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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 	 	 	
FORM 10-Q

 	 	 	
 
(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the quarterly period ended September 30, 2016
OR

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the transition period from             to             
Commission file number: 001-31719

 	 	 	
 
MOLINA HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)

 	 	 	

 	 	 	
Delaware	 	13-4204626	
(State or other jurisdiction of incorporation or organization)	 	(I.R.S. Employer Identification No.)	
 	 	
200 Oceangate, Suite 100
Long Beach, California	 	90802	
(Address of principal executive offices)	 	(Zip Code)	
(562) 435-3666
(Registrant’s telephone number, including area code)

 	 	 	
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	ý	Accelerated filer	¨	
 	 	 	 	
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	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  ¨ No  ý
The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of October 21, 2016, was approximately 56,821,000.

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MOLINA HEALTHCARE, INC.
Form 10-Q

For the Quarterly Period Ended September 30, 2016 
TABLE OF CONTENTS

 	 	 	
 	Part I - Financial Information 	 	
Item 1.	Financial Statements	1	
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32	
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48	
Item 4.	Controls and Procedures	48	
 	 	 	
 	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	50	
Item 3.	Defaults Upon Senior Securities	50	
Item 4.	Mine Safety Disclosures	50	
Item 5.	Other Information	50	
Item 6.	Exhibits	50	
 	Signatures	51	

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PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
MOLINA HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS

 	September 30,
2016	 	December 31,
2015	
 	(Amounts in millions,
except per-share data)	
 	(Unaudited)	 	 	
ASSETS	
Current assets:	 	 	 	
Cash and cash equivalents	$	2,842	
 	 	$	2,329	
 	
Investments	1,735	
 	 	1,801	
 	
Receivables	1,053	
 	 	597	
 	
Income taxes refundable	—	
 	 	13	
 	
Prepaid expenses and other current assets	169	
 	 	192	
 	
Derivative asset	314	
 	 	374	
 	
Total current assets	6,113	
 	 	5,306	
 	
Property, equipment, and capitalized software, net	450	
 	 	393	
 	
Deferred contract costs	83	
 	 	81	
 	
Intangible assets, net	149	
 	 	122	
 	
Goodwill	619	
 	 	519	
 	
Restricted investments	116	
 	 	109	
 	
Deferred income taxes	—	
 	 	18	
 	
Other assets	40	
 	 	28	
 	
 	$	7,570	
 	 	$	6,576	

LIABILITIES AND STOCKHOLDERS’ EQUITY	
Current liabilities:	 	 	 	
Medical claims and benefits payable	$	1,871	
 	 	$	1,685	
 	
Amounts due government agencies	1,232	
 	 	729	
 	
Accounts payable and accrued liabilities	383	
 	 	362	
 	
Deferred revenue	380	
 	 	223	
 	
Income taxes payable	19	
 	 	—	
 	
Current portion of long-term debt	466	
 	 	449	
 	
Derivative liability	314	
 	 	374	
 	
Total current liabilities	4,665	
 	 	3,822	
 	
Senior notes	971	
 	 	962	
 	
Lease financing obligations	198	
 	 	198	
 	
Deferred income taxes	6	
 	 	—	
 	
Other long-term liabilities	39	
 	 	37	
 	
Total liabilities	5,879	
 	 	5,019	

Stockholders’ equity:	 	 	 	
Common stock, $0.001 par value; 150 shares authorized; outstanding: 57 shares at September 30, 2016 and 56 shares at December 31, 2015	—	
 	 	—	
 	
Preferred stock, $0.001 par value; 20 shares authorized, no shares issued and outstanding	—	
 	 	—	
 	
Additional paid-in capital	831	
 	 	803	
 	
Accumulated other comprehensive gain (loss)	3	
 	 	(4	)	
Retained earnings	857	
 	 	758	
 	
Total stockholders' equity	1,691	
 	 	1,557	
 	
 	$	7,570	
 	 	$	6,576	
 	
See accompanying notes.

