Molina Healthcare reports strong quarterly results for 2013

Molina Healthcare, Inc. (NYSE: MOH) today reported its financial results for the quarter ended March 31, 2013.

• Full year 2013 guidance increased to $1.55 per diluted share
• Earnings per diluted share for first quarter 2013 of $0.64, up from $0.39 in first quarter of 2012
• Operating income doubles from 2012, increasing by $34 million
• Quarterly premium revenues of $1.5 billion, up 17% over 2012

Net income for the first quarter of 2013 was $29.9 million, or $0.64 per diluted share, compared with net income of $18.1 million, or $0.39 per diluted share, for the quarter ended March 31, 2012.

"This was a strong quarter," said J. Mario Molina, M.D., chief executive officer of Molina Healthcare, Inc. "More importantly, we continue to lay the foundation for even greater success in the future. During the first quarter, we solidified the progress we had made during the second half of 2012, we strengthened our capital position, and we continued to prepare for the opportunities and challenges of the next few years. I thank our employees, our state partners and our providers for their continued commitment to providing health care to those most in need."

Overview of Financial Results

First Quarter 2013 Compared with First Quarter 2012

The Company's financial performance in the first quarter of 2013 improved substantially over the first quarter of 2012. Among the key developments affecting first quarter 2013 performance were the following:

• The recognition of approximately $21 million of premium rate changes at the California health plan. Approximately $19 million of the premium revenue related to 2012 and 2011. Net of related expenses, the rate increases resulted in an increase of approximately $19 million to pretax income; $18 million (approximately $0.24 per diluted share) of which related to 2012 and 2011. The adjustment to premium rates resulted from the receipt of new rate sheets from the state of California that restored the rates that had existed prior to the cuts that had been taken effective July 1, 2011, and a modest increase to rates for the Company's aged, blind, or disabled, or ABD, membership retroactive to July 1, 2011. The new premium rates are expected to increase premium revenue at the California health plan going forward by approximately $400,000 per month;
• The recognition of approximately $6 million (approximately $0.08 per diluted share) of performance revenue at the Texas health plan related to 2012. The Texas health plan recently received notice from the Texas Department of Health and Human Services that a specific measure is being removed from the calculation of performance revenue for all contracted health plans for 2012. As of December 31, 2012, the Texas health plan had not recognized approximately $6 million of revenue related to this performance measure;
• Flat inpatient utilization compared with the first quarter of 2012;
• Improved performance at the Florida, Texas, Ohio and Wisconsin health plans; and
• The immediate recognition in interest expense of approximately $6 million (approximately $0.08 per diluted share) of debt issuance fees related to the Company's issuance of $550 million of 1.125% cash convertible senior notes (the 1.125% Notes) in February 2013. The remainder of the fees associated with that issuance will be expensed over the seven-year life of the 1.125% Notes.

Health Plans Segment Results

Premium Revenue

Premium revenue for the first quarter of 2013 increased 16.7% over the first quarter of 2012, primarily due to a shift in member mix to populations generating higher premium revenue per member per month (PMPM). Medicare premium revenue was $118.4 million for the first quarter of 2013 compared with $109.8 million for the first quarter of 2012.

Growth in the Company's ABD membership in Washington and California led to higher premium revenue PMPM in 2013. ABD membership, as a percent of total membership, has increased approximately 10% year over year. Premium revenue PMPM also increased in the first quarter of 2013 as a result of the inclusion of revenue for pharmacy benefits for the Utah health plan effective January 1, 2013, and as a result of the inclusion of revenue for inpatient facility and pharmacy benefits across all of the Texas health plan's membership effective March 1, 2012.

Medical Care Costs

Medical care costs increased in the first quarter of 2013 primarily due to the same shifts in member mix and the benefit expansions that led to increased premium revenue, particularly in California, Texas and Washington. The Company's consolidated medical care ratio, however, decreased to 86.1% in the first quarter of 2013, from 88.1% in the first quarter of 2012. Retroactive rate increases for the California health plan and increased margins at the Texas health plan were the primary drivers of the lower medical care ratio in the first quarter of 2013. Stable inpatient utilization and lower pharmacy unit costs also contributed to the lower medical care ratio in the first quarter of 2013.

