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Molina Healthcare (MOH) Incurs Loss in Q2, Revenues Beat

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Molina Healthcare Inc. (MOH - Free Report) reported second-quarter 2017 net loss of $4.10 per share against the Zacks Consensus Estimate of earnings of 68 cents. The bottom line also compared unfavorably with earnings of 58 cents in the year-ago quarter.

Operational Update

In the second quarter, total revenue of $5 billion beat the Zacks Consensus Estimate by 3.4%. The top line has also grew 15% year over year, primarily due to an increase in premium revenues and investment income.

For the quarter, total operating expenses rose 24% year over year to $5.3 billion. This was due to higher medical care costs, increased cost of service revenues, rise in general and administrative expenses, higher premium tax expenses as well as depreciation and amortization costs and impairment losses.

For the quarter, medical care cost increased 25% year over year to $4.5 billion due to out-of-period claims development, particularly at the Florida, Illinois, New Mexico and Puerto Rico health plans.

Continuously rising debt burden resulted in Molina Healthcare’s interest expenses increasing 8% year over year to $27 million.

Molina Healthcare Inc Price, Consensus and EPS Surprise

Financial Update

As of Jun 30, 2017, Molina Healthcare’s cash and cash equivalents increased 6% from year-end 2016 to $3 billion.

Total assets grew 15% from the end of 2016 to $8.6 billion.

The company’s shareholder equity declined 7.8% from year-end 2016 to $1.5 billion.

Net cash used in operating activities totaled $47 million in the second quarter, down from $139 million used in the year-ago quarter.

Restructuring and Profit Improvement Plan

Due to the Molina Healthcare’s poor operating performance, it intends to implement a comprehensive restructuring and profitability improvement plan. Under the plan the company would streamline its organizational structure to improve efficiency as well as the speed and quality of decision-making.

The company would re-design core operating processes, remediate high cost provider contracts and build high quality, cost-effective networks. Molina Healthcare will also restructure its existing direct delivery operations and review its vendor base.

The company expects the Restructuring Plan to reduce annualized run-rate expenses by approximately $300 million to $400 million upon its completion in late 2018. Molina Healthcare also estimates that total pre-tax costs associated with the Restructuring Plan will be approximately $130–$150 million for the second half of 2017, with an additional $40 million to be incurred in 2018.

Molina Healthcare expects a reduction of $200 million to annualized run-rate expenses resulting from staff reductions expected to be achieved by the end of 2017 and in time for full realization in 2018.

Direct delivery operations will be restructured during the second half of 2017 and Marketplace participation will be terminated in Utah and Wisconsin in 2018.

2017 Guidance

At the end of first-quarter 2017, the company projected earnings per diluted share and adjusted earnings per diluted share to be $2.53 and $2.90, respectively for 2017.

However, at the end the second quarter, the company withdrew its 2017 earnings guidance owing to uncertain medical cost trends in the Florida, Illinois, New Mexico, and Puerto Rico health plans, uncertainty around the funding of Marketplace cost sharing subsidies and potential variability in the timing of benefits achieved and costs incurred as a result of the Restructuring Plan.

Our Take

Despite its numerous restructuring initiatives, Molina Healthcare's disappointing second-quarter results along with several headwinds faced by the company make us skeptical of its ability to return to profit any time soon. The company’s internal road blocks along with continued regulatory uncertainty in the health insurance industry will make the operating conditions difficult in days ahead.

Zacks Rank

Molina Healthcare currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Insurers

Among the other firms in the medical sector that have reported second-quarter earnings so far, the bottom lines of Anthem Inc. (ANTM - Free Report) , Humana Inc. (HUM - Free Report) and UnitedHealth Group Inc. (UNH - Free Report) beat their respective Zacks Consensus Estimate.

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