Molina Healthcare Announces Fourth Quarter and Year-End 2017 Results and Provides Fiscal Year 2018 Preliminary Guidance

Molina Healthcare, Inc. (NYSE: MOH):

• Net loss of $4.59 per diluted share for the quarter.
• Medical care ratio excluding Marketplace declines to 88.8% from 90.9% in the third quarter of 2017.
• General and administrative expense ratio declines to 7.4% from 7.6% in the third quarter of 2017.
• Fourth quarter results include $356 million of impairment losses, restructuring and separation costs, and loss on debt extinguishment.
• Fourth quarter results include $53 million increased medical care costs for termination of cost sharing reduction (CSR) subsidy payments effective October 1, 2017, and other Marketplace reserve adjustments.
• 2018 preliminary guidance of $3.00 - $3.50 net income per diluted share and $3.23 - $3.73 adjusted net income per diluted share. Preliminary guidance has been developed with conservative views of medical cost trends, Marketplace pricing adequacy, and the ultimate outcome of numerous profit improvement initiatives. Preliminary guidance will be updated once the Company has the benefit of first quarter earnings and further insight into the execution of these profit improvement initiatives.

Molina Healthcare, Inc. (NYSE: MOH) today reported its financial results for the fourth quarter and year ended December 31, 2017, and provided its preliminary guidance for fiscal year 2018.

“Our fourth quarter results are emblematic of the significant transition Molina is undertaking,” said Joe Zubretsky, president and CEO. “The disappointment of contract losses and related goodwill charges, continued restructuring costs, and catch up adjustments to unacceptable Marketplace results are legacies of the past. Looking forward, the core business results showed improvement quarter over quarter, and we took steps to strengthen the quality of the balance sheet, all of which serve as a solid platform to achieve our margin recovery and sustainability plan we outlined for investors last month. Medical cost control, administrative cost discipline, and capital strength remain at the fore of our plan.”

Fourth Quarter 2017 and Full Year Highlights

Summary of Significant Items Affecting 2017 Financial Results

Fourth Quarter 2017 Compared With Third Quarter 2017

Developments in our business during 2017 limit the value of comparisons to 2016 performance. The Company believes that the comparison of 2017 fourth quarter performance with 2017 third quarter performance provides the most meaningful context for fourth quarter results.

Loss before income tax benefit for the fourth quarter of 2017 was $316 million, compared with a loss before income tax benefit of $113 million for the third quarter of 2017. Net loss per diluted share was $4.59 for the fourth quarter of 2017 compared with net loss per diluted share of $1.70 reported for the third quarter of 2017.

Despite the loss reported for the quarter, the performance of core operations and overall administrative cost efficiency improved in the fourth quarter when compared with the third quarter of 2017.

Marketplace performance deteriorated due to normal seasonality and other matters discussed below. The Company has increased premium rates and reduced its Marketplace presence effective January 1, 2018 as part of its overall program to improve profitability.

Among the key developments affecting fourth quarter 2017 results were:

• The medical care ratio for the Company’s Medicaid and Medicare programs combined (“core operations”) declined to 88.8% in the fourth quarter of 2017, from 90.9% in the third quarter of 2017.
• The general and administrative expense ratio declined to 7.4% in the fourth quarter of 2017 from 7.6% in the third quarter of 2017.
• The decision by the federal government to cease payment of Marketplace CSR subsidies in the fourth quarter of 2017 increased loss before income tax benefit for the quarter by approximately $73 million ($0.81 per diluted share). Despite its decision to record a charge in the fourth quarter for this item, the Company believes that it is legally entitled to these federal payments and will pursue all available means to collect them.
• Increases to Marketplace risk transfer and CSR liabilities related to the first three quarters of 2017 increased loss before income tax benefit by approximately $50 million ($0.55 per diluted share) in the fourth quarter.
• The reduction of the Marketplace-related premium deficiency reserve to zero as of December 31, 2017 reduced loss before income tax benefit by $70 million ($0.77 per diluted share) in the fourth quarter.
• Non-cash goodwill and intangible asset impairment charges of $269 million ($3.22 per diluted share) were incurred at the Florida, Illinois, and New Mexico health plans in the fourth quarter.
• Approximately $73 million ($0.81 per diluted share) of restructuring costs were recognized in the fourth quarter.
• Approximately $14 million ($0.24 per diluted share) of non-cash costs were recognized in the fourth quarter in connection with the issuance of our common shares in exchange for $141 million face value of our 1.625% convertible senior notes.

