Quarterly Report (10-q)

Date : 04/30/2018 @ 6:20AM
Source : Edgar (US Regulatory)
Stock : Molina Healthcare (MOH)
Quote : 134.08  -0.48 (-0.36%) @ 4:03PM

Quarterly Report (10-q)


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, 2018
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, smaller reporting company, or an 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 25, 2018 , was approximately 61,685,000 .



MOLINA HEALTHCARE, INC. FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED March 31, 2018

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,
 
2018
 
2017
 
(In millions, except per-share data)
(Unaudited)
Revenue:
 
 
 
Premium revenue
$
4,323

 
$
4,648

Service revenue
134

 
131

Premium tax revenue
104

 
111

Health insurer fees reimbursed
61

 

Investment income and other revenue
24

 
14

Total revenue
4,646

 
4,904

Operating expenses:
 
 
 
Medical care costs
3,722

 
4,111

Cost of service revenue
120

 
122

General and administrative expenses
352

 
439

Premium tax expenses
104

 
111

Health insurer fees
75

 

Depreciation and amortization
26

 
39

Restructuring and separation costs
25

 

Total operating expenses
4,424

 
4,822

Operating income
222

 
82

Other expenses (income), net:
 
 
 
Interest expense
33

 
26

Other expense (income), net
10

 
(75
)
Total other expenses (income), net
43

 
(49
)
Income before income tax expense
179

 
131

Income tax expense
72

 
54

Net income
$
107

 
$
77

 
 
 
 
Net income per share:
 
 
 
Basic
$
1.79

 
$
1.38

Diluted
$
1.64

 
$
1.37

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended March 31,
 
2018
 
2017
 
(Amounts in millions)
(Unaudited)
Net income
$
107

 
$
77

Other comprehensive (loss) income:
 
 
 
Unrealized investment (loss) gain
(7
)
 
1

Less: effect of income taxes

 

Other comprehensive (loss) income, net of tax
(7
)
 
1

Comprehensive income
$
100

 
$
78

See accompanying notes.

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 3


CONSOLIDATED BALANCE SHEETS
 
March 31,
2018
 
December 31,
2017
 
(Amounts in millions,
except per-share data)
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,729

 
$
3,186

Investments
2,444

 
2,524

Restricted investments
77

 
169

Receivables
950

 
871

Prepaid expenses and other current assets
411

 
239

Derivative asset
585

 
522

Total current assets
8,196

 
7,511

Property, equipment, and capitalized software, net
318

 
342

Goodwill and intangible assets, net
250

 
255

Restricted investments
120

 
119

Deferred income taxes
114

 
103

Other assets
135

 
141

 
$
9,133

 
$
8,471

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Medical claims and benefits payable
$
2,023

 
$
2,192

Amounts due government agencies
1,714

 
1,542

Accounts payable and accrued liabilities
713

 
366

Deferred revenue
404

 
282

Current portion of long-term debt
566

 
653

Derivative liability
585

 
522

Total current liabilities
6,005

 
5,557

Long-term debt
1,318

 
1,318

Lease financing obligations
198

 
198

Other long-term liabilities
59

 
61

Total liabilities
7,580

 
7,134

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.001 par value, 150 shares authorized; outstanding: 62 shares at March 31, 2018 and 60 shares at December 31, 2017

 

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

 

Additional paid-in capital
1,153

 
1,044

Accumulated other comprehensive loss
(12
)
 
(5
)
Retained earnings
412

 
298

Total stockholders’ equity
1,553

 
1,337

 
$
9,133

 
$
8,471

See accompanying notes.

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 4


CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
 
Outstanding
 
Amount
 
 
 
 
 
(In millions)
 
(Unaudited)
Balance at January 1, 2018
60

 
$

 
$
1,044

 
$
(5
)
 
$
298

 
$
1,337

Net income

 

 

 

 
107

 
107

Adoption of Topic 606

 

 

 

 
6

 
6

Adoption of ASU 2018-02

 

 

 

 
1

 
1

1.625% Convertible Notes exchange transaction
2

 

 
108

 

 

 
108

Other comprehensive loss, net

 

 

 
(7
)
 

 
(7
)
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, 2018 Form 10-Q | 5


CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31,
 
2018
 
2017
 
(Amounts in millions)
(Unaudited)
Operating activities:
 
 
 
Net income
$
107

 
$
77

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
37

 
49

Deferred income taxes
(6
)
 
(5
)
Share-based compensation
6

 
6

Non-cash restructuring costs
17

 

Amortization of convertible senior notes and lease financing obligations
7

 
8

Loss on debt extinguishment
10

 

Other, net
2

 
3

Changes in operating assets and liabilities:
 
 
 
Receivables
(83
)
 
(32
)
Prepaid expenses and other current assets
(239
)
 
(12
)
Medical claims and benefits payable
(163
)
 
(3
)
Amounts due government agencies
172

 
373

Accounts payable and accrued liabilities
319

 
50

Deferred revenue
130

 
146

Income taxes
78

 
59

Net cash provided by operating activities
394

 
719

Investing activities:
 
 
 
Purchases of investments
(389
)
 
(733
)
Proceeds from sales and maturities of investments
543

 
433

Purchases of property, equipment and capitalized software
(4
)
 
(26
)
Increase in restricted investments held-to-maturity

 
(5
)
Other, net
(5
)
 
(6
)
Net cash provided by (used in) investing activities
145

 
(337
)
Financing activities:
 
 
 
Cash paid for financing transaction fees
(5
)
 

Proceeds from employee stock plans

 
1

Other, net

 
(2
)
Net cash used in financing activities
(5
)
 
(1
)
Net increase in cash, cash equivalents, and restricted cash and cash equivalents
534

 
381

Cash, cash equivalents, and restricted cash and cash equivalents at beginning of period
3,290

 
2,912

Cash, cash equivalents, and restricted cash and cash equivalents at end of period
$
3,824

 
$
3,293


Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 6



CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
 
Three Months Ended March 31,
 
2018
 
2017
 
(Amounts in millions)
(Unaudited)
Supplemental cash flow information:
 
 
 
 
 
 
 
Schedule of non-cash investing and financing activities:
 
 
 
Common stock used for share-based compensation
$
(5
)
 
$
(6
)
 
 
 
 
Details of change in fair value of derivatives, net:
 
 
 
 Gain (loss) on 1.125% Call Option
$
63

 
$
(86
)
(Loss) gain on 1.125% Conversion Option
(63
)
 
