions of Illinois and Wisconsin. |
| |
• | Illinois. In March 2014, our Illinois subsidiary, IlliniCare Health, 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). |
In July 2014, IlliniCare Health began operating under a new contract with the Cook County Health and Hospitals System to perform third party administrative services to members enrolled in the CountyCare program, as well as care coordination, behavioral health, vision care and pharmacy benefit management services.
In September 2014, IlliniCare Health began serving additional Medicaid members under the state's Medicaid and Medicaid expansion programs.
| |
• | Indiana. In February 2015, our Indiana subsidiary, Managed Health Services, began operating under an expanded contract with the Indiana Family & Social Services Administration to provide Medicaid services under the state's Healthy Indiana Plan 2.0 program. |
| |
• | Louisiana. In July 2014, we completed the transaction whereby Community Health Solutions of America, Inc. (CHS) assigned its contract with the Louisiana Department of Health and Hospitals under the Bayou Health Shared Savings Program to our subsidiary, Louisiana Healthcare Connections (LHC). |
In February 2015, LHC began operating under a new contract with the Louisiana Department of Health and Hospitals to serve Bayou Health (Medicaid) beneficiaries. Members previously served under the shared savings program were transitioned to the at-risk program on February 1, 2015.
| |
• | Mississippi. In July 2014, our Mississippi subsidiary, Magnolia Health, began operating as one of two contractors under a new statewide managed care contract serving members enrolled in the Mississippi Coordinated Access Network program. Program expansion began in December 2014. |
In January 2015, Magnolia Health began operating under a new contract with the State of Mississippi to provide services under the Children's Health Insurance Program (CHIP).
| |
• | New Hampshire. In September 2014, our New Hampshire subsidiary, New Hampshire Healthy Families, began serving members under the state's Medicaid expansion program. |
| |
• | Ohio. In May 2014, our Ohio subsidiary, Buckeye Health Plan (Buckeye), began operating under a new contract with the Ohio Department of Medicaid and the Centers for Medicare and Medicaid Services to serve Medicaid members in a dual-eligible demonstration program in three of seven regions: Northeast (Cleveland), Northwest (Toledo) and West Central (Dayton). This three-year program, which is part of the Integrated Care Delivery System expansion, serves those who have both Medicare and Medicaid eligibility. Passive enrollment for Medicaid began in May 2014 and implementation was completed in July 2014. Passive enrollment for Medicare began in January 2015. |
| |
• | South Carolina. In February 2015, our South Carolina subsidiary, Absolute Total Care, began operating under a new contract with the South Carolina Department of Health and Human Services and the Centers for Medicare and Medicaid Services to serve dual-eligible members as part of the state's dual demonstration program. |
| |
• | Texas. In September 2014, we began operating under a new contract with the Texas Health and Human Services Commission (HHSC) to expand our operations and serve STAR+PLUS members in two Medicaid Rural Service Areas. We also began providing expanded coverage in September 2014 under our STAR+PLUS contracts to provide acute care services for intellectually and developmentally disabled members. In March 2015, we began operating under an expanded STAR+PLUS contract with the Texas HHSC to include nursing facility benefits. |
In March 2015, we also began operating under a new contract with the Texas HHSC and the Centers for Medicare and Medicaid Services to serve dual-eligible members in three counties as part of the state's dual demonstration program.
| |
• | Vermont. In February 2015, Centurion began operating under a new contract with the State of Vermont Department of Corrections to provide comprehensive correctional healthcare services. |
In addition, in July 2014, we completed an investment accounted for under the equity method for the purchase of a noncontrolling interest in Ribera Salud S.A. (Ribera Salud), a Spanish health management group. Centene is a joint shareholder with Ribera Salud's remaining investor, Banco Sabadell S.A.
