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Centene 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-12.1
  4. Ex-31.1
  5. Ex-31.2
  6. Ex-32.1
  7. Ex-32.2
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form10q.htm
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, 2010
OR

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

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

Delaware
42-1406317
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
   
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: T Yes £ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). T Yes £ No

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

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

As of October 15, 2010, the registrant had 51,724,423 shares of common stock outstanding.
 
 
 
 
 
 


CENTENE CORPORATION

QUARTERLY REPORT ON FORM 10-Q


   
PAGE
     
Part I
Financial Information
Item 1.
  
 
1
 
2
 
3
 
4
 
5
Item 2.
11
Item 3.
18
Item 4.
18
Part II
Other Information
Item 1A.
19
Item 2.
25
Item 6.
26
27



CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

All statements, other than statements of current or historical fact, contained in this filing are forward-looking statements.  We have attempted to identify these statements by terminology including “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “seek,” “target,” “goal,” “may,” “will,” “should,” “can,” “continue” and other similar words or expressions in connection with, among other things, any discussion of future operating or financial performance.  In particular, these statements include statements about our market opportunity, our growth strategy, competition, expected activities and future acquisitions, investments and the adequacy of our available cash resources.  These statements may be found in the various sections of this filing, including those entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Part II, Item 1A.  “Risk Factors.”  Readers are cautioned that matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, regulatory, competitive and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.  These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions.

All forward-looking statements included in this filing are based on information available to us on the date of this filing and we undertake no obligation to update or revise the forward-looking statements included in this filing, whether as a result of new information, future events or otherwise, after the date of this filing.  Actual results may differ from projections or estimates due to a variety of important factors, including:

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

PART I

FINANCIAL INFORMATION


CENTENE CORPORATION AND SUBSIDIARIES

(In thousands, except share data)
(Unaudited)
 
   
September 30,
2010
    
December 31,
 2009
  
ASSETS
            
Current assets:
            
Cash and cash equivalents of continuing operations, including $5,389 and $8,667, respectively, from consolidated variable interest entities
   $ 397,519     $ 400,951  
Cash and cash equivalents of discontinued operations
     147       2,801  
Total cash and cash equivalents
     397,666       403,752  
Premium and related receivables, net of allowance for uncollectible accounts of $1,336 and $1,338, respectively, including $3,208 and $11,313, respectively, from consolidated variable interest entities
     182,379       103,456  
Short-term investments, at fair value (amortized cost $30,667 and $39,230, respectively)
     30,857       39,554  
Other current assets, including $2,023 and $4,507, respectively, from consolidated variable interest entities
     63,408       64,866  
Current assets of discontinued operations other than cash
     1,678       4,506  
Total current assets
     675,988       616,134  
Long-term investments, at fair value (amortized cost $463,877 and $514,256, respectively)
     479,164       525,497  
Restricted deposits, at fair value (amortized cost $20,527 and $20,048, respectively)
     20,589       20,132  
Property, software and equipment, net of accumulated depreciation of $127,969 and $103,883, respectively, including $138,008 and $89,219, respectively, from consolidated variable interest entities
     311,195       230,421  
Goodwill
     247,757       224,587  
Intangible assets, net
     24,608       22,479  
Other long-term assets, including $2,806 and $30, respectively, from consolidated variable interest entities
     28,398       36,829  
Long-term assets of discontinued operations
     7,478       26,285  
Total assets
   $ 1,795,177     $ 1,702,364  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Medical claims liability
   $ 457,085     $ 470,932  
Accounts payable and accrued expenses, including $20,926 and $14,020, respectively, from consolidated variable interest entities
     145,877       132,001  
Unearned revenue
     52,936       91,644  
Current portion of long-term debt
     663       646  
Current liabilities of discontinued operations
     4,531       20,685  
Total current liabilities
     661,092       715,908  
Long-term debt
     263,513       307,085  
Other long-term liabilities
     66,355       59,561  
Long-term liabilities of discontinued operations
     285       383  
Total liabilities
     991,245       1,082,937  
                 
Commitments and contingencies
                
                 
Stockholders’ equity:
                
