MOH-2013.09.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2013
Or
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-31719
Molina Healthcare, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 13-4204626 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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200 Oceangate, Suite 100 Long Beach, California | | 90802 |
(Address of principal executive offices) | | (Zip Code) |
(562) 435-3666
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | x | Accelerated filer | ¨ |
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Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares of the issuer’s Common Stock outstanding as of October 28, 2013, was approximately 45,760,400.
MOLINA HEALTHCARE, INC.
Index
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
MOLINA HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS |
| | | | | | | |
| September 30, 2013 | | December 31, 2012 |
| (Amounts in thousands, except per-share data) |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 856,556 |
| | $ | 795,770 |
|
Investments | 735,151 |
| | 342,845 |
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Receivables | 293,967 |
| | 149,682 |
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Deferred income taxes | 30,480 |
| | 32,443 |
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Prepaid expenses and other current assets | 50,061 |
| | 28,386 |
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Total current assets | 1,966,215 |
| | 1,349,126 |
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Property, equipment, and capitalized software, net | 267,277 |
| | 221,443 |
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Deferred contract costs | 48,768 |
| | 58,313 |
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Intangible assets, net | 104,635 |
| | 77,711 |
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Goodwill and indefinite-lived intangible assets | 230,783 |
| | 151,088 |
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Derivative asset | 191,663 |
| | — |
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Restricted investments | 65,225 |
| | 44,101 |
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Auction rate securities | 11,674 |
| | 13,419 |
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Deferred income taxes | 3,090 |
| | — |
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Other assets | 35,736 |
| | 19,621 |
|
| $ | 2,925,066 |
| | $ | 1,934,822 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Medical claims and benefits payable | $ | 632,706 |
| | $ | 494,530 |
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Accounts payable and accrued liabilities | 282,727 |
| | 184,034 |
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Deferred revenue | 124,388 |
| | 141,798 |
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Income taxes payable | 5,508 |
| | 6,520 |
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Current maturities of long-term debt | 109 |
| | 1,155 |
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Total current liabilities | 1,045,438 |
| | 828,037 |
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Convertible senior notes | 591,884 |
| | 175,468 |
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Lease financing obligations | 178,188 |
| | — |
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Other long-term debt | — |
| | 86,316 |
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Derivative liabilities | 191,556 |
| | 1,307 |
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Deferred income taxes | — |
| | 37,900 |
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Other long-term liabilities | 25,152 |
| | 23,480 |
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Total liabilities | 2,032,218 |
| | 1,152,508 |
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Stockholders’ equity: | | | |
Common stock, $0.001 par value; 150,000 shares authorized; outstanding: 45,757 shares at September 30, 2013 and 46,762 shares at December 31, 2012 | 46 |
| | 47 |
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Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding | — |
| | — |
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Additional paid-in capital | 331,958 |
| | 285,524 |
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Accumulated other comprehensive loss | (1,411 | ) | | (457 | ) |
Treasury stock, at cost; 111 shares at December 31, 2012 | — |
| | (3,000 | ) |
Retained earnings | 562,255 |
| | 500,200 |
|
Total stockholders’ equity | 892,848 |
| | 782,314 |
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| $ | 2,925,066 |
| | $ | 1,934,822 |
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See accompanying notes.
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (Amounts in thousands, except net income (loss) per share) (Unaudited) |
Revenue: | | | | | | | |
Premium revenue | $ | 1,584,656 |
| | $ | 1,448,600 |
| | $ | 4,583,818 |
| | $ | 4,066,737 |
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Premium tax receipts | 43,723 |
| | 37,894 |
| | 127,606 |
| | 120,953 |
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Service revenue | 51,100 |
| | 48,422 |
| | 150,528 |
| | 132,351 |
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Investment income | 1,740 |
| | 1,155 |
| | 4,884 |
| | 3,893 |
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Rental and other income | 5,860 |
| | 4,079 |
| | 16,476 |
| | 12,315 |
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Total revenue | 1,687,079 |
| | 1,540,150 |
| | 4,883,312 |
| | 4,336,249 |
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Expenses: | | | | | | | |
Medical care costs | 1,383,213 |
| | 1,319,991 |
| | 3,965,834 |
| | 3,715,455 |
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Cost of service revenue | 40,113 |
| | 37,004 |
| | 119,188 |
| | 98,111 |
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General and administrative expenses | 176,233 |
| | 127,035 |
| | 478,990 |
| | 365,564 |
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Premium tax expenses | 43,723 |
| | 37,894 |
| | 127,606 |
| | 120,953 |
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Depreciation and amortization | 18,871 |
| | 15,858 |
| | 52,449 |
| | 46,916 |
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Total expenses | 1,662,153 |
| | 1,537,782 |
| | 4,744,067 |
| | 4,346,999 |
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Operating income (loss) | 24,926 |
| | 2,368 |
| | 139,245 |
| | (10,750 | ) |
Other expenses: | | | | | | | |
Interest expense | 13,532 |
| | 4,315 |
| | 38,236 |
| | 12,421 |
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Other (income) expense | (24 | ) | | 184 |
| | 3,347 |
| | 1,270 |
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Total other expenses | 13,508 |
| | 4,499 |
| | 41,583 |
| | 13,691 |
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Income (loss) from continuing operations before income tax expense | 11,418 |
| | (2,131 | ) | | 97,662 |
| | (24,441 | ) |
Income tax expense (benefit) | 3,865 |
| | (1,966 | ) | | 43,791 |
| | (11,113 | ) |
Income (loss) from continuing operations | 7,553 |
| | (165 | ) | | 53,871 |
| | (13,328 | ) |
Income (loss) from discontinued operations, net of tax expense (benefit) of $97, $1,474, $(10,046), and $(4,115), respectively | 16 |
| | 3,529 |
| | 8,184 |
| | (2,525 | ) |
Net income (loss) | $ | 7,569 |
| | $ | 3,364 |
| | $ | 62,055 |
| | $ | (15,853 | ) |
| | | | | | | |
Basic income (loss) per share: | | | | | | | |
Income (loss) from continuing operations | $ | 0.17 |
| | $ | (0.01 | ) | | $ | 1.18 |
| | $ | (0.29 | ) |
Income (loss) from discontinued operations | — |
| | 0.08 |
| | 0.18 |
| | (0.05 | ) |
Basic net income (loss) per share | $ | 0.17 |
| | $ | 0.07 |
| | $ | 1.36 |
| | $ | (0.34 | ) |
Diluted income (loss) per share: | | | | | | | |
Income (loss) from continuing operations | $ | 0.16 |
| | $ | (0.01 | ) | | $ | 1.15 |
| | $ | (0.29 | ) |
Income (loss) from discontinued operations | — |
| | 0.08 |
| | 0.18 |
| | (0.05 | ) |
Diluted net income (loss) per share | $ | 0.16 |
| | $ | 0.07 |
| | $ | 1.33 |
| | $ | (0.34 | ) |
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | 45,699 |
| | 46,546 |
| | 45,708 |
| | 46,301 |
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Diluted | 47,062 |
| | 46,880 |
| | 46,767 |
| | 46,301 |
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See accompanying notes.
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (Amounts in thousands) (Unaudited) |
Net income (loss) | $ | 7,569 |
| | $ | 3,364 |
| | $ | 62,055 |
| | $ | (15,853 | ) |
Other comprehensive income (loss): | | | | | | | |
Gross unrealized investment gain (loss) | 2,087 |
| | 733 |
| | (1,539 | ) | | 1,734 |
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Effect of income taxes | 793 |
| | 278 |
| | (585 | ) | | 659 |
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Other comprehensive income (loss), net of tax | 1,294 |
| | 455 |
| | (954 | ) | | 1,075 |
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Comprehensive income (loss) | $ | 8,863 |
| | $ | 3,819 |
| | $ | 61,101 |
| | $ | (14,778 | ) |
See accompanying notes.
