Molina Healthcare, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Dollar amounts are in millions unless stated otherwise.
Business context
Molina provides managed health care primarily to people receiving government assistance. Its Health Plans segment is the dominant business; at quarter-end it served approximately 4.0 million members in 13 states and Puerto Rico. The company completed the sale of Molina Medicaid Solutions (MMS) on September 30, 2018, and subsequently sold Pathways on October 19, 2018.
Financial results and key metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $4,697 | $5,031 | $14,226 | $14,934 |
| Premium revenue | $4,337 | $4,777 | $13,174 | $14,165 |
| Operating income (loss) | $295 | $(81) | $859 | $(286) |
| Net income (loss) | $197 | $(97) | $506 | $(250) |
| Diluted earnings (loss) per share | $2.90 | $(1.70) | $7.60 | $(4.44) |
| Medical care ratio (MCR) | 87.4% | 88.3% | 86.2% | 90.5% |
| G&A ratio | 6.6% | 7.6% | 7.0% | 8.2% |
| Net profit (loss) margin | 4.2% | (1.9%) | 3.6% | (1.7%) |
For the nine months, operating cash flow was a use of $191, versus a source of $957 in 2017. Investing activities provided $821 and financing activities used $1,012. Cash, cash equivalents and restricted cash ended at $2,908. At September 30, working capital was $2,088 and cash plus investments totaled $4,746; $505 of cash and investments were held at the parent, or $390 adjusted for the October 1 HIF payment and MMS proceeds.
Outstanding debt principal was $1,344, down from $2,041 at December 31, 2017. The $500 revolving credit facility had no borrowings outstanding and $494 of available capacity. The company reported compliance with debt covenants. Health-plan subsidiaries held approximately $2,041 of net assets not transferable to the parent under regulatory restrictions.
Material changes versus comparable periods
- Revenue declined 7% in Q3 and 5% for the nine-month period. Member months fell 11% in Q3 and 13% year to date; Marketplace membership contracted substantially, with ending Marketplace members down to 384,000 from 877,000 a year earlier.
- Despite lower revenue, earnings improved substantially, primarily as MCR and administrative expense ratios improved. The nine-month MCR improvement was broad across Medicaid, Medicare and Marketplace, though the reported results include prior-period adjustments.
- Q3 2017 included $247 of impairment and restructuring charges; nine-month 2017 included $362. Those charges contributed to the prior-year losses and make the comparison less representative of recurring performance.
- The company recognized $37 pretax gain on the MMS sale; its $233 proceeds were received October 1. The Pathways sale occurred after quarter-end, for nominal consideration, and the company expected an approximately $40 after-tax loss.
- Debt reduction included repayment of the $300 credit-facility balance and partial repayments or conversions of convertible notes. Financing also included significant cash settlements and warrant-termination payments tied to the 1.125% Notes.
Outlook, management commentary and risks
- Management said cash resources, available credit and internally generated funds should support operations, regulatory requirements, debt repayments and capital expenditures for at least the next 12 months. No specific consolidated earnings guidance is provided in the filing.
- The 2017 restructuring plan had generated approximately $230 of savings through September 30; cumulative costs were $269. A new IT restructuring began in Q3, with approximately $6 of additional costs expected in Q4. Management said it would report anticipated savings later.
- Management cited new or expanded Medicaid contract awards in Washington, Florida and Puerto Rico. The New Mexico contract remained in run-off pending a protest decision; the plan served approximately 206,000 members there and generated $891 of nine-month premium revenue.
- Q3 and year-to-date results included a $57 reduction in premium revenue from a retroactively reinstated California Medicaid Expansion risk corridor. Conversely, the company recognized $81 of 2017 Marketplace cost-sharing reduction benefits and $56 of Marketplace risk-adjustment benefits in the nine-month period.
- Key uncertainties include medical-cost and claims-reserve estimates, Marketplace risk adjustment and rate adequacy, state and federal Medicaid funding and contract renewals, restricted subsidiary capital, Puerto Rico conditions, and regulatory or legal actions. The filing describes a securities class action filed in October 2018; the company says it intends to defend the case.
- Cash from operations was affected by timing of premium receipts, claims payable and government settlements. The $348 HIF payable was paid October 1, 2018. The company also noted that a 1% immediate increase in interest rates would reduce fixed-income investment fair value by approximately $16.
Most important facts for investors to verify
- Whether improved MCR and G&A performance persists after excluding prior-period benefits, the California risk-corridor adjustment, and sale gains.
- Claims-reserve development and the disclosed added uncertainty from Puerto Rico billing requirements, Florida system changes and claims-review processes.
- New Mexico contract protest outcomes, upcoming Texas reprocurements, and extensions of Medicare-Medicaid demonstration programs.
- Actual cash conversion and parent-level liquidity after the October HIF payment and MMS proceeds, given regulated-subsidiary dividend restrictions.
- Remaining cash-conversion obligations on the $314 of 1.125% Notes, debt maturities, and any effects of the Pathways divestiture and expected loss.
- Whether expected restructuring savings materialize and whether the securities litigation or other contingencies result in material costs.