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Molina Healthcare
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$128.38 63 $8,040
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-30 Regulation FD, Exhibits
8-K 2019-05-13 Shareholder Vote
8-K 2019-04-29 Earnings, Exhibits
8-K 2019-02-11 Earnings, Exhibits
8-K 2019-02-04 Enter Agreement, Regulation FD, Exhibits
8-K 2019-01-31 Enter Agreement, Other Events, Exhibits
8-K 2019-01-07 Regulation FD, Exhibits
8-K 2019-01-03 Regulation FD, Exhibits
8-K 2018-10-31 Earnings, Exhibits
8-K 2018-10-25 Enter Agreement, M&A, Regulation FD, Exhibits
8-K 2018-10-01 Regulation FD, Exhibits
8-K 2018-08-13 Leave Agreement
8-K 2018-07-31 Earnings, Exhibits
8-K 2018-07-11 Other Events, Exhibits
8-K 2018-07-09 Regulation FD, Exhibits
8-K 2018-06-26 Enter Agreement, Regulation FD, Exhibits
8-K 2018-06-18 Regulation FD, Exhibits
8-K 2018-05-31 Regulation FD, Exhibits
8-K 2018-05-25 Officers, Regulation FD, Exhibits
8-K 2018-05-24 Regulation FD, Exhibits
8-K 2018-05-23 Officers, Regulation FD, Exhibits
8-K 2018-05-07 Shareholder Vote, Exhibits
8-K 2018-03-05 Other Events, Exhibits
8-K 2018-02-28 Amend Bylaw, Other Events, Exhibits
8-K 2018-02-23 Officers, Regulation FD, Exhibits
8-K 2018-02-12 Earnings, Impairments, Exhibits
8-K 2018-02-01 Regulation FD
8-K 2018-01-10 Officers, Regulation FD, Exhibits
8-K 2018-01-08 Regulation FD, Exhibits
8-K 2018-01-02 Enter Agreement, Off-BS Arrangement, Exhibits
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BLFS Biolife Solutions 313
STXS Stereotaxis 0
UHN United States Diesel-Heating Oil Fund 0
SLGD Scotts Liquid Gold 0
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HRGG Heritage Nola Bancorp 0
KLMN Kalmin 0
MOH 2019-03-31
EX-31.1 moh-03312019xex311.htm
EX-31.2 moh-03312019xex312.htm
EX-32.1 moh-03312019xex321.htm
EX-32.2 moh-03312019xex322.htm

Molina Healthcare Earnings 2019-03-31

MOH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 moh-03312019x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨
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
 
 
 
 
molinalogo2016a26.jpg
MOLINA HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
13-4204626
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
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, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý Accelerated filer ¨ Non-accelerated filer ¨ (do not check if a smaller reporting company)
Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ¨
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, $0.001 par value, outstanding as of April 26, 2019, was approximately 62,619,000.



MOLINA HEALTHCARE, INC. FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED March 31, 2019

TABLE OF CONTENTS
ITEM NUMBER
Page
 
 
 
PART I - Financial Information
 
 
 
 
1.
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
Part II - Other Information
 
 
 
 
1.
 
 
 
1A.
 
 
 
2.
 
 
 
3.
Defaults Upon Senior Securities
Not Applicable.
 
 
 
4.
Mine Safety Disclosures
Not Applicable.
 
 
 
5.
Other Information
Not Applicable.
 
 
 
6.
 
 
 
 
 
 
 
 
 
 





CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions, except per-share amounts)
(Unaudited)
Revenue:
 
 
 
Premium revenue
$
3,952

 
$
4,323

Premium tax revenue
138

 
104

Health insurer fees reimbursed

 
61

Service revenue

 
134

Investment income and other revenue
29

 
24

Total revenue
4,119

 
4,646

Operating expenses:
 
 
 
Medical care costs
3,371

 
3,722

General and administrative expenses
302

 
352

Premium tax expenses
138

 
104

Health insurer fees

 
75

Depreciation and amortization
25

 
26

Restructuring costs
3

 
25

Cost of service revenue

 
120

Total operating expenses
3,839

 
4,424

Operating income
280

 
222

Other expenses, net:
 
 
 
Interest expense
23

 
33

Other (income) expenses, net
(3
)
 
10

Total other expenses, net
20

 
43

Income before income tax expense
260

 
179

Income tax expense
62

 
72

Net income
$
198

 
$
107

 
 
 
 
Net income per share:
 
 
 
Basic
$
3.19

 
$
1.79

Diluted
$
2.99

 
$
1.64

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
(Unaudited)
Net income
$
198

 
$
107

Other comprehensive income (loss):
 
 
 
Unrealized investment gain (loss)
7

 
(7
)
Less: effect of income taxes
2

 
(1
)
Other comprehensive income (loss), net of tax
5

 
(6
)
Comprehensive income
$
203

 
$
101

See accompanying notes.

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 3


CONSOLIDATED BALANCE SHEETS
 
March 31,
2019
 
December 31,
2018
 
(Dollars in millions,
except per-share amounts)
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,224

 
$
2,826

Investments
1,508

 
1,681

Receivables
1,359

 
1,330

Prepaid expenses and other current assets
124

 
149

Derivative asset
516

 
476

Total current assets
6,731

 
6,462

Property, equipment, and capitalized software, net
376

 
241

Goodwill and intangible assets, net
185

 
190

Restricted investments
100

 
120

Deferred income taxes
76

 
117

Other assets
111

 
24

 
$
7,579

 
$
7,154

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Medical claims and benefits payable
$
1,995

 
$
1,961

Amounts due government agencies
932

 
967

Accounts payable and accrued liabilities
444

 
390

Deferred revenue
207

 
211

Current portion of long-term debt
198

 
241

Derivative liability
516

 
476

Total current liabilities
4,292

 
4,246

Long-term debt
1,121

 
1,020

Finance lease liabilities
234

 
197

Other long-term liabilities
97

 
44

Total liabilities
5,744

 
5,507

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.001 par value, 150 million shares authorized; outstanding: 63 million shares at March 31, 2019 and 62 million shares at December 31, 2018

 

Preferred stock, $0.001 par value; 20 million shares authorized, no shares issued and outstanding

 

Additional paid-in capital
543

 
643

Accumulated other comprehensive loss
(3
)
 
(8
)
Retained earnings
1,295

 
1,012

Total stockholders’ equity
1,835

 
1,647

 
$
7,579

 
$
7,154

See accompanying notes.

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 4


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
 
Outstanding
 
Amount
 
 
 
 
 
(In millions)
 
(Unaudited)
Balance at December 31, 2018
62

 
$

 
$
643

 
$
(8
)
 
$
1,012

 
$
1,647

Net income

 

 

 

 
198

 
198

Adoption of new accounting standard

 

 

 

 
85

 
85

Partial termination of 1.125% Warrants

 

 
(103
)
 

 

 
(103
)
Other comprehensive gain, net

 

 

 
5

 

 
5

Share-based compensation
1

 

 
3

 

 

 
3

Balance at March 31, 2019
63

 
$

 
$
543

 
$
(3
)
 
$
1,295

 
$
1,835



 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
 
Outstanding
 
Amount
 
 
 
 
 
(In millions)
 
(Unaudited)
Balance at December 31, 2017
60

 
$

 
$
1,044

 
$
(5
)
 
$
298

 
$
1,337

Net income

 

 

 

 
107

 
107

Adoption of new accounting standards

 

 

 
(1
)
 
7

 
6

Exchange of 1.625% Convertible Notes
2

 

 
108

 

 

 
108

Other comprehensive loss, net

 

 

 
(6
)
 

 
(6
)
Share-based compensation

 

 
1

 

 

 
1

Balance at March 31, 2018
62

 
$

 
$
1,153

 
$
(12
)
 
$
412

 
$
1,553


See accompanying notes.