We expect the following items to contribute to our future growth potential:
| |
• | We expect to realize the full year benefit in 2015 of business commenced during 2014 in Florida, Illinois, Louisiana, Mississippi, New Hampshire, Ohio and Texas as discussed above. |
| |
• | In April 2015, Managed Health Services began operating under an expanded contract with the Indiana Family & Social Services Administration to provide services to its ABD Medicaid enrollees who qualify for the new Hoosier Care Connect Program. |
| |
• | In April 2015, Centurion was recommended for an award by the Mississippi Department of Corrections to provide comprehensive correctional healthcare services. The contract is expected to commence in the third quarter of 2015. |
| |
• | In March 2015, our Missouri subsidiary, Home State Health, was selected by the Missouri Division of Purchasing and Materials Management to continue providing managed care services to MO HealthNet Managed Care beneficiaries. The new contract will be effective in the third quarter of 2015. |
| |
• | In February 2015, our Texas subsidiary, Superior HealthPlan, was tentatively recommended for a contract award by the Texas HHSC to continue to serve STAR Health (Foster Care) Medicaid recipients. The new contract is expected to commence in the third quarter of 2015. |
| |
• | In January 2015, we signed a definitive agreement to acquire Agate Resources, Inc., a diversified holding company that offers primarily Medicaid and other healthcare products and services to Oregon residents. The transaction is expected to close in the third quarter of 2015, subject to customary closing conditions, including Oregon regulatory approval. |
| |
• | In December 2014, our subsidiary, Cenpatico Integrated Care, in partnership with University of Arizona Health Plan, was selected by the Arizona Department of Health Services/Division of Behavioral Health Services to be the Regional Behavioral Health Authority for the new southern geographic service area. The new contract is expected to commence in the fourth quarter of 2015. |
| |
• | 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 second quarter of 2015, subject to certain closing conditions including regulatory approvals. Fidelis was 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 second quarter of 2015. |
MEMBERSHIP
From March 31, 2014 to March 31, 2015, we increased our managed care membership by 1.4 million, or 44%. The following table sets forth our membership by state for our managed care organizations:
|
| | | | | | | | |
| March 31, 2015 | | December 31, 2014 | | March 31, 2014 |
Arizona | 202,200 |
| | 204,000 |
| | 169,800 |
|
Arkansas | 43,200 |
| | 38,400 |
| | 16,400 |
|
California | 171,200 |
| | 163,900 |
| | 118,100 |
|
Florida | 463,100 |
| | 425,700 |
| | 230,300 |
|
Georgia | 405,600 |
| | 389,100 |
| | 331,400 |
|
Illinois | 184,800 |
| | 87,800 |
| | 22,400 |
|
Indiana | 227,700 |
| | 197,700 |
| | 198,700 |
|
Kansas | 143,700 |
| | 143,300 |
| | 145,000 |
|
Louisiana | 359,500 |
| | 152,900 |
| | 149,800 |
|
Massachusetts | 64,500 |
| | 48,400 |
| | 50,800 |
|
Minnesota | 9,500 |
| | 9,500 |
| | 9,400 |
|
Mississippi | 141,900 |
| | 108,700 |
| | 85,400 |
|
Missouri | 75,600 |
| | 71,000 |
| | 58,100 |
|
New Hampshire | 67,500 |
| | 62,700 |
| | 37,100 |
|
Ohio | 296,000 |
| | 280,100 |
| | 181,800 |
|
South Carolina | 106,000 |
| | 109,700 |
| | 96,300 |
|
Tennessee | 20,800 |
| | 21,000 |
| | 21,100 |
|
Texas | 974,900 |
| | 971,000 |
| | 904,000 |
|
Vermont | 1,600 |
| | — |
| | — |
|
Washington | 207,100 |
| | 194,400 |
| | 151,700 |
|
Wisconsin | 82,100 |
| | 83,200 |
| | 70,800 |
|
Total at-risk membership | 4,248,500 |
| | 3,762,500 |
| | 3,048,400 |
|
Non-risk membership | 153,200 |
| | 298,400 |
| | — |
|
Total | 4,401,700 |
| | 4,060,900 |
| | 3,048,400 |
|
At March 31, 2015, we served 331,800 Medicaid members in Medicaid expansion programs in California, Illinois, Indiana, Massachusetts, New Hampshire, Ohio and Washington included in the table above.
