Molina Healthcare, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended March 31, 2017 unless noted. Molina provides managed care and related Medicaid administration services, primarily through health plans in 13 states and Puerto Rico. Health plans served approximately 4.1 million members at quarter-end, down from 4.8 million a year earlier.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Total revenue | $4.646 billion | $4.904 billion | Down 5%; premium revenue fell 7% to $4.323 billion |
| Operating income | $222 million | $82 million | Operating margin approximately 4.8%, versus 1.7% |
| Net income | $107 million | $77 million | Net margin 2.3%, versus 1.6% |
| Diluted EPS | $1.64 | $1.37 | Adjusted diluted EPS, a non-GAAP measure, was $1.71 versus $1.47 |
| Medical care costs / MCR | $3.722 billion / 86.1% | $4.111 billion / 88.4% | MCR excluding the 2017 Marketplace CSR adjustment was 87.7% |
| Health Plans medical margin | $601 million | $537 million | Up 12% |
| General and administrative expenses | $352 million | $439 million | G&A ratio improved to 7.6% from 8.9% |
| Net cash from operating activities | $394 million | $719 million | Down $325 million |
| Cash, cash equivalents and restricted cash at quarter-end | $3.824 billion | $3.293 billion | Cash and cash equivalents on the balance sheet were $3.729 billion |
Balance sheet and liquidity: At March 31, 2018, working capital was $2.191 billion, compared with $1.954 billion at December 31, 2017. Cash and investments totaled $6.372 billion, versus $6.000 billion. Total liabilities were $7.580 billion and stockholders’ equity was $1.553 billion. Debt and lease financing obligations totaled approximately $2.082 billion, including $300 million drawn on the revolving Credit Facility. The company reported $194 million of remaining Credit Facility capacity and $550 million available under its Bridge Credit Agreement, subject to the agreement’s terms. It was in compliance with debt covenants.
Material changes and notable items
- Premium revenue declined primarily because Marketplace membership fell by more than 50%; premium rate increases partly offset the membership reduction. Total ending membership fell to 4.061 million from 4.766 million year over year.
- Reported MCR improved to 86.1%. The quarter included a $70 million benefit to medical expense related to 2017 Marketplace cost-sharing reduction subsidies. Excluding this item, consolidated MCR was 87.7%.
- Medical margin improved despite lower premium revenue, with management citing improved medical and administrative cost efficiency. Medicaid and Medicare combined MCR improved to 90.0% from 91.0%; Marketplace MCR was 50.6%, or approximately 67% excluding the CSR adjustment.
- Q1 2018 included $25 million of restructuring and separation costs and a $10 million loss on extinguishment of debt. Together with the $70 million CSR benefit, these produced a disclosed net pre-tax benefit of $35 million, or $0.38 per diluted share. Q1 2017 included a $75 million acquisition termination fee.
- Favorable prior-period medical claims development was $241 million, compared with $142 million in Q1 2017. The filing identifies claims inventory shifts, a more severe influenza season, a new Florida clinical service system, and claims-review process changes as sources of added reserve-estimation uncertainty.
- Operating cash flow decreased to $394 million. Management attributed the year-over-year decline mainly to changes in amounts due government agencies and medical claims payable, as well as working-capital movements associated with the reinstated Health Insurer Fee.
Outlook, risks and contingencies
- Management expects the 2017 restructuring plan to be completed by the end of 2018, except for settling lease termination liabilities. It estimates annualized run-rate savings of $300 million to $400 million when completed; the savings are expected to affect both G&A and medical costs. The filing does not provide full-year revenue or EPS guidance.
- Management stated that cash resources, borrowing capacity and internally generated funds should be sufficient for operations, regulatory requirements, debt repayment obligations and capital expenditures for at least the next 12 months. It noted that regulated subsidiaries’ funds are subject to statutory capital and dividend restrictions: approximately $1.777 billion of net assets was not transferable to the parent, and parent-held cash and investments available for general use were $706 million.
- Convertible-note obligations require monitoring. The $550 million principal amount of 1.125% Convertible Notes became convertible into cash after its stock-price trigger was met and was classified as current. Holders of the remaining $64 million of 1.625% Convertible Notes could exercise conversion or put rights in 2018; management said restricted cash was available to repay them.
- Contract renewals and state procurement are material risks. After quarter-end, Florida notified Molina on April 24 that it was not awarded the Region 11 Medicaid contract. Molina was protesting the New Mexico award; without reversal, its New Mexico plan would enter run-off. Puerto Rico, Texas and Washington procurements were also identified as upcoming.
- Other disclosed risks include Medicaid funding and state budget pressure, Marketplace risk adjustment and premium adequacy, medical-cost and claims-reserve estimation, provider contracting, regulatory capital restrictions, and Puerto Rico’s fiscal and operating environment. A securities class-action complaint was filed April 27, 2018 concerning alleged statements about administrative infrastructure; the company said it intends to defend the matter.
- The company recognized a $7 million other comprehensive loss from unrealized investment losses. Management described investment losses as temporary and estimated that an immediate 1% increase in interest rates would reduce the fair value of fixed-income investments by approximately $21 million.
Important facts for investors to verify
- Whether improved medical margins persist, particularly after excluding the $70 million prior-year CSR benefit and $241 million favorable prior-period claims development.
- Actual restructuring savings achieved against the $300 million to $400 million annualized target, and remaining restructuring and lease-exit costs.
- Results of state contract protests and procurements, especially Florida, New Mexico, Washington and Puerto Rico, and the resulting membership and revenue impacts.
- Marketplace membership, rate adequacy and risk-adjustment estimates, including the $1.129 billion Marketplace risk-adjustment payable reported at quarter-end.
- Cash generation and working-capital trends, the availability of parent-level liquidity given regulated-subsidiary restrictions, and refinancing or settlement needs for convertible notes.
- Developments in the securities litigation and any changes to medical claims reserves as additional claims data becomes available.