Molina Healthcare, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparison with the corresponding 2014 periods. Molina provides government-sponsored health plans and Medicaid administrative services. It reported 3.47 million health plan members across 11 states and Puerto Rico.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $3.611bn | $2.484bn | $10.307bn | $6.866bn |
| Premium revenue | $3.377bn | $2.317bn | $9.652bn | $6.424bn |
| Operating income | $112.9m | $39.8m | $310.7m | $96.5m |
| Income from continuing operations | $46.3m | $16.1m | $113.4m | $28.6m |
| Diluted EPS from continuing operations | $0.77 | $0.33 | $2.07 | $0.60 |
| Medical care ratio | 89.3% | 90.6% | 88.9% | 89.6% |
| G&A expense ratio | 8.0% | 7.2% | 8.1% | 8.2% |
For the third quarter, revenue increased 45.4% and operating income increased 183.7% year over year. Management attributed the improvement to enrollment growth, better medical cost efficiency, and reimbursement of the Affordable Care Act health insurer fee (HIF). Nine-month revenue rose 50.1%; continuing-operations income rose 295.8%. The effective tax rate was 52.6% for the quarter and 57.3% year to date, elevated mainly by nondeductible HIF costs and losses in Puerto Rico for which tax benefits were not recorded.
Cash, liquidity, and debt
- Nine-month operating cash flow was $905.8m, versus $841.2m in 2014. Investing used $665.1m; financing provided $384.4m. Cash increased $625.1m to $2.164bn.
- At September 30, cash and investments, including restricted investments, totaled $3.730bn. Working capital was $1.049bn, compared with $1.071bn at year-end 2014.
- Convertible notes had $851.6m aggregate principal and $725.4m carrying value. The 1.125% notes became convertible into cash through at least December 31, 2015; $450.3m carrying value was consequently classified as current. Management said it expected any conversions over the next 12 months to be insignificant.
- A new unsecured $250m revolving credit facility had no borrowings outstanding; $245m was available after a letter of credit. Molina reported compliance with its covenants.
- The June stock offering raised $373.2m net. Restricted statutory capital and dividend rules limit upstream transfers; approximately $1.072bn of subsidiary net assets was not transferable, while parent-held cash and investments were $471.8m.
Material changes, outlook, and risks
- Membership growth was a major driver: Medicaid expansion, Marketplace and Medicare-Medicaid plans, Puerto Rico operations, and acquisitions contributed. Membership reached 3.47m, up from 2.40m a year earlier. Florida Marketplace enrollment and new Puerto Rico operations were notable contributors.
- Q3 HIF revenue included catch-up reimbursement for prior periods, including approximately $25m from Michigan and Utah for 2014 and the first half of 2015. This boosts comparability-adjusted results and should not be treated as wholly recurring quarterly growth.
- Medical claims reserve development provided a $142.9m benefit in the first nine months. The company identified added reserve uncertainty from claims-system issues in Illinois and Wisconsin, Washington claims inventory fluctuations, new Michigan members, and the Texas MMP launch.
- Washington’s 2014 Medicaid expansion medical-cost-floor settlement was paid in October 2015 for $246.6m, about $7m above the company’s June estimate. New Mexico recorded a $20m Q3 revenue reduction; the company estimated a further $15m–$20m potential liability above its September accrual, subject to discussion with the state.
- Management expected cash resources and internally generated funds to support operations, regulatory requirements, and capital spending for at least 12 months. No numerical earnings guidance is provided in the filing. Announced but unclosed acquisitions were expected to require approximately $309m; the planned Providence behavioral-health acquisition was approximately $200m and expected to close in Q4 2015, subject to approvals and conditions.
- Key exposures include state contractual medical-cost floors, corridors, profit ceilings and quality measures (management said roughly 85% of premium revenue was subject to such provisions); state payment delays and budget pressures; Puerto Rico’s fiscal condition; utilization and claims-estimation risk; and contract renewal and regulatory risk.
- Legal and operational matters include Louisiana litigation over alleged pharmacy reimbursement calculations, a California qui tam action, and a disputed hospital management agreement that had generated monthly losses. Termination without cause could trigger an estimated $30m–$40m payment for remaining contract obligations and run-out costs.
Investor verification points
- Reconcile reported earnings growth with HIF catch-up revenue and the $142.9m favorable prior-period claims development; assess how sustainable the lower medical care ratio is.
- Track Washington settlement finalization and the New Mexico retroactive-membership dispute, including any additional accruals or payments.
- Monitor claims reserves and medical-cost performance in Illinois, Wisconsin, Washington, Michigan, and Texas, where management cited elevated estimation uncertainty.
- Review cash needs for announced acquisitions, potential cash conversion or repurchase of notes, and the availability of parent-level liquidity given regulated-subsidiary dividend restrictions.
- Follow state premium-payment timing, Puerto Rico’s ability to pay, contract renewals and quality-related revenue, and the hospital agreement dispute.