Molina Healthcare reports net income of $17.4 million for first quarter 2011

Molina Healthcare, Inc. (NYSE: MOH):

“We remain profitable in our core markets and continue to grow our enrollment. Our expansion into the Dallas-Fort Worth Star+Plus program will allow us to demonstrate once again the value of the high quality health care services we offer.”

• Earnings per diluted share for first quarter 2011 of $0.56, up 37% over 2010
• Quarterly premium revenues of $1.1 billion, up 12% over 2010
• Quarterly operating income of $31 million, up 53% over 2010
• Aggregate membership up 11% over 2010

Molina Healthcare, Inc. (NYSE: MOH) today reported its financial results for the first quarter ended March 31, 2011.

Net income for the quarter was $17.4 million, or $0.56 per diluted share, compared with net income of $10.6 million, or $0.41 per diluted share, for the quarter ended March 31, 2010.

"I am pleased with our first quarter results," said J. Mario Molina, M.D., chief executive officer of Molina Healthcare, Inc. "We remain profitable in our core markets and continue to grow our enrollment. Our expansion into the Dallas-Fort Worth Star+Plus program will allow us to demonstrate once again the value of the high quality health care services we offer."

Guidance

The Company reaffirms its earnings per diluted share guidance for fiscal year 2011 of $2.20. Although the Company's first quarter financial performance was strong, budgets in every state in which the Company operates its health plans are in deficit and are likely to remain so through state fiscal year 2012. Given this uncertainty in the rate environment, any adjustment to our guidance is unwarranted at this time.

Overview of Financial Results

First Quarter 2011 Compared with Fourth Quarter 2010

Net income in the first quarter of 2011 of $17.4 million was consistent with net income in the fourth quarter of 2010 of $17.6 million. Medical care costs as a percentage of premium revenue (the medical care ratio, or MCR) was 84.5% in the first quarter of 2011 compared with 82.7% in the fourth quarter of 2010. Sequential medical care costs trends were as follows:

• Pharmacy costs on a per member per month, or PMPM, basis increased approximately 7% in the first quarter of 2011 from the fourth quarter of 2010.
• Capitation costs dropped approximately 13% PMPM due to the transition of members in Michigan and Washington into fee-for-service networks.
• Fee-for-service costs increased approximately 8% PMPM, partially due to the transition of members from capitated provider networks into fee-for-service networks. Fee-for-service and capitation costs combined increased approximately 4% PMPM.

First Quarter 2011 Compared with First Quarter 2010

Health Plans Segment

Premium revenue grew 12% in the first quarter of 2011 compared with the first quarter of 2010, due to a membership increase of 11%. Consolidated premium revenue increased by approximately 1% on a PMPM basis. Medicare enrollment exceeded 24,000 members at March 31, 2011, and Medicare premium revenue for the quarter was $85.4 million compared with $50.3 million in the first quarter of 2010.

The medical care ratio decreased to 84.5% in the first quarter of 2011 compared with 85.3% for the same period of 2010. Total medical care costs increased less than 1% PMPM, while medical care costs for the Company's Medicaid membership decreased by approximately 2% PMPM.

• Pharmacy costs (adjusted for the state's retention of the pharmacy benefit in Ohio effective February 1, 2010) increased approximately 5% PMPM.
• Capitation costs decreased approximately 15% PMPM, primarily due to the transition of members in Michigan and Washington into fee-for-service networks.
• Fee-for-service costs increased approximately 4% PMPM, partially due to the transition of members from capitated provider networks into fee-for-service networks. Fee-for-service and capitation costs combined increased less than 1% PMPM.
• Hospital admissions per thousand members per year decreased approximately 7% in the first quarter of 2011 when compared with the first quarter of 2010.
• Pharmacy utilization was essentially flat, with the increase in costs being driven by higher costs per prescription.

The medical care ratio of the California health plan decreased to 84.3% in the first quarter of 2011 from 86.8% in the first quarter of 2010, as higher premium revenue PMPM more than offset an increase of approximately 27% in pharmacy costs and an increase of approximately 5% in fee-for-service costs.

The medical care ratio of the Florida health plan increased to 96.6% in the first quarter of 2011 from 88.7% in the first quarter of 2010, primarily due to higher fee-for-service and capitation costs, which more than offset lower pharmacy costs. The Company has undertaken a number of measures - focused on both utilization and unit cost reductions - to improve the profitability of the Florida health plan. The Florida health plan's medical care ratio decreased from 100.2% in the fourth quarter of 2010.