Common stock, $.001 par value; authorized 100,000,000 shares; 51,716,723 issued and 49,265,875 outstanding at September 30, 2010, and 45,593,383 shares issued and 43,179,373 shares outstanding at December 31, 2009
     52       46  
Additional paid-in capital
     400,213       281,806  
Accumulated other comprehensive income:
                
Net unrealized gain on investments, net of tax
     9,661       7,348  
Retained earnings
     428,344       358,907  
Treasury stock, at cost (2,450,848 and 2,414,010 shares, respectively)
     (47,976 )     (47,262 )
Total Centene Corporation stockholders’ equity
     790,294       600,845  
Noncontrolling interest
     13,638       18,582  
Total stockholders’ equity
     803,932       619,427  
Total liabilities and stockholders’ equity
   $ 1,795,177     $ 1,702,364  

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

 

CENTENE CORPORATION AND SUBSIDIARIES

(In thousands, except share data)
(Unaudited)
 
 
 
 
 
Three Months Ended September 30,
  
Nine Months Ended September 30,
  
 
2010
  
2009
  
2010
  
2009
  
Revenues:
                        
Premium
$
1,060,559
  
$
960,009
  
$
3,085,802
  
$
2,754,713
  
Service
  
20,954
    
27,300
    
68,543
    
72,740
  
Premium and service revenues
  
1,081,513
    
987,309
    
3,154,345
    
2,827,453
  
Premium tax
  
40,348
    
50,925
    
113,009
    
182,685
  
Total revenues
  
1,121,861
    
1,038,234
    
3,267,354
    
3,010,138
  
Expenses:
                        
Medical costs
  
893,281
    
803,062
    
2,592,324
    
2,298,108
  
Cost of services
  
14,646
    
15,843
    
47,505
    
46,364
  
General and administrative expenses
  
132,095
    
130,024
    
401,072
    
381,524
  
Premium tax
  
41,591
    
51,295
    
114,885
    
183,785
  
Total operating expenses
  
1,081,613
    
1,000,224
    
3,155,786
    
2,909,781
  
Earnings from operations
  
40,248
    
38,010
    
111,568
    
100,357
  
Other income (expense):
                        
Investment and other income
  
713
    
3,750
    
11,912
    
11,781
  
Interest expense
  
(4,858
)
  
(4,064
)
  
(12,540
)
  
(12,210
)
Earnings from continuing operations, before income tax expense
  
36,103
    
37,696
    
110,940
    
99,928
  
Income tax expense
  
13,163
    
12,426
    
42,942
    
35,060
  
Earnings from continuing operations, net of income tax expense
  
22,940
    
25,270
    
67,998
    
64,868
  
Discontinued operations, net of income tax expense (benefit) of $26, $(792), $4,376 and $(1,148), respectively
  
260
    
(1,460
)
  
3,954
    
(2,394
)
Net earnings
  
23,200
    
23,810
    
71,952
    
62,474
  
Noncontrolling interest
  
538
    
2,542
    
2,515
    
2,518
  
Net earnings attributable to Centene Corporation
$
22,662
  
$
21,268
  
$
69,437
  
$
59,956
  
                         
Amounts attributable to Centene Corporation common stockholders:
                        
Earnings from continuing operations, net of income tax expense
$
22,402
  
$
22,728
  
$
65,483
  
$
62,350
  
Discontinued operations, net of income tax expense (benefit)
  
260
    
(1,460
)
  
3,954
    
(2,394
)
Net earnings
$
22,662
  
$
21,268
  
$
69,437
  
$
59,956
  
                         
Net earnings (loss) per common share attributable to Centene Corporation:
                        
Basic:
                        
Continuing operations
$
0.46
  
$
0.53
  
$
1.35
  
$
1.45
  
Discontinued operations
  
—  
    
(0.04
)
  
0.08
    
(0.06
)
Earnings per common share
$
0.46
  
$
0.49
  
$
1.43
  
$
1.39
  
Diluted:
                        
Continuing operations
$
0.44
  
$
0.51
  
$
1.30
  
$
1.41
  
Discontinued operations
  
—  
    
(0.03
)
  
0.08
    
(0.05
)
Earnings per common share
$
0.44
  
$
0.48
  
$
1.38
  
$
1.36
  
                         
Weighted average number of shares outstanding:
                        
