Molina Healthcare Reports Third Quarter 2012 Results

Molina Healthcare Reports Third Quarter 2012 Results

LONG BEACH, Calif.--(BUSINESS WIRE)-- Molina Healthcare, Inc. (NYS: MOH) :

• Earnings per diluted share for third quarter 2012 of $0.07, down from $0.41 in 2011

• Quarterly premium revenues of $1.5 billion, up 31% over 2011

• Aggregate membership up 9% over 2011

• Year to date cash provided by operating activities up $109 million over 2011

Molina Healthcare, Inc. (NYS: MOH) today reported its financial results for the third quarter and nine months ended September 30, 2012.

Net income for the quarter was $3.4 million, or $0.07 per diluted share, compared with net income of $19.0 million, or $0.41 per diluted share, for the quarter ended September 30, 2011.

"Our third quarter results demonstrate the tremendous opportunities we have before us," said J. Mario Molina, M.D., chief executive officer of Molina Healthcare, Inc. "The growth in our Washington revenue in the third quarter was more than enough to replace the revenue we lost as a result of the termination of our contract in Missouri. The developments in Washington are an example of the growth that is happening in our industry even without the impetus of federal legislation. I am also pleased with the rapid turnaround at our Texas health plan, where we have made remarkable progress in the last three months."

Overview of Financial Results

The Company's financial performance in the third quarter of 2012 improved substantially over the second quarter of 2012 due to a significant improvement in the profitability of its Texas health plan. Revenue was consistent between the second and third quarters of 2012 as a 30% increase in revenue at the Washington health plan offset both the termination of the Company's Missouri enrollment and the slight decline in Texas enrollment.

Health Plans Segment Results

Premium Revenue

Premium revenue for the third quarter of 2012 increased 31% over the third quarter of 2011, primarily due to an increase in membership, a shift in member mix to populations generating higher premium revenue per member per month (PMPM), and benefit expansions.

Membership at the Texas health plan nearly doubled year over year, while also growing significantly in Ohio and Washington. Growth in the Company's aged, blind or disabled, or ABD, membership led to higher premium revenue PMPM in 2012. ABD membership, as a percent of total membership, has increased approximately 37% year over year. Premium revenue PMPM also increased in the third quarter of 2012 as a result of the inclusion of revenue from the pharmacy benefit for the Ohio health plan effective October 1, 2011, and as a result of the inclusion of revenue from the 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 third quarter of 2012 primarily due to the same shifts in member mix and the benefit expansions that led to increased premium revenue. Medical care costs as a percentage of premium revenue (the medical care ratio) also increased in the third quarter of 2012 when compared with the third quarter of 2011 because increases in premium rates have not kept pace with increases in medical costs.

Individual Health Plan Analysis

The Texas health plan's financial performance improved dramatically in the third quarter from the second quarter of 2012. The medical care ratio of the Texas health plan was 90% in the third quarter of 2012 compared with 109% in the second quarter of 2012 and 94% in the third quarter of 2011. The medical care ratio for the Texas health plan's ABD membership declined to 94% in the third quarter of 2012 from 119% in the second quarter. The Company received a blended rate increase in Texas of approximately 4%, or $4.5 million per month, effective September 1, 2012. The loss before taxes at the Texas health plan was approximately $5 million for the third quarter of 2012, compared with approximately $68 million for the second quarter of 2012 (which included a premium deficiency reserve charge of $10 million). The Company has previously discussed at length the steps it is taking to bring the Texas health plan to profitability. The Company confirms its previously disclosed expectation that the Texas health plan will be operating at financial break even on a go forward basis by December of 2012.

The medical care ratio at the California health plan increased to 96% in the third quarter of 2012 from 89% in the third quarter of 2011. The higher medical care ratio was primarily the result of a shift in member mix to include more ABD members. The medical care ratio for the California health plan's ABD membership was 110% in the third quarter of 2012, 100% for the nine months ended September 30, 2012, and 84% for the third quarter of 2011. The California Department of Health Care Services has recently solicited health plan input as to whether to conduct a review of the adequacy of ABD premium rates in California. The Company's California health plan, which believes the ABD premium rates to be inadequate, has provided input supporting such a review. During the fourth quarter of 2012, the Company intends to exit an unprofitable service area in California, reducing enrollment by approximately 6,000 members.

The addition of ABD members to the Washington health plan effective July 1, 2012, increased its medical care ratio to 86% in the third quarter of 2012 compared with 83% in the third quarter of 2011. The higher premium revenue PMPM associated with the ABD membership, however, offset the increased medical care ratio, so that income from operations was consistent between the third quarters of 2012 and 2011. The medical care ratio for the Washington health plan's new ABD membership was 93% in the third quarter of 2012.

Molina Medicaid Solutions Segment Results

Performance of the Molina Medicaid Solutions segment was as follows:

Operating income for the Company's Molina Medicaid Solutions segment improved $8 million and $27 million for the three months and nine months ended September 30, 2012, respectively. This improvement was primarily the result of stabilization of the Company's newest Medicaid Management Information Systems, or MMIS, in Idaho and Maine. For the quarter ended September 30, 2012, the Molina Medicaid Solutions segment gross profit margin rate was 24%, compared with 12% for the Health Plans segment.

Cash Flow

Cash provided by operating activities was $264 million for the nine months ended September 30, 2012, compared with $155 million for the nine months ended September 30, 2011. Higher medical claims and benefits payable at our Texas health plan was the primary reason for the increase, followed by an increase in deferred revenue. The increases in medical claims and benefits payable and deferred revenue were offset by the decline in year to date net income.