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2013 | | 2012 |
| (Amounts in thousands) (Unaudited) |
Operating activities: | | | |
Net income (loss) | $ | 62,055 |
| | $ | (15,853 | ) |
Adjustments to reconcile net income (loss) to net cash change in operating activities: | | | |
Depreciation and amortization | 68,035 |
| | 58,289 |
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Deferred income taxes | (38,442 | ) | | 523 |
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Stock-based compensation | 20,654 |
| | 15,448 |
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Gain on sale of subsidiary | — |
| | (1,747 | ) |
Amortization of convertible senior notes and lease financing obligations | 16,128 |
| | 4,414 |
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Change in fair value of derivatives | 3,383 |
| | 1,270 |
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Amortization of premium/discount on investments | 8,053 |
| | 5,166 |
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Amortization of deferred financing costs | 3,042 |
| | 825 |
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Tax deficiency from employee stock compensation | (72 | ) | | (159 | ) |
Changes in operating assets and liabilities: | | | |
Receivables | (144,285 | ) | | 10,989 |
|
Prepaid expenses and other current assets | (27,552 | ) | | (10,574 | ) |
Medical claims and benefits payable | 138,176 |
| | 133,987 |
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Accounts payable and accrued liabilities | 20,991 |
| | (9,030 | ) |
Deferred revenue | (17,410 | ) | | 92,354 |
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Income taxes | (1,012 | ) | | (21,878 | ) |
Net cash provided by operating activities | 111,744 |
| | 264,024 |
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Investing activities: | | | |
Purchases of equipment | (64,426 | ) | | (52,548 | ) |
Purchases of investments | (627,953 | ) | | (234,465 | ) |
Sales and maturities of investments | 227,800 |
| | 213,665 |
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Proceeds from sale of subsidiary, net of cash surrendered | — |
| | 9,162 |
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Net cash paid in business combinations | (57,684 | ) | | — |
|
Change in deferred contract costs | 9,545 |
| | (18,799 | ) |
Increase in restricted investments | (21,124 | ) | | (3,034 | ) |
Change in other non-current assets and liabilities | (7,574 | ) | | (4,775 | ) |
Net cash used in investing activities | (541,416 | ) | | (90,794 | ) |
Financing activities: | | | |
Proceeds from issuance of 1.125% Notes, net of deferred financing costs | 537,973 |
| | — |
|
Proceeds from sale-leaseback transactions | 158,694 |
| | — |
|
Purchase of 1.125% Notes call option | (149,331 | ) | | — |
|
Proceeds from issuance of warrants | 75,074 |
| | — |
|
Treasury stock purchases | (50,000 | ) | | — |
|
Repayment of amounts borrowed under credit facility | (40,000 | ) | | (20,000 | ) |
Amount borrowed under credit facility | — |
| | 60,000 |
|
Principal payments on term loan | (47,471 | ) | | (846 | ) |
Settlement of interest rate swap | (875 | ) | | — |
|
Proceeds from employee stock plans | 5,156 |
| | 5,571 |
|
Excess tax benefits from employee stock compensation | 1,238 |
| | 3,698 |
|
Net cash provided by financing activities | 490,458 |
| | 48,423 |
|
Net increase in cash and cash equivalents | 60,786 |
| | 221,653 |
|
Cash and cash equivalents at beginning of period | 795,770 |
| | 493,827 |
|
Cash and cash equivalents at end of period | $ | 856,556 |
| | $ | 715,480 |
|
MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
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| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2013 | | 2012 |
| (Amounts in thousands) |
| (Unaudited) |
Supplemental cash flow information: | | | |
Cash paid during the period for: | | | |
Income taxes | $ | 72,156 |
| | $ | 1,074 |
|
Interest | $ | 28,035 |
| | $ | 5,663 |
|
Schedule of non-cash investing and financing activities: | | | |
Retirement of treasury stock | $ | 53,000 |
| | $ | — |
|
Common stock used for stock-based compensation | $ | 6,667 |
| | $ | 9,852 |
|
Non-cash financing obligation for construction projects | $ | 19,222 |
| | $ | — |
|
Details of business combinations: | | | |
Fair value of assets acquired | $ | 121,845 |
| | $ | — |
|
Fair value of contingent consideration liabilities incurred | (59,947 | ) | | — |
|
Payable to seller | (3,882 | ) | | — |
|
Escrow deposit | (332 | ) | | $ | — |
|
Net cash paid in business combinations | $ | 57,684 |
| | $ | — |
|
Details of change in fair value of derivatives: | | | |
Gain on 1.125% Call Option | $ | 42,332 |
| | $ | — |
|
Loss on embedded cash conversion option | (42,225 | ) | | — |
|
Loss on 1.125% Warrants | (3,923 | ) | | — |
|
Gain (loss) on interest rate swap | 433 |
| | (1,270 | ) |
Change in fair value of derivatives | $ | (3,383 | ) | | $ | (1,270 | ) |
Details of sale of subsidiary: | | | |
Decrease in carrying value of assets | $ | — |
| | $ | 30,942 |
|
Decrease in carrying value of liabilities | — |
| | (23,527 | ) |
Gain on sale | — |
| | 1,747 |
|
Proceeds from sale of subsidiary, net of cash surrendered | $ | — |
| | $ | 9,162 |
|
See accompanying notes.
MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2013
1. Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides quality and cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals and to assist state agencies in their administration of the Medicaid program. We report our financial performance based on two reportable segments: Health Plans and Molina Medicaid Solutions.
Our Health Plans segment comprises health plans in California, Florida, Illinois, Michigan, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin, and includes our direct delivery business. As of September 30, 2013, these health plans served approximately 1.9 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO. Our direct delivery business consists of primary care community clinics in California, Florida, New Mexico, and Washington.
Our health plans’ state Medicaid contracts generally have terms of three to four years with annual adjustments to premium rates. These contracts typically contain renewal options exercisable by the state Medicaid agency, and allow either the state or the health plan to terminate the contract with or without cause. Our health plan subsidiaries have generally been successful in retaining their contracts, but such contracts are subject to risk of loss when a state issues a new request for proposals (RFP) open to competitive bidding by other health plans. If one of our health plans is not a successful responsive bidder to a state RFP, its contract may be subject to non-renewal.
Our Molina Medicaid Solutions segment provides business processing and information technology development and administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, and West Virginia, and drug rebate administration services in Florida.
Market Updates - Health Plans Segment
California Health Plan Tentative Rate Settlement Agreement. In the third quarter of 2013, our California health plan reached a tentative settlement agreement with the California Department of Health Care Services (DHCS), conditioned on final government approvals. The tentative settlement agreement settles rate disputes initiated by our California health plan dating back to 2003 with respect to its participation in California’s Medicaid program, or Medi-Cal.
Under the terms of the tentative settlement agreement, DHCS has agreed to extend each of the California health plan’s existing Medi-Cal managed care contracts for an additional five years, including its contracts in San Diego, San Bernardino, Riverside, and Sacramento counties. In addition, effective January 1, 2014, the settlement establishes a settlement account applicable to the California health plan’s Medi-Cal, Seniors and Persons with Disabilities, and the dual eligibles pilot programs. The settlement account will be established with an initial balance of zero, and will be adjusted annually to reflect a calendar year deficit or surplus. A deficit or surplus will result to the extent the plan’s pre-tax margin is below or above a specified percentage, subject to further adjustment as specified in the settlement agreement. Cash settlement will occur after December 31, 2017. DHCS will make an interim partial settlement payment to us if it terminates early, without replacement, any of our Medi-Cal managed care contracts. Upon expiration of the settlement agreement, if the settlement account is in a deficit position, then DHCS will pay the amount of the deficit to us, subject to an alternative minimum payment amount. If the settlement account is in a surplus position, then no amount is owed to either party. The maximum amount that DHCS would pay to us under the terms of the settlement agreement is limited. See Note 18, "Subsequent Events," for further information.
We do not expect the tentative settlement agreement to impact our consolidated financial condition, cash flows, or results of operations for the year ending December 31, 2013.
Florida. On October 23, 2013, our Florida health plan and the Florida Agency for Health Care Administration (AHCA), agreed to a settlement under which our health plan will be awarded three contracts under the Florida Statewide Medicaid Managed Care Managed Medical Assistance Invitation to Negotiate. The three contracts are expected to commence in the second or third quarter of 2014.
On February 14, 2013, we announced that AHCA awarded our Florida health plan contracts in three regions under the Statewide Medicaid Managed Care Long-Term Care Program. As a result of the awards, we will now enter into a comprehensive pre-contracting assessment, with the program currently scheduled to commence on December 1, 2013. Under the program, we will provide long-term care benefits, including institutional and home and community-based services.
New Mexico. On August 1, 2013, our New Mexico health plan closed on its acquisition of the Lovelace Community Health Plan’s contract for the New Mexico Medicaid Salud! Program, under which Lovelace’s Medicaid members became Molina Healthcare Medicaid members and now receive their Medicaid managed services and benefits from our New Mexico health plan. Additionally, in the coming months we expect to add membership currently covered under New Mexico’s State Coverage Insurance (SCI) program with Lovelace. See Note 4, "Business Combinations," for further information.
On February 11, 2013, we announced that our New Mexico health plan was selected by the New Mexico Human Services Department (HSD) to participate in the new Centennial Care program. In addition to continuing to provide physical and acute health care services, under the new program our New Mexico health plan will expand its services to provide behavioral health and long-term care services. The selection of our New Mexico health plan was made by HSD pursuant to its RFP issued in August 2012. The operational start date for the program is currently scheduled for January 2014.
South Carolina. On July 26, 2013, we entered into an agreement with Community Health Solutions of America, Inc. (CHS) to acquire certain assets, including the rights to convert certain of CHS’ Medicaid members who will be covered by South Carolina’s full-risk Medicaid managed care program. See Note 4, "Business Combinations," for further information.
Market Updates - Molina Medicaid Solutions Segment
U.S. Virgin Islands and West Virginia. In 2012, Molina Medicaid Solutions of West Virginia secured a historic partnership with the United States Virgin Islands (USVI). The partnership involves processing the USVI’s Medicaid claims using West Virginia’s certified Medicaid management information system. On August 1, 2013 the system went live, marking the first MMIS for a U.S. Territory, and the first to be shared between two government agencies on a single business processing platform.
Louisiana. In 2011, Molina Medicaid Solutions received notice from the state of Louisiana that the state intended to award the contract for a replacement MMIS to a different vendor, CNSI. However, in March 2013, the state of Louisiana cancelled its contract award to CNSI. CNSI is currently challenging the contract cancellation. The state has informed us that we will continue to perform under our current contract until a successor is named. At such time as a new RFP may be issued, we intend to respond to the state's RFP. For the nine months ended September 30, 2013, our revenue under the Louisiana MMIS contract was approximately $31.1 million, or 20.7% of total service revenue. So long as our Louisiana MMIS contract continues, we expect to recognize approximately $40.0 million of service revenue annually under this contract.
Consolidation and Interim Financial Information
The consolidated financial statements include the accounts of Molina Healthcare, Inc., its subsidiaries and variable interest entities in which Molina Healthcare, Inc. is considered to be the primary beneficiary. Such variable interest entities are insignificant to our consolidated financial position and results of operations. In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the interim periods presented have been included; such adjustments consist of normal recurring adjustments. All significant intercompany balances and transactions have been eliminated. The consolidated results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2013.
