Molina Healthcare, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unless otherwise stated, amounts below are in U.S. dollars; financial statement amounts are rounded to millions. Molina operates Medicaid-focused health plans and Medicaid technology and processing services. Its plans served approximately 1.826 million members at quarter-end.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $1,540.2m | $1,176.7m | $4,450.2m | $3,463.5m |
| Operating income (loss) | $7.2m | $33.6m | $(18.7)m | $96.3m |
| Net income (loss) | $3.4m | $19.0m | $(15.9)m | $53.8m |
| Diluted earnings (loss) per share | $0.07 | $0.41 | $(0.34) | $1.16 |
| Medical care ratio | 88.3% | 84.3% | 88.7% | 84.3% |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $264.0m | $155.2m |
- Premium revenue was $1,488.7m in Q3 and $4,308.4m year to date. Growth reflected membership and higher-acuity member mix, plus benefit expansions, particularly in Texas and Ohio.
- Q3 medical care costs rose to $1,314.6m from $959.2m; costs per member per month increased to $240.25 from $192.87. Management said premium rate increases had not kept pace with medical cost increases.
- At September 30, cash and cash equivalents were $715.5m, current investments $356.9m, and working capital $482.4m. Cash and investments, including restricted investments, totaled $1,130.4m. Management said available resources were expected to support operations, regulatory requirements, and capital spending for at least 12 months.
- Debt carrying value was approximately $261.7m, comprising $173.9m carrying value for $187m of 3.75% convertible notes due 2014, $40m drawn on the revolving facility, and $47.8m on the term loan. Cash and investments were substantial, but $519.2m of regulated-subsidiary net assets were not freely transferable to the parent. Health plans exceeded aggregate minimum statutory capital requirements: $525.4m versus $270.0m required.
- Non-GAAP EBITDA was $27.5m in Q3 versus $51.4m, and $39.6m year to date versus $148.7m. EBITDA is a company-defined supplemental measure, not a substitute for GAAP results.
Material changes and business developments
- Total membership increased from 1.678m at September 30, 2011 to 1.826m at September 30, 2012. Texas membership nearly doubled year over year following expansion, while Washington membership also increased. Missouri membership ended after the state contract expired without renewal on June 30, 2012.
- Q3 earnings fell year over year, while the year-to-date result shifted from profit to loss. The year-to-date medical care ratio rose 4.4 percentage points to 88.7%, and the Health Plans segment reported a $41.9m operating loss. Molina Medicaid Solutions improved to $23.2m operating income year to date from a $4.0m loss, as Idaho and Maine systems stabilized and Idaho received federal certification.
- Q3 operating performance improved substantially from Q2, principally due to Texas. Texas’s medical care ratio improved to 90.3% from 109.4% in Q2; its pretax loss narrowed to approximately $5m from approximately $68m. Consolidated Q3 revenue was broadly consistent with Q2, with Washington growth offsetting Missouri’s exit and a slight Texas membership decline.
- Operating cash flow increased year over year, partly because medical claims payable provided $134.0m of cash and deferred revenue provided $92.4m. These working-capital movements are not necessarily recurring measures of underlying cash generation.
Outlook, risks, and unusual items
- Management reiterated its expectation that the Texas health plan would operate at financial break-even on a forward basis by December 2012. A Texas blended rate increase of approximately 4% took effect September 1, 2012.
- Molina expected to continue Louisiana MMIS services through implementation and acceptance of the successor system, which management believed would not occur before 2014; it expected approximately $40m in annual revenue under that contract until then. Louisiana represented $38.8m, or 29.3%, of nine-month service revenue.
- In the second quarter, Texas and Wisconsin recorded premium deficiency charges of $10m and $3m, respectively. The aggregate reserve was $1.5m at September 30 after a partial Wisconsin reserve reversal. Management said Wisconsin rates remained inadequate and warned that continued participation could become infeasible if actuarially sound rates were not achieved.
- Favorable prior-period claims development reduced medical care costs by $37.7m for the nine months, including $47.0m in Q3. Management identified heightened reserve uncertainty from Texas expansion and new benefits, California ABD membership, and changing claims inventories. Its sensitivity analysis showed that a 1% change in estimated completion factors could change nine-month net income by approximately $15m, or $0.32 per diluted share; a 1% change in medical cost trends could change it by approximately $7.9m, or $0.17 per share.
- Other material exposures include the loss of the Missouri contract, pending state procurement and renewal decisions, state rate adequacy and budget pressure, medical-cost and claims-reserve estimation, and contract execution risks for Medicaid systems. Maine provided a schedule alleging approximately $32.6m of unspecified MMIS-related damages; no formal claim had been asserted, and Molina could not estimate potential liability. The filing also warns that adverse outcomes in unresolved legal matters could materially affect results.
- Auction-rate securities remained illiquid following failed auctions beginning in 2008; their September 30 fair value was $13.5m against $15.0m par value. The company reported a $1.3m liability on its interest-rate swap, which becomes effective March 2013. The Affordable Care Act’s federal insurer fee, effective in 2014, was expected to be significant; its effect on Molina’s rates was undetermined.
- Ohio’s new Medicaid managed-care program was delayed from January to July 2013. The company also cited planned participation in Ohio’s integrated-care program and a Florida long-term-care procurement, both subject to awards, readiness, or implementation processes. The filing provided no consolidated full-year earnings guidance.
Investor verification priorities
- Track Texas and Wisconsin profitability, rate adequacy, and whether the stated Texas break-even expectation is achieved.
- Assess the adequacy of claims reserves and the degree to which favorable prior-period development affected reported results; monitor claims inventory and subsequent claims payments.
- Verify whether membership growth and benefit expansions generate margins after medical costs and state rate adjustments.
- Monitor Missouri transition costs, Louisiana contract timing and revenue, and the Maine allegation and any formal claim or liability estimate.
- Review liquidity available at the parent versus regulated subsidiaries, debt maturities and covenant compliance, and the effect of the 2014 federal insurer fee.