86

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 of 1.625% Convertible Notes 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, 2018 Form 10-Q | 7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2018

1 . Basis of Presentation
Organization and Operations
Molina Healthcare, Inc. provides quality managed health care to people receiving government assistance. We offer cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist government agencies in their administration of the Medicaid program. We have three reportable segments. These segments consist of our Health Plans segment, which constitutes the vast majority of our operations; our Molina Medicaid Solutions segment; and our Other segment.
The Health Plans segment consists of health plans operating in 13 states and the Commonwealth of Puerto Rico. As of March 31, 2018 , these health plans served approximately 4.1 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. This membership includes Affordable Care Act Marketplace (Marketplace) members, most of whom receive government premium subsidies. The health plans are 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  four  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 (RFP) 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 (ABD); and regions or service areas.
The Molina Medicaid Solutions segment provides support to state government agencies’ administration of their Medicaid programs, including business processing, information technology development and administrative services. The Other segment includes primarily our Pathways behavioral health and social services provider, and corporate amounts not allocated to other reportable segments.
Presentation and Reclassification
We have reclassified certain amounts in the 2017 consolidated statement of cash flows to conform to the 2018 presentation, relating to the presentation of restricted cash and cash equivalents. The reclassification is a result of our adoption of Accounting Standards Update (ASU) 2016-18, Restricted Cash effective January 1, 2018. See Note 2 , “ Significant Accounting Policies ,” for further information, including the amount reclassified.
We have combined certain line items in the accompanying consolidated balance sheets. For all periods presented, we have combined the presentation of:
Income taxes refundable with “Prepaid expenses and other current assets;”
Income taxes payable with “Accounts payable and accrued liabilities;”
Goodwill, and intangible assets, net to a single line; and
Deferred contract costs with “Other assets.”
Consolidation and Interim Financial Information
The consolidated financial statements include the accounts of Molina Healthcare, Inc., its subsidiaries, and variable interest entities (VIEs) in which Molina Healthcare, Inc. is considered to be the primary beneficiary. Such VIEs are insignificant to our consolidated financial position and results of operations. 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

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 8


months ended March 31, 2018 are not necessarily indicative of the results for the entire year ending December 31, 2018 .
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, 2017 . Accordingly, certain disclosures that would substantially duplicate the disclosures contained in our December 31, 2017 audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our December 31, 2017 audited consolidated financial statements.

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.
 
Three Months Ended March 31,
 
2018
 
2017
 
(In millions)
Cash and cash equivalents
$
3,729

 
$
3,198

Restricted cash and cash equivalents
95

 
95

Total cash, cash equivalents, and restricted cash and cash equivalents presented in the statements of cash flows
$
3,824

 
$
3,293

Revenue Recognition
We adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) effective January 1, 2018, using the modified retrospective approach. The insurance contracts of our Health Plans segment, which segment constitutes the vast majority of our operations, are excluded from the scope of Topic 606 because the recognition of revenue under these contracts is dictated by other accounting standards governing insurance contracts. The cumulative effect of initially applying the guidance, relating entirely to our Molina Medicaid Solutions segment contracts, resulted in an immaterial impact to beginning retained earnings, as presented in the accompanying consolidated statement of stockholders’ equity. Topic 606 was only applied to service contracts that were not completed as of December 31, 2017. Refer to “Molina Medicaid Solutions segment” and “Other segment” below for further information.
Health Plans segment
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 two broad categories discussed in further detail below: 1) “Contractual Provisions That May Adjust or Limit Revenue or Profit;” and 2) “Quality Incentives.” Liabilities recorded for such provisions are included in “Amounts due government agencies” in the accompanying consolidated balance sheets.
1)
Contractual Provisions That May Adjust or Limit Revenue or Profit:
Medicaid
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 $148 million and $135 million at March 31, 2018 and December 31, 2017 , respectively. Approximately $97 million and $96 million of the liability

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 9


accrued at March 31, 2018 and December 31, 2017 , respectively, relates to our participation in Medicaid Expansion programs.
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
Minimum MLR: Federal regulations have 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.
Marketplace
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 transfer payment into the pool if their composite risk scores are below the average risk score, and will receive a risk transfer payment from the pool if their composite risk scores are above the average risk score. 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, 2018, and December 31, 2017 the Marketplace risk adjustment payable amounted to $1,129 million and $912 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.
2)
Quality Incentives:
At many of our health plans, revenue ranging from approximately 1% to 3% 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, 2018 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, 2018 .
 
Three Months Ended March 31,
 
2018
 
2017
 
(Dollars in millions)
Maximum available quality incentive premium - current period
$
40

 
$
38

Quality incentive premium revenue recognized in current period:
 
 
 
Earned current period
$
24

 
$
19

Earned prior periods
11

 
5

Total
$
35

 
$
24

 
 
 
 
Quality incentive premium revenue recognized as a percentage of total premium revenue
0.8
%
 
0.5
%
Molina Medicaid Solutions segment
Molina Medicaid Solutions is under contract with Medicaid agencies in six states and the U.S. Virgin Islands. Our existing contracts have terms that currently extend to 2018 through 2025, before renewal options. As of March 31, 2018, the aggregate amount of service revenue relating to unsatisfied performance obligations amounted to $571 million .
Business process outsourcing services are billed immediately following the end of the month in which such services are performed, with payment received soon thereafter. Payments for the design, development and implementation (DDI) of Medicaid management information systems milestones are received following our performance, and the

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 10


customer’s acceptance, of the milestone deliverable. However, DDI revenue is deferred until the system ‘go-live’ date, and is amortized over the initial contract hosting period.
Other segment
Our Pathways behavioral health subsidiary’s revenue is variable, and generally invoiced after services are rendered; customer payment follows invoicing. We have concluded that there is no change to revenue recognition under Topic 606 for our Pathways behavioral health subsidiary, and therefore no impact to retained earnings effective January 1, 2018.
The following table presents the opening and closing balances of receivables, deferred contract costs (contract assets), and deferred revenue (contract liabilities) from contracts with customers, by segment.
 
