Centene Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Acquisitions

Acquisitions

12 Months Ended

Dec. 31, 2019

WellCare Acquisition

On January 23, 2020, the Company acquired all of the issued and outstanding shares of WellCare Health Plans, Inc. (WellCare, and such acquisition, the WellCare Acquisition). The transaction is valued at approximately $19.6 billion, including the assumption of $1.95 billion of outstanding debt.

Total consideration for the acquisition was $17,605 million, consisting of Centene common shares valued at $11,431 million (based on Centene's stock price of $66.76), $6,079 million in cash, and $95 million related to the fair value of replacement equity awards associated with pre-combination service. Each WellCare share was converted into 3.38 of validly issued, fully paid, non-assessable shares of Centene common stock and $120.00 in cash. In total, 171 million shares of Centene common stock were issued to the WellCare stockholders. The cash portion of the acquisition consideration was funded through the issuance of long-term debt as further discussed in Note 10. Debt.

The acquisition of WellCare will be 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.

Divestitures

Immediately prior to the closing of the WellCare Acquisition, Anthem, Inc. acquired WellCare's Missouri Medicaid health plan, a WellCare Missouri Medicare Advantage health plan, and WellCare's Nebraska Medicaid health plan. CVS Health Corporation acquired portions of Centene's Illinois Medicaid and Medicare Advantage health plans as part of previously announced divestiture agreements.

Unaudited Pro Forma Financial Information

The following table presents supplemental pro forma information for the year ended December 31, 2019 and 2018, respectively ($ in millions, except per share data):



	Year Ended December 31, 2019		Year Ended December 31, 2018
Total revenues	$	102,379	$	88,842
Net earnings attributable to common stockholders	1,462		$	1,211
Diluted earnings per share	$	2.47	$	2.06

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, 2018 and is not a projection of future results.

The unaudited pro forma financial information reflects the historical results of Centene and WellCare adjusted as if the acquisition had occurred on January 1, 2018, primarily for the following:


•	Interest expense associated with debt incurred to finance the transaction.


•	Elimination of historical WellCare intangible asset amortization expense and addition of amortization expense based on the current estimated values of identifiable intangible assets of approximately $7 billion.


•	Issuance of 171 million shares of Centene common stock in connection with the per share common stock consideration.


•	Elimination of acquisition related costs.


•	Adjustments to income tax expense related to pro forma adjustments and increased income tax expense related to IRS Regulation 162(m)(6).

In addition, the acquisition of Fidelis Care by Centene and the acquisition of Meridian by WellCare both occurred in 2018. The pro forma information gives effect to both acquisitions and the related financing as if they occurred on January 1, 2018.

The unaudited pro forma financial information does not reflect the previously discussed divestitures as the impact would be impracticable to quantify.

Fidelis Care Acquisition

On July 1, 2018, the Company acquired substantially all of the assets of Fidelis Care for approximately $3,621 million of cash consideration, including a working capital adjustment. The acquisition consideration was funded through the issuance of $53.2 million shares of Centene common stock and the issuance of long-term 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 that requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. The valuation of all assets acquired and liabilities assumed was finalized in the second quarter of 2019.

The Company's 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	442
Other current assets	32
Restricted deposits	495
Property, software and equipment	48
Intangible assets ^(a)	956
Other long-term assets	2
Total assets acquired	3,976

Medical claims liability	1,218
Accounts payable and accrued expenses	238
Return of premium payable	123
Unearned revenue	115
Other long-term liabilities	324
Total liabilities assumed	2,018

Total identifiable net assets	1,958
Goodwill ^(b)	1,663
Total assets acquired and liabilities assumed	$	3,621

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. The Company has estimated the fair value of intangible assets to be $956 million with a weighted average life of 13 years. The identifiable intangible assets include customer relationships, provider contracts, trade names and developed technologies.

The fair values and weighted average useful lives for identifiable intangible assets acquired are as follows:



	Fair Value		Weighted Average Useful Life (in years)
Customer relationships	$	711	11
Trade name	196		20
Provider contracts	33		15
Developed technologies	16		2
Total intangible assets acquired	$	956	13


(b)	The acquisition resulted in $1.7 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 December 31, 2018, the Company's Consolidated Statements of Operations include total Fidelis Care revenues of $5,628 million. It is impracticable to determine the effect on net income resulting from the Fidelis Care acquisition for the year ended December 31, 2018, as the Company began immediately integrating Fidelis Care into its ongoing operations.

Unaudited Pro Forma Financial Information

The following table presents supplemental pro forma information for the year ended December 31, 2018 and 2017, respectively ($ in millions, except per share data):



	Year Ended December 31, 2018		Year Ended December 31, 2017
Total revenues	$	65,792	$	58,275
Net earnings attributable to common stockholders	$	1,342	$	936
Diluted earnings per share	$	3.22	$	2.27

The pro forma results do not reflect any anticipated synergies, efficiencies, or other cost savings of the acquisition prior to July 1, 2018, or the impact of the WellCare acquisition and related financing. 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 and expense 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, in connection with the acquisition Fidelis Care, the Company entered into certain undertakings with the New York State Department of Health. These 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 the Company's 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 $328 million, was expensed during 2018. As of December 31, 2019, the Company has paid $136 million.