UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-31719

 

Molina Healthcare, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		13-4204626 (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 þ No o

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the issuer’s Common Stock outstanding as of October 21, 2011, was approximately 45,696,400.

 

 

MOLINA HEALTHCARE, INC.

Index

Part I — Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010			1
Consolidated Statements of Income for the three month and nine month periods ended September 30, 2011 and 2010 (unaudited)			2
Consolidated Statements of Comprehensive Income for the three month and nine month periods ended September 30, 2011 and 2010 (unaudited)			3
Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2011 and 2010 (unaudited)			4
Notes to Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			49
Item 4. Controls and Procedures			49
Part II — Other Information
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 6. Exhibits			52
Signatures			53
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1.		Financial Statements.

MOLINA HEALTHCARE, INC.

CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2011				2010
		(Amounts in thousands,
		except per-share data)
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	487,492			$	455,886
Investments			324,902				295,375
Receivables			180,039				168,190
Income tax refundable			5,781				—
Deferred income taxes			14,096				15,716
Prepaid expenses and other current assets			22,285				22,772
Total current assets			1,034,595				957,939
Property and equipment, net			127,657				100,537
Deferred contract costs			52,839				28,444
Intangible assets, net			84,495				105,500
Goodwill and indefinite-lived intangible assets			212,484				212,228
Auction rate securities			18,112				20,449
Restricted investments			50,494				42,100
Receivable for ceded life and annuity contracts			23,696				24,649
Other assets			13,932				17,368
		$	1,618,304			$	1,509,214
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable		$	361,055			$	354,356
Accounts payable and accrued liabilities			141,688				137,930
Deferred revenue			101,701				60,086
Income taxes payable			—				13,176
Total current liabilities			604,444				565,548
Long-term debt			168,109				164,014
Deferred income taxes			22,948				16,235
Liability for ceded life and annuity contracts			23,696				24,649
Other long-term liabilities			17,287				19,711
Total liabilities			836,484				790,157
Stockholders’ equity (1):
Common stock, $0.001 par value; 80,000 shares authorized; outstanding: 45,690 shares at September 30, 2011 and 45,463 shares at December 31, 2010			46				45
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding			—				—
Additional paid-in capital			260,166				251,612
Accumulated other comprehensive loss			(1,762	)			(2,192	)
Retained earnings			523,370				469,592
Total stockholders’ equity			781,820				719,057
		$	1,618,304			$	1,509,214

See accompanying notes.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF INCOME

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(Amounts in thousands, except
		net income per share)
		(Unaudited)
Revenue:
Premium revenue		$	1,138,230			$	1,005,115			$	3,348,438			$	2,947,020
Service revenue			37,728				32,271				111,290				53,325
Investment income			764				1,760				3,804				4,880
Total revenue			1,176,722				1,039,146				3,463,532				3,005,225
Expenses:
Medical care costs			959,158				845,937				2,822,049				2,508,366
Cost of service revenue			34,584				27,605				105,020				41,859
General and administrative expenses			99,610				88,660				290,967				245,619
Premium tax expenses			36,374				35,037				110,633				104,578
Depreciation and amortization			13,430				11,954				38,587				33,234
Total expenses			1,143,156				1,009,193				3,367,256				2,933,656
Operating income			33,566				29,953				96,276				71,569
Interest expense			4,380				4,600				11,666				12,056
Income before income taxes			29,186				25,353				84,610				59,513
Provision for income taxes			10,236				9,180				30,832				22,171
Net income		$	18,950			$	16,173			$	53,778			$	37,342
Net income per share (1):
Basic		$	0.41			$	0.38			$	1.18			$	0.94
Diluted		$	0.41			$	0.38			$	1.16			$	0.93
Weighted average shares outstanding (1):
Basic			45,834				42,177				45,693				39,767
Diluted			46,296				42,546				46,334				40,203

See accompanying notes.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(Amounts in thousands)
		(Unaudited)
Net income		$	18,950			$	16,173			$	53,778			$	37,342
Other comprehensive income, net of tax:
Unrealized (loss) gain on investments			(165	)			(68	)			430				(295	)
Other comprehensive (loss) income			(165	)			(68	)			430				(295	)
Comprehensive income		$	18,785			$	16,105			$	54,208			$	37,047

See accompanying notes.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended
		September 30,
		2011				2010
		(Amounts in thousands)
		(Unaudited)
Operating activities:
Net income		$	53,778			$	37,342
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			52,414				40,485
Deferred income taxes			8,069				4,463
Stock-based compensation			12,723				7,268
Non-cash interest on convertible senior notes			4,095				3,800
Amortization of premium/discount on investments			5,300				1,023
Amortization of deferred financing costs			2,451				1,278
Unrealized gain on trading securities			—				(4,170	)
Loss on rights agreement			—				3,807
Tax deficiency from employee stock compensation			(647	)			(676	)
Changes in operating assets and liabilities:
Receivables			(11,789	)			(64,896	)
Prepaid expenses and other current assets			(1,819	)			(7,707	)
Medical claims and benefits payable			6,699				33,347
Accounts payable and accrued liabilities			246				15,131
Deferred revenue			42,600				(64,337	)
Income taxes			(18,957	)			3,327
Net cash provided by operating activities			155,163				9,485
Investing activities:
Purchases of equipment			(45,921	)			(31,918	)
Purchases of investments			(258,209	)			(162,620	)
Sales and maturities of investments			226,413				184,170
Net cash paid in business combinations			(3,253	)			(127,231	)
Increase in deferred contract costs			(32,765	)			(20,616	)
Increase in restricted investments			(8,394	)			(8,513	)
Change in other noncurrent assets and liabilities			(533	)			2,340
Net cash used in investing activities			(122,662	)			(164,388	)
Financing activities:
Amount borrowed under credit facility			—				105,000
Proceeds from common stock offering, net of issuance costs			—				111,246
Repayment of amount borrowed under credit facility			—				(105,000	)
Treasury stock purchases			(7,000	)			—
Credit facility fees paid			(1,125	)			(1,671	)
Proceeds from employee stock plans			5,640				1,862
Excess tax benefits from employee stock compensation			1,590				420
Net cash (used in) provided by financing activities			(895	)			111,857
Net increase (decrease) in cash and cash equivalents			31,606				(43,046	)
Cash and cash equivalents at beginning of period			455,886				469,501
Cash and cash equivalents at end of period		$	487,492			$	426,455

See accompanying notes.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (continued)

		Nine Months Ended
		September 30,
		2011				2010
		(Amounts in thousands)
		(Unaudited)
Supplemental cash flow information:
Cash paid during the period for:
Income taxes		$	43,550			$	12,129
Interest		$	5,026			$	7,175
Schedule of non-cash investing and financing activities:
Common stock used for stock-based compensation		$	3,751			$	2,173
Details of business combinations:
Increase in fair value of assets acquired		$	(256	)		$	(161,862	)
(Decrease) increase in fair value of liabilities assumed			(1,045	)			25,880
(Decrease) increase in payable to seller			(1,952	)			8,751
Net cash paid in business combinations		$	(3,253	)		$	(127,231	)

See accompanying notes.