March 31,
2018
 
December 31,
2017
 
(In millions)
Receivables:
 
 
 
Molina Medicaid Solutions
$
41

 
$
30

Other
46

 
44

Deferred contract costs (contract assets) – Molina Medicaid Solutions
103

 
101

Deferred revenue (contract liabilities) – Molina Medicaid Solutions
41

 
49

Medical Care Costs - Marketplace Cost Share Reduction (CSR) Update
During the first quarter of 2018, we recognized a benefit of approximately $70 million in reduced medical expense related to 2017 dates of service as a result of the federal government’s confirmation that the reconciliation of 2017 Marketplace 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.
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 was not impacted by HIF in 2017 given the 2017 HIF moratorium.
The effective tax rate may be subject to fluctuations during the year, particularly as a result of the level of pretax earnings, and also as new information is obtained. Such information may affect the assumptions used to estimate the annual effective tax rate, including factors such as 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.
The Tax Cuts and Jobs Act (TCJA) was enacted on December 22, 2017. The TCJA, in part, reduced the U.S. federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018. Accounting guidance allows filers one year subsequent to the end of the tax year to finalize the valuation of deferred tax assets and liabilities. At March 31, 2018, we had not completed our accounting for the tax effects resulting from enactment of TCJA with respect to valuation of our deferred tax assets and liabilities. We will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we gain a more thorough understanding of the tax law based on expected future guidance from the Internal Revenue Service and U.S. Treasury.
Recent Accounting Pronouncements Adopted
Revenue Recognition (Topic 606). See discussion above, in “Revenue Recognition.”
Comprehensive Income. In February 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. ASU 2018-02 is effective beginning January 1, 2019; we early adopted this ASU effective

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 11


January 1, 2018. The effect of applying the guidance resulted in an immaterial impact to beginning retained earnings, as presented in the accompanying consolidated statement of stockholders’ equity.
Restricted Cash. In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which requires us to include in our consolidated statements of cash flows the balances of cash, cash equivalents, restricted cash and restricted cash equivalents. When these items are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Transfers between cash and cash equivalents and restricted cash and restricted cash equivalents are no longer presented in the statement of cash flows. We adopted ASU 2016-18 on January 1, 2018. We have applied the guidance retrospectively to all periods presented. Such retrospective adoption resulted in a $95 million reclassification of restricted cash and cash equivalents from “Investing activities” to the beginning and ending balances of cash and cash equivalents in our consolidated statements of cash flows for the quarter ended March 31, 2017. There was no impact to our consolidated statements of income, balance sheets, or stockholders’ equity. The reconciliation of cash and cash equivalents to cash, cash equivalents and restricted cash and cash equivalents is presented at the beginning of this note.
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 of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 is effective for us beginning January 1, 2020, and must be adopted as a cumulative effect adjustment to retained earnings; early adoption is permitted. We are evaluating the effect of this guidance.
Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), as modified by ASU 2017-03, Transition and Open Effective Date Information . Under ASU 2016-02, an entity will be required to recognize assets and liabilities for the rights and obligations created by leases on the entity’s balance sheet for both financing and operating leases. For leases with a term of 12 months or less, an entity may elect to not recognize lease assets and lease liabilities and expense the lease over a straight-line basis for the term of the lease. ASU 2016-02 will require new disclosures that depict the amount, timing, and uncertainty of cash flows pertaining to an entity’s leases. ASU 2016-02 is effective for us beginning January 1, 2019, and must be adopted using a modified retrospective approach for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. Under this guidance, we will record assets and liabilities relating primarily to our long-term office leases. We are currently updating the configuration of our lease database management system for the adoption of Topic 842, and we are in the early stages of computing the impact of Topic 842 on our consolidated financial statements.


Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 12


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,
 
2018
 
2017
 
(In millions, except net income per share)
Numerator:
 
 
 
Net income
$
107

 
$
77

Denominator:
 
 
 
Shares outstanding at the beginning of the period
59

 
56

Weighted-average number of shares issued:
 
 
 
1.625% Exchange (1)
1

 

Denominator for basic net income per share
60

 
56

Effect of dilutive securities:
 
 
 
Convertible senior notes (1)
1

 

1.125% Warrants (1)
4

 

Denominator for diluted net income per share
65

 
56

 
 
 
 
Net income per share: (2)
 
 
 
Basic
$
1.79

 
$
1.38

Diluted
$
1.64

 
$
1.37

______________________________
(1)
For more information regarding the 1.625% Exchange and the convertible senior notes, refer to Note 7 , “ Debt .” For more information regarding the 1.125% Warrants, refer to Note 9 , “ Stockholders' Equity .” The dilutive effect of all potentially dilutive common shares is calculated using the treasury stock method.
(2)
Source data for calculations in thousands.
4 . Fair Value Measurements
We consider the carrying amounts of cash, cash equivalents and other 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 2017 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. These derivatives are not 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, 2018 , 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. As described further in Note 8 , “ Derivatives ,” 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 operations for the three months ended March 31, 2018 .

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 13


Our financial instruments measured at fair value on a recurring basis at March 31, 2018 , were as follows:
 
Total
 
Quoted Market Prices (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
(In millions)
Corporate debt securities
$
1,618

 
$

 
$
1,618

 
$

U.S. treasury notes
329

 
329

 

 

Government-sponsored enterprise securities (GSEs)
227

 
227

 

 

Municipal securities
131

 

 
131

 

Asset-backed securities
110

 

 
110

 

Certificate of deposit
27

 

 
27

 

Other
2

 

 
2

 

  Subtotal - current investments
2,444

 
556

 
1,888

 

Corporate debt securities
66

 

 
66

 

U.S. treasury notes
11

 
11

 

 

     Subtotal - current restricted investments
77

 
11

 
66

 

1.125% Call Option derivative asset
585

 

 

 
585

Total assets
$
3,106

 
$
567

 
$
1,954

 
$
585

 
 
 
 
 
 
 
 
1.125% Conversion Option derivative liability
$
585

 
$

 
$

 
$
585

Total liabilities
$
585

 
$

 
$

 
$
585

Our financial instruments measured at fair value on a recurring basis at December 31, 2017 , were as follows:
 
Total
 
Quoted Market Prices (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
(In millions)
Corporate debt securities
$
1,588

 
$

 
$
1,588

 
$

U.S. treasury notes
388

 
388

 

 

GSEs
253

 
253

 

 

Municipal securities
141

 

 
141

 

Asset-backed securities
117

 

 
117

 

Certificates of deposit
37

 

 
37

 

  Subtotal - current investments
2,524

 
641

 
1,883

 

Corporate debt securities
101

 

 
101

 

U.S. treasury notes
68

 
68

 

 

     Subtotal - current restricted investments
169

 
68

 
101

 

1.125% Call Option derivative asset
522

 

 

 
522

Total assets
$
3,215

 
$
709

 
$
1,984

 
$
522

 
 
 
 
 
 
 
 
1.125% Conversion Option derivative liability
$
522

 
$

 
$

 
$
522

Total liabilities
$
522

 
$

 
$

 
$
522



Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 14


Fair Value Measurements – Disclosure Only
The carrying amounts and estimated fair values of our senior notes 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 amount due under our Credit Facility is classified as a Level 3 financial instrument, because certain inputs used to determine its fair value are not observable. The carrying amount of the amount due under the Credit Facility approximates its fair value because the Credit Facility’s interest rate is a variable rate that approximates rates currently available to us.
 