The unaudited consolidated interim financial statements have been prepared under the assumption that users of the interim financial data have either read or have access to our audited consolidated financial statements for the fiscal year ended December 31, 2012. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in the December 31, 2012 audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our December 31, 2012 audited consolidated financial statements.
Presentation and Reclassifications
We previously reported that our Medicaid managed care contract with the state of Missouri expired without renewal on June 30, 2012. Effective June 30, 2013 the transition obligations associated with that contract terminated. Therefore, we have reclassified the results relating to the Missouri health plan to discontinued operations for all periods presented. These results are presented in a single line item, net of taxes, in the unaudited consolidated statements of operations. Additionally, we abandoned our equity interests in the Missouri health plan during the second quarter of 2013, resulting in the recognition of a tax benefit of
approximately $9.5 million, which is also included in discontinued operations in the unaudited consolidated statements of operations. The Missouri health plan's revenues amounted to $0.2 million and $113.8 million for the nine months ended September 30, 2013 and 2012, respectively.
We have reclassified certain amounts in the 2012 consolidated balance sheet, and statements of operations and cash flows to conform to the 2013 presentation, including the presentation of premium tax receipts as a separate line item in the consolidated statements of operations.
2. Significant Accounting Policies
Revenue Recognition
Premium Revenue – Health Plans Segment
Premium revenue is fixed in advance of the periods covered and, except as described below, is not generally subject to significant accounting estimates. Premium revenues are recognized in the month that members are entitled to receive health care services.
Certain components of premium revenue are subject to accounting estimates. The components of premium revenue subject to estimation fall into two categories:
(1) Contractual provisions that may limit revenue based upon the costs incurred or the profits realized under a specific contract: These are contractual provisions that require the health plan to return premiums to the extent that certain thresholds are not met. In some instances premiums are returned when medical costs fall below a certain percentage of gross premiums; or when administrative costs or profits exceed a certain percentage of gross premiums. In other instances, premiums are partially determined by the acuity of care provided to members (risk adjustment). To the extent that our expenses and profits change from the amounts previously reported (due to changes in estimates), our revenue earned for those periods will also change. In all of these instances, our revenue is only subject to estimate due to the fact that the thresholds themselves contain elements (expense or profit) that are subject to estimate. While we have adequate experience and data to make sound estimates of our expenses or profits, changes to those estimates may be necessary, which in turn would lead to changes in our estimates of revenue. In general, a change in estimate relating to expense or profit would offset any related change in estimate to premium, resulting in no or small impact to net income. The following contractual provisions fall into this category:
California Health Plan Medical Cost Floors (Minimums): A portion of certain premiums received by our California health plan may be returned to the state if certain minimum amounts are not spent on defined medical care costs. We recorded a liability under the terms of these contract provisions of approximately $0.8 million and $0.3 million at September 30, 2013 and December 31, 2012, respectively.
Florida Health Plan Medical Cost Floor (Minimum): A portion of premiums received by our Florida health plan may be returned to the state if certain minimum amounts are not spent on defined behavioral health care costs (in all counties except Broward). A similar minimum expenditure is required for total health care costs in Broward county only. At both September 30, 2013 and December 31, 2012, we had not recorded any liability under the terms of these contract provisions.
New Mexico Health Plan Medical Cost Floors (Minimums) and Administrative Cost and Profit Ceilings (Maximums): Our contract with the state of New Mexico directs that a portion of premiums received may be returned to the state if certain minimum amounts are not spent on defined medical care costs, or if administrative costs or profit, as defined in the contract, exceed certain amounts. At both September 30, 2013 and December 31, 2012, we had not recorded any liability under the terms of these contract provisions.
Ohio Health Plan Medical Cost Floors (Minimums): Sanctions may be levied by the state if certain minimum amounts are not spent on defined medical care costs. These sanctions include the requirements to file a corrective action plan as well as an enrollment freeze.
Texas Health Plan Profit Sharing: Under our contract with the state of Texas, there is a profit-sharing agreement under which we pay a rebate to the state of Texas if our Texas health plan generates pretax income, as defined in the contract, above a certain specified percentage as determined in accordance with a tiered rebate schedule. We are limited in the amount of administrative costs that we may deduct in calculating the rebate, if any. As a result of profits in excess of the amount we are allowed to fully retain, we had accrued an aggregate liability of approximately $2.2 million and $3.2 million pursuant to our profit-sharing agreement with the state of Texas at September 30, 2013 and December 31, 2012, respectively.
Washington Health Plan Medical Cost Floors (Minimums): A portion of certain premiums received by our Washington health plan may be returned to the state if certain minimum amounts are not spent on defined medical care costs. At
September 30, 2013, we recorded a liability under the terms of these contract provisions of approximately $0.3 million. At December 31, 2012, we had not recorded any liability under the terms of this contract provision.
Medicare Revenue Risk Adjustment: Based on member encounter data that we submit to the Centers for Medicare and Medicaid Services (CMS), our Medicare premiums are subject to retroactive adjustment for both member risk scores and member pharmacy cost experience for up to two years after the original year of service. This adjustment takes into account the acuity of each member’s medical needs relative to what was anticipated when premiums were originally set for that member. In the event that a member requires less acute medical care than was anticipated by the original premium amount, CMS may recover premium from us. In the event that a member requires more acute medical care than was anticipated by the original premium amount, CMS may pay us additional retroactive premium. A similar retroactive reconciliation is undertaken by CMS for our Medicare members’ pharmacy utilization. We estimate the amount of Medicare revenue that will ultimately be realized for the periods presented based on our knowledge of our members’ health care utilization patterns and CMS practices. Based on our knowledge of member health care utilization patterns and expenses we have recorded a net receivable of approximately $18.4 million and $0.3 million as of September 30, 2013 and December 31, 2012, respectively for anticipated Medicare risk adjustment premiums.
(2) Quality incentives that allow us to recognize incremental revenue if certain quality standards are met: These are contract provisions that allow us to earn additional premium revenue in certain states if we achieve certain quality-of-care or administrative measures. We estimate the amount of revenue that will ultimately be realized for the periods presented based on our experience and expertise in meeting the quality and administrative measures as well as our ongoing and current monitoring of our progress in meeting those measures. The amount of the revenue that we will realize under these contractual provisions is determinable based upon that experience. The following contractual provisions fall into this category:
New Mexico Health Plan Quality Incentive Premiums: Under our contract with the state of New Mexico, incremental revenue of up to 0.75% of our total premium is earned if certain performance measures are met. These performance measures are generally linked to various quality-of-care and administrative measures dictated by the state.
Ohio Health Plan Quality Incentive Premiums: Under our contract with the state of Ohio, incremental revenue of up to 1% of our total premium is earned if certain performance measures are met. These performance measures are generally linked to various quality-of-care measures dictated by the state.
Texas Health Plan Quality Incentive Premiums: Effective March 1, 2012, under our contract with the state of Texas, incremental revenue of up to 5% of our total premium may be earned if certain performance measures are met. These performance measures are generally linked to various quality-of-care measures established by the state.
Wisconsin Health Plan Quality Incentive Premiums: Under our contract with the state of Wisconsin, incremental revenue of up to 3.25% of total premium is earned if certain performance measures are met. These performance measures are generally linked to various quality-of-care measures dictated by the state.
