Quarterly Report (10-q)

Date : 08/01/2018 @ 6:16AM
Source : Edgar (US Regulatory)
Stock : Molina Healthcare (MOH)
Quote : 134.15  0.14 (0.10%) @ 4:02PM

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 June 30, 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, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act.
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes   ¨ No   ý
The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of July 27, 2018 , was approximately 61,762,000 .



MOLINA HEALTHCARE, INC. FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED June 30, 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 OPERATIONS
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions, except per-share data)
(Unaudited)
Revenue:
 
 
 
 
 
 
 
Premium revenue
$
4,514

 
$
4,740

 
$
8,837

 
$
9,388

Service revenue
127

 
129

 
261

 
260

Premium tax revenue
106

 
114

 
210

 
225

Health insurer fees reimbursed
104

 

 
165

 

Investment income and other revenue
32

 
16

 
56

 
30

Total revenue
4,883

 
4,999

 
9,529

 
9,903

Operating expenses:
 
 
 
 
 
 
 
Medical care costs
3,850

 
4,491

 
7,572

 
8,602

Cost of service revenue
118

 
124

 
238

 
246

General and administrative expenses
335

 
405

 
687

 
844

Premium tax expenses
106

 
114

 
210

 
225

Health insurer fees
99

 

 
174

 

Depreciation and amortization
25

 
37

 
51

 
76

Impairment losses

 
72

 

 
72

Restructuring and separation costs
8

 
43

 
33

 
43

Total operating expenses
4,541

 
5,286

 
8,965

 
10,108

Operating income (loss)
342

 
(287
)
 
564

 
(205
)
Other expenses (income), net:
 
 
 
 
 
 
 
Interest expense
32

 
27

 
65

 
53

Other expense (income), net
5

 

 
15

 
(75
)
Total other expenses (income), net
37

 
27

 
80

 
(22
)
Income (loss) before income tax expense (benefit)
305

 
(314
)
 
484

 
(183
)
Income tax expense (benefit)
103

 
(84
)
 
175

 
(30
)
Net income (loss)
$
202

 
$
(230
)
 
$
309

 
$
(153
)
 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
3.29

 
$
(4.10
)
 
$
5.10

 
$
(2.74
)
Diluted
$
3.02

 
$
(4.10
)
 
$
4.68

 
$
(2.74
)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Amounts in millions)
(Unaudited)
Net income (loss)
$
202

 
$
(230
)
 
$
309

 
$
(153
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized investment gain (loss)
1

 

 
(6
)
 
1

Less: effect of income taxes
(1
)
 

 
(1
)
 

Other comprehensive income (loss), net of tax
2

 

 
(5
)
 
1

Comprehensive income (loss)
$
204

 
$
(230
)
 
$
304

 
$
(152
)
See accompanying notes.

Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 3


CONSOLIDATED BALANCE SHEETS
 
June 30,
2018
 
December 31,
2017
 
(Amounts in millions,
except per-share data)
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,392

 
$
3,186

Investments
2,176

 
2,524

Restricted investments
80

 
169

Receivables
1,148

 
871

Prepaid expenses and other current assets
344

 
239

Derivative asset
657

 
522

Assets held for sale
230

 

Total current assets
8,027

 
7,511

Property, equipment, and capitalized software, net
276

 
342

Goodwill and intangible assets, net
201

 
255

Restricted investments
117

 
119

Deferred income taxes
114

 
103

Other assets
28

 
141

 
$
8,763

 
$
8,471

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Medical claims and benefits payable
$
1,920

 
$
2,192

Amounts due government agencies
1,746

 
1,542

Accounts payable and accrued liabilities
754

 
366

Deferred revenue
193

 
282

Current portion of long-term debt
484

 
653

Derivative liability
657

 
522

Liabilities held for sale
66

 

Total current liabilities
5,820

 
5,557

Long-term debt
1,019

 
1,318

Lease financing obligations
198

 
198

Other long-term liabilities
68

 
61

Total liabilities
7,105

 
7,134

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.001 par value, 150 shares authorized; outstanding: 62 shares at June 30, 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
1,055

 
1,044

Accumulated other comprehensive loss
(11
)
 
(5
)
Retained earnings
614

 
298

Total stockholders’ equity
1,658

 
1,337

 
$
8,763

 
$
8,471

See accompanying notes.