Basic
  
49,238,406
    
43,001,870
    
48,552,135
    
43,023,431
  
Diluted
  
50,938,357
    
44,291,604
    
50,192,190
    
44,247,153
  

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

CENTENE CORPORATION AND SUBSIDIARIES
 
(In thousands, except share data)
(Unaudited)
Nine Months Ended September 30, 2010
 ­
 
Centene Stockholders’ Equity
              
 
Common Stock
                    
Treasury Stock
              
 
$.001 Par
Value
Shares
  
Amt
  
Additional
Paid-in
Capital
  
Accumulated
Other
Comprehensive
Income
  
Retained
Earnings
  
$.001 Par
Value
Shares
  
Amt
  
Non
controlling
Interest
  
Total
  
Balance, December 31, 2009
45,593,383
  
$
46
  
$
281,806
  
$
7,348 
  
$
358,907
  
2,414,010
  
$
(47,262)
  
$
18,582
  
$
619,427
  
Consolidation of Syncare LLC
—  
    
—  
    
—  
    
—  
    
—  
  
—  
    
—  
    
(72)
    
(72
)
Comprehensive Earnings:
                                                  
Net earnings
—  
    
—  
    
—  
    
—  
    
69,437
  
—  
    
—  
    
2,515
    
71,952
  
Change in unrealized investment gain, net of $1,261 tax
—  
    
—  
    
—  
    
2,313
    
—  
  
—  
    
—  
    
—  
    
2,313
  
Total comprehensive earnings
                                              
74,265
  
Common stock issued for stock offering
5,750,000
    
6
    
104,528
    
—  
    
—  
  
—  
    
—  
    
—  
    
104,534
  
Common stock issued for employee benefit plans
373,340
    
—  
    
3,032
    
—  
    
—  
  
—  
    
—  
    
—  
    
3,032
  
Common stock repurchases
—  
    
—  
    
—  
    
—  
    
—  
  
36,838
    
(714)
    
—  
    
(714
)
Issuance of stock warrants
—  
    
—  
    
296
    
—  
    
—  
  
—  
    
—  
    
—  
    
296
  
Stock compensation expense
—  
    
—  
    
10,224
    
—  
    
—  
  
—  
    
—  
    
—  
    
10,224
  
Excess tax benefits from stock compensation
—  
    
—  
    
327
    
—  
    
—  
  
—  
    
—  
    
—  
    
327
  
Distributions to noncontrolling interest
—  
    
—  
    
—  
    
—  
    
—  
  
—  
    
—  
    
(7,387)
    
(7,387
)
Balance, September 30, 2010
51,716,723
  
$
52
  
$
400,213
  
$
9,661
  
$
428,344
  
2,450,848
  
$
(47,976)
  
$
13,638
  
$
803,932
  

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


CENTENE CORPORATION AND SUBSIDIARIES

(In thousands)
(Unaudited)

   
Nine Months Ended September 30,
  
   
2010
    
2009
  
Cash flows from operating activities:
            
Net earnings
   $ 71,952     $ 62,474  
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
                
Depreciation and amortization
     38,620       30,800  
Stock compensation expense
     10,224       11,428  
(Gain) loss on sale of investments, net
     (6,331 )     261  
(Gain) on sale of UHP
     (8,201 )     ―  
Impairment of investment
     5,531       ―  
Deferred income taxes
     7,012       4,516  
Changes in assets and liabilities:
                
Premium and related receivables
     (68,125 )      (381 )
Other current assets
     (2,932 )     (2,595 )
Other assets
     (990 )     (593 )
Medical claims liabilities
     (29,304 )     31,612  
Unearned revenue
     (38,708 )     54,725  
Accounts payable and accrued expenses
     (3,174 )      (17,656 )
Other operating activities
     (1,267 )      2,386  
Net cash (used in) provided by operating activities
     (25,693 )      176,977  
Cash flows from investing activities:
                