The following table quantifies the quality incentive premium revenue recognized for the periods presented, including the amounts earned in the period presented and prior periods. Although the reasonably possible effects of a change in estimate related to quality incentive premium revenue as of September 30, 2013 are not known, we have no reason to believe that the adjustments to prior years noted below are not indicative of the potential future changes in our estimates as of September 30,
2013. |
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2013 |
| Maximum Available Quality Incentive Premium - Current Year | | Amount of Current Year Quality Incentive Premium Revenue Recognized | | Amount of Quality Incentive Premium Revenue Recognized from Prior Year | | Total Quality Incentive Premium Revenue Recognized | | Total Premium Revenue Recognized |
| (In thousands) |
New Mexico | $ | 906 |
| | $ | 818 |
| | $ | 2 |
| | $ | 820 |
| | $ | 130,318 |
|
Ohio | 3,080 |
| | 976 |
| | (52 | ) | | 924 |
| | 280,964 |
|
Texas | 15,744 |
| | 15,744 |
| | — |
| | 15,744 |
| | 320,657 |
|
Wisconsin | 1,209 |
| | — |
| | — |
| | — |
| | 39,676 |
|
| $ | 20,939 |
| | $ | 17,538 |
| | $ | (50 | ) | | $ | 17,488 |
| | $ | 771,615 |
|
| | | | | | | | | |
| Three Months Ended September 30, 2012 |
| Maximum Available Quality Incentive Premium - Current Year | | Amount of Current Year Quality Incentive Premium Revenue Recognized | | Amount of Quality Incentive Premium Revenue Recognized from Prior Year | | Total Quality Incentive Premium Revenue Recognized | | Total Premium Revenue Recognized |
| (In thousands) |
New Mexico | $ | 560 |
| | $ | 532 |
| | $ | — |
| | $ | 532 |
| | $ | 80,846 |
|
Ohio | 2,824 |
| | 1,412 |
| | — |
| | 1,412 |
| | 282,489 |
|
Texas | 17,685 |
| | 10,453 |
| | — |
| | 10,453 |
| | 344,522 |
|
Wisconsin | 419 |
| | — |
| | 246 |
| | 246 |
| | 16,279 |
|
| $ | 21,488 |
| | $ | 12,397 |
| | $ | 246 |
| | $ | 12,643 |
| | $ | 724,136 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2013 |
| Maximum Available Quality Incentive Premium - Current Year | | Amount of Current Year Quality Incentive Premium Revenue Recognized | | Amount of Quality Incentive Premium Revenue Recognized from Prior Year | | Total Quality Incentive Premium Revenue Recognized | | Total Premium Revenue Recognized |
| (In thousands) |
New Mexico | $ | 2,079 |
| | $ | 1,685 |
| | $ | 159 |
| | $ | 1,844 |
| | $ | 298,767 |
|
Ohio | 9,049 |
| | 3,115 |
| | 501 |
| | 3,616 |
| | 819,879 |
|
Texas | 47,683 |
| | 47,683 |
| | 5,995 |
| | 53,678 |
| | 969,063 |
|
Wisconsin | 3,239 |
| | — |
| | 1,104 |
| | 1,104 |
| | 104,540 |
|
| $ | 62,050 |
| | $ | 52,483 |
| | $ | 7,759 |
| | $ | 60,242 |
| | $ | 2,192,249 |
|
| | | | | | | | | |
| Nine Months Ended September 30, 2012 |
| Maximum Available Quality Incentive Premium - Current Year | | Amount of Current Year Quality Incentive Premium Revenue Recognized | | Amount of Quality Incentive Premium Revenue Recognized from Prior Year | | Total Quality Incentive Premium Revenue Recognized | | Total Premium Revenue Recognized |
| (In thousands) |
New Mexico | $ | 1,676 |
| | $ | 1,350 |
| | $ | 658 |
| | $ | 2,008 |
| | $ | 240,568 |
|
Ohio | 8,222 |
| | 6,810 |
| | 966 |
| | 7,776 |
| | 827,219 |
|
Texas | 41,687 |
| | 30,487 |
| | — |
| | 30,487 |
| | 892,377 |
|
Wisconsin | 1,284 |
| | — |
| | 492 |
| | 492 |
| | 52,209 |
|
| $ | 52,869 |
| | $ | 38,647 |
| | $ | 2,116 |
| | $ | 40,763 |
| | $ | 2,012,373 |
|
Taxes Based on Premiums
Certain of our health plans are assessed a tax based on premium revenue collected. The premium revenues we receive from these states include the premium tax assessment. We have reported these taxes on a gross basis, included in premium tax
receipts (within revenue), and premium tax expense (within expenses), in the consolidated statements of operations. Prior to the third quarter of 2013, premium tax receipts were included in premium revenue. The presentation change affected only premium revenue amounts previously reported, by reducing premium revenue for the amount now included in premium tax receipts. There is no effect on income from continuing operations, net income, or per-share amounts. This change was made to more clearly present the portion of premium revenue not available in the general operations of our health plans. All prior periods presented have been adjusted to conform to this presentation.
Service Revenue and Cost of Service Revenue — Molina Medicaid Solutions Segment
The payments received by our Molina Medicaid Solutions segment under its state contracts are based on the performance of multiple services. The first of these is the design, development and implementation (DDI) of a Medicaid management information system (MMIS). An additional service, following completion of DDI, is the operation of the MMIS under a business process outsourcing (BPO) arrangement. While providing BPO services (which include claims payment and eligibility processing), we also provide the state with other services including both hosting and support and maintenance. Our Molina Medicaid Solutions contracts may extend over a number of years, particularly in circumstances where we are delivering extensive and complex DDI services, such as the initial design, development and implementation of a complete MMIS. For example, the terms of our most recently implemented Molina Medicaid Solutions contracts (in Idaho and Maine) were each seven years in total, consisting of two years allocated for the delivery of DDI services, followed by five years for the performance of BPO services. We receive progress payments from the state during the performance of DDI services based upon the attainment of predetermined milestones. We receive a flat monthly payment for BPO services under our Idaho and Maine contracts. The terms of our other Molina Medicaid Solutions contracts – which primarily involve the delivery of BPO services with only minimal DDI activity (consisting of system enhancements) – are shorter in duration than our Idaho and Maine contracts.
We have evaluated our Molina Medicaid Solutions contracts to determine if such arrangements include a software element. Based on this evaluation, we have concluded that these arrangements do not include a software element. As such, we have concluded that our Molina Medicaid Solutions contracts are multiple-element service arrangements.
Additionally, we evaluate each required deliverable under our multiple-element service arrangements to determine whether it qualifies as a separate unit of accounting. Such evaluation is generally based on whether the deliverable has standalone value to the customer. The arrangement’s consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. In general, the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent.
We have concluded that the various service elements in our Molina Medicaid Solutions contracts represent a single unit of accounting due to the fact that DDI, which is the only service performed in advance of the other services (all other services are performed over an identical period), does not have standalone value because our DDI services are not sold separately by any vendor and the customer could not resell our DDI services. Further, we have no objective and reliable evidence of fair value for any of the individual elements in these contracts, and at no point in the contract will we have objective and reliable evidence of fair value for the undelivered elements in the contracts. We lack objective and reliable evidence of the fair value of the individual elements of our Molina Medicaid Solutions contracts for the following reasons:
| |
• | Each contract calls for the provision of its own specific set of services. While all contracts support the system of record for state MMIS, the actual services we provide vary significantly between contracts; and |
| |
• | The nature of the MMIS installed varies significantly between our older contracts (proprietary mainframe systems) and our new contracts (commercial off-the-shelf technology solutions). |
Because we have determined the services provided under our Molina Medicaid Solutions contracts represent a single unit of accounting and because we are unable to determine a pattern of performance of services during the contract period, we recognize all revenue (both the DDI and BPO elements) associated with such contracts on a straight-line basis over the period during which BPO, hosting, and support and maintenance services are delivered. As noted above, the period of performance of BPO services under our Idaho and Maine contracts is five years. Therefore, absent any contingencies as discussed in the following paragraph, we would recognize all revenue associated with those contracts over a period of five years. In cases where there is no DDI element associated with our contracts, BPO revenue is recognized on a monthly basis as specified in the applicable contract or contract extension.
Provisions specific to each contract may, however, lead us to modify this general principle. In those circumstances, the right of the state to refuse acceptance of services, as well as the related obligation to compensate us, may require us to delay recognition of all or part of our revenue until that contingency (the right of the state to refuse acceptance) has been removed. In
those circumstances we defer recognition of any contingent revenue (whether DDI, BPO services, hosting, and support and maintenance services) until the contingency has been removed. These types of contingency features are present in our Maine and Idaho contracts. In those states, we deferred recognition of revenue until the contingencies were removed.
Costs associated with our Molina Medicaid Solutions contracts include software-related costs and other costs. With respect to software-related costs, we apply the guidance for internal-use software and capitalize external direct costs of materials and services consumed in developing or obtaining the software, and payroll and payroll-related costs associated with employees who are directly associated with and who devote time to the computer software project. With respect to all other direct costs, such costs are expensed as incurred, unless corresponding revenue is being deferred. If revenue is being deferred, direct costs relating to delivered service elements are deferred as well and are recognized on a straight-line basis over the period of revenue recognition, in a manner consistent with our recognition of revenue that has been deferred. Such direct costs can include:
•Transaction processing costs;
•Employee costs incurred in performing transaction services;
•Vendor costs incurred in performing transaction services;
•Costs incurred in performing required monitoring of and reporting on contract performance;
•Costs incurred in maintaining and processing member and provider eligibility; and
•Costs incurred in communicating with members and providers.
The recoverability of deferred contract costs associated with a particular contract is analyzed on a periodic basis using the undiscounted estimated cash flows of the whole contract over its remaining contract term. If such undiscounted cash flows are insufficient to recover the long-lived assets and deferred contract costs, the deferred contract costs are written down by the amount of the cash flow deficiency. If a cash flow deficiency remains after reducing the balance of the deferred contract costs to zero, any remaining long-lived assets are evaluated for impairment. Any such impairment recognized would equal the amount by which the carrying value of the long-lived assets exceeds the fair value of those assets.
Income Taxes
The provision for income taxes is determined using an estimated annual effective tax rate, which is generally greater than the U.S. federal statutory rate primarily because of state taxes and non-deductible compensation under a provision of the Affordable Care Act that limits deductions claimed by health insurers on compensation earned after December 31, 2009 that is paid after December 31, 2012. The effective tax rate may be subject to fluctuations during the year as new information is obtained. Such information may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pretax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or derecognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net operating loss and tax credit carryovers.
The total amount of unrecognized tax benefits was $12.5 million and $10.6 million as of September 30, 2013 and December 31, 2012, respectively. Approximately $10.5 million and $8.4 million of the unrecognized tax benefits recorded at September 30, 2013 and December 31, 2012, respectively, relate to a tax position claimed on a state refund claim that will not result in a cash payment for income taxes if our claim is denied. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $8.6 million and $7.4 million as of September 30, 2013 and December 31, 2012, respectively. We expect that during the next 12 months it is reasonably possible that unrecognized tax benefit liabilities may decrease by as much as $10.7 million due to the expiration of statute of limitations and the resolution to the state refund claim described above.
Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2013 and December 31, 2012, we had accrued $67,000 and $56,000, respectively, for the payment of interest and penalties.
Recent Accounting Pronouncements
Income Taxes. In July 2013, the Financial Accounting Standards Board (FASB) issued guidance for the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The
new guidance states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent one of these items is not available at the reporting date; the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The new guidance should be applied prospectively to all unrecognized tax benefits that exist at the effective date, with retrospective application permitted. We do not expect the adoption of this new guidance to have a material impact on our consolidated financial position, results of operations or cash flows.
