Molina Medicaid Solutions - DHHR

e10vkGain on purchase of convertible senior notes 1,532 — — — —Operating income 57,393 112,605 98,327 75,811 45,780Interest expense (13,777) (13,231) (5,605) (2,353) (1,929)Income before income taxes 43,616 99,374 92,722 73,458 43,851Provision for income taxes 12,748 39,776 34,996 27,731 16,255Net income $ 30,868 $ 59,598 $ 57,726 $ 45,727 $ 27,596Net income per share:Basic $ 1.19 $ 2.15 $ 2.04 $ 1.64 $ 1.00Diluted $ 1.19 $ 2.15 $ 2.03 $ 1.62 $ 0.98Weighted average number of common shares outstanding 25,843,000 27,676,000 28,275,000 27,966,000 27,711,000Weighted average number of common shares and potential dilutivecommon shares outstanding 25,984,000 27,772,000 28,419,000 28,164,000 28,023,000Operating Statistics:Medical care ratio(5) 86.8% 84.8% 84.5% 84.6% 86.9%General and administrative expense ratio(6) 10.9% 11.1% 11.5% 11.4% 9.9%General and administrative expense ratio, excluding premium taxes 7.5% 8.0% 8.2% 8.4% 7.1%Members(7) 1,455,000 1,256,000 1,149,000 1,077,000 893,00033Table of ContentsAs of December 31,2009 2008(1) 2007(1),(2) 2006(3) 2005Balance Sheet Data:Cash and cash equivalents $ 469,501 $ 387,162 $ 459,064 $ 403,650 $ 249,203Total assets 1,245,235 1,148,068 1,170,016 864,475 659,927Long-term debt (including current maturities) 158,900 164,873 160,166 45,000 —Total liabilities 702,497 616,306 655,640 444,309 297,077Stockholders’ equity 542,738 531,762 514,376 420,166 362,850(1) The consolidated balance sheet and operating results have been recast to reflect the adoption of FASB ASC Subtopic 470-20, Debt with Conversion and Other Options.The cumulative adjustments to reduce retained earnings were $3.4 million as of January 1, 2009, and $604,000 as of January 1, 2008. Additionally, interest expenseincreased $4.5 million for the year ended December 31, 2008, and $1.0 million for the year ended December 31, 2007.(2) The balance sheet and operating results of the Mercy CarePlus acquisition, relating to our Missouri health plan, have been included since November 1, 2007, the effectivedate of the acquisition.(3) The balance sheet and operating results of the Cape Health Plan acquisition, relating to our Michigan health plan, have been included since May 15, 2006, the effectivedate of the acquisition.(4) Amount represents an impairment charge related to commercial software no longer used for operations.(5) Medical care ratio represents medical care costs as a percentage of premium revenue. The medical care ratio is a key operating indicator used to measure our performancein delivering efficient and cost effective health care services. Changes in the medical care ratio from period to period result from changes in Medicaid funding by thestates, our ability to effectively manage costs, and changes in accounting estimates related to incurred but not reported claims. See Management’s Discussion and Analysisof Financial Condition and Results of Operations for further discussion.(6) General and administrative expense ratio represents such expenses as a percentage of total revenue.(7) Number of members at end of period.34Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion of our financial condition and results of operations should be read in conjunction with the “Selected Financial Data” and the accompanyingconsolidated financial statements and the notes to those statements appearing elsewhere in this report. This discussion contains forward-looking statements that involve knownand unknown risks and uncertainties, including those set forth under Item 1A — Risk Factors, above.Adoption of Convertible Debt AccountingOur 2008 and 2007 consolidated financial statements have been recast to reflect the adoption of FASB Accounting Standards Codification (ASC) 470-20, Debt withConversion and Other Options. This resulted in additional interest expense of $4.5 million ($0.10 per diluted share) for the year ended December 31, 2008, and $1.0 million($0.02 per diluted share) for the year ended December 31, 2007.OverviewMolina Healthcare, Inc. is a multi-state managed care organization that arranges for the delivery of health care services to persons eligible for Medicaid, Medicare, andother government-sponsored programs for low-income families and individuals. We conduct our business primarily through licensed health plans in the states of California,Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, and Washington. Effective December 31, 2009, we terminated operations at our small Medicare health plan inNevada. The health plans are locally operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization, orHMO.On January 18, 2010, we entered into a definitive agreement to acquire the Health Information Management, or HIM, business of Unisys Corporation. The HIMbusiness provides design, development, implementation, and business process outsourcing solutions to state governments for their Medicaid Management Information Systems,or MMIS, a core tool used to support the administration of state Medicaid and other health care entitlement programs. The HIM business currently holds MMIS contracts withthe states of Idaho, Louisiana, Maine, New Jersey, and West Virginia, as well as a contract to provide drug rebate administration services for the Florida Medicaid program. Theacquisition is expected to close in the first half of 2010. We intend to operate the HIM business under the name, Molina Medicaid Solutions.Our financial performance for 2009, 2008, and 2007 is briefly summarized below (dollars in thousands, except per-share data):Year Ended December 31,2009 2008 2007Earnings per diluted share $ 1.19 $ 2.15 $ 2.03Premium revenue $3,660,207 $3,091,240 $2,462,369Operating income $ 57,393 $ 112,605 $ 98,327Net income $ 30,868 $ 59,598 $ 57,726Medical care ratio 86.8% 84.8% 84.5%G&A expenses as a percentage of total revenue 10.9% 11.1% 11.5%Total ending membership 1,455,000 1,256,000 1,149,000RevenuePremium revenue is fixed in advance of the periods covered and, except as described below, is not generally subject to significant accounting estimates. For the yearended December 31, 2009, we received approximately 92% of our premium revenue as a fixed amount per member per month, or PMPM, pursuant to our Medicaid contractswith state agencies, our Medicare contracts with CMS, and our contracts with other managed care organizations for which we operate as a subcontractor. These premiumrevenues are recognized in the month that members are entitled to receive health care services. The state Medicaid programs and the federal Medicare program periodicallyadjust premium rates.The amount of the premiums paid to us may vary substantially between states and among various government programs. PMPM premiums for CHIP members of the aregenerally among our lowest, with rates as low as35Table of Contentsapproximately $75 PMPM in California. Premium revenues for Medicaid members are generally higher. Among the TANF Medicaid population — the Medicaid group thatincludes mostly mothers and children — PMPM premiums range between approximately $100 in California to over $240 in Ohio. Among our Medicaid ABD membership,PMPM premiums range from approximately $320 in Utah to over $1,000 in Ohio. Contributing to the variability in Medicaid rates among the states is the practice of somehttp://sec.gov/Archives/edgar/data/1179929/000095012310025132/a55407e10vk.htm[1/6/2012 11:12:35 AM]