Molina Healthcare, Inc. June 30, 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

 

 

 

 
309

 
309

Adoption of Topic 606

 

 

 

 
6

 
6

Adoption of ASU 2018-02

 

 

 
(1
)
 
1

 

Partial termination of 1.125% Warrants

 

 
(113
)
 

 

 
(113
)
1.625% Convertible Notes exchange transaction
2

 

 
108

 

 

 
108

Other comprehensive loss, net

 

 

 
(5
)
 

 
(5
)
Share-based compensation

 

 
16

 

 

 
16

Balance at June 30, 2018
62

 
$

 
$
1,055

 
$
(11
)
 
$
614

 
$
1,658


See accompanying notes.

Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 5


CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended June 30,
 
2018
 
2017
 
(Amounts in millions)
(Unaudited)
Operating activities:
 
 
 
Net income (loss)
$
309

 
$
(153
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
73

 
96

Impairment losses

 
72

Deferred income taxes
(6
)
 
(41
)
Share-based compensation
13

 
35

Non-cash restructuring costs
17

 

Amortization of convertible senior notes and lease financing obligations
13

 
16

Loss on debt extinguishment
15

 

Other, net
4

 
7

Changes in operating assets and liabilities:
 
 
 
Receivables
(315
)
 
(32
)
Prepaid expenses and other current assets
(181
)
 
(38
)
Medical claims and benefits payable
(267
)
 
148

Amounts due government agencies
205

 
642

Accounts payable and accrued liabilities
349

 
(18
)
Deferred revenue
(42
)
 
(32
)
Income taxes
127

 
(30
)
Net cash provided by operating activities
314

 
672

Investing activities:
 
 
 
Purchases of investments
(914
)
 
(1,636
)
Proceeds from sales and maturities of investments
1,335

 
874

Purchases of property, equipment and capitalized software
(14
)
 
(60
)
Other, net
(9
)
 
(24
)
Net cash provided by (used in) investing activities
398

 
(846
)
Financing activities:
 
 
 
Repayment of credit facility
(300
)
 

Repayment of 1.125% Convertible Notes
(89
)
 

Cash paid for partial settlement of 1.125% Conversion Option
(134
)
 

Cash received for partial termination of 1.125% Call Option
134

 

Cash paid for partial termination of 1.125% Warrants
(113
)
 

Proceeds from senior notes offerings, net of issuance costs

 
325

Other, net
(1
)
 
8

Net cash (used in) provided by financing activities
(503
)
 
333

Net increase in cash, cash equivalents, and restricted cash and cash equivalents
209

 
159

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
$
3,499

 
$
3,071


Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 6



CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
 
Six Months Ended June 30,
 
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
$
(6
)
 
$
(21
)
 
 
 
 
Details of change in fair value of derivatives, net:
 
 
 
Gain on 1.125% Call Option
$
135

 
$
173

Loss on 1.125% Conversion Option
(135
)
 
(173
)
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. June 30, 2018 Form 10-Q | 7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 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 June 30, 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  five  years. These contracts typically contain renewal options exercisable by the state Medicaid agency, and allow either the state or the health plan to terminate the contract with or without cause. Such contracts are subject to risk of loss in states that issue requests for proposal (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.
Recent Developments – Health Plans Segment
Puerto Rico Health Plan . In July 2018, our Puerto Rico health plan was selected by the Puerto Rico Health Insurance Administration to be one of the organizations to administer the Commonwealth’s new Medicaid Managed Care contract. Services under the new contract, currently expected to begin on November 1, 2018, would cover the entire island. The base contract runs for a period of three years with an optional one year extension. As of June 30, 2018, we served approximately 326,000 Medicaid members in the East and Southwest regions of Puerto Rico, which represented premium revenue of $370 million for the six months ended June 30, 2018 .
Florida Health Plan. In June 2018, our Florida health plan was awarded comprehensive Medicaid Managed Care contracts by the Florida Agency for Health Care Administration (AHCA) in Regions 8 and 11 of the Florida Statewide Medicaid Managed Care Invitation to Negotiate. As of June 30, 2018, we served approximately 96,000 Medicaid members in those regions, which represented premium revenue of approximately $232 million for the six months ended June 30, 2018 . Services under the new contract are expected to begin on January 1, 2019. We will be serving both the Medicaid and long-term care populations in the two regions.
Washington Health Plan. In May 2018, our Washington health plan was selected by the Washington State Health Care Authority (HCA) to enter into a managed care contract for the eight remaining regions of the state’s Apple Health Integrated Managed Care program, in addition to the two regions previously awarded to us. We were selected by HCA for the following regions: Greater Columbia, King, North Sound, Pierce, and Spokane beginning January 1, 2019; and Salish, Thurston-Mason, and Great Rivers beginning January 1, 2020. As of June 30, 2018, we served approximately 742,000 Medicaid members in Washington, which represented premium revenue of $1,083 million for the six months ended June 30, 2018 .
Recent Developments – Molina Medicaid Solutions Segment
In June 2018, we entered into a definitive agreement to sell Molina Medicaid Solutions (MMS) to DXC Technology Company. The divestiture, expected to close in the third quarter of 2018, is subject to the satisfaction of customary

Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 8


closing conditions and the receipt of certain third party consents and regulatory approvals. Refer to Note 11 , “ Segments ,” for further information.
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 six months ended June 30, 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 audited consolidated financial statements for the fiscal year ended December 31, 2017 .

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.
 
Six Months Ended June 30,
 
2018
 
2017
 
(In millions)
Cash and cash equivalents
$
3,392

 
$
2,979

Restricted cash and cash equivalents
98

 
92

Cash and cash equivalents reported in assets held for sale
9

 

Total cash, cash equivalents, and restricted cash and cash equivalents presented in the statements of cash flows
$
3,499

 
$
3,071


Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 9


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 $144 million and $135 million at June 30, 2018 and December 31, 2017 , respectively. Approximately $97 million and $96 million of the liability accrued at June 30, 2018 and December 31, 2017 , respectively, relates to our participation in Medicaid Expansion programs. Refer to Note 12 , “ Commitments and Contingencies ,” for further information regarding the California Medicaid Expansion program.
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 operations.
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 adjustment payment into the pool if their composite risk scores are below the average risk score, and will receive a risk adjustment 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 operations. As of June 30, 2018 , and December 31, 2017, the Marketplace risk adjustment payable amounted to $1,159 million and $912 million , respectively. Refer to Note 12 , “ Commitments and Contingencies ,” for further information regarding recent developments in the Marketplace risk adjustment program.
Minimum MLR: The Affordable Care Act (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 operations.

Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 10


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 June 30, 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 June 30, 2018 .
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in millions)
Maximum available quality incentive premium - current period
$
47

 
$
39

 
$
87

 
$
77

Quality incentive premium revenue recognized in current period:
 
 
 
 
 
 
 
Earned current period
$
34

 
$
29

 
$
58

 
$
48

Earned prior periods
12

 
1

 
23

 
6

Total
$
46

 
$
30

 
$
81

 
54

 
 
 
 
 
 
 
 
Quality incentive premium revenue recognized as a percentage of total premium revenue
1.0
%
 
0.6
%
 
0.9
%
 
0.6
%
Molina Medicaid Solutions segment
MMS 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 June 30, 2018 , the aggregate amount of service revenue relating to unsatisfied performance obligations amounted to approximately $638 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 customer’s acceptance, of the milestone deliverable. However, recognition of 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 all 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.
 
June 30,
2018
 
December 31,
2017
 
(In millions)
Receivables:
 
 
 
Molina Medicaid Solutions
$
34

 
$
30

Other
40

 
44

Deferred contract costs (contract assets) – Molina Medicaid Solutions
109

 
101

Deferred revenue (contract liabilities) – Molina Medicaid Solutions
39

 
49

Medical Care Costs - Marketplace Cost Share Reduction (CSR) Update
During the first half of 2018, we recognized a benefit of approximately $76 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

Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 11


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 as new information is obtained. Such information may affect the assumptions used to estimate the annual effective tax rate, including projected pretax earnings, the mix of pretax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or the reversal of the recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business. We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, along with net operating loss and tax credit carryovers.
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 June 30, 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 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 changes in the balances of cash, cash equivalents, restricted cash and restricted cash equivalents. 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 $92 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 six months ended June 30, 2017 . There was no impact to our consolidated statements of operations, 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 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 and ASU 2018-10, Codification Improvements to Topic 842, Leases . 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,

Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 12


and uncertainty of cash flows pertaining to an entity’s leases. ASU 2016-02 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 right of use 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; we do not currently expect the adoption of this guidance to have a material effect on our consolidated results of operations, financial condition or cash flows.