Reclassifications Out of Accumulated Other Comprehensive Income. In February 2013, the FASB issued guidance for the reporting of amounts reclassified out of accumulated other comprehensive income. The new guidance requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. The new guidance does not change the current requirements for reporting net income or other comprehensive income in financial statements and is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this new guidance in 2013 did not impact our consolidated financial position, results of operations or cash flows.
Balance Sheet Offsetting. In December 2011, the FASB issued guidance for new disclosure requirements related to the nature of an entity’s rights of set-off and related arrangements associated with its financial instruments and derivative instruments. The new guidance is effective for annual reporting periods, and interim periods within those years, beginning on or after January 1, 2013. The adoption of this new guidance in 2013 did not impact our consolidated financial position, results of operations or cash flows.
Federal Premium-Based Assessment. In July 2011, the FASB issued guidance related to accounting for the fees to be paid by health insurers to the federal government under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (ACA). The ACA imposes an annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The fee will be imposed beginning in 2014 based on a company's share of the industry's net premiums written during the preceding calendar year.
The new guidance specifies that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The new guidance is effective for annual reporting periods beginning after December 31, 2013, when the fee initially becomes effective. As enacted, this federal premium-based assessment is non-deductible for income tax purposes, and is anticipated to be significant. It is yet undetermined how this premium-based assessment will be factored into the calculation of our premium rates, if at all. Accordingly, adoption of this guidance and the enactment of this assessment as currently written is expected to have a material impact on our financial position, results of operations, and cash flows in future periods. We estimate that the fee in 2014 will be approximately $100.0 million.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants (AICPA), and the Securities and Exchange Commission (SEC) did not have, or are not believed by management to have, a material impact on our present or future consolidated financial statements.
3. Net Income per Share
The following table sets forth the calculation of the denominators used to compute basic and diluted net income per share:
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Shares outstanding at the beginning of the period | 45,683 |
| | 46,527 |
| | 46,762 |
| | 45,815 |
|
Weighted-average number of shares repurchased | — |
| | — |
| | (1,375 | ) | | — |
|
Weighted-average number of shares issued | 16 |
| | 19 |
| | 321 |
| | 486 |
|
Denominator for basic net income (loss) per share | 45,699 |
| | 46,546 |
| | 45,708 |
| | 46,301 |
|
Dilutive effect of employee stock options and stock grants (1) | 453 |
| | 334 |
| | 532 |
| | — |
|
Dilutive effect of convertible senior notes | 910 |
| | — |
| | 527 |
| | — |
|
Denominator for diluted net income (loss) per share (2) | 47,062 |
| | 46,880 |
| | 46,767 |
| | 46,301 |
|
| |
(1) | Unvested restricted shares are included in the calculation of diluted net income per share when their grant date fair values are below the average fair value of the common shares for each of the periods presented. Options to purchase common shares are included in the calculation of diluted net income per share when their exercise prices are below the average fair value of the common shares for each of the periods presented. For the three and nine months ended September 30, 2013 there were no anti-dilutive weighted restricted shares. For the three and nine months ended September 30, 2013 there were approximately 60,000 and 48,600 anti-dilutive weighted options, respectively. For the three months ended September 30, 2012, there were approximately 370,000 anti-dilutive weighted restricted shares and 125,000 anti-dilutive weighted options. Potentially dilutive unvested restricted shares and stock options were not included in the computation of diluted loss per share for the nine months ended September 30, 2012, because to do so would have been anti-dilutive. |
| |
(2) | Potentially dilutive shares issuable pursuant to our 1.125% Warrants (defined in Note 11, "Long-Term Debt") were not included in the computation of diluted income per share for the three and nine month period ended September 30, 2013, because to do so would have been anti-dilutive. Potentially dilutive shares issuable pursuant to our 3.75% Notes (defined in Note 11, "Long-Term Debt") were not included in the computation of diluted loss per share for the three and nine month period ended September 30, 2012, because to do so would have been anti-dilutive. |
4. Business Combinations
Health Plans Segment
South Carolina. On July 26, 2013, we entered into an agreement with Community Health Solutions of America, Inc. (CHS) to acquire certain assets, including the rights to convert certain of CHS’ Medicaid members who will be covered by South Carolina’s full-risk Medicaid managed care program, consistent with our stated strategy to enter new markets. The conversion of such members is contingent on our successful receipt of an HMO license from the South Carolina Department of Insurance, the award to Molina Healthcare of a full-risk Medicaid managed care contract by the South Carolina Department of Health and Human Services, and the state's conversion to a full-risk Medicaid managed care program. Each of these three conditions is expected to be satisfied by January 2014. In connection with the agreement, we paid CHS $7.5 million on the closing date. We currently expect to convert approximately 130,000 members under the agreement, for a total estimated discounted purchase price of $65.0 million. The final purchase price will be settled when the member conversion has been completed.
Because the number of members we will ultimately convert was unknown as of the July 26, 2013 acquisition date, $57.5 million of the purchase price represents contingent consideration for the number of members we expect to enroll in our health plan as a result of the conversion. The contingent consideration liability will be remeasured to fair value at each quarter until the contingency is resolved, with adjustments, if any, recorded to operations. The undiscounted amount we could be required to pay under this contingent consideration arrangement ranges from $7.5 million (which we paid on the closing date) to approximately $70 million. We expect most of the contingent consideration liability to be settled in the second quarter of 2014.
We recorded $42.1 million in goodwill, which relates to future economic benefits arising from expected synergies achieved in the transaction. Such synergies include use of our existing infrastructure to support our health plan operations in South Carolina. We also recorded $22.9 million in intangible assets, as indicated in the table below. Accumulated amortization was immaterial as of September 30, 2013. We expect to record amortization of approximately $1.9 million per year in the years 2014 through 2018.
New Mexico. Consistent with our stated strategy to expand within existing markets, on August 1, 2013, our New Mexico health plan closed on its acquisition of the Lovelace Community Health Plan’s contract for the New Mexico Medicaid Salud! Program, under which Lovelace’s Medicaid members became Molina Healthcare Medicaid members and now receive their Medicaid managed services and benefits from our New Mexico health plan. As part of this acquisition, we also expect to add membership currently covered under New Mexico’s State Coverage Insurance (SCI) program with Lovelace in the near future. Effective January 1, 2014, members in this program will ultimately be a) enrolled in the Centennial Care program as Medicaid members, or b) eligible to enroll in New Mexico’s health insurance marketplace. All members transferred from Lovelace will be able to continue with Molina Healthcare as the state transitions to the Centennial Care program. We expect the final purchase price for the acquisition to amount to approximately $53.5 million, of which $47.2 million was paid on the closing date. As of September 30, 2013, the New Mexico health plan's membership increased by approximately 80,000 members as a result of this transaction.
Because the number of SCI members we will ultimately retain was unknown as of the August 1, 2013 acquisition date, $2.4 million of contingent consideration was recorded for this SCI membership as of September 30, 2013. We believe the contingent consideration amount may decrease as we learn more about how many SCI members we will retain, but is unlikely to increase. The contingent consideration liability will be remeasured to fair value at each quarter until the contingency is resolved, with adjustments, if any, recorded to operations. We expect that the contingency will be settled in the second quarter of 2014.
We recorded $35.2 million in goodwill, which relates to future economic benefits arising from expected synergies achieved in the transaction. Such synergies include use of our existing infrastructure to support the added membership. We also recorded $18.3 million in intangible assets, as indicated in the table below. Accumulated amortization was immaterial as of September 30, 2013. We expect to record amortization of approximately $1.8 million per year in the years 2014 through 2018.
Florida. On June 30, 2013, our Florida health plan acquired assets relating to the Statewide Medicaid Managed Care Long-Term Care Program from Neighborly Care Network, Inc. The final purchase price for this acquisition was $3.3 million. Accumulated amortization as September 30, 2013, and future amortization for this acquisition are immaterial.
The following table presents assets acquired and the weighted average useful life for the major asset categories for the business combinations in 2013:
|
| | | | | | | | | | | | | | | | | |
| Fair Value of Assets Acquired - Health Plans Segment |
| Weighted average useful life | | South Carolina | | New Mexico | | Florida | | Total |
| (Years) | | (In thousands) |
Membership conversion rights | 12.0 | | $ | 21,800 |
| | $ | — |
| | $ | — |
| | $ | 21,800 |
|
Contract rights | 10.6 | | — |
| | 18,300 |
| | — |
| | 18,300 |
|
Other finite-lived intangibles | 7.7 | | 1,060 |
| | — |
| | 990 |
| | 2,050 |
|
Goodwill | — | | 42,140 |
| | 35,223 |
| | 2,332 |
| | 79,695 |
|
| | | $ | 65,000 |
| | $ | 53,523 |
| | $ | 3,322 |
| | $ | 121,845 |
|
Acquisition costs relating to these transactions were immaterial individually and in the aggregate. The amounts recorded as goodwill represent intangible assets that do not qualify for separate recognition as identifiable intangible assets. The entire amounts recorded as goodwill are deductible for income tax purposes. Goodwill is not amortized, but is subject to an annual impairment test.
5. Stock-Based Compensation
At September 30, 2013, we had employee equity incentives outstanding under two plans: (1) the 2011 Equity Incentive Plan; and (2) the 2002 Equity Incentive Plan (from which equity incentives are no longer awarded).
