Molina Healthcare, Inc. — Q2 2013 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2013. Molina provides Medicaid-related health plan and administrative services through its Health Plans and Molina Medicaid Solutions segments. Its health plans served approximately 1.85 million members across nine states at quarter-end.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $1,605.8 million | $1,479.2 million | $3,196.2 million | $2,796.1 million |
| Operating income (loss), continuing operations | $46.4 million | ($49.4 million) | $114.3 million | ($13.1 million) |
| Continuing-operations net income (loss) | $15.8 million | ($33.1 million) | $46.3 million | ($13.2 million) |
| Consolidated net income (loss), including discontinued operations | $24.6 million | ($37.3 million) | $54.5 million | ($19.2 million) |
| Diluted EPS, continuing operations | $0.34 | ($0.71) | $1.00 | ($0.29) |
| Medical care ratio | 86.2% | 94.5% | 86.1% | 91.4% |
Q2 total revenue increased about 9% year over year; first-half revenue rose about 14%. Q2 operating margin was 2.9% versus negative 3.3% a year earlier; first-half operating margin was 3.6% versus negative 0.5%. The medical care ratio measures medical costs as a percentage of premium revenue net of premium taxes.
- Revenue and operations: Premium revenue was $1,548.6 million in Q2 and $3,083.0 million for the first half. Management attributed growth to membership gains, including in Washington and Wisconsin, and rate increases, including in Texas and Washington. Q2 Health Plans operating income improved substantially, led by Texas and better results at most other plans. Molina Medicaid Solutions operating income declined to $6.3 million in Q2 from $6.6 million, and to $12.6 million for the first half from $15.1 million, partly due to a shift toward lower-fee managed-care encounter processing.
- Expenses and margins: Q2 medical care costs were $1,294.7 million, down from $1,317.6 million despite higher premium revenue. G&A rose to $161.5 million and 10.1% of revenue from $125.8 million and 8.5%, reflecting preparations for expected 2014 growth and a $3.5 million provider-litigation charge. Q2 premium tax expense was $46.9 million. Interest expense increased to $11.7 million in Q2 and $24.7 million for the first half, principally reflecting the 2013 note issuance and non-cash discount amortization.
- Cash flow: Operating activities used $111.7 million in the first half, compared with $236.0 million provided in the prior-year period. Investing activities used $431.8 million, mainly reflecting investment purchases; financing activities provided $490.5 million, largely from debt issuance and sale-leaseback proceeds. Cash and cash equivalents were $742.7 million at June 30, 2013, versus $795.8 million at year-end.
- Liquidity and debt: Working capital was $1,037.6 million. Cash, investments and restricted investments totaled $1,530.7 million. Long-term debt principal was $737 million: $550 million of 1.125% cash-convertible notes due 2020 and $187 million of 3.75% convertible notes due 2014. The balance sheet also included $175.7 million of lease financing obligations. The company repaid and terminated its revolving credit facility and repaid its term loan during the period. Management said available cash resources and internally generated funds should support operations, regulatory requirements and capital expenditure for at least 12 months.
Material changes, outlook and risks
- Claims estimates: Molina recorded $62.8 million of favorable prior-period claims development in the first half, including $50.0 million in Q2. Management cited changes in Texas, Washington, Ohio and New Mexico claims experience. The filing emphasizes that claims reserves are estimates and that adverse revisions could materially reduce future-period earnings. It also identified uncertainty around Wisconsin’s approximately 50,000 recently transitioned members and a claims-data system issue in Michigan.
- Discontinued operation and unusual items: Missouri was reclassified as a discontinued operation after transition obligations ended and the company abandoned its equity interests. Q2 discontinued-operations income was $8.8 million; it included a $9.5 million tax benefit and a $0.5 million pretax write-off loss. Q2 also included a $3.9 million non-cash warrant-related charge; the warrants were reclassified to equity, ending future mark-to-market adjustments.
- Financing and leases: The company issued $550 million of 1.125% cash-convertible notes and entered a call-spread arrangement intended to offset cash conversion payments, subject to counterparty performance and transaction terms. A June property sale-leaseback generated $158.6 million but was accounted for as financing, not a sale. Minimum payments under the sale-leaseback obligations total $477.0 million, including $385.8 million thereafter.
- Outlook and expansion: No specific earnings or revenue guidance is provided. The company anticipated Florida long-term-care Medicaid operations beginning in December 2013 and New Mexico Centennial Care beginning in January 2014. A July 2013 agreement to assume a New Mexico Medicaid contract was expected to close August 1, subject to customary conditions. The Louisiana Medicaid systems contract remained in place pending a successor selection; management expected about $40 million in annual service revenue while it continued.
- Key risks: The filing cites state contract renewal and rate-setting, medical-cost and reserve estimation, government audits, litigation, and implementation of the Affordable Care Act. The 2014 federal health-insurer assessment was expected to be significant and could increase capitalization requirements; its effect on rates and financial results was still being evaluated. Medicare Advantage payments were subject to a 2% sequestration reduction beginning April 1, 2013, which may pressure earnings and provider relationships.
- Capital and governance considerations: Health plans had $627.7 million of aggregate statutory capital and surplus against $363.2 million of required minimums and were in compliance. State restrictions limited transfer of $607.5 million of subsidiary net assets to the parent. The filing also discloses a related-party office lease with a landlord whose principals include the CFO and his wife.
Investor verification priorities
- Assess the sustainability of the lower medical care ratio and how much current earnings benefited from favorable prior-period claims development.
- Track claims emergence for Wisconsin’s new members, the Texas claims-lag distortion and the Michigan claims-data correction.
- Review the 2014 insurer assessment, state rate updates, sequestration effects and progress toward the announced Medicaid program expansions.
- Evaluate the 2014 maturity of the $187 million convertible notes, the cash-conversion exposure and the long-term lease financing commitments.
- Separate continuing-operations performance from Missouri discontinued-operation results and the associated tax benefit.