Edgar Filing: CENTENE CORP

Document

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, 2018



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

For the transition period from to

____________________________________________

Commission file number: 001-31826

____________________________________________

CENTENE CORPORATION

(Exact name of registrant as specified in its charter)



Delaware	42-1406317
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

7700 Forsyth Boulevard
St. Louis, Missouri	63105
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (314) 725-4477

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days x Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “small reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer	o
Non-accelerated filer o	Smaller reporting company	o
	Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

As of October 12, 2018, the registrant had 205,355,367 shares of common stock outstanding.

CENTENE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

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		PAGE

	Part I
	Financial Information
Item 1.	Financial Statements	1
	Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017	1
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	2
	Consolidated Statements of Comprehensive Earnings for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	3
	Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2018 (unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (unaudited)	5
	Notes to the Consolidated Financial Statements (unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
	Part II
	Other Information
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 6.	Exhibits	51
Signatures		52

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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 intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe-harbor provisions. We have attempted to identify these statements by terminology including “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “seek,” “target,” “goal,” “may,” “will,” “would,” “could,” “should,” “can,” “continue” and other similar words or expressions (and the negative thereof) in connection with, among other things, any discussion of future operating or financial performance. In particular, these statements include without limitation statements about our market opportunity, growth strategy, competition, expected activities in completed and future acquisitions, including statements about the impact of our recent acquisition of New York State Catholic Health Plan, Inc., d/b/a Fidelis Care New York (Fidelis Care) (Fidelis Care Acquisition), investments and the adequacy of our available cash resources. These statements may be found in the various sections of this filing, such as Part I, Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1. “Legal Proceedings,” 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. Except as may be otherwise required by law, 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. You should not place undue reliance on any forward-looking statements, as actual results may differ materially from projections, estimates, or other forward-looking statements due to a variety of important factors, including but not limited to:


•	our ability to accurately predict and effectively manage health benefits and other operating expenses and reserves;


•	competition;


•	membership and revenue declines or unexpected trends;


•	changes in healthcare practices, new technologies, and advances in medicine;


•	increased healthcare costs;


•	changes in economic, political or market conditions;


•	changes in federal or state laws or regulations, including changes with respect to income tax reform or government healthcare programs as well as changes with respect to the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act and any regulations enacted thereunder that may result from changing political conditions;


•	rate cuts or other payment reductions or delays by governmental payors and other risks and uncertainties affecting our government businesses;


•	our ability to adequately price products on federally facilitated and state-based Health Insurance Marketplaces;


•	tax matters;


•	disasters or major epidemics;


•	the outcome of legal and regulatory proceedings;


•	changes in expected contract start dates;


•	provider, state, federal and other contract changes and timing of regulatory approval of contracts;


•	the expiration, suspension, or termination of our contracts with federal or state governments (including but not limited to Medicaid, Medicare, TRICARE or other customers);


•	the difficulty of predicting the timing or outcome of pending or future litigation or government investigations;


•	challenges to our contract awards;


•	cyber-attacks or other privacy or data security incidents;


•	the possibility that the expected synergies and value creation from acquired businesses, including, without limitation, the acquisition (Health Net Acquisition) of Health Net, Inc. (Health Net) and the Fidelis Care Acquisition, will not be realized, or will not be realized within the expected time period;


•	the exertion of management’s time and our resources, and other expenses incurred and business changes required in connection with complying with the undertakings in connection with any regulatory, governmental or third party consents or approvals for the Health Net Acquisition or the Fidelis Care Acquisition;


•	disruption caused by significant completed and pending acquisitions, including the Health Net Acquisition and the Fidelis Care Acquisition, making it more difficult to maintain business and operational relationships;


•	the risk that unexpected costs will be incurred in connection with the completion and/or integration of acquisition transactions, including among others, the Health Net Acquisition and the Fidelis Care Acquisition;

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•	changes in expected closing dates, estimated purchase price and accretion for acquisitions;


•	the risk that acquired businesses, including Health Net and Fidelis Care, will not be integrated successfully;


•	the risk that, following the Fidelis Care Acquisition, we may not be able to effectively manage our expanded operations;


•	restrictions and limitations in connection with our indebtedness;


•	our ability to achieve improvement in the Centers for Medicare and Medicaid Services (CMS) Star ratings and maintain or achieve improvement in other quality scores in each case that can impact revenue and future growth;


•	availability of debt and equity financing, on terms that are favorable to us;


•	inflation; and


•	foreign currency fluctuations.

This list of important factors is not intended to be exhaustive. We discuss certain of these matters more fully, as well as certain other 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 report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. 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. Due to these important factors and risks, we cannot give assurances with respect to our future performance, including without limitation our ability to maintain adequate premium levels or our ability to control our future medical and selling, general and administrative costs.

