Molina Healthcare : Announces Second Quarter 2018 Results and Increases Fiscal Year 2018 Guidance

Molina Healthcare, Inc. (NYSE: MOH):

• Net income of $3.02 per diluted share on a GAAP basis in the second quarter of 2018, compared with $1.64 per diluted share in the first quarter of 2018
• Second quarter 2018 results include a net benefit of $0.83 per diluted share for non-run rate items, primarily relating to the 2017 Marketplace risk adjustment
• Premium revenue increases $191 million, or 4.4%, in the second quarter of 2018 compared with the first quarter of 2018
• Medical care ratio of 85.3% in the quarter
• General and administrative expense ratio of 6.9% in the quarter
• Net profit margin of 4.1% in the quarter and 3.2% year to date
• 2018 guidance increases by $3.00 per diluted share at the midpoint to a range of $7.15 - $7.35 net income per diluted share on a GAAP basis
• 2018 guidance includes the net benefit of $0.96 per diluted share for the non-run rate items recorded in the first half of the year

Molina Healthcare, Inc. (NYSE: MOH) today reported its financial results for the second quarter of 2018.

“Our second quarter results are a strong indication that the early stages of our margin recovery and sustainability plan are working,” said Joe Zubretsky, President and Chief Executive Officer. “Our focus on managed care fundamentals and a more rigorous performance management process is reflected in our improved earnings.”

We believe that the sequential comparison of our 2018 second quarter performance with our 2018 first quarter performance is the most useful indicator of our business progress. Significant items impacting the quarter are presented in a table later in this press release.

Second Quarter of 2018 Compared With First Quarter of 2018

Net income increased to $202 million, from $107 million in the first quarter of 2018. Net income per diluted share increased to $3.02, from $1.64 in the first quarter of 2018.

Overall, the medical care ratio improved to 85.3%, from 86.1% in the first quarter of 2018. Excluding the combined benefit of the 2017 Marketplace risk adjustment and cost sharing reduction (CSR) reimbursement, the medical care ratio would have been 87.0% in the second quarter of 2018, compared with 87.2% in the first quarter of 2018. The sequential improvement in the overall medical care ratio was due to a decrease in the Medicaid medical care ratio partially offset by a seasonally higher Marketplace medical care ratio.

• The Medicaid medical care ratio decreased to 89.8%, from 90.8% in the first quarter of 2018. Improved performance at the Washington, California, Texas, New Mexico and Illinois health plans, partially offset by a decline in performance at the Ohio and Florida health plans, drove the decrease in the medical care ratio for Medicaid.
• The Marketplace medical care ratio increased to 57.4%, from 50.6% in the first quarter of 2018. Excluding the combined net benefit of the 2017 risk adjustment and CSR, the Marketplace medical care ratio would have been 68.4% in the second quarter of 2018, compared with 63.5% in the first quarter of 2018.

The general and administrative (G&A) expense ratio decreased to 6.9%, from 7.6% in the first quarter of 2018, due to increased revenue and continuing G&A cost containment. Excluding the impact of Marketplace broker commissions and exchange fees in both periods, the G&A ratio decreased to 6.2%, from 6.8% in the first quarter of 2018.

Renewal of Medicaid Contracts

Year to date in 2018, we renewed Medicaid contracts in Washington, Florida and Puerto Rico as follows:

• In May 2018, our Washington health plan was selected to negotiate and enter into a managed care contract for the eight remaining regions of the state’s Apple Health Integrated Managed Care program, in addition to the two regions previously awarded to us. As of June 30, 2018, we served approximately 742,000 Medicaid members in Washington.
• In June 2018, our Florida health plan was awarded Medicaid Managed Care contracts in Regions 8 and 11 of the Florida Statewide Medicaid Managed Care Invitation to Negotiate, beginning in 2019. As of June 30, 2018, we served approximately 96,000 Medicaid members in those regions.
• In July 2018, our Puerto Rico health plan was selected to be one of the organizations to administer the Commonwealth’s new Medicaid Managed Care contract. Services under the new contract, currently expected to begin on November 1, 2018, would cover the entire island. As of June 30, 2018, we served approximately 326,000 Medicaid members in the East and Southwest regions of Puerto Rico.

Capital Plan Progress

In the second quarter of 2018, we repaid $300 million outstanding under the revolving credit facility. In addition, we repaid $96 million aggregate principal amount of our 1.125% cash convertible senior notes due 2020 and entered into privately negotiated termination agreements to terminate the respective portions of the call options and warrants. Year to date, we have reduced the principal amount of outstanding debt by $493 million.

Sale of Molina Medicaid Solutions Segment

In June 2018, we entered into a definitive agreement to sell Molina Medicaid Solutions (MMS) to DXC Technology Company. The divestiture, expected to close in the third quarter of 2018, is subject to the satisfaction of customary closing conditions and the receipt of certain third party consents and regulatory approvals. We expect the net cash selling price for the equity interests of MMS to approximate $220 million after certain adjustments.

Second Quarter of 2018 Compared With Second Quarter of 2017

Net income for the second quarter of 2018 was $202 million, compared with a net loss of $230 million for the second quarter of 2017. Net income per diluted share was $3.02 for the second quarter of 2018 compared with net loss per diluted share of $4.10 reported for the second quarter of 2017. In the second quarter of 2017, we recorded significant medical care costs relating to prior year dates of service in excess of historical expectations, and Marketplace-related premium deficiency reserves and changes in estimates relating to prior year dates of service. In addition, we recorded significant impairment and restructuring charges.