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 5


CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
(Unaudited)
Operating activities:
 
 
 
Net income
$
198

 
$
107

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
25

 
37

Deferred income taxes
15

 
(6
)
Share-based compensation
9

 
6

Amortization of convertible senior notes and finance lease liabilities
3

 
7

(Gain) loss on debt extinguishment
(3
)
 
10

Non-cash restructuring costs

 
17

Other, net
3

 
2

Changes in operating assets and liabilities:
 
 
 
Receivables
(29
)
 
(83
)
Prepaid expenses and other current assets
20

 
(239
)
Medical claims and benefits payable
34

 
(163
)
Amounts due government agencies
(35
)
 
172

Accounts payable and accrued liabilities
(30
)
 
319

Deferred revenue
(4
)
 
130

Income taxes
43

 
78

Net cash provided by operating activities
249

 
394

Investing activities:
 
 
 
Purchases of investments
(185
)
 
(389
)
Proceeds from sales and maturities of investments
366

 
543

Purchases of property, equipment and capitalized software
(6
)
 
(4
)
Other, net
(4
)
 
(5
)
Net cash provided by investing activities
171

 
145

Financing activities:
 
 
 
Repayment of principal amount of 1.125% Convertible Notes
(46
)
 

Cash paid for partial settlement of 1.125% Conversion Option
(115
)
 

Cash received for partial termination of 1.125% Call Option
115

 

Cash paid for partial termination of 1.125% Warrants
(103
)
 

Proceeds from borrowings under Term Loan
100

 

Other, net
1

 
(5
)
Net cash used in financing activities
(48
)
 
(5
)
Net increase in cash, cash equivalents, and restricted cash and cash equivalents
372

 
534

Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period
2,926

 
3,290

Cash, cash equivalents, and restricted cash and cash equivalents at end of period
$
3,298

 
$
3,824


Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 6



CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
(Unaudited)
Supplemental cash flow information:
 
 
 
 
 
 
 
Schedule of non-cash investing and financing activities:
 
 
 
Common stock used for share-based compensation
$
(7
)
 
$
(5
)
 
 
 
 
Details of change in fair value of derivatives, net:
 
 
 
Gain on 1.125% Call Option
$
155

 
$
63

Loss on 1.125% Conversion Option
(155
)
 
(63
)
Change in fair value of derivatives, net
$

 
$

 
 
 
 
1.625% Convertible Notes exchange transaction:
 
 
 
Common stock issued in exchange for 1.625% Convertible Notes
$

 
$
131

Component allocated to additional paid-in capital, net of income taxes

 
(23
)
Net increase to additional paid-in capital
$

 
$
108

See accompanying notes.


Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2019

1. Organization and Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides managed health care services under the Medicaid and Medicare programs and through the insurance marketplaces (the “Marketplace”). We currently have two reportable segments: our Health Plans segment and our Other segment. We manage the vast majority of our operations through our Health Plans segment. The Other segment includes the historical results of the Medicaid management information systems (“MMIS”) and behavioral health subsidiaries that were sold in the fourth quarter of 2018, as well as certain corporate amounts not allocated to the Health Plans segment. Prior to the fourth quarter of 2018, the MMIS subsidiary was reported as a stand-alone segment.
The Health Plans segment consists of health plans operating in 14 states and the Commonwealth of Puerto Rico. As of March 31, 2019, these health plans served approximately 3.4 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals including Marketplace members, most of whom receive government subsidies for premiums. The health plans are generally operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (“HMO”).
Our health plans’ state Medicaid contracts generally have terms of three to five years. 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. Such contracts are subject to risk of loss in states that issue requests for proposal (“RFPs”) 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 not be renewed.
In addition to contract renewal, our state Medicaid contracts may be periodically amended to include or exclude certain health benefits (such as pharmacy services, behavioral health services, or long-term care services); populations such as the aged, blind or disabled; and regions or service areas.
Consolidation and Interim Financial Information
The consolidated financial statements include the accounts of Molina Healthcare, Inc., and its subsidiaries. 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 three months ended March 31, 2019, are not necessarily indicative of the results for the entire year ending December 31, 2019.
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, 2018. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in our December 31, 2018, audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our audited consolidated financial statements for the fiscal year ended December 31, 2018.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Principal areas requiring the use of estimates include:
The determination of medical claims and benefits payable of our Health Plans segment;
Health plans’ contractual provisions that may limit revenue recognition based upon the costs incurred or the profits realized under a specific contract;
Health plans’ quality incentives that allow us to recognize incremental revenue if certain quality standards are met;
Settlements under risk or savings sharing programs;
The assessment of long-lived and intangible assets, and goodwill for impairment;

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 8


The determination of reserves for potential absorption of claims unpaid by insolvent providers;
The determination of reserves for litigation outcomes;
The determination of valuation allowances for deferred tax assets; and
The determination of unrecognized tax benefits.

2. Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid investments that are both readily convertible into known amounts of cash and have a maturity of three months or less on the date of purchase. The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents reported within the accompanying consolidated balance sheets that sum to the total of the same such amounts presented in the accompanying consolidated statements of cash flows. The restricted cash and cash equivalents presented below are included in non-current “Restricted investments” in the accompanying consolidated balance sheets.
 
March 31,
 
2019
 
2018
 
(In millions)
Cash and cash equivalents
$
3,224

 
$
3,729

Restricted cash and cash equivalents
74

 
95

Total cash, cash equivalents, and restricted cash and cash equivalents presented in the statements of cash flows
$
3,298

 
$
3,824

Premium Revenue
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, and premiums collected in advance are deferred. Certain components of premium revenue are subject to accounting estimates and fall into the following categories:
Contractual Provisions That May Adjust or Limit Revenue or Profit
Medicaid Program
Medical Cost Floors (Minimums), and Medical Cost Corridors. A portion of our premium revenue may be returned if certain minimum amounts are not spent on defined medical care costs. In the aggregate, we recorded a liability under the terms of such contract provisions of $98 million and $103 million at March 31, 2019 and December 31, 2018, respectively. Approximately $87 million of the liability accrued at both March 31, 2019 and December 31, 2018, relates to our participation in Medicaid Expansion programs.
In certain circumstances, the health plans may receive additional premiums if amounts spent on medical care costs exceed a defined maximum threshold. Receivables relating to such provisions were insignificant at March 31, 2019 and December 31, 2018.
Profit Sharing and Profit Ceiling. Our contracts with certain states contain profit-sharing or profit ceiling provisions under which we refund amounts to the states if our health plans generate profit above a certain specified percentage. In some cases, we are limited in the amount of administrative costs that we may deduct in calculating the refund, if any. Liabilities for profits in excess of the amount we are allowed to retain under these provisions were insignificant at March 31, 2019 and December 31, 2018.
Retroactive Premium Adjustments. State Medicaid programs periodically adjust premium rates on a retroactive basis. In these cases, we must adjust our premium revenue in the period in which we learn of the adjustment, rather than in the months of service to which the retroactive adjustment applies.
Medicare Program
Risk Adjusted Premiums: Our Medicare premiums are subject to retroactive increase or decrease based on the health status of our Medicare members (as measured by member risk score). We estimate our members’ risk scores and the related amount of Medicare revenue that will ultimately be realized for the periods presented based on our knowledge of our members’ health status, risk scores and CMS practices. Consolidated balance sheet

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 9


amounts related to anticipated Medicare risk adjusted premiums and Medicare Part D settlements were insignificant at March 31, 2019 and December 31, 2018.
Minimum MLR. The Affordable Care Act (“ACA”) has established a minimum annual medical loss ratio (Minimum MLR) of 85% for Medicare. The medical loss ratio represents medical costs as a percentage of premium revenue. Federal regulations define what constitutes medical costs and premium revenue. If the Minimum MLR is not met, we may be required to pay rebates to the federal government. We recognize estimated rebates under the Minimum MLR as an adjustment to premium revenue in our consolidated statements of income. The amounts payable for the Medicare Minimum MLR was not significant at March 31, 2019 and December 31, 2018.
Marketplace Program
Risk adjustment. Under this program, our health plans’ composite risk scores are compared with the overall average risk score for the relevant state and market pool. Generally, our health plans will make a risk adjustment payment into the pool if their composite risk scores are below the average risk score (risk adjustment payable), and will receive a risk adjustment payment from the pool if their composite risk scores are above the average risk score (risk adjustment receivable). We estimate our ultimate premium based on insurance policy year-to-date experience, and recognize estimated premiums relating to the risk adjustment program as an adjustment to premium revenue in our consolidated statements of income. As of March 31, 2019, and December 31, 2018, the Marketplace risk adjustment payable amounted to $568 million and $466 million, respectively. As of March 31, 2019, and December 31, 2018, the Marketplace risk adjustment receivable amounted to $51 million and $34 million, respectively.
Minimum MLR. The ACA has established a Minimum MLR of 80% for the Marketplace. If the Minimum MLR is not met, we may be required to pay rebates to our Marketplace policyholders. The Marketplace risk adjustment program is taken into consideration when computing the Minimum MLR. We recognize estimated rebates under the Minimum MLR as an adjustment to premium revenue in our consolidated statements of income. Aggregate balance sheet amounts related to the Minimum MLR were insignificant at March 31, 2019 and December 31, 2018.
Quality Incentives
At many of our health plans, revenue ranging from approximately 1% to 4% of certain health plan premiums is earned only if certain performance measures are met.
The following table quantifies the quality incentive premium revenue recognized for the periods presented, including the amounts earned in the periods presented and prior periods. Although the reasonably possible effects of a change in estimate related to quality incentive premium revenue as of March 31, 2019, 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 March 31, 2019.
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
Maximum available quality incentive premium - current period
$
45