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Non-GAAP Financial Presentation

The Company is providing certain non-GAAP financial measures in this report as the Company believes that these figures are helpful in allowing investors to more accurately assess the ongoing nature of the Company's operations and measure the Company's performance more consistently across periods. The Company uses the presented non-GAAP financial measures internally to allow management to focus on period-to-period changes in the Company's core business operations. Therefore, the Company believes that this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

Specifically, the Company believes the presentation of non-GAAP financial information that excludes amortization of acquired intangible assets, acquisition related expenses, as well as other items, allows investors to develop a more meaningful understanding of the Company's performance over time. The tables below provide reconciliations of non-GAAP items ($ in millions, except per share data):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017

GAAP net earnings	$	19		$	205		$	659		$	598
Amortization of acquired intangible assets	65			38			149			117
Acquisition related expenses	401			7			423			13
California minimum medical loss ratio changes	—			—			30			—
Penn Treaty assessment expense	—			9			—			56
Income tax effects of adjustments⁽¹⁾	(110		)	(20		)	(140		)	(68		)
Adjusted net earnings	$	375		$	239		$	1,121		$	716

GAAP diluted earnings per share (EPS)	$	0.09		$	1.16		$	3.37		$	3.39
Amortization of acquired intangible assets ⁽²⁾	0.24			0.14			0.59			0.42
Acquisition related expenses ⁽³⁾	1.46			0.02			1.65			0.05
California minimum medical loss ratio changes ⁽⁴⁾	—			—			0.12			—
Penn Treaty assessment expense ⁽⁵⁾	—			0.03			—			0.20
Adjusted Diluted EPS	$	1.79		$	1.35		$	5.73		$	4.06


(1)	The income tax effects of adjustments are based on the effective income tax rates applicable to adjusted (non-GAAP) results.


(2)	The amortization of acquired intangible assets per diluted share are net of an income tax benefit of $0.07 and $0.07 for the three months ended September 30, 2018 and 2017, respectively, and $0.17 and $0.24 for the nine months ended September 30, 2018 and 2017, respectively.


(3)	Acquisition related expenses per diluted share are net of an income tax benefit of $0.46 and $0.02 for the three months ended September 30, 2018 and 2017, respectively, and $0.51 and $0.03 for the nine months ended September 30, 2018 and 2017, respectively.


(4)	The impact of retroactive changes to the California minimum medical loss ratio (MLR) per diluted share is net of an income tax benefit of $0.04 for the nine months ended September 30, 2018.


(5)	The Penn Treaty assessment expense per diluted share is net of an income tax benefit of $0.02 and $0.12 for the three and nine months ended September 30, 2017, respectively.

iii

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017

GAAP selling, general and administrative expenses	$	1,934	$	1,030	$	4,487	$	3,186
Acquisition related expenses	399		7		421		13
Penn Treaty assessment expense	—		9		—		56
Adjusted selling, general and administrative expenses	$	1,535	$	1,014	$	4,066	$	3,117

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PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements.

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions, except shares in thousands and per share data in dollars)



	September 30, 2018			December 31, 2017
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	6,847		$	4,072
Premium and trade receivables	4,647			3,413
Short-term investments	594			531
Other current assets	1,000			687
Total current assets	13,088			8,703
Long-term investments	6,272			5,312
Restricted deposits	550			135
Property, software and equipment, net	1,584			1,104
Goodwill	6,803			4,749
Intangible assets, net	2,423			1,398
Other long-term assets	437			454
Total assets	$	31,157		$	21,855

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims liability	$	6,983		$	4,286
Accounts payable and accrued expenses	4,550			4,165
Return of premium payable	918			549
Unearned revenue	286			328
Current portion of long-term debt	4			4
Total current liabilities	12,741			9,332
Long-term debt	6,379			4,695
Other long-term liabilities	1,276			952
Total liabilities	20,396			14,979
Commitments and contingencies
Redeemable noncontrolling interests	11			12
Stockholders’ equity:
Preferred stock, $0.001 par value; authorized 10,000 shares; no shares issued or outstanding at September 30, 2018 and December 31, 2017	—			—
Common stock, $0.001 par value; authorized 400,000 shares; 207,550 issued and 205,354 outstanding at September 30, 2018, and 180,379 issued and 173,437 outstanding at December 31, 2017	—			—
Additional paid-in capital	7,395			4,349
Accumulated other comprehensive loss	(79		)	(3		)
Retained earnings	3,422			2,748
Treasury stock, at cost (2,196 and 6,942 shares, respectively)	(85		)	(244		)
Total Centene stockholders’ equity	10,653			6,850
Noncontrolling interest	97			14
Total stockholders’ equity	10,750			6,864
Total liabilities, redeemable noncontrolling interests and stockholders’ equity	$	31,157		$	21,855

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

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data in dollars)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues:
Premium	$	14,623		$	10,850		$	38,639		$	32,393
Service	732			571			2,147			1,634
Premium and service revenues	15,355			11,421			40,786			34,027
Premium tax and health insurer fee	827			477			2,771			1,549
Total revenues	16,182			11,898			43,557			35,576
Expenses:
Medical costs	12,626			9,543			33,045			28,278
Cost of services	622			437			1,823			1,334
Selling, general and administrative expenses	1,934			1,030			4,487			3,186
Amortization of acquired intangible assets	65			38			149			117
Premium tax expense	716			510			2,451			1,643
Health insurer fee expense	178			—			532			—
Total operating expenses	16,141			11,558			42,487			34,558
Earnings from operations	41			340			1,070			1,018
Other income (expense):
Investment and other income	80			51			186			137
Interest expense	(97		)	(65		)	(245		)	(189		)
Earnings from operations, before income tax expense	24			326			1,011			966
Income tax expense	8			125			358			381
Net earnings	16			201			653			585
Loss attributable to noncontrolling interests	3			4			6			13
Net earnings attributable to Centene Corporation	$	19		$	205		$	659		$	598