In March 2013, our named executive officers were granted restricted stock awards with performance conditions as follows: our chief executive officer was awarded 186,858 shares, our chief financial officer was awarded 93,429 shares, our chief operating officer was awarded 62,286 shares, our chief accounting officer was awarded 28,029 shares, and our general counsel was awarded 21,800 shares. These awards were apportioned into four equal increments, and will vest in accordance with the following four measures: (i) 1/4th will vest in equal 1/3rd increments over three years on March 1, 2014, March 1,
2015, and March 1, 2016; (ii) 1/4th will vest upon our achievement of three-year Total Stockholder Return (TSR) as determined by Institutional Shareholder Services Inc. (ISS) calculations for the three-year period ending December 31, 2013 equal to or greater than the 50th percentile within our ISS peer group; (iii) 1/4th shall vest upon our achievement of total revenue in any of the 2013, 2014, or 2015 fiscal years equal to or greater than $12 billion; and (iv) 1/4th shall vest upon our achievement of the three-year earnings before interest, taxes, depreciation and amortization (EBITDA) margin percentage for the three-year period ending December 31, 2013 equal to or greater than 2.5%. In the event the vesting conditions are not achieved, the awards shall lapse. As of September 30, 2013, such performance goals have not yet been met, but we do expect the awards to vest in full.
Charged to general and administrative expenses, total stock-based compensation expense was as follows for the three and nine month periods ended September 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (In thousands) |
Restricted stock and performance awards | $ | 7,634 |
| | $ | 5,093 |
| | $ | 18,593 |
| | $ | 13,943 |
|
Employee stock purchase plan and stock options | 870 |
| | 543 |
| | 2,061 |
| | 1,505 |
|
| $ | 8,504 |
| | $ | 5,636 |
| | $ | 20,654 |
| | $ | 15,448 |
|
As of September 30, 2013, there was $28.0 million of total unrecognized compensation expense related to unvested restricted share awards, including those with performance conditions, which we expect to recognize over a remaining weighted-average period of 1.7 years. Also as of September 30, 2013, there was $0.6 million of total unrecognized compensation expense related to unvested stock options, which we expect to recognize over a weighted-average period of 2.3 years.
Restricted and performance stock activity for the nine months ended September 30, 2013 is summarized below:
|
| | | | | | |
| Shares | | Weighted Average Grant Date Fair Value |
Unvested balance as of December 31, 2012 | 986,577 |
| | $ | 23.74 |
|
Granted - restricted stock | 587,706 |
| | 32.15 |
|
Granted - performance stock | 456,174 |
| | 30.80 |
|
Vested | (581,329 | ) | | 24.72 |
|
Forfeited | (31,500 | ) | | 25.55 |
|
Unvested balance as of September 30, 2013 | 1,417,628 |
| | 29.06 |
|
The total fair value of restricted and performance awards granted during the nine months ended September 30, 2013 and 2012 was $33.3 million and $23.0 million, respectively. The total fair value of restricted awards, including those with performance conditions, vested during the nine months ended September 30, 2013 and 2012 was $19.3 million and $24.3 million, respectively.
The weighted-average grant date fair value per share of the performance awards with vesting conditions based on TSR, as described above, was $28.24. We estimated the fair value on the grant date using a Monte Carlo Simulation to project TSR over the performance period using correlations and volatilities of the ISS peer group. Additional inputs included a risk-free interest rate of 0.14%, dividend yield of 0%, and an expected life of 0.83 years.
Stock option activity for the nine months ended September 30, 2013 is summarized below:
|
| | | | | | | | | | | | |
| Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual term |
| | | | | (In thousands) | | (Years) |
Outstanding as of December 31, 2012 | 414,061 |
| | $ | 22.39 |
| |
| | |
Granted | 45,000 |
| | 33.02 |
| |
| | |
Exercised | (70,000 | ) | | 20.11 |
| |
|
| | |
Forfeited | (300 | ) | | 17.63 |
| |
| | |
Outstanding as of September 30, 2013 | 388,761 |
| | 24.04 |
| | $ | 4,495 |
| | 3.6 |
Stock options exercisable and expected to vest as of September 30, 2013 | 388,761 |
| | 24.04 |
| | $ | 4,495 |
| | 3.6 |
Exercisable as of September 30, 2013 | 333,761 |
| | 22.50 |
| | $ | 4,371 |
| | 2.7 |
The weighted-average grant date fair value per share of stock options awarded to the new members of our board of directors during the nine months ended September 30, 2013 was $14.67. The weighted-average grant date fair value per share of the stock option awarded to the director appointed during 2012 was $13.97. We estimate the fair value of each stock option award on the grant date using the Black-Scholes option pricing model. To determine the fair values of these stock options we applied risk-free interest rates of 1.1% to 1.4%, expected volatilities of 41.3% to 43.0%, dividend yields of 0%, and expected lives of 6 years to 7 years.
6. Fair Value Measurements
Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, receivables, a derivative asset, trade accounts payable, medical claims and benefits payable, long-term debt, a derivative liability, contingent consideration, and other liabilities. We consider the carrying amounts of cash and cash equivalents, receivables, other current assets and current liabilities to approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization or payment. For our financial instruments measured at fair value on a recurring basis, we prioritize the inputs used in measuring fair value according to a three-tier fair value hierarchy as follows:
Level 1 — Observable Inputs
Our Level 1 financial instruments recorded at fair value consist of investments including government-sponsored enterprise securities (GSEs) and U.S. treasury notes that are classified as current investments in the accompanying consolidated balance sheets. These financial instruments are actively traded and therefore the fair value for these securities is based on quoted market prices on one or more securities exchanges.
Level 2 — Directly or Indirectly Observable Inputs
Our Level 2 financial instruments recorded at fair value consist of investments including corporate debt securities, municipal securities, and certificates of deposit that are classified as current investments in the accompanying consolidated balance sheets. Such investments are traded frequently though not necessarily daily. Fair value for these investments is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.
Level 3 — Unobservable Inputs
Our Level 3 financial instruments recorded at fair value include non-current auction rate securities that are designated as available-for-sale, and are reported at fair value of $11.7 million (par value of $12.4 million) as of September 30, 2013. To estimate the fair value of these securities we use valuation data from our primary pricing source, a third party who provides a marketplace for illiquid assets with over 10,000 participants including global financial institutions, hedge funds, private equity funds, mutual funds, corporations and other institutional investors. This valuation data is based on a range of prices that represent indicative bids from potential buyers. To validate the reasonableness of the data, we compare these valuations to data from two other third-party pricing sources, which also provide a range of prices representing indicative bids from potential buyers. We have concluded that these estimates, given the lack of market available pricing, provide a reasonable basis for determining the fair value of the auction rate securities as of September 30, 2013.
Level 3 financial instruments also include derivative financial instruments comprising the 1.125% Call Option asset, and the embedded cash conversion option liability. These derivatives are not actively traded and are valued based on an option pricing model that uses observable and unobservable market data for inputs. Significant market data inputs used to determine fair value as of September 30, 2013 included our common stock price, time to maturity of the derivative instruments, the risk-free interest rate, and the implied volatility of our common stock. As described further in Note 11, “Long-Term Debt,” and Note 12, “Derivative Financial Instruments,” the 1.125% Call Option asset and the embedded cash conversion option liability were designed such that changes in their fair values would offset, with minimal impact to the consolidated statements of operations. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such instruments is mitigated.
Additionally, Level 3 financial instruments include contingent consideration liabilities of $59.9 million, primarily relating to the acquisition in South Carolina as described in Note 4, "Business Combinations," and recorded to accounts payable and accrued liabilities in our consolidated balance sheets. We applied discounted cash flow analysis to determine the fair value of the contingent consideration liabilities. Significant unobservable inputs primarily related to the probability weighted present values of the purchase price estimates for the membership that could convert in the South Carolina acquisition. Such membership could range from zero to approximately 170,000 members, with a weighted average of approximately 130,000 members.