At September 30, 2012, the Company had cash and investments of $1.1 billion, and the parent company had cash and investments of $41 million.

⁽¹⁾ GAAP stands for U.S. generally accepted accounting principles.

⁽²⁾ EBITDA is not prepared in conformity with GAAP because it excludes depreciation and amortization, as well as interest expense and the provision for income taxes. This non-GAAP financial measure should not be considered as an alternative to the GAAP measures of net income, operating income, operating margin, or cash provided by operating activities, nor should EBITDA be considered in isolation from these GAAP measures of operating performance. Management uses EBITDA as a supplemental metric in evaluating the Company's financial performance, in evaluating financing and business development decisions, and in forecasting and analyzing future periods. For these reasons, management believes that EBITDA is a useful supplemental measure to investors in evaluating the Company's performance and the performance of other companies in the Company's industry.

Conference Call

The Company's management will host a conference call and webcast to discuss its third quarter results at 5:00 p.m. Eastern time on Tuesday, October 23, 2012. The number to call for the interactive teleconference is (212) 231-2900. A telephonic replay of the conference call will be available from 7:00 p.m. Eastern time on Tuesday, October 23, 2012, through 6:00 p.m. on Wednesday, October 24, 2012, by dialing (800) 633-8284 and entering confirmation number 21602734. 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.

About Molina Healthcare

Molina Healthcare, Inc., a FORTUNE 500 company, 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. The Company's licensed health plans in California, Florida, Michigan, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin currently serve approximately 1.8 million members, and its subsidiary, Molina Medicaid Solutions, provides business processing and information technology administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, and West Virginia, and drug rebate administration services in Florida.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This earnings release contains "forward-looking statements" regarding the Company's plans, expectations, and anticipated future events.Actual results could differ materially due to numerous known and unknown risks and uncertainties, including, without limitation, risk factors related to the following:

• the effectiveness of our medical cost containment initiatives in Texas;

• significant budget pressures on state governments and their potential inability to maintain current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria;

• uncertainties regarding the implementation of the Patient Protection and Affordable Care Act, including the potential refusal of a state to expand Medicaid eligibility to its uninsured population, issues surrounding state insurance exchanges, the impact of the health insurance industry excise tax, the effect of various implementing regulations, and uncertainties regarding the impact of other federal or state health care and insurance reform measures;

• management of the Company's medical costs, including seasonal flu patterns and rates of utilization that are consistent with the Company's expectations, and the reduction over time of the high medical costs associated with new populations;

• the success of the Company's efforts to retain existing government contracts and to obtain new government contracts in connection with state requests for proposals (RFPs) in both existing and new states, including the pending RFP in New Mexico, and the Company's ability to grow the Company's revenues consistent with the Company's expectations;

• the accurate estimation of incurred but not reported medical costs across the Company's health plans;

• risks associated with the continued growth in new Medicaid and Medicare enrollees, and the development of actuarially sound rates with respect to such new enrollees, including dually eligible enrollees;

• retroactive adjustments to premium revenue or accounting estimates which require adjustment based upon subsequent developments, including Medicaid pharmaceutical rebates;

• the continuation and renewal of the government contracts of both the Company's health plans and Molina Medicaid Solutions and the terms under which such contracts are renewed;

• the timing of receipt and recognition of revenue and the amortization of expense under the state contracts of Molina Medicaid Solutions in Maine or Idaho;

• additional administrative costs and the potential payment of additional amounts to providers and/or the state by Molina Medicaid Solutions as a result of MMIS implementation issues in Maine or Idaho;

• government audits and reviews, and any enrollment freeze or monitoring program that may result therefrom;

• changes with respect to the Company's provider contracts and the loss of providers;

• the establishment of a federal or state medical cost expenditure floor as a percentage of the premiums we receive, and the interpretation and implementation of medical cost expenditure floors, administrative cost and profit ceilings, and profit sharing arrangements;

• the interpretation and implementation of at-risk premium rules regarding the achievement of certain quality measures;

• approval by state regulators of dividends and distributions by the Company's health plan subsidiaries;

• changes in funding under the Company's contracts as a result of regulatory changes, programmatic adjustments, or other reforms;

• high dollar claims related to catastrophic illness;

• the favorable resolution of litigation, arbitration, or administrative proceedings;

• restrictions and covenants in the Company's credit facility;

• the relatively small number of states in which we operate health plans;

• the availability of financing to fund and capitalize the Company's acquisitions and start-up activities and to meet the Company's liquidity needs;

• a state's failure to renew its federal Medicaid waiver;

• an inadvertent unauthorized disclosure of protected health information;

• changes generally affecting the managed care or Medicaid management information systems industries;

• increases in government surcharges, taxes, and assessments;

• changes in general economic conditions, including unemployment rates;

• increasing consolidation in the Medicaid industry;

and numerous other risk factors, including those discussed in the Company's periodic reports and filings with the Securities and Exchange Commission.These reports can be accessed under the investor relations tab of the Company's website or on the SEC's website atwww.sec.gov.Given these risks and uncertainties, we can give no assurances that the Company's forward-looking statements will prove to be accurate, or that any other results or events projected or contemplated by the Company's forward-looking statements will in fact occur, and we caution investors not to place undue reliance on these statements.All forward‐looking statements in this release represent the Company's judgment as of October 23, 2012, and we disclaim any obligation to update any forward-looking statements to conform the statement to actual results or changes in the Company's expectations.