Capital expenditures
     (91,960 )     (42,696 )
Purchases of investments
     (382,730 )     (647,086 )
Proceeds from asset sales
     13,420       ―  
Sales and maturities of investments
     452,128       546,640  
Investments in acquisitions, net of cash acquired
     (26,847 )     (31,533 )
Net cash used in investing activities
     (35,989 )     (174,675 )
Cash flows from financing activities:
                
Proceeds from exercise of stock options
     2,394       1,717  
Proceeds from borrowings
     53,812       468,500  
Proceeds from stock offering
     104,534       ―  
Payment of long-term debt
     (97,467 )     (456,059 )
Distributions (to) from noncontrolling interest
     (7,387 )     4,324  
Excess tax benefits from stock compensation
     424       43  
Common stock repurchases
     (714 )     (5,539 )
Debt issuance costs
     ―       (405 )
Net cash provided by financing activities
     55,596       12,581  
Net (decrease) increase in cash and cash equivalents
     (6,086 )      14,883  
Cash and cash equivalents, beginning of period
     403,752       379,099  
Cash and cash equivalents, end of period
   $ 397,666     $ 393,982  
                 
Supplemental disclosures of cash flow information:
                
Interest paid
   $ 9,501     $ 8,556  
Income taxes paid
   $ 44,407     $ 43,308  
                 
Supplemental disclosure of non-cash investing and financing activities:
                
Contribution from noncontrolling interest
   $ 306     $ 5,491  
Capital expenditures
   $ 15,291     $ 10,106  
 
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.


CENTENE CORPORATION AND SUBSIDIARIES

(Dollars in thousands, except share data)
(Unaudited)

  1. Basis of Presentation
 
The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements for the fiscal year ended December 31, 2009 filed on Form 10-K on February 22, 2010.  The unaudited interim financial statements herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the December 31, 2009 audited financial statements, have been omitted from these interim financial statements where appropriate.  In the opinion of management, these financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of the interim periods presented.
 
Certain 2009 amounts in the consolidated financial statements have been reclassified to conform to the 2010 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.
 
2. Recent Accounting Pronouncements

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

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

3. Discontinued Operations: University Health Plans, Inc.

In March 2010, the Company completed the sale of certain assets of the New Jersey health plan, University Health Plans, Inc., or UHP, and recorded a pre-tax gain of $8,201.  Goodwill and intangible assets associated with the New Jersey operations disposed of as a part of the sale were $3,720.  The assets, liabilities and results of operations of UHP were classified as discontinued operations for all periods presented beginning in December 2008 and were previously reported in the Medicaid Managed Care segment.  The total revenue associated with UHP included in results from discontinued operations was zero and $37,170 for the three months ended September 30, 2010 and 2009, respectively.   The total revenue associated with UHP included in results from discontinued operations was $21,993 and $109,256 for the nine months ended September 30, 2010 and 2009, respectively.  UHP had statutory capital of approximately $7,000 at September 30, 2010, which will be transferred to unregulated cash upon receiving regulatory approval.

During the three and nine months ending September 30, 2010, the Company incurred additional exit costs related to lease termination costs and employee retention programs and made related payments.  In total, the Company has incurred exit costs totaling $5,032.  The change in the exit cost liability for UHP is summarized as follows:

   
Three Months Ended September 30, 2010
    
Nine Months Ended September 30, 2010
  
   
Employee
Benefits
    
Lease
Termination
    
Total
    
Employee
Benefits
    
Lease
Termination
    
Total
  
Beginning Balance
   $ 1,392     $ 1,069     $ 2,461     $ 2,726     $ 267     $ 2,993  
Incurred/(Adjustments)
     (347 )     (79 )     (426 )     (274 )     1,056       782  
Paid
     (497 )     —       (497 )     (1,904 )     (333 )     (2,237 )
Ending Balance
   $ 548     $ 990     $ 1,538     $ 548     $ 990     $ 1,538  

 4. Acquisitions

In June 2010, the Company acquired certain assets of Carolina Crescent Health Plan, South Carolina’s largest non-profit Medicaid managed care organization for $17,993 in total consideration.  The Company recorded an initial allocation of value that resulted in goodwill of $14,394 and other identifiable intangible assets of $3,599.  The Company allocated the total consideration to assets acquired and liabilities assumed based on its initial estimates of fair value using methodologies and assumptions that it believed were reasonable.  During the quarter ended September 30, 2010, the Company adjusted the allocation of the total consideration to identifiable assets and liabilities which increased goodwill to $16,403 and decreased other identifiable intangible assets to $1,590.  The acquisition is recorded in the Medicaid Managed Care segment.

