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

For the quarterly period ended September 30, 2010

Or

o		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

 

Molina Healthcare, Inc.

Delaware		13-4204626
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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 o 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. (Check one):

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, par value $0.001 per share, outstanding as of October 29, 2010, was approximately 30,239,000.

 

 

MOLINA HEALTHCARE, INC.

Index

Part I — Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009			3
Consolidated Statements of Income for the three month and nine month periods ended September 30, 2010 and 2009 (unaudited)			4
Consolidated Statements of Comprehensive Income for the three month and nine month periods ended September 30, 2010 and 2009 (unaudited)			5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)			6
Notes to Consolidated Financial Statements (unaudited)			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			52
Item 4. Controls and Procedures			52
Part II — Other Information
Item 1. Legal Proceedings			53
Item 1A. Risk Factors			53
Item 6. Exhibits			55
Signatures			56
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1: Financial Statements.

MOLINA HEALTHCARE, INC.

CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2010				2009
		(Amounts in thousands,
		except per-share data)
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	426,455			$	469,501
Investments			195,358				174,844
Receivables			225,547				136,654
Income and related taxes refundable			2,755				6,067
Deferred income taxes			7,580				8,757
Prepaid expenses and other current assets			25,185				15,583
Total current assets			882,880				811,406
Property and equipment, net			91,826				78,171
Deferred contract costs			20,255				—
Intangible assets, net			115,270				80,846
Goodwill and indefinite-lived intangible assets			213,261				133,408
Investments			20,294				59,687
Restricted investments			45,047				36,274
Receivable for ceded life and annuity contracts			25,134				25,455
Other assets			17,463				19,988
		$	1,431,430			$	1,245,235
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims and benefits payable		$	355,140			$	316,516
Accounts payable and accrued liabilities			117,299				71,732
Deferred revenue			37,648				101,985
Total current liabilities			510,087				490,233
Long-term debt			162,700				158,900
Deferred income taxes			16,773				12,506
Liability for ceded life and annuity contracts			25,134				25,455
Other long-term liabilities			19,004				15,403
Total liabilities			733,698				702,497
Stockholders’ equity:
Common stock, $0.001 par value; 80,000 shares authorized; outstanding: 30,207 shares at September 30, 2010 and 25,607 shares at December 31, 2009			30				26
Preferred stock, $0.001 par value; 20,000 shares authorized, no shares issued and outstanding			—				—
Additional paid-in capital			247,845				129,902
Accumulated other comprehensive loss			(2,107	)			(1,812	)
Retained earnings			451,964				414,622
Total stockholders’ equity			697,732				542,738
		$	1,431,430			$	1,245,235

See accompanying notes.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF INCOME

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Amounts in thousands, except
		net income per share)
		(Unaudited)
Revenue:
Premium revenue		$	1,005,115			$	914,805			$	2,947,020			$	2,697,796
Service revenue			32,271				—				53,325				—
Investment income			1,760				1,707				4,880				7,336
Total revenue			1,039,146				916,512				3,005,225				2,705,132
Expenses:
Medical care costs			845,937				792,771				2,508,366				2,333,865
Cost of service revenue			27,605				—				41,859				—
General and administrative expenses			88,660				68,563				245,619				198,981
Premium tax expenses			35,037				30,257				104,578				87,612
Depreciation and amortization			11,954				9,832				33,234				28,468
Total expenses			1,009,193				901,423				2,933,656				2,648,926
Gain on retirement of convertible senior notes			—				—				—				1,532
Operating income			29,953				15,089				71,569				57,738
Interest expense			(4,600	)			(3,279	)			(12,056	)			(9,917	)
Income before income taxes			25,353				11,810				59,513				47,821
Provision for income taxes			9,180				3,246				22,171				12,481
Net income		$	16,173			$	8,564			$	37,342			$	35,340
Net income per share:
Basic		$	0.58			$	0.34			$	1.41			$	1.36
Diluted		$	0.57			$	0.33			$	1.39			$	1.36
Weighted average shares outstanding:
Basic			28,118				25,539				26,511				25,944
Diluted			28,363				25,630				26,802				26,058

See accompanying notes.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Amounts in thousands)
		(Unaudited)
Net income		$	16,173			$	8,564			$	37,342			$	35,340
Other comprehensive income, net of tax:
Unrealized (loss) gain on investments			(68	)			37				(295	)			645
Other comprehensive (loss) income			(68	)			37				(295	)			645
Comprehensive income		$	16,105			$	8,601			$	37,047			$	35,985

See accompanying notes.