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2011

1. Basis of Presentation

Organization and Operations

Molina Healthcare, Inc. provides quality and cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals and to assist state agencies in their administration of the Medicaid program.

Our Health Plans segment comprises health plans in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin. As of September 30, 2011, these health plans served approximately 1.7 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO.

Our Molina Medicaid Solutions segment, which we acquired during the second quarter of 2010, provides business processing and information technology development and administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, and West Virginia, and drug rebate administration services in Florida.

On June 9, 2011, Molina Medicaid Solutions received notice from the state of Louisiana that the state intends to award our contract for a replacement Medicaid Management Information System, or MMIS, to another firm. Our revenue under the Louisiana MMIS contract from May 1, 2010, the date we acquired Molina Medicaid Solutions, through December 31, 2010, was approximately $32 million. For the nine months ended September 30, 2011, our revenue under the Louisiana MMIS contract was approximately $36 million. Until the replacement MMIS is designed, developed, and implemented, we will continue to perform under the existing MMIS contract, a period which we expect to last at least two years.

Consolidation and Interim Financial Information

The consolidated financial statements include the accounts of Molina Healthcare, Inc. and all majority owned subsidiaries. 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 in consolidation. The consolidated results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2011. Financial information related to subsidiaries acquired during any year is included only for periods subsequent to their acquisition.

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, 2010. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in the December 31, 2010 audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our December 31, 2010 audited financial statements.

Adjustments and Reclassifications

We have adjusted all applicable share and per-share amounts to reflect the retroactive effects of the three-for-two stock split in the form of a stock dividend that was effective May 20, 2011.

We have reclassified certain amounts in the 2010 consolidated statement of cash flows to conform to the 2011 presentation.

2. Significant Accounting Policies

Recognition of Service Revenue and Cost of Service Revenue — Molina Medicaid Solutions Segment

The payments received by our Molina Medicaid Solutions segment under its state contracts are based on the performance of three elements of service. The first of these is the design, development and implementation, or DDI, of a Medicaid Management Information System, or MMIS. The second element, following completion of the DDI element, is the operation of the MMIS under a business process outsourcing, or BPO, arrangement. While providing BPO services, we also provide the state with the third contracted element — training and IT support and hosting services (training and support).

Because they include these three elements of service, our Molina Medicaid Solutions contracts are multiple-element arrangements. The following discussion applies to our contracts with multiple elements entered into prior to January 1, 2011, before our prospective adoption of Accounting Standards Update, or ASU, No. 2009-13, Revenue Recognition (Accounting Standards Codification, or ASC, Topic 605) — Multiple-Deliverable Revenue Arrangements.

For those contracts entered into prior to January 1, 2011, we have no vendor specific objective evidence, or VSOE, of fair value for any of the individual elements in these contracts, and at no point in the contract will we have VSOE for the undelivered elements in the contract. We lack VSOE of the fair value of the individual elements of our Molina Medicaid Solutions contracts for the following reasons:

•

Each contract calls for the provision of its own specific set of products and services, which vary significantly between contracts; and

•

The nature of the MMIS installed varies significantly between our older contracts (proprietary mainframe systems) and our newer contracts (commercial off-the-shelf technology solutions).

The absence of VSOE within the context of a multiple element arrangement prior to January 1, 2011 requires us to delay recognition of any revenue for an MMIS contract until completion of the DDI phase of the contract. As a general principle, revenue recognition will therefore commence at the completion of the DDI phase, and all revenue will be recognized over the period that BPO services and training and support services are provided. Consistent with the deferral of revenue, recognition of all direct costs (such as direct labor, hardware, and software) associated with the DDI phase of our contracts is deferred until the commencement of revenue recognition. Deferred costs are recognized on a straight-line basis over the period of revenue recognition.

Provisions specific to each contract may, however, lead us to modify this general principle. In those circumstances, the right of the state to refuse acceptance of services, as well as the related obligation to compensate us, may require us to delay recognition of all or part of our revenue until that contingency (the right of the state to refuse acceptance) has been removed. In those circumstances we defer recognition of any revenue at risk (whether DDI, BPO services, or training and support services) until the contingency has been removed. When we defer revenue recognition we also defer recognition of incremental direct costs (such as direct labor, hardware, and software) associated with the revenue deferred. Such deferred contract costs are recognized on a straight-line basis over the period of revenue recognition.

However, direct costs in excess of the estimated future net revenues associated with a contract may not be deferred. In circumstances where estimated direct costs over the life of a contract exceed estimated future net revenues of that contract, the excess of direct costs over revenue is expensed as a period cost.

In Idaho, revenue recognition is expected to begin during the second half of 2012. Consistent with the deferral of revenue, we have deferred recognition of a portion of the direct contract costs associated with that revenue. Deferred contract costs, if any, deferred through the date revenue recognition begins will be recognized simultaneously with revenue. As noted above, direct costs in excess of the estimated future net revenues associated with a contract may not be deferred. For the three and nine months ended September 30, 2011, we recorded $2.5 million and $9.5 million, respectively, of direct contract costs associated with our Idaho contract. We were not able to defer these direct contract costs because estimated future net revenues as of each measurement date did not exceed estimated future direct costs of the contract. We currently expect the Idaho contract to perform financially at a break even basis through its initial term. So long as we continue to defer revenue recognition under the contract, we will also continue to defer direct costs associated with the agreement. If our break-even assumptions were to change, we may not be able to continue to defer direct contract costs.

We began to recognize revenue and the related deferred costs associated with our Maine contract in September 2010.

Molina Medicaid Solutions’ deferred revenue was $53.1 million at September 30, 2011, and $10.9 million at December 31, 2010, and unamortized deferred contract costs were $52.8 million at September 30, 2011, and $28.4 million at December 31, 2010.

For all new or materially modified revenue arrangements with multiple elements entered into on or after January 1, 2011, we apply the guidance contained in ASU No. 2009-13. For these arrangements, we allocate total arrangement consideration to the elements of the arrangement, which are expected to be DDI, BPO, and training and support services, because this is consistent with the current elements included in our Molina Medicaid Solutions contracts. The arrangement allocation is performed using the relative selling-price method. When determining the selling price of each element, VSOE should first be used, if available. Since VSOE is unavailable under our contracts, we will attempt to use third-party evidence, or TPE, of vendors selling similar services to similarly situated customers on a standalone basis, if available. If TPE is not available, we use our best estimate of the selling price for each element.

We then evaluate whether, at each stage in the life cycle of the contract, we are able to recognize revenue associated with that element. To the extent that our revenue arrangements have provisions that allow our state customers to refuse acceptance of services performed, we are still required to defer revenue recognition until such state customers accept our performance. Once this acceptance is achieved, we immediately recognize the revenue associated with any delivered elements, which differs from our current practice for arrangements entered into prior to January 1, 2011, where the revenue associated with delivered elements is recognized over the final service element of the arrangement because VSOE for the other elements does not exist. As such, we expect that the adoption of ASU No. 2009-13 will result in an overall acceleration of revenue recognition with respect to any multiple-element arrangements entered into on or after January 1, 2011. We have entered into no new or materially modified revenue arrangements with multiple elements since January 1, 2011.