 
$
40

 
 
 
 
Quality incentive premium revenue recognized in current period:
 
 
 
Earned current period
$
26

 
$
24

Earned prior periods
20

 
11

Total
$
46

 
$
35

 
 
 
 
Quality incentive premium revenue recognized as a percentage of total premium revenue
1.2
%
 
0.8
%

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 10


A summary of the categories of amounts due government agencies is as follows:
 
March 31,
2019
 
December 31,
2018
 
(In millions)
Medicaid program:
 
 
 
Medical cost floors and corridors
$
98

 
$
103

Other amounts due to states
90

 
81

Marketplace program:
 
 
 
Risk adjustment
568

 
466

Cost sharing reduction

 
183

Other
176

 
134

 
$
932

 
$
967

Medical Care Costs
Marketplace Program
In the first quarter of 2018, we recognized a benefit of approximately $70 million in reduced medical care costs related to 2017 dates of service as a result of the federal government’s confirmation that the reconciliation of 2017 Marketplace cost sharing reduction (“CSR”) subsidies would be performed on an annual basis. In the fourth quarter of 2017, we had assumed a nine-month reconciliation of this item pending confirmation of the time period to which the 2017 reconciliation would be applied.
Leases
Right-of-use (“ROU”) assets represent our right to use the underlying assets over the lease term, and lease liabilities represent our obligation to make lease payments arising from the related leases. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Lease terms may include options to extend or terminate the lease when we believe it is reasonably certain that we will exercise such options. Operating lease ROU assets are reported in other assets, and operating lease liabilities are reported in accounts payable and accrued liabilities (current), and other long-term liabilities (non-current) in our consolidated balance sheets. Finance lease ROU assets are reported in property, equipment, and capitalized software, and finance lease liabilities are reported in accounts payable and accrued liabilities (current), and finance lease liabilities (non-current) in our consolidated balance sheets.
Because most of our leases do not provide an implicit interest rate, we generally use our incremental borrowing rate to determine the present value of lease payments. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term, and the related ROU assets and liabilities are reduced to the present value of the remaining lease payments at the end of each period. Finance lease payments reduce finance lease liabilities, the related ROU assets are amortized on a straight-line basis over the lease term, and interest expense is recognized using the effective interest method.
Short-term leases (with a term of 12 months or less) are not recorded as ROU assets or liabilities in the consolidated balance sheets. We account for lease and non-lease components as a single lease component. For certain leases that represent a portfolio of similar assets, such as a fleet of vehicles, we apply a portfolio approach to account for the related operating lease ROU assets and liabilities, rather than account for such assets and liabilities on an individual basis. A nominal number of our lease agreements include rental payments that adjust periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
For further information regarding our adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), see Recent Accounting Pronouncements Adopted, below.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments, receivables, and restricted investments. Our investments and a portion of our cash equivalents are managed by professional portfolio managers operating under documented investment guidelines. Our portfolio managers must obtain our prior approval before selling investments where the loss position of those investments exceeds certain levels. Our investments consist primarily of investment-grade debt securities with a

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 11


maximum maturity of 10 years. Restricted investments are invested principally in certificates of deposit and U.S. Treasury securities. Concentration of credit risk with respect to accounts receivable is generally limited because our payors consist principally of the governments of each state in which our health plan subsidiaries operate.
Income Taxes
The provision for income taxes is determined using an estimated annual effective tax rate, which generally differs from the U.S. federal statutory rate primarily because of state taxes, nondeductible expenses such as the Health Insurer Fee (“HIF”), certain compensation, and other general and administrative expenses. The effective tax rate will not be impacted by HIF in 2019 given the 2019 HIF moratorium.
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 projected pretax earnings, the mix of pretax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or the reversal of the recognition 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.
Recent Accounting Pronouncements Adopted
Leases. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Topic 842, which was subsequently modified by several ASUs issued in 2017 and 2018. Topic 842 was issued to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet. Most prominent among the changes in Topic 842 is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. In addition, Topic 842’s disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. Topic 842’s transition provisions are applied using a modified retrospective approach under which entities may not retrospectively adjust any periods prior to the earliest comparative period presented, or at the beginning of the period of adoption, whichever is later. Entities may elect whether to apply the transition provisions, including disclosure requirements, at the beginning of the earliest comparative period presented or on the adoption date.
We adopted Topic 842 effective January 1, 2019, and have elected to apply the transition provisions as of January 1, 2019. Accordingly, we recognized the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings on January 1, 2019. In addition, we elected the available practical expedients and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
As indicated in the accompanying consolidated statements of stockholders’ equity, the cumulative effect adjustment was an increase of $85 million to retained earnings, relating primarily to the transition provisions for sale-leaseback arrangements that did not qualify for sale treatment. Accordingly, such arrangements for certain office buildings were de-recognized and recorded as finance lease ROU assets and lease liabilities. The difference between the de-recognized assets and lease financing obligations resulted in an increase to retained earnings. The recognition of these arrangements as finance lease ROU assets and lease liabilities will not materially impact our consolidated results of operations throughout the terms of the leases.
See Note 13, “Leases,” for the required disclosures under Topic 842, including the amount and location of the ROU assets and lease liabilities recognized.
Software Licenses. In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We early adopted ASU 2018-15 effective January 1, 2019, using the prospective method, with no material impact to our financial condition, results of operations or cash flows. Adoption of this guidance may be significant to us in the future depending on the extent to which we use cloud computing arrangements that qualify as service contracts.
Recent Accounting Pronouncements Not Yet Adopted
Credit Losses. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount companies expect to collect over the instrument’s

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 12


contractual life. ASU 2016-13 is effective beginning January 1, 2020, and must be adopted as a cumulative effect adjustment to retained earnings; early adoption is permitted. We are in the early stages of evaluating the effect of this guidance.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (“SEC”) did not have, nor does management expect such pronouncements to have, a significant impact on our present or future consolidated financial statements.

3. Net Income per Share
The following table sets forth the calculation of basic and diluted net income per share:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions, except net income per share)
Numerator:
 
 
 
Net income
$
198

 
$
107

Denominator:
 
 
 
Shares outstanding at the beginning of the period
62.1

 
59.3

Weighted-average number of shares issued:
 
 
 
Exchange of 1.625% Convertible Notes

 
0.5

Denominator for basic net income per share
62.1

 
59.8

Effect of dilutive securities:
 
 
 
1.125% Warrants (1)
3.5

 
4.4

1.625% Convertible Notes

 
0.7

Stock-based compensation
0.6

 
0.3

Denominator for diluted net income per share
66.2

 
65.2

 
 
 
 
Net income per share: (2)
 
 
 
Basic
$
3.19

 
$
1.79

Diluted
$
2.99

 
$
1.64

 
 
 
 
Potentially dilutive common shares excluded from calculations: (1)
 
 
 
Stock-based compensation
0.1

 
0.4

______________________________
(1)
For more information and definitions regarding the 1.125% Warrants, including partial termination transactions, refer to Note 9, “Stockholders' Equity.” The dilutive effect of all potentially dilutive common shares is calculated using the treasury stock method. Certain potentially dilutive common shares issuable were not included in the computation of diluted net income per share because to do so would have been anti-dilutive.
(2)
Source data for calculations in thousands.
4. Fair Value Measurements
We consider the carrying amounts of current assets and current liabilities (not including derivatives and the current portion of long-term debt) 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 the three-tier fair value hierarchy. For a description of the methods and assumptions that we use to a) estimate the fair value; and b) determine the classification according to the fair value hierarchy for each financial instrument, see Note 4, “Fair Value Measurements,” in our 2018 Annual Report on Form 10-K.
Derivative financial instruments include the 1.125% Call Option derivative asset and the 1.125% Conversion Option derivative liability (see Note 8Derivatives,” for definitions and further information). These derivatives are not