Net earnings per common share attributable to Centene Corporation:
Basic earnings per common share	$	0.09		$	1.19		$	3.44		$	3.47
Diluted earnings per common share	$	0.09		$	1.16		$	3.37		$	3.39

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

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In millions)

(Unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
Net earnings	$	16		$	201	$	653		$	585
Reclassification adjustment, net of tax	1			—		1			(1		)
Change in unrealized gain (loss) on investments, net of tax	(12		)	7		(75		)	41
Foreign currency translation adjustments	(1		)	1		(2		)	5
Other comprehensive earnings (loss)	(12		)	8		(76		)	45
Comprehensive earnings	4			209		577			630
Comprehensive loss attributable to noncontrolling interests	3			4		6			13
Comprehensive earnings attributable to Centene Corporation	$	7		$	213	$	583		$	643

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

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In millions, except shares in thousands and per share data in dollars)

(Unaudited)

Nine Months Ended September 30, 2018



	Centene Stockholders’ Equity
	Common Stock											Treasury Stock
	$.001 Par Value Shares	Amt		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Retained Earnings		$.001 Par Value Shares		Amt			Non- controlling Interest			Total
Balance, December 31, 2017	180,379	$	—	$	4,349		$	(3	)	$	2,748	6,942		$	(244	)	$	14		$	6,864
Comprehensive Earnings:
Net earnings	—	—		—			—			659		—		—			(3		)	656
Other comprehensive loss, net of ($23) tax	—	—		—			(76		)	—		—		—			—			(76		)
Common stock issued for acquisitions	—	—		331			—			—		(4,894	)	176			—			507
Common stock issued	26,604	—		2,779			—			—		—		—			—			2,779
Common stock issued for employee benefit plans	567	—		12			—			—		—		—			—			12
Common stock repurchases	—	—		—			—			—		148		(17		)	—			(17		)
Stock compensation expense	—	—		105			—			—		—		—			—			105
Cumulative-effect of adopting new accounting guidance	—	—		—			—			15		—		—			—			15
Contribution from noncontrolling interest	—	—		—			—			—		—		—			3			3
Purchase of noncontrolling interest	—	—		(181		)	—			—		—		—			(15		)	(196		)
Acquisition resulting in noncontrolling interest	—	—		—			—			—		—		—			98			98
Balance, September 30, 2018	207,550	$	—	$	7,395		$	(79	)	$	3,422	2,196		$	(85	)	$	97		$	10,750

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

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net earnings	$	653		$	585
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization	354			264
Stock compensation expense	105			99
Deferred income taxes	(103		)	(32		)
Changes in assets and liabilities
Premium and trade receivables	(696		)	(749		)
Other assets	65			(39		)
Medical claims liabilities	1,380			406
Unearned revenue	(150		)	255
Accounts payable and accrued expenses	35			205
Other long-term liabilities	199			45
Other operating activities, net	26			—
Net cash provided by operating activities	1,868			1,039
Cash flows from investing activities:
Capital expenditures	(489		)	(301		)
Purchases of investments	(2,691		)	(1,693		)
Sales and maturities of investments	1,575			1,308
Acquisitions, net of cash acquired	(1,958		)	—
Net cash used in investing activities	(3,563		)	(686		)
Cash flows from financing activities:
Proceeds from the issuance of common stock	2,779			—
Proceeds from long-term debt	5,480			1,170
Payments of long-term debt	(3,692		)	(1,124		)
Common stock repurchases	(17		)	(18		)
Purchase of noncontrolling interest	(63		)	(33		)
Debt issuance costs	(25		)	—
Other financing activities, net	(2		)	2
Net cash provided by (used in) financing activities	4,460			(3		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	—			1
Net increase in cash, cash equivalents and restricted cash	2,765			351
Cash, cash equivalents, and restricted cash and cash equivalents, beginning of period	4,089			3,936
Cash, cash equivalents, and restricted cash and cash equivalents, end of period	$	6,854		$	4,287
Supplemental disclosures of cash flow information:
Interest paid	$	213		$	210
Income taxes paid	$	340		$	358
Equity issued in connection with acquisitions	$	507		$	—

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

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CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Operations

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, 2017. 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, 2017 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 2017 amounts in the consolidated financial statements and notes to the consolidated financial statements have been reclassified to conform to the 2018 presentation. These reclassifications have no effect on net earnings or stockholders' equity as previously reported.

On July 1, 2018, the Company acquired substantially all of the assets of New York State Catholic Health Plan, Inc. d/b/a Fidelis Care New York (Fidelis Care) for approximately $3.47 billion of cash consideration, which includes a working capital adjustment. The Fidelis Care acquisition expanded the Company's scale and presence to New York State. The acquisition was accounted for as a business combination, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Those estimated amounts are reflected in the accompanying financial statements.

As a result of the completion of the Fidelis Care acquisition, the Company's results of operations for the three and nine months ended September 30, 2018 include the results of operations of Fidelis Care from July 1, 2018 to September 30, 2018. The Fidelis Care operations are included in the Managed Care segment.