3 . Net Income (Loss) per Share
The following table sets forth the calculation of basic and diluted net income (loss) per share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions, except net income per share)
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
202

 
$
(230
)
 
$
309

 
$
(153
)
Denominator:
 
 
 
 
 
 
 
Shares outstanding at the beginning of the period
61

 
56

 
59

 
56

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

 

 
2

 

Denominator for basic net income per share
61

 
56

 
61

 
56

Effect of dilutive securities:
 
 
 
 
 
 
 
1.625% Convertible Notes (1)
1

 

 

 

1.125% Warrants (1)
5

 

 
5

 

Denominator for diluted net income per share
67

 
56

 
66

 
56

 
 
 
 
 
 
 
 
Net income (loss) per share: (2)
 
 
 
 
 
 
 
Basic
$
3.29

 
$
(4.10
)
 
$
5.10

 
$
(2.74
)
Diluted
$
3.02

 
$
(4.10
)
 
$
4.68

 
$
(2.74
)
 
 
 
 
 
 
 
 
Potentially dilutive common shares excluded from calculations:
 
 
 
 
 
 
 
1.125% Warrants (1)

 
2

 

 
1

______________________________
(1)
For more information and definitions regarding the 1.625% Exchange and the 1.625% Convertible 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. Certain potentially dilutive common shares issuable are not included in the computation of diluted net income (loss) per share because to do so would be anti-dilutive. For the three and six months ended June 30, 2017, the 1.125% Warrants were not included in diluted shares outstanding because to do so would have been anti-dilutive.
(2)
Source data for calculations in thousands.
4 . Fair Value Measurements
We consider the carrying amounts of cash, cash equivalents and other current assets and current liabilities (not including derivatives, the current portion of long-term debt, and certain accounts reported in assets and liabilities held for sale) 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.

Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 13


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 June 30, 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 operations. 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 six months ended June 30, 2018 .
Our financial instruments measured at fair value on a recurring basis at June 30, 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
$
1,382

 
$

 
$
1,382

 
$

U.S. treasury notes
330

 
330

 

 

Government-sponsored enterprise securities (GSEs)
207

 
207

 

 

Municipal securities
136

 

 
136

 

Asset-backed securities
99

 

 
99

 

Certificate of deposit
19

 

 
19

 

Other
3

 

 
3

 

  Subtotal - current investments
2,176

 
537

 
1,639

 

Corporate debt securities
55

 

 
55

 

U.S. treasury notes
25

 
25

 

 

     Subtotal - current restricted investments
80

 
25

 
55

 

1.125% Call Option derivative asset
657

 

 

 
657

Total assets
$
2,913

 
$
562

 
$
1,694

 
$
657

 
 
 
 
 
 
 
 
1.125% Conversion Option derivative liability
$
657

 
$

 
$

 
$
657

Total liabilities
$
657

 
$

 
$

 
$
657


Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 14


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

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 was classified as a Level 3 financial instrument, because certain inputs used to determine its fair value were not observable. The carrying amount of the amount due under the Credit Facility as of December 31, 2017, approximated its fair value because the Credit Facility’s interest rate is a variable rate that approximates rates currently available to us.
 
June 30, 2018
 
December 31, 2017
 
Carrying
Amount
 

Fair Value
 
Carrying
Amount
 

Fair Value
 
(In millions)
5.375% Notes
$
693

 
$
706

 
$
692

 
$
730

1.125% Convertible Notes (1)
420

 
1,099

 
496

 
1,052

4.875% Notes
326

 
320

 
325

 
329

1.625% Convertible Notes
63

 
107

 
157

 
220

Credit Facility

 

 
300

 
300

 
$
1,502

 
$
2,232

 
$
1,970

 
$
2,631

______________________
(1)
The fair value of the 1.125% Conversion Option (the embedded cash conversion option) amounted to $657 million and $522 million as of June 30, 2018 , and December 31, 2017 , respectively. See further discussion at Note 7 , “ Debt ,” and Note 8 , “ Derivatives .”