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended
		September 30,
		2010				2009
		(Amounts in thousands)
		(Unaudited)
Operating activities:
Net income		$	37,342			$	35,340
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			40,485				28,468
Unrealized gain on trading securities			(4,170	)			(3,509	)
Loss on rights agreement			3,807				3,204
Deferred income taxes			4,463				2,322
Stock-based compensation			7,268				5,730
Non-cash interest on convertible senior notes			3,800				3,563
Gain on repurchase and retirement of convertible senior notes			—				(1,532	)
Amortization of deferred financing costs			1,278				1,040
Tax deficiency from employee stock compensation recorded as additional paid-in capital			(676	)			(704	)
Changes in operating assets and liabilities:
Receivables			(64,896	)			(15,567	)
Prepaid expenses and other current assets			(8,307	)			454
Medical claims and benefits payable			33,947				10,672
Accounts payable and accrued liabilities			15,131				(6,140	)
Deferred revenue			(64,337	)			61,381
Income taxes			3,327				5,561
Net cash provided by operating activities			8,462				130,283
Investing activities:
Purchases of equipment			(31,918	)			(28,390	)
Purchases of investments			(162,620	)			(127,335	)
Sales and maturities of investments			185,193				149,770
Net cash paid in business combinations			(127,231	)			(10,900	)
Increase in deferred contract costs			(20,616	)			—
Increase in restricted investments			(8,513	)			(4,198	)
Increase in other assets			(389	)			(1,877	)
Increase (decrease) in other long-term liabilities			2,729				(8,788	)
Net cash used in investing activities			(163,365	)			(31,718	)
Financing activities:
Amount borrowed under credit facility			105,000				—
Proceeds from common stock offering, net of underwriting discount			111,578				—
Repayment of amount borrowed under credit facility			(105,000	)			—
Treasury stock purchases			—				(27,712	)
Purchase of convertible senior notes			—				(9,653	)
Credit facility fees paid			(1,671	)			—
Equity offering costs paid			(332	)			—
Proceeds from employee stock plans			1,862				1,081
Excess tax benefits from employee stock compensation			420				26
Net cash provided by (used in) financing activities			111,857				(36,258	)
Net (decrease) increase in cash and cash equivalents			(43,046	)			62,307
Cash and cash equivalents at beginning of period			469,501				387,162
Cash and cash equivalents at end of period		$	426,455			$	449,469

MOLINA HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (continued)

		Nine Months Ended
		September 30,
		2010				2009
		(Amounts in thousands)
		(Unaudited)
Supplemental cash flow information:
Cash paid during the period for:
Income taxes		$	12,129			$	16,305
Interest		$	7,175			$	4,254
Schedule of non-cash investing and financing activities:
Unrealized (loss) gain on investments		$	(476	)		$	936
Deferred taxes			181				(291	)
Net unrealized (loss) gain on investments		$	(295	)		$	645
Accrued purchases of equipment		$	632			$	366
Retirement of common stock used for stock-based compensation		$	2,173			$	920
Retirement of treasury stock		$	—			$	48,102
Details of business combinations:
Fair value of assets acquired		$	(161,862	)		$	(30,600	)
Fair value of liabilities assumed			25,880				—
Release of deposit			—				9,000
Payable to seller			8,751				10,700
Net cash paid in business combinations		$	(127,231	)		$	(10,900	)

See accompanying notes.

MOLINA HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 licensed health plans in California, Florida, Michigan, Missouri, New Mexico, Ohio, Texas, Utah, Washington, and Wisconsin currently serve approximately 1.6 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. The health plans are locally operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization, or HMO. Effective January 1, 2010, we terminated operations at our small Medicare health plan in Nevada. Our subsidiary, Molina Medicaid Solutions, provides business processing and information technology administrative services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, and West Virginia, and drug rebate administration services in Florida.

On September 1, 2010, we acquired Abri Health Plan, a Medicaid managed care organization based in Milwaukee, Wisconsin. As of September 30, 2010, Abri Health Plan served approximately 28,000 Medicaid members. See Note 3, “Business Combinations,” for more information relating to this acquisition.

On May 1, 2010, we acquired a health information management business which now operates under the name, Molina Medicaid Solutions^SM. Molina Medicaid Solutions 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. See Note 3, “Business Combinations,” for more information relating to this acquisition.

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. Except as described below under “Reclassifications,” 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, 2010. 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, 2009. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in the December 31, 2009 audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our December 31, 2009 audited financial statements.

Reclassifications

Effective January 1, 2010, we have recorded the Michigan modified gross receipts tax as a premium tax and not as an income tax. For the three month and nine month periods ended September 30, 2009, amounts for premium tax expense and income tax expense have been reclassified to conform to this presentation. See Note 2, “Significant Accounting Policies.”

In prior periods, general and administrative expenses have included premium tax expenses. Beginning in the second quarter of 2010, we have reported premium tax expenses on a separate line in the accompanying consolidated statements of income. Prior periods have been reclassified to conform to this presentation.

2. Significant Accounting Policies

Molina Medicaid Solutions Segment Revenue Recognition and Deferred Contract Costs

As a result of our recent acquisition of Molina Medicaid Solutions, we report on the results of our operations using two business segments. The Molina Medicaid Solutions segment derives its revenue from service arrangements. This segment provides technology solutions to state Medicaid programs that include system development, system integration, and technology outsourcing services. In addition, this segment offers business process outsourcing to state Medicaid agencies that handle key administrative functions such as claims processing, provider enrollment, pharmacy drug rebate services, recipient eligibility management, and pre-authorization services. The following is an update of our accounting policies on revenue recognition, as included in our December 31, 2009 audited financial statements, which specifically addresses revenue recognition for service arrangements.

Under certain of the contracts we acquired, the development of the MMIS solution has already been completed. Under these contracts, we provide business process outsourcing and technology outsourcing services, and recognize outsourcing services revenue on a straight-line basis over the remaining term of the contract.

For fixed-price contracts where the system design and development phase was in process as of the acquisition date, we apply contract accounting because we will deliver significantly modified and customized MMIS software to the customer under the terms of the contract. Additionally, these contracts contain multiple deliverables; once the system design and development phase is complete, we provide technology outsourcing services and business process outsourcing. We do not have vendor specific objective evidence of the fair value of the technology outsourcing and business process outsourcing components of the contracts because we do not have history of offering these services on a stand-alone basis. As such, we account for these fixed-price service contracts as a single element.