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 13


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 March 31, 2019, included the price of our common stock, the time to maturity of the derivative instruments, the risk-free interest rate, and the implied volatility of our common stock. The 1.125% Call Option derivative asset and the 1.125% Conversion Option derivative liability were designed such that changes in their fair values would offset, with minimal impact to the consolidated statements of income. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such derivative instruments is mitigated.
The net changes in fair value of Level 3 financial instruments were insignificant to our results of income for the three months ended March 31, 2019.
Our financial instruments measured at fair value on a recurring basis at March 31, 2019, were as follows:
 
Total
 
Observable Inputs (Level 1)
 
Directly or Indirectly Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
 
(In millions)
Corporate debt securities
$
947

 
$

 
$
947

 
$

U.S. Treasury notes
168

 

 
168

 

Government-sponsored enterprise securities (“GSEs”)
166

 

 
166

 

Municipal securities
112

 

 
112

 

Asset-backed securities
75

 

 
75

 

Mortgage-backed securities
23

 

 
23

 

Certificate of deposit
14

 

 
14

 

Other
3

 

 
3

 

  Subtotal - current investments
1,508

 

 
1,508

 

1.125% Call Option derivative asset
516

 

 

 
516

Total assets
$
2,024

 
$

 
$
1,508

 
$
516

 
 
 
 
 
 
 
 
1.125% Conversion Option derivative liability
$
516

 
$

 
$

 
$
516

Total liabilities
$
516

 
$

 
$

 
$
516

Our financial instruments measured at fair value on a recurring basis at December 31, 2018, were as follows:
 
Total
 
Observable Inputs (Level 1)
 
Directly or Indirectly Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
 
(In millions)
Corporate debt securities
$
1,123

 
$

 
$
1,123

 
$

U.S. Treasury notes
181

 

 
181

 

GSEs
163

 

 
163

 

Municipal securities
114

 

 
114

 

Asset-backed securities
82

 

 
82

 

Certificates of deposit
14

 

 
14

 

Other
4

 

 
4

 

  Subtotal - current investments
1,681

 

 
1,681

 

1.125% Call Option derivative asset
476

 

 

 
476

Total assets
$
2,157

 
$

 
$
1,681

 
$
476

 
 
 
 
 
 
 
 
1.125% Conversion Option derivative liability
$
476

 
$

 
$

 
$
476

Total liabilities
$
476

 
$

 
$

 
$
476


Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 14


Fair Value Measurements – Disclosure Only
The carrying amounts and estimated fair values of our notes payable are classified as Level 2 financial instruments. Fair value for these securities is determined using a market approach based on quoted market prices for similar securities in active markets or quoted prices for identical securities in inactive markets. The carrying amount and estimated fair value of the Term Loan is classified as a Level 3 financial instrument, because certain inputs used to determine its fair value are not observable. As of March 31, 2019, the carrying amount of the Term Loan approximates fair value because its interest rate is a variable rate that approximates rates currently available to us.
 
March 31, 2019
 
December 31, 2018
 
Carrying
Amount
 

Fair Value
 
Carrying
Amount
 

Fair Value
 
(In millions)
5.375% Notes
$
695

 
$
725

 
$
694

 
$
674

4.875% Notes
326

 
327

 
326

 
301

1.125% Convertible Notes (1),(2)
198

 
716

 
240

 
732

Term Loan
100

 
100

 

 

 
$
1,319

 
$
1,868

 
$
1,260

 
$
1,707

______________________
(1)
The fair value of the 1.125% Conversion Option (the embedded cash conversion option), which is reflected in the fair value amounts presented above, amounted to $516 million and $476 million as of March 31, 2019, and December 31, 2018, respectively. See further discussion at Note 7, “Debt,” and Note 8, “Derivatives.”
(2)
For more information on debt repayments in the first quarter of 2019, refer to Note 7, “Debt.”

5. Investments
Available-for-Sale Investments
We consider all of our investments classified as current assets to be available-for-sale. The following tables summarize our investments as of the dates indicated:
 
March 31, 2019
 
Amortized
 
Gross
Unrealized
 
Estimated
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In millions)
Corporate debt securities
$
949

 
$
1

 
$
3

 
$
947

U.S. Treasury notes
168

 

 

 
168

GSEs
167

 

 
1

 
166

Municipal securities
113

 

 
1

 
112

Asset-backed securities
75

 

 

 
75

Mortgage-backed securities
23

 

 

 
23

Certificates of deposit
14

 

 

 
14

Other
3

 

 

 
3

 
$
1,512

 
$
1

 
$
5

 
$
1,508


Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 15


 
December 31, 2018
 
Amortized
 
Gross
Unrealized
 
Estimated
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In millions)
Corporate debt securities
$
1,131

 
$

 
$
8

 
$
1,123

U.S. Treasury notes
181

 

 

 
181

GSEs
164

 

 
1

 
163

Municipal securities
115

 

 
1

 
114

Asset-backed securities
83

 

 
1

 
82

Certificates of deposit
14

 

 

 
14

Other
4

 

 

 
4

Total current investments
$
1,692

 
$

 
$
11

 
$
1,681

The contractual maturities of our available-for-sale investments as of March 31, 2019 are summarized below:
 
Amortized Cost
 
Estimated
Fair Value
 
(In millions)
Due in one year or less
$
927

 
$
926

Due after one year through five years
550

 
547

Due after five years through ten years
12

 
12

Due after ten years
23

 
23

 
$
1,512

 
$
1,508

Gross realized gains and losses from sales of available-for-sale securities are calculated under the specific identification method and are included in investment income. Gross realized investment gains and losses for the three months ended March 31, 2019 and 2018, were insignificant.
We have determined that unrealized losses at March 31, 2019, and December 31, 2018, 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 creditworthiness of the issuers. So long as we maintain the intent and ability to hold these securities to maturity, we are unlikely to experience losses. In the event that we dispose of these securities before maturity, we expect that realized losses, if any, will be insignificant. 
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 continuous loss position for 12 months or more as of March 31, 2019:
 
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
Positions
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Positions
 
(Dollars in millions)
Corporate debt securities
$
207

 
$
1

 
96

 
$
403

 
$
2

 
280

GSEs

 

 

 
122

 
1

 
71

Municipal securities

 

 

 
87

 
1

 
91

 
$
207

 
$
1

 
96

 
$
612

 
$
4

 
442


Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 16


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 continuous loss position for 12 months or more as of December 31, 2018:
 
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
Positions
 
Estimated
Fair
Value
 
Unrealized
Losses
 
Total
Number of
Positions
 
(Dollars in millions)
Corporate debt securities
$
509

 
$
3

 
285

 
$
412

 
$
5

 
298

GSEs

 

 

 
127

 
1

 
76

Municipal securities

 

 

 
87

 
1

 
90

Asset-backed securities

 

 

 
68

 
1

 
52

 
$
509

 
$
3

 
285

 
$
694

 
$
8

 
516

Held-to-Maturity Investments
Pursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and deposits required by government authorities primarily in certificates of deposit and U.S. Treasury securities. We also maintain restricted investments as protection against the insolvency of certain capitated providers. The use of these funds is limited as required by regulations in the various states in which we operate, or as needed in the event of insolvency of capitated providers. Therefore, such investments are reported as non-current “Restricted investments” in the accompanying consolidated balance sheets. We have the ability to hold these restricted investments until maturity, and as a result, we would not expect the value of these investments to decline significantly due to a sudden change in market interest rates.
Our held-to-maturity restricted investments are carried at amortized cost, which approximates fair value. Such investments amounted to $100 million at March 31, 2019, and mature in one year or less.

6. Medical Claims and Benefits Payable
The following table provides the details of our medical claims and benefits payable as of the dates indicated.
 
March 31,
2019
 
December 31,
2018
 
(In millions)
Fee-for-service claims incurred but not paid (“IBNP”)
$
1,411

 
$
1,562

Pharmacy payable
114

 
115

Capitation payable
59

 
52

Other
411

 
232

 
$
1,995

 
$
1,961

“Other” medical claims and benefits payable includes amounts payable to certain providers for which we act as an intermediary on behalf of various government agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of income. Non-risk provider payables amounted to $278 million and $107 million as of March 31, 2019 and December 31, 2018, respectively.
The following table presents the components of the change in our medical claims and benefits payable for the periods indicated. The amounts presented for “Components of medical care costs related to: Prior periods” represent the amounts by which our original estimate of medical claims and benefits payable at the beginning of the period were more than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported.