The following table sets forth our membership by line of business:
|
| | | | | | | | |
| March 31, 2015 | | December 31, 2014 | | March 31, 2014 |
Medicaid | 3,133,900 |
| | 2,754,900 |
| | 2,169,100 |
|
CHIP & Foster Care | 233,600 |
| | 222,700 |
| | 269,200 |
|
ABD, Medicare & Duals | 410,400 |
| | 392,700 |
| | 300,500 |
|
LTC | 71,200 |
| | 60,800 |
| | 51,800 |
|
Health Insurance Marketplaces | 161,700 |
| | 74,500 |
| | 39,700 |
|
Hybrid Programs 1 | — |
| | 18,900 |
| | 14,400 |
|
Behavioral Health | 195,100 |
| | 197,000 |
| | 162,700 |
|
Correctional Healthcare Services | 42,600 |
| | 41,000 |
| | 41,000 |
|
Total at-risk membership | 4,248,500 |
| | 3,762,500 |
| | 3,048,400 |
|
Non-risk membership | 153,200 |
| | 298,400 |
| | — |
|
Total | 4,401,700 |
| | 4,060,900 |
| | 3,048,400 |
|
| | | | | |
1 In February 2015, hybrid programs in Indiana and Massachusetts were converted to Medicaid expansion contracts. |
The following table identifies our dual-eligible membership by line of business. The membership tables above include these members.
|
| | | | | | | |
| March 31, 2015 | | December 31, 2014 | | March 31, 2014 |
ABD | 112,600 |
| | 118,300 | | 72,800 |
|
LTC | 52,000 |
| | 35,900 | | 41,300 |
|
Medicare | 6,800 |
| | 7,200 | | 6,500 |
|
Medicaid / Medicare Duals | 12,600 |
| | 3,200 | | — |
|
Total | 184,000 |
| | 164,600 | | 120,600 |
|
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, 2015 and 2014, prepared in accordance with generally accepted accounting principles in the United States.
Summarized comparative financial data for the three months ended March 31, 2015 and 2014 is as follows ($ in millions, except per share data):
|
| | | | | | | | | | |
| Three Months Ended March 31, |
| 2015 | | 2014 | | % Change 2014-2015 |
Premium | $ | 4,299 |
| | $ | 3,071 |
| | 40.0 | % |
Service | 462 |
| | 281 |
| | 64.4 | % |
Premium and service revenues | 4,761 |
| | 3,352 |
| | 42.0 | % |
Premium tax and health insurer fee | 370 |
| | 108 |
| | 242.6 | % |
Total revenues | 5,131 |
| | 3,460 |
| | 48.3 | % |
Medical costs | 3,861 |
| | 2,743 |
| | 40.8 | % |
Cost of services | 402 |
| | 242 |
| | 66.1 | % |
General and administrative expenses | 403 |
| | 296 |
| | 36.1 | % |
Premium tax expense | 281 |
| | 78 |
| | 260.3 | % |
Health insurer fee expense | 55 |
| | 31 |
| | 77.4 | % |
Earnings from operations | 129 |
| | 70 |
| | 84.3 | % |
Other income (expense), net | (1 | ) | | (2 | ) | | 50.0 | % |
Earnings from continuing operations, before income tax expense | 128 |
| | 68 |
| | 88.2 | % |
Income tax expense | 63 |
| | 35 |
| | 80.0 | % |
Earnings from continuing operations, net of income tax | 65 |
| | 33 |
| | 97.0 | % |
Discontinued operations, net of income tax expense of $0 and $0, respectively | (1 | ) | | (1 | ) | | — | % |
Net earnings | 64 |
| | 32 |
| | 100.0 | % |
(Earnings) loss attributable to noncontrolling interests | (1 | ) | | 1 |
| | 200.0 | % |
Net earnings attributable to Centene Corporation | $ | 63 |
| | $ | 33 |
| | 90.9 | % |
| | | | | |
Amounts attributable to Centene Corporation common shareholders: |
Earnings from continuing operations, net of income tax expense | $ | 64 |
| | $ | 34 |
| | 88.2 | % |
Discontinued operations, net of income tax expense | (1 | ) | | (1 | ) | | — | % |
Net earnings | $ | 63 |
| | $ | 33 |
| | 90.9 | % |
| | | | | |
Diluted earnings (loss) per common share attributable to Centene Corporation: |
Continuing operations | $ | 0.52 |
| | $ | 0.29 |
| | 79.3 | % |
Discontinued operations | (0.01 | ) | | (0.01 | ) | | — | % |
Total diluted earnings per common share | $ | 0.51 |
| | $ | 0.28 |
| | 82.1 | % |
Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014
Premium and Service Revenues
Premium and service revenues increased 42.0% in the three months ended March 31, 2015 over the corresponding period in 2014 primarily as a result of a full quarter's impact from expansions or new programs in 2014 in many of our states, particularly Florida, Illinois and Ohio. During the three months ended March 31, 2015, we received premium rate adjustments which yielded a net 0% 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,:
|
| | | | | |
| 2015 | | 2014 |
Medicaid, CHIP, Foster Care & HIM | 87.6 | % | | 86.9 | % |
ABD, LTC and Medicare | 92.9 |
| | 92.9 |
|
Specialty Services | 85.2 |
| | 87.7 |
|
Total | 89.8 |
| | 89.3 |
|
The consolidated HBR for the three months ended March 31, 2015, was 89.8%, compared to 89.3% in the same period in 2014. The increase compared to last year is primarily attributable to an increase in higher acuity membership and higher flu related costs over the prior year.