Recently Adopted Accounting Guidance

In August 2018, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) which modifies the disclosure requirements on fair value measurements. The amendments in this ASU remove the requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. The amendments require public entities to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements for instruments held at the end of the reporting period, and the range and weighted average used to develop significant inputs for Level 3 fair value measurements. For investments in certain entities that calculate net asset value, the standard requires the disclosure of the period of time over which the underlying assets might be liquidated if the investee has announced the timing publicly. The Company adopted the new guidance in the third quarter of 2018. The new guidance did not have any impact on the Company’s consolidated financial position, results of operations or cash flows.

In June 2018, the FASB issued an ASU that simplifies the accounting for share-based payment arrangements with non-employees for goods and services. Under the ASU, the guidance on such payments to non-employees is aligned with the accounting for share-based payments granted to employees, including the measurement of equity-classified awards, which is fixed at the grant date under the new guidance. The Company adopted the new guidance in the second quarter of 2018 using the modified retrospective approach with an immaterial cumulative-effect adjustment to retained earnings.

In February 2018, the FASB issued an ASU which allows a reclassification from accumulated other comprehensive income (OCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Acts (TCJA). Consequently, the amendments eliminate the stranded tax effects resulting from the TCJA and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the TCJA, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this ASU also require certain disclosures about stranded tax effects. The Company adopted the new guidance in the first quarter of 2018 and elected to reclassify stranded tax effects as a result of the TCJA related to unrealized gains and losses on investments and defined benefit plan obligations. The Company uses the individual security approach to release income tax effects from accumulated OCI. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

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In November 2016, the FASB issued an ASU clarifying the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the new guidance in the first quarter of 2018. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Cash, cash equivalents, and restricted cash and cash equivalents reported on the Consolidated Statements of Cash Flows includes restricted cash and cash equivalents of $6 million, $6 million, $17 million and $7 million as of December 31, 2016, September 30, 2017, December 31, 2017 and September 30, 2018, respectively.

In March 2016, the FASB issued an ASU which requires entities to measure equity investments at fair value and recognize any change in fair value in net income. The standard does not apply to accounting methods that result in consolidation of the investee and those accounted for under the equity method. The standard also requires entities to record changes in instrument-specific credit risk for financial liabilities measured under the fair value option in other comprehensive income. Companies are required to record a cumulative-effect adjustment to the statement of financial position as of the beginning of the fiscal year in which the guidance is adopted, with the exception of amendments related to equity investments without readily determinable fair values, which will be applied prospectively to all investments that exist as of the date of adoption. The Company adopted the new guidance in the first quarter of 2018. The new guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued an ASU which supersedes existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity's insurance contracts). Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the new guidance in the first quarter of 2018 using the modified retrospective approach with a cumulative-effect increase to retained earnings of $16 million. The Company also elected the practical expedient of applying the new guidance only to contracts that are not completed as of the date of initial application. The majority of the Company's revenues are derived from insurance contracts and are excluded from the new standard.

Accounting Guidance Not Yet Adopted

In August 2018, the FASB issued an ASU which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this ASU require an entity that is the customer in a hosting arrangement to follow the guidance on internal-use software to determine which implementation costs to capitalize and which costs to expense. The standard also requires an entity that is the customer to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. The new guidance requires an entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element of the arrangement and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. The entity is also required to present the capitalized implementation costs in the statement of financial position in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented. The guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The new guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

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In February 2016, the FASB issued an ASU which introduces a lessee model that requires the majority of leases to be recognized on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification 606, the FASB's new revenue recognition standard, and addresses other concerns related to the current lessee model. The standard also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. It is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The initial standard required a modified retrospective transition approach, with application, including disclosures, in all comparative periods presented. In July 2018, the FASB issued an ASU which gives all entities a transition option and provides lessors with a practical expedient. The transition option allows entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. Under the transition option, entities can continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year of adoption of the lease standard. Entities that elect this option will adopt the standard using the modified retrospective transition method but recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The practical expedient provides lessors the option to not separate the non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant components. The Company is currently evaluating the effect of the new lease guidance and plans to elect the transition option of using the effective date of the new standard as the date of initial application.

2. 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

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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.

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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.

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):



	September 30, 2018									December 31, 2017
	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	$	259	$	—	$	(3	)	$	256	$	311	$	—	$	(2	)	$	309
Corporate securities	2,774		4		(44		)	2,734		2,208		12		(10		)	2,210
Restricted certificates of deposit	430		—		—			430		4		—		—			4
Restricted cash equivalents	7		—		—			7		17		—		—			17
Municipal securities	2,231		2		(35		)	2,198		2,085		12		(10		)	2,087
Asset-backed securities	598		—		(4		)	594		437		1		(1		)	437
Residential mortgage-backed securities	382		—		(14		)	368		337		1		(6		)	332
Commercial mortgage-backed securities	317		—		(8		)	309		272		1		(2		)	271
Private equity investments	382		—		—			382		176		—		—			176
Life insurance contracts	138		—		—			138		135		—		—			135
Total	$	7,518	$	6	$	(108	)	$	7,416	$	5,982	$	27	$	(31	)	$	5,978

The Company’s investments are debt securities classified as available-for-sale with the exception of life insurance contracts and certain private equity investments. The Company’s investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets with the focus on high credit quality securities. The Company limits the size of investment in any single issuer other than U.S. treasury securities and obligations of U.S. government corporations and agencies. As of September 30, 2018, 96% of the Company’s investments in rated securities carry an investment grade rating by nationally recognized statistical rating organizations. At September 30, 2018, the Company held certificates of deposit, life insurance contracts and private equity investments which did not carry a credit rating.