Our financial instruments measured at fair value on a recurring basis at September 30, 2013, were as follows: |
| | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Corporate debt securities | $ | 467,060 |
| | $ | — |
| | $ | 467,060 |
| | $ | — |
|
GSEs | 74,951 |
| | 74,951 |
| | — |
| | — |
|
Municipal securities | 107,844 |
| | — |
| | 107,844 |
| | — |
|
U.S. treasury notes | 42,207 |
| | 42,207 |
| | — |
| | — |
|
Certificates of deposit | 43,089 |
| | — |
| | 43,089 |
| | — |
|
Auction rate securities | 11,674 |
| | — |
| | — |
| | 11,674 |
|
1.125% Call Option derivative asset | 191,663 |
| | — |
| | — |
| | 191,663 |
|
Total assets measured at fair value on a recurring basis | $ | 938,488 |
| | $ | 117,158 |
| | $ | 617,993 |
| | $ | 203,337 |
|
| | | | | | | |
Embedded cash conversion option derivative liability | $ | 191,556 |
| | $ | — |
| | $ | — |
| | $ | 191,556 |
|
Contingent consideration liabilities | 59,947 |
| | — |
| | — |
| | 59,947 |
|
Total liabilities measured at fair value on a recurring basis | $ | 251,503 |
| | $ | — |
| | $ | — |
| | $ | 251,503 |
|
Our financial instruments measured at fair value on a recurring basis at December 31, 2012, were as follows:
|
| | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
Corporate debt securities | $ | 191,008 |
| | $ | — |
| | $ | 191,008 |
| | $ | — |
|
GSEs | 29,525 |
| | 29,525 |
| | — |
| | — |
|
Municipal securities | 75,848 |
| | — |
| | 75,848 |
| | — |
|
U.S. treasury notes | 35,740 |
| | 35,740 |
| | — |
| | — |
|
Certificates of deposit | 10,724 |
| | — |
| | 10,724 |
| | — |
|
Auction rate securities | 13,419 |
| | — |
| | — |
| | 13,419 |
|
Total assets measured at fair value on a recurring basis | $ | 356,264 |
| | $ | 65,265 |
| | $ | 277,580 |
| | $ | 13,419 |
|
| | | | | | | |
Interest rate swap derivative liability | $ | 1,307 |
| | $ | — |
| | $ | 1,307 |
| | $ | — |
|
The following tables present activity relating to our assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
| | | | | | | | | | | | | | | |
| Changes in Level 3 Instruments for the Nine Months Ended September 30, 2013 |
| Total | | Auction Rate Securities | | Derivatives, Net | | Contingent Consideration |
| (In thousands) |
Balance at December 31, 2012 | $ | 13,419 |
| | $ | 13,419 |
| | $ | — |
| | $ | — |
|
Net unrealized gains included in other comprehensive income | 505 |
| | 505 |
| | — |
| | — |
|
Net unrealized losses included in other expense | (3,382 | ) | | — |
| | (3,382 | ) | | — |
|
Issuances | (75,074 | ) | | — |
| | (75,074 | ) | | — |
|
Auction rate securities settlements and derivative re-designation | 76,747 |
| | (2,250 | ) | | 78,997 |
| | — |
|
Acquisitions | (59,947 | ) | | — |
| | — |
| | (59,947 | ) |
Balance at September 30, 2013 | $ | (47,732 | ) | | $ | 11,674 |
| | $ | 541 |
| | $ | (59,947 | ) |
The amount of total unrealized gains for the period included in other comprehensive income attributable to the change in accumulated other comprehensive losses relating to assets still held at September 30, 2013 | $ | 397 |
| | $ | 397 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| Changes in Level 3 Instruments for the Year Ended December 31, 2012 |
| Total | | Auction Rate Securities | | Derivatives, Net | | Contingent Consideration |
| (In thousands) |
Balance at December 31, 2011 | $ | 16,134 |
| | $ | 16,134 |
| | $ | — |
| | $ | — |
|
Net unrealized gains included in other comprehensive income | 1,635 |
| | 1,635 |
| | — |
| | — |
|
Settlements | (4,350 | ) | | (4,350 | ) | | — |
| | — |
|
Balance at December 31, 2012 | $ | 13,419 |
| | $ | 13,419 |
| | $ | — |
| | $ | — |
|
The amount of total unrealized gains for the period included in other comprehensive income attributable to the change in accumulated other comprehensive losses relating to assets still held at December 31, 2012 | $ | 1,059 |
| | $ | 1,059 |
| | $ | — |
| | $ | — |
|
Fair Value Measurements – Disclosure Only
The carrying amounts and estimated fair values of our long-term debt, as well as the applicable fair value hierarchy tiers, are contained in the tables below. Our convertible senior notes are classified as Level 2 financial instruments. Fair value for these securities is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets. As described in greater detail Note 11, "Long-Term Debt," we recorded lease financing obligations in connection with sale-leaseback transactions executed in the first half of 2013. The lease financing obligations are classified as Level 3 financial instruments because certain inputs used to determine their fair value are unobservable, such as our incremental borrowing rate. Fair value for these obligations was determined using discounted cash flow analysis with an estimated incremental borrowing rate for debt with similar terms. The credit facility was repaid and terminated effective February 15, 2013, and the term loan was repaid in June 2013.
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2013 |
| Carrying Value | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
1.125% Notes | $ | 411,659 |
| | $ | 596,899 |
| | $ | — |
| | $ | 596,899 |
| | $ | — |
|
3.75% Notes | 180,225 |
| | 229,556 |
| | — |
| | 229,556 |
| | — |
|
Lease financing obligations | 178,188 |
| | 178,500 |
| | — |
| | — |
| | 178,500 |
|
| $ | 770,072 |
| | $ | 1,004,955 |
| | $ | — |
| | $ | 826,455 |
| | $ | 178,500 |
|
| | | | | | | | | |
| December 31, 2012 |
| Carrying | | Total | | | | | | |
| Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| (In thousands) |
3.75% Notes | $ | 175,468 |
| | $ | 208,460 |
| | $ | — |
| | $ | 208,460 |
| | $ | — |
|
Term loan | 47,471 |
| | 47,471 |
| | — |
| | — |
| | 47,471 |
|
Credit facility | 40,000 |
| | 40,000 |
| | — |
| | — |
| | 40,000 |
|
| $ | 262,939 |
| | $ | 295,931 |
| | $ | — |
| | $ | 208,460 |
| | $ | 87,471 |
|
7. Investments
The following tables summarize our investments as of the dates indicated:
|
| | | | | | | | | | | | | | | |
| September 30, 2013 |
| Amortized | | Gross Unrealized | | Estimated Fair |
| Cost | | Gains | | Losses | | Value |
| (In thousands) |
Corporate debt securities | $ | 467,785 |
| | $ | 306 |
| | $ | 1,031 |
| | $ | 467,060 |
|
GSEs | 75,022 |
| | 18 |
| | 89 |
| | 74,951 |
|
Municipal securities | 108,647 |
| | 109 |
| | 912 |
| | 107,844 |
|
U.S. treasury notes | 42,159 |
| | 67 |
| | 19 |
| | 42,207 |
|
Certificates of deposit | 43,087 |
| | 3 |
| | 1 |
| | 43,089 |
|
Subtotal - current investments | 736,700 |
| | 503 |
| | 2,052 |
| | 735,151 |
|
Auction rate securities | 12,400 |
| | — |
| | 726 |
| | 11,674 |
|
| $ | 749,100 |
| | $ | 503 |
| | $ | 2,778 |
| | $ | 746,825 |
|
| | | | | | | |
| December 31, 2012 |
| Amortized | | Gross Unrealized | | Estimated Fair |
| Cost | | Gains | | Losses | | Value |
| (In thousands) |
Corporate debt securities | $ | 190,545 |
| | $ | 528 |
| | $ | 65 |
| | $ | 191,008 |
|
GSEs | 29,481 |
| | 45 |
| | 1 |
| | 29,525 |
|
Municipal securities | 75,909 |
| | 185 |
| | 246 |
| | 75,848 |
|
U.S. treasury notes | 35,700 |
| | 42 |
| | 2 |
| | 35,740 |
|
Certificates of deposit | 10,715 |
| | 9 |
| | — |
| | 10,724 |
|
Subtotal - current investments | 342,350 |
| | 809 |
| | 314 |
| | 342,845 |
|
Auction rate securities | 14,650 |
| | — |
| | 1,231 |
| | 13,419 |
|
| $ | 357,000 |
| | $ | 809 |
| | $ | 1,545 |
| | $ | 356,264 |
|
The contractual maturities of our investments as of September 30, 2013 are summarized below: |
| | | | | | | |
| Cost | | Estimated Fair Value |
| (In thousands) |
Due in one year or less | $ | 406,330 |
| | $ | 406,342 |
|
Due one year through five years | 330,370 |
| | 328,809 |
|
Due after ten years | 12,400 |
| | 11,674 |
|
| $ | 749,100 |
| | $ | 746,825 |
|
Gross realized gains and gross realized losses from sales of available-for-sale securities are calculated under the specific identification method and are included in investment income. Net realized investment gains for the three months ended September 30, 2013 and 2012 were $27,000 and $12,000, respectively. Net realized investment gains for the nine months ended September 30, 2013 and 2012 were $169,000 and $250,000, respectively.
We monitor our investments for other-than-temporary impairment. For investments other than our auction rate securities, discussed below, we have determined that unrealized gains and losses at September 30, 2013 and December 31, 2012, are temporary in nature, because the change in market value for these securities has resulted from fluctuating interest rates, rather than a deterioration of the credit worthiness of the issuers. So long as we hold these securities to maturity, we are unlikely to experience gains or losses. In the event that we dispose of these securities before maturity, we expect that realized gains or losses, if any, will be immaterial.
The following tables segregate those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a loss position for 12 months or more as of September 30, 2013.
|
| | | | | | | | | | | | | | | | | | | | | |
| In a Continuous Loss Position for Less than 12 Months | | In a Continuous Loss Position for 12 Months or More |
| Estimated Fair Value | | Unrealized Losses | | Total Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Total Number of Securities |
| (Dollars in thousands) |
Corporate debt securities | $ | 254,351 |
| | $ | 991 |
| | 99 |
| | $ | 5,580 |
| | $ | 40 |
| | 5 |
|
Municipal securities | 60,428 |
| | 736 |
| | 68 |
| | 12,424 |
| | 176 |
| | 29 |
|
GSEs | 24,271 |
| | 89 |
| | 15 |
| | — |
| | — |
| | — |
|
U.S. treasury notes | 12,487 |
| | 19 |
| | 11 |
| | — |
| | — |
| | — |
|
Certificates of deposit | 415 |
| | 1 |
| | 2 |
| | — |
| | — |
| | — |
|
Auction rate securities | — |
| | — |
| | — |
| | 11,674 |
| | 726 |
| | 17 |
|
| $ | 351,952 |
| | $ | 1,836 |
| | 195 |
| | $ | 29,678 |
| | $ | 942 |
| | 51 |
|
The following table segregates those available-for-sale investments that have been in a continuous loss position for less than 12 months, and those that have been in a loss position for 12 months or more as of December 31, 2012.
|
| | | | | | | | | | | | | | | | | | | | | |
| In a Continuous Loss Position for Less than 12 Months | | In a Continuous Loss Position for 12 Months or More |
| Estimated Fair Value | | Unrealized Losses | | Total Number of Securities | | Estimated Fair Value | | Unrealized Losses | | Total Number of Securities |
| (Dollars in thousands) |
Corporate debt securities | $ | 44,457 |
| | $ | 65 |
| | 23 |
| | $ | — |
| | $ | — |
| | — |
|
Municipal securities | 35,223 |
| | 246 |
| | 43 |
| | — |
| | — |
| | — |
|
GSEs | 5,004 |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
|
U.S. treasury notes | 4,511 |
| | 2 |
| | 5 |
| | — |
| | — |
| | — |
|
Auction rate securities | — |
| | — |
| | — |
| | 13,419 |
| | 1,231 |
| | 21 |
|
| $ | 89,195 |
| | $ | 314 |
| | 72 |
| | $ | 13,419 |
| | $ | 1,231 |
| | 21 |
|
Auction Rate Securities
Due to events in the credit markets, the auction rate securities held by us experienced failed auctions beginning in the first quarter of 2008, and such auctions have not resumed. Therefore, quoted prices in active markets have not been available since early 2008. Our investments in auction rate securities are collateralized by student loan portfolios guaranteed by the U.S. government, and the range of maturities for such securities is from 17 years to 33 years. Considering the relative insignificance of these securities when compared with our liquid assets and other sources of liquidity, we have no current intention of selling these securities nor do we expect to be required to sell these securities before a recovery in their cost basis. For this reason, and because the decline in the fair value of the auction rate securities was not due to the credit quality of the issuers, we do not consider the auction rate securities to be other-than-temporarily impaired at September 30, 2013. At the time of the first failed auctions during first quarter 2008, we held a total of $82.1 million in auction rate securities at par value; since that time, we have settled $69.7 million of these instruments at par value.