Therefore, in general, we recognize contract revenues as a single element ratably over the performance period, or contract term, of the outsourcing services because these are the last elements to be delivered under the contract. Such contract terms typically range from five to 10 years. In those service arrangements where final acceptance of a system or solution by the customer is required, contract revenues and costs are deferred until all material acceptance criteria have been met. Performance will often extend over long periods, and our right to receive future payment depends on our future performance in accordance with the agreement. Revenues earned in excess of related billings are accrued, whereas billings in excess of revenues earned are deferred until the related services are provided.

Deferred contract costs include direct and incremental costs such as direct labor, hardware and software. We also defer and subsequently amortize certain transition costs related to activities that transition the contract from the design, development, and implementation phase to the operational, or business process outsourcing, phase. Deferred contract costs, including transition costs, are amortized on a straight-line basis over the remaining original contract term, consistent with the revenue recognition period. Indirect costs associated with MMIS service contracts are generally expensed as incurred.

The recoverability of deferred contract costs associated with a particular contract is analyzed on a periodic basis using the undiscounted estimated cash flows of the whole contract over its remaining contract term. If such undiscounted cash flows are insufficient to recover the long-lived assets and deferred contract costs, the deferred contract costs are written down by the amount of the cash flow deficiency. If a cash flow deficiency remains after reducing the balance of the deferred contract costs to zero, any remaining long-lived assets are evaluated for impairment. Any such impairment recognized would equal the amount by which the carrying value of the long-lived assets exceeds the fair value of those assets.

Property and Equipment

Property and equipment are stated at historical cost. Replacements and major improvements are capitalized, and repairs and maintenance are charged to expense as incurred. Furniture and equipment are generally depreciated using the straight-line method over estimated useful lives ranging from three to seven years. Software developed for internal use is capitalized. Software is generally amortized over its estimated useful life of three years. Leasehold improvements are amortized over the term of the lease, or over their useful lives from five to 10 years, whichever is shorter. Buildings are depreciated over their estimated useful lives of 31.5 years.

As discussed in “Molina Medicaid Solutions Segment Revenue Recognition and Deferred Contract Costs” above, the costs associated with certain equipment and software, which may be ultimately transferred to our clients under fixed-price contracts, are capitalized and recorded as deferred contract costs. Such costs are amortized on a straight-line basis over the performance period, consistent with the revenue recognition period.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Identifiable intangible assets (consisting principally of purchased contract rights and provider contracts) are amortized on a straight-line basis over the expected period to be benefited (generally between one and 15 years).

Goodwill and indefinite-lived assets are not amortized, but are subject to impairment tests on an annual basis or more frequently if indicators of impairment exist. We use a discounted cash flow methodology to assess the fair values of our reporting units. If the carrying values of our reporting units exceed the fair values, we perform a hypothetical purchase price allocation. Impairment is measured by comparing the goodwill derived from the hypothetical purchase price allocation to the carrying value of the goodwill and indefinite-lived asset balance.

Identifiable intangible assets associated with Molina Medicaid Solutions are classified as either contract backlog or customer relationships.

The contract backlog intangible asset comprises all contractual cash flows anticipated to be received during the remaining contracted period for each specific contract relating to work that was performed prior to the acquisition. The contract backlog intangible has been developed on a contract-by-contract basis. The amortization of that portion of the contract backlog intangible associated with contracts for which revenue recognition has not yet commenced is deferred until revenue recognition has begun. Because each acquired contract constitutes a single revenue element, amortization of the contract backlog intangible is recorded to contra-service revenue so that amortization is matched to any revenues associated with contract performance that occurred prior to the acquisition date. The contract backlog intangible asset is amortized on a straight-line basis for each specific contract over periods generally ranging from one to six years.

The customer relationship intangible asset comprises all contractual cash flows that are anticipated to be received during the option periods of each specific contract as well as anticipated renewals of those contracts. The customer relationship intangible is amortized on a straight-line basis for each specific contract over periods generally ranging from four to nine years.

The determination of the value of identifiable intangible assets requires us to make estimates and assumptions about estimated asset lives, future business trends, and growth. In addition to annual impairment testing, we continually evaluate whether events and circumstances have occurred that indicate the balance of identifiable intangible assets may not be recoverable. In evaluating impairment, we compare the estimated fair value of the intangible asset to its underlying book value. Such evaluation is significantly impacted by estimates and assumptions of future revenues, costs and expenses, and other factors. If an event occurs that would cause us to revise our estimates and assumptions used in analyzing the value of our identifiable intangible assets, such revision could result in a non-cash impairment charge that could have a material impact on our financial results.

Depreciation and Amortization

As noted above, the amortization of the contract backlog intangibles associated with the acquisition of Molina Medicaid Solutions is recorded as contra-service revenue, rather than as part of depreciation and amortization, to match revenues associated with contract performance that occurred prior to the acquisition date. Additionally, most of the depreciation associated with Molina Medicaid Solutions is recorded as cost of service revenue. The following table presents all depreciation and amortization recorded in our consolidated financial statements:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(In thousands)
Depreciation and amortization		$	11,954			$	9,832			$	33,234			$	28,468
Amortization recorded as contra-service revenue			2,655				—				4,246				—
Depreciation recorded as cost of service revenue			1,964				—				3,005				—
Depreciation and amortization reported in our consolidated statements of cash flows		$	16,573			$	9,832			$	40,485			$	28,468

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 $11.0 million and $4.1 million at September 30, 2010, and December 31, 2009, respectively. Approximately $8.4 million of the unrecognized tax benefits recorded at September 30, 2010, relates 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 $7.8 million and $3.4 million as of September 30, 2010 and December 31, 2009, respectively. We expect that during the next 12 months it is reasonably possible that unrecognized tax benefit liabilities will decrease by approximately $0.5 million due to the expiration of statute of limitations.

Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits in income tax expense. Our accrual for the payment of interest relating to unrecognized tax benefits was $74,000 and $75,000 as of September 30, 2010 and December 31, 2009, respectively.

Through December 31, 2009, income tax expense included both the Michigan business income tax, or BIT, and Michigan modified gross receipts tax, or MGRT. Effective January 1, 2010, we have recorded the MGRT as a premium tax and not as an income tax. We will continue to record the BIT as an income tax. The MGRT amounted to $4.6 million and $3.4 million for the nine months ended September 30, 2010, and 2009, respectively.

Generally, the MGRT is a 0.976% tax (statutory rate of 0.8% plus 21.99% surtax) on modified gross receipts, which for most taxpayers is defined as receipts less purchases from other firms. Managed care organizations, however, are not currently allowed to deduct payments to providers in determining modified gross receipts. As a result, the MGRT is 0.976% of our Michigan plan’s receipts and does not vary with levels of pretax income or margins. We believe that presentation of the MGRT as a premium tax produces financial statements that are more useful to the reader.

Recent Accounting Pronouncements

Revenue Recognition. In late 2009, the Financial Accounting Standards Board, or FASB, issued the following new accounting guidance which is first applicable for our January 1, 2011 reporting:

•

ASU No. 2009-14, Software (ASC Topic 985) — Certain Revenue Arrangements That Include Software Elements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies the scope of ASC Subtopic 985-605 — Software-Revenue Recognition to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. We do not expect the update to impact our consolidated financial position, results of operations or cash flows.

•

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 allowing 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. In addition, the residual method of allocating arrangement consideration is no longer permitted. We do not expect the update to impact our consolidated financial position, results of operations or cash flows.

Fair Value Measurements. In January 2010, the FASB issued the following guidance which expanded the required disclosures about fair value measurements. Effective for interim and annual reporting beginning after December 15, 2009, with one new disclosure effective after December 15, 2010, we adopted this guidance in full during the interim period ended March 31, 2010.

•

ASU No. 2010-6, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements. This guidance requires (a) separate disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements along with the reasons for such transfers, (b) information about purchases, sales, issuances and settlements to be presented separately in the reconciliation for Level 3 fair value measurements, (c) fair value measurement disclosures for each class of assets and liabilities and (d) disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for fair value measurements that fall in either Level 2 or Level 3. The adoption of this guidance did not impact our consolidated financial position, results of operations or cash flows.

3. Business Combinations

Wisconsin Health Plan

On September 1, 2010, Molina acquired 100% of the voting equity interests in Avatar Partners, LLC, which is the sole shareholder of Abri Health Plan, Inc. (“Abri”), a Medicaid managed care organization based in Milwaukee, Wisconsin. This acquisition is consistent with our stated strategy to enter markets with competitive provider communities, supportive regulatory environments, significant size and, where practicable, mandated Medicaid managed care enrollment.

We expect the final purchase price for the Abri acquisition to be approximately $16 million, subject to adjustments. As of September 30, 2010, we had paid $5 million of the total purchase price. There will be two subsequent measurement dates (November 1, 2010 and February 1, 2011) on which we will compute amounts due to the sellers based on the plan’s membership on those dates. Following the final membership reconciliation on February 1, 2011, 10% of the final purchase price will be deposited to an escrow account payable at the later of 12 months or the resolution of all unresolved claims. In connection with this acquisition, we recorded $6.2 million in goodwill, and $3.9 million in various definite-lived identifiable intangible assets, with a weighted average useful life of 6.3 years. Accumulated amortization totaled approximately $135,000 as of September 30, 2010, which reflects amortization expense recorded since the acquisition date. We expect to record amortization relating to this acquisition in future years as follows— 2011: $1.1 million, 2012: $432,000, 2013: $396,000, 2014: $325,000, and 2015: $281,000.

Molina Medicaid Solutions

On May 1, 2010, we acquired a health information management business that was previously an operating unit of Unisys Corporation. This business now operates under the name Molina Medicaid Solutions^SM, or Molina Medicaid Solutions. Molina Medicaid Solutions provides design, development, implementation, and business process outsourcing solutions to state governments for their Medicaid Management Information Systems (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. As a result of this acquisition, we are diversifying our core health plan business, and we believe that the use of a common claims processing platform across our health plans and our new MMIS business will enable us to achieve synergies in the operations of both.

We paid $131.3 million to acquire Molina Medicaid Solutions. The acquisition was funded with available cash of $26 million and $105 million drawn under our credit facility. In connection with the closing, both the fourth amendment and the fifth amendment to our credit facility became effective (see Note 11, “Long-Term Debt”).

Recording of assets acquired and liabilities assumed: The transaction has been accounted for using the acquisition method of accounting which requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Accounts receivable are based on gross contractual amounts receivable, substantially all of which we expect to collect because the creditors are state governments.

