MOH

Molina Healthcare, Inc. - Q1 2011 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2011. Molina Healthcare, Inc. operates two primary segments: Health Plans, which manages Medicaid and Medicare HMOs in ten states serving approximately 1.6 million members, and Molina Medicaid Solutions, which provides IT and administrative services to state Medicaid agencies in five states. The company is an accelerated filer incorporated in Delaware.

Key Financial Metrics

Liquidity: Operating cash flow was $84.1 million, a significant improvement from a $26.2 million outflow in the prior year, driven largely by a $72.7 million advance premium payment from the state of Ohio. The company maintains a $150 million revolving credit facility with no outstanding principal balance as of March 31, 2011.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 16% year-over-year, driven by an 11% increase in membership and the inclusion of the Molina Medicaid Solutions segment, which contributed $36.7 million in service revenue (compared to zero in Q1 2010).
• Profitability: Operating income rose 53% to $31.3 million, and Net Income increased 64% to $17.4 million. Diluted EPS grew 37%.
• Medical Costs: The aggregate medical care ratio improved (decreased) by 80 basis points to 84.5%. This was due to lower medical costs per member per month (PMPM) despite membership growth.
• Segment Performance: The Health Plans segment generated $29.6 million in operating income, while Molina Medicaid Solutions generated $1.7 million.

Outlook, Risks, and Management Commentary

• State Budget Pressures: Management remains concerned about state budget deficits, creating uncertainty regarding rate renewals and benefit packages for the remainder of 2011.
• Contract Challenges: System stabilization efforts in Idaho and Maine (Molina Medicaid Solutions) are taking longer and costing more than anticipated. Revenue recognition for the Idaho contract is deferred until 2012 pending CMS certification.
• Specific State Issues:
  • Florida: The health plan faces challenges with a medical care ratio of 96.6%, though it improved from 100.2% in Q4 2010.
  • Wisconsin: The acquired plan recorded a $3.35 million premium deficiency reserve, resulting in a medical care ratio of 118.1%.
  • Idaho: The state indicated a desire to remit $5–6 million less than invoiced for MMIS operations; the company disputes this and has not adjusted financials.
• Accounting Changes: The company adopted ASU No. 2009-13 regarding revenue recognition for multiple-deliverable arrangements effective January 1, 2011, which is expected to accelerate revenue recognition for new contracts.
• Stock Split: A 3-for-2 stock split was authorized on April 27, 2011, to be distributed on May 20, 2011.

Investor Verification Checklist

• Idaho Revenue Dispute: Verify the status of the $5–6 million payment dispute with the Idaho Department of Administration and the timeline for CMS certification.
• Florida & Wisconsin Ratios: Monitor the medical care ratios for Florida (96.6%) and Wisconsin (118.1%) to assess if profitability improvements are sustainable.
• State Rate Renewals: Track upcoming contract renewals in states facing budget deficits, specifically Missouri (noted 5% rate increase) and Arizona (unsuccessful bid).
• Deferred Revenue: Review the $36.1 million in deferred revenue for Molina Medicaid Solutions and the timeline for recognition in Maine and Idaho.
• Claims Reserves: Assess the $44.4 million benefit from prior period claims development to ensure it does not mask underlying cost trends.