The Company's residential mortgage-backed securities are primarily issued by the Federal National Mortgage Association, Government National Mortgage Association or Federal Home Loan Mortgage Corporation, which carry implicit or explicit guarantees of the U.S. government. The Company's commercial mortgage-backed securities are primarily senior tranches with a weighted average rating of AA+ and a weighted average duration of 3.8 years at September 30, 2018.

In March 2018, the Company completed a 25% investment in RxAdvance, a full-service pharmacy benefit manager. In May 2018, the Company made an additional investment, bringing the total ownership to 28%. The investment is accounted for using the equity method of accounting. In September 2018, the Company made an additional investment in RxAdvance in the form of convertible preferred stock.

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The fair value of available-for-sale debt securities 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):



	September 30, 2018										December 31, 2017
	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	)	$	93	$	(2	)	$	161	$	(1	)	$	222	$	(1	)	$	79
Corporate securities	(31		)	1,913		(13		)	337		(6		)	1,044		(4		)	185
Municipal securities	(25		)	1,518		(10		)	286		(7		)	943		(3		)	175
Asset-backed securities	(3		)	409		(1		)	66		(1		)	228		—			28
Residential mortgage-backed securities	(4		)	186		(10		)	178		(1		)	109		(5		)	171
Commercial mortgage-backed securities	(4		)	174		(4		)	90		(1		)	112		(1		)	51
Total	$	(68	)	$	4,293	$	(40	)	$	1,118	$	(17	)	$	2,658	$	(14	)	$	689

As of September 30, 2018, the gross unrealized losses were generated from 3,200 positions out of a total of 3,954 positions. The change in fair value of fixed income securities is primarily a result of movement in interest rates subsequent to the purchase of the security.

For each security in an unrealized loss position, the Company assesses whether it intends to sell the security or if it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If the security meets this criterion, the decline in fair value is other-than-temporary and is recorded in earnings. The Company does not intend to sell these securities prior to maturity and it is not likely that the Company will be required to sell these securities prior to maturity; therefore, there is no indication of other-than-temporary impairment for these securities.

The contractual maturities of short-term and long-term investments and restricted deposits are as follows ($ in millions):



	September 30, 2018								December 31, 2017
	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	$	517	$	515	$	201	$	201	$	474	$	474	$	48	$	47
One year through five years	2,674		2,636		350		349		2,424		2,420		88		88
Five years through ten years	2,277		2,242		—		—		1,773		1,779		—		—
Greater than ten years	202		202		—		—		129		130		—		—
Asset-backed securities	1,297		1,271		—		—		1,046		1,040		—		—
Total	$	6,967	$	6,866	$	551	$	550	$	5,846	$	5,843	$	136	$	135

Actual maturities may differ from contractual maturities due to call or prepayment options. Private equity 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 private equity 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.

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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.

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The following table summarizes fair value measurements by level at September 30, 2018, 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	$	6,847	$	—	$	—	$	6,847
Investments available for sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	143	$	—	$	—	$	143
Corporate securities	—		2,734		—		2,734
Municipal securities	—		2,198		—		2,198
Asset-backed securities	—		594		—		594
Residential mortgage-backed securities	—		368		—		368
Commercial mortgage-backed securities	—		309		—		309
Total investments	$	143	$	6,203	$	—	$	6,346
Restricted deposits available for sale:
Cash and cash equivalents	$	7	$	—	$	—	$	7
Certificates of deposit	430		—		—		430
U.S. Treasury securities and obligations of U.S. government corporations and agencies	113		—		—		113
Total restricted deposits	$	550	$	—	$	—	$	550

Total assets at fair value	$	7,540	$	6,203	$	—	$	13,743
Liabilities
Other long-term liabilities:
Interest rate swap agreements	$	—	$	147	$	—	$	147
Total liabilities at fair value	$	—	$	147	$	—	$	147

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The following table summarizes fair value measurements by level at December 31, 2017, 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	$	4,072	$	—	$	—	$	4,072
Investments available for sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	195	$	—	$	—	$	195
Corporate securities	—		2,210		—		2,210
Municipal securities	—		2,087		—		2,087
Asset-backed securities	—		437		—		437
Residential mortgage-backed securities	—		332		—		332
Commercial mortgage-backed securities	—		271		—		271
Total investments	$	195	$	5,337	$	—	$	5,532
Restricted deposits available for sale:
Cash and cash equivalents	$	17	$	—	$	—	$	17
Certificates of deposit	4		—		—		4
U.S. Treasury securities and obligations of U.S. government corporations and agencies	114		—		—		114
Total restricted deposits	$	135	$	—	$	—	$	135
Other long-term assets:
Interest rate swap agreements	$	—	$	1	$	—	$	1
Total assets at fair value	$	4,402	$	5,338	$	—	$	9,740
Liabilities
Other long-term liabilities:
Interest rate swap agreements	$	—	$	72	$	—	$	72
Total liabilities at fair value	$	—	$	72	$	—	$	72

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. In addition, the aggregate carrying amount of the Company’s life insurance contracts and other private equity investments, which approximates fair value, was $520 million and $311 million as of September 30, 2018 and December 31, 2017, respectively.

