Molina Healthcare, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2013; financial comparisons are against the corresponding 2012 period. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The company operates Medicaid and other government-sponsored health plans and Medicaid information-processing services.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $1,687.1 | $1,540.2 | $4,883.3 | $4,336.2 |
| Premium revenue | $1,584.7 | $1,448.6 | $4,583.8 | $4,066.7 |
| Operating income (loss) | $24.9 | $2.4 | $139.2 | $(10.8) |
| Continuing-operations income (loss) | $7.6 | $(0.2) | $53.9 | $(13.3) |
| Net income (loss), including discontinued operations | $7.6 | $3.4 | $62.1 | $(15.9) |
| Diluted EPS from continuing operations | $0.16 | $(0.01) | $1.15 | $(0.29) |
| Medical care ratio | 87.3% | 91.1% | 86.5% | 91.4% |
| General and administrative expense / total revenue | 10.4% | 8.2% | 9.8% | 8.4% |
- Revenue and earnings: Q3 premium revenue increased 9%, reflecting 5% enrollment growth and 4% higher revenue per member per month. Management attributed enrollment growth primarily to the New Mexico acquisition. Q3 continuing-operations income improved as medical margins rose, partly offset by higher administrative costs. Nine-month results also improved substantially, with operating income turning positive.
- Margins and claims: The Q3 medical care ratio improved as medical ratios declined in eight of nine health plans. Nine-month medical margin increased in all nine. Favorable prior-period claims development was $54.0 million for the nine months, including $32.6 million in Q3; management said Q3 favorable development was below its usual level and materially weighed on quarterly performance.
- Cash flow: Operating cash flow was $111.7 million for the nine months, down from $264.0 million. The company cited the timing and movement of receivables and deferred revenue, which used $161.7 million of cash in aggregate, partly offset by higher net income. Investing activities used $541.4 million, including investment purchases and acquisitions; financing activities provided $490.5 million. Cash increased $60.8 million to $856.6 million.
- Liquidity: Working capital was $920.8 million at September 30, versus $521.1 million at year-end 2012. Cash, investments and restricted investments totaled $1,668.6 million. Management believed available cash and internally generated funds would cover operations, regulatory requirements and capital expenditures for at least 12 months. Parent-company cash, cash equivalents and investments were $472.1 million; $601.1 million of health-plan subsidiary net assets were not freely transferable because of regulatory restrictions.
- Debt and obligations: The company issued $550 million principal of 1.125% cash-convertible notes due 2020 and had $187 million principal of 3.75% convertible notes due October 2014. Balance-sheet carrying amounts for convertible notes totaled $591.9 million, reflecting unamortized discounts. Lease financing obligations were $178.2 million. Interest expense rose to $13.5 million in Q3 and $38.2 million for nine months, mainly due to the new notes and related discount amortization. The former credit facility was repaid and terminated; the term loan was repaid in June.
Material changes and notable developments
- Ending health-plan membership was approximately 1.942 million, up from 1.826 million a year earlier. New Mexico added about 80,000 members through its Lovelace contract acquisition, completed August 1.
- Acquisitions and related contingent consideration increased assets and obligations. New Mexico’s expected purchase price was about $53.5 million; the South Carolina transaction had an estimated discounted price of $65 million, conditional on approvals and member conversion. The company recorded $59.9 million of contingent consideration, primarily for South Carolina.
- Health Plans operating income was $16.9 million in Q3 versus a $5.8 million loss a year earlier; nine-month operating income was $118.6 million versus a $34.0 million loss. Medicaid Solutions operating income declined to $8.0 million for Q3 and $20.6 million for nine months, with management citing lower-fee managed-care encounter mix and contract revenue changes.
- Following quarter-end, California finalized a rate settlement that extends existing Medi-Cal contracts by five years and adds an Imperial County contract. A settlement account will reflect margins against a 3.25% threshold; payments are expected after 2017 and DHCS payments are capped at $40 million. The company said the agreement would not affect 2013 consolidated results.
- Missouri operations were presented as discontinued operations after transition obligations ended. The company abandoned its Missouri equity interests and recognized an approximately $9.5 million tax benefit; nine-month discontinued-operations income was $8.2 million.
Outlook, risks and contingencies
- Growth and reform: Management expected significant 2014 membership growth tied to Medicaid expansion, health insurance marketplaces, and Medicare-Medicaid demonstrations. Nine subsidiaries were selected to offer Qualified Health Plans in marketplaces. The company was preparing through hiring, technology and operational investments; these preparations contributed about $30 million of Q3 administrative expense, approximately 1.8% of premium revenue. No specific consolidated earnings guidance was provided.
- ACA insurer fee: The company estimated the non-deductible federal health-insurer fee at approximately $100 million in 2014 and expected it to materially affect future financial position, results and cash flows. Whether premium rates will offset the fee was undetermined. Management estimated the fee would reduce health-plan statutory capital and surplus by a similar amount when recorded.
- Claims-estimate risk: Claims liabilities depend on actuarial assumptions and are subject to significant estimation uncertainty. Management highlighted unusual older claims in Texas, recovery-data distortions in Michigan, and limited claims experience for newly acquired New Mexico members. A hypothetical 1% change in completion factors or PMPM cost assumptions would change nine-month net income by approximately $15.3 million or $14.1 million, respectively, before considering interaction between assumptions.
- Contract and regulatory risks: Washington’s Health Care Authority alleged overpayments dating from July 2012 and indicated it may seek recoupment; an adverse result could hurt Q4 results, but the amount was not clear in the filing. Louisiana’s replacement Medicaid-system contract remained uncertain amid a challenge to the state’s canceled award; the existing contract continued pending a successor. State rate setting, contract renewals, competitive procurements, medical-cost trends and limits on subsidiary dividends were also cited risks.
- Other contingencies and unusual items: The company entered a 10-year hospital management agreement after quarter-end and warned that start-up losses may occur. It also disclosed related-party office leases involving an executive and his spouse. Legal matters were described as uncertain; the filing did not provide a clear aggregate possible-loss estimate for matters without accruals.
Most important facts for investors to verify
- Whether improved medical care ratios and margins persist, and how much future earnings depend on favorable prior-period claims development.
- Actual claims experience for New Mexico’s acquired members and resolution of the Texas and Michigan reserve uncertainties.
- Washington’s potential recoupment claim, its eventual amount and timing, and the status of the Louisiana Medicaid contract.
- Realized membership, pricing, start-up costs and margins from 2014 expansions, marketplace offerings, state programs and the hospital agreement.
- The 2014 insurer-fee impact, any rate recovery, and resulting statutory capital, liquidity and dividend capacity.
- Funding and dilution implications of the convertible notes, warrants, 2014 note maturity and lease financing obligations.