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Molina Healthcare Reports Third Quarter 2012 Results

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This earnings release contains “forward-looking statements” regarding the Company’s plans, expectations, and anticipated future events. Actual results could differ materially due to numerous known and unknown risks and uncertainties, including, without limitation, risk factors related to the following:

  • the effectiveness of our medical cost containment initiatives in Texas;
  • significant budget pressures on state governments and their potential inability to maintain current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria;
  • uncertainties regarding the implementation of the Patient Protection and Affordable Care Act, including the potential refusal of a state to expand Medicaid eligibility to its uninsured population, issues surrounding state insurance exchanges, the impact of the health insurance industry excise tax, the effect of various implementing regulations, and uncertainties regarding the impact of other federal or state health care and insurance reform measures;
  • management of the Company’s medical costs, including seasonal flu patterns and rates of utilization that are consistent with the Company’s expectations, and the reduction over time of the high medical costs associated with new populations;
  • the success of the Company’s efforts to retain existing government contracts and to obtain new government contracts in connection with state requests for proposals (RFPs) in both existing and new states, including the pending RFP in New Mexico, and the Company’s ability to grow the Company’s revenues consistent with the Company’s expectations;
  • the accurate estimation of incurred but not reported medical costs across the Company’s health plans;
  • risks associated with the continued growth in new Medicaid and Medicare enrollees, and the development of actuarially sound rates with respect to such new enrollees, including dually eligible enrollees;
  • retroactive adjustments to premium revenue or accounting estimates which require adjustment based upon subsequent developments, including Medicaid pharmaceutical rebates;
  • the continuation and renewal of the government contracts of both the Company’s health plans and Molina Medicaid Solutions and the terms under which such contracts are renewed;
  • the timing of receipt and recognition of revenue and the amortization of expense under the state contracts of Molina Medicaid Solutions in Maine or Idaho;
  • additional administrative costs and the potential payment of additional amounts to providers and/or the state by Molina Medicaid Solutions as a result of MMIS implementation issues in Maine or Idaho;
  • government audits and reviews, and any enrollment freeze or monitoring program that may result therefrom;
  • changes with respect to the Company’s provider contracts and the loss of providers;
  • the establishment of a federal or state medical cost expenditure floor as a percentage of the premiums we receive, and the interpretation and implementation of medical cost expenditure floors, administrative cost and profit ceilings, and profit sharing arrangements;
  • the interpretation and implementation of at-risk premium rules regarding the achievement of certain quality measures;
  • approval by state regulators of dividends and distributions by the Company’s health plan subsidiaries;
  • changes in funding under the Company’s contracts as a result of regulatory changes, programmatic adjustments, or other reforms;
  • high dollar claims related to catastrophic illness;
  • the favorable resolution of litigation, arbitration, or administrative proceedings;
  • restrictions and covenants in the Company’s credit facility;
  • the relatively small number of states in which we operate health plans;
  • the availability of financing to fund and capitalize the Company’s acquisitions and start-up activities and to meet the Company’s liquidity needs;
  • a state’s failure to renew its federal Medicaid waiver;
  • an inadvertent unauthorized disclosure of protected health information;
  • changes generally affecting the managed care or Medicaid management information systems industries;
  • increases in government surcharges, taxes, and assessments;
  • changes in general economic conditions, including unemployment rates;
  • increasing consolidation in the Medicaid industry;

and numerous other risk factors, including those discussed in the Company’s periodic reports and filings with the Securities and Exchange Commission. These reports can be accessed under the investor relations tab of the Company’s website or on the SEC’s website at www.sec.gov . Given these risks and uncertainties, we can give no assurances that the Company’s forward-looking statements will prove to be accurate, or that any other results or events projected or contemplated by the Company’s forward-looking statements will in fact occur, and we caution investors not to place undue reliance on these statements. All forward‐looking statements in this release represent the Company’s judgment as of October 23, 2012, and we disclaim any obligation to update any forward-looking statements to conform the statement to actual results or changes in the Company’s expectations.