In July 2010, the Company acquired certain assets of NovaSys Health, LLC, a leading third party administrator in Arkansas and paid $4,330 in cash.  The Company performed an initial allocation of fair value that resulted in goodwill of $1,444 and other identifiable intangible assets of $3,050 that were recorded in the Specialty Services segment.

5. Variable Interest Entities

Centene Center, LLC

In June 2009, the Company executed an agreement as a 50% joint venture partner in a real estate development entity, Centene Center, LLC, or Centene Center, associated with the construction of a real estate development to include the Company’s corporate headquarters.  Centene Center is a variable interest entity, or VIE, and the Company concluded it was the primary beneficiary.  Accordingly, the Company’s consolidated financial statements include the accounts of Centene Center.  During the third quarter of 2010, the real estate development was put in service and began generating income and expense recorded as general and administrative expense on the Company’s consolidated statement of operations.

As part of financing the real estate development, Centene Center executed a $95,000 construction loan due June 1, 2011, which may be extended for two additional one year terms.  The Company and its development partner have guaranteed up to $65,000 each associated with this construction loan until substantial completion of the real estate development when the guarantee is reduced to 50% of the outstanding loan balance.  As of September 30, 2010, the development was substantially complete and $73,371 was outstanding under this loan.  Centene Center has capitalized $1,089 of interest in 2010.

Access Health Solutions, LLC

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

Syncare, LLC

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

The carrying amounts of the consolidated assets and liabilities related to the Company’s interests in Centene Center, Access and Syncare, are as follows:
 
   
September 30,
2010
    
December 31,
2009
  
Cash and cash equivalents
   $ 5,389     $ 8,667  
Premium and related receivables
     3,208       11,313  
Other current assets
     2,023       4,507  
Property, software and equipment, net
     138,008       89,219  
Other long-term assets
     2,806       30  
                 
Accounts payable and accrued expenses
   $ 20,926     $ 14,020  
Long-term debt
     73,471       32,559  

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

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

   
September 30, 2010
  
December 31, 2009
  
   
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized Losses
    
Fair
Value
    
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized Losses
    
Fair
Value
  
U.S. Treasury securities
   $ 29,291     $ 678     $ (9 )   $ 29,960     $ 27,080     $ 213     $ (5 )   $ 27,288  
Corporate securities
     179,356       4,669       (3 )     184,022       165,720       581       (940 )     165,361  
Municipal securities:
                                                                
General obligation
     110,413       4,806       —       115,219       141,039       6,249       (3 )     147,285  
Pre-refunded
     33,862       1,023       —       34,885       39,928       950       (25 )     40,853  
Revenue
     104,187       4,009       —       108,196       119,488       4,429       (3 )     123,914  
Variable rate demand notes
     24,740       —       —       24,740       33,500       —       —       33,500  
Asset backed securities
     12,786       366       —       13,152       19,934       61       —       19,995  
Reserve Primary fund
     —       —       —       —       2,444       —       —       2,444  
Cost method investments and equity securities
     6,119       —       —       6,119       9,751       312       (170 )     9,893  
Life insurance contracts
     14,317       —       —       14,317       14,650       —       —       14,650  
Total
   $ 515,071     $ 15,551     $ (12 )   $ 530,610     $ 573,534     $ 12,795     $ (1,146 )   $ 585,183  

The Company’s investments are classified as available-for-sale with the exception of life insurance contracts and certain cost method investments.  The Company’s investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets with the focus on high credit quality securities.  The Company limits the size of investment in any single issuer.  As of September 30, 2010, the Company had no single issue with a par value greater than $5,000.  As of September 30, 2010, 40% of the Company’s investments in securities that carry a rating by Moody’s or S&P were rated AAA or higher, 75% were rated AA- or higher, and 99% were rated A- or higher.  At September 30, 2010, the Company held certificates of deposit of $13,922, life insurance contracts of $14,317 and cost method invesments of $6,119 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:

   
September 30, 2010
    
December 31, 2009
  
   
Less Than 12 Months
    
12 Months or More
    
Less Than 12 Months
    
12 Months or More
  
   
Unrealized
Losses
    
Fair
Value
    
Unrealized Losses
    
Fair
Value
    
Unrealized Losses
    
Fair
Value
    
Unrealized Losses
    
Fair
Value
  
U.S. Treasury securities
   $ (9 )   $ 1,107     $ —     $ —     $ (5 )   $ 785     $ —     $ —  
Corporate securities
     (3 )     4,849       —       —       (901 )     99,418       (39 )      892  
Municipal securities:
                                                                
General obligation
     —       —       —       —       (3 )     956       —       —  
Pre-refunded
     —       —       —       —       (25 )     7,811       —       —  
Revenue
     —       —       —       —       (3 )     916       —       —  
Equity securities
     —       —       —       —       (84 )     527       (86 )      629  
Total
   $ (12 )   $ 5,956     $ —     $ —     $ (1,021 )   $ 110,413     $ (125 )   $ 1,521  

As of September 30, 2010, the gross unrealized losses were generated from seven positions out of a total of 340 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 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 contractual maturities of short-term and long-term investments and restricted deposits as of September 30, 2010 are as follows:

   
Investments
    
Restricted Deposits
  
   
Amortized
Cost
    
Fair
Value
    
Amortized
Cost
    
Fair
Value
  
One year or less
   $ 30,667     $ 30,857     $ 19,250     $ 19,264  
One year through five years
     422,305       437,494       1,277       1,325  
Five years through ten years
     25,892       25,915       —       —  
Greater than ten years
     15,680       15,755       —       —  
Total
   $ 494,544     $ 510,021     $ 20,527     $ 20,589  
                                 

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

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

Actual maturities may differ from contractual maturities due to call or prepayment options.  Asset backed securities are included in the one year through five years category, equity securities and life insurance contracts are included in the five years through ten years category, and variable rate demand notes are included in the greater than 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.
 
Realized gains and losses are determined on the basis of specific identification or a first-in, first-out methodology, if specific identification is not practicable.  The Company’s gross recorded realized gains and losses on investments were as follows:

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
 
2010
  
2009
  
2010
  
2009
  
Gains
   $ 2,310     $ 297     $ 6,027     $ 850  
Losses
     (23 )     (128 )     (268 )     (1,111 )
Impairment of investment
     (5,531 )  
­­­­—
       (5,531 )     —  

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.  During the quarter ended September 30, 2010, the Company determined it had an other-than-temporary impairment of a cost method investment in a start-up company that provides software to automate the clinical, administrative, and technical components of care management programs.  As a result, the Company recorded an impairment charge of $5,531, including $3,531 of convertible promissory notes.  The impairment charge is included in investment and other income for the quarter.

Investment and other income in the three months ended September 30, 2010 included a net realized gain of $1,961 related to sales of fixed income investments and also included a gain on a distribution from the Reserve Primary money market fund of $326, representing distributions received in excess of our adjusted basis.  During 2008, the Company recorded a loss of $4,457 related to its investment in the Reserve Primary money market fund whose Net Asset Value fell below $1.00 per share.

Investment and other income in the nine months ended September 30, 2010 included a net realized gain of $2,472 related to sales of fixed income investments and also included realized gains of $3,287 related to the Reserve Primary money market fund for distributions made during the first and third quarters of 2010.
 
7. Fair Value Measurements
 
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the extent to which the fair value estimates are based upon observable or unobservable inputs.  Level inputs are as follows:
 
 
Level Input:
  
 
Input Definition:
Level I
  
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
   
Level II
  
Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
   
Level III
  
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

 
 
The following table summarizes fair value measurements by level at September 30, 2010, for assets and liabilities measured at fair value on a recurring basis:
 
   
Level I
    
Level II
    
Level III
    
Total
  
Cash and cash equivalents
   $ 397,519     $ ―     $ ―     $ 397,519  
                                 
Investments available for sale:
                                