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,:
|
| | | | | |
| 2015 | | 2014 |
Premium and Service Revenue | | | |
New business | 23 | % | | 20 | % |
Existing business | 77 | % | | 80 | % |
| | | |
HBR | | | |
New business | 91.0 | % | | 93.1 | % |
Existing business | 89.5 | % | | 88.3 | % |
Cost of Services
Cost of services increased by $160 million in the three months ended March 31, 2015, compared to the corresponding period in 2014. This was primarily due to the growth in the AcariaHealth business.
General & Administrative Expenses
General and administrative expenses, or G&A, increased by $107 million in the three months ended March 31, 2015, compared to the corresponding period in 2014. This was primarily due to expenses for additional staff and facilities to support our membership growth. During the three months ended March 31, 2015, we recorded a gain of $10 million on the settlement of contingent consideration related to the CHS transaction. We also recorded expense of $10 million for a contribution to our charitable foundation during the first quarter of 2015.
The consolidated G&A expense ratio for the three months ended March 31, 2015 and 2014 was 8.5% and 8.8%, respectively. The year over year decrease in the G&A ratio reflects the leveraging of expenses over higher revenues in 2015 as well as the impact of transaction costs recognized in 2014.
Health Insurer Fee
During the three months ended March 31, 2015, we recorded $55 million of non-deductible expense for the Affordable Care Act (ACA) annual health insurer fee. As of March 31, 2015, we have received signed agreements from all applicable states 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 $88 million in Premium Tax and Health Insurer Fee revenue associated with the accrual for the reimbursement of the fee. Therefore, the health insurer fee had no impact on diluted earnings per share during the first quarter of 2015.
During the three months ended March 31, 2014, we recorded $31 million of non-deductible expense for the 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 (representing approximately 60% of the necessary reimbursements). As a result, we recorded $29 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 $0.08 during the first quarter of 2014 due to the timing of the recognition of the revenue associated with the reimbursement from our state customers.
Other Income (Expense)
The following table summarizes the components of other income (expense) for the three months ended March 31, ($ in millions):
|
| | | | | | | |
| 2015 | | 2014 |
Investment and other income | $ | 9 |
| | $ | 5 |
|
Interest expense | (10 | ) | | (7 | ) |
Other income (expense), net | $ | (1 | ) | | $ | (2 | ) |
The increase in investment income in 2015 reflects an increase in investment balances over 2014 and improved performance of certain equity investments. Interest expense increased in 2015 compared to 2014, primarily reflecting the issuance of $300 million of Senior Notes in April 2014 and the issuance of an additional $200 million in Senior Notes in January 2015.
Income Tax Expense
Our effective tax rate for the three months ended March 31, 2015 and 2014, was 49.2% and 51.5%, respectively. The effective tax rate is higher than the applicable statutory rate primarily as a result of the non-deductibility of the health insurer fee expense.
Segment Results
The following table summarizes our consolidated operating results by segment for the three months ended March 31, ($ in millions):
|
| | | | | | | | | | |
| 2015 | | 2014 | | % Change 2014-2015 |
Premium and Service Revenues | | | | | |
Managed Care | $ | 4,267 |
| | $ | 2,983 |
| | 43.0 | % |
Specialty Services | 1,593 |
| | 1,021 |
| | 56.0 | % |
Eliminations | (1,099 | ) | | (652 | ) | | (68.6 | )% |
Consolidated Total | $ | 4,761 |
| | $ | 3,352 |
| | 42.0 | % |
Earnings from Operations | |
| | |
| | |
|
Managed Care | $ | 95 |
| | $ | 44 |
| | 115.9 | % |
Specialty Services | 34 |
| | 26 |
| | 30.8 | % |
Consolidated Total | $ | 129 |
| | |