The following table summarizes the provisional acquisition-date fair values of the assets acquired and liabilities assumed:

		May 1, 2010
		(In thousands)
Assets
Accounts receivable		$	17,128
Other current assets			3,884
Equipment and other long-term assets			783
Identifiable intangible assets			48,150
Goodwill			72,943
			142,888
Less: liabilities
Accounts payable and accrued liabilities			11,153
Deferred tax liability			115
Other long-term liabilities			370
Net assets acquired		$	131,250

The recorded amounts for assets and liabilities are provisional and subject to change. We will finalize the amounts recognized as we obtain the information necessary to complete the analyses, but by no later than December 31, 2010.

A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. Results that differ from the estimates and judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.

Accounts receivable: Accounts receivable are stated at fair value, based on the gross contractual amounts receivable. We expect to collect substantially all of the accounts receivable because the creditors are state governments.

Identifiable intangible assets: The following table is a summary of the fair value estimates of the identifiable intangible assets and their weighted-average useful lives:

		Estimated Fair				Weighted Average
		Value				Useful Life
		(In thousands)				(years)
Customer relationships		$	24,550				5.2
Contract backlog			23,600				3.3
		$	48,150

Accumulated amortization totaled approximately $6.4 million as of September 30, 2010, which reflects total amortization recorded since the acquisition date. For identifiable intangible assets recorded as of September 30, 2010, we expect to record amortization in future years as follows — 2011: $11.2 million, 2012: $10.6 million, 2013: $7.1 million, 2014: $5.3 million, and 2015: $1.7 million.

Goodwill: Goodwill in the amount of $72.9 million was recognized for this acquisition, of which approximately $70.9 million is expected to be deductible for tax purposes. The total goodwill amount was calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill recorded as part of the acquisition of Molina Medicaid Solutions includes:

•

Expected synergies and other benefits that we believe will result from combining the operations of Molina Medicaid Solutions with the operations of Molina;

•

Any intangible assets that do not qualify for separate recognition such as the assembled workforce; and

•

The value of the going-concern element of Molina Medicaid Solutions’ existing businesses (the higher rate of return on the assembled collection of net assets versus acquiring all of the net assets separately).

Accounts payable and accrued liabilities: Accounts payable and accrued liabilities include $1.3 million payable to the seller of Molina Medicaid Solutions, which represented a working capital adjustment provided in the purchase agreement. The working capital adjustment provided that the net working capital, or current assets minus current liabilities, on Molina Medicaid Solutions’ opening balance sheet would equal $10 million. To the extent the final net working capital conveyed by the seller exceeded $10 million, the amount would be payable back to the seller; conversely, to the extent that net working capital conveyed by the seller was less than $10 million, the shortage would be a receivable from the seller. Thus, the $1.3 million amount described above represents the amount payable to the seller for net working capital in excess of $10 million on the opening balance sheet, and was paid to the seller in August 2010.

Pro-forma impact of the acquisition: The unaudited pro-forma results presented below include the effects of the acquisition as if it had been consummated as of January 1, 2010 and 2009. The pro-forma results include the amortization associated with the acquired intangible assets and interest expense associated with debt used to fund the acquisition. To better reflect the combined operating results, material non-recurring charges directly attributable to the transaction have been excluded. In addition, the pro-forma results do not include any anticipated synergies or other expected benefits of the acquisition. Accordingly, the unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been consummated as of January 1, 2010 or January 1, 2009.

		Three Months
		Ended Sept. 30,				Nine Months Ended Sept. 30,
		2009				2010				2009
Revenue		$	942,846			$	3,044,149			$	2,781,356
Net income		$	8,557			$	40,645			$	34,369
Diluted earnings per share		$	0.33			$	1.52			$	1.32

4. 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 described in Note 3, “Business Combinations.”

We now report our financial performance based on the following two reportable segments — Health Plans and Molina Medicaid Solutions. The Health Plans segment represents our former single-segment health plan operations. The Molina Medicaid Solutions segment represents the operations of our new MMIS solutions business.

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.

Operating segment revenues and profitability for the three months and nine months ended September 30, 2010 and 2009 were as follows:

						Molina
						Medicaid
		Health Plans				Solutions				Total
		(In thousands)
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
Three months ended September 30, 2009
Premium revenue		$	914,805			$	—			$	914,805
Service revenue			—				—				—
Investment income			1,707				—				1,707
Total revenue		$	916,512			$	—			$	916,512
Operating income		$	15,089			$	—			$	15,089
Nine months ended September 30, 2009
Premium revenue		$	2,697,796			$	—			$	2,697,796
Service revenue			—				—				—
Investment income			7,336				—				7,336
Total revenue		$	2,705,132			$	—			$	2,705,132
Operating income		$	57,738			$	—			$	57,738

Reconciliation to Income before Income Taxes

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(In thousands)
Segment operating income		$	29,953			$	15,089			$	71,569			$	57,738
Interest expense			(4,600	)			(3,279	)			(12,056	)			(9,917	)
Income before income taxes		$	25,353			$	11,810			$	59,513			$	47,821

Segment Assets

						Molina
						Medicaid
		Health Plans				Solutions				Total
		(In thousands)
As of September 30, 2010		$	1,261,967			$	169,463			$	1,431,430
As of December 31, 2009		$	1,245,235			$	—			$	1,245,235

5. 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,
		2010				2009				2010				2009
		(In thousands)
Shares outstanding at the beginning of the period			25,811				25,529				25,607				26,725
Weighted-average number of shares issued			2,279				—				768				—
Weighted-average number of shares purchased			—				—				—				(865	)
Weighted-average number of shares issued			28				10				136				84
Denominator for basic earnings per share			28,118				25,539				26,511				25,944
Dilutive effect of employee stock options and stock grants(1)			245				91				291				114
Denominator for diluted earnings per share(2)			28,363				25,630				26,802				26,058