U.S. Treasury securities and obligations of U.S. government corporations and agencies
   $ 21,378     $ 703     $ ―     $ 22,081  
Corporate securities
     ―       171,312       ―       171,312  
Municipal securities:
                                
General obligation
     ―       115,219       ―       115,219  
Pre-refunded
     ―       34,885       ―       34,885  
Revenue
     ―       108,196       ―       108,196  
Variable rate demand notes
     ―       24,740       ―       24,740  
Asset backed securities
     ―       13,152       ―       13,152  
Total investments
   $ 21,378     $ 468,207     $ ―     $ 489,585  
                                 
Restricted deposits available for sale:
                                
Cash and cash equivalents
   $ 6,306     $ ―     $ ―     $ 6,306  
Certificates of deposit
     6,404       ―       ―       6,404  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
     7,879       ―       ―       7,879  
Total restricted deposits
   $ 20,589     $ ―     $ ―     $ 20,589  
                                 
Total assets at fair value
   $ 439,486     $ 468,207     $ ―     $ 907,693  
 
The following table summarizes fair value measurements by level at December 31, 2009, for assets and liabilities measured at fair value on a recurring basis:
 
   
Level I
    
Level II
    
Level III
    
Total
  
Cash and cash equivalents
   $ 400,951     $ ―     $ ―     $ 400,951  
                                 
Investments available for sale:
                                
U.S. Treasury securities and obligations of U.S. government corporations and agencies
   $ 16,635     $ 2,764     $ ―     $ 19,399  
Corporate securities
     ―       152,919       ―       152,919  
Municipal securities:
                                
General obligation
     ―       147,285       ―       147,285  
Pre-refunded
     ―       40,853       ―       40,853  
Revenue
     ―       123,914       ―       123,914  
Variable rate demand notes
     ―       33,500       ―       33,500  
Equity securities
     3,585       ―       ―       3,585  
Asset backed securities
     ―       19,995       ―       19,995  
Total investments
   $ 20,220     $ 521,230     $ ―     $ 541,450  
                                 
Restricted deposits available for sale:
                                
Cash and cash equivalents
   $ 7,285     $ ―     $ ―     $ 7,285  
Certificates of deposit
     4,958       ―       ―       4,958  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
     7,889       ―       ―       7,889  
Total restricted deposits
   $ 20,132     $ ―     $ ―     $ 20,132  
                                 
Total assets at fair value
   $ 441,303     $ 521,230     $ ―     $ 962,533  

The Company periodically transfers U.S. Treasury securities between Level I and Level II fair value measurements dependent upon the level of trading activity for the specific securities at the measurement date.  The Company utilizes matrix pricing services to estimate fair value for securities which are not actively traded on the measurement date.  The Company designates these securities as Level II fair value measurements.  The aggregate carrying amount of the Company’s life insurance contracts and cost-method investments, which approximates fair value, was $20,436 and $23,601 as of September 30, 2010, and December 31, 2009, respectively.
 
8. Debt

Debt consists of the following:
   
September 30, 2010
    
December 31, 2009
  
$175,000 senior notes
   $ 175,000     $ 175,000  
$300,000 revolving credit agreement
     ―       84,000  
Joint venture construction loan
     73,371       32,559  
Mortgage note payable
     9,600       9,900  
Capital leases and other
     6,205       6,272  
     Total debt
     264,176       307,731  
Less current maturities
     (663 )     (646 )
     Long-term debt
   $ 263,513     $ 307,085  

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

9. Income Taxes

Excluding the effects of noncontrolling interests, the effective tax rate for the three months ended September 30, 2010 would be 37.0% compared to 35.3% in 2009, and the effective tax rate for the nine months ended September 30, 2010 would be 39.6% compared to 36.0% in 2009.  The increase in the effective tax rate for the three month period was primarily related to a decrease in tax exempt interest and an increase in state income taxes. The increase in the effective tax rate for the nine month period was primarily driven by recently enacted legislation in the state of Georgia which replaced the state income tax with a premium tax for Medicaid managed care organizations effective July 1, 2010.  As a result of the new legislation, the Company is unable to realize any future tax benefit from deferred tax assets recorded related to Georgia state net operating loss carry forwards.  Accordingly, a deferred tax asset of $1,700, or approximately $0.03 per share, was written off during the second quarter.
 