For the nine months ended September 30, 2013 and 2012, we recorded pretax unrealized gains of $0.5 million and $1.4 million, respectively, to accumulated other comprehensive income for the changes in their fair value. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive income. If we determine that any future valuation adjustment was other-than-temporary, we would record a charge to earnings as appropriate.
8. Receivables
Receivables consist primarily of amounts due from the various states in which we operate. Accounts receivable increased as of September 30, 2013, primarily due to certain intermediary arrangements with state agencies entered into in the third quarter of 2013. For further information on these arrangements, refer to Note 10, "Medical Claims and Benefits Payable."
|
| | | | | | | |
| September 30, 2013 | | December 31, 2012 |
| (In thousands) |
Health Plans segment: | | | |
California | $ | 130,718 |
| | $ | 28,553 |
|
Florida | 2,239 |
| | 953 |
|
Michigan | 16,311 |
| | 12,873 |
|
New Mexico | 14,091 |
| | 9,059 |
|
Ohio | 79,200 |
| | 40,980 |
|
Texas | 5,280 |
| | 7,459 |
|
Utah | 10,375 |
| | 3,359 |
|
Washington | 12,668 |
| | 17,587 |
|
Wisconsin | 5,033 |
| | 4,098 |
|
Other | 633 |
| | 2,177 |
|
Total Health Plans segment | 276,548 |
| | 127,098 |
|
Molina Medicaid Solutions segment | 17,419 |
| | 22,584 |
|
| $ | 293,967 |
| | $ | 149,682 |
|
9. Restricted Investments
Pursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and deposits required by state authorities in certificates of deposit and U.S. treasury securities. We also maintain restricted investments as protection against the insolvency of certain capitated providers. Additionally, in connection with the Molina Medicaid Solutions segment contracts with the states of Maine and Idaho, we maintain restricted investments as collateral for letters of credit. The following table presents the balances of restricted investments:
|
| | | | | | | |
| September 30, 2013 | | December 31, 2012 |
| (In thousands) |
California | $ | 373 |
| | $ | 373 |
|
Florida | 8,840 |
| | 5,738 |
|
Michigan | 1,014 |
| | 1,014 |
|
New Mexico | 24,620 |
| | 15,915 |
|
Ohio | 9,081 |
| | 9,082 |
|
Texas | 3,500 |
| | 3,503 |
|
Utah | 3,308 |
| | 3,126 |
|
Washington | 151 |
| | 151 |
|
Other | 4,037 |
| | 5,199 |
|
Total Health Plans segment | 54,924 |
| | 44,101 |
|
Molina Medicaid Solutions segment | 10,301 |
| | — |
|
| $ | 65,225 |
| | $ | 44,101 |
|
The contractual maturities of our held-to-maturity restricted investments as of September 30, 2013 are summarized below.
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
| (In thousands) |
Due in one year or less | $ | 59,633 |
| | $ | 59,636 |
|
Due one year through five years | 5,592 |
| | 5,596 |
|
| $ | 65,225 |
| | $ | 65,232 |
|
10. Medical Claims and Benefits Payable
As of September 30, 2013, medical claims and benefits payable include amounts payable to certain providers for which we act as an intermediary on behalf of various state agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of operations. As of September 30, 2013, we recorded provider payables of approximately $64.1 million, and $69.7 million accounts receivable for new intermediary arrangements that began in the third quarter of 2013.
The following table presents the components of the change in our medical claims and benefits payable for the periods indicated. The amounts displayed for “Components of medical care costs related to: Prior periods” represent the amount by which our original estimate of claims and benefits payable at the beginning of the period were (more) or less than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported. The following table shows the components of the change in medical claims and benefits payable from continuing and discontinued operations for the periods indicated:
|
| | | | | | | | | | | |
| Nine Months Ended | | Three Months Ended | | Year Ended |
| September 30, 2013 | | September 30, 2013 | | December 31, 2012 |
| (Dollars in thousands) |
Balances at beginning of period | $ | 494,530 |
| | $ | 465,487 |
| | $ | 402,476 |
|
Components of medical care costs related to: | | | | | |
Current period | 4,021,461 |
| | 1,415,670 |
| | 5,136,055 |
|
Prior periods | (54,040 | ) | | (32,575 | ) | | (39,295 | ) |
Total medical care costs | 3,967,421 |
| | 1,383,095 |
| | 5,096,760 |
|
Payments for medical care costs related to: | | | | | |
Current period | 3,410,689 |
| | 851,025 |
| | 4,649,363 |
|
Prior periods | 418,556 |
| | 364,851 |
| | 355,343 |
|
Total paid | 3,829,245 |
| | 1,215,876 |
| | 5,004,706 |
|
Balances at end of period | $ | 632,706 |
| | $ | 632,706 |
| | $ | 494,530 |
|
Benefit from prior period as a percentage of: | | | | | |
Balance at beginning of period | 10.9 | % | | 7.0 | % | | 9.8 | % |
Premium revenue, trailing twelve months | 0.9 | % | | 0.5 | % | | 0.7 | % |
Medical care costs, trailing twelve months | 1.0 | % | | 0.6 | % | | 0.8 | % |
Assuming that our initial estimate of claims incurred but not paid (IBNP) is accurate, we believe that amounts ultimately paid out would generally be between 8% and 10% less than the liability recorded at the end of the period as a result of the inclusion in that liability of the allowance for adverse claims development and the accrued cost of settling those claims. Because the amount of our initial liability is merely an estimate (and therefore not perfectly accurate), we will always experience variability in that estimate as new information becomes available with the passage of time. Therefore, there can be no assurance that amounts ultimately paid out will fall within the range of 8% to 10% lower than the liability that was initially recorded. Furthermore, because our initial estimate of IBNP is derived from many factors, some of which are qualitative in nature rather than quantitative, we are seldom able to assign specific values to the reasons for a change in estimate - we only know when the circumstances for any one or more factors are out of the ordinary.
As indicated above, the amounts ultimately paid out on our liabilities in fiscal years 2013 and 2012 were less than what we had expected when we had established our reserves. For example, for the year ended December 31, 2012, the amounts ultimately paid out were less than the amount of the reserves we had established as of December 31, 2011 by 9.8%. While many related factors working in conjunction with one another determine the accuracy of our estimates, we are seldom able to quantify the impact that any single factor has on a change in estimate. In addition, given the variability inherent in the reserving process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.
We recognized favorable prior period claims development in the amount of $54.0 million for the nine months ended September 30, 2013. This amount represents our estimate, as of September 30, 2013, of the extent to which our initial estimate of medical claims and benefits payable at December 31, 2012 was more than the amount that will ultimately be paid out in satisfaction of that liability. We believe the overestimation of our claims liability at December 31, 2012 was due primarily to the following factors:
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• | At our Washington health plan prior to July 2012, certain high-cost newborns that were approved for supplemental security income (SSI) coverage by the state were retroactively dis-enrolled from our Healthy Options (TANF) coverage, and the health plan was reimbursed for the claims paid on behalf of these members. Starting July 1, 2012, these newborns, as well as other high-cost disabled members, are now covered by the health plan under the Healthy Options Blind and Disabled (HOBD) program. At the end of 2012, we had limited claims history with which to estimate the claims liability of the HOBD members, and as a result the liability for these high-cost members was overstated. |
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• | At our New Mexico health plan, we overestimated the impact of certain high-dollar outstanding claim payments as of December 31, 2012. |
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• | At our Ohio health plan, we overestimated the impact of several potential high-dollar claims relating to our aged, blind or disabled (ABD) members. |
We recognized favorable prior period claims development in the amount of $32.6 million for the three months ended September 30, 2013. This amount represents our estimate as of September 30, 2013, of the extent to which our initial estimate of medical claims and benefits payable at June 30, 2013 was more than the amount that will ultimately be paid out in satisfaction of that liability. This amount of favorable development was considerably less than we typically experience, and was significant enough to have a materially unfavorable impact upon our third quarter financial performance. We believe the overestimation of our claims liability at June 30, 2013 was due primarily to the following factors:
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• | At our Ohio health plan, we overestimated the impact of several potential high-dollar claims relating to critically ill members. |
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• | At our Michigan health plan, we underestimated the impact of future claims overpayment recoveries when establishing reserves at June 30, 2013. |