Molina Healthcare(MOH) - 2020 Q2 - Quarterly Report

Part I - Financial and Operational Information Financial Statements Molina Healthcare, Inc.'s unaudited consolidated financial statements as of June 30, 2020, show significant year-over-year growth in net income to $276 million for Q2 and $454 million for H1, with total assets increasing to $7.88 billion, reflecting operations across Health Plans and Other segments Consolidated Statements of Income Highlights (Unaudited) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $4,618 million | $4,193 million | $9,167 million | $8,312 million | | Operating Income | $424 million | $265 million | $698 million | $545 million | | Net Income | $276 million | $196 million | $454 million | $394 million | | Diluted Net Income per Share | $4.65 | $3.06 | $7.54 | $6.04 | Consolidated Balance Sheet Highlights (Unaudited) | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $3,303 million | $2,452 million | | Total Assets | $7,876 million | $6,787 million | | Total Liabilities | $5,880 million | $4,827 million | | Total Stockholders' Equity | $1,996 million | $1,960 million | Consolidated Statements of Cash Flows Highlights (Unaudited) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $749 million | $156 million | | Net cash provided by (used in) investing activities | $38 million | ($393) million | | Net cash provided by (used in) financing activities | $71 million | ($362) million | Note 1. Organization and Basis of Presentation Molina Healthcare provides managed healthcare services through its Health Plans and Other segments, serving approximately 3.6 million members as of June 30, 2020, while actively pursuing acquisitions like YourCare and Magellan Complete Care, winning new contracts in Kentucky, and exiting the Puerto Rico Medicaid program - The company operates through two segments: Health Plans and Other. The Health Plans segment served approximately 3.6 million members in 14 states and Puerto Rico as of June 30, 2020[16][17] - Recent strategic activities include: - New York: Completed the acquisition of YourCare Health Plan for $42 million on July 1, 2020 - Kentucky: Selected for a statewide Medicaid contract starting January 1, 2021, and agreed to acquire Passport Health Plan for approximately $20 million - Magellan Complete Care: Agreed to acquire the MCC line of business for approximately $820 million, expected to close by Q1 2021 - Puerto Rico: Exiting the Medicaid program upon contract expiration in October 2020[20][21][23] Note 2. Significant Accounting Policies Key accounting policies include monthly premium revenue recognition with adjustments for MLR and risk, a Q2 2020 accrual of $75 million for COVID-19 related premium refunds, and an estimated $277 million liability for the reinstated 2020 Health Insurer Fee which increases the effective tax rate - Due to reduced medical service demand from COVID-19, the company accrued approximately $75 million in Q2 2020 for retroactive premium refunds and related actions to various states[39] Amounts Due Government Agencies (in millions) | Program | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Medicaid Program | $190 | $187 | | Medicare Program | $78 | $71 | | Marketplace Program | $597 | $406 | | Total | $865 | $664 | - The federal Health Insurer Fee (HIF) was reinstated for 2020, with an estimated liability of $277 million. This fee is not tax-deductible and increases the 2020 effective tax rate. The HIF is repealed for years after 2020[54] Note 6. Medical Claims and Benefits Payable Total medical claims and benefits payable increased to $1.960 billion at June 30, 2020, primarily due to higher fee-for-service claims IBNP, with favorable prior-year reserve development of $58 million in H1 2020, less than the $232 million in H1 2019 Medical Claims and Benefits Payable (in millions) | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Fee-for-service claims IBNP | $1,432 | $1,406 | | Pharmacy payable | $132 | $126 | | Capitation payable | $74 | $55 | | Other | $322 | $267 | | Total | $1,960 | $1,854 | - Estimates for prior-year medical claims payable developed favorably by $58 million in the first six months of 2020. This was a smaller favorable development compared to the $232 million seen in the first six months of 2019[82] Note 7. Debt Molina significantly restructured its debt in Q2 2020 by issuing $800 million in 4.375% Senior Notes to repay a $600 million term loan and expanding its revolving credit facility to $1.0 billion, resulting in total long-term debt of $1.812 billion as of June 30, 2020 - In June 2020, the company issued $800 million of 4.375% Notes due 2028. Proceeds were used to repay a $600 million term loan and for general corporate purposes[92] - A new credit agreement was established in June 2020, increasing the revolving credit facility to $1.0 billion from $500 million and terminating the previous term loan facility[85][96] Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported strong Q2 2020 results with $4.65 net income per diluted share, driven by an 8.0% premium revenue increase and lower MCR, with COVID-19 having a net positive impact on earnings, while the company strengthened its balance sheet and pursued strategic acquisitions and contract wins Second Quarter 2020 Highlights Q2 2020 saw strong financial performance with $276 million net income ($4.65 per diluted share), supported by an 8.0% premium revenue increase and a lower consolidated MCR of 82.3%, with COVID-19 having a net positive impact on earnings estimated between $65 million and $100 million Q2 2020 Key Performance Metrics | Metric | Q2 2020 | Change vs. Q2 2019 | | :--- | :--- | :--- | | Premium Revenue | $4.4 billion | +8.0% | | Consolidated MCR | 82.3% | -330 bps | | G&A Ratio | 7.5% | -30 bps | | After-tax Margin | 6.0% | +130 bps | - The combined effects of COVID-19 are estimated to have increased net income by approximately $65 million to $100 million, or $1.10 to $1.65 per diluted share[123] Health Plans Segment Analysis The Health Plans segment, serving 3.6 million members, experienced a Medical Margin increase to $774 million in Q2 2020 due to lower MCR from reduced healthcare utilization during COVID-19, partially offset by premium refunds, while navigating uncertainties from the pandemic, the ACA Supreme Court case, and contract re-procurements - Total membership grew to 3.56 million as of June 30, 2020, an increase of 151,000 in the quarter, primarily in the Medicaid program due to the suspension of member redeterminations during the pandemic[155][177] Medical Margin by Program (in millions) | Program | Q2 2020 Medical Margin | Q2 2019 Medical Margin | Change | | :--- | :--- | :--- | :--- | | Medicaid | $553 | $364 | +52% | | Medicare | $125 | $84 | +49% | | Marketplace | $96 | $135 | -29% | | Total | $774 | $583 | +33% | - The company faces significant uncertainty from the pending Supreme Court decision on the ACA. As of June 30, 2020, ACA-related programs (Medicaid Expansion and Marketplace) accounted for nearly 1 million members and $2.4 billion in revenue for the first half of the year[161] - The company is actively pursuing growth through acquisitions, including the pending $820 million purchase of Magellan Complete Care and the $20 million purchase of Passport Health Plan in Kentucky[164][166] Liquidity and Financial Condition Molina's financial condition strengthened with parent company cash and investments increasing to $1.17 billion at June 30, 2020, driven by new debt issuance and subsidiary dividends, offset by loan repayment and stock repurchases, maintaining sufficient liquidity for future acquisitions like Magellan Complete Care and Passport Health Plan - Cash, cash equivalents and investments at the parent company increased to $1,166 million as of June 30, 2020, from $997 million at December 31, 2019[202] - Net cash from operating activities was strong at $749 million for the first six months of 2020, a significant increase from $156 million in the prior-year period, due to better operating results and timing of government payments[210] - The company has available borrowing capacity of approximately $1 billion under its new revolving credit facility as of June 30, 2020[225] - Future uses of liquidity include funding the acquisitions of Magellan Complete Care (approx. $820 million) and Passport Health Plan (approx. $20 million), both of which will be funded with cash on hand[229][230] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk, where a hypothetical 1% increase in market rates as of June 30, 2020, would decrease the fair value of its fixed-income investments by approximately $47 million, while declining rates would reduce future investment income - The company's main market risk is interest rate risk. A hypothetical and immediate 1% increase in market interest rates would decrease the fair value of its fixed income investments by approximately $47 million as of June 30, 2020[235] Controls and Procedures As of June 30, 2020, the company's management, including the CEO and CFO, concluded that its disclosure controls and procedures are effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period[237] - No material changes to the company's internal control over financial reporting occurred during the second quarter of 2020[238] Part II - Other Information Legal Proceedings The company is involved in various legal actions in the ordinary course of business, accruing liabilities for probable and estimable losses, though the uncertain outcome of pending matters could negatively impact its financial position - The company is involved in legal actions in the ordinary course of business and has accrued for losses that are probable and estimable, though outcomes remain uncertain[239][111] Risk Factors The company highlights significant business risks, particularly from the unforeseeable full impact of the COVID-19 pandemic on health costs, state premium actions, and cybersecurity, alongside risks associated with its October 2020 exit from Puerto Rico's Medicaid program - The full impact of the COVID-19 pandemic on business, financial condition, and results of operations cannot be reasonably foreseen. Key risks include increased medical costs, retroactive state rate actions, potential disruption in state payments, and heightened cybersecurity threats[240][241] - The company's exit from Puerto Rico's Medicaid program in October 2020 presents a risk. A failure to achieve an orderly transition could negatively impact financial results[241] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2020, the company did not repurchase shares under a publicly announced plan, which concluded in March, but withheld 2,568 common shares at an average price of $176.52 to satisfy employee income tax obligations for vested equity awards Issuer Purchases of Equity Securities (Q2 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 1 - April 30 | 136 | $133.48 | | May 1 - May 31 | 2,024 | $180.01 | | June 1 - June 30 | 408 | $173.58 | | Total | 2,568 | $176.52 | - All shares purchased during the quarter were withheld to settle employee income tax obligations for vested awards under the 2019 Equity Incentive Plan. No shares were purchased under a publicly announced buyback program[242] Exhibits This section lists the exhibits filed with the Form 10-Q, including agreements for the Magellan acquisition, the new credit agreement, and senior notes indenture, along with required CEO and CFO certifications and XBRL data files