6. Share-Based Compensation

At September 30, 2010, we had employee equity incentives outstanding under two plans: (1) the 2002 Equity Incentive Plan; and (2) the 2000 Omnibus Stock and Incentive Plan (from which equity incentives are no longer awarded). 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, 2010 and 2009:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(In thousands)
Restricted stock awards		$	2,367			$	1,787			$	6,113			$	4,661
Stock options (including shares issued under our employee stock purchase plan)			393				485				1,155				1,069
Total stock-based compensation expense		$	2,760			$	2,272			$	7,268			$	5,730

As of September 30, 2010, there was $14.4 million of total unrecognized compensation expense related to unvested restricted stock awards, which we expect to recognize over a remaining weighted-average period of 2.7 years. Also as of September 30, 2010, there was $352,000 of unrecognized compensation expense related to unvested stock options, which we expect to recognize over a remaining weighted-average period of 0.6 years.

The total fair value of restricted shares granted during the nine months ended September 30, 2010 and 2009 was $11.9 million and $7.8 million, respectively. The total fair value of restricted shares vested during the nine months ended September 30, 2010 and 2009 was $6.1 million and $3.0 million, respectively. Restricted stock activity for the nine months ended September 30, 2010 is summarized below:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Unvested balance as of December 31, 2009			687,630			$	24.64
Granted			521,225				22.78
Vested			(257,781	)			25.83
Forfeited			(87,875	)			23.32
Unvested balance as of September 30, 2010			863,199				23.30

Stock option activity for the nine months ended September 30, 2010 is summarized below:

														Weighted
						Weighted								Average
						Average				Aggregate				Remaining
						Exercise				Intrinsic				Contractual
		Shares				Price				Value				Term
										(In thousands)				(Years)
Stock options outstanding as of December 31, 2009			650,739			$	30.25
Exercised			(29,702	)			25.58
Forfeited			(11,513	)			32.39
Stock options outstanding as of September 30, 2010			609,524				30.44			$	583				4.4
Stock options exercisable and expected to vest as of September 30, 2010			606,816				30.43			$	582				4.4
Exercisable as of September 30, 2010			559,974				30.29			$	580				4.2

7. 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.

Based on quoted market prices, the fair value of our convertible senior notes issued in October 2007 was $181.4 million at September 30, 2010, and $160.8 million at December 31, 2009. The carrying amount of the convertible senior notes was $162.7 million at September 30, 2010, and $158.9 million at December 31, 2009.

To prioritize the inputs we use in measuring fair value, we apply a three-tier fair value hierarchy. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of September 30, 2010, we held certain assets that are required to be measured at fair value on a recurring basis. These included investments as follows:

Balance Sheet Classification		Description
Current assets:
Investments (see Note 8)		Investment grade debt securities; designated as available-for-sale; reported at fair value based on market prices that are readily available (Level 1).
Non-current assets:
Investments (see Note 8)		Auction rate securities; designated as available-for-sale; reported at fair value based on discounted cash flow analysis or other type of valuation model (Level 3).

As of September 30, 2010, $24.7 million par value ($20.3 million fair value) of our investments consisted of auction rate securities, all of which were 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, 2010. 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, all of 2009, and continued to be unavailable as of September 30, 2010. 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 fair value of the auction rate securities as of September 30, 2010.

As of September 30, 2010, all of our auction rate securities were designated as available-for-sale securities. As a result of the decrease in fair value of auction rate securities designated as available-for-sale, we recorded pretax unrealized losses of $0.5 million to accumulated other comprehensive loss for the nine months ended September 30, 2010. We have deemed these unrealized losses to be temporary and attribute the decline in value to liquidity issues, as a result of the failed auction market, rather than to credit issues. 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 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 auction rate securities (designated as trading securities) with a certain investment securities firm. In the fourth quarter of 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. The remaining eligible auction rate securities, totaling $15.9 million as of June 30, 2010, were sold at par value on July 1, 2010. For the nine months ended September 30, 2010 and 2009, we recorded pretax gains of $4.2 million and $3.5 million, respectively, 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. When the remaining eligible auction rate securities were sold at par value on July 1, 2010, the value of the Rights was zero. For the nine months ended September 30, 2010 and 2009, we recorded pretax losses of $3.8 million and $3.2 million, respectively, on the Rights.

Our assets measured at fair value on a recurring basis at September 30, 2010, were as follows:

		Fair Value Measurements at Reporting Date Using
		Total				Level 1				Level 2				Level 3
		(In thousands)
Government -sponsored enterprise securities		$	70,787			$	70,787			$	—			$	—
Municipal securities			23,644				23,644				—				—
Corporate debt securities			79,354				79,354				—				—
U.S. treasury notes			18,296				18,296				—				—
Certificates of deposit			3,277				3,277				—				—
Auction rate securities (available-for-sale)			20,294				—				—				20,294
Total assets measured at fair value		$	215,652			$	195,358			$	—			$	20,294

The following table presents a roll-forward of the balance of our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

		(Level 3)
		(In thousands)
Balance at December 31, 2009		$	63,494
Total gains (losses):
Included in earnings:
Auction rate securities designated as trading securities			4,170
Change in fair value of Rights			(3,807	)
Included in other comprehensive income			(513	)
Settlements			(43,050	)
Balance at September 30, 2010		$	20,294
The amount of total losses for the period included in other comprehensive loss attributable to the change in unrealized losses relating to assets still held at September 30, 2010		$	(513	)

