Molina Healthcare, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; year-to-date comparisons are for the nine months ended September 30, 2014 versus the same 2013 period. Amounts are in U.S. dollars.
Business context
Molina provides Medicaid-related health plans and Medicaid administration and technology services. It reported two segments: Health Plans, operating in 11 states, and Molina Medicaid Solutions. Health Plans served approximately 2.4 million members at quarter-end, up from 1.9 million a year earlier. Growth reflected Medicaid expansion, South Carolina operations, and other membership additions. Marketplace membership was fewer than 20,000.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $2.484 billion | $1.687 billion | $6.866 billion | $4.883 billion |
| Operating income | $39.8 million | $24.9 million | $96.5 million | $139.2 million |
| Income from continuing operations | $16.1 million | $7.6 million | $28.6 million | $53.9 million |
| Net income, including discontinued operations | $16.1 million | $7.6 million | $28.4 million | $62.1 million |
| Diluted EPS from continuing operations | $0.33 | $0.16 | $0.60 | $1.15 |
| Medical care ratio | 90.6% | 87.3% | 89.6% | 86.5% |
| Operating margin | 1.6% | 1.5% | 1.4% | 2.9% |
Q3 premium revenue rose 46%; nine-month premium revenue rose 40%. Membership growth and higher revenue per member drove the increase. Medical care costs grew faster than premiums, raising the medical care ratio; management said higher LTSS enrollment, inadequate rate increases relative to cost trends, and contract profit-cap and medical-cost-floor provisions contributed. Nine-month medical margin nevertheless increased 8.5%, or $52.5 million. General and administrative expense declined to 7.2% of revenue in Q3 from 10.4%, and to 8.2% year to date from 9.8%, reflecting improved fixed-cost leverage.
Molina Medicaid Solutions operating income increased to $9.9 million in Q3 from $8.0 million, and to $30.6 million for nine months from $20.6 million, primarily on higher transaction volumes; year-to-date results also benefited from lower G&A costs.
Cash, liquidity, and debt
Cash and cash equivalents were $1.599 billion at September 30, 2014, versus $935.9 million at December 31, 2013. Cash, investments, and restricted investments totaled $2.541 billion, and working capital was $1.051 billion. Management stated available cash and internally generated funds were expected to support operations, regulatory requirements, and capital expenditures for at least 12 months.
For the first nine months, operating cash flow was $841.2 million, compared with $111.7 million in 2013; investing cash outflow was $261.3 million versus $541.4 million; financing cash inflow was $82.8 million versus $490.5 million. The increase in operating cash flow was substantially supported by higher claims payable, accrued liabilities, and deferred revenue alongside membership growth; it should not be read as earnings growth alone.
Convertible-note principal totaled $862.0 million at quarter-end, with a net carrying amount of $707.7 million. The company issued $125 million principal amount of 1.625% notes in September and exchanged $176.6 million of 3.75% notes for 1.625% notes and approximately 1.7 million shares. The remaining $10.4 million of 3.75% notes was repaid in early October. Total liabilities were $3.092 billion. State rules restricted approximately $717 million of health-plan subsidiary net assets from transfer to the parent; parent-company cash, equivalents, and investments were $374.3 million.
Outlook, commentary, and material risks
- 2014 earnings outlook: Management said continuing-operations diluted EPS and adjusted diluted EPS may fall short of the low end of previously issued 2014 guidance. The filing text provided here does not state the prior guidance ranges.
- Health insurer fee (HIF): Molina paid an $88.6 million 2014 assessment. Management estimated approximately $50 million of full-year HIF revenue remained unsupported by state reimbursement agreements and said full reimbursement was not expected before year-end. Unreimbursed HIF and related tax effects reduced pretax income by approximately $37 million, or $0.49 per diluted share, for the first nine months.
- Texas quality revenue: $17.7 million of potential revenue was unrecognized for the first nine months. Management cited uncertainty about state standards and calculations and was doubtful it would recognize the full amount in 2014.
- Claims and utilization uncertainty: Medical claims payable rose to $1.124 billion from $669.8 million at year-end. New Medicaid expansion and South Carolina populations had limited claims history; New Mexico retroactive enrollment and a Washington inpatient-claims backlog added estimation uncertainty. Favorable prior-period claims development was $41.0 million for the first nine months.
- Other unusual items: Washington settlements reduced Q3 premium revenue by a net $11.2 million. An IRS regulation change generated an approximately $7 million tax benefit, or $0.15 per diluted share, relating to prior periods. Contractual minimum medical-spending and profit-sharing provisions also materially affected reported economics.
- Expansion and contracts: Molina was selected in October 2014 to operate Puerto Rico’s Medicaid-funded plan in two regions, with service expected to begin in Q2 2015. A Florida Medicaid asset and contract acquisition was expected to close in late 2014 or early 2015.
- Legal and regulatory exposure: The State of Louisiana alleged an incorrect pharmaceutical-claims reimbursement formula; relator actions in Florida and California also remained pending. The company said these liabilities were not currently probable or reasonably estimable. Adverse outcomes, state rate decisions, contract renewals, regulatory requirements, specialty-drug costs, and the ability to obtain HIF reimbursement were identified as risks.
Important facts for investors to verify
- Updated 2014 EPS guidance and the expected effect of higher medical costs and contract profit limitations.
- Whether states reimburse the outstanding HIF amounts, including related tax effects, and whether Texas quality revenue becomes recognizable.
- Claims reserve development, claims backlog resolution, and utilization experience in newer or expanded membership cohorts.
- Medical care ratios and profitability by state, particularly Washington, Utah, Florida, New Mexico, and Texas.
- Cash-flow sustainability after the effects of growth-related claims payables and accruals, alongside parent-level liquidity and restrictions on subsidiary funds.
- Debt and dilution implications of convertible notes, repurchase rights beginning in 2018 for the 1.625% notes, and related warrants.
- Developments in the Louisiana and False Claims Act matters, and completion and performance of announced contract and acquisition expansions.