5 . Investments
Available-for-Sale Investments
We consider all of our investments classified as current assets (including restricted investments) to be available-for-sale. Our 4.875% 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

Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 15


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:
 
June 30, 2018
 
Amortized
 
Gross
Unrealized
 
Estimated
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
(In millions)
Corporate debt securities
$
1,390

 
$

 
$
8

 
$
1,382

U.S. treasury notes
331

 

 
1

 
330

GSEs
209

 

 
2

 
207

Municipal securities
138

 

 
2

 
136

Asset backed securities
100

 

 
1

 
99

Certificates of deposit
19

 

 

 
19

Other
3

 

 

 
3

Subtotal - current investments
2,190

 

 
14

 
2,176

Corporate debt securities
55

 

 

 
55

U.S. treasury notes
25

 

 

 
25

Subtotal - current restricted investments
80

 

 

 
80

 
$
2,270

 
$

 
$
14

 
$
2,256

 
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 June 30, 2018 are summarized below:
 
Amortized Cost
 
Estimated
Fair Value
 
(In millions)
Due in one year or less
$
1,356

 
$
1,354

Due after one year through five years
914

 
902

 
$
2,270

 
$
2,256

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 and six months ended June 30, 2018 and 2017 were insignificant.
We have determined that unrealized losses at June 30, 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. 

Molina Healthcare, Inc. June 30, 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 June 30, 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
$
959

 
$
7

 
535

 
$
116

 
$
1

 
72

U.S. Treasury notes
224

 
1

 
52

 

 

 

GSEs

 

 

 
113

 
2

 
56

Municipal securities
81

 
1


79


40


1


52

Asset backed securities
90

 
1

 
59

 

 

 

 
$
1,354

 
$
10

 
725

 
$
269

 
$
4

 
180

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.
Our held-to-maturity restricted investments are carried at amortized cost, which approximates fair value. Such investments amounted to $117 million at June 30, 2018 , and mature in one year or less.

6 . Medical Claims and Benefits Payable
The following table provides the details of our medical claims and benefits payable (including amounts payable for the provision of long-term services and supports, or LTSS) as of the dates indicated:
 
June 30,
2018
 
December 31,
2017
 
(In millions)
Fee-for-service claims incurred but not paid (IBNP)
$
1,510

 
$
1,717

Pharmacy payable
116

 
112

Capitation payable
49

 
67

Other
245

 
296

 
$
1,920

 
$
2,192


Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 17


“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 operations. Non-risk provider payables amounted to $158 million and $122 million as of June 30, 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 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.
 
Six Months Ended June 30,
 
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
7,794

 
8,633

Prior periods
(222
)
 
(31
)
Total medical care costs
7,572

 
8,602

 
 
 
 
Change in non-risk provider payables
56

 
(114
)
 
 
 
 
Payments for medical care costs related to:
 
 
 
Current period
6,248

 
6,883

Prior periods
1,652

 
1,457

Total paid
7,900

 
8,340

Medical claims and benefits payable, ending balance
$
1,920

 
$
2,077

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, 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 June 30, 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.
In June 2018, our Puerto Rico health plan implemented state prescribed claim billing requirements to ensure more accurate claims submissions. The billing requirements were more stringent and caused a significant number of claim denials. Although we expect providers to ultimately submit updated claims with

Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 18


the required information, the impact of the new billing requirements create more uncertainty in our liability estimates.
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 $222 million for the six months ended June 30, 2018 . This amount represents our estimate as of June 30, 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 the first half of 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 higher than our actual experience.
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
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:
 
June 30,
2018
 
December 31,
2017
 
(In millions)
Current portion of long-term debt:
 
 
 
1.125% Convertible Notes, net of unamortized discount
$
422

 
$
499

1.625% Convertible Notes, net of unamortized discount
63

 
157

Lease financing obligations
1

 
1

Debt issuance costs
(2
)
 
(4
)
 
484

 
653

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

 
700

4.875% Notes
330

 
330

Credit Facility

 
300

Debt issuance costs
(11
)
 
(12
)
 
1,019

 
1,318

Lease financing obligations
198

 
198

 
$
1,701

 
$
2,169


Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 19


Interest cost recognized relating to our convertible senior notes for the periods presented was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions)
Contractual interest at coupon rate
$
2