March 31, 2018
 
December 31, 2017
 
Carrying
Value
 

Fair Value
 
Carrying
Value
 

Fair Value
 
(In millions)
5.375% Notes
$
693

 
$
694

 
$
692

 
$
730

1.125% Convertible Notes
502

 
1,111

 
496

 
1,052

4.875% Notes
326

 
307

 
325

 
329

Credit Facility
300

 
300

 
300

 
300

1.625% Convertible Notes
63

 
90

 
157

 
220

 
$
1,884

 
$
2,502

 
$
1,970

 
$
2,631


5 . Investments
Available-for-Sale Investments
We consider all of our investments classified as current assets (including restricted investments) to be available-for-sale. Certain of our senior notes, as further discussed in Note 7 , “ Debt ,” contain a limitation on the use of proceeds which required us to deposit the net proceeds from their issuance into a segregated deposit account, a current asset reported as “Restricted investments” in the accompanying consolidated balance sheets. Such proceeds, while restricted as to their use and held in a segregated deposit account, are available-for-sale based upon our contractual liquidity requirements.
The following tables summarize our investments as of the dates indicated:
 
March 31, 2018
 
Amortized
 
Gross
Unrealized
 
Estimated
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In millions)
Corporate debt securities
$
1,627

 
$

 
$
9

 
$
1,618

U.S. treasury notes
330

 

 
1

 
329

GSEs
229

 

 
2

 
227

Municipal securities
133

 

 
2

 
131

Asset backed securities
111

 

 
1

 
110

Certificates of deposit
27

 

 

 
27

Other
2

 

 

 
2

Subtotal - current investments
2,459

 

 
15

 
2,444

Corporate debt securities
66

 

 

 
66

U.S. treasury notes
11

 

 

 
11

Subtotal - current restricted investments
77

 

 

 
77

 
$
2,536

 
$

 
$
15

 
$
2,521


Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 15


 
December 31, 2017
 
Amortized
 
Gross
Unrealized
 
Estimated
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In millions)
Corporate debt securities
$
1,591

 
$
1

 
$
4

 
$
1,588

U.S. treasury notes
389

 

 
1

 
388

GSEs
255

 

 
2

 
253

Municipal securities
142

 

 
1

 
141

Asset-backed securities
117

 

 

 
117

Certificates of deposit
37

 

 

 
37

Subtotal - current investments
2,531

 
1

 
8

 
2,524

Corporate debt securities
101

 

 

 
101

U.S. treasury notes
68

 

 

 
68

Subtotal - current restricted investments
169

 

 

 
169

 
$
2,700

 
$
1

 
$
8

 
$
2,693


The contractual maturities of our available-for-sale investments as of March 31, 2018 are summarized below:
 
Amortized Cost
 
Estimated
Fair Value
 
(In millions)
Due in one year or less
$
1,576

 
$
1,573

Due after one year through five years
959

 
947

Due after five years through ten years
1

 
1

 
$
2,536

 
$
2,521

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, 2018 and 2017 were insignificant.
We have determined that unrealized losses at March 31, 2018 and December 31, 2017 , 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, 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
$
1,276

 
$
7

 
610

 
$
93

 
$
2

 
71

U.S. Treasury notes
364

 
1

 
81

 

 

 

GSEs
179

 
1

 
67

 
95

 
1

 
47

Municipal securities
85

 
1

 
97

 
38

 
1

 
46

Asset backed securities
97

 
1

 
60

 

 

 

 
$
2,001

 
$
11

 
915

 
$
226

 
$
4

 
164


Molina Healthcare, Inc. March 31, 2018 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, 2017 :
 
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
$
1,297

 
$
3

 
561

 
$
94

 
$
1

 
69

U.S. Treasury Notes
470

 
1

 
89

 

 

 

GSEs
173

 
1

 
69

 
95

 
1

 
47

Municipal securities

 

 

 
38

 
1

 
48

 
$
1,940

 
$
5

 
719

 
$
227

 
$
3

 
164

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.
The contractual maturities of our held-to-maturity restricted investments, which are carried at amortized cost, which approximates fair value, as of March 31, 2018 , are summarized below:
 
Amortized
Cost
 
Estimated
Fair Value
 
(In millions)
Due in one year or less
$
117

 
$
117

Due after one year through five years
3

 
3

 
$
120

 
$
120


6 . Medical Claims and Benefits Payable
The following table provides the details of our medical claims and benefits payable (including amounts payable for the provision of long-term services and supports, or LTSS) as of the dates indicated:
 
March 31,
2018
 
December 31,
2017
 
(In millions)
Fee-for-service claims incurred but not paid (IBNP)
$
1,586

 
$
1,717

Pharmacy payable
127

 
112

Capitation payable
62

 
67

Other
248

 
296

 
$
2,023

 
$
2,192

“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 $146 million and $122 million as of March 31, 2018 and December 31, 2017 , 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

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 17


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.
 
Three Months Ended March 31,
 
2018
 
2017
 
(Dollars in millions)
Medical claims and benefits payable, beginning balance
$
2,192

 
$
1,929

Components of medical care costs related to:
 
 
 
Current period
3,963

 
4,253

Prior periods
(241
)
 
(142
)
Total medical care costs
3,722

 
4,111

 
 
 
 
Change in non-risk provider payables
45

 
(96
)
 
 
 
 
Payments for medical care costs related to:
 
 
 
Current period
2,498

 
2,683

Prior periods
1,438

 
1,335

Total paid
3,936

 
4,018

Medical claims and benefits payable, ending balance
$
2,023

 
$
1,926

Benefit from prior period as a percentage of:
 
 
 