The medical care ratio of the Michigan health plan increased to 81.2% in the first quarter of 2011 from 80.8% in the first quarter of 2010, as higher physician and outpatient facility fee-for-service costs and higher pharmacy costs more than offset lower capitation costs.

The medical care ratio of the Missouri health plan increased to 93.6% in the first quarter of 2011 from 83.5% in the first quarter of 2010 due to higher fee-for-service costs.

The medical care ratio of the New Mexico health plan increased to 82.8% in the first quarter of 2011 from 77.4% in the first quarter of 2010, as lower fee-for-service costs failed to offset the impact of a premium rate decrease of approximately 8.5% PMPM.

The medical care ratio of the Ohio health plan decreased to 74.6% in the first quarter of 2011 from 79.1% in the first quarter of 2010, due to an increase in Medicaid premium PMPM of approximately 4.5% effective January 1, 2011, and flat fee-for-service costs.

The medical care ratio of the Texas health plan increased to 91.1% in the first quarter of 2011 from 82.5% in the first quarter of 2010. Effective February 1, 2011, the Company added approximately 30,000 aged, blind or disabled, or ABD, Medicaid members in the Dallas-Fort Worth area, and effective September 1, 2010, the Company added approximately 54,000 members state-wide who are covered under the Children's Health Insurance Program, or CHIP.

The medical care ratio of the Utah health plan decreased to 79.3% in the first quarter of 2011 from 105.0% in the first quarter of 2010, primarily due to reduced fee-for-service costs in the outpatient facility and physician categories and an increase in Medicaid premium PMPM of approximately 7% effective July 1, 2010. Lower fee-for-service costs were the result of both lower unit costs and lower utilization.

The medical care ratio of the Washington health plan decreased to 86.6% in the first quarter of 2011 from 90.3% in the first quarter of 2010. Lower capitation costs more than offset higher fee-for-service and higher pharmacy costs. Pharmacy costs for the Washington health plan's Medicaid members grew approximately 22% PMPM.

The medical care ratio of the Wisconsin health plan (acquired September 1, 2010) was 118.1% in the first quarter of 2011. The Wisconsin health plan recorded a premium deficiency reserve of $3.35 million in the first quarter of 2011. Absent that premium deficiency reserve, the Wisconsin health plan's medical care ratio would have been approximately 98% for the first quarter of 2011.

Days in medical claims and benefits payable were as follows:

Consolidated Expenses

General and administrative expenses, or G&A, were $94.4 million, or 8.4% of total revenue, for the first quarter of 2011 compared with $78.9 million, or 8.2% of total revenue, for the first quarter of 2010.

Premium tax expense decreased to 3.4% of premium revenue in the first quarter of 2011 from 3.6% in the first quarter of 2010.

Depreciation and amortization expense related to the Company's Health Plans segment is all recorded in "Depreciation and Amortization" in the Company's consolidated statements of income. Depreciation and amortization related to the Company's Molina Medicaid Solutions segment is recorded within three different headings in the Company's consolidated statements of income as follows:

• Amortization of purchased intangibles relating to customer relationships is reported as amortization in "Depreciation and Amortization;"
• Amortization of purchased intangibles relating to contract backlog is recorded as a reduction of service revenue; and
• Depreciation is recorded as cost of service revenue.

The following table presents all depreciation and amortization recorded in the Company's consolidated statements of income, regardless of whether the item appears as depreciation and amortization, a reduction of revenue, or as cost of service revenue, and reconciles that amount to the condensed consolidated statements of cash flows.

Interest expense was $3.6 million for the first quarter of 2011 compared with $3.4 million in the first quarter of 2010.

Income tax expense was recorded at an effective rate of 37.2% in the first quarter of 2011 compared with 38.0% in the first quarter of 2010.

Molina Medicaid Solutions Segment

Performance of Molina Medicaid Solutions for the quarter ended March 31, 2011, was as follows:

Cash Flow

Cash provided by operating activities was $82.4 million in 2011 compared with cash used in operating activities of $26.5 million for 2010. Deferred revenue, which was a use of operating cash totaling $90.7 million in 2010, was a source of operating cash totaling $84.2 million in 2011.

At March 31, 2011, the Company had cash and investments of $870.8 million, and the parent company had cash and investments of $25.6 million.