Premium Deficiency Reserve

We assess the profitability of each contract by state for providing medical care services to our members and identify any contracts where current operating results or forecasts indicate probable future losses. Anticipated future premiums are compared to anticipated medical care costs, including the cost of processing claims. If the anticipated future costs exceed the premiums, a loss contract accrual is recognized. In the first quarter of 2011, our Wisconsin health plan recorded a premium deficiency reserve in the amount of $3.35 million to medical claims and benefits payable. As of September 30, 2011, the reserve balance was zero.

Income Taxes

The provision for income taxes is determined using an estimated annual effective tax rate, which is generally greater than the U.S. federal statutory rate primarily because of state taxes. 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 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 derecognition 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 total amount of unrecognized tax benefits was $10.9 million, and $11.0 million as of September 30, 2011 and December 31, 2010, respectively. Approximately $8.4 million of the unrecognized tax benefits recorded at September 30, 2011, relate to a tax position claimed on a state refund claim that will not result in a cash payment for income taxes if our claim is denied. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $7.6 million as of September 30, 2011. We expect that during the next 12 months it is reasonably possible that unrecognized tax benefit liabilities may decrease by as much as $8.8 million due to the expiration of statute of limitations and the resolution to the state refund claim described above.

Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2011, and December 31, 2010, we had accrued $61,000 and $82,000, respectively, for the payment of interest and penalties.

Recent Accounting Pronouncements

Revenue Recognition. In late 2009, the Financial Accounting Standards Board, or FASB, issued the following accounting guidance relating to revenue recognition. Effective for interim and annual reporting beginning on or after December 15, 2010, we adopted this guidance in full effective January 1, 2011.

•

ASU No. 2009-13, Revenue Recognition (ASC Topic 605) — Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies previous requirements by requiring the use of the “best estimate of selling price” in the absence of vendor-specific objective evidence (“VSOE”) or verifiable objective evidence (“VOE”) (now referred to as “TPE” or third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when more objective evidence of the selling price cannot be determined. By providing an alternative for determining the selling price of deliverables, this guidance allows companies to allocate arrangement consideration in multiple deliverable arrangements in a manner that better reflects the transaction’s economics. In addition, the residual method of allocating arrangement consideration is no longer permitted under this new guidance. We have adopted this guidance effective January 1, 2011, and will apply it on a prospective basis for all new or materially modified revenue arrangements with multiple deliverables entered into on or after January 1, 2011. Because we did not enter into any new or materially modified agreements with multiple elements and fixed payments in the nine months ended September 30, 2011 that would have been impacted by this guidance, the adoption did not have a material impact on the timing or pattern of revenue recognition.

For the year ended December 31, 2010, there would have been no change in revenue recognized relating to multiple-element arrangements if we had adopted this guidance retrospectively for contracts entered into prior to January 1, 2011.

Goodwill Impairment Testing. The FASB issued the following guidance which modifies goodwill impairment testing.

•

ASU No. 2011-08, Intangibles—Goodwill and Other (ASC Topic 350) — Testing Goodwill for Impairment, a consensus of the FASB Emerging Issues Task Force. This guidance allows an entity the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under that option, an entity would no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. We do not expect the adoption of this guidance to impact our consolidated financial position, results of operations or cash flows. This guidance is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011.

•

ASU No. 2010-28, Intangibles—Goodwill and Other (ASC Topic 350) — When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, a consensus of the FASB Emerging Issues Task Force. This guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The adoption of this guidance did not impact our consolidated financial position, results of operations or cash flows. Effective for interim and annual reporting beginning on or after December 15, 2010, we adopted this guidance in full effective January 1, 2011.

Presentation of Financial Statements. In June 2011, the FASB and International Accounting Standards Board, or IASB, issued the following guidance which modifies how other comprehensive income, or OCI, is reported under U.S. Generally Accepted Accounting Principles, or GAAP, and International Financial Reporting Standards, or IFRS. This guidance is effective for interim and annual reporting beginning on or after December 15, 2011.

•

ASU No. 2011-05, Comprehensive Income (ASC Topic 220) — Presentation of Comprehensive Income, a consensus of the FASB Emerging Issues Task Force. This guidance eliminates the option to present components of OCI as part of the statement of changes to stockholders’ equity. All filers are required to present all non-owner changes in stockholders’ equity in a single statement of comprehensive income or in two separate but consecutive statements. We do not expect the adoption of this guidance to impact our consolidated financial position, results of operations or cash flows.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, or AICPA, and the Securities and Exchange Commission, or SEC, did not have, or are not believed by management to have, a material impact on our present or future consolidated financial statements.

3. Earnings per Share

The denominators for the computation of basic and diluted earnings per share were calculated as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(In thousands)
Shares outstanding at the beginning of the period			46,062				38,717				45,463				38,410
Weighted-average number of shares repurchased			(235	)			—				(160	)			—
Weighted-average number of shares issued			7				3,460				390				1,357
Denominator for basic earnings per share			45,834				42,177				45,693				39,767
Dilutive effect of employee stock options and stock grants (1)			462				369				641				436
Denominator for diluted earnings per share (2)			46,296				42,546				46,334				40,203

4. Share-Based Compensation

At September 30, 2011, we had employee equity incentives outstanding under three plans: (1) the 2011 Equity Incentive Plan; (2) the 2002 Equity Incentive Plan; and (3) the 2000 Omnibus Stock and Incentive Plan (from which equity incentives are no longer awarded). On March 1, 2011, our chief executive officer, chief financial officer, and chief operating officer were awarded 150,000 shares, 112,500 shares, and 27,000 shares, respectively, of restricted stock with performance and service conditions. Each of the grants shall vest on March 1, 2012, provided that: (i) the Company’s total operating revenue for 2011 is equal to or greater than $3.7 billion, and (ii) the respective officer continues to be employed by the Company as of March 1, 2012. In the event both vesting conditions are not achieved, the equity compensation awards shall lapse. As of September 30, 2011, we expect these awards to vest in full.

Charged to general and administrative expenses, total stock-based compensation expense was as follows for the three month and nine month periods ended September 30, 2011 and 2010:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(In thousands)
Restricted stock awards		$	4,004			$	2,367			$	11,742			$	6,113
Stock options (including shares issued under our employee stock purchase plan)			345				393				981				1,155
Total stock-based compensation expense		$	4,349			$	2,760			$	12,723			$	7,268

As of September 30, 2011, there was $17.7 million of total unrecognized compensation expense related to unvested restricted stock awards, which we expect to recognize over a remaining weighted-average period of two years. As of September 30, 2011, there was no remaining unrecognized compensation expense related to unvested stock options.