8. Investments

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

		September 30, 2010
						Gross								Estimated
						Unrealized								Fair
		Cost				Gains				Losses				Value
		(In thousands)
Government-sponsored enterprise securities		$	70,687			$	426			$	326			$	70,787
Municipal securities (including non-current auction rate securities)			48,293				144				4,499				43,938
Corporate debt securities			79,892				163				701				79,354
U.S. treasury notes			18,169				137				10				18,296
Certificates of deposit			3,277				—				—				3,277
		$	220,318			$	870			$	5,536			$	215,652

		December 31, 2009
						Gross								Estimated
						Unrealized								Fair
		Cost				Gains				Losses				Value
		(In thousands)
Government-sponsored enterprise securities		$	89,451			$	504			$	281			$	89,674
Municipal securities (including non-current auction rate securities)			82,009				3,120				4,154				80,975
Corporate debt securities			32,543				206				185				32,564
U.S. treasury notes			28,052				92				84				28,060
Certificates of deposit			3,258				—				—				3,258
		$	235,313			$	3,922			$	4,704			$	234,531

The contractual maturities of our investments as of September 30, 2010 are summarized below.

						Estimated
		Cost				Fair Value
		(In thousands)
Due in one year or less		$	100,109			$	99,474
Due one year through five years			94,779				95,071
Due after five years through ten years			1,430				1,421
Due after ten years			24,000				19,686
		$	220,318			$	215,652

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 of available-for-sale securities were $35.4 million and $66.9 million for the three months ended September 30, 2010, and 2009, respectively. Total proceeds from sales of available-for-sale securities were $101.3 million and $148.8 million for the nine months ended September 30, 2010, and 2009, respectively. Net realized investment gains for the three months and nine months ended September 30, 2010, and 2009 were not significant.

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, 2010, and December 31, 2009, 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 half of our investment in municipal securities consists of auction rate securities. As described in Note 7, “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, 2010.

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 September 30, 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)
Government-sponsored enterprise securities		$	7,712			$	17			$	9,639			$	309			$	17,351			$	326
Municipal securities			9,110				55				23,963				4,444				33,073				4,499
Corporate debt securities			45,090				331				12,350				370				57,440				701
U.S. treasury notes			8,558				10				—				—				8,558				10
		$	70,470			$	413			$	45,952			$	5,123			$	116,422			$	5,536

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, 2009. At December 31, 2009, we previously reported only those available-for-sale investments in an unrealized loss position for at least two consecutive months. To conform to the current year presentation, we have included all available-for-sale investments in an unrealized loss position at December 31, 2009. This presentation change increased the total amount of unrealized losses reported in the following table by $113,000 at December 31, 2009. The accompanying increase to the estimated fair value of the underlying investments amounted to $42.9 million at December 31, 2009.

		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)
Government-sponsored enterprise securities		$	30,460			$	187			$	7,297			$	94			$	37,757			$	281
Municipal securities			12,460				78				24,031				3,902				36,491				3,980
Corporate debt securities			13,513				149				1,203				36				14,716				185
U.S. treasury notes			21,824				84				—				—				21,824				84
		$	78,257			$	498			$	32,531			$	4,032			$	110,788			$	4,530

9. Receivables

Health Plans receivables consist primarily of amounts due from the various states in which we operate. Such receivables are subject to potential retroactive adjustment. Molina Medicaid Solutions’ receivables consist primarily of MMIS development milestone billings to states. 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:

		Sept. 30,				Dec. 31,
		2010				2009
		(In thousands)
Health Plans:
California		$	96,797			$	34,289
Michigan			14,285				14,977
Missouri			21,576				19,670
New Mexico			17,757				11,919
Ohio			23,142				37,004
Utah			5,220				6,107
Washington			14,281				9,910
Wisconsin			6,651				—
Others			3,424				2,778
			203,133				136,654
Molina Medicaid Solutions			22,414				—
Total receivables		$	225,547			$	136,654

10. 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 capitated providers. The following table presents the balances of restricted investments by health plan, and by our insurance company:

		Sept. 30,				Dec. 31,
		2010				2009
		(In thousands)
California		$	369			$	368
Florida			4,466				2,052
Michigan			1,000				1,000
Missouri			500				503
New Mexico			18,873				15,497
Ohio			9,061				9,036
Texas			3,501				1,515
Utah			1,280				578
Washington			151				151
Wisconsin			260				—
Insurance company			4,689				4,686
Other			897				888
Total		$	45,047			$	36,274

The contractual maturities of our held-to-maturity restricted investments as of September 30, 2010 are summarized below.

		Amortized				Estimated
		Cost				Fair Value
		(In thousands)
Due in one year or less		$	36,148			$	36,155
Due one year through five years			8,774				8,815
Due after five years through ten years			125				164
		$	45,047			$	45,134

11. Long-Term Debt

Credit Facility

We are a party to an Amended and Restated Credit Agreement, dated as of March 9, 2005, as amended by the first amendment on October 5, 2005, the second amendment on November 6, 2006, the third amendment on May 25, 2008, the fourth amendment on November 2009, and the fifth amendment on March 15, 2010, among Molina Healthcare Inc., certain lenders, and Bank of America N.A., as Administrative Agent (the “Credit Facility”) for a revolving credit line of $150 million that matures in May 2012. The Credit Facility is intended to be used for general corporate purposes. As described below and in Note 3, “Business Combinations,” we borrowed $105 million under the Credit Facility to acquire Molina Medicaid Solutions in the second quarter of 2010. During the third quarter of 2010, we repaid this amount using proceeds from our equity offering, described in Note 12, “Stockholders’ Equity.” As of September 30, 2010, and December 31, 2009, there was no outstanding principal balance under the Credit Facility.