Balance at beginning of period
11.0
%
 
7.4
%
Premium revenue, trailing twelve months
1.3
%
 
0.8
%
Medical care costs, trailing twelve months
1.4
%
 
0.9
%
Assuming that our initial estimate of IBNP is accurate, we believe that amounts ultimately paid would generally be between 8% and 10% less than the IBNP liability recorded at the end of the period as a result of the inclusion in that liability of the provision for adverse claims deviation and the accrued cost of settling those claims. Because we establish the provision for adverse claims deviation and the accrued cost of settling claims on a consistent basis every quarter, the lower cost recognized in a subsequent period if such a provision proved unnecessary would be offset by the establishment of a similar provision during that subsequent period.
Because the amount of our initial liability is an estimate (and therefore not perfectly accurate), we will always experience variability in that estimate as new information becomes available with the passage of time. Therefore, there can be no assurance that amounts ultimately paid out will fall within the range of 8% to 10% lower than the liability that was initially recorded. Furthermore, because our initial estimate of IBNP is derived from many factors, some of which are qualitative in nature rather than quantitative, we are seldom able to assign specific values to the reasons for a change in estimate—we only know when the circumstances for any one or more factors are out of the ordinary.
The differences between our original estimates and the amounts ultimately paid out for the most part relate to IBNP. While many related factors working in conjunction with one another serve to determine the accuracy of our estimates, we are seldom able to quantify the impact that any single factor has on a change in estimate. In addition, given the variability inherent in the reserving process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.
We believe that the most significant uncertainties surrounding our IBNP estimates at March 31, 2018 are as follows:
Across all of our health plans, the inventory of unpaid claims increased significantly during the first half of 2017, then decreased in the last half of 2017 and into 2018. Changes in claims inventories impact the timing between date of service and the date of claim payment, increasing the volatility of our liability estimates.
According to The Centers for Disease Control and Prevention, and confirmed by our own claims experience, the influenza season was much more severe this year than last year in several states in which we operate health plans. Although we have established liabilities for additional expected claims related to influenza, our liability estimates are subject to more than the usual amount of uncertainty.

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 18


At our Florida health plan a new clinical service system was implemented in the first quarter of 2018. This system impacted the reporting of inpatient authorizations used in our development of claims liabilities, which makes our liability estimates subject to more than the usual amount of uncertainty.
We recently implemented a new process for increased quality review of claims payments in nine of our health plans. While we do not anticipate this new process will impact the percentage of claims paid within the timely turnaround requirements, we believe it will have a minor impact on the timing of some paid claims. For this reason, our liability estimates in the nine health plans are subject to more than the usual amount of uncertainty.
We recognized favorable prior period claims development in the amount of $241 million for the three months ended March 31, 2018. This amount represents our estimate as of March 31, 2018, of the extent to which our initial estimate of medical claims and benefits payable at December 31, 2017, was more than the amount that will ultimately be paid out in satisfaction of that liability. We believe the overestimation was due primarily to the following factors:
The impact of the provision for adverse claims deviation and the accrued cost of settling claims as discussed above. Because we re-establish the provision for adverse claims deviation and the accrued cost of settling claims on a consistent basis every quarter, the impact of this item on first quarter 2018 results was minimal.
Across all of our health plans, the inventory of unpaid claims increased significantly during the first half of 2017, then decreased in the last half of 2017. In hindsight, the impact of the changes in claims processing timing reduced our liabilities more than we had anticipated.
December 2017 data from The Centers for Disease Control and Prevention indicated widespread influenza activity in several states in which we operate health plans. The additional liabilities established in consideration of increased claims related to a more severe influenza season turned out to be conservative.
In establishing our liability at December 31, 2017, we anticipated an increase in the utilization of medical services by Marketplace members concerned about the future of their healthcare coverage as a result of uncertainties related to high premium increases and issuer exits. This induced demand did not materialize to the degree we expected.

7 . Debt
Substantially all of our debt is held at the parent, which is reported in the Other segment. The following table summarizes our outstanding debt obligations and their classification in the accompanying consolidated balance sheets:
 
March 31,
2018
 
December 31,
2017
 
(In millions)
Current portion of long-term debt:
 
 
 
1.125% Convertible Notes, net of unamortized discount
$
505

 
$
499

1.625% Convertible Notes, net of unamortized discount
63

 
157

Lease financing obligations
1

 
1

Debt issuance costs
(3
)
 
(4
)
 
566

 
653

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

 
700

4.875% Notes
330

 
330

Credit Facility
300

 
300

Debt issuance costs
(12
)
 
(12
)
 
1,318

 
1,318

Lease financing obligations
198

 
198

 
$
2,082

 
$
2,169


Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 19


Interest cost recognized relating to our convertible senior notes for the periods presented was as follows:
 
Three Months Ended March 31,
 
2018
 
2017
 
(In millions)
Contractual interest at coupon rate
$
2

 
$
3

Amortization of the discount
7

 
8

 
$
9

 
$
11

Credit Facility
In January 2017, we entered into an amended unsecured $500 million revolving credit facility (Credit Facility). The Credit Facility has a term of five years and all amounts outstanding will be due and payable on January 31, 2022. As of March 31, 2018 , $300 million was outstanding under the Credit Facility, and outstanding letters of credit amounting to $6 million reduced our remaining borrowing capacity under the Credit Facility to $194 million .
Borrowings under our Credit Facility bear interest based, at our election, on a base rate or an adjusted London Interbank Offered Rate (LIBOR), 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 Facility, we are required to pay a quarterly commitment fee. The Credit Facility contains customary non-financial and financial covenants, including a net leverage ratio and an interest coverage ratio. As of March 31, 2018 , we were in compliance with all financial and non-financial covenants under the Credit Facility and other long-term debt.
Bridge Credit Agreement
In January 2018, we entered into a bridge credit agreement (Bridge Credit Agreement) with several banks. Under the Bridge Credit Agreement, we may borrow up to $550 million to: (i) satisfy conversions of our 1.125% Convertible Notes; (ii) satisfy and/or refinance indebtedness incurred to satisfy conversion of the 1.125% Convertible Notes; (iii) repay or refinance our Credit Facility; and (iv) pay fees and expenses in connection with the foregoing. Subject to the satisfaction of certain conditions, the remaining amount of any borrowing may be used for general corporate purposes.
Borrowings under the Bridge Credit Agreement are reduced by the following:
Any future debt and/or equity transactions including term loans, but excluding any Credit Facility drawing (excluding transactions with proceeds used for working capital purposes and acquisition financings up to $300 million ); and
On August 20, 2018 (the first put date for the 1.625% Convertible Notes), the Bridge Credit Agreement shall permanently be reduced by the greater of $150 million ; and the principal amount of the 1.625% Convertible Notes that are exchanged into equity or otherwise defeased on or prior to that date.
The Bridge Credit Agreement matures on January 1, 2019 and, subject to the satisfaction of certain conditions, we may elect to extend twice the initial maturity date by a period of six months each. The amount available for borrowing under the Bridge Credit Agreement at March 31, 2018, was $550 million .
Borrowings under the Bridge Credit Agreement will bear interest based, at our election, at a base rate or an adjusted LIBOR rate, plus in each case the applicable margin. Our wholly owned subsidiaries that guarantee our obligations under the indenture governing the 4.875% Notes, the 5.375% Notes, and the Credit Facility have jointly and severally guaranteed our obligations under the Bridge Credit Agreement.
The Bridge Credit Agreement contains usual and customary (a) affirmative covenants for credit facilities of this type and substantially similar to those contained in the Credit Facility, (b) negative covenants consistent with those contained in the 4.875% Notes and (c) events of default for credit facilities of this type and substantially similar to those contained in the 4.875% Notes.
4.875% Notes due 2025
We have outstanding $330 million aggregate principal amount of senior notes ( 4.875% Notes) due June 15, 2025, unless earlier redeemed. Interest on the 4.875% Notes is payable semiannually in arrears on June 15 and December 15. Guarantees under the 4.875% Notes mirror those of the Credit Facility. See Note 13 , “ Supplemental Condensed Consolidating Financial Information ,” for more information on the guarantors. The 4.875% Notes contain customary non-financial covenants and change of control provisions.