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MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME

 	Three Months Ended September 30,	 	Nine Months Ended September 30,	
 	2016	 	2015	 	2016	 	2015	
 	(In millions, except per-share data)
(Unaudited)	
Revenue:	 	 	 	 	 	 	 	
Premium revenue	$	4,191	
 	 	$	3,377	
 	 	$	12,215	
 	 	$	9,652	
 	
Service revenue	133	
 	 	47	
 	 	408	
 	 	146	
 	
Premium tax revenue	127	
 	 	99	
 	 	345	
 	 	289	
 	
Health insurer fee revenue	85	
 	 	81	
 	 	251	
 	 	203	
 	
Investment income	9	
 	 	5	
 	 	25	
 	 	12	
 	
Other revenue	1	
 	 	2	
 	 	4	
 	 	5	
 	
Total revenue	4,546	
 	 	3,611	
 	 	13,248	
 	 	10,307	
 	
Operating expenses:	 	 	 	 	 	 	 	
Medical care costs	3,748	
 	 	3,016	
 	 	10,930	
 	 	8,581	
 	
Cost of service revenue	119	
 	 	34	
 	 	362	
 	 	103	
 	
General and administrative expenses	343	
 	 	287	
 	 	1,034	
 	 	830	
 	
Premium tax expenses	127	
 	 	99	
 	 	345	
 	 	289	
 	
Health insurer fee expenses	55	
 	 	36	
 	 	163	
 	 	117	
 	
Depreciation and amortization	36	
 	 	26	
 	 	102	
 	 	76	
 	
Total operating expenses	4,428	
 	 	3,498	
 	 	12,936	
 	 	9,996	
 	
Operating income	118	
 	 	113	
 	 	312	
 	 	311	
 	
Interest expense	26	
 	 	15	
 	 	76	
 	 	45	
 	
Income before income tax expense	92	
 	 	98	
 	 	236	
 	 	266	
 	
Income tax expense	50	
 	 	52	
 	 	137	
 	 	153	
 	
Net income	$	42	
 	 	$	46	
 	 	$	99	
 	 	$	113	

Net income per share:	 	 	 	 	 	 	 	
Basic	$	0.77	
 	 	$	0.84	
 	 	$	1.79	
 	 	$	2.21	
 	
Diluted	$	0.76	
 	 	$	0.77	
 	 	$	1.77	
 	 	$	2.07	
 	
See accompanying notes.

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MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 	Three Months Ended September 30,	 	Nine Months Ended September 30,	
 	2016	 	2015	 	2016	 	2015	
 	(Amounts in millions)
(Unaudited)	
Net income	$	42	
 	 	$	46	
 	 	$	99	
 	 	$	113	
 	
Other comprehensive (loss) income:	 	 	 	 	 	 	 	
Unrealized investment (loss) gain	(3	)	 	2	
 	 	10	
 	 	1	
 	
Less: effect of income taxes	(2	)	 	—	
 	 	3	
 	 	—	
 	
Other comprehensive (loss) income, net of tax	(1	)	 	2	
 	 	7	
 	 	1	
 	
Comprehensive income	$	41	
 	 	$	48	
 	 	$	106	
 	 	$	114	

See accompanying notes.

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MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 	Nine Months Ended September 30,	
 	2016	 	2015	
 	(Amounts in millions)
(Unaudited)	
Operating activities:	 	 	 	
Net income	$	99	
 	 	$	113	
 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	
Depreciation and amortization	135	
 	 	93	
 	
Deferred income taxes	20	
 	 	(12	)	
Share-based compensation	24	
 	 	16	
 	
Amortization of convertible senior notes and lease financing obligations	23	
 	 	22	
 	
Other, net	14	
 	 	13	
 	
Changes in operating assets and liabilities:	 	 	 	
Receivables	(427	)	 	(23	)	
Prepaid expenses and other assets	(116	)	 	(63	)	
Medical claims and benefits payable	168	
 	 	359	
 	
Amounts due government agencies	503	
 	 	453	
 	
Accounts payable and accrued liabilities	1	
 	 	34	
 	
Deferred revenue	157	
 	 	(129	)	
Income taxes	32	
 	 	30	
 	
Net cash provided by operating activities	633	
 	 	906	
 	
Investing activities:	 	 	 	
Purchases of investments	(1,444	)	 	(1,311	)	
Proceeds from sales and maturities of investments	1,512	
 	 	863	
 	
Purchases of property, equipment and capitalized software	(143	)	 	(101	)	
Change in restricted investments	4	
 	 	(5	)	
Net cash paid in business combinations	(48	)	 	(77	)	
Other, net	(12	)	 	(34	)	
Net cash used in investing activities	(131	)	 	(665	)	
Financing activities:	 	 	 	
Proceeds from common stock offering, net of issuance costs	—	
 	 	373	
 	