To the extent that in the future we incur any obligations under the Credit Facility, such obligations will be secured by a lien on substantially all of our assets and by a pledge of the capital stock of our health plan subsidiaries (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, investments, and a fixed charge coverage ratio. 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 at any time. At September 30, 2010, we were in compliance with all financial covenants in the Credit Facility.

The commitment fee on the total unused commitments of the lenders under the Credit Facility is 50 basis points on all levels of the pricing grid, with the pricing grid referring to our ratio of consolidated funded debt to consolidated EBITDA. The pricing for LIBOR loans and base rate loans is 200 basis points at every level of the pricing grid. Thus, the applicable margins under the Credit Facility range between 2.75% and 3.75% for LIBOR loans, and between 1.75% and 2.75% for base rate loans. The Credit Facility carves out from our indebtedness and restricted payment covenants under the Credit Facility the $187.0 million current principal amount of the convertible senior notes, although the $187.0 million indebtedness is included in the calculation of our consolidated leverage ratio. The fixed charge coverage ratio set forth pursuant to the Credit Facility was 2.75x (on a pro forma basis) at December 31, 2009, and 3.00x thereafter.

The fifth amendment increased the maximum consolidated leverage ratio under the Credit Facility to 3.25 to 1.0 for the fourth quarter of 2009 (on a pro forma basis), and to 3.50 to 1.0 for the first and second quarters of 2010, and through August 14, 2010. Effective as of August 15, 2010, the consolidated leverage ratio under the Credit Facility reverted back to 2.75 to 1.0. In connection with the lenders’ approval of the fifth amendment, we paid an amendment fee of 25 basis points on the amount of each consenting lender’s commitment. We also paid an incremental commitment fee of 12.5 basis points based on each lender’s unfunded commitment during the period from the effective date of the fifth amendment through August 15, 2010.

Convertible Senior Notes

In October 2007, we sold $200.0 million aggregate principal amount of 3.75% Convertible Senior Notes due 2014 (the “Notes”). The sale of the Notes resulted in net proceeds totaling $193.4 million. During 2009, we purchased and retired $13.0 million face amount of the Notes, so the remaining aggregate principal amount totaled $187.0 million at September 30, 2010 and December 31, 2009. 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 21.3067 shares of our common stock per one thousand dollar principal amount of the Notes. This represents an initial conversion price of approximately $46.93 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. Prior to July 2014, holders may convert their Notes only under the following circumstances:

•

During any fiscal quarter after our fiscal quarter ended December 31, 2007, if the closing sale price per share of our common stock, for each of at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, is greater than or equal to 120% of the conversion price per share of our common stock;

•

During the five business day period immediately following any five consecutive trading day period in which the trading price per one thousand dollar principal amount of the Notes for each trading day of such period was less than 98% of the product of the closing price per share of our common stock on such day and the conversion rate in effect on such day; or

•

Upon the occurrence of specified corporate transactions or other specified events.

On or after July 1, 2014, holders may convert their Notes at any time prior to the close of business on the scheduled trading day immediately preceding the stated maturity date regardless of whether any of the foregoing conditions is satisfied.

We will deliver cash and shares of our common stock, if any, upon conversion of each $1,000 principal amount of Notes, as follows:

•

An amount in cash (the “principal return”) equal to the sum of, for each of the 20 Volume-Weighted Average Price (VWAP) trading days during the conversion period, the lesser of the daily conversion value for such VWAP trading day and fifty dollars (representing 1/20th of one thousand dollars); and

•

A number of shares based upon, for each of the 20 VWAP trading days during the conversion period, any excess of the daily conversion value above fifty dollars.

The proceeds from the issuance of such convertible debt instruments 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, 2010, we expect the Notes to be outstanding until their October 1, 2014 maturity date, for a remaining amortization period of 48 months. The Notes’ if-converted value did not exceed their principal amount as of September 30, 2010. At September 30, 2010, 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,
		2010				2009
		(In thousands)
Details of the liability component:
Principal amount		$	187,000			$	187,000
Unamortized discount			(24,300	)			(28,100	)
Net carrying amount		$	162,700			$	158,900

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(In thousands)
Interest cost recognized for the period relating to the:
Contractual interest coupon rate of 3.75%		$	1,753			$	1,753			$	5,259			$	5,323
Amortization of the discount on the liability component			1,291				1,197				3,800				3,563
Total interest cost recognized		$	3,044			$	2,950			$	9,059			$	8,886

12. Stockholders’ Equity

In August 2010, we commenced an underwritten public offering of 4,000,000 shares of our common stock, conducted pursuant to an effective registration statement filed with the Securities and Exchange Commission on December 8, 2008. In connection with the offering, we granted the underwriters an overallotment option to purchase up to 350,000 shares, and the single selling stockholder, the Molina Siblings Trust, granted the underwriters an option to purchase up to 250,000 shares. The overallotment option was subsequently exercised in August 2010. Our chief financial officer, John Molina, is the trustee of the Molina Siblings Trust, with sole voting and investment power. Dr. J. Mario Molina, our president and chief executive officer and the brother of John Molina, is a beneficiary of the Molina Siblings Trust, as is John Molina and each of his other three siblings.