Molina Healthcare, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods unless noted. Molina operates Medicaid-focused health plans, Medicaid technology and administrative services, and other businesses. Its health plans served 4.233 million members at quarter-end.
Financial performance
| Metric (millions, except per-share data) | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Total revenue | $4,359 | $3,525 | $8,702 | $6,696 |
| Operating income | $105 | $116 | $194 | $198 |
| Net income | $33 | $39 | $57 | $67 |
| Diluted EPS | $0.58 | $0.72 | $1.01 | $1.29 |
| Medical care ratio | 89.2% | 88.7% | 89.5% | 88.7% |
| Medical margin | $435 | $375 | $842 | $710 |
- Revenue growth reflected expanded enrollment, acquisitions, and higher service revenue. Premium revenue rose 22% in Q2 and 28% in H1; management attributed lower premium revenue per member partly to lower Medicaid Expansion rates and a greater share of TANF and Marketplace business.
- Profit declined despite growth: medical costs and administrative costs increased, and interest expense rose to $25 million in Q2 and $50 million in H1, primarily reflecting the $700 million senior-note issuance in 2015.
- H1 cash from operations was $278 million, down from $648 million. Investing used $273 million; financing provided $11 million. Cash increased $16 million to $2.345 billion.
- At June 30, cash and current investments totaled $4.313 billion; including restricted investments, cash and investments were $4.420 billion. Working capital was $1.899 billion. Debt had $1.552 billion principal and $1.428 billion carrying value; the $250 million revolver had no borrowings and $244 million available.
Material changes and unusual items
- Membership increased 26% year over year to 4.233 million, including substantial Marketplace growth and membership acquired in Illinois, Michigan, and Washington. Marketplace membership was 597,000, versus 205,000 at year-end 2015.
- H1 medical margin increased 19%, but the medical care ratio worsened by 0.8 percentage points. Molina reported $189 million of favorable development in prior-period medical claims estimates during H1; claims reserving remains sensitive to utilization and new populations.
- Q2 included approximately $51 million of previously deferred Texas quality revenue after the state said it would not recoup quality revenue for 2014–2016. Other Q2 out-of-period items included a $37 million reduction in Marketplace pretax income and an $11 million Puerto Rico premium reduction; net out-of-period adjustments increased Q2 pretax income by about $3 million. H1 net out-of-period adjustments reduced pretax income by about $17 million, including a $18 million Florida retroactive premium increase.
- Reported Q2 diluted EPS was $0.58; management also disclosed adjusted diluted EPS of $0.67. These non-GAAP results should be considered alongside GAAP earnings.
- Completed several health-plan membership acquisitions in H1; goodwill recorded was $90 million. A further New York plan acquisition was expected to close in H2 for approximately $41 million, subject to approvals and closing conditions.
Outlook, risks, and contingencies
- The filing gives no full-year earnings or revenue guidance. Management expected H2 results to depend on cost-saving execution, rate changes, and Marketplace margins. It anticipated Medicaid rate increases in California, Puerto Rico, and Texas, but Medicaid Expansion rate decreases in California and Ohio; a South Carolina Medicaid medical-cost-ratio floor of 86% also took effect July 1.
- Management expected Marketplace margins to decline in H2 due to normal attrition, higher-cost special-enrollment members, cost-sharing limits being reached, and greater utilization.
- Key risks include medical-cost and claims-reserve estimation, premium rate adequacy, Marketplace risk-adjustment and reinsurance estimates, state budget and payment delays, Puerto Rico’s fiscal crisis, regulatory capital restrictions, contract renewals, and cybersecurity. The company reported $474 million payable under Marketplace risk adjustment at June 30.
- Approximately $1.299 billion of regulated-subsidiary net assets was not transferable to the parent under applicable restrictions. Health plans had $1.384 billion of statutory capital and surplus against $854 million required; all were in compliance.
- Legal matters include Louisiana’s pharmaceutical-reimbursement lawsuit, for which liability was not considered probable or estimable, and the Rodriguez litigation involving acquired Pathways subsidiary PCC. The filing says the Silingo litigation was dismissed with prejudice on July 11, 2016.
Investor facts to verify
- Whether medical-cost trends and reserve development remain favorable, especially in new Marketplace and acquired membership.
- How much of Q2 and H1 earnings depended on prior-period quality and premium adjustments, and whether Texas quality revenue is repeatable.
- Whether H2 rate changes, the South Carolina medical-cost floor, and Marketplace membership mix affect margins as management anticipated.
- Cash generation and parent-level liquidity, given state dividend restrictions, debt obligations, and the planned acquisition.
- Developments in Puerto Rico, state payment timing, and the material legal and regulatory matters disclosed in the filing.