Molina Healthcare, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited consolidated results, compared with Q1 2014 unless noted. Molina provides government-sponsored health plans and Medicaid information technology and administrative services. Its health plans served approximately 2.965 million members across 11 states and Puerto Rico at quarter-end.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $3.171 billion | $2.069 billion | +53.3% |
| Premium revenue | $2.971 billion | $1.940 billion | +53.1% |
| Operating income | $82.2 million | $24.3 million | +238.9% |
| Income from continuing operations | $28.1 million | $4.8 million | +482.1% |
| Net income | $28.2 million | $4.5 million | — |
| Diluted EPS, continuing operations | $0.56 | $0.10 | +460.0% |
| Operating cash flow | $553.6 million | $210.9 million | +$342.7 million |
Margins and costs: Medical care costs were $2.636 billion; the medical care ratio (medical costs as a percentage of premium revenue) was 88.7%, unchanged year over year and below Q4 2014’s 89.4%. Medical margin rose 53% to $334.9 million. General and administrative expenses were $256.1 million; the G&A ratio improved to 8.1% from 9.1% (approximately 7.4% excluding specified Puerto Rico start-up and Marketplace costs). Operating margin was approximately 2.6%, versus 1.2% a year earlier; net margin was approximately 0.9%, versus 0.2%. The effective tax rate was 58.2%, up from 53.9%.
Cash flow and liquidity: Cash and cash equivalents were $1.870 billion at March 31, up from $1.539 billion at year-end. Cash and investments, including restricted investments, totaled $3.178 billion, versus $2.666 billion. Operating cash flow was partly supported by changes in claims payable, payables and receivables; investing activities used $227.8 million, primarily for investment purchases, and capital spending was $25.0 million. Working capital was $682.4 million, down from $1.071 billion, primarily because $440.2 million of 1.125% notes was classified as current after becoming convertible. Management said cash resources and internally generated funds should support operations, regulatory requirements and capital expenditures for at least 12 months.
Debt: Convertible notes had $851.6 million principal and $711.1 million net carrying value. The 1.125% notes’ $440.2 million carrying amount was current because a stock-price trigger made them convertible for cash through at least June 30, 2015; management expected any conversions over the next 12 months to be insignificant. The 1.625% notes were not convertible at quarter-end. Lease financing obligations were approximately $201.1 million, including related-party obligations.
Changes, outlook and notable items
- Management attributed premium growth to membership increasing more than 38% and premium revenue per member per month rising nearly 15%, reflecting growth in programs serving members with more complex needs. Total membership rose from 2.151 million at March 31, 2014 to 2.965 million.
- Florida added approximately 185,000 Marketplace members in Q1. Puerto Rico began operations April 1, 2015, with approximately 350,000 members. New Jersey selected Molina Medicaid Solutions for a 10-year MMIS contract effective May 1, 2015, with three one-year renewal options. These are post-quarter developments.
- Medicaid Solutions operating income increased to $13.8 million from $10.2 million, which the company attributed to a renegotiated state contract, operational efficiencies and lower intangible amortization.
- Q1 included $135.8 million of favorable prior-period claims development, equal to 11.3% of beginning claims payable. Approximately $25 million related to medical-cost floor or corridor programs and reduced premium revenue. Management highlighted higher reserve uncertainty from fast-growing Florida, Illinois and Ohio populations and increased Washington claims inventory following fee-schedule implementation delays.
- Contractual medical-cost floor and corridor liabilities were $446.5 million at quarter-end, approximately $430 million related to Medicaid expansion; about $260 million related to Washington, where adjustments may depend on costs across participating health plans. Profit-sharing and profit-ceiling liabilities were $5.6 million.
- Health Insurer Fee (HIF) reimbursement delays from California, Michigan and Utah reduced Q1 pretax income by approximately $16 million, or $0.20 per diluted share. The company reported no Q1 recognition of $20 million in outstanding 2014 HIF reimbursement, but said California reimbursed the 2014 amount, including related tax effects, in April. Management had agreements for 2015 reimbursement from all state partners except California, Michigan and Utah and warned that incomplete reimbursement could materially affect results.
- Other principal risks include medical-cost estimation and utilization, state rate and reimbursement decisions, ACA implementation and litigation, contract renewals and competitive bids, government audits, provider disputes, specialty-drug costs, and regulatory limits on subsidiary dividends. Nearly $928 million of subsidiary net assets was not transferable to the parent under current restrictions; parent-company cash, cash equivalents and investments were $210.6 million. All health plans met minimum capital requirements.
- Pending matters include Louisiana’s claims over an alleged pharmaceutical reimbursement formula and qui tam actions involving Florida and California. The company said the alleged liabilities were not currently probable or reasonably estimable; adverse outcomes could materially affect results. It also authorized up to $50 million of share repurchases through December 31, 2015; no purchases under the program were reported in Q1.
- No numerical full-year earnings or revenue guidance was provided in the supplied filing text. Management cautioned that interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether the elevated favorable claims development reverses, and how new-member growth and Washington claims inventory affect reserve adequacy and future medical care ratios.
- Whether California, Michigan and Utah reimburse the full 2015 HIF and related tax impact, and the timing of recognition.
- Whether 1.125% noteholders convert or put meaningful pressure on liquidity, and how the cash-settlement exposure is offset by the related call spread arrangements.
- Whether high medical care ratios in Utah, Washington, New Mexico and Texas persist, and whether state rate and quality-incentive adjustments compensate for medical costs.
- Whether Puerto Rico’s launch, Florida Marketplace growth and the New Jersey MMIS award meet operational and financial expectations.
- How the Louisiana and qui tam litigation, government oversight, and restrictions on moving regulated-subsidiary capital affect potential exposure and parent liquidity.