Proceeds from employee stock plans	10	
 	 	8	
 	
Other, net	1	
 	 	3	
 	
Net cash provided by financing activities	11	
 	 	384	
 	
Net increase in cash and cash equivalents	513	
 	 	625	
 	
Cash and cash equivalents at beginning of period	2,329	
 	 	1,539	
 	
Cash and cash equivalents at end of period	$	2,842	
 	 	$	2,164	

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MOLINA HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)

 	Nine Months Ended September 30,	
 	2016	 	2015	
 	(Amounts in millions)
(Unaudited)	
Supplemental cash flow information:	 	 	 	
 	 	 	 	
Schedule of non-cash investing and financing activities:	 	 	 	
Common stock used for share-based compensation	$	(8	)	 	$	(9	)	
 	 	 	 	
Details of change in fair value of derivatives, net:	 	 	 	
(Loss) gain on 1.125% Call Option	$	(60	)	 	$	161	
 	
Gain (loss) on 1.125% Conversion Option	60	
 	 	(161	)	
Change in fair value of derivatives, net	$	—	
 	 	$	—	

Details of business combinations:	 	 	 	
Fair value of assets acquired	$	(186	)	 	$	(69	)	
Fair value of liabilities assumed	28	
 	 	—	
 	
Purchase price amounts accrued/received (paid)	8	
 	 	(8	)	
Reversal of amounts advanced to sellers in prior year	102	
 	 	—	
 	
Net cash paid in business combinations	$	(48	)	 	$	(77	)	

See accompanying notes.

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MOLINA HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2016 
1. Basis of Presentation 
Organization and Operations
Molina Healthcare, Inc. provides quality managed health care to people receiving government assistance. We offer cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist government agencies in their administration of the Medicaid program. We have three reportable segments. These segments include our Health Plans segment, which comprises the vast majority of our operations; our Molina Medicaid Solutions segment; and our Other segment, which includes our behavioral health and social services subsidiary, Pathways. As of December 31, 2015, we changed our reporting structure as a result of the Pathways acquisition in November 2015. All prior periods reported conform to this presentation.
The Health Plans segment consists of health plans in 12 states and the Commonwealth of Puerto Rico, and includes our direct delivery business. As of September 30, 2016, these health plans served 4.2 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. This membership includes Health Insurance Marketplace (Marketplace) members, most of whom receive government premium subsidies. The health plans are operated by our respective wholly owned subsidiaries in those states, each of which is licensed as a health maintenance organization (HMO). Our direct delivery business consists primarily of the operation of primary care clinics in several states in which we operate.
The Molina Medicaid Solutions segment provides support to state government agencies in the administration of their Medicaid programs including business processing, information technology development, and administrative services. Molina Medicaid Solutions is under contract with the Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, West Virginia, and the U.S. Virgin Islands, and drug rebate administration services in Florida.  
The Other segment includes businesses, such as our Pathways behavioral health and social services provider, which do not meet the quantitative thresholds for a reportable segment as defined by U.S. generally accepted accounting principles (GAAP), as well as corporate amounts not allocated to other reportable segments. 
Market Updates - Health Plans
Proposed acquisition. On August 2, 2016, we entered into substantially identical agreements with each of Aetna, Inc. and Humana, Inc. to acquire certain of their Medicare Advantage membership and other assets related to such Medicare Advantage business (the Medicare Acquisition) for cash. The Medicare Acquisition is related to Aetna Inc.'s proposed acquisition of Humana Inc. (the Aetna-Humana Merger). We expect the Medicare Acquisition to close in 2017 subject to the following:
 	 	
•	Completion of the Aetna-Humana Merger;	
 	 	
•	Resolution, in a manner permitting the Medicare Acquisition, of the pending litigation brought by the United States Department of Justice challenging the Aetna-Humana Merger;	
 	 	
•	Approval by the federal Centers for Medicare & Medicaid Services (CMS) of the novation to us of each of the contracts to be divested under the Medicare Acquisition; and	
 	 	
•	Customary closing conditions, including approvals of state departments of insurance and other regulators.	
Completed acquisitions. For all of the following transactions, see Note 4, "Business Combinations," for further information.
Illinois. On January 1, 2016, our Illinois health plan closed on its acquisitions of the Medicaid membership, and certain assets related to the Medicaid business of, Accountable Care Chicago, LLC, also known as MyCare Chicago, and Loyola Physician Partners, LLC.
On March 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related to the Medicaid business, of Better Health Network, LLC.
Michigan. On January 1, 2016, our Michigan health plan closed on its acquisition of the Medicaid and MIChild membership, and certain Medicaid and MIChild assets, of HAP Midwest Health Plan, Inc. 
New York. On August 1, 2016, we closed on our acquisition to acquire all outstanding equity interests of Today's Options of New York, Inc., which operates the Total Care Medicaid plan. 

