Molina Healthcare, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Dollar amounts below are in millions unless otherwise stated. The filing is unaudited.
Business context
Molina operates Medicaid-focused health plans and provides Medicaid systems and administrative services through Molina Medicaid Solutions. Health Plans served approximately 1.853 million members at quarter-end. Missouri’s Medicaid contract expired without renewal on June 30, 2012; Texas membership grew substantially following service-area, population, and benefit expansions effective March 1, 2012.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Total revenue | $1,536.4 | $1,167.1 | $2,910.0 | $2,286.8 |
| Operating income (loss) | $(59.3) | $31.4 | $(25.8) | $62.7 |
| Net income (loss) | $(37.3) | $17.4 | $(19.2) | $34.8 |
| Diluted EPS | $(0.80) | $0.38 | $(0.42) | $0.75 |
| Medical care ratio | 92.3% | 84.1% | 89.0% | 84.3% |
- Premium revenue rose 32% in Q2 and 28% in H1. Growth reflected membership and higher premium per member, including Texas expansion and added benefits. Total ending membership increased about 13% year over year.
- Q2 operating and net margins were approximately negative 3.9% and negative 2.4%; H1 margins were approximately negative 0.9% and negative 0.7%. The medical care ratio deteriorated as care costs rose faster than premiums.
- H1 operating cash flow was $236.0, versus $114.9 in 2011. The increase was driven substantially by higher claims payable and deferred revenue, not earnings: those items contributed $123.1 and $125.4, respectively, to H1 operating cash flow.
- At June 30, cash and cash equivalents were $727.1; current investments were $344.9. Management reported total cash and investments of $1,128.7, including restricted investments and auction-rate securities. Working capital was $481.9.
- Debt carrying value was approximately $270.5, including $187.0 principal of 3.75% convertible notes due 2014, $50.0 drawn on the revolving facility, and a $48.0 term loan. The company was in compliance with credit-facility covenants. The $170 facility had $10.3 of letters of credit outstanding in addition to the $50.0 borrowing.
- Stockholders’ equity was $746.0, compared with $755.1 at year-end 2011. The company reported $528.3 of health-plan net assets restricted from transfer to the parent.
Material changes and unusual items
- Health Plans reported Q2 operating loss of $65.9, versus income of $36.9 a year earlier. Texas was the largest pressure: its Q2 medical care ratio was 109.4%, including a $10.0 premium-deficiency charge and $14.1 of unfavorable prior-period claims development. Excluding those items, the ratio was about 102.7%.
- Texas recorded a $10.0 premium-deficiency charge for the contract period through August 31; Wisconsin recorded $3.0. Wisconsin’s Q2 medical care ratio was 121.1% (about 105.2% excluding its charge).
- Molina Medicaid Solutions swung to Q2 operating income of $6.6 from a $5.5 loss, and H1 income of $15.1 from a $3.8 loss, reflecting stabilization of its Idaho and Maine systems. Idaho received full federal MMIS certification on July 13, 2012, allowing the state to claim 75% federal reimbursement of operating costs retroactive to June 1, 2010.
- H1 included $36.4 of favorable prior-period claims development, compared with $45.4 in H1 2011; Q2 itself included $0.5 of unfavorable development. Claims payable rose to $525.5 from $402.5 at year-end, and days in fee-for-service claims payable increased to 44 from 39 a year earlier.
- The tax line was a benefit of $25.8 in Q2 and $14.7 in H1, reflecting losses; reported effective tax rates were negative. A $1.1 swap fair-value liability was charged to Q2 general and administrative expense. The sale of the insurance subsidiary generated a $2.4 gain.
Outlook, risks, and contingencies
- Management expected a preliminary Texas rate increase effective September 1 to add about $7.4 monthly to profitability; provider and other cost initiatives were expected to add another $6.6 monthly by December. Management estimated Texas was then losing about $14 monthly before tax and targeted a return to profitability in Texas fiscal 2013. These are expectations, not guaranteed outcomes; the filing warns that rates and savings may not be achieved, and Texas enrollment could decline in Q3.
- Management attributed Texas pressure to high utilization and inadequate rates for expanded ABD coverage, particularly in Hidalgo and El Paso. It also cited budget pressure on states, medical-cost and claims-estimation uncertainty, contract renewals and competitive bids, and uncertainty over state participation in the Affordable Care Act Medicaid expansion.
- Louisiana intends to replace Molina’s MMIS contract. Molina expected to continue service until successor implementation and acceptance, believed no earlier than 2014, and anticipated about $40 annual revenue until then. Louisiana represented $24.7, or 29.4%, of H1 service revenue.
- Maine provided a schedule asserting approximately $32.6 of damages related to MMIS delays and other matters; no formal claim had been asserted, and potential liability could not be estimated. The filing says an adverse legal outcome could materially affect results, liquidity, or financial condition.
- All health plans except Wisconsin met minimum statutory capital requirements at June 30; the company contributed capital to Wisconsin in late July to restore compliance. The company stated cash resources, its credit facility, and internally generated funds should support operations and capital needs for at least 12 months.
- Other risks include medical-cost estimation, state rate setting and contract renewals, regulatory and litigation exposure, restricted subsidiary dividends, and $13.1 of illiquid auction-rate securities, which had experienced failed auctions since 2008.
Key facts for investors to verify
- Whether Texas rate increases and cost-containment measures took effect as expected, and whether Texas medical ratios and losses improved.
- Subsequent claims development and the adequacy of reserves, especially for expanded Texas coverage and the elevated claims inventory.
- Wisconsin’s capital compliance and the performance of its contract following the January 2013 rate change.
- The operational and financial impact of Missouri’s exit and the timing and revenue consequences of Louisiana’s replacement MMIS.
- Resolution of the Maine damages assertion, and any changes in legal or regulatory contingencies.
- Liquidity and covenant headroom, distinguishing unrestricted funds from regulated or otherwise restricted investments.