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5. Medical Claims Liability

The following table summarizes the change in medical claims liability ($ in millions):



	Nine Months Ended September 30,
	2018			2017
Balance, January 1	$	4,286		$	3,929
Less: Reinsurance recoverable	18			5
Balance, January 1, net	4,268			3,924
Acquisitions	1,319			—
Incurred related to:
Current year	33,465			28,666
Prior years	(420		)	(388		)
Total incurred	33,045			28,278
Paid related to:
Current year	28,194			24,787
Prior years	3,485			3,099
Total paid	31,679			27,886
Balance at September 30, net	6,953			4,316
Plus: Reinsurance recoverable	30			17
Balance, September 30	$	6,983		$	4,333

Reinsurance recoverables related to medical claims are included in premium and related receivables. Changes in estimates of incurred claims for prior years are primarily attributable to reserving under moderately adverse conditions. Additionally, as a result of development within "Incurred related to: Prior years" due to minimum health benefits ratio (HBR) and other return of premium programs, we recorded $23 million as a reduction to premium revenues and $4 million as an increase to premium revenues in the nine months ended September 30, 2018 and 2017, respectively.

Incurred but not reported (IBNR) plus expected development on reported claims as of September 30, 2018 was $5,326 million. Total IBNR plus expected development on reported claims represents estimates for claims incurred but not reported, development on reported claims, and estimates for the costs necessary to process unpaid claims at the end of each period. We estimate our liability using actuarial methods that are commonly used by health insurance actuaries and meet Actuarial Standards of Practice. These actuarial methods consider factors such as historical data for payment patterns, cost trends, product mix, seasonality, utilization of healthcare services and other relevant factors.

6. Affordable Care Act

The Affordable Care Act (ACA) established risk spreading premium stabilization programs effective January 1, 2014. 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 MLR and cost sharing reductions. 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 MLR.

During the second quarter of 2018, the Company recognized a $79 million net pre-tax benefit related to the reconciliation of the 2017 risk adjustment program compared to a $48 million net pre-tax benefit related to the reconciliation of the 2016 risk adjustment program during the second quarter of 2017.

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The Company's net receivables (payables) for each of these programs are as follows ($ in millions):



	September 30, 2018			December 31, 2017
Risk adjustment	$	(784	)	$	(677	)
Reinsurance	1			15
Risk corridor	4			6
Minimum MLR	(154		)	(22		)
Cost sharing reductions	(61		)	(96		)

7. Debt

Debt consists of the following ($ in millions):



	September 30, 2018			December 31, 2017
$1,400 million 5.625% Senior notes, due February 15, 2021	$	1,400		$	1,400
$1,000 million 4.75% Senior notes, due May 15, 2022	1,005			1,006
$1,000 million 6.125% Senior notes, due February 15, 2024	1,000			1,000
$1,200 million 4.75% Senior notes, due January 15, 2025	1,200			1,200
$1,800 million 5.375% Senior notes, due June 1, 2026	1,800			—
Fair value of interest rate swap agreements	(147		)	(71		)
Total senior notes	6,258			4,535
Revolving credit agreement	100			150
Mortgage notes payable	59			61
Construction loan payable	40			—
Capital leases and other	5			18
Debt issuance costs	(79		)	(65		)
Total debt	6,383			4,699
Less current portion	(4		)	(4		)
Long-term debt	$	6,379		$	4,695

Senior Notes

In May 2018, a wholly-owned unrestricted subsidiary of the Company (Escrow Issuer) issued $1,800 million in aggregate principal amount of 5.375% Senior Notes at par due 2026. In connection with the closing of the Fidelis Care acquisition, the Escrow Issuer merged with and into the Company and the Company assumed the obligations of the Escrow Issuer under the 5.375% Senior Notes due 2026. The Company used the net proceeds of the offering to finance a portion of the cash consideration for the Fidelis Care acquisition, which closed in July 2018, to pay related fees and expenses, and for general corporate purposes, including the repayment of outstanding indebtedness.

The indentures governing the senior notes listed in the table above contain restrictive covenants of Centene Corporation. At September 30, 2018, the Company was in compliance with all covenants.

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 following is a summary of the notional amounts of the Company's interest rate swap agreements as of September 30, 2018:



Expiration Date	Notional Amount
February 15, 2021	$	600
May 15, 2022	500
February 15, 2024	1,000
January 15, 2025	600
Total	$	2,700

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The fair value of the swap agreements shown above are recorded in other long-term liabilities in the Consolidated Balance Sheets. Under the swap agreements, the Company receives a fixed rate of interest and pays an average variable rate of either the one or three month LIBOR plus 3.61% adjusted monthly or quarterly, based on the terms of the individual swap agreements. At September 30, 2018, the weighted average rate was 5.89%.