Unvested restricted stock and restricted stock activity for the nine months ended September 30, 2011 is summarized below:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Unvested balance as of December 31, 2010			1,253,624			$	15.55
Granted			759,300				23.52
Vested			(483,735	)			17.39
Forfeited			(69,531	)			15.44
Unvested balance as of September 30, 2011			1,459,658				19.09

The total fair value of restricted shares granted during the nine months ended September 30, 2011 and 2010 was $17.9 million and $11.9 million, respectively. The total fair value of restricted shares vested during the nine months ended September 30, 2011 and 2010 was $11.5 million and $6.1 million, respectively.

Stock option activity for the nine months ended September 30, 2011 is summarized below:

														Weighted
						Weighted								Average
						Average				Average				Remaining
						Grant Date				Intrinsic				Contractual
		Shares				Fair Value				Value				term
										(In thousands)				(Years)
Stock options outstanding as of December 31, 2010			770,421			$	20.39
Exercised			(185,672	)			19.23
Forfeited			(21,700	)			21.45
Stock options outstanding as of September 30, 2011			563,049				20.74			$	204				4.2
Stock options exercisable and expected to vest as of September 30, 2011			562,965				20.74			$	204				4.2
Exercisable as of September 30, 2011			560,799				20.73			$	204				4.2

5. Fair Value Measurements

Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, receivables, trade accounts payable, medical claims and benefits payable, long-term debt, and other liabilities. We consider the carrying amounts of cash and cash equivalents, receivables, other current assets and current liabilities to approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization or payment. For a comprehensive discussion of fair value measurements with regard to our current and non-current investments, see below.

The carrying amount of the convertible senior notes was $168.1 million and $164.0 million as of September 30, 2011, and December 31, 2010, respectively. Based on quoted market prices, the fair value of the convertible senior notes was approximately $179.2 million and $188.4 million as of September 30, 2011, and December 31, 2010, respectively.

To prioritize the inputs we use in measuring fair value, we apply a three-tier fair value hierarchy as follows:

•		Level 1 — Observable inputs such as quoted prices in active markets: Our Level 1 securities consist of government-sponsored enterprise securities (GSEs) and U.S. treasury notes. Level 1 securities are classified as current investments in the accompanying consolidated balance sheets. These securities are actively traded and therefore the fair value for these securities is based on quoted market prices on one or more securities exchanges.
•		Level 2 — Inputs other than quoted prices in active markets that are either directly or indirectly observable: Our Level 2 securities consist of corporate debt securities, municipal securities, and certificates of deposit, and are classified as current investments in the accompanying consolidated balance sheets. Our investments in securities classified as Level 2 are traded frequently though not necessarily daily. Fair value for these securities is determined using a market approach based on quoted prices for similar securities in active markets or quoted prices for identical securities in inactive markets.
•		Level 3 — Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions: We hold investments in auction rate securities which are designated as available-for-sale, and are reported at fair value of $18.1 million (par value of $21.3 million) as of September 30, 2011. Our investments in auction rate securities are collateralized by student loan portfolios guaranteed by the U.S. government. We continued to earn interest on substantially all of these auction rate securities as of September 30, 2011. Due to events in the credit markets, the auction rate securities held by us experienced failed auctions beginning in the first quarter of 2008. As such, quoted prices in active markets were not readily available during the majority of 2008, 2009, and 2010, and continued to be unavailable as of September 30, 2011. To estimate the fair value of these securities, we used pricing models that included factors such as the collateral underlying the securities, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security would have a successful auction. The estimated values of these securities were also compared, when possible, to valuation data with respect to similar securities held by other parties. We concluded that these estimates, given the lack of market available pricing, provided a reasonable basis for determining the fair value of the auction rate securities as of September 30, 2011. For our investments in auction rate securities, we do not intend to sell, nor is it more likely than not that we will be required to sell, these investments before recovery of their cost.

As a result of changes in the fair value of auction rate securities designated as available-for-sale, we recorded pretax unrealized gains of $0.9 million and pretax unrealized losses of $0.5 million to accumulated other comprehensive income (loss) for the nine months ended September 30, 2011, and 2010, respectively. Any future fluctuation in fair value related to these instruments that we deem to be temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive income (loss). If we determine that any future valuation adjustment was other-than-temporary, we would record a charge to earnings as appropriate.

Until July 2, 2010, we held certain auction rate securities (designated as trading securities) with an investment securities firm. In 2008, we entered into a rights agreement with this firm that (1) allowed us to exercise rights (the “Rights”) to sell the eligible auction rate securities at par value to this firm between June 30, 2010 and July 2, 2012, and (2) gave the investment securities firm the right to purchase the auction rate securities from us any time after the agreement date as long as we received the par value. On June 30, 2010, and July 1, 2010, all of the eligible auction rate securities remaining at that time were settled at par value. During 2010, the aggregate auction rate securities (designated as trading securities) settled amounted to $40.9 million par value (fair value $36.7 million). Substantially all of the difference between par value and fair value on these securities was recovered through the rights agreement. For the nine months ended September 30, 2010, we recorded pretax gains of $4.2 million on the auction rate securities underlying the Rights.

We accounted for the Rights as a freestanding financial instrument and, until July 2, 2010, recorded the value of the Rights under the fair value option. For the nine months ended September 30, 2010, we recorded pretax losses of $3.8 million on the Rights, attributable to the decline in the fair value of the Rights. When the remaining eligible auction rate securities were sold at par value on July 1, 2010, the value of the Rights was zero.

Our assets measured at fair value on a recurring basis at September 30, 2011, were as follows:

		Total				Level 1				Level 2				Level 3
		(In thousands)
Corporate debt securities		$	215,875			$	—			$	215,875			$	—
Government-sponsored enterprise securities (GSEs)			45,224				45,224				—				—
Municipal securities			36,088				—				36,088				—
U.S. treasury notes			24,454				24,454				—				—
Certificates of deposit			3,261				—				3,261				—
Auction rate securities			18,112				—				—				18,112
		$	343,014			$	69,678			$	255,224			$	18,112

In prior periods we reported our investments in corporate debt securities, municipal securities and certificates of deposit in Level 1. Upon re-evaluation of the inputs used to measure fair value within the fair value hierarchy, we have determined that these investments should be reported in Level 2, and have reclassified the tabular disclosure accordingly.