 
10. Earnings Per Share

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

   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
   
2010
  
2009
  
2010
  
2009
  
Net earnings (loss) attributable to Centene Corporation common stockholders:
                          
Earnings from continuing operations, net of tax
  
$
22,402
  
$
22,728
  
$
65,483
  
$
62,350
  
Discontinued operations, net of tax
    
260
    
(1,460
)
  
3,954
    
(2,394
)
Net earnings
  
$
22,662
  
$
21,268
  
$
69,437
  
$
59,956
  
Shares used in computing per share amounts:
                          
Weighted average number of common shares outstanding
    
49,238,406
    
43,001,870
    
48,552,135
    
43,023,431
  
Common stock equivalents (as determined by applying the treasury stock method)
    
1,699,951
    
1,289,734
    
1,640,055
    
1,223,722
  
Weighted average number of common shares and potential dilutive common shares outstanding
    
50,938,357
    
44,291,604
    
50,192,190
    
44,247,153
  
                           
Net earnings (loss) per share attributable to Centene Corporation common stockholders:
                          
Basic:
                          
Continuing operations
  
$
0.46
  
$
0.53
  
$
1.35
  
$
1.45
  
Discontinued operations
    
―
    
(0.04
)
  
0.08
    
(0.06
)
Earnings per common share
  
$
0.46
  
$
0.49
  
$
1.43
  
$
1.39
  
                           
Diluted:
                          
Continuing operations
  
$
0.44
  
$
0.51
  
$
1.30
  
$
1.41
  
Discontinued operations
    
―
    
(0.03
)
  
0.08
    
(0.05
)
Earnings per common share
  
$
0.44
  
$
0.48
  
$
1.38
  
$
1.36
  
                           
The calculation of diluted earnings per common share for the three and nine months ended September 30, 2010 excludes the impact of 1,931,808 and 1,975,387 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.  The calculation of diluted earnings per common share for the three and nine months ended September 30, 2009 excludes the impact of 2,352,841 and 2,546,193 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.

11. Stockholders’ Equity

During the first quarter of 2010, the Company completed the sale of 5.75 million shares of common stock for $19.25 per share. Net proceeds from the sale of the additional shares were $104,534.  A portion of the proceeds was used to repay the outstanding indebtedness under our $300,000 revolving credit loan facility ($84,000 as of December 31, 2009).  The Company has used the remaining proceeds to fund its acquisition in South Carolina as well as capital expenditures.

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

As a component of the employee stock compensation plan, employees can use shares of stock which have vested to satisfy personal tax withholding obligations.  During the nine months ended September 30, 2010, the Company purchased 36,838 vested shares from employees at an aggregate cost of $714.  These shares are included in the Company’s treasury stock.
 
12. Segment Information
 
Centene operates in two segments: Medicaid Managed Care and Specialty Services.  The Medicaid Managed Care segment consists of Centene’s health plans including all of the functions needed to operate them.  The health plans in Florida, Georgia, Indiana, Ohio, South Carolina, Texas and Wisconsin are included in the Medicaid Managed Care segment.  The Specialty Services segment consists of Centene’s specialty companies which offer products for behavioral health, health insurance exchanges, individual health insurance, life and health management, long-term care programs, managed vision, telehealth services and pharmacy benefits management.  The health plans in Arizona, operated by our long-term care company, and Massachusetts, operated by our individual health insurance provider, are included in the Specialty Services segment.

Segment information for the three months ended September 30, 2010 follows:
 
   
Medicaid
Managed Care
    
Specialty
Services
    
Eliminations
    
Consolidated
Total
  
Revenue from external customers
   $ 934,664     $ 146,849     $ —     $ 1,081,513  
Revenue from internal customers
     15,512       124,732       (140,244 )     —  
Total premium and service revenues
   $ 950,176     $ 271,581     $ (140,244 )   $ 1,081,513  
                                 
Earnings from operations
   $ 35,702     $ 4,546     $ —     $ 40,248  

Segment information for the three months ended September 30, 2009 follows:
 
   
Medicaid
Managed Care
    
Specialty
Services