The swap agreements are formally designated and qualify as fair value hedges. 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 Statements 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 $1,500 million revolving credit facility. The agreement has a maturity date of December 14, 2022. Borrowings under the agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate. As of September 30, 2018, the Company had $100 million borrowings outstanding under the agreement and the Company was in compliance with all covenants.

The revolving credit facility contains non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios and maximum debt-to-EBITDA ratios. The Company is required to not exceed a maximum debt-to-EBITDA ratio of 3.5 to 1.0. As of September 30, 2018, there were no limitations on the availability under the revolving credit agreement as a result of the debt-to-EBITDA ratio.

Mortgage Notes Payable

The Company has a non-recourse mortgage note of $59 million at September 30, 2018 collateralized by its corporate headquarters building. The mortgage note is due January 1, 2021 and bears a 5.14% interest rate. The collateralized property had a net book value of $164 million at September 30, 2018.

Construction Loan

The Company has a $200 million non-recourse construction loan to fund the expansion of the Company's corporate headquarters. The loan bears interest based on the one month LIBOR plus 2.70% and matures in April 2021 with an optional one-year extension. The agreement contains financial and non-financial covenants aligning with the Company's revolving credit agreement. The Company has guaranteed completion of the construction project associated with the loan. As of September 30, 2018, the Company had $40 million in borrowings outstanding under the loan.

Letters of Credit & Surety Bonds

The Company had outstanding letters of credit of $55 million as of September 30, 2018, which were not part of the revolving credit facility. The Company also had letters of credit for $44 million (valued at September 30, 2018 conversion rate), or €38 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 1.33% as of September 30, 2018. The Company had outstanding surety bonds of $501 million as of September 30, 2018.

8. Stockholders' Equity

In May 2018, the Company completed a registered offering of 26.6 million shares of Centene common stock with a fair value of $2,860 million. This included the 10% over allotment option to purchase additional shares from the Company which was exercised in full by the underwriters. Net proceeds after underwriting discounts and commissions was $2,779 million. The Company used the net proceeds of the offering to finance a portion of the cash consideration in connection with the Fidelis Care acquisition, to pay related fees and expenses, and for general corporate purposes, including the repayment of outstanding indebtedness.

In April 2018, the Company acquired MHM Services Inc. (MHM) and issued 1.7 million shares of Centene common stock to the selling shareholders, with a fair value of $183 million.

In March 2018, the Company acquired Community Medical Holdings Corp., d/b/a Community Medical Group (CMG) and issued 1.4 million shares of Centene common stock to the selling shareholders, with a fair value of $149 million.

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In March 2018, the Company acquired an additional 61% of Interpreta Holdings, Inc. (Interpreta) and issued 1.7 million shares of Centene common stock to the selling shareholders, with a fair value of $175 million.

9. Earnings Per Share

The following table sets forth the calculation of basic and diluted net earnings per common share ($ in millions, except shares in thousands and per share data in dollars):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017

Earnings attributable to Centene Corporation	$	19	$	205	$	659	$	598

Shares used in computing per share amounts:
Weighted average number of common shares outstanding	205,295		172,508		191,628		172,314
Common stock equivalents (as determined by applying the treasury stock method)	4,227		4,407		4,005		4,100
Weighted average number of common shares and potential dilutive common shares outstanding	209,522		176,915		195,633		176,414

Net earnings per common share attributable to Centene Corporation:
Basic earnings per common share	$	0.09	$	1.19	$	3.44	$	3.47
Diluted earnings per common share	$	0.09	$	1.16	$	3.37	$	3.39

The calculation of diluted earnings per common share for the three and nine months ended September 30, 2018 excludes the impact of 10 thousand and 27 thousand shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units. The calculation of diluted earnings per common share for both the three and nine months ended September 30, 2017 excludes the impact of 4 thousand and 27 thousand shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.

10. 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 September 30, 2018, follows ($ in millions):



	Managed Care		Specialty Services			Eliminations			Consolidated Total
Total revenues from external customers	$	15,420	$	762		$	—		$	16,182
Total revenues from internal customers	26		2,350			(2,376		)	—
Total revenues	$	15,446	$	3,112		$	(2,376	)	$	16,182
Earnings from operations	$	92	$	(51	)	$	—		$	41

Segment information for the three months ended September 30, 2017, follows ($ in millions):



	Managed Care		Specialty Services		Eliminations			Consolidated Total
Total revenues from external customers	$	11,248	$	650	$	—		$	11,898
Total revenues from internal customers	11		2,367		(2,378		)	—
Total revenues	$	11,259	$	3,017	$	(2,378	)	$	11,898
Earnings from operations	$	238	$	102	$	—		$	340

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Segment information for the nine months ended September 30, 2018, follows ($ in millions):



	Managed Care		Specialty Services		Eliminations			Consolidated Total
Total revenues from external customers	$	41,153	$	2,404	$	—		$	43,557
Total revenues from internal customers	76		6,919		(6,995		)	—
Total revenues	$	41,229	$	9,323	$	(6,995	)	$	43,557
Earnings from operations	$	983	$	87	$	—		$	1,070

Segment information for the nine months ended September 30, 2017, follows ($ in millions):