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Washington. On January 1, 2016, our Washington health plan closed on its acquisition of the Medicaid contracts, and certain assets related to the operation of the Medicaid business, of Columbia United Providers, Inc.
Consolidation and Interim Financial Information
The consolidated financial statements include the accounts of Molina Healthcare, Inc., its subsidiaries, and variable interest entities (VIEs) in which Molina Healthcare, Inc. is considered to be the primary beneficiary. Such VIEs are insignificant to our consolidated financial position and results of operations. In the opinion of management, all adjustments considered necessary for a fair presentation of the results as of the date and for the interim periods presented have been included; such adjustments consist of normal recurring adjustments. All significant intercompany balances and transactions have been eliminated. The consolidated results of operations for the current interim period are not necessarily indicative of the results for the entire year ending December 31, 2016.
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, 2015. Accordingly, certain disclosures that would substantially duplicate the disclosures contained in the December 31, 2015 audited consolidated financial statements have been omitted. These unaudited consolidated interim financial statements should be read in conjunction with our December 31, 2015 audited consolidated financial statements.
2. Significant Accounting Policies 
Revenue Recognition – Health Plans Segment
Premium revenue is fixed in advance of the periods covered and except as described below, is not generally subject to significant accounting estimates. Premium revenues are recognized in the month that members are entitled to receive health care services, and premiums collected in advance are deferred. Certain components of premium revenue are subject to accounting estimates and fall into the following categories:
Contractual Provisions That May Adjust or Limit Revenue or Profit
Medicaid
Medical Cost Floors (Minimums), Medical Cost Corridors, and Administrative Cost Ceilings (Maximums): A portion of our premium revenue may be returned if certain minimum amounts are not spent on defined medical care costs. In the aggregate, we recorded a liability under the terms of such contract provisions of $323 million and $214 million at September 30, 2016 and December 31, 2015, respectively, to amounts due government agencies. Approximately $298 million and $208 million of the liability accrued at September 30, 2016 and December 31, 2015, respectively, relates to our participation in Medicaid Expansion programs.
In certain circumstances, the health plans may receive additional premiums if amounts spent on medical care costs exceed a defined maximum threshold. We recorded receivables of $1 million and $3 million at September 30, 2016 and December 31, 2015, respectively, relating to such provisions.
Profit Sharing and Profit Ceiling: Our contracts with certain states contain profit-sharing or profit ceiling provisions under which we refund amounts to the states if our health plans generate profit above a certain specified percentage. In some cases, we are limited in the amount of administrative costs that we may deduct in calculating the refund, if any. Under these provisions, we recorded a liability of $9 million and $10 million at September 30, 2016 and December 31, 2015, respectively, for profit in excess of the amount we are allowed to retain.
Retroactive Premium Adjustments: The state Medicaid programs periodically adjust premium rates on a retroactive basis. In these cases, we must adjust our premium revenue in the period in which we learn of the adjustment, rather than in the months of service to which the retroactive adjustment applies. In the first quarter of 2016, our Florida health plan recorded a retroactive increase to Medicaid premium revenue of approximately $18 million relating to dates of service prior to 2016.
Cost Plus Retroactive Premium Adjustments: In New Mexico, when members are retroactively enrolled into our health plan, we earn revenue only to the extent of the actual medical costs incurred by us for services provided during those retroactive periods, plus a small percentage of that medical cost for administration and profit. This arrangement first became effective July 1, 2014 (retroactive to January 1, 2014). We are paid normal monthly capitation rates for the retroactive eligibility periods, and the difference between those capitation rates and the amounts due to us on a cost plus basis are periodically settled with the state. To date, no such settlement has been made. During the years ended December 31, 2014 and 2015, our New Mexico contract was not specific as to the definition of retroactive membership, and the amount we owe the state (or that the state owes us) for the difference between capitation received and amounts due to us under the cost plus arrangement during those periods varies widely depending upon the definition of retroactive membership. Although we believe that the amount we have recorded as a

