Business Context and Reporting Period
This Form 8-K, filed on January 18, 2010, by Molina Healthcare, Inc., reports the entry into a Material Definitive Agreement and the creation of a direct financial obligation. The filing details the acquisition of the Health Information Management (HIM) business from Unisys Corporation and a corresponding amendment to Molina's credit facility.
Key Financial Metrics and Transaction Terms
- Purchase Price: $135 million in cash, subject to a working capital adjustment targeting $10 million.
- Financing: Funded via a draw on an existing $200 million credit facility. Outstanding principal balance prior to the transaction was $0.
- Indemnification Caps: Liability capped at $25 million per party; lost profits capped at $12.5 million.
- Employee Count: Approximately 900 employees from the HIM business are expected to transfer to Molina.
- Contract Portfolio: Includes MMIS contracts in Idaho, Louisiana, Maine, New Jersey, and West Virginia, plus drug rebate administration for Florida.
Material Changes and Credit Agreement Amendments
To facilitate the acquisition, Molina entered into a Fourth Amendment to its Credit Agreement with Bank of America, N.A. Key changes include:
- Interest Rate Margins: LIBOR loan margins increased to a range of 2.75% to 3.75%; Base rate loan margins increased to 1.75% to 2.75%. Until a compliance certificate is delivered post-closing, margins are fixed at 3.5% (LIBOR) and 2.5% (Base Rate).
- Covenant Adjustments: Fixed charge coverage ratio reduced from 3.50x to 2.75x (pro forma) for December 31, 2009, and 3.00x thereafter.
- Capital Expenditures: Allowable capex increased to $55 million for 2009, with annual step-ups to $70 million by 2012.
- Debt Carve-out: $187 million of 3.75% convertible senior notes due 2014 are carved out from indebtedness covenants.
- Fees: A consent fee of 10 basis points was paid on lender commitments.
Outlook, Risks, and Contingencies
The transaction is subject to customary regulatory approvals and state contract assignment consents. The agreement includes a termination right if the acquisition does not close by June 30, 2010. Unisys will provide transitional support for up to one year post-closing.
Identified Risks:
- Timely closing and receipt of regulatory/customer consents.
- Integration of operations and retention of 900 employees.
- Renewal of state government contracts and implementation of Maine and Idaho systems.
- MMIS certification by the Centers for Medicare and Medicaid.
- Accuracy of operating cost and capital outlay projections.
Investor Verification Checklist
- Verify the status of regulatory approvals and state contract assignment consents required for closing.
- Confirm the exact closing date to ensure it occurs before the June 30, 2010 termination deadline.
- Review the pro forma impact of the increased interest rate margins (fixed at 3.5% initially) on future debt service costs.
- Assess the integration plan for the 900 incoming employees and the stability of the five state MMIS contracts.
- Monitor the delivery of the compliance certificate required to adjust interest margins from the fixed rate.