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 20


The 4.875% Notes contain a limitation on the use of proceeds which required us to deposit the net proceeds from their issuance into a segregated deposit account, a current asset reported as “Restricted investments” in our consolidated balance sheets. These funds may be used by us as follows:
On or prior to August 20, 2018, to:
Redeem, repurchase, repay, tender for, or acquire for value all or any portion of our 1.625% Convertible Notes, defined and discussed further below, or to satisfy the cash portion of any consideration due upon any conversion of the 1.625% Convertible Notes; and/or
Pay any interest due on all or any portion of the 4.875% Notes.
On or after August 20, 2018, to repurchase all or any portion of the 1.625% Convertible Notes that we are obligated to repurchase; and
Subsequent to August 20, 2018 (or such earlier date in the event that there are no longer any 1.625% Convertible Notes outstanding), in any other manner not otherwise prohibited in the indenture governing the 4.875% Notes.
The investments that constitute the segregated funds are current assets reported as “Restricted investments” in the accompanying consolidated balance sheets. As a result of the 1.625% Exchange described below, approximately $94 million of such investments were transferred to unrestricted current investments in the first quarter of 2018. As of March 31, 2018, the balance of current restricted investments was $77 million .
5.375% Notes due 2022
We have outstanding $700 million aggregate principal amount of senior notes ( 5.375% Notes) due November 15, 2022, unless earlier redeemed. Interest on the 5.375% Notes is payable semiannually in arrears on May 15 and November 15. Certain of our wholly owned subsidiaries guarantee our obligations under the 5.375% Notes. Such guarantees mirror those of the Credit Facility. See Note 13 , “ Supplemental Condensed Consolidating Financial Information ,” for more information on the guarantors. The 5.375% Notes contain customary non-financial covenants and change in control provisions.
1.125% Cash Convertible Senior Notes due 2020
We have outstanding $550 million aggregate principal amount of 1.125% cash convertible senior notes due January 15, 2020 (1.125% Convertible Notes), unless earlier repurchased or converted. Interest 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 for the 1.125% Convertible Notes 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 of 1.125% Convertible Notes, 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 stock price trigger for the 1.125% Convertible Notes is $53.00 per share. The 1.125% Convertible Notes met this trigger in the quarter ended March 31, 2018 ; therefore, they are convertible into cash and are reported in current portion of long-term debt as of March 31, 2018 .
The 1.125% Convertible Notes contain an embedded cash conversion option (the 1.125% Conversion Option), which 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 settles or expires. The effective interest rate approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued is approximately 6% . As of March 31, 2018 , the 1.125% Convertible Notes had a remaining amortization period of 1.8 years. The 1.125% Convertible Notes’ if-converted value exceeded their principal amount by approximately $527 million and $406 million as of March 31, 2018 and December 31, 2017 , respectively.
1.625% Convertible Senior Notes due 2044
In March 2018, we entered into separate, privately negotiated, synthetic exchange agreements (1.625% Exchange) with certain holders of our outstanding 1.625% convertible senior notes due 2044 (1.625% Convertible Notes). In this transaction, we exchanged $97 million aggregate principal amount and accrued interest for 1.8 million shares of our common stock. We recorded a loss on debt extinguishment, including transaction fees, of $10 million , for the transaction, primarily relating to the inducement premium paid to the bondholders, which is recorded in “Other

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 21


expenses (income), net” in the accompanying consolidated statements of income. We did not receive any proceeds from the 1.625% Exchange.
Following the 1.625% Exchange, we have outstanding $64 million aggregate principal amount of the 1.625% Convertible Notes. The initial conversion rate for the 1.625% Convertible Notes is 17.2157 shares of our common stock per $1,000 principal amount, or approximately $ 58.09 per share of our common stock. Upon conversion, we will pay cash and, if applicable, deliver shares of our common stock to the converting holder in an amount per $1,000 principal amount of 1.625% Notes equal to the settlement amount (as defined in the related indenture).
The stock price trigger for the 1.625% Convertible Notes is $75.51 per share. The 1.625% Convertible Notes did not meet this stock price trigger in the quarter ended March 31, 2018 . However, on contractually specified dates beginning in August 2018, holders of the 1.625% Convertible Notes may require us to repurchase some or all of such notes. In addition, beginning May 15, 2018 until August 19, 2018, holders may convert some or all of the 1.625% Convertible Notes. Because of these put and conversion features, the 1.625% Convertible Notes are reported in current portion of long-term debt as of March 31, 2018 . As noted above, because the proceeds from the 4.875% Notes are initially restricted to payments upon conversion or redemption of the 1.625% Convertible Notes, such restricted investments are also classified as current in the accompanying consolidated balance sheets.
The expected life of the 1.625% Convertible Notes is approximately four years, beginning on the issuance date and ending on the first date we may redeem the 1.625% Convertible Notes in August 2018. As of March 31, 2018 , the 1.625% Convertible Notes had a remaining amortization period of 0.4 years. The effective interest rate approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued is approximately 5% . The outstanding 1.625% Convertible Notes’ if-converted value exceeded their principal amount at March 31, 2018 and December 31, 2017 by approximately $19 million and $50 million , respectively. At March 31, 2018 and  December 31, 2017 , the equity component of the 1.625% Convertible Notes, including the impact of deferred taxes, was $5 million and $12 million , respectively.
Cross-Default Provisions
The indentures governing the 4.875% Notes, the 5.375% Notes, the 1.125% Convertible Notes and the 1.625% 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.