	Managed Care		Specialty Services		Eliminations			Consolidated Total
Total revenues from external customers	$	33,704	$	1,872	$	—		$	35,576
Total revenues from internal customers	33		7,112		(7,145		)	—
Total revenues	$	33,737	$	8,984	$	(7,145	)	$	35,576
Earnings from operations	$	799	$	219	$	—		$	1,018

11. Contingencies

Overview

The Company records reserves and accrues costs for certain legal proceedings and regulatory matters to the extent that it determines an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. While such reserves and accrued costs reflect the Company's best estimate of the probable loss for such matters, the recorded amounts may differ materially from the actual amount of any such losses. In some cases, no estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made because of the inherently unpredictable nature of legal and regulatory proceedings, which may be exacerbated by various factors, including but not limited to, they may involve indeterminate claims for monetary damages or may involve fines, penalties or punitive damages; present novel legal theories or legal uncertainties; involve disputed facts; represent a shift in regulatory policy; involve a large number of parties, claimants or regulatory bodies; are in the early stages of the proceedings; involve a number of separate proceedings and/or a wide range of potential outcomes; or result in a change of business practices.

As of the date of this report, amounts accrued for legal proceedings and regulatory matters were not material. However, it is possible that in a particular quarter or annual period the Company’s financial condition, results of operations, cash flow and/or liquidity could be materially adversely affected by an ultimate unfavorable resolution of or development in legal and/or regulatory proceedings, including as described below. Except for the proceedings discussed below, the Company believes that the ultimate outcome of any of the regulatory and legal proceedings that are currently pending against it should not have a material adverse effect on financial condition, results of operations, cash flow or liquidity.

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California

On October 20, 2015, the Company's California subsidiary, Health Net of California, Inc. (Health Net California), was named as a defendant in a California taxpayer action filed in Los Angeles County Superior Court, captioned as Michael D. Myers v. State Board of Equalization, Dave Jones, Insurance Commissioner of the State of California, Betty T. Yee, Controller of the State of California, et al., Los Angeles Superior Court Case No. BS158655. This action is brought under a California statute that permits an individual taxpayer to sue a governmental agency when the taxpayer believes the agency has failed to enforce governing law. Plaintiff contends that Health Net California, a California licensed Health Care Service Plan (HCSP), is an “insurer” for purposes of taxation despite acknowledging it is not an “insurer” under regulatory law. Under California law, “insurers” must pay a gross premiums tax (GPT), calculated as 2.35% on gross premiums. As a licensed HCSP, Health Net California has paid the California Corporate Franchise Tax (CFT), the tax generally paid by California businesses. Plaintiff contends that Health Net California must pay the GPT rather than the CFT. Plaintiff seeks a writ of mandate directing the California taxing agencies to collect the GPT, and seeks an order requiring Health Net California to pay GPT, interest and penalties for a period dating to eight years prior to the October 2015 filing of the complaint. This lawsuit is being coordinated with similar lawsuits filed against other entities (collectively, "Related Actions"). In September 2017, the Company filed a demurrer seeking to dismiss the complaint, and a motion to strike the allegations seeking retroactive relief. In March 2018, the Court overruled the Company's demurrer and denied the motion to strike. In August 2018, the trial court stayed all the Related Actions pending determination of a writ of mandate by the California Court of Appeals in two of the Related Actions. The Company intends to vigorously defend itself against these claims; however, this matter is subject to many uncertainties, and an adverse outcome in this matter could potentially have a materially adverse impact on our financial position, results of operations and cash flows.

Federal Securities Class Action

On November 14, 2016, a putative federal securities class action, Israel Sanchez v. Centene Corp., et al., was filed against the Company and certain of its executives in the U.S. District Court for the Central District of California. In March 2017, the court entered an order transferring the matter to the U.S. District Court for the Eastern District of Missouri. The plaintiffs in the lawsuit allege that the Company's accounting and related disclosures for certain liabilities acquired in the acquisition of Health Net violated federal securities laws. In July 2017, the lead plaintiff filed a Consolidated Class Action Complaint. The Company filed a motion to dismiss this complaint in September 2017. In February 2018, the Court held a hearing on the motion to dismiss but has not yet issued a ruling.

The Company denies any wrongdoing and is vigorously defending itself against these claims. Nevertheless, this matter is subject to many uncertainties and the Company cannot predict how long this litigation will last or what the ultimate outcome will be, and an adverse outcome in this matter could potentially have a materially adverse impact on our financial position and results of operations.

Additionally, on January 24, 2018, a separate derivative action was filed by plaintiff Harkesh Parekh on behalf of Centene Corporation against the Company and certain of its officers and directors in the United States District Court for the Eastern District of Missouri. Plaintiff purports to bring suit derivatively on behalf of the Company against certain officers and directors for violation of securities laws, breach of fiduciary duty, waste of corporate assets and unjust enrichment. The derivative complaint repeats many of the allegations in the federal securities class action described above and asserts that defendants made inaccurate or misleading statements, and/or failed to correct the alleged misstatements.

A second shareholder derivative action was filed on March 9, 2018, by plaintiffs Laura Wood and Peoria Police Pension Fund on behalf of Centene Corporation against the Company and certain of its offi