Molina Healthcare, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; balance-sheet figures are as of June 30, 2015. Unless stated otherwise, financial amounts below are in millions of dollars. Molina provides Medicaid-related health plans and Medicaid administrative technology services. Its plans served 3.352 million members across 11 states and Puerto Rico at quarter-end.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $3,524.9 | $2,312.0 | $6,696.0 | $4,381.3 |
| Operating income | $115.6 | $32.4 | $197.9 | $56.7 |
| Income from continuing operations | $38.9 | $7.7 | $67.1 | $12.6 |
| Net income | $38.9 | $7.8 | $67.1 | $12.3 |
| Diluted EPS from continuing operations | $0.72 | $0.16 | $1.29 | $0.26 |
| Medical care ratio | 88.7% | 89.3% | 88.7% | 89.0% |
| G&A expense ratio | 8.1% | 8.4% | 8.1% | 8.7% |
| Net profit margin, continuing operations | 1.1% | 0.3% | 1.0% | 0.3% |
Quarterly revenue rose 52.5% year over year, principally from enrollment growth, including Medicaid expansion, Marketplace, Illinois and the Puerto Rico launch. Operating income increased 256.6%; continuing-operations income increased 402.9%. Management attributed improved results to higher revenue, better medical and administrative cost efficiency, and more complete state reimbursement of the Affordable Care Act health insurer fee (HIF). The effective tax rate was 61.3% in Q2, versus 58.0% a year earlier, reflecting nondeductible HIF expense and no tax benefit for Puerto Rico losses.
For the six months, operating cash flow was $647.7 million, investing cash flow was negative $556.8 million, and financing cash flow was positive $384.0 million. Cash increased $474.8 million to $2,013.9 million. Cash, investments and restricted investments totaled $3,593.8 million. Working capital was $1,067.7 million.
Balance sheet, debt and liquidity
- Total assets were $5,736.2 million and total liabilities were $4,273.1 million. Medical claims and benefits payable were $1,492.3 million, up from $1,200.5 million at year-end 2014; amounts due government agencies were $824.9 million, up from $527.2 million.
- Convertible notes had $851.6 million principal outstanding and $718.2 million carrying value. The $550 million 1.125% cash-convertible notes met their stock-price conversion trigger and were convertible through at least September 30, 2015; $445.2 million carrying value was classified as current. The company said it expected any conversions in the following 12 months to be insignificant, but disclosed cash-settlement risk.
- A new unsecured $250 million revolving credit facility was undrawn at June 30, 2015. Molina reported covenant compliance. It also raised $373.2 million net from issuing 5.75 million common shares in June.
- Management stated cash resources and internally generated funds should be sufficient for operations, regulatory requirements and capital expenditures for at least 12 months. State regulatory limits restricted approximately $1,005 million of subsidiary net assets from transfer to the parent.
Material changes, outlook and key risks
- Membership and expansion: Total plan membership increased from 2.623 million at December 31, 2014 to 3.352 million at June 30, 2015. Puerto Rico began serving members April 1 and had approximately 361,000 members at quarter-end. Marketplace membership was 261,000, including approximately 176,000 in Florida.
- Claims estimates: The six-month period included $138.1 million of favorable prior-period claims development. Molina identified new and rapidly growing member populations and changes in Washington claims inventory as sources of added reserve uncertainty. Claims payable estimates are a critical accounting estimate.
- HIF and contractual provisions: Q2 included California HIF reimbursement for prior and current periods; management described the net Q2 HIF impact as favorable by $12 million, or $0.14 per diluted share, while the six-month impact was unfavorable by $5 million, or $0.06 per diluted share. The company had not secured full 2015 HIF reimbursement agreements with Michigan and Utah; it estimated those states needed to pay approximately $33 million to make it whole. Liabilities for medical-cost floors and corridors were $516.8 million, including $458.1 million associated with Medicaid expansion.
- Growth plans: Molina expected three announced Florida, Illinois and Michigan Medicaid acquisitions to add approximately 180,000 members by year-end 2015, for an estimated total cost of $110 million, subject to approvals and closing conditions. It expected closings in Q3 for Florida and Michigan and Q4 for Illinois. New Jersey selected Molina Medicaid Solutions for a 10-year MMIS contract effective May 1, 2015. The filing provides no formal earnings or revenue guidance.
- Government payment and program risks: Illinois had no state budget for fiscal 2016; it was current on payments through June 30 but had not paid July or August as of July 30. Puerto Rico continued weekly payments as of July 30, but its fiscal and debt crisis could impair its ability to pay Molina. The filing also cites risks involving Medicaid rate and cost rules, contract renewals and competitive bids, ACA implementation, pharmaceutical costs, audits, privacy and cybersecurity, and medical-cost estimation.
- Legal and unusual items: The company disclosed Louisiana litigation alleging an incorrect pharmaceutical reimbursement formula and two False Claims Act qui tam matters in Florida and California; it said liabilities were not currently probable or reasonably estimable. A $2.6 million share-based compensation reversal was recorded in Q2 for performance awards the company no longer expected to vest. A $50 million share-repurchase authorization remained available through December 31, 2015; no shares were purchased under the program during Q2.
Most important facts for investors to verify
- Whether favorable claims reserve development and the lower consolidated medical care ratio persist, especially as new members mature and claims inventories change.
- Whether state medical-cost floor/corridor liabilities and HIF reimbursements—particularly in Michigan and Utah—are ultimately settled at the amounts estimated.
- Whether Illinois and Puerto Rico continue timely premium payments, and whether Puerto Rico’s financial condition affects the new plan’s viability.
- Whether the three planned Medicaid acquisitions close on schedule and within the estimated $110 million cost, and whether integration and medical costs meet expectations.
- Potential cash needs if holders convert the 1.125% notes, alongside the company’s stated liquidity capacity and covenant compliance.
- Outcomes and potential exposure from the disclosed litigation, regulatory matters, and government contract renewals or rebids.