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 17


 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
Medical claims and benefits payable, beginning balance
$
1,961

 
$
2,192

Components of medical care costs related to:
 
 
 
Current period
3,560

 
4,033

Prior periods (1)
(189
)
 
(311
)
Total medical care costs
3,371

 
3,722

 
 
 
 
Change in non-risk provider payables
171

 
45

 
 
 
 
Payments for medical care costs related to:
 
 
 
Current period
2,197

 
2,498

Prior periods
1,311

 
1,438

Total paid
3,508

 
3,936

Medical claims and benefits payable, ending balance
$
1,995

 
$
2,023

_______________________
(1)
March 31, 2018, includes the 2018 benefit of the 2017 Marketplace CSR reimbursement of $70 million.
Our estimates of medical claims and benefits payable recorded at December 31, 2018, and 2017 developed favorably by approximately $189 million and $311 million as of March 31, 2019, and 2018, respectively.
The favorable prior year development recognized in the first quarter of 2019, was primarily due to lower than expected utilization of medical services by our Medicaid and Marketplace members and improved operating performance. Consequently, the ultimate costs recognized in 2019, as claims payment were processed, was lower than our original estimates in 2018.

7. Debt
As of March 31, 2019, contractual maturities of debt were as follows. All amounts represent the principal amounts of the debt instruments outstanding.
 
Total
 
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
5.375% Notes
$
700

 
$

 
$

 
$
700

 
$

 
$

 
$

4.875% Notes
330

 

 

 

 

 

 
330

1.125% Convertible Notes
206

 
206

 

 

 

 

 

Term Loan
100

 
3

 
7

 
10

 
10

 
70

 

 
$
1,336

 
$
209

 
$
7

 
$
710

 
$
10

 
$
70

 
$
330


Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 18


All of our debt is held at the parent, which is reported, for segment purposes, in the Other segment. The following table summarizes our outstanding debt obligations and their classification in the accompanying consolidated balance sheets:
 
March 31,
2019
 
December 31,
2018
 
(In millions)
Current portion of long-term debt:
 
 
 
1.125% Convertible Notes, net of unamortized discount
$
199

 
$
241

Lease financing obligations

 
1

Debt issuance costs
(1
)
 
(1
)
 
$
198

 
$
241

Non-current portion of long-term debt:
 
 
 
5.375% Notes
$
700

 
$
700

4.875% Notes
330

 
330

Term Loan
100

 

Debt issuance costs
(9
)
 
(10
)
 
$
1,121

 
$
1,020

Interest cost recognized relating to our convertible senior notes for the periods presented was as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
Contractual interest at coupon rate
$
1

 
$
2

Amortization of the discount
3

 
7

 
$
4

 
$
9

Credit Agreement
We are party to a Credit Agreement, which provides for an unsecured delayed draw term loan facility described below (the “Term Loan”), and an unsecured $500 million revolving credit facility (the “Credit Facility”). Borrowings under our Credit Agreement bear interest based, at our election, on a base rate or other defined rate, plus in each case the applicable margin. In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the Credit Agreement, we are required to pay a quarterly commitment fee.
The Credit Agreement contains customary non-financial and financial covenants, including a net leverage ratio and an interest coverage ratio. As of March 31, 2019, we were in compliance with all financial and non-financial covenants under the Credit Agreement and other long-term debt. Effective as of the date of the Sixth Amendment to the Credit Agreement described below, there are no guarantors as parties to the Credit Agreement.
In January 2019, we entered into a Sixth Amendment to the Credit Agreement that provided for a delayed draw term loan facility in an aggregate principal amount of $600 million, under which we may request up to ten advances, each in a minimum principal amount of $50 million, until July 31, 2020. The Term Loan will amortize in quarterly installments, commencing on September 30, 2020, equal to the principal amount of the Term Loan outstanding multiplied by rates ranging from 1.25% to 2.50% (depending on the applicable fiscal quarter) for each fiscal quarter. The Term Loan expires on January 31, 2024; therefore, any remaining outstanding balance under the Term Loan will be due and payable on that date. As of March 31, 2019, $100 million was outstanding under the Term Loan. Each advance under the Term Loan results in a permanent reduction to its borrowing capacity; therefore, our borrowing capacity under the Term Loan as of March 31, 2019, was $500 million.
The Credit Facility expires on January 31, 2022; therefore, any amounts outstanding under the Credit Facility will be due and payable on that date. As of March 31, 2019, no amounts were outstanding under the Credit Facility, and outstanding letters of credit amounting to $2 million reduced our borrowing capacity under the Credit Facility to $498 million.

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 19


5.375% Notes due 2022
We had $700 million aggregate principal amount of senior notes (the “5.375% Notes”) outstanding as of March 31, 2019, which are due November 15, 2022, unless earlier redeemed. Interest on the 5.375% Notes at a rate of 5.375% per annum is payable semiannually in arrears on May 15 and November 15. The 5.375% Notes contain customary non-financial covenants and change in control provisions.
4.875% Notes due 2025
We had $330 million aggregate principal amount of senior notes (the “4.875% Notes”) outstanding as of March 31, 2019, which are due June 15, 2025, unless earlier redeemed. Interest on the 4.875% Notes at a rate of 4.875% per annum is payable semiannually in arrears on June 15 and December 15. The 4.875% Notes contain customary non-financial covenants and change of control provisions.
1.125% Cash Convertible Senior Notes due 2020
In the first quarter of 2019, we entered into a privately negotiated note purchase agreement with certain holders of our outstanding 1.125% cash convertible senior notes due January 15, 2020 (the “1.125% Convertible Notes”), pursuant to which we repaid $46 million aggregate principal amount, or $44 million aggregate carrying amount, of the 1.125% Convertible Notes. In addition, we paid $115 million to settle the 1.125% Convertible Notes’ embedded cash conversion option feature at fair value (which is a derivative liability we refer to as the “1.125% Conversion Option”).
In the three months ended March 31, 2019, we recorded a gain on debt extinguishment of $3 million for the 1.125% Convertible Notes purchase (net of accelerated original issuance discount amortization), primarily relating to a favorable mark to market valuation on the partial termination of the Call Spread Overlay executed in connection with the related debt extinguishment. This gain is reported in “Other (income) expenses, net” in the accompanying consolidated statements of income. No common shares were issued in connection with the transaction.
In connection with the 1.125% Convertible Notes purchases, we also entered into privately negotiated agreements in the first quarter of 2019, to partially terminate the Call Spread Overlay, defined and further discussed in Note 8, “Derivatives,” and Note 9, “Stockholders' Equity.” The net cash proceeds from the Call Spread Overlay partial termination transactions partially offset the cash paid to settle the 1.125% Convertible Notes.
Following the transaction described above, we had $206 million aggregate principal amount of the 1.125% Convertible Notes outstanding at March 31, 2019. Interest at a rate of 1.125% per annum is payable semiannually in arrears on January 15 and July 15. The 1.125% Convertible Notes are convertible only into cash, and not into shares of our common stock or any other securities. The initial conversion rate is 24.5277 shares of our common stock per $1,000 principal amount, or approximately $40.77 per share of our common stock. Upon conversion, in lieu of receiving shares of our common stock, a holder will receive an amount in cash, per $1,000 principal amount, equal to the settlement amount, determined in the manner set forth in the indenture. We may not redeem the 1.125% Convertible Notes prior to the maturity date. The 1.125% Convertible Notes are convertible by the holders within one year of the current balance sheet date until they mature; therefore, they are reported in current portion of long-term debt.
Concurrent with the issuance of the 1.125% Convertible Notes in 2013, the 1.125% Conversion Option was separated from the 1.125% Convertible Notes and accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the 1.125% Conversion Option fully settles or expires. This initial liability simultaneously reduced the carrying value of the 1.125% Convertible Notes’ principal amount (effectively an original issuance discount), which is amortized to the principal amount through the recognition of non-cash interest expense over the expected life of the debt. The effective interest rate of 6% approximates the interest rate we would have incurred had we issued nonconvertible debt with otherwise similar terms. As of March 31, 2019, the 1.125% Convertible Notes had a remaining amortization period of less than one year, and their ‘if-converted’ value exceeded their principal amount by approximately $456 million and $581 million as of March 31, 2019 and December 31, 2018, respectively.
Cross-Default Provisions
The indentures governing the 4.875% Notes, the 5.375% Notes and the 1.125% Convertible Notes contain cross-default provisions that are triggered upon default by us or any of our subsidiaries on any indebtedness in excess of the amount specified in the applicable indenture.