The following table presents our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

		(Level 3)
		(In thousands)
Balance at December 31, 2010		$	20,449
Total gains (realized or unrealized):
Included in other comprehensive income			913
Settlements			(3,250	)
Balance at September 30, 2011		$	18,112
The amount of total gains for the period included in other comprehensive income attributable to the change in unrealized gains relating to assets still held at September 30, 2011		$	913

In 2010, we recorded a $2.8 million liability for contingent consideration related to the acquisition of our Wisconsin health plan. In the first quarter of 2011, we determined that there was no liability for contingent consideration relating to the acquisition. The liability for contingent consideration related to this acquisition was measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The following table presents a roll forward of this liability for 2011:

		(Level 3)
		(In thousands)
Balance at December 31, 2010		$	(2,800	)
Total gains included in earnings			2,800
Balance at September 30, 2011		$	—

6. Investments

The following tables summarize our investments as of the dates indicated:

		September 30, 2011
						Gross								Estimated
						Unrealized								Fair
		Cost				Gains				Losses				Value
		(In thousands)
Corporate debt securities		$	219,955			$	98			$	4,178			$	215,875
GSEs			45,338				44				158				45,224
Municipal securities (including non-current auction rate securities)			57,477				165				3,442				54,200
U.S. treasury notes			24,323				136				5				24,454
Certificates of deposit			3,261				—				—				3,261
		$	350,354			$	443			$	7,783			$	343,014

		December 31, 2010
						Gross								Estimated
						Unrealized								Fair
		Cost				Gains				Losses				Value
		(In thousands)
Corporate debt securities		$	179,124			$	193			$	1,388			$	177,929
GSEs			59,790				293				370				59,713
Municipal securities (including non-current auction rate securities)			55,247				78				4,313				51,012
U.S. treasury notes			23,864				114				60				23,918
Certificates of deposit			3,252				—				—				3,252
		$	321,277			$	678			$	6,131			$	315,824

The contractual maturities of our investments as of September 30, 2011 are summarized below:

						Estimated
		Cost				Fair Value
		(In thousands)
Due in one year or less		$	159,060			$	156,445
Due one year through five years			170,494				168,888
Due after ten years			20,800				17,681
		$	350,354			$	343,014

Gross realized gains and gross realized losses from sales of available-for-sale securities are calculated under the specific identification method and are included in investment income. Total proceeds from sales and maturities of available-for-sale securities were $105.0 million and $52.0 million for the three months ended September 30, 2011, and 2010, respectively. Total proceeds from sales and maturities of available-for-sale securities were $226.4 million and $143.3 million for the nine months ended September 30, 2011, and 2010, respectively. Net realized investment gains for the three months ended September 30, 2011, and 2010 were $153,000 and $21,000 respectively. Net realized investment gains for the nine months ended September 30, 2011, and 2010 were $331,000 and $81,000 respectively.

We monitor our investments for other-than-temporary impairment. For investments other than our municipal securities, we have determined that unrealized gains and losses at September 30, 2011, and December 31, 2010, 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 credit worthiness of the issuers. So long as we hold these securities to maturity, we are unlikely to experience gains or losses. In the event that we dispose of these securities before maturity, we expect that realized gains or losses, if any, will be immaterial.

Approximately 33% of our investment in municipal securities consists of auction rate securities. As described in Note 5, “Fair Value Measurements,” the unrealized losses on these investments were caused primarily by the illiquidity in the auction markets. Because the decline in market value is not due to the credit quality of the issuers, and because we do not intend to sell, nor is it more likely than not that we will be required to sell, these investments before recovery of their cost, we do not consider the auction rate securities that are designated as available-for-sale to be other-than-temporarily impaired at September 30, 2011.

The following tables segregate 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 loss position for 12 months or more as of September 30, 2011.

		In a Continuous Loss								In a Continuous Loss
		Position								Position
		for Less than 12 Months								for 12 Months or More								Total
		Estimated								Estimated								Estimated
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Corporate debt securities		$	169,582			$	3,625			$	17,720			$	553			$	187,302			$	4,178
GSEs			18,522				78				1,167				80				19,689				158
Municipal securities			22,731				188				21,055				3,254				43,786				3,442
U.S. treasury notes			4,705				5				—				—				4,705				5
		$	215,540			$	3,896			$	39,942			$	3,887			$	255,482			$	7,783

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 loss position for 12 months or more as of December 31, 2010.

		In a Continuous Loss								In a Continuous Loss
		Position								Position
		for Less than 12 Months								for 12 Months or More								Total
		Estimated								Estimated								Estimated
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Corporate debt securities		$	103,225			$	1,060			$	10,490			$	328			$	113,715			$	1,388
GSEs			13,014				71				7,539				299				20,553				370
Municipal securities			18,884				117				25,271				4,196				44,155				4,313
U.S. treasury notes			5,480				40				6,806				20				12,286				60
		$	140,603			$	1,288			$	50,106			$	4,843			$	190,709			$	6,131

7. Receivables

Health Plans segment receivables consist primarily of amounts due from the various states in which we operate. Such receivables are subject to potential retroactive adjustment. Because all of our receivable amounts are readily determinable and our creditors are in almost all instances state governments, our allowance for doubtful accounts is immaterial. Any amounts determined to be uncollectible are charged to expense when such determination is made. Accounts receivable were as follows:

		September 30,				December 31,
		2011				2010
		(In thousands)
Health Plans segment:
California		$	31,742			$	46,482
Michigan			11,265				13,596
Missouri			24,025				22,841
New Mexico			9,722				18,310
Ohio			27,901				21,622
Washington			11,766				14,486
Wisconsin			7,777				5,437
Others			7,029				5,187
Total Health Plans segment			131,227				147,961
Molina Medicaid Solutions segment			48,812				20,229
		$	180,039			$	168,190

During the second quarter of 2011, we settled certain claims we had made against the state of Utah regarding the savings share provision of our contract in effect from 2003 through June of 2009. Additionally, we recognized a liability for certain overpayments received from the state for the period 2003 through 2009. As a result of these developments, we recognized $6.9 million in premium revenue without any corresponding charge to expense during the second quarter of 2011.

8. Restricted Investments

Pursuant to the regulations governing our Health Plan subsidiaries, we maintain statutory deposits and deposits required by state Medicaid authorities in certificates of deposit and U.S. treasury securities. Additionally, we maintain restricted investments as protection against the insolvency of certain capitated providers. The following table presents the balances of restricted investments by health plan, and for our insurance company:

		September 30,				December 31,
		2011				2010
		(In thousands)
California		$	372			$	372
Florida			8,196				4,508
Insurance Company			4,672				4,689
Michigan			1,000				1,000
Missouri			505				508
New Mexico			15,902				15,881
Ohio			9,077				9,066
Texas			3,500				3,501
Utah			2,799				1,279
Washington			151				151
Wisconsin			—				260
Other			4,320				885
		$	50,494			$	42,100

The contractual maturities of our held-to-maturity restricted investments as of September 30, 2011 are summarized below.

		Amortized				Estimated
		Cost				Fair Value
		(In thousands)
Due in one year or less		$	45,281			$	45,292
Due one year through five years			5,213				5,266
		$	50,494			$	50,558

9. Long-Term Debt

Credit Facility

On September 9, 2011, we entered into a credit agreement for a $170 million revolving credit facility (the “Credit Facility”) with various lenders and U.S. Bank National Association, as LC Issuer, Swing Line Lender, and Administrative Agent. The Credit Facility will be used for general corporate purposes.

The Credit Facility has a term of five years under which all amounts outstanding will be due and payable on September 9, 2016. Subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, we may increase the Credit Facility to up to $195 million. As of September 30, 2011 there was no outstanding principal balance under the Credit Facility. However, as of September 30, 2011, our lenders had issued two letters of credit in the aggregate principal amount of $10.3 million in connection with the Molina Medicaid Solutions contracts with the states of Maine and Idaho, which reduces the amount available under the Credit Facility.

