Molina Healthcare, Inc. — Q1 2017 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. Molina provides government-sponsored managed health care and Medicaid administration. Its health plans served approximately 4.8 million members across 12 states and Puerto Rico.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Total revenue | $4.904 billion | $4.343 billion | Up 13% |
| Premium revenue | $4.648 billion | $3.995 billion | Up 16%; member months rose 14% and revenue per member-month rose 2% |
| Operating income | $82 million | $89 million | Down $7 million |
| Net income | $77 million | $24 million | Up $53 million |
| Diluted EPS | $1.37 | $0.43 | Adjusted diluted EPS, a non-GAAP measure, was $1.47 versus $0.51 |
| Medical care ratio (MCR) | 88.4% | 89.8% | Improved 1.4 percentage points |
| G&A ratio | 8.9% | 7.8% | Increased 1.1 percentage points |
| Operating cash flow | $719 million | $139 million | Increase largely reflected timing of premium receipts and changes in operating balances |
Health Plans medical margin increased 32% to $537 million from $407 million. The effective tax rate fell to 41.6% from 61.7%, primarily because the health insurer fee was suspended for 2017. Net income included a $75 million termination fee related to a proposed Medicare acquisition; excluding that fee, management reported net profit margin of 0.6%, unchanged from Q1 2016. Adjusted net income was $83 million versus $29 million, but this measure adjusts for intangible amortization and does not remove the termination fee.
Financial position and liquidity
- At March 31, 2017, cash and cash equivalents were $3.198 billion and current investments were $2.056 billion; together, cash and investments totaled $5.371 billion. Working capital was $1.980 billion.
- Total liabilities were $6.311 billion and stockholders’ equity was $1.727 billion. Debt included $1.455 billion of senior notes and $198 million of lease financing obligations. The $500 million revolving facility had no borrowings outstanding; $494 million remained available after letters of credit.
- Operating cash flow was $719 million; investing cash outflow was $339 million, principally reflecting net investment purchases. Cash increased $379 million during the quarter.
- Management said cash resources and internally generated funds should be sufficient for operations, regulatory requirements, and capital expenditures for at least 12 months. Approximately $1.527 billion of regulated-subsidiary net assets was not transferable to the parent; parent-held cash, cash equivalents, and investments were $273 million.
Material changes, outlook, and risks
- Growth and medical costs: Marketplace ending membership rose to 1.035 million from 526,000 at December 31, 2016. Marketplace MCR was 75.0%, compared with 81.7% a year earlier; the quarter included an $8 million reduction in the Marketplace premium deficiency reserve. Management cautioned that claims estimates for the large enrollment increase were unusually uncertain. Pharmacy costs increased.
- State-level performance: Illinois reported a 112.1% MCR and a $19 million medical margin loss, including approximately $20 million of medical costs relating to 2016. The filing identifies claims-estimate uncertainty in Illinois, Florida, and among new Marketplace members.
- Management and costs: On May 2, 2017, the CEO and CFO were terminated without cause, after quarter-end. The company expected severance and related costs to negatively affect its 2017 G&A ratio. The filing does not provide a total dollar estimate for these payments; benefits depend on the executives signing releases.
- Guidance: Management expected an approximately 42% effective tax rate for full-year 2017. The filing provides no specific full-year earnings or revenue guidance and says Molina had not committed to participating in the Marketplace in 2018.
- Government and contract exposure: Illinois was operating without a state budget and owed Molina approximately $80 million for January–March premiums as of April 28. Puerto Rico filed for a Title III restructuring proceeding on May 3; it was current on premium payments as of April 28, but payment and contract-renewal risks remain. Several significant Medicaid contracts were scheduled for re-procurement.
- Risk corridor and litigation: Molina sued the federal government seeking approximately $52 million in 2015 Marketplace risk corridor payments and said it believed approximately $90 million was due for 2016. These amounts were not recognized as revenue or receivables. A separate proposed $14 million settlement in the Rodriguez matter was expected to be fully recovered under seller indemnification, subject to finalizing the agreement.
- Controls: Disclosure controls were deemed ineffective because of a previously identified material weakness involving calculation of a California Medicaid Expansion liability. A $44 million understatement of 2016 net income was corrected before issuance of the 2016 financial statements. Management was implementing remediation targeted for completion during 2017; the weakness was not yet considered remediated.
- Other exposures: A hypothetical immediate 1-percentage-point rise in interest rates would reduce the fair value of fixed-income investments by approximately $22 million. The company also cited ACA and Marketplace policy uncertainty, medical-cost and claims-estimation risks, state funding pressures, contract renewals, and regulatory requirements.
Investor verification priorities
- Assess how much of the earnings increase is attributable to the $75 million acquisition termination fee, and distinguish GAAP results from non-GAAP measures.
- Track Marketplace claims experience, reserve estimates, risk-adjustment liabilities, and the company’s decision on 2018 participation.
- Verify collection of Illinois’s reported $80 million receivable and monitor Puerto Rico’s payments and contract status.
- Monitor remediation and testing of the California liability control weakness, along with any resulting financial-statement adjustments.
- Confirm executive severance costs, leadership succession, and outcomes of upcoming Medicaid contract re-procurements.