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 20


Subsequent Events
1.125% Convertible Notes. In April 2019, we entered into privately negotiated note purchase agreements with certain holders of our outstanding 1.125% Convertible Notes. Under these agreements, we repaid $128 million aggregate principal amount, or approximately $123 million aggregate carrying amount, of the 1.125% Convertible Notes. In addition, we paid $332 million to settle the 1.125% Convertible Notes’ embedded cash conversion option feature at fair value.
Credit Agreement. We drew down an additional $120 million under the Term Loan in April 2019, further reducing borrowing capacity by that amount permanently.

8. Derivatives
The following table summarizes the fair values and the presentation of our derivative financial instruments (defined and discussed individually below) in the accompanying consolidated balance sheets:
 
Balance Sheet Location
 
March 31,
2019
 
December 31,
2018
 
 
 
(In millions)
Derivative asset:
 
 
 
 
 
1.125% Call Option
Current assets: Derivative asset
 
$
516

 
$
476

Derivative liability:
 
 
 
 
 
1.125% Conversion Option
Current liabilities: Derivative liability
 
$
516

 
$
476

Our derivative financial instruments do not qualify for hedge treatment; therefore, the change in fair value of these instruments is recognized immediately in our consolidated statements of income, and reported in “Other (income) expenses, net.” Gains and losses for our derivative financial instruments are presented individually in the accompanying consolidated statements of cash flows, “Supplemental cash flow information.”
1.125% Convertible Notes Call Spread Overlay. Concurrent with the issuance of the 1.125% Convertible Notes in 2013, we entered into privately negotiated hedge transactions (collectively, the 1.125% Call Option) and warrant transactions (collectively, the 1.125% Warrants), with certain of the initial purchasers of the 1.125% Convertible Notes (the Counterparties). We refer to these transactions collectively as the Call Spread Overlay. Under the Call Spread Overlay, the cost of the 1.125% Call Option we purchased to cover the cash outlay upon conversion of the 1.125% Convertible Notes was reduced by proceeds from the sale of the 1.125% Warrants. Assuming full performance by the Counterparties (and 1.125% Warrants strike prices in excess of the conversion price of the 1.125% Convertible Notes), these transactions are intended to offset cash payments in excess of the principal amount of the 1.125% Convertible Notes due upon any conversion of such notes.
In the first quarter of 2019, in connection with the 1.125% Convertible Notes purchases (described in Note 7, “Debt”), we entered into privately negotiated termination agreements with each of the Counterparties to partially terminate the Call Spread Overlay, in notional amounts corresponding to the aggregate principal amount of the 1.125% Convertible Notes purchased. In the first quarter of 2019, this resulted in our receipt of $115 million for the settlement of the 1.125% Call Option (which is a derivative asset), and the payment of $103 million for the partial termination of the 1.125% Warrants, for an aggregate net cash receipt of $12 million from the Counterparties.
1.125% Call Option. The 1.125% Call Option, which is indexed to our common stock, is a derivative asset that requires mark-to-market accounting treatment due to cash settlement features until the 1.125% Call Option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Call Option, refer to Note 4, “Fair Value Measurements.”
1.125% Conversion Option. The embedded cash conversion option within the 1.125% Convertible Notes is accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the cash conversion option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Conversion Option, refer to Note 4, “Fair Value Measurements.”
As of March 31, 2019, the 1.125% Call Option and the 1.125% Conversion Option were classified as a current asset and current liability, respectively, because the 1.125% Convertible Notes may be converted within twelve months of March 31, 2019, as described in Note 7, “Debt.”


Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 21


9. Stockholders' Equity
1.125% Warrants
In connection with the Call Spread Overlay transaction described in Note 8, “Derivatives,” in 2013, we issued 13.5 million warrants with a strike price of $53.8475 per share. Under certain circumstances, beginning in April 2020, if the price of our common stock exceeds the strike price of the 1.125% Warrants, we will be obligated to issue shares of our common stock subject to a share delivery cap. The 1.125% Warrants could separately have a dilutive effect to the extent that the market value per share of our common stock exceeds the applicable strike price of the 1.125% Warrants. Refer to Note 3, “Net Income per Share,” for dilution information for the periods presented. We will not receive any additional proceeds if the 1.125% Warrants are exercised. Following the transactions described below, 5.1 million of the 1.125% Warrants remain outstanding.
As described in Note 8, “Derivatives,” in the first quarter of 2019, we entered into privately negotiated termination agreements with each of the Counterparties to partially terminate the Call Spread Overlay, in notional amounts corresponding to the aggregate principal amount of the 1.125% Convertible Notes purchased. In the first quarter of 2019, we paid $103 million to the Counterparties for the termination of 1.1 million of the 1.125% Warrants outstanding, which resulted in a reduction of additional paid-in-capital for the same amount.
Subsequent Event
In April 2019, we entered into privately negotiated termination agreements with each of the Counterparties to partially terminate the Call Spread Overlay, in notional amounts corresponding to the aggregate principal amount of the 1.125% Convertible Notes purchased. Pursuant to these transactions, we paid $298 million to the Counterparties for the termination of 3.1 million of the 1.125% Warrants outstanding, which resulted in a reduction of additional paid-in-capital for the same amount.
Share-Based Compensation
In connection with our employee stock plans, approximately 84,000 shares of common stock vested or were purchased, net of shares used to settle employees’ income tax obligations, during the three months ended March 31, 2019.
Share-based compensation is generally recorded to “General and administrative expenses” in the accompanying consolidated statements of income. Total share-based compensation expense for the three months ended March 31, 2019 and 2018, amounted to $9 million and $6 million, respectively.
As of March 31, 2019, there was $71 million of total unrecognized compensation expense related to unvested restricted stock awards (“RSAs”), and performance stock units (“PSUs”), which we expect to recognize over a remaining weighted-average period of 2.9 years and 2.3 years, respectively. This unrecognized compensation cost assumes an estimated forfeiture rate of 14.1% for non-executive employees as of March 31, 2019.
Also as of March 31, 2019, there was $8 million of total unrecognized compensation expense related to unvested stock options, which we expect to recognize over a weighted-average period of 1.5 years. No stock options were granted or exercised in the three months ended March 31, 2019.
Activity for RSAs, performance stock awards (“PSAs”) and PSUs, for the three months ended March 31, 2019, is summarized below:
 
RSAs
 
PSAs
 
PSUs
 
Total
 
Weighted
Average
Grant Date
Fair Value
Unvested balance, December 31, 2018
399,795

 
3,132

 
201,383

 
604,310

 
$
71.50

Granted
215,178

 

 
138,994

 
354,172

 
137.37

Vested
(119,994
)
 
(3,132
)
 
(10,528
)
 
(133,654
)
 
68.24

Forfeited
(14,220
)
 

 
(4,140
)
 
(18,360
)
 
74.03

Unvested balance, March 31, 2019
480,759

 

 
325,709

 
806,468

 
100.91


Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 22


The aggregate fair values of RSAs, PSAs and PSUs granted and vested are presented in the following table:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
Granted:
 
 
 
RSAs
$
30

 
$
23

PSUs
18

 
14

 
$
48

 
$
37

Vested:
 
 
 
RSAs
$
16

 
$
12

PSUs
2

 

PSAs

 
3

 
$
18

 
$
15


10. Restructuring Costs
Restructuring costs are reported by the same name in the accompanying consolidated statements of income.
IT Restructuring Plan
Management is focused on a margin recovery plan that includes identification and implementation of various profit improvement initiatives. To that end, we began a plan to restructure our information technology department (the “IT Restructuring Plan”) in 2018. In early 2019, we have entered into services agreements with Infosys Limited under which Infosys manages certain of our information technology services.
We expect to complete the IT Restructuring Plan by the end of 2019, incurring cumulative total costs of approximately $15 million in the Other segment. This total has decreased compared with the $20 million reported in the 2018 Form 10-K due to more of our IT employees transitioned to Infosys than originally contemplated, resulting in lower one-time termination benefit costs.
As of March 31, 2019, we had incurred cumulative restructuring costs under the IT Restructuring Plan of $11 million, including $7 million of one-time termination benefits and $4 million of other restructuring costs (consulting fees).
As of December 31, 2018, there was $6 million accrued under the IT Restructuring Plan, primarily for one-time termination benefits that require cash settlement. In the first quarter of 2019, we incurred $2 million of other restructuring costs, and paid $2 million to settle one-time termination benefits and $1 million to settle other restructuring costs. As of March 31, 2019, there was $5 million accrued under the IT Restructuring Plan.
2017 Restructuring Plan
As of December 31, 2018, we had $18 million of accrued liabilities for the 2017 Restructuring Plan. In the first quarter of 2019, we incurred $1 million of restructuring costs for adjustments to previously recorded lease contract termination costs implemented pursuant to the restructuring and profitability improvement plan approved by our Board in June 2017 (the “2017 Restructuring Plan”), and paid $3 million to settle one-time termination and lease contract termination costs. As of March 31, 2019, there was $16 million accrued for lease contract termination costs under the 2017 Restructuring Plan. We expect to continue to settle these liabilities through 2025, unless the leases are terminated sooner.