Borrowings under the Credit Facility will bear interest based, at our election, on the base rate plus an applicable margin or the Eurodollar rate. The base rate is, for any day, a rate of interest per annum equal to the highest of (i) the prime rate of interest announced from time to time by U.S. Bank or its parent, (ii) the sum of the federal funds rate for such day plus 0.50% per annum and (iii) the Eurodollar rate (without giving effect to the applicable margin) for a one month interest period on such day (or if such day is not a business day, the immediately preceding business day) plus 1.00%. The Eurodollar rate is a reserve adjusted rate at which Eurodollar deposits are offered in the interbank Eurodollar market plus an 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 of 0.25% to 0.50% (based upon our leverage ratio) of the unused amount of the lenders’ commitments under the Credit Facility. The initial commitment fee shall be set at 0.35% until our delivery of its financials for the quarter ended September 30, 2011. The applicable margins range between 0.75% to 1.75% for base rate loans and 1.75% to 2.75% for Eurodollar loans, in each case, based upon our leverage ratio.

Our obligations under the Credit Facility are secured by a lien on substantially all of our assets, with the exception of certain of our real estate assets, and by a pledge of the capital stock or membership interests of our operating subsidiaries and health plans (with the exception of the California health plan).

The Credit Facility includes usual and customary covenants for credit facilities of this type, including covenants limiting liens, mergers, asset sales, other fundamental changes, debt, acquisitions, dividends and other distributions, capital expenditures, and investments. The Credit Facility also requires us to maintain a ratio of total consolidated debt to total consolidated EBITDA of not more than 2.75 to 1.00 as of the end of each fiscal quarter and a fixed charge coverage ratio of not less than 1.75 to 1.00. At September 30, 2011, we were in compliance with all financial covenants under the Credit Facility.

In the event of a default, including cross-defaults relating to specified other debt in excess of $20 million, the lenders may terminate the commitments under the Credit Facility and declare the amounts outstanding, including all accrued interest and unpaid fees, payable immediately. In addition, the lenders may enforce any and all rights and remedies created under the Credit Facility or applicable law.

In connection with our entrance into the Credit Facility, on September 9, 2011, we terminated our existing credit agreement with Bank of America, dated March 9, 2005, as amended to date, which had provided us with a $150 million revolving credit facility. As of September 30, 2011 and December 31, 2010, there was no outstanding principal balance under this credit agreement.

Convertible Senior Notes

As of September 30, 2011, $187.0 million in aggregate principal amount of our 3.75% Convertible Senior Notes due 2014 (the “Notes”) remain outstanding. The Notes rank equally in right of payment with our existing and future senior indebtedness. The Notes are convertible into cash and, under certain circumstances, shares of our common stock. The initial conversion rate is 31.9601 shares of our common stock per one thousand dollar principal amount of the Notes. This represents an initial conversion price of approximately $31.29 per share of our common stock. In addition, if certain corporate transactions that constitute a change of control occur prior to maturity, we will increase the conversion rate in certain circumstances.

The proceeds from the issuance of the Notes have been allocated between a liability component and an equity component. We have determined that the effective interest rate of the Notes is 7.5%, principally based on the seven-year U.S. treasury note rate as of the October 2007 issuance date, plus an appropriate credit spread. The resulting debt discount is being amortized over the period the Notes are expected to be outstanding, as additional non-cash interest expense. As of September 30, 2011, we expect the Notes to be outstanding until their October 1, 2014 maturity date, for a remaining amortization period of 36 months. The Notes’ if-converted value did not exceed their principal amount as of September 30, 2011. At September 30, 2011, the equity component of the Notes, net of the impact of deferred taxes, was $24.0 million. The following table provides the details of the liability amounts recorded:

		As of				As of
		September 30,				December 31,
		2011				2010
		(In thousands)
Details of the liability component:
Principal amount		$	187,000			$	187,000
Unamortized discount			(18,891	)			(22,986	)
Net carrying amount		$	168,109			$	164,014

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(In thousands)
Interest cost recognized for the period relating to the:
Contractual interest coupon rate of 3.75%		$	1,753			$	1,753			$	5,259			$	5,259
Amortization of the discount on the liability component			1,384				1,291				4,095				3,800
Total interest cost recognized		$	3,137			$	3,044			$	9,354			$	9,059

10. Stockholders’ Equity

Securities Repurchase Program. Effective as of October 26, 2011, our board of directors has authorized the repurchase of $75 million in aggregate of either our common stock or our convertible senior notes due 2014 (see Note 9, “Long-Term Debt”). The repurchase program will be funded with working capital or the Company’s credit facility, and repurchases may be made from time to time on the open market or through privately negotiated transactions. The repurchase program extends through October 25, 2012, but the Company reserves the right to suspend or discontinue the program at any time.

On July 27, 2011, our board of directors approved a stock repurchase program of up to $7 million to be used to purchase shares of our common stock under a Rule 10b5-1 trading plan. Under this program, we purchased approximately 400,000 shares of our common stock for $7 million (average cost of approximately $17.47 per share) during August 2011. These purchases did not materially impact diluted earnings per share for the three months or nine months ended September 30, 2011. Subsequently, we retired the $7.0 million of treasury shares purchased, which reduced additional paid-in capital as of September 30, 2011.

Stock Split. On April 27, 2011, we announced that our board of directors authorized a 3-for-2 stock split of our common stock to be effected in the form of a stock dividend of one share of our stock for every two shares outstanding. The dividend was distributed on May 20, 2011.

Stock Plans. In connection with the plans described in Note 4, “Share-Based Compensation,” we issued approximately 627,000 shares of common stock, net of shares used to settle employees’ income tax obligations, for the nine months ended September 30, 2011. Stock plan activity resulted in a $15.6 million increase to additional paid-in capital for the same period.

11. Segment Reporting

Our reportable segments are consistent with how we manage the business and view the markets we serve. In the second quarter of 2010, we added a segment to our internal financial reporting structure as a result of the acquisition of Molina Medicaid Solutions. We report our financial performance based on two reportable segments: Health Plans and Molina Medicaid Solutions.

We rely on an internal management reporting process that provides segment information to the operating income level for purposes of making financial decisions and allocating resources. The accounting policies of the segments are the same as those described in Note 2, “Significant Accounting Policies.” The cost of services shared between the Health Plans and Molina Medicaid Solutions segments is charged to the Health Plans segment.

