Molina Healthcare, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; compared with Q1 2011 unless otherwise noted. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions. Molina operates Medicaid-focused health plans in 10 states and Medicaid systems services in five states, serving approximately 1.825 million health plan members at quarter-end.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $1,373.6 million | $1,119.7 million; up 22.7% |
| Premium revenue | $1,327.4 million | $1,081.4 million; up 22.7% |
| Service revenue | $42.2 million | $36.7 million |
| Operating income | $33.4 million | $31.3 million |
| Net income | $18.1 million | $17.4 million |
| Diluted EPS | $0.39 | $0.38 |
| Medical care ratio | 85.2% | 84.5% |
| G&A expense ratio | 8.8% | 8.4% |
| Operating margin / net margin | 2.4% / 1.3% | 2.8% / 1.6% |
| Operating cash flow | $50.6 million | $84.1 million |
Premium growth reflected approximately 6.5% growth in member months and 15.2% higher premium revenue per member per month, including expanded benefits and a shift toward more medically intensive populations. Health Plans operating income fell to $25.0 million from $29.6 million; Molina Medicaid Solutions operating income rose to $8.4 million from $1.7 million.
At March 31, 2012, cash and cash equivalents were $517.7 million, current investments $358.0 million, and working capital $474.9 million. The company reported consolidated cash and investments of $933.8 million, including restricted investments and auction-rate securities. Total assets were $1.740 billion and stockholders’ equity $775.3 million. Debt carrying value was approximately $229.3 million: $187.0 million principal of 3.75% convertible notes due 2014, a $48.3 million term loan, and $10.0 million drawn on the revolving facility, less the notes’ unamortized discount. Operating cash flow declined $33.5 million year over year; receivables growth was a significant cash use, partly offset by deferred revenue and claims payable movements.
Material changes and unusual items
- Medical costs rose to $1,131.0 million from $913.5 million. The medical care ratio increased 0.7 percentage points, and the company cited higher-cost new member mix and rate reductions, particularly in California and Ohio. Texas membership more than doubled year over year; quarter-end membership was 280,000 and reached approximately 300,000 by April 30.
- Favorable prior-period claims development reduced Q1 2012 medical costs by $36.6 million, versus $44.4 million in Q1 2011. The reserve release reflected, among other items, recoveries on Washington newborn claims and lower-than-estimated costs for Texas members. Claims estimates remain sensitive to new populations, utilization, claims-processing patterns, and other assumptions.
- Q1 2012 included a $2.4 million gain from the February sale of Molina Healthcare Insurance Company. The sale eliminated a $23.4 million ceded-life reinsurance receivable and corresponding liability; Molina said it remains contingently liable for policy benefits if both the reinsurer and buyer cannot pay.
- Cash used in investing was $42.7 million, including equipment purchases and net investment purchases; financing provided $16.0 million, including a $10.0 million credit-facility borrowing.
Outlook, risks, and contingencies
- State contract losses: Missouri’s Medicaid contract was scheduled to expire without renewal June 30, 2012; its Q1 premium revenue was $56.6 million, or 4.3% of total premium revenue. Ohio’s Medicaid contract was scheduled to expire December 31, 2012 after the health plan was not selected in a state procurement; Molina appealed. Ohio generated $293.5 million, or 22.1% of Q1 premium revenue. If the appeal fails, most Ohio business activities were expected to cease in 2013; Molina planned to retain its Ohio Medicare Advantage business.
- Other contract exposure: Louisiana selected another provider for its replacement Medicaid system. Molina expected to continue its existing work through successor-system implementation and acceptance, which it believed would not occur before 2014; it expected $45–$50 million of annual Louisiana contract revenue until then. Idaho MMIS revenue and related direct costs remained deferred pending CMS certification.
- Claims and medical-cost uncertainty: Medical claims payable were $455.8 million, including $347.3 million of fee-for-service incurred-but-not-paid claims. The filing highlights substantial sensitivity of earnings to claims estimation and potential for future reserve adjustments. New Texas coverage, California ABD enrollment, Michigan claim inventory, and Wisconsin’s February claims-system conversion were among factors considered in estimates.
- Legal matter: Maine provided a schedule alleging approximately $32.6 million of damages related to MMIS implementation delays and other unspecified matters. No formal claim or legal basis had been asserted, and Molina said potential liability could not be reasonably estimated. Unisys agreed to defend the portion related to certain pre-acquisition delay.
- Liquidity and capital: Management believed cash resources, the credit facility, and internally generated funds would support operations, regulatory requirements, and capital expenditures for at least 12 months. The $170 million revolver had $10.0 million drawn and $10.3 million of letters of credit; financial covenants were met at quarter-end. State rules restricted transfer of $519.5 million of subsidiary net assets to the parent. Health plans had $536.3 million of statutory capital and surplus against $265.1 million of required minimums.
- Additional developments: Molina expected to file a shelf registration statement in Q2 2012 for possible future securities offerings. A special committee was negotiating a possible lease with a company in which CFO and director John C. Molina and his wife had interests; no agreement was reported. The board’s $75 million share-or-note repurchase authorization remained in effect through October 25, 2012, with no program repurchases during the quarter.
- Other stated risks include state budget and rate pressure, contract renewals and procurement outcomes, healthcare utilization and inflation, regulatory changes, government audits, and restrictions on subsidiary dividends. The company reported no material changes to the risk factors in its 2011 Form 10-K.
Most important facts for investors to verify
- Outcomes and financial impact of the Missouri contract expiration and Ohio appeal, particularly Ohio’s material share of premium revenue.
- Whether Texas growth and new benefit responsibilities remain adequately priced as claims experience develops.
- Subsequent claims development, given the $36.6 million favorable prior-period release and the sensitivity of earnings to reserve assumptions.
- Timing of Idaho CMS certification and Louisiana successor-system implementation, and the related revenue-recognition and contract-continuity effects.
- Any formal Maine claim, potential exposure, and developments in the proposed related-party lease or shelf offering.