11. Segments
We currently have two reportable segments: our Health Plans segment and our Other segment. Our reportable segments are consistent with how we currently manage the business and view the markets we serve.
Description of Earnings Measures for Reportable Segments
Margin is the appropriate earnings measure for our reportable segments, based on how our chief operating decision maker currently reviews results, assesses performance, and allocates resources.

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 23


Margin for our Health Plans segment is referred to as “Medical margin,” which represents the amount earned by the segments after medical costs are deducted from premium revenue. The medical care ratio represents the amount of medical care costs as a percentage of premium revenue, and is one of the key metrics used to assess the performance of the segments. Therefore, the underlying medical margin is the most important measure of earnings reviewed by the chief operating decision maker.
The following table presents total revenue by segment. Inter-segment revenue was insignificant for all periods presented.
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
Total revenue:
 
 
 
Health Plans
$
4,117

 
$
4,509

Other
2

 
137

Consolidated
$
4,119

 
$
4,646

The following table reconciles margin by segment to consolidated income before income taxes:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
Margin:
 
 
 
Health Plans
$
581

 
$
601

Other

 
14

Total margin
581

 
615

Add: other operating revenues (1)
167

 
189

Less: other operating expenses (2)
(468
)
 
(582
)
Operating income
280

 
222

Other expenses, net
20

 
43

Income before income taxes
$
260

 
$
179

______________________
(1)
Other operating revenues include premium tax revenue, health insurer fees reimbursed, and investment income and other revenue.
(2)
Other operating expenses include general and administrative expenses, premium tax expenses, health insurer fees, depreciation and amortization, and restructuring costs.
  
12. Commitments and Contingencies
Legal Proceedings
The health care industry is subject to numerous laws and regulations of federal, state, and local governments. Penalties associated with violations of these laws and regulations include significant fines, exclusion from participating in publicly funded programs, and the repayment of previously collected revenues.
In the ordinary course of business we are involved in legal actions, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance. We have accrued liabilities for certain matters for which we deem the loss to be both probable and reasonably estimable, but the outcome of legal actions is inherently uncertain and our estimates of such losses could change as a result of further developments of these matters. For certain pending matters, accruals have not been established because such matters have not progressed sufficiently through discovery or factual development to enable us to reasonably estimate a range of possible loss. An adverse determination in one or more of these pending matters could have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Steamfitters Local 449 Pension Plan v. Molina Healthcare, Inc., et al. On October 5, 2018, the Steamfitters Local 449 Pension Plan filed its first amended class action securities complaint in the Central District Court of California against the Company and its former executive officers, J. Mario Molina, John C. Molina, Terry P. Bayer, and Rick Hopfer, Case 2:18-cv-03579. The amended complaint purports to seek recovery on behalf of all persons or entities

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 24


who purchased Molina common stock between October 31, 2014, and August 2, 2017, for alleged violations under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The plaintiff alleges the defendants misled investors regarding the scalability of the Company’s administrative infrastructure during the identified class period. On December 13, 2018, the Court granted the Company’s motion to dismiss in its entirety and closed the case. On January 9, 2019, plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit. The Company believes it has meritorious defenses to the alleged claims and intends to defend the matter vigorously. At this time, we are not able to estimate a possible loss or range of loss that may result from this matter or to determine whether such loss, if any, would have a material adverse effect on our financial condition, results of operations, or cash flows.
States’ Budgets
Nearly all of our premium revenues come from the joint federal and state funding of the Medicaid and Children’s Health Insurance Program (“CHIP”) programs. The states and Commonwealth in which we operate our health plans regularly face significant budgetary pressures.

13. Leases
As discussed in Note 2, “Significant Accounting Policies,” we elected the Topic 842 transition provision that allows entities to continue to apply the legacy guidance in Topic 840, Leases, including its disclosure requirements, in the comparative periods presented in the year of adoption. Accordingly, the Topic 842 disclosures below are presented as of and for the three-month period ended March 31, 2019, only.
We are a party to operating and finance leases primarily for our corporate and health plan offices. Our operating leases have remaining lease terms up to 10 years, some of which include options to extend the leases for up to 10 years. Our finance leases have remaining lease terms of 3 to 19 years, some of which include options to extend the leases for up to 25 years.
The components of lease expense were as follows:
 
Three Months Ended March 31, 2019
 
(In millions)
Operating lease cost
$
9

 
 
Finance lease cost:
 
Amortization of ROU assets
$
4

Interest on lease liabilities
4

Total finance lease cost
$
8

Supplemental consolidated cash flow information related to leases follows:
 
Three Months Ended March 31, 2019
 
(In millions)
Cash used in operating activities:
 
Operating leases
$
9

Finance leases
$
4

Cash used in financing activities:
 
Finance leases
$
1

ROU assets recognized in exchange for lease obligations:
 
Operating leases
$
94

Finance leases
$
241



Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 25


Supplemental information related to leases, including location of amounts reported in the accompanying consolidated balance sheets, follows:
 
March 31, 2019
 
(Dollars in millions)
Operating leases
 
Other assets
$
83

 
 
Accounts payable and accrued liabilities
31

Other long-term liabilities
62

Total operating lease liabilities
$
93

 
 
Finance leases
 
Property, equipment, and capitalized software, net
$
237

 
 
Accounts payable and accrued liabilities
$
7

Finance lease liabilities
234

Total finance lease liabilities
$
241

 
 
Weighted average remaining lease term
 
Operating leases
4 years

Finance leases
17 years

Weighted average discount rate
 
Operating leases
5.5
%
Finance leases
6.6
%
Maturities of lease liabilities as of March 31, 2019, were as follows:
 
Operating Leases
 
Finance Leases
 
(In millions)
2019 (excluding the three months ended March 31, 2019)
$
27

 
$
16

2020
28

 
22

2021
18

 
22

2022
12

 
21

2023
9

 
21

Thereafter
9

 
311

Total lease payments
103

 
413

Less imputed interest
(10
)
 
(172
)
 
$
93

 
$
241




Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 26


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, and results of operations within the meaning of Section 27A of the Securities Act of 1933, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Securities Exchange Act. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe harbor provisions. All statements included in this quarterly report, other than statements of historical fact, may be deemed to be forward-looking statements for purposes of the Securities Act and the Securities Exchange Act. Without limiting the foregoing, we use the words “anticipate(s),” “believe(s),” “estimate(s),” “expect(s),” “intend(s),” “may,” “plan(s),” “project(s),” “will,” “would,” “could,” “should” and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and, accordingly, you should not place undue reliance on our forward-looking statements. We caution you that we do not undertake any obligation to update forward-looking statements made by us. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected, estimated, or expected. Those known risks and uncertainties include, but are not limited to, the following:
the numerous political, judicial and market-based uncertainties associated with the Affordable Care Act (the “ACA”) or “Obamacare,” including the ultimate outcome on appeal of the Texas et al. v. U.S. et al. matter;
the market dynamics surrounding the ACA Marketplaces, including but not limited to uncertainties associated with risk adjustment requirements, the potential for disproportionate enrollment of higher acuity members, the discontinuation of premium tax credits, and the adequacy of agreed rates;
subsequent adjustments to reported premium revenue based upon subsequent developments or new information, including changes to estimated amounts payable or receivable related to Marketplace risk adjustment;
effective management of the Company’s medical costs;
the Company’s ability to predict with a reasonable degree of accuracy utilization rates, including utilization rates associated with seasonal flu patterns or other newly emergent diseases;
significant budget pressures on state governments and their potential inability to maintain current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria;
the full reimbursement of the ACA health insurer fee, or HIF;
the success of the Company’s efforts to retain existing or awarded government contracts, including the success of any requests for proposal protest filings or defenses;
the Company’s ability to manage its operations, including maintaining and creating adequate internal systems and controls relating to authorizations, approvals, provider payments, and the overall success of its care management initiatives;
the Company’s receipt of adequate premium rates to support increasing pharmacy costs, including costs associated with specialty drugs and costs resulting from formulary changes that allow the option of higher-priced non-generic drugs;
the Company’s ability to operate profitably in an environment where the trend in premium rate increases lags behind the trend in increasing medical costs;
the interpretation and implementation of federal or state medical cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, profit sharing arrangements, and risk adjustment provisions and requirements;
the Company’s estimates of amounts owed for such cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, profit-sharing arrangements, and risk adjustment provisions;
the Medicaid expansion medical cost corridor, and any other retroactive adjustment to revenue where methodologies and procedures are subject to interpretation or dependent upon information about the health status of participants other than Molina members;
the interpretation and implementation of at-risk premium rules and state contract performance requirements regarding the achievement of certain quality measures, and the Company’s ability to recognize revenue amounts associated therewith;