Molina Medicaid Solutions was acquired on May 1, 2010; therefore, the nine months ended September 30, 2010 include only five months of operating results for this segment. Operating segment revenues and profitability for the three months and nine months ended September 30, 2011 and 2010 were as follows:

						Molina
						Medicaid
		Health Plans				Solutions				Total
		(In thousands)
Three months ended September 30, 2011
Premium revenue		$	1,138,230			$	—			$	1,138,230
Service revenue			—				37,728				37,728
Investment income			764				—				764
Total revenue		$	1,138,994			$	37,728			$	1,176,722
Operating income (loss)		$	33,773			$	(207	)		$	33,566
Nine months ended September 30, 2011
Premium revenue		$	3,348,438			$	—			$	3,348,438
Service revenue			—				111,290				111,290
Investment income			3,804				—				3,804
Total revenue		$	3,352,242			$	111,290			$	3,463,532
Operating income (loss)		$	100,273			$	(3,997	)		$	96,276
Three months ended September 30, 2010
Premium revenue		$	1,005,115			$	—			$	1,005,115
Service revenue			—				32,271				32,271
Investment income			1,760				—				1,760
Total revenue		$	1,006,875			$	32,271			$	1,039,146
Operating income		$	28,796			$	1,157			$	29,953
Nine months ended September 30, 2010
Premium revenue		$	2,947,020			$	—			$	2,947,020
Service revenue			—				53,325				53,325
Investment income			4,880				—				4,880
Total revenue		$	2,951,900			$	53,325			$	3,005,225
Operating income		$	65,407			$	6,162			$	71,569

Reconciliation to Income before Income Taxes

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(In thousands)
Segment operating income		$	33,566			$	29,953			$	96,276			$	71,569
Interest expense			4,380				4,600				11,666				12,056
Income before income taxes		$	29,186			$	25,353			$	84,610			$	59,513

Segment Assets

						Molina
						Medicaid
		Health Plans				Solutions				Total
		(In thousands)
As of September 30, 2011		$	1,389,940			$	228,364			$	1,618,304
As of December 31, 2010		$	1,333,599			$	175,615			$	1,509,214

12. Commitments and Contingencies

Legal

The health care industry is 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 various legal actions in the normal course of business, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance. These actions, when finally concluded and determined, are not likely, in our opinion, to have a material adverse effect on our business, consolidated financial position, cash flows, or results of operations.

Provider Claims

Many of our medical contracts are complex in nature and may be subject to differing interpretations regarding amounts due for the provision of various services. Such differing interpretations have led certain medical providers to pursue us for additional compensation. The claims made by providers in such circumstances often involve issues of contract compliance, interpretation, payment methodology, and intent. These claims often extend to services provided by the providers over a number of years.

Various providers have contacted us seeking additional compensation for claims that we believe to have been settled. These matters, when finally concluded and determined, will not, in our opinion, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.

Regulatory Capital and Dividend Restrictions

Our health plans 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, and restrict the timing, payment, and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent the subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us. 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 $456.2 million at September 30, 2011, and $397.8 million at December 31, 2010.

The National Association of Insurance Commissioners, or 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. Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin have adopted these rules, which may vary from state to state. California and Florida have not yet adopted NAIC risk-based capital requirements for HMOs and have not formally given notice of their intention to do so. Such requirements, if adopted by California and Florida, may increase the minimum capital required for those states.

As of September 30, 2011, our health plans had aggregate statutory capital and surplus of approximately $463.1 million compared with the required minimum aggregate statutory capital and surplus of approximately $273.9 million. All of our health plans were in compliance with the minimum capital requirements at September 30, 2011. We have the ability and commitment to provide additional capital to each of our health plans when necessary to ensure that statutory capital and surplus continue to meet regulatory requirements.

13. Related Party Transactions

We have an equity investment in a medical service provider that provides certain vision services to our members. We account for this investment under the equity method of accounting because we have an ownership interest in the investee that confers significant influence over operating and financial policies of the investee. As of September 30, 2011, and December 31, 2010, our carrying amount for this investment amounted to $3.9 million, and $3.8 million, respectively. For the three months ended September 30, 2011 and 2010, we paid $5.0 million, and $6.0 million, respectively, for medical service fees to this provider. For the nine months ended September 30, 2011 and 2010, we paid $16.8 million, and $15.7 million, respectively, for medical service fees to this provider.

14. Subsequent Events

Effective as of October 26, 2011, our board of directors has authorized the repurchase of $75 million in aggregate of either our common stock or our convertible senior notes due 2014 (see Note 9, “Long-Term Debt”). The repurchase program will be funded with working capital or the Company’s credit facility, and repurchases may be made from time to time on the open market or through privately negotiated transactions. The repurchase program extends through October 25, 2012, but the Company reserves the right to suspend or discontinue the program at any time.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition and results of operations within the meaning of Section 27A of the Securities Act of 1933, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Securities Exchange Act. We intend such forward-looking statements to be covered by the safe harbour provisions for forward-looking statements contained in the Private Securities Litigation reform Act of 1995, and we are including this statement for purposes of complying with these safe harbour provisions. All statements, other than statements of historical facts, included in this quarterly report may be deemed to be forward-looking statements for purposes of the Securities Act and the Securities Exchange Act. Without limiting the foregoing, we use the words “anticipate(s),” “believe(s),” “estimate(s),” “expect(s),” “intend(s),” “may,” “plan(s),” “project(s),” “will,” “would,” “could,” “should” and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we will actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and, accordingly, you should not place undue reliance on our forward-looking statements. There are a number of important factors that could cause actual results or events to differ materially from the forward-looking statements that we make. You should read these factors and the other cautionary statements as being applicable to all related forward-looking statements wherever they appear in this quarterly report. We caution you that we do not undertake any obligation to update forward-looking statements made by us. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected, estimated, expected, or contemplated as a result of, but not limited to, risk factors related to the following:

•

significant budget pressures on state governments which cause them to lower rates unexpectedly or to rescind expected rates increases, or their failure to maintain existing benefit packages or membership eligibility thresholds or criteria;

•

uncertainties regarding the impact of the Patient Protection and Affordable Care Act, including its possible repeal, judicial overturning of the individual insurance mandate or Medicaid expansion, the effect of various implementing regulations, and uncertainties regarding the impact of other federal or state health care and insurance reform measures;

•

management of our medical costs, including costs associated with unexpectedly severe or widespread illnesses such as influenza, and rates of utilization that are consistent with our expectations;

•

the success of our efforts to retain existing government contracts and to obtain new government contracts in connection with state requests for proposals (RFPs) in both existing and new states (including in Washington, Ohio, and Missouri), and our ability to grow our revenues consistent with our expectations;

•

the accurate estimation of incurred but not reported medical costs across our health plans;

•

risks associated with the continued growth in new Medicaid and Medicare enrollees;

•

retroactive adjustments to premium revenue or accounting estimates which require adjustment based upon subsequent developments, including the California rate cut expected to be retroactive to July 1, 2011, and Medicaid pharmaceutical rebates;

•

the continuation and renewal of the government contracts of both our health plans and Molina Medicaid Solutions and the terms under which such contracts are renewed;

•

the timing of receipt and recognition of revenue and the amortization of expense under the state contracts of Molina Medicaid Solutions in Maine and Idaho;

•

reductions to revenue, additional administrative costs and the potential payment of additional amounts to providers and/or the state by Molina Medicaid Solutions as a result of MMIS implementation issues in Maine and/or Idaho;

•

government audits and reviews, including the audit of our Medicare plans by the Centers for Medicare and Medicaid Services, or CMS;