Income Tax (Benefit) Expense

The revaluation of deferred tax assets in connection with the Tax Cuts and Jobs Act of 2017 resulted in $54 million additional income tax expense in the fourth quarter and year ended December 31, 2017 ($0.94 per diluted share and $0.95 per diluted share, respectively). In addition, the effective tax benefit for 2017 is less than the statutory tax benefit due to the relatively large amount of reported expenses that are not deductible for tax purposes, primarily relating to goodwill impairment losses and separation costs.

2018 Preliminary Guidance

The Company has offered guidance on a preliminary basis because of the inherent uncertainty around achievement and the timing of its numerous profit improvement initiatives. While those initiatives extend across the various dimensions of managed care fundamentals, many are in the early stages of development and implementation.

Therefore, the Company’s guidance should be viewed as a preliminary estimate of what it expects to achieve until the profit improvement initiatives manifest themselves in the earnings stream. Once it has the benefit of first quarter earnings and further insight into the execution of the profit improvement initiatives, the Company will be able to provide a firmer view of 2018 guidance.

To provide for an appropriate amount of execution risk, the Company’s preliminary guidance has been developed with appropriately conservative views of:

• Medical cost baseline in 2017;
• Medical cost trend for 2018;
• Potential rate increases and retained amounts of revenue at risk; and
• The turnaround of the Marketplace business until the achievement of the margins implicit in 2018 pricing is observed.

The following table summarizes 2018 Preliminary Guidance ⁽¹⁾:

Conference Call

Management will host a conference call and webcast to discuss Molina Healthcare’s fourth quarter and year-end 2017 results at 8:30 a.m. Eastern time on Tuesday, February 13, 2018. The number to call for the interactive teleconference is (888) 317-6003 and entering confirmation number 5278774. A telephonic replay of the conference call will be available through Tuesday, February 20, 2018, by dialing (877) 344-7529 and entering confirmation number 10116226. A live audio broadcast of Molina Healthcare’s conference call will be available on our website, molinahealthcare.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 managed health care services under the Medicaid and Medicare programs and through the state insurance marketplaces. Through our health plans operating in 13 states across the nation and in the Commonwealth of Puerto Rico, Molina serves approximately 4.5 million members. For more information about Molina Healthcare, please visit our website at molinahealthcare.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: This earnings release contains “forward-looking statements” regarding our 2018 preliminary guidance, as well as our plans, expectations, and anticipated future events. Actual results could differ materially due to numerous known and unknown risks and uncertainties. Those known risks and uncertainties include, but are not limited to, the following:

• the success of our profit improvement and maintenance initiatives, including the timing and amounts of the benefits realized, and administrative savings achieved;
• the numerous political and market-based uncertainties associated with the Affordable Care Act (the “ACA”) or “Obamacare;”
• the market dynamics surrounding the ACA Marketplaces, including but not limited to uncertainties associated with risk transfer requirements, the potential for disproportionate enrollment of higher acuity members, the discontinuation of premium tax credits, the adequacy of agreed rates, and potential disruption associated with market withdrawal from Utah, Wisconsin, or other states;
• 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/risk transfer, risk corridors, and reinsurance;
• effective management of our medical costs;
• our 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 our efforts to retain existing government contracts, including those in Florida, New Mexico, Puerto Rico, Texas, and Washington, including the success of any protest filings;
• our ability to manage our operations, including maintaining and creating adequate internal systems and controls relating to authorizations, approvals, provider payments, and the overall success of our care management initiatives;
• our ability to consummate and realize benefits from acquisitions or divestitures;
• our 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;
• our 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;
• our 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 cost corridors in California, New Mexico, and Washington, 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 our ability to recognize revenue amounts associated therewith;
• cyber-attacks or other privacy or data security incidents resulting in an inadvertent unauthorized disclosure of protected health information;
• the success of our health plan in Puerto Rico, including the resolution of the Puerto Rico debt crisis, payment of all amounts due under our Medicaid contract, the effect of the PROMESA law, the impact of Hurricane Maria and our efforts to better manage the health care costs of our Puerto Rico health plan;
• the success and renewal of our 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 our health plans;
• efforts by states to recoup previously paid and recognized premium amounts;
• complications, member confusion, or enrollment backlogs related to the annual renewal of Medicaid coverage;
• government audits and reviews, or potential investigations, and any fine, sanction, enrollment freeze, monitoring program, or premium recovery that may result therefrom;
• changes with respect to our provider contracts and the loss of providers;
• approval by state regulators of dividends and distributions by our health plan subsidiaries;
• changes in funding under our 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;
• the relatively small number of states in which we operate health plans, including the greater scale and revenues of our California, Ohio, Texas, and Washington health plans;
• the availability of adequate financing on acceptable terms to fund and capitalize our expansion and growth, repay our outstanding indebtedness at maturity and meet our liquidity needs, including the interest expense and other costs associated with such financing;
• our failure to comply with the financial or other covenants in our credit agreement or the indentures governing our outstanding notes;
• the sufficiency of our funds on hand to pay the amounts due upon conversion or maturity of our outstanding notes;
• the failure of a state in which we operate to renew its federal Medicaid waiver;
• changes generally affecting the managed care or Medicaid management information systems industries;
• increases in government surcharges, taxes, and assessments, including but not limited to the deductibility of certain compensation costs;
• newly emergent viruses or widespread epidemics, public catastrophes or terrorist attacks, and associated public alarm;
• increasing competition and consolidation in the Medicaid industry;

and numerous other risk factors, including those discussed in our periodic reports and filings with the Securities and Exchange Commission. These reports can be accessed under the investor relations tab of our website or on the SEC’s website at sec.gov. Given these risks and uncertainties, we can give no assurances that our forward-looking statements will prove to be accurate, or that any other results or events projected or contemplated by our 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 our judgment as of February 12, 2018, and we disclaim any obligation to update any forward-looking statements to conform the statement to actual results or changes in our expectations.

Our claims liability includes a provision for adverse claims deviation based on historical experience and other factors including, but not limited to, variations in claims payment patterns, changes in utilization and cost trends, known outbreaks of disease, and large claims. Our reserving methodology is consistently applied across all periods presented. The amounts displayed for “Components of medical care costs related to: Prior period” represent the amount by which our original estimate of claims and benefits payable at the beginning of the period was less (more) than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported. The following table presents the components of the change in medical claims and benefits payable for the periods indicated:

We use non-GAAP financial measures as supplemental metrics in evaluating our financial performance, making financing and business decisions, and forecasting and planning for future periods. For these reasons, management believes such measures are useful supplemental measures to investors in comparing our performance to the performance of other public companies in the health care industry. These non-GAAP financial measures should be considered as supplements to, and not as substitutes for or superior to, GAAP measures. See further information regarding non-GAAP measures below the tables (in millions, except per diluted share amounts).

The following are descriptions of the adjustments made to GAAP measures used to calculate the non-GAAP measures used in this news release:

Earnings before interest, taxes, depreciation and amortization (EBITDA): Net (loss) income (GAAP) less depreciation, and amortization of intangible assets and capitalized software, interest expense and income tax (benefit) expense. We believe that EBITDA is helpful in assessing our ability to meet the cash demands of our operating units.

Adjusted net (loss) income: Net (loss) income (GAAP) less amortization of intangible assets, net of income tax effect calculated at the statutory tax rate of 37%. We believe that adjusted net (loss) income is helpful in assessing our financial performance exclusive of the non-cash impact of the amortization of purchased intangibles.

Adjusted net (loss) income per diluted share: Adjusted net (loss) income divided by weighted average common shares outstanding on a fully diluted basis.

View source version on businesswire.com: http://www.businesswire.com/news/home/20180212006254/en/

Molina Healthcare, Inc.
Ryan Kubota, 562-435-3666, ext. 119057
Investor Relations

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