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 27


cyber-attacks or other privacy or data security incidents resulting in an inadvertent unauthorized disclosure of protected health information;
the success of the Company’s health plan in Puerto Rico, including the resolution of the debt crisis and the effect of the PROMESA law, and the impact of any future significant weather events;
the success and renewal of the Company’s duals demonstration programs in California, Illinois, Michigan, Ohio, South Carolina, and Texas;
the accurate estimation of incurred but not reported or paid medical costs across the Company’s health plans;
efforts by states to recoup previously paid and recognized premium amounts;
complications, member confusion, eligibility redeterminations, or enrollment backlogs related to the annual renewal of Medicaid coverage;
government audits, reviews, comment letters, or potential investigations, and any fine, sanction, enrollment freeze, monitoring program, or premium recovery that may result therefrom;
changes with respect to the Company’s provider contracts and the loss of providers;
approval by state regulators of dividends and distributions by the Company’s health plan subsidiaries;
changes in funding under the Company’s contracts as a result of regulatory changes, programmatic adjustments, or other reforms;
high dollar claims related to catastrophic illness;
the favorable resolution of litigation, arbitration, or administrative proceedings, including litigation involving the ACA to which we are not a direct party;
the relatively small number of states in which we operate health plans, including the greater scale and revenues of the Company’s California, Ohio, Texas, and Washington health plans;
the availability of adequate financing on acceptable terms to fund and capitalize the Company’s expansion and growth, repay the Company’s outstanding indebtedness at maturity and meet its liquidity needs, including the interest expense and other costs associated with such financing;
the Company’s failure to comply with the financial or other covenants in its credit agreement or the indentures governing its outstanding notes;
the sufficiency of the Company’s funds on hand to pay the amounts due upon conversion or maturity of its outstanding notes;
the failure of a state in which we operate to renew its federal Medicaid waiver;
changes generally affecting the managed care industry;
increases in government surcharges, taxes, and assessments;
newly emergent viruses or widespread epidemics, public catastrophes or terrorist attacks, and associated public alarm;
the unexpected loss of the leadership of one or more of our senior executives; and
increasing competition and consolidation in the Medicaid industry;
Readers should refer to the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of certain risk factors that could materially affect our business, financial condition, cash flows, or results of operations. Given these risks and uncertainties, we can give no assurance that any results or events projected or contemplated by our forward-looking statements will in fact occur.
This Quarterly Report on Form 10-Q and the following discussion of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the notes to those statements appearing elsewhere in this report, and the audited financial statements and Management’s Discussion and Analysis appearing in our Annual Report on Form 10-K for the year ended December 31, 2018.

OVERVIEW
Molina Healthcare, Inc., a FORTUNE 500, multi-state healthcare organization, arranges for the delivery of health care services to individuals and families who receive their care through the Medicaid and Medicare programs, and through the insurance marketplaces (the “Marketplace”). Through our locally operated health plans in 14 states and the Commonwealth of Puerto Rico, we served approximately 3.4 million members as of March 31, 2019. The health plans are generally operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (“HMO”).
We currently have two reportable segments: our Health Plans segment and our Other segment. We manage the vast majority of our operations through our Health Plans segment. The Other segment includes the historical results of the Medicaid management information systems (“MMIS”) and behavioral health subsidiaries that were sold in the fourth quarter of 2018, as well as certain corporate amounts not allocated to the Health Plans segment. Prior to the

Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 28


fourth quarter of 2018, the MMIS subsidiary was reported as a stand-alone segment. Beginning in 2019, we no longer report service revenue or cost of service revenue as a result of the sales of the MMIS and behavioral health subsidiaries noted above.
FIRST QUARTER 2019 HIGHLIGHTS
In summary, we produced pretax earnings of $260 million and net income of $198 million in the first quarter of 2019, resulting in after-tax margin of 4.8%. These results include, on a consolidated basis, a medical care ratio (“MCR”) of 85.3% and a general and administrative (“G&A”) expense ratio of 7.3%.
Overall, the MCR decreased by 80 basis points in the first quarter of 2019, from 86.1% in the first quarter of 2018, driven by year-over-year improvement in the underlying performance across all our programs.
Program Performance. The underlying performance improved across all our programs on a year-over-year basis. The Medicaid MCR decreased to 88.5% from 90.8%, and the combined Medicare MCR improved 10 basis points, from 84.8% to 84.7%. The Marketplace MCR also improved on a year-over-year basis, excluding a $70 million benefit of the 2017 Marketplace cost sharing reduction (“CSR”) subsidies recognized in the first quarter of 2018.
Health Plan Performance. We significantly improved the performance of our locally operated health plans in 2018, and our largest health plans, from a revenue standpoint going forward, have continued to perform well into 2019. California, Illinois, Michigan and Texas, four of our largest plans, performed well during the quarter, and Florida effectively managed the transition of lost regions. In Ohio, our MCR increased year-over-year, mainly due to cost pressures in Medicaid from a shift in the Medicaid Expansion risk pool and a newly carved-in behavioral health benefit, both of which have not been adequately rated.
Operational Improvements. We continue to gain operating efficiencies, as our G&A expense ratio has improved 30 basis points year over year, from 7.6% in the first quarter of 2018. Additionally, we have recently announced new partnerships to upgrade our technology to improve claims payment processes, and to enhance utilization management of certain specialty areas.
Balance Sheet and Capital Management. In the first quarter of 2019, we repaid $46 million aggregate principal amount of our 1.125% Convertible Notes and entered into privately negotiated termination agreements to terminate the respective portion of the related 1.125% Call Option and 1.125% Warrants.
In April 2019, we repaid an additional $128 million aggregate principal amount of our 1.125% Convertible Notes and entered into privately negotiated termination agreements to terminate the respective portion of the related 1.125% Call Option and 1.125% Warrants. Following these transactions, the remaining principal amount outstanding of our 1.125% Convertible Notes is $78 million. In addition, we have received a conversion notice for $7 million principal amount that will be settled in August 2019.



Molina Healthcare, Inc. March 31, 2019 Form 10-Q | 29



FINANCIAL SUMMARY
 
Three Months Ended March 31,
 
2019
 
2018
 
(Dollars in millions, except per-share amounts)
Premium revenue
$
3,952

 
$
4,323

Premium tax revenue
138

 
104

Health insurer fees reimbursed

 
61

Investment income and other revenue
29

 
24

 
 
 
 
Medical care costs
3,371

 
3,722

General and administrative expenses
302

 
352

Premium tax expenses
138

 
104

Health insurer fees

 
75

Restructuring costs
3

 
25

 
 
 
 
Operating income
280

 
222

Interest expense
23

 
33

Other (income) expenses, net
(3
)
 
10

Income tax expense
62

 
72

Net income
198

 
107

Net income per diluted share
$
2.99

 
$
1.64

 
 
 
 
Operating Statistics:
 
 
 
Ending total membership
3,393,000

 
4,061,000

MCR (1)
85.3
%
 
86.1
%
G&A ratio (2)
7.3
%
 
7.6
%
Premium tax ratio (1)
3.4
%
 
2.3
%
Effective income tax expense rate
23.8
%
 
40.3