•

changes with respect to our provider contracts and the loss of providers;

•

the establishment, interpretation, and implementation of a federal or state medical cost expenditure floor as a percentage of the premiums we receive, administrative cost and profit ceilings, and profit sharing arrangements;

•

the interpretation and implementation of at-risk premium rules regarding the achievement of certain quality measures;

•

the successful integration of our acquisitions;

•

approval by state regulators of dividends and distributions by our health plan subsidiaries;

•

changes in funding under our contracts as a result of regulatory changes, programmatic adjustments, or other reforms;

•

high dollar claims related to catastrophic illness;

•

the favorable resolution of litigation, arbitration, or administrative proceedings, and the costs associated therewith;

•

restrictions and covenants in our credit facility;

•

the relatively small number of states in which we operate health plans;

•

the availability of financing to fund and capitalize our acquisitions and start-up activities and to meet our liquidity needs and the costs and fees associated therewith;

•

a state’s failure to renew its federal Medicaid waiver;

•

an inadvertent unauthorized disclosure of protected health information by us or our business associates;

•

changes generally affecting the managed care or Medicaid management information systems industries;

•

increases in government surcharges, taxes, and assessments;

•

changes in general economic conditions, including unemployment rates.

Investors should refer to Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, as updated in Part II, Item 1A—Risk Factors, in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011 and in Part II, Item 1A—Risk Factors, of this report for a discussion of certain risk factors that could materially affect our business, financial condition, cash flows, or results of operations. Given these risks and uncertainties, we can give no assurance that any results or events projected or contemplated by our forward-looking statements will in fact occur.

This document and the following discussion of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the notes to those statements appearing elsewhere in this report and the audited financial statements and Management’s Discussion and Analysis appearing in our Annual Report on Form 10-K for the year ended December 31, 2010.

Adjustments

We have adjusted all applicable share and per-share amounts to reflect the retroactive effects of the three-for-two stock split in the form of a stock dividend that was effective May 20, 2011.

Overview

Molina Healthcare, Inc. provides quality and cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist state agencies in their administration of the Medicaid program. Our business comprises our Health Plans segment, consisting of licensed health maintenance organizations serving Medicaid populations in ten states, and our Molina Medicaid Solutions segment, which provides design, development, implementation, and business process outsourcing solutions to Medicaid agencies in an additional five states. We also have a direct delivery business that currently consists of primary care community clinics in California and Washington; additionally, we manage three county-owned primary care clinics under a contract with Fairfax County, Virginia.

We report our financial performance based on the following two reportable segments: Health Plans; and Molina Medicaid Solutions.

Our Health Plans segment comprises health plans in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin, and includes our direct delivery business. This segment served approximately 1.7 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals as of September 30, 2011. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO.

On May 1, 2010, we acquired a health information management business which we now operate under the name, Molina Medicaid SolutionsSM. Our Molina Medicaid Solutions segment provides design, development, implementation, and business process outsourcing solutions to state governments for their Medicaid Management Information Systems, or MMIS. MMIS is a core tool used to support the administration of state Medicaid and other health care entitlement programs. Molina Medicaid Solutions currently holds MMIS contracts with the states of Idaho, Louisiana, Maine, New Jersey, and West Virginia, as well as a contract to provide drug rebate administration services for the Florida Medicaid program.

Composition of Revenue and Membership

Health Plans Segment

Our Health Plans segment derives its revenue, in the form of premiums, chiefly from Medicaid contracts with the states in which our health plans operate. Premium revenue is fixed in advance of the periods covered and, except as described in “Critical Accounting Policies” below, is not generally subject to significant accounting estimates. For the nine months ended September 30, 2011, we received approximately 94% of our premium revenue as a fixed amount per member per month, or PMPM, pursuant to our Medicaid contracts with state agencies, our Medicare contracts with the Centers for Medicare and Medicaid Services, or CMS, and our contracts with other managed care organizations for which we operate as a subcontractor. These premium revenues are recognized in the month that members are entitled to receive health care services. The state Medicaid programs and the federal Medicare program periodically adjust premium rates.

For the nine months ended September 30, 2011, we received approximately 6% of our premium revenue in the form of “birth income” — a one-time payment for the delivery of a child — from the Medicaid programs in all of our state health plans except New Mexico. Such payments are recognized as revenue in the month the birth occurs.

The amount of the premiums paid to us may vary substantially between states and among various government programs. PMPM premiums for the Children’s Health Insurance Program, or CHIP, members are generally among our lowest, with rates as low as approximately $75 PMPM in California. Premium revenues for Medicaid members are generally higher. Among the Temporary Assistance for Needy Families, or TANF, Medicaid population — the Medicaid group that includes mostly mothers and children — PMPM premiums range between approximately $110 in California to $250 in Missouri. Among our Medicaid Aged, Blind or Disabled, or ABD, membership, PMPM premiums range from approximately $325 in Utah to $1,000 in Ohio. Contributing to the variability in Medicaid rates among the states is the practice of some states to exclude certain benefits from the managed care contract (most often pharmacy, inpatient, behavioral health and catastrophic case benefits) and retain responsibility for those benefits at the state level. Medicare membership generates the highest PMPM premiums, at approximately $1,200 PMPM.

The following table sets forth the approximate total number of members by state health plan as of the dates indicated:

		September 30,				June 30,				December 31,				September 30,
		2011				2011				2010				2010
Total Ending Membership by Health Plan:
California			350,000				348,000				344,000				349,000
Florida			67,000				66,000				61,000				57,000
Michigan			217,000				220,000				227,000				225,000
Missouri			78,000				80,000				81,000				79,000
New Mexico			89,000				89,000				91,000				91,000
Ohio			256,000				245,000				245,000				241,000
Texas			148,000				129,000				94,000				96,000
Utah			82,000				82,000				79,000				78,000
Washington			350,000				345,000				355,000				353,000
Wisconsin (1)			41,000				41,000				36,000				28,000
Total			1,678,000				1,645,000				1,613,000				1,597,000
Total Ending Membership by State for our Medicare Advantage Plans (1):
California			6,500				6,000				4,900				4,300
Florida			700				600				500				500
Michigan			7,600				7,100				6,300				5,700
New Mexico			800				700				600				600
Ohio			100				200				—				—
Texas			600				600				700				600
Utah			7,400				7,000				8,900				8,600
Washington			4,500				4,000				2,600				2,300
Total			28,200				26,200				24,500				22,600
Total Ending Membership by State for our Aged, Blind or Disabled Population:
California			23,700				17,000				13,900				13,500
Florida			10,400				10,300				10,000				9,500
Michigan			31,600				31,600				31,700				31,400
New Mexico			5,600				5,600				5,700				5,700
Ohio			29,900				28,700				28,200				27,900
Texas			61,800				52,000				19,000				18,900
Utah			8,300				8,300				8,000				7,900
Washington			4,700				4,400				4,000				3,700
Wisconsin (1)			1,700				1,700				1,700				1,700
Total			177,700				159,600				122,200				120,200