Quarterly report pursuant to Section 13 or 15(d)

Fidelis Care Acquisition

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Fidelis Care Acquisition
9 Months Ended
Sep. 30, 2018
Business Combinations [Abstract]  
Fidelis Care Acquisition
Fidelis Care Acquisition

On July 1, 2018, the Company acquired substantially all of the assets of Fidelis Care for approximately $3.47 billion of cash consideration, which includes a working capital adjustment. The acquisition consideration was funded through the issuance of 26.6 million shares of Centene common stock as further discussed in Note 8. Stockholders Equity and the issuance of long-term debt as further discussed in Note 7. Debt. The Fidelis Care acquisition expanded the Company's scale and presence to New York State.

The acquisition of Fidelis Care was accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The valuation of assets acquired and liabilities assumed has not yet been finalized. Any necessary adjustments from preliminary estimates will be finalized within one year from the date of acquisition. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date. Due to the timing of the acquisition, the Company has performed limited valuation procedures, and the valuation of all assets and liabilities assumed is not yet complete. The Company's preliminary allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date of July 1, 2018 is as follows ($ in millions):
Assets acquired and liabilities assumed
 
 
Cash and cash equivalents
 
$
2,001

Premium and related receivables
 
535

Other current assets
 
32

Restricted deposits
 
495

Property, software and equipment, net
 
80

Intangible assets (a)
 
1,000

Other long-term assets
 
18

Total assets acquired
 
4,161

 
 
 
Medical claims liability
 
1,319

Accounts payable and accrued expenses
 
300

Return of premium payable
 
124

Unearned revenue
 
115

Other long-term liabilities
 
261

Total liabilities assumed
 
2,119

 
 
 
Total identifiable net assets
 
2,042

Goodwill (b)
 
1,428

Total assets acquired and liabilities assumed
 
$
3,470


The Company has made the following preliminary fair value adjustments based on information reviewed through September 30, 2018. Significant fair value adjustments are noted as follows:

(a)
The identifiable intangible assets acquired are to be measured at fair value as of the completion of the acquisition. The fair value of intangible assets is determined primarily using variations of the "income approach," which is based on the present value of the future after tax cash flows attributable to each identified intangible asset. Other valuation methods, including the market approach and cost approach, were also considered in estimating the fair value. As discussed above, due to the timing of the acquisition date, the Company has only performed limited valuation procedures, and the intangible asset valuation is incomplete. The Company has estimated the preliminary fair value of intangible assets to be $1.0 billion with a weighted average life of 13 years. The Company expects the identifiable intangible assets to include customer relationships, provider contracts, trade names and developed technology.

(b)
The acquisition resulted in $1.4 billion of goodwill related primarily to synergies expected from the acquisition and the assembled workforce of Fidelis Care. All of the goodwill has been assigned to the Managed Care segment. The goodwill is deductible for income tax purposes.

Statement of Operations

From the acquisition date through September 30, 2018, the Company's Consolidated Statements of Operations include total Fidelis Care revenues of $2,797 million. It is impracticable to determine the effect on net income resulting from the Fidelis Care acquisition for the three and nine months ended September 30, 2018, as the Company began immediately integrating Fidelis Care into its ongoing operations.

Unaudited Pro Forma Financial Information

The unaudited pro forma total revenues for the nine months ended September 30, 2018 were $49,170 million. It is impracticable for the Company to determine the pro forma earnings information for the nine months ended September 30, 2018 due to the nature of obtaining that information as the Company began immediately integrating Fidelis Care into its ongoing operations. The following table presents supplemental pro forma information for the three and nine months ended September 30, 2017 ($ in millions, except per share data):
 
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
Total revenues
 
$
14,387

 
$
42,954

Net earnings attributable to Centene Corporation
 
$
248

 
$
721

Diluted earnings per share
 
$
1.22

 
$
3.55



The pro forma results do not reflect any anticipated synergies, efficiencies, or other cost savings of the acquisition. Accordingly, the unaudited pro forma financial information is not indicative of the results if the acquisition had been completed on January 1, 2017 and is not a projection of future results.

The unaudited pro forma financial information reflects the historical results of Centene and Fidelis Care adjusted as if the acquisition had occurred on January 1, 2017, primarily for the following:

Additional premium tax expense related to Fidelis Care no longer being a not-for-profit entity.
Additional Health Insurer Fee revenue in 2018 related to Fidelis Care as some of those revenues will be subject to the Health Insurer Fee following the first year of the closing of the Fidelis Care acquisition, absent a Health Insurer Fee moratorium.
Reduced Fidelis Care investment income to reflect lower investment balances and mix of investments associated with the acquired assets.
Interest expense associated with debt incurred to finance the transaction.
An adjustment to basic and diluted shares outstanding to reflect the shares issued by Centene to finance the transaction.
An adjustment to income tax expense to reflect the tax impact of the acquisition and Fidelis Care becoming subject to income tax.
Elimination of acquisition related costs.

Commitments

As part of the regulatory approval process, the Company entered into certain undertakings with the New York State Department of Health. The undertakings contain various commitments by the Company effective upon completion of the Fidelis Care acquisition. One of the undertakings includes a $340 million contribution by the Company to the State of New York to be paid over a five-year period for initiatives consistent with our mission of providing high quality healthcare to vulnerable populations within New York State. As a result of the closing of the Fidelis Care acquisition, the present value of the $340 million contribution to the State of New York, approximately $324 million, was expensed in SG&A during the third quarter of 2018.