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liability for this matter is consistent with the state’s expectations, we cannot be certain that the state will not seek to recover an amount in excess of our recorded liability.
Medicare
Risk Adjustment: Our Medicare premiums are subject to retroactive increase or decrease based on the health status of our Medicare members (as measured by member risk score). We estimate our members' risk scores and the related amount of Medicare revenue that will ultimately be realized for the periods presented based on our knowledge of our members’ health status, risk scores and CMS practices. Based on our estimates, we have recorded a net payable of $17 million and $4 million for anticipated Medicare risk adjustment premiums and Medicare Part D settlements at September 30, 2016 and December 31, 2015, respectively.
Marketplace
Premium Stabilization Programs: The Affordable Care Act (ACA) established Marketplace premium stabilization programs effective January 1, 2014. These programs, commonly referred to as the "3R's," include a permanent risk adjustment program, a transitional reinsurance program, and a temporary risk corridor program. We record receivables or payables related to the 3R programs and the minimum annual medical loss ratio (Minimum MLR) when the amounts are reasonably estimable as described below, and, for receivables, collection is reasonably assured. Our receivables (payables) for each of these programs, as of the dates indicated, were as follows:

 	September 30, 2016	 	December 31,
2015	
 	Current Benefit Year	 	Prior Benefit Years	 	Total	 	 	
 	(In millions)	
Risk adjustment	$	(372	)	 	$	2	
 	 	$	(370	)	 	$	(214	)	
Reinsurance	62	
 	 	4	
 	 	66	
 	 	36	
 	
Risk corridor	(4	)	 	(1	)	 	(5	)	 	(10	)	
Minimum MLR	(11	)	 	(4	)	 	(15	)	 	(3	)	
 	 	
•	Risk adjustment: Under this permanent program, our health plans' composite risk scores are compared with the overall average risk score for the relevant state and market pool. Generally, our health plans will make a risk transfer payment into the pool if their composite risk scores are below the average risk score, and will receive a risk transfer payment from the pool if their composite risk scores are above the average risk score. We estimate our ultimate premium based on insurance policy year-to-date experience, and recognize estimated premiums relating to the risk adjustment program as an adjustment to premium revenue in our consolidated statements of income. On June 30, 2016, CMS released the final update on risk transfer and reinsurance payments for the 2015 benefit year, and we adjusted our accruals accordingly.	
 	 	
•	Reinsurance: This program is designed to provide reimbursement to insurers for high cost members. Our health plans pay an annual contribution on a per-member basis, and are eligible for recoveries if claims for individual members exceed a specified threshold, up to a maximum amount. This three-year program will end on December 31, 2016. We recognize the assessments to fund the transitional reinsurance program as a reduction to premium revenue in our consolidated statements of income. We recognize recoveries under the reinsurance program as a reduction to medical care costs in our consolidated statements of income.	
 	 	
•	Risk corridor: This program is intended to limit gains and losses of insurers by comparing allowable costs to a target amount as defined by CMS. Variances from the target amount exceeding certain thresholds may result in amounts due to or receivables due from CMS. This three-year program will end on December 31, 2016. Due to uncertainties as to the amount of federal funding available to support the risk corridor program, we do not recognize amounts receivable under this program. Our estimate of the unrecorded receivable for the Marketplace risk corridor amounted to approximately $80 million as of September 30, 2016. Of this total amount, $52 million relates to the 2015 benefit year and $28 million relates to the nine months ended September 30, 2016. All liabilities are recognized as incurred. We estimate our ultimate premium based on insurance policy year-to-date experience, and recognize estimated premiums relating to the risk corridor program as an adjustment to premium revenue in our consolidated statements of income.	
Additionally, the ACA established a Minimum MLR of 80% for the Marketplace. The medical loss ratio represents medical costs as a percentage of premium revenue. What constitutes medical costs and premium revenue are specifically defined by federal regulations. If the Minimum MLR is not met, we may be required to pay rebates to our Marketplace policyholders. Each of the 3R programs is taken into consideration when computing the Minimum MLR. We recognize estimated rebates under the Minimum MLR as an adjustment to premium revenue in our consolidated statements of income.

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Quality Incentives
At several of our health plans, revenue ranging from approximately 1% to 3% of certain health plan premiums is earned only if certain performance measures are met.
During the second quarter of 2016, we were informed by the Texas Department of Health and Human Services that it will not recoup any quality revenue for calendar years 2014, 2015, and 2016. Therefore, we recognized previously deferred quality revenue amounting to approximately $51 million in the second quarter of 2016. Of the $51 million total adjustment, $44 million related to 2015 and 2014 dates of service, and $7 million related to the first quarter of 2016.
The following table quantifies the quality incentive premium revenue recognized for the periods presented, including the amounts earned in the periods presented and prior periods. Although the reasonably possible effects of a change in estimate related to quality incentive premium revenue as of September 30, 2016 are not known, we have no reason to believe that the adjustments to prior periods noted below are not indicative of the potential future changes in our estimates as of September 30, 2016, other than the Texas quality revenue recognized in the second quarter of 2016 described above.

