Molina Healthcare, Inc. — Q3 2011 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2011. Molina operates Medicaid-focused health plans in ten states and provides Medicaid systems and administrative services through Molina Medicaid Solutions. Its health plans served approximately 1.678 million members at quarter-end.
Financial performance
Amounts below are in millions except per-share data. Comparisons are with the corresponding 2010 period.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $1,176.7 | $1,039.1 | $3,463.5 | $3,005.2 |
| Operating income | $33.6 | $30.0 | $96.3 | $71.6 |
| Net income | $19.0 | $16.2 | $53.8 | $37.3 |
| Diluted EPS | $0.41 | $0.38 | $1.16 | $0.93 |
| Medical care ratio | 84.3% | 84.2% | 84.3% | 85.1% |
- Q3 premium revenue rose 13% to $1,138.2 million; nine-month premium revenue rose 14% to $3,348.4 million. Growth reflected membership and per-member revenue increases. Total ending membership increased about 5% year over year; member-month growth was reported as 8% for Q3 and 10% for the nine-month period.
- Operating margin was approximately 2.9% in Q3 and 2.8% year to date; net margin was approximately 1.6% for both periods. The nine-month operating margin improved from approximately 2.4% in 2010.
- Nine-month operating cash flow was $155.2 million, versus $9.5 million in 2010. Deferred revenue provided $42.6 million of operating cash, compared with a $64.3 million use in 2010. Investing cash outflow was $122.7 million; financing cash outflow was $0.9 million. Cash increased $31.6 million to $487.5 million.
- At September 30, cash and investments were $881.0 million, working capital was $430.2 million, and total stockholders’ equity was $781.8 million. Current assets were $1,034.6 million versus current liabilities of $604.4 million.
- Debt included $187.0 million principal of 3.75% convertible notes due 2014, with a $168.1 million carrying value. A new $170 million revolving credit facility had no borrowings outstanding; $10.3 million was committed to letters of credit. The company reported compliance with its financial covenants.
Material changes and operating drivers
- Health Plans segment operating results strengthened, while Molina Medicaid Solutions moved to an operating loss of $0.2 million in Q3 and $4.0 million for nine months. The 2010 nine-month comparison includes only five months of Medicaid Solutions results because the business was acquired in May 2010.
- Consolidated medical care costs rose, but the nine-month medical care ratio improved to 84.3% from 85.1%. Q3 was essentially unchanged year over year. Texas and Florida remained challenging; Q3 ratios were 93.7% and 89.2%, respectively. California’s Q3 ratio rose to 88.8%, including the effect of an estimated premium reduction.
- Nine-month earnings included a $6.9 million Utah premium revenue settlement with no corresponding expense. Favorable development of prior-period medical claims estimates reduced medical costs by $49.5 million during the nine months.
- The company recorded $9.5 million of Idaho contract direct costs in the first nine months that could not be deferred because estimated future net revenue did not exceed estimated direct costs. Idaho revenue recognition is expected to begin in the second half of 2012; management expects the contract to break even through its initial term.
Outlook, risks and unusual items
- Management said state budget pressures and health-plan rate levels remained uncertain. Rate reductions included California (estimated 6%, retroactive to July 1), New Mexico (2.5%), Utah (2%), and Texas (2%); reported increases included Missouri (5%), Florida (7.5%), and Michigan (1%). Management anticipated another 1% California reduction effective October 1, 2011.
- CMS indicated general approval on October 27 of the proposed California rate cut, but its immediate effect remained unclear and litigation to block implementation was anticipated. The company had reserved approximately $7.5 million for the estimated cut and had not recorded a potential recovery of provider payments.
- Louisiana notified Molina Medicaid Solutions that it intended to award the replacement Medicaid Management Information System contract to another firm. Molina expected to continue operating under the existing contract for at least two years; Louisiana contract revenue was approximately $36 million for the first nine months of 2011.
- Management said system stabilization in Idaho and Maine was taking longer and costing more than anticipated, and believed Medicaid Solutions profitability could improve as those costs decline. Idaho certification review was anticipated in late 2011 or early 2012, with certification expected in the second half of 2012; Maine certification was underway.
- Medical claims estimates are a significant judgment area. Management reported $49.5 million of favorable prior-period claims development and warned that future reserve increases could materially reduce earnings. The filing quantifies substantial sensitivity to changes in claims completion factors and cost trends.
- Other risks include state contract renewals, rate and benefit changes, medical utilization and cost trends, government audits, regulatory capital and dividend restrictions, and credit-facility covenants. The company reported $463.1 million of health-plan statutory capital and surplus against a $273.9 million minimum; $456.2 million of subsidiary net assets were not freely transferable to the parent.
- Management stated that cash resources, the credit facility and internally generated funds should support operations, regulatory requirements and capital expenditures for at least 12 months. Subsequent events included an October 26 authorization to repurchase up to $75 million of common stock or 2014 notes, and an October 11 agreement to acquire an office project for $83 million, subject to conditions and expected to close in December 2011 or Q1 2012.
- The filing reports no material change in contractual obligations since the 2010 Form 10-K. Management considered ordinary-course legal matters unlikely to have a material adverse effect. No specific full-year earnings guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether California’s rate reduction is implemented retroactively as assumed, and the ultimate effect on premiums and provider-payment recoveries.
- Medical claims reserve development, particularly the sustainability of favorable prior-period adjustments and the assumptions underlying incurred-but-not-paid claims.
- Texas, Florida, California and Wisconsin plan profitability, including medical cost trends and the effects of rate changes and membership mix.
- Replacement of Louisiana’s MMIS contract and the cost, certification timing and economics of the Idaho and Maine implementations.
- Availability of parent-company liquidity after regulated-subsidiary capital and dividend restrictions, the proposed $83 million property purchase, and the $75 million repurchase authorization.