Molina Healthcare, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amounts are in millions except per-share data, ratios, membership, and where noted. Molina provides government-sponsored managed health care, principally through Medicaid health plans; it served approximately 4.5 million members across 12 states and Puerto Rico.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $5,031 | $4,546 | $14,934 | $13,248 |
| Operating income (loss) | $(81) | $118 | $(286) | $312 |
| Net income (loss) | $(97) | $42 | $(250) | $99 |
| Diluted earnings (loss) per share | $(1.70) | $0.76 | $(4.44) | $1.77 |
| Medical care ratio (MCR) | 88.3% | 89.4% | 90.5% | 89.5% |
| General and administrative ratio | 7.6% | 7.6% | 8.2% | 7.8% |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $957 | $633 |
- Revenue and segment economics: Q3 premium revenue rose 14% to $4,777; nine-month premium revenue rose 16% to $14,165. Health Plans medical margin was $557 in Q3 and $1,343 for nine months, versus $443 and $1,285, respectively, in 2016. Q3 MCR improved year over year, but the nine-month MCR worsened.
- Cash flow and liquidity: Nine-month operating cash flow increased $324 year over year. Management attributed the change principally to movements in medical claims payable, receivables, deferred revenue, and amounts due to government agencies, so cash-flow timing is important. At September 30, cash was $3,934; working capital was $1,746; and cash and investments were reported by management at $6,166. The company said available cash, credit capacity, and internally generated funds should support operations, restructuring, regulatory requirements, and capital expenditures for at least 12 months.
- Debt: Debt and lease financing obligations totaled approximately $2,297 on the balance sheet, including $782 classified as current; debt excluding lease financing obligations was approximately $2,098. This included $700 of 5.375% notes, $330 of 4.875% notes, $300 drawn on a $500 revolving facility, and convertible notes. The 1.125% notes became convertible into cash after meeting their stock-price trigger; the 1.625% notes were classified as current because of holder put and conversion features beginning in 2018. The company reported compliance with credit-facility covenants.
Material changes and unusual items
- Q3 results included $129 of non-cash goodwill impairment charges and $118 of restructuring and separation costs. Together, these items increased Q3 pretax loss by approximately $247. Nine-month charges were $201 for impairments and $161 for restructuring and separation.
- The impairments included $101 for Pathways and $28 for Molina Medicaid Solutions in Q3. Pathways had also incurred $61 of goodwill and $11 of intangible-asset impairment in Q2. Management cited weaker results and reduced anticipated benefits from integrating these businesses with Health Plans.
- In May, the company terminated its former CEO and CFO without cause and recorded $35 of separation costs, including accelerated equity compensation. An October exhibit identifies an employment agreement with Joseph M. Zubretsky.
- The company received a $75 termination fee in Q1 after the proposed Medicare acquisition agreements were terminated; this was recorded as other income. The 2017 health insurer fee moratorium also meant no health insurer fee revenue or expense, unlike 2016.
- For Q3, management reported adjusted net loss of $93, or $1.62 per diluted share, compared with adjusted net income of $47, or $0.85 per diluted share, a non-GAAP measure. Nine-month adjusted net loss was $235, or $4.17 per diluted share. These measures exclude specified items and should be considered alongside GAAP results.
Outlook, risks, and contingencies
- Restructuring outlook: Management estimated $300–$400 of annualized run-rate savings when the plan is completed by the end of 2018, including $200 already achieved on an annualized basis and expected to take full effect by January 1, 2018. Estimated total plan costs were $220–$240, including costs incurred to date; the company expected $70–$90 of additional pretax costs in Q4 2017 and $20–$40 in 2018. Management cautioned that 2017 one-time costs would exceed realized benefits.
- Marketplace and CSR uncertainty: Molina planned to exit Utah and Wisconsin Marketplace business effective December 31, 2017, increase 2018 premiums by 55% in remaining Marketplace plans, and reduce its Washington Marketplace scope. Q3 results did not include the potential effects of the October 12 federal direction to cease CSR subsidy payments. The company had recorded approximately $220 payable to CMS for excess CSR subsidies received through September 30 and expected approximately $85 of Q4 unreimbursed expense. The ultimate effect depends on CMS’s reconciliation period; an annual reconciliation could offset nearly all of that expense, while a nine-month reconciliation could leave the pretax expense substantially unoffset.
- Medical claims estimates: Medical claims payable was $2,478, up from $1,929 at year-end. Prior-period claims development was unfavorable by $9 for the first nine months, compared with favorable development of $190 in the prior-year period. Management cited added estimation uncertainty in Florida, Illinois, California, and Puerto Rico, including Hurricane Maria’s effect on utilization and claims processing.
- State and contract exposure: Illinois owed approximately $220 for March–September premiums as of September 30; the filing said Puerto Rico was current on premiums as of October 27, but its debt restructuring and Hurricane Maria remained risks. Florida, New Mexico, and Texas Medicaid contracts were scheduled for re-procurement. Illinois and Washington had new contracts scheduled to start in 2018. The company had sued to recover approximately $52 of 2015 Marketplace risk-corridor payments and estimated approximately $76 for 2016; neither amount was recognized as revenue or a receivable.
- Controls: Management concluded disclosure controls were not effective at the reasonable-assurance level because of a material weakness in controls over interim goodwill impairment testing. Spreadsheet and calculation errors were not detected in review, though corrected before the filing. Management was implementing enhanced controls and targeting completion in Q4 2017. A separate previously disclosed material weakness related to California Medicaid Expansion corridor calculations was also being remediated.
- Other risks include Medicaid rate and utilization trends, ACA and Marketplace policy changes, state budget or payment delays, contract renewals and competitive bids, regulatory capital restrictions, litigation, and the ability to achieve restructuring savings. Approximately $1,696 of health-plan subsidiary net assets was not freely transferable to the parent under regulatory restrictions; parent-held cash, cash equivalents, and unrestricted investments were $391.
Most important facts for investors to verify
- Whether medical claims experience and the elevated nine-month MCR improve, and how claims reserve uncertainty resolves.
- CMS’s CSR reconciliation approach and the actual Q4 2017 impact versus the estimated $85 expense and $220 payable.
- Execution, timing, and cash costs of the restructuring plan, and whether the targeted $300–$400 annualized savings are realized.
- Collection timing for Illinois premiums, Puerto Rico payment and contract developments, and outcomes of upcoming Medicaid re-procurements.
- Liquidity available at the parent, refinancing or cash needs associated with convertible-note features, and continued compliance with debt covenants.
- Completion and effective testing of the goodwill-impairment and California corridor control-remediation plans.