Molina Healthcare, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Molina provides Medicaid, Medicare, and Marketplace managed-care services. Its health plans operated in 14 states and Puerto Rico and served approximately 3.56 million members at quarter-end.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $4.618 billion | $4.193 billion | $9.167 billion | $8.312 billion |
| Premium revenue | $4.372 billion | $4.049 billion | $8.676 billion | $8.001 billion |
| Operating income | $424 million | $265 million | $698 million | $545 million |
| Net income | $276 million | $196 million | $454 million | $394 million |
| Diluted EPS | $4.65 | $3.06 | $7.54 | $6.04 |
| Medical care ratio (MCR) | 82.3% | 85.6% | 84.3% | 85.5% |
| G&A ratio | 7.5% | 7.8% | 7.2% | 7.6% |
| After-tax margin | 6.0% | 4.7% | 5.0% | 4.7% |
Q2 medical margin was $774 million, up from $583 million; first-half medical margin was $1.362 billion, compared with $1.164 billion. Management attributed higher operating income mainly to lower MCR. The Q2 MCR improvement reflected reduced utilization during COVID-19, partly offset by state premium refunds and other actions. Marketplace medical margin declined year over year, while Medicaid and Medicare margins increased.
Cash flow and liquidity: First-half operating cash flow was $749 million, versus $156 million a year earlier. Investing activities provided $38 million, compared with $393 million used; financing activities provided $71 million, compared with $362 million used. Cash, cash equivalents, and restricted cash increased by $858 million to $3.366 billion. At June 30, cash and investments totaled $5.296 billion, working capital was $3.307 billion, and long-term debt was $1.812 billion. The company reported approximately $1 billion of available revolving-credit capacity, no revolver borrowings, and compliance with debt covenants.
Debt increased from $1.237 billion at year-end 2019. In June, Molina issued $800 million of 4.375% notes due 2028, using proceeds in part to repay $600 million of term-loan debt. It also replaced its credit agreement with a five-year agreement that increased the revolving facility to $1 billion. Interest expense was $24 million in Q2 and $45 million in the first half.
Changes, notable items, and outlook
- Membership reached 3.555 million, up from 3.370 million at June 30, 2019. Second-quarter enrollment included 151,000 additional members, primarily Medicaid members, largely associated with suspended eligibility redeterminations.
- Management estimated that COVID-related effects, chiefly lower medical utilization partly offset by premium refunds, increased Q2 net income by approximately $65 million to $100 million, or $1.10 to $1.65 per diluted share. Management cautioned that the utilization pattern may not continue.
- The company accrued approximately $75 million in Q2 for certain probable, estimable retroactive Medicaid premium refunds and related actions. Further state actions remained uncertain; management expected greater clarity in Q3 or Q4.
- Marketplace results were below expectations, with lower-than-expected risk scores for some higher-acuity new members. Marketplace risk adjustment payables were $529 million, with related receivables of $72 million, for a net payable of $457 million at June 30; $297 million related primarily to 2019.
- A court entered a $128.1 million judgment for Molina’s 2014–2016 Marketplace risk-corridor claims. The company had not recognized it as of June 30 because collection timing was uncertain.
- Investment income and other revenue declined to $18 million in Q2 and $47 million in the first half. Management expected investment income to decline in 2020 amid low interest rates. The 2020 health insurer fee expense was $139 million for the first half and was substantially reimbursed; the fee is nondeductible and contributed to a higher effective tax rate.
- Management said cash, available borrowing capacity, and operating cash flow should be sufficient for operations, regulatory requirements, debt obligations, and capital expenditures for at least the next 12 months. The filing provides no specific earnings or EPS guidance.
- Growth and contract developments include the completed July 1 acquisition of certain YourCare assets for $42 million; a pending Passport Health Plan asset acquisition for approximately $20 million plus contingent consideration; and a pending Magellan Complete Care acquisition for approximately $820 million net of certain tax benefits, expected by Q1 2021. Both pending acquisitions are subject to approvals and closing conditions.
- Molina plans to exit Puerto Rico Medicaid when its contract expires in October 2020. Texas Medicaid procurement awards were canceled, with next steps uncertain; California and Ohio contract procurements are also forthcoming. The Kentucky Medicaid contract award is expected to begin January 1, 2021.
Key risks and contingencies
Management highlighted uncertainty around COVID-19 utilization, future claims costs, state premium refunds and rate actions, Medicaid enrollment, and government payment timing. Other material risks include ACA litigation, Marketplace pricing and risk-adjustment estimates, state contract renewals and procurements, the Puerto Rico exit, acquisition approvals and integration, medical-claim estimates, and the ability to maintain regulated subsidiary capital and pay dividends upstream. A hypothetical immediate 1% increase in interest rates would reduce the fair value of fixed-income investments by approximately $47 million. The filing states that legal matters are ongoing; outcomes and potential losses may be uncertain.
Investor verification priorities
- Track whether deferred or curtailed care rebounds and how claims experience affects MCR and margins.
- Verify the amount, timing, and financial effect of state premium refunds, risk corridors, and Marketplace risk-adjustment settlements.
- Monitor the $128.1 million risk-corridor judgment’s collection status; it was not recognized in Q2.
- Confirm closing, funding, integration, and expected returns for the Passport and Magellan transactions.
- Assess outcomes for the Puerto Rico exit and key state contracts and procurements, including Texas, Ohio, and California.
- Review debt maturities, acquisition funding needs, regulated-subsidiary capital requirements, dividend restrictions, and covenant compliance.