 	Three Months Ended September 30,	 	Nine Months Ended September 30,	
 	2016	 	2015	 	2016	 	2015	
 	(In millions)	
Maximum available quality incentive premium - current period	$	33	
 	 	$	28	
 	 	$	114	
 	 	$	86	
 	
Amount of quality incentive premium revenue recognized in current period:	 	 	 	 	 	 	 	
Earned current period	$	26	
 	 	$	17	
 	 	$	80	
 	 	$	38	
 	
Earned prior periods	—	
 	 	—	
 	 	54	
 	 	11	
 	
Total	$	26	
 	 	$	17	
 	 	$	134	
 	 	49	

Quality incentive premium revenue recognized as a percentage of total premium revenue	0.6	%	 	0.5	%	 	1.1	%	 	0.5	%	
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, nondeductible expenses such as the Health Insurer Fee (HIF), certain compensation, and other general and administrative expenses. The effective tax rate may be subject to fluctuations during the year, particularly as a result of the level of pretax earnings, and also as new information is obtained. Such information may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of pretax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or the reversal of the recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business. For example, in the third quarter of 2016 we entered into an agreement with the seller in the Pathways acquisition to change the allocation of the purchase price across certain legal entities, allowing us to recognize a $4 million tax benefit. 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.
Recent Accounting Pronouncements
Statement of Cash Flows. In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-15,  Classification of Certain Cash Receipts and Cash Payments , which amends Accounting Standards Codification (ASC) 230 to add or clarify guidance on eight classification issues related to the statement of cash flows such as debt prepayment or debt extinguishment costs, and contingent consideration payments made after a business combination. ASU 2016-15 is effective for fiscal periods beginning after December 15, 2017 and must be adopted using a retrospective transition method to each period presented but may be applied prospectively if retrospective application would be impracticable. Early adoption is permitted, including adoption in an interim period. We are evaluating the potential effects of the adoption to our financial statements.
Revenue Recognition. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606). The amendments, which address transition, collectibility, non-cash consideration and the presentation of sales and other similar taxes, do not change the core principles of ASU 2014-09, but rather address implementation issues and are intended to result in

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more consistent application. We intend to adopt this standard on January 1, 2018. We are evaluating the potential effects of the adoption to our financial statements.
In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which amends certain aspects of ASC 606,  Revenue from Contracts with Customers . ASU 2016-10 amends step two of the new revenue standard’s five-step model to include guidance on immaterial promised goods or services, shipping and handling activities and identifying when promises represent performance obligations. ASU 2016-10 also provides guidance related to licensing such as, but not limited to, sales-based and usage-based royalties and renewals of licenses that provide a right to use intellectual property. We intend to adopt this standard on January 1, 2018. We are evaluating the potential effects of the adoption to our financial statements.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers - Principal vs. Agent Considerations, which amends the principal–versus–agent implementation guidance in ASC 606. ASU 2016-08 clarifies that an entity should evaluate whether it is the principal or agent for each specified good or service promised in a contract with a customer as defined in ASC 606. The entity must first identify each specified good or service to be provided to the customer and then assess whether it controls each specified good or service. The ASU also removed two of the five indicators used in evaluating control under the old guidance and reframes the remaining three indicators. We intend to adopt this standard on January 1, 2018. We are evaluating the potential effects of the adoption to our financial statements.
Credit Losses. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost, such as loans, receivables and held-to-maturity debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument's contractual life. ASU 2016-13 is effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings. Early adoption is permitted. We are evaluating the potential effects of the adoption to our financial statements.
Stock Compensation. In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation, which simplifies several aspects of accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax and classification in the statement of cash flows. ASU 2016-09 is effective for fiscal periods beginning after December 15, 2016 and must be adopted using the modified retrospective approach except for classification in the statement of cash flows, which must be adopted using either the prospective or retrospective approach. Early adoption is permitted. We are evaluating the potential effects of the adoption to our financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (SEC) did not have, or are not believed by management to have, a material impact on our present or future consolidated financial statements.

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3. Net Income per Share 
The following table sets forth the calculation of basic and diluted net income per share:

 	Three Months Ended September 30,	 	Nine Months Ended September 30,	
 	2