MOH

Business Context and Reporting Period

Company: Molina Healthcare, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Molina is a multi-state managed care organization participating exclusively in government-sponsored health care programs (Medicaid, CHIP, and limited Medicare) for low-income persons. Operations are conducted through 10 licensed health plans in California, Florida, Michigan, Missouri, Nevada, New Mexico, Ohio, Texas, Utah, and Washington.

Key Financial Metrics

Note: Q1 2008 figures have been recast to reflect the adoption of FSP APB 14-1 regarding convertible debt accounting.

Material Changes vs. Prior Period

• Revenue Growth: Premium revenue increased 17.5% ($127.9 million) year-over-year, driven primarily by a 10% increase in total membership (1,303,000 vs. 1,185,000) and the launch of the Florida health plan in late 2008.
• Profitability: Net income remained relatively flat ($12.2 million vs. $12.5 million) despite revenue growth. This was due to a slight increase in the medical care ratio and a 52% decline in investment income ($3.5 million vs. $7.4 million) caused by lower interest rates.
• Medical Care Costs: The consolidated medical care ratio increased slightly to 86.1% from 85.8%. California's ratio rose significantly to 94.5% due to rising fee-for-service costs, while Ohio improved to 84.3% following provider re-contracting.
• Debt Reduction: The company repurchased and retired $13.0 million face amount of convertible senior notes, resulting in a $1.5 million gain. Long-term debt decreased by approximately $9.6 million.
• Cash Flow: Net cash provided by operating activities turned positive at $66.9 million, compared to a use of $23.5 million in the prior year, largely due to timing of premium receipts and increased claims payables.

Outlook, Risks, and Unusual Items

• Accounting Changes: Effective Jan 1, 2009, the company adopted FSP APB 14-1, requiring the allocation of convertible note proceeds between liability and equity components, resulting in increased non-cash interest expense.
• Auction Rate Securities (ARS): The company holds $70.2 million par value of ARS (fair value $61.8 million). Due to failed auctions, these are classified as Level 3 assets valued using discounted cash flow models. The company recorded a $3.3 million reduction in the fair value of "Rights" associated with these securities in Q1 2009.
• Acquisitions: The company is in the process of acquiring Florida NetPASS. An initial $9.0 million payment was made in Q4 2008, recorded as goodwill/intangibles in Q1 2009. Final closing is expected in Q3 2009.
• Repurchase Programs: The Board authorized an additional $25 million repurchase program for common stock or convertible notes in March 2009. In Q1, the company repurchased 808,000 shares of common stock for $15 million.
• Risk Factors: Key risks include budgetary pressures on state governments (specifically California), the illiquidity of ARS, potential flu pandemics (noting the 2009 H1N1 outbreak), and uncertainties regarding health care reform.

Investor Verification Checklist

• Claims Reserve Adequacy: Verify the sensitivity of the "Incurred But Not Paid" (IBNP) liability ($247.1 million) to changes in completion factors and trended PMPM costs, as a 1% change could impact net income by ~$6.5 million.
• California Budget Impact: Monitor the state of California's budget crisis and its ability to make timely payments under contracts with Molina's California health plan.
• ARS Liquidity: Assess the potential for further valuation adjustments on the $61.8 million of auction rate securities and the timeline for the "Rights" agreement to allow sale at par.
• Florida Integration: Track the enrollment growth and medical care ratio of the new Florida health plan, which operated at a 90.2% ratio in its first full quarter.
• Ohio Receivables: Review the $26.5 million receivable from a capitated provider group in Ohio and the associated escrow arrangements.