2018 Revised Guidance

The following table summarizes 2018 Revised Guidance ⁽¹⁾:

Conference Call

Management will host a conference call and webcast to discuss Molina Healthcare’s second quarter 2018 results at 8:00 a.m. Eastern time on Wednesday, August 1, 2018. The number to call for the interactive teleconference is (877) 883-0383 and entering confirmation number 7567890. A telephonic replay of the conference call will be available through Wednesday, August 8, 2018, by dialing (877) 344-7529 and entering confirmation number 10121865. A live audio broadcast of this conference call will be available on Molina Healthcare’s website, molinahealthcare.com. A 30-day online replay will be available approximately an hour following the conclusion of the live broadcast.

About Molina Healthcare

Molina Healthcare, Inc., a FORTUNE 500 company, provides managed health care services under the Medicaid and Medicare programs and through the state insurance marketplaces. Through its locally operated health plans, Molina Healthcare served approximately 4.1 million members as of June 30, 2018. For more information about Molina Healthcare, please visit molinahealthcare.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This earnings release contains “forward-looking statements” regarding the Company’s 2018 revised guidance, as well as its plans, expectations, and anticipated future events. Actual results could differ materially due to numerous known and unknown risks and uncertainties. Those known risks and uncertainties include, but are not limited to, the following:

• the success of the Company’s profit improvement and maintenance initiatives, including the timing and amounts of the benefits realized, and administrative and medical cost savings achieved;
• the numerous political and market-based uncertainties associated with the Affordable Care Act (the “ACA”) or “Obamacare;”
• the market dynamics surrounding the ACA Marketplaces, including but not limited to uncertainties associated with risk adjustment requirements, the potential for disproportionate enrollment of higher acuity members, the discontinuation of premium tax credits, and the adequacy of agreed rates;
• subsequent adjustments to reported premium revenue based upon subsequent developments or new information, including changes to estimated amounts payable or receivable related to Marketplace risk adjustment;
• effective management of the Company’s medical costs;
• the Company’s ability to predict with a reasonable degree of accuracy utilization rates, including utilization rates associated with seasonal flu patterns or other newly emergent diseases;
• 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;
• the full reimbursement of the ACA health insurer fee, or HIF;
• the success of the Company’s efforts to retain existing or awarded government contracts, including those in New Mexico and Texas, and those for Regions 8 and 11 in Florida, including the success of any protest filings or defenses;
• the Company’s ability to manage its operations, including maintaining and creating adequate internal systems and controls relating to authorizations, approvals, provider payments, and the overall success of its care management initiatives;
• the Company’s ability to consummate and realize benefits from divestitures and acquisitions, including the timely closing of the MMS divestiture;
• the Company’s receipt of adequate premium rates to support increasing pharmacy costs, including costs associated with specialty drugs and costs resulting from formulary changes that allow the option of higher-priced non-generic drugs;
• the Company’s ability to operate profitably in an environment where the trend in premium rate increases lags behind the trend in increasing medical costs;
• the interpretation and implementation of federal or state medical cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, profit sharing arrangements, and risk adjustment provisions and requirements;
• the Company’s estimates of amounts owed for such cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, profit-sharing arrangements, and risk adjustment provisions;
• the Medicaid expansion medical cost corridors in California, New Mexico, and Washington, and any other retroactive adjustment to revenue where methodologies and procedures are subject to interpretation or dependent upon information about the health status of participants other than Molina members;
• the interpretation and implementation of at-risk premium rules and state contract performance requirements regarding the achievement of certain quality measures, and the Company’s ability to recognize revenue amounts associated therewith;
• cyber-attacks or other privacy or data security incidents resulting in an inadvertent unauthorized disclosure of protected health information;
• the success of the Company’s health plan in Puerto Rico, including the resolution of the debt crisis and the effect of the PROMESA law, and the impact of any future significant weather events;
• the success and renewal of the Company’s duals demonstration programs in California, Illinois, Michigan, Ohio, South Carolina, and Texas;
• the accurate estimation of incurred but not reported or paid medical costs across the Company’s health plans;
• efforts by states to recoup previously paid and recognized premium amounts;
• complications, member confusion, or enrollment backlogs related to the annual renewal of Medicaid coverage;
• government audits and reviews, or potential investigations, and any fine, sanction, enrollment freeze, monitoring program, or premium recovery that may result therefrom;
• changes with respect to the Company’s provider contracts and the loss of providers;
• 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, including litigation involving the ACA to which we ourselves are not a direct party;
• the relatively small number of states in which we operate health plans, including the greater scale and revenues of the Company’s California, Ohio, Texas, and Washington health plans;
• the availability of adequate financing on acceptable terms to fund and capitalize the Company’s expansion and growth, repay the Company’s outstanding indebtedness at maturity and meet its liquidity needs, including the interest expense and other costs associated with such financing;
• the Company’s failure to comply with the financial or other covenants in its credit agreements or the indentures governing its outstanding notes;
• the sufficiency of the Company’s funds on hand to pay the amounts due upon conversion or maturity of its outstanding notes;
• the failure of a state in which we operate to renew its federal Medicaid waiver;
• changes generally affecting the managed care or Medicaid management information systems industries;
• increases in government surcharges, taxes, and assessments, including but not limited to the deductibility of certain compensation costs;
• newly emergent viruses or widespread epidemics, public catastrophes or terrorist attacks, and associated public alarm;
• the unexpected loss of the leadership of one or more of our senior executives;
• increasing competition and 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 sec.gov. Given these risks and uncertainties, the Company can give no assurances that its forward-looking statements will prove to be accurate, or that any other results or events projected or contemplated by its forward-looking statements will in fact occur, and the Company cautions investors not to place undue reliance on these statements. All forward-looking statements in this release represent the Company’s judgment as of July 31, 2018, and the Company disclaims any obligation to update any forward-looking statements to conform the statement to actual results or changes in its expectations.