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,
2018
 
December 31,
2017
 
 
 
(In millions)
Derivative asset:
 
 
 
 
 
1.125% Call Option
Current assets: Derivative asset
 
$
585

 
$
522

Derivative liability:
 
 
 
 
 
1.125% Conversion Option
Current liabilities: Derivative liability
 
$
585

 
$
522

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 expenses (income), 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% 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.

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 22


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, 2018 , 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, 2018 , as described in Note 7 , “ Debt .”

9 . Stockholders' Equity
1.625% Exchange
As described in Note 7 , “ Debt ,” we issued 1.8 million shares of our common stock in connection with the 1.625% Exchange in March 2018.
1.125% Warrants
In connection with the Call Spread Overlay transaction described in Note 8 , “ Derivatives ,” in 2013, we issued 13,490,236 warrants with a strike price of $53.8475 per share. Under certain circumstances, beginning in April 2020, when 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.
Share-Based Compensation
In connection with our equity incentive plans and employee stock purchase plan, approximately 127,000 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, 2018 .
We record share-based compensation as “General and administrative expenses” in the accompanying consolidated statements of income. As of March 31, 2018 , there was $53 million of total unrecognized compensation expense related to unvested restricted stock awards (RSAs), performance stock awards (PSAs), and performance stock units (PSUs), which we expect to recognize over a remaining weighted-average period of 3.2 years , 0.9 years and 2.7 years , respectively. This unrecognized compensation cost assumes an estimated forfeiture rate of 9.7% for non-executive employees as of March 31, 2018 .
Also as of March 31, 2018, there was $13 million of total unrecognized compensation expense related to unvested stock options, which we expect to recognize over a weighted-average period of 2.5 years . No stock options were granted or exercised in the three months ended March 31, 2018.
Activity for RSAs, PSAs and PSUs, for the three months ended March 31, 2018 , is summarized below:
 
Restricted Stock Awards
 
Performance Stock Awards
 
Performance Stock Units
 
Total
 
Weighted
Average
Grant Date
Fair Value
Unvested balance, December 31, 2017
401,804

 
84,762

 
91,828

 
578,394

 
$
58.35

Granted
321,798

 

 
188,455

 
510,253

 
72.46

Vested
(163,043
)
 
(32,929
)
 

 
(195,972
)
 
55.16

Forfeited
(59,931
)
 
(44,384
)
 
(47,650
)
 
(151,965
)
 
62.99

Unvested balance, March 31, 2018
500,628

 
7,449

 
232,633

 
740,710

 
67.96


Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 23


The total fair value of awards granted and vested is presented in the following table:
 
Three Months Ended March 31,
 
2018
 
2017
 
(In millions)
Granted:
 
 
 
Restricted stock awards
$
23

 
$
17

Performance stock units
14

 

 
$
37

 
$
17

Vested:
 
 
 
Restricted stock awards
$
12

 
$
10

Performance stock awards
3

 
6

 
$
15

 
$
16



10 . Restructuring and Separation Costs
Following a management-initiated, broad operational assessment in early 2017, our board of directors approved, and we committed to, a comprehensive restructuring and profitability improvement plan in June 2017 (the 2017 Restructuring Plan). Key activities under this plan to date have included:
Streamlining of our organizational structure to eliminate redundant layers of management, consolidate regional support services, and other staff reductions to improve efficiency and the speed and quality of decision making;
Re-design of core operating processes such as provider payment, utilization management, quality monitoring and improvement, and information technology, to achieve more effective and cost-efficient outcomes;
Remediation of high-cost provider contracts and enhancement of high quality, cost-effective networks;
Restructuring, including selective exits, of direct delivery operations; and
Partnering with the lowest-cost, most effective vendors.
Costs Incurred
In our 2017 Annual Report on Form 10-K, we reported that we had incurred substantially all of the costs associated with the 2017 Restructuring Plan in 2017, amounting to $234 million . In the first quarter of 2018, we incurred an additional $25 million in such costs, primarily as a result of our further evaluation of a utilization and care management project terminated because of its inconsistency with the goals of the 2017 Restructuring Plan. As a result, assets relating to this project were written off. In addition, we recorded nominal amounts for one-time termination benefits, and true-ups of consulting fees and contract termination costs recorded in 2017. We expect to complete all activities under the 2017 Restructuring Plan in 2018, with the exception of the settlement of lease termination liabilities. We expect to continue to settle those liabilities through 2025, unless the leases are terminated sooner.
Restructuring and separation costs are reported by the same name in the accompanying consolidated statements of income. The following tables present the major types of such costs by segment. Current and long-lived assets include current and non-current capitalized project costs, and capitalized software determined to be unrecoverable.

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 24


 
Three Months Ended March 31, 2018
 
One-Time Termination Benefits
 
Other Restructuring Costs
 
Total
 
 
Write-offs of Current and Long-lived Assets
 
Consulting Fees
 
Contract Termination Costs
 
 
(In millions)
Health Plans
$
1

 
$
(1
)
 
$

 
$
(1
)
 
$
(1
)
Other
5

 
20

 
1

 

 
26

 
$
6

 
$
19

 
$
1

 
$
(1
)
 
$
25

No restructuring costs were reported in the first quarter of 2017.
As of March 31, 2018 , we had incurred cumulative restructuring costs under the 2017 Restructuring Plan as follows:
 
Separation Costs - Former Executives
 
One-Time Termination Benefits
 
Other Restructuring Costs
 
Total
 
 
 
Write-offs of Current and Long-lived Assets
 
Consulting Fees
 
Contract Termination Costs
 
 
(In millions)
Health Plans
$

 
$
34

 
$
15

 
$

 
$
23

 
$
72

Molina Medicaid Solutions

 

 
8

 

 

 
8

Other
36

 
39

 
57

 
45

 
2

 
179

 
$
36

 
$
73

 
$
80

 
$
45

 
$
25

 
$
259

Reconciliation of Liability
For those restructuring and separation costs that require cash settlement (primarily separation costs, one-time termination benefits, consulting fees and contract termination costs), the following table presents a roll-forward of the accrued liability, which is reported in “Accounts payable and accrued liabilities” in the accompanying consolidated balance sheets. The adjustments are due to true-ups of consulting fees and contract termination costs recorded in 2017.
 
