Molina Healthcare, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter filing; it also reports unaudited Q4 results. Dollar figures below are in millions unless stated otherwise.
Business context
Molina provides Medicaid-related health plans and Medicaid information-system services to government agencies. At year-end, its health plans served approximately 1.931 million members across 11 states. The Health Plans segment is the main business; Molina Medicaid Solutions provides Medicaid systems and administrative services.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $6,588.9 | $5,914.2 |
| Premium revenue | $6,179.2 | $5,544.1 |
| Operating income | $136.6 | $41.1 |
| Continuing-operations income | $44.8 | $12.9 |
| Net income, including discontinued operations | $52.9 | $9.8 |
| Diluted continuing-operations EPS | $0.96 | $0.27 |
| Medical care ratio | 87.1% | 90.0% |
| G&A expense ratio | 10.1% | 8.8% |
| Operating cash flow | $190.1 | $347.8 |
- Premium revenue rose 11%, reflecting 6% growth in member months and 5% growth in revenue per member per month. Consolidated medical margin increased about 45%; eight of nine operating health plans had higher medical margins than in 2012, excluding the newly operational Illinois plan.
- G&A expense increased to $666.0 million. Management attributed approximately $135 million of 2013 spending to preparations for expected 2014 membership growth.
- Q4 2013 reported a $9.0 million loss from continuing operations and a $9.1 million net loss. Health Plans segment operating loss was $14.7 million; Molina Medicaid Solutions operating income was $12.0 million. Q4 premium revenue was $1,595.4 million.
- Cash and cash equivalents were $935.9 million; current investments were $703.1 million. Cash and investments totaled $1,712.9 million, and working capital was $745.7 million at year-end.
- Cash provided by operations was $190.1 million, while investing activities used $543.3 million and financing activities provided $493.4 million. The lower operating cash flow versus 2012 reflected, among other factors, no comparable advance Washington premium payment and increased receivables.
- Debt carrying amounts, including current maturities, totaled approximately $784.9 million. Principal on convertible notes was $737 million: $187 million due October 2014 and $550 million due January 2020. The company intended to repay the 2014 notes from parent-company cash. Sale-leaseback transactions also created lease-financing obligations.
- The company reported a non-GAAP adjusted diluted EPS of $3.13 for continuing operations, versus $1.72 in 2012; this is supplemental and differs materially from GAAP diluted EPS of $0.96.
Material changes and notable items
- New Mexico’s acquisition of the Lovelace Medicaid contract added approximately 80,000 members in 2013. South Carolina added approximately 137,000 members on January 1, 2014; the expected purchase price was about $63 million.
- In 2013, Molina issued $550 million of 1.125% cash-convertible notes due 2020, completed property sale-leaseback transactions, and repaid its credit facility and term loan. Financing transactions generated approximately $482 million of net cash after debt repayment and stock repurchases, according to management.
- Missouri operations were presented as discontinued operations after the state contract expired in 2012 and transition obligations ended in 2013. 2013 discontinued-operations income included a $9.5 million tax benefit from abandoning the company’s Missouri equity interests.
- A California rate-dispute settlement extended existing Medi-Cal contracts by five years. Its settlement-account provisions apply beginning in 2014; the maximum amount payable to Molina under the agreement is $40 million, subject to its terms.
Outlook, risks and contingencies
- Management expected growth from Medicaid expansion, dual-eligible demonstrations, South Carolina enrollment and other ACA-related changes, while cautioning that implementation, new populations and utilization patterns create uncertainty. It stated that cash resources and internally generated funds should support operations, regulatory requirements and capital expenditures for at least 12 months.
- The federal health-insurer excise tax was estimated at approximately $85 million for 2014 and is nondeductible. Molina estimated that roughly $128 million in incremental revenue, or an overall Medicaid premium rate increase of about 2.3%, would be needed to cover the tax and related tax effects. At the filing date, Washington and Wisconsin had contractually committed to reimburse the full economic impact; other states had not.
- Management warned that the high-priced hepatitis C drug Sovaldi, priced at about $84,000 for a standard 12-week course, was not reflected in 2014 rates. Unreimbursed treatment costs could adversely affect results.
- Profitability remains sensitive to medical-cost forecasting and claims reserves. Year-end medical claims and benefits payable were $669.8 million, including $424.2 million of fee-for-service incurred-but-not-paid claims. A hypothetical 1% change in key reserve assumptions could change net income by approximately $16.4 million or $8.5 million, depending on the assumption.
- Other key risks include state rate reductions or delayed payments, contract losses or nonrenewals, regulatory capital and dividend restrictions, provider-network or delegated-provider problems, audits and litigation, cybersecurity, and execution of rapid growth and new programs. A Washington state agency alleged certain overpayments; Molina said liability was not then probable or reasonably estimable.
Most important facts for investors to verify
- Whether 2014 state reimbursement fully offsets the estimated $85 million nondeductible excise tax and related gross-up; only Washington and Wisconsin were contractually committed at the filing date.
- Whether medical-cost trends and IBNP reserves prove adequate, particularly as membership and covered benefits expand.
- Whether new growth initiatives and acquisitions produce sustainable margins after the elevated 2013 administrative spending.
- How the 2014 maturity of $187 million in convertible notes, lease-financing obligations and regulated-subsidiary cash restrictions affect parent-company liquidity.
- Whether the Washington alleged-overpayment matter, California settlement-account provisions, and other contract or audit contingencies result in material payments or adjustments.