MOH

Molina Healthcare, Inc. - 10-Q Summary (Q3 2008)

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2008. Molina Healthcare, Inc. is a multi-state managed care organization serving low-income populations through government-sponsored programs (Medicaid, SCHIP) and Medicare. The company operates licensed health plans in nine states: California, Michigan, Missouri, Nevada, New Mexico, Ohio, Texas, Utah, and Washington. Results include the impact of the November 2007 acquisition of Mercy CarePlus in Missouri.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Premium revenue increased 26% in Q3 and 27.4% for the nine months, driven by the Missouri acquisition, enrollment growth in Ohio and New Mexico, and increased Medicare revenue.
• Profitability: Net income remained flat in Q3 ($17.2M vs $17.5M) despite revenue growth, due to a higher medical care ratio and increased interest expense from $200M convertible notes issued in late 2007. Nine-month net income grew 16%.
• Cash Flow: Operating cash flow turned negative ($20.3M used) for the nine months ended Sept 30, 2008, compared to $112.8M provided in 2007. This was primarily due to a $40.5M increase in California receivables caused by a state budget delay and timing differences in deferred revenue.
• Medical Care Ratio: The ratio increased to 84.6% in Q3 (from 83.7% in 2007) due to rate cuts in California, higher pharmacy costs, and reduced benefit from reserve releases in New Mexico.
• Investments: The company recorded unrealized losses of $4.3 million (net of tax) on auction rate securities due to liquidity issues in the credit markets, classified as non-current assets.

Guidance, Outlook, and Risks

• Outlook: Management expects the effective tax rate for the full year 2008 to be approximately 41%, higher than prior years due to Michigan state tax changes. The company believes current cash resources and credit facilities are sufficient for the next 12 months.
• Acquisitions: The company announced the acquisition of Florida NetPASS, LLC, with an initial closing in October 2008 and full transition expected in Q1 2009. A Medicaid contract in Florida was awarded, commencing December 1, 2008.
• Stock Repurchases: The company completed a $30M repurchase plan in June 2008 and a subsequent 1M share plan in October 2008, totaling approximately 1.9 million shares repurchased for $50 million.
• Risks:
  • California Rate Reductions: A 10% provider rate reduction implemented in July 2008 was temporarily halted by a court injunction; re-implementation could adversely affect results.
  • Investment Liquidity: Continued volatility in credit markets poses risks to the value and liquidity of auction rate securities ($63.8M fair value).
  • Reserving Uncertainty: Significant judgment is required for Incurred But Not Reported (IBNR) claims; a 1% change in completion factors could impact net income by approximately $0.19 per diluted share.

Investor Verification Checklist

• Verify the collection status of the $40.5M California receivable balance resulting from the state budget delay.
• Monitor the status of the court injunction regarding California provider rate reductions and potential financial impact if lifted.
• Assess the liquidity and fair value of the $63.8M auction rate securities portfolio in light of ongoing credit market disruptions.
• Review the integration progress and financial performance of the newly acquired Florida NetPASS operations.
• Confirm the accuracy of IBNR claims reserves, particularly given the sensitivity of net income to changes in completion factors and PMPM cost estimates.