         

MOLINA HEALTHCARE, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 
Three Months Ended

September 30,

Nine Months Ended

September 30,

2012   2011 2012   2011
(Amounts in thousands, except

net income (loss) per share)

Revenue:
Premium revenue $ 1,488,718 $ 1,138,230 $ 4,308,439 $ 3,348,438
Service revenue 48,422 37,728 132,351 111,290
Investment income 1,171 764 3,996 3,804
Rental income   1,879         5,408      
Total revenue   1,540,190     1,176,722     4,450,194     3,463,532  
Expenses:
Medical care costs 1,314,571 959,158 3,823,136 2,822,049
Cost of service revenue 37,004 34,584 98,111 105,020
General and administrative expenses 127,500 99,610 379,208 290,967
Premium tax expenses 37,894 36,374 120,953 110,633
Depreciation and amortization   16,034     13,430     47,446     38,587  
Total expenses   1,533,003     1,143,156     4,468,854     3,367,256  
Operating income (loss) 7,187 33,566 (18,660 ) 96,276
Interest expense   4,315     4,380     12,421     11,666  
Income (loss) before income taxes 2,872 29,186 (31,081 ) 84,610
Income tax (benefit) expense   (492 )   10,236     (15,228 )   30,832  
Net income (loss) $ 3,364   $ 18,950   $ (15,853 ) $ 53,778  
 
Net income (loss) per share:
Basic $ 0.07   $ 0.41   $ (0.34 ) $ 1.18  
Diluted $ 0.07   $ 0.41   $ (0.34 ) $ 1.16  
Weighted average shares outstanding:
Basic   46,546     45,834     46,301     45,693  
Diluted   46,880     46,296     46,301     46,334  
 
Operating Statistics:
Ratio of medical care costs paid directly to providers to premium revenue 86.1 % 81.9 % 86.5 % 82.0 %
Ratio of medical care costs not paid directly to providers to premium revenue   2.2     2.4     2.2     2.3  
Medical care ratio (1)   88.3 %   84.3 %   88.7 %   84.3 %
General and administrative expense ratio (2) 8.3 % 8.5 % 8.5 % 8.4 %
Premium tax ratio (1) 2.5 % 3.2 % 2.8 % 3.3 %
Effective tax rate (17.1 %) 35.1 % 49.0 % 36.4 %
 

(1) Medical care ratio represents medical care costs as a percentage of premium revenue; premium tax ratio represents premium taxes as a percentage of premium revenue.

(2) Computed as a percentage of total operating revenue.

     

MOLINA HEALTHCARE, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

 
Sept. 30,

2012

Dec. 31,

2011

(Amounts in thousands,

except per share data)

ASSETS
Current assets:
Cash and cash equivalents $ 715,480 $ 493,827
Investments 356,895 336,916
Receivables 156,909 167,898
Income tax refundable 33,530 11,679
Deferred income taxes 21,533 18,327
Prepaid expenses and other current assets   30,002     19,435  
Total current assets 1,314,349 1,048,082
Property, equipment, and capitalized software, net 210,972 190,934
Deferred contract costs 67,516 54,582
Intangible assets, net 85,033 101,796
Goodwill and indefinite-lived intangible assets 151,088 153,954
Auction rate securities 13,523 16,134
Restricted investments 44,488 46,164
Receivable for ceded life and annuity contracts 23,401
Other assets   20,098     17,099  
$ 1,907,067   $ 1,652,146  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable $ 536,463 $ 402,476
Accounts payable and accrued liabilities 151,029 147,214
Deferred revenue 143,301 50,947
Current maturities of long-term debt   1,143     1,197  
Total current liabilities 831,936 601,834
Long-term debt 260,551 216,929
Deferred income taxes 37,478 33,127
Liability for ceded life and annuity contracts 23,401
Other long-term liabilities   22,101     21,782  
Total liabilities   1,152,066     897,073  
Stockholders’ equity:

Common stock, $0.001 par value; 80,000 shares authorized; outstanding: 46,571 shares at September 30, 2012 and 45,815 shares at December 31, 2011

46 46

Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding

Additional paid-in capital 280,728 266,022
Accumulated other comprehensive loss (330 ) (1,405 )
Retained earnings   474,557     490,410  
Total stockholders’ equity   755,001     755,073  
$ 1,907,067   $ 1,652,146  
         

MOLINA HEALTHCARE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Three Months Ended

September 30,

Nine Months Ended

September 30,

2012   2011 2012   2011
(Amounts in thousands)
Operating activities:
Net income (loss) $ 3,364 $ 18,950 $ (15,853 ) $ 53,778
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 20,279 17,812 58,289 52,414
Deferred income taxes 1,787 10,908 1,166 8,069
Stock-based compensation 5,636 4,349 15,448 12,723
Gain on sale of subsidiary (2,390 )
Non-cash interest on convertible senior notes 1,499 1,384 4,414 4,095
Change in fair value of interest rate swap 184 1,270
Amortization of premium/discount on investments 1,551 1,861 5,166 5,300
Amortization of deferred financing costs 310 1,444 825 2,451
Tax deficiency from employee stock compensation (109 ) (158 ) (159 ) (647 )
Changes in operating assets and liabilities:
Receivables 4,098 (21,588 ) 10,989 5,411
Prepaid expenses and other current assets (222 ) 961 (10,574 ) (1,819 )
Medical claims and benefits payable 10,925 19,442 133,987 6,699
Accounts payable and accrued liabilities 13,952 8,961 (9,030 ) 246
Deferred revenue (33,072 ) (12,675 ) 92,354 25,400
Income taxes   (2,141 )   (11,386 )   (21,878 )   (18,957 )
Net cash provided by operating activities   28,041     40,265     264,024     155,163  
 
Investing activities:
Purchases of equipment (19,247 ) (15,055 ) (52,548 ) (45,921 )
Purchases of investments (90,117 ) (74,562 ) (234,465 ) (258,209 )
Sales and maturities of investments 76,893 104,979 213,665 226,413
Proceeds from sale of subsidiary, net of cash surrendered 9,162
Net cash paid in business combinations (3,253 )
Increase in deferred contract costs 4,256 (16,360 ) (18,799 ) (32,765 )
Increase in restricted investments (880 ) (164 ) (3,034 ) (8,394 )
Change in other noncurrent assets and liabilities   (392 )   (2,723 )   (4,775 )   (533 )
Net cash used in investing activities   (29,487 )   (3,885 )   (90,794 )   (122,662 )
 
Financing activities:
Amounts borrowed under credit facility 60,000
Repayment of amounts borrowed under credit facility (10,000 ) (20,000 )
Treasury stock purchases (7,000 ) (7,000 )
Credit facility fees paid (1,125 ) (1,125 )
Principal payments on term loan (273 ) (846 )
Proceeds from employee stock plans 86 5,571 5,640
Excess tax benefits from employee stock compensation   21     24     3,698     1,590  
Net cash (used in) provided by financing activities   (10,166 )   (8,101 )   48,423     (895 )
Net increase in cash and cash equivalents (11,612 ) 28,279 221,653 31,606
Cash and cash equivalents at beginning of period   727,092     459,213     493,827     455,886  
Cash and cash equivalents at end of period $ 715,480   $ 487,492   $ 715,480   $ 487,492  
 

MOLINA HEALTHCARE, INC.

UNAUDITED DEPRECIATION AND AMORTIZATION DATA

Depreciation and amortization related to the Company’s Health Plans segment is all recorded in “Depreciation and Amortization” in the consolidated statements of operations. Depreciation and amortization related to the Company’s Molina Medicaid Solutions segment is recorded within three different headings in the consolidated statements of operations as follows:

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