Separation Costs - Former Executives
 
One-Time Termination Benefits
 
Other Restructuring Costs
 
Total
 
(In millions)
Accrued as of December 31, 2017
$
2

 
$
11

 
$
35

 
$
48

Adjustments

 

 
(1
)
 
(1
)
Charges

 
6

 
2

 
8

Cash payments
(2
)
 
(12
)
 
(9
)
 
(23
)
Accrued as of March 31, 2018
$

 
$
5

 
$
27

 
$
32


11 . Segments
We have three reportable segments. These segments consist of our Health Plans segment, which constitutes the vast majority of our operations; our Molina Medicaid Solutions segment; and our Other segment. Our reportable segments are consistent with how we currently manage the business and view the markets we serve.
Gross 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.
Gross margin for our Health Plans segment is referred to as “Medical margin,” and for our Molina Medicaid Solutions and Other segments, as “Service margin.” Medical margin represents the amount earned by the Health Plans segment after medical care costs are deducted from premium revenue. The medical care ratio represents medical care costs as a percentage of premium revenue, and is one of the key metrics used to assess the performance of the Health Plans segment. Therefore, the underlying medical margin is the most important measure

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 25


of earnings reviewed by the chief operating decision maker. The service margin is equal to service revenue minus cost of service revenue.
The following table presents total revenue by segment. Inter-segment revenue is insignificant for all periods presented.
 
Three Months Ended March 31,
 
2018
 
2017
 
(In millions)
Total revenue:
 
 
 
Health Plans
$
4,509

 
$
4,771

Molina Medicaid Solutions
51

 
46

Other
86

 
87

Consolidated
$
4,646

 
$
4,904

The following table reconciles gross margin by segment to consolidated income before income tax expense:
 
Three Months Ended March 31,
 
2018
 
2017
 
(In millions)
Gross margin:
 
 
 
Health Plans
$
601

 
$
537

Molina Medicaid Solutions
8

 
4

Other
6

 
5

Total gross margin
615

 
546

Add: other operating revenues (1)
189

 
125

Less: other operating expenses (2)
(582
)
 
(589
)
Operating income
222

 
82

Other expenses (income), net
43

 
(49
)
Income before income taxes
$
179

 
$
131

______________________
(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 and separation costs.

12 . Commitments and Contingencies
Regulatory Capital Requirements and Dividend Restrictions
Our health plans, which are operated by our wholly owned subsidiaries in the states in which our health plans operate, are subject to state laws and regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state. Regulators in some states may also attempt to enforce capital requirements that require the retention of net worth in excess of amounts formally required by statute or regulation. Such statutes, regulations and informal capital requirements also restrict the timing, payment, and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent our subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. Based on current statutes and regulations, the net assets in these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans, advances, or cash dividends was approximately $1,777 million at March 31, 2018 , and $1,691 million at December 31, 2017 . Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments (excluding restricted investments) held by the parent company—Molina Healthcare, Inc. Such cash, cash equivalents and investments (excluding restricted investments) amounted to $706 million and $696 million as of March 31, 2018 and December 31, 2017 , respectively.

Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 26


The National Association of Insurance Commissioners (NAIC) adopted rules effective December 31, 1998, which, if implemented by the states, set minimum capitalization requirements for insurance companies, HMOs, and other entities bearing risk for health care coverage. The requirements take the form of risk-based capital (RBC) rules which may vary from state to state. All of the states and Commonwealth in which our health plans operate, except California, Florida and New York, have adopted these rules. Such requirements, if adopted by California, Florida and New York, may increase the minimum capital required for those states.
As of March 31, 2018 , our health plans had aggregate statutory capital and surplus of approximately $1,904 million compared with the required minimum aggregate statutory capital and surplus of approximately $1,181 million . All of our health plans were in compliance with the minimum capital requirements at March 31, 2018 . We have the ability, and have committed to provide, additional capital to each of our health plans as necessary to ensure compliance with statutory capital and surplus requirements.
Legal Proceedings
The health care and Medicaid-related business process outsourcing industries are subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. Penalties associated with violations of these laws and regulations include significant fines, exclusion from participating in publicly funded programs, and the repayment of previously billed and collected revenues.
We are involved in legal actions in the ordinary course of business, 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, and/or development of important factual information and legal issues is insufficient to enable us to estimate a range of possible loss, if any. 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 April 27, 2018, the Steamfitters Local 449 Pension Plan filed a 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 complaint purports to seek recovery on behalf of all persons or entities 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 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. The Company believes it has meritorious defenses to the alleged claims and intends to defend the matter vigorously.
States’ Budgets
Nearly all of our premium revenues come from the joint federal and state funding of the Medicaid and CHIP programs. The states and Commonwealth in which we operate our health plans regularly face significant budgetary pressures.

13 . Supplemental Condensed Consolidating Financial Information
As discussed in Note 7 , “ Debt ,” we have outstanding $700 million aggregate principal amount of 5.375% Notes due November 15, 2022, unless earlier redeemed. The 5.375% Notes were registered in September 2016, and are fully and unconditionally guaranteed by certain of our wholly owned subsidiaries on a joint and several basis, with exceptions considered customary for such guarantees.
For all periods presented, the following condensed consolidating financial statements present Molina Healthcare, Inc. (as “Parent Guarantor”), the subsidiary guarantors (as “Other Guarantors”), the subsidiary non-guarantors (as “Non-Guarantors”) and “Eliminations”, according to the guarantor structure as assessed as of and for the three months ended March 31, 2018 .


Molina Healthcare, Inc. March 31, 2018 Form 10-Q | 27


CONDENSED CONSOLIDATING STATEMENTS OF INCOME
 
Three Months Ended March 31, 2018
 
Parent Guarantor
 
Other Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In millions)
Revenue:
 
 
 
 
 
 
 
 
 
Total revenue
$
333

 
$
52

 
$
4,592

 
$
(331
)
 
$
4,646

Expenses:
 
 
 
 
 
 
 
 
 
Medical care costs
4

 

 
3,718

 

 
3,722

Cost of service revenue

 
43

 
77

 

 
120

General and administrative expenses
267

 
4

 
412