Molina Healthcare, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Molina operates Medicaid and other government-sponsored health plans, plus Medicaid administrative-services and behavioral-health businesses. At quarter-end it served approximately 4.1 million members in 13 states and Puerto Rico.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $4.883 billion | $4.999 billion | $9.529 billion | $9.903 billion |
| Operating income (loss) | $342 million | $(287) million | $564 million | $(205) million |
| Net income (loss) | $202 million | $(230) million | $309 million | $(153) million |
| Diluted EPS | $3.02 | $(4.10) | $4.68 | $(2.74) |
| Medical care ratio (MCR) | 85.3% | 94.8% | 85.7% | 91.6% |
| G&A ratio | 6.9% | 8.1% | 7.2% | 8.5% |
- Premium revenue declined 5% in Q2 and 6% in the first half, primarily reflecting lower Marketplace membership; member months fell 14% and 13%, respectively. Higher premium per member partly offset the decline.
- Health Plans medical margin increased to $664 million in Q2 from $249 million, and to $1.265 billion for the first half from $786 million. Management attributed improved results to lower medical costs, improved health-plan performance, and Marketplace rate and membership changes.
- Reported results included prior-year Marketplace risk-adjustment benefits of $79 million in Q2 and $56 million for the first half, and CSR-related medical-cost benefits of $6 million and $76 million, respectively. These items materially contributed to the period’s improvement.
- First-half EBITDA, a non-GAAP measure, was $616 million versus $(40) million. Restructuring costs were $33 million for the first half; debt-extinguishment losses were $15 million.
Cash, debt, and liquidity
- Cash and cash equivalents were $3.392 billion at June 30, 2018; investments were $2.176 billion. Cash and investments totaled $5.767 billion, down from $6.000 billion at year-end 2017. Working capital was $2.207 billion.
- Operating cash flow was $314 million for the first half, compared with $672 million a year earlier. Investing activities provided $398 million; financing activities used $503 million. Cash, cash equivalents, and restricted cash increased $209 million.
- Reported long-term debt, including current maturities, was about $1.503 billion; lease financing obligations were $198 million. Molina repaid its $300 million revolver balance and reduced debt principal by $493 million year to date. No credit-facility borrowings remained at quarter-end.
- Available borrowing capacity was $550 million under a bridge agreement and $494 million under the revolving facility. Management said available resources and internally generated funds should support operations, regulatory requirements, debt payments, and capital spending for at least 12 months. The company reported compliance with debt covenants.
- Liquidity is constrained by regulated-subsidiary capital rules: approximately $2.008 billion of subsidiary net assets was not transferable to the parent. Parent-level cash, cash equivalents, and investments were approximately $350 million.
Business developments, outlook, and material items
- Molina agreed to sell Molina Medicaid Solutions to DXC Technology for expected net cash proceeds of approximately $220 million after adjustments. The sale was expected to close in Q3 2018, subject to customary approvals and consents.
- Management estimated the 2017 restructuring plan would produce $300 million to $400 million of annualized run-rate savings when substantially completed by year-end 2018. The company had incurred $267 million of cumulative restructuring costs through June 30; lease termination payments may continue through 2025.
- Molina reported awards or selections for expanded or new Medicaid contracts in Washington, Florida, and Puerto Rico. Expected start dates vary from November 2018 through January 2020. The Puerto Rico contract would cover the island, subject to final implementation.
- The remaining $64 million principal amount of 1.625% convertible notes was scheduled for cash redemption on August 20, 2018, unless converted. The 1.125% convertible notes, with $454 million principal remaining after Q2 repurchases, became convertible into cash after a stock-price trigger was met.
- CMS reissued the Marketplace risk-adjustment methodology in July 2018; the 2017 benefit-year settlement was expected to proceed with a one-month delay to September. The related Marketplace risk-adjustment payable was $1.159 billion at quarter-end.
- California was evaluating whether to apply a risk corridor retroactively to Medicaid Expansion rates for 2016–2017. If imposed, it could reduce premium revenue and, the company cautioned, materially adversely affect financial position, results, or cash flows.
- Other risks include medical-claims estimate uncertainty, state budget and Medicaid funding pressures, contract renewals and procurement, Marketplace rate adequacy and regulation, Puerto Rico conditions, and limits on upstreaming subsidiary cash. A securities class-action complaint alleging investor misstatements was filed in April 2018; Molina said it intended to defend the case.
Most important facts for investors to verify
- How much of the earnings improvement reflects sustainable medical-cost and administrative efficiencies versus prior-year Marketplace adjustments and other favorable developments?
- Whether claims-reserve estimates remain reliable amid the disclosed Puerto Rico billing changes, Florida system implementation, and claims-processing changes; first-half favorable prior-period claims development was $222 million.
- Whether the $1.159 billion Marketplace risk-adjustment payable and expected September settlement are resolved on the anticipated terms and timing.
- Whether California applies the potential retroactive Medicaid Expansion risk corridor, and the resulting revenue or cash-flow impact.
- Whether the MMS sale closes on schedule and near the stated expected net proceeds, and whether restructuring savings reach the $300–$400 million annualized target.
- Whether debt conversions or redemptions, contract transitions, and regulatory capital requirements affect parent-level liquidity; regulated health-plan assets are not freely transferable.