Texas Health Plan Update

The Company has previously reported on the financial challenges faced by its Texas health plan. Although first quarter results show considerable improvement over the results reported for the first quarter of 2012, management cautions investors regarding the following points:

• The first quarters of 2013 and 2012 are not meaningfully comparable. The state of Texas expanded Medicaid managed care into new regions effective March 1, 2012. Additionally, the state extended inpatient facility and pharmacy benefits into Medicaid managed care on that date. The result of these actions was to dramatically increase the Texas health plan's revenue and medical costs between the first quarters of 2012 and 2013.
• The Texas health plan received a 4% rate increase (adding about $4 million to monthly revenue) effective September 1, 2012.
• Certain out-of-period adjustments artificially lowered the medical care ratio for the Texas health plan in the first quarter of 2013. Absent the previously described $6 million out-of-period benefit related to 2012 performance revenue and a $13.5 million benefit from favorable development of the claims liability established for the health plan at December 31, 2012, the Texas health plan's medical care ratio for the first quarter of 2013 would have been approximately 86.6% rather than the reported medical care ratio of 80.9%.
• While management continues to work to improve the financial performance of the Texas health plan, management also believes that increased payments to certain providers are necessary. Specifically, the health plan intends to increase provider reimbursement for personal attendant services and day activity and health services effective July 1, 2013. The Company anticipates that this increase in provider payments alone will add approximately $10 million to medical expense in the second half of 2013.

Cash Flow

Cash provided by operating activities was $20.1 million for the three months ended March 31, 2013, compared with $50.6 million for the three months ended March 31, 2012. The decrease in cash provided by operating activities was primarily due to the changes in deferred revenue and medical claims and benefits payable, partially offset by the change in accounts receivable. Deferred revenue and medical claims and benefits payable were a use of operating cash amounting to $9.4 million in the aggregate in the three months ended March 31, 2013, compared with a source of operating cash amounting to $97.9 million in the aggregate in the same period in 2012. Accounts receivable was a use of operating cash amounting to $0.6 million in the three months ended March 31, 2013, compared with $54.4 million in same period in 2012.

Cash provided by financing activities for the three months ended March 31, 2013, was $374.8 million compared with $16.0 million for the three months ended March 31, 2012, an increase of $358.8 million. The significant increase was primarily due to $538.0 million in proceeds the Company received from its offering of 1.125% Notes and $75.1 million from the sale of warrants, partially offset by $149.3 million paid for the purchased call option relating to the 1.125% Notes, $50.0 million paid for repurchases of common stock, and $40.0 million used to repay the Company's Credit Facility.

At March 31, 2013, the Company had cash and investments of $1.6 billion, and the parent company had cash and investments of $450.5 million.

Earnings Per Share Guidance

The Company is revising its previously issued guidance of $1.45 to reflect updated anticipated earnings per diluted share of $1.55 for fiscal year 2013. Core operations are performing better than previously anticipated. For all of 2013, the Company believes that the improved performance of its core operations will be partially offset by the following incremental expenses.

• The Company expects to increase payments to certain providers of personal attendant services and day activity and health services in Texas, effective July 1, 2013. The Company expects that this action will increase expense during the second half of 2013 by approximately $10 million.
• In March 2013, the Company adopted a performance-based equity compensation program that is expected to increase previously anticipated equity compensation expense for all of 2013 by approximately $13 million. The Company believes that performance-based equity grants align compensation with the long-term interest of investors.

The Company notes that its revised guidance, like its previously issued guidance, does not include certain administrative costs to be incurred in 2013 related to growth in membership that the Company expects to occur in 2014. Guidance excludes such costs because the Company still lacks visibility into the size of that membership and the timing of its expected transition into the Company's health plans.

The Company also notes that the extrapolation of its first quarter 2013 results to the full year of 2013 is inappropriate. As noted above, first quarter results benefited from the retroactive adjustment of California premium rates. Furthermore, the incremental expense noted above for Texas provider compensation, equity compensation, and the costs associated with new membership effective in 2014 were not fully reflected in first quarter results.

Conference Call

The Company's management will host a conference call and webcast to discuss its first quarter results at 5:00 p.m. Eastern time on Thursday, April 25, 2013. The number to call for the interactive teleconference is (212) 231-2932. A telephonic replay of the conference call will be available from 7:00 p.m. Eastern time on Thursday, April 25, 2013, through 6:00 p.m. on Friday, April 26, 2013, by dialing (800) 633-8284 and entering confirmation number 21653764. A live broadcast of Molina Healthcare's conference call will be available on the Company's website, www.molinahealthcare.com, or at www.earnings.com. A 30-day online replay will be available approximately an hour following the conclusion of the live broadcast.