 
$
3

 
$
4

 
$
6

Amortization of the discount
6

 
8

 
13

 
16

 
$
8

 
$
11

 
$
17

 
$
22

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. In May 2018, we repaid all outstanding borrowings under the Credit Facility. As of June 30, 2018 , no amounts were outstanding under the Credit Facility, and outstanding letters of credit amounting to $6 million reduced our borrowing capacity under the Credit Facility to $494 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 June 30, 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 June 30, 2018 , was $550 million .
Borrowings under the Bridge Credit Agreement 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 which are 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 which are 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. June 30, 2018 Form 10-Q | 20


The 4.875% Notes contain a limitation on the use of proceeds which required us to deposit a portion of the net proceeds from their issuance into a segregated deposit account. 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 June 30, 2018 , the balance of current restricted investments was $80 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
In June 2018, we entered into two separate, privately negotiated note purchase agreements with certain holders of our outstanding 1.125% cash convertible senior notes due January 15, 2020 (1.125% Convertible Notes). In these transactions, we repaid $96 million aggregate principal amount of the 1.125% Convertible Notes , plus accrued interest, for an aggregate cash payment of $228 million . The $132 million difference between the principal amount extinguished and our cash payment represents primarily the settlement of the fair value of the 1.125% Convertible Notes’ embedded cash conversion option feature (which is a derivative liability we refer to as the 1.125% Conversion Option). In addition, we recorded a loss on debt extinguishment of $5 million , primarily relating to the acceleration of the debt discount, which is recorded in “Other expenses (income), net” in the accompanying consolidated statements of operations. No common shares were issued in connection with these transactions.
Also in June 2018, in connection with the 1.125% Notes purchases, we entered into privately negotiated termination agreements with each of the counterparties to partially terminate the Call Spread Overlay, defined and further discussed in Notes 8 , “ Derivatives ,” and 9 , “ Stockholders' Equity .”
Following the transactions described above, we have outstanding $454 million aggregate principal amount of 1.125% Convertible Notes. 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 June 30, 2018 ; therefore, they are convertible into cash and are reported in current portion of long-term debt as of June 30, 2018 .
The 1.125% Conversion Option was separated from the 1.125% Convertible Notes and accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of operations 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 June 30,

Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 21


2018 , the 1.125% Convertible Notes had a remaining amortization period of 1.5 years. The 1.125% Convertible Notes’ if-converted value exceeded their principal amount by approximately $503 million and $406 million as of June 30, 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 expenses (income), net” in the accompanying consolidated statements of operations. We did not receive any proceeds from the 1.625% Exchange.
On July 11, 2018, we announced notice of our election to redeem the remaining $64 million aggregate principal amount of the 1.625% Convertible Notes on August 20, 2018 (the Redemption Date). Pursuant to the terms of the indenture, the 1.625% Convertible Notes will be redeemed for cash equal to 100% of the principal amount plus accrued and unpaid interest to, but excluding the Redemption Date (the Redemption Price).
Also pursuant to the indenture, the 1.625% Convertible Notes may be converted until August 17, 2018, at a conversion rate of 17.2157 s hares 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 for the principal and, if applicable, deliver shares of our common stock to the converting holders in an amount per $1,000 principal amount equal to the settlement amount (as defined in the related indenture). After August 17, 2018, holders will be entitled only to the Redemption Price.
Because the 1.625% Convertible Notes are convertible within 12 months, they are reported in current portion of long-term debt as of June 30, 2018 .
From the issuance date in 2014, the expected life of the 1.625% Convertible Notes has been approximately four years, ending on the first date we may redeem the 1.625% Convertible Notes in August 2018. As of June 30, 2018 , the 1.625% Convertible Notes had a remaining amortization period of 0.1 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 June 30, 2018 and December 31, 2017 by approximately $39 million and $50 million , respectively. At June 30, 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
 
June 30,
2018
 
December 31,
2017
 
 
 
(In millions)
Derivative asset:
 
 
 
 
 
1.125% Call Option
Current assets: Derivative asset
 
$
657

 
$
522

Derivative liability:
 
 
 
 
 
1.125% Conversion Option
Current liabilities: Derivative liability
 
$
657

 
$
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 operations, 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.”

Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 22


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.
In June 2018, in connection with the 1.125% Convertible Notes purchases (described in Note 7 , “ Debt ”), we entered into privately negotiated termination agreements with each of the Counterparties to partially terminate the Call Spread Overlay, in notional amounts corresponding to the aggregate principal amount of the 1.125% Convertible Notes purchased. This resulted in our receipt of $134 million for the settlement of the 1.125% Call Option (which is a derivative asset), and the payment of $113 million for the partial termination of the 1.125% Warrants, for an aggregate net cash receipt of $21 million from the Counterparties.
1.125% Call Option. The 1.125% Call Option, which is indexed to our common stock, is a derivative asset that requires mark-to-market accounting treatment due to cash settlement features until the 1.125% Call Option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Call Option, refer to Note 4 , “ Fair Value Measurements .”
1.125% Conversion Option. The embedded cash conversion option within the 1.125% Convertible Notes is accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of operations 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 June 30, 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 June 30, 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 13.5 million warrants with a strike price of $53.8475 per share. Under certain circumstances, beginning in April 2020, if the price of our common stock exceeds the strike price of the 1.125% Warrants, we will be obligated to issue shares of our common stock subject to a share delivery cap. The 1.125% Warrants could separately have a dilutive effect to the extent that the market value per share of our common stock exceeds the applicable strike price of the 1.125% Warrants. Refer to Note 3 , “ Net Income (Loss) per Share ,” for dilution information for the periods presented. We will not receive any additional proceeds if the 1.125% Warrants are exercised.
As described in Note 8 , “ Derivatives ,” in June 2018, we entered into privately negotiated termination agreements with each of the Counterparties to partially terminate the Call Spread Overlay, in notional amounts corresponding to the aggregate principal amount of the 1.125% Convertible Notes purchased. We paid $113 million to the Counterparties for the termination of 2.4 million of the 1.125% Warrants outstanding, which resulted in a reduction of additional paid-in capital for the same amount. Following this transaction, 11.1 million of the 1.125% Warrants remain outstanding.
Share-Based Compensation
In connection with our equity incentive plans and employee stock purchase plan, approximately 276,000 shares of common stock vested or were purchased, net of shares used to settle employees’ income tax obligations, during the six months ended June 30, 2018 .
We record share-based compensation as “General and administrative expenses” in the accompanying consolidated statements of operations. As of June 30, 2018 , there was $46 million of total unrecognized compensation expense

Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 23


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 3.1 years , 0.7 years and 2.6 years , respectively. This unrecognized compensation cost assumes an estimated forfeiture rate of 10.8% for non-executive employees as of June 30, 2018 .
Also as of June 30, 2018 , there was $12 million of total unrecognized compensation expense related to unvested stock options, which we expect to recognize over a weighted-average period of 2.3 years . No stock options were granted or exercised in the six months ended June 30, 2018 .
Activity for RSAs, PSAs and PSUs, for the six months ended June 30, 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
346,491

 

 
211,969

 
558,460

 
73.43

Vested
(183,595
)
 
(32,929
)
 

 
(216,524
)
 
57.04

Forfeited
(124,690
)
 
(48,701
)
 
(101,320
)
 
(274,711
)
 
63.38

Unvested balance, June 30, 2018
440,010

 
3,132

 
202,477

 
645,619

 
69.69

The aggregate fair values of RSAs, PSAs and PSUs granted and vested are presented in the following table:
 
Six Months Ended June 30,
 
2018
 
2017
 
(In millions)
Granted:
 
 
 
Restricted stock awards
$
25

 
$
19

Performance stock units
16

 
16

 
$
41

 
$
35

Vested:
 
 
 
Restricted stock awards
$
14

 
$
20

Performance stock awards
3

 
15

Performance stock units

 
9

 
$
17

 
$
44



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 half of 2018, we incurred an

Molina Healthcare, Inc. June 30, 2018 Form 10-Q | 24


additional $33 million in such costs, primarily as a result of our further evaluation and write-off of a utilization and care management project terminated because of its inconsistency with the goals of the 2017 Restructuring Plan. We also recorded nominal amounts for one-time termination benefits, true-ups of certain lease contract termination costs, and consulting fees recorded in 2017. As of June 30, 2018 , we had incurred $267 million in total costs under the 2017 Restructuring Plan; we expect to complete all activities under the 2017 Restructuring Plan in 2018, with the exception of the cash 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 operations. 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.
 
Three Months Ended June 30, 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
)
 
$

 
$

 
$
9

 
$
8

 
$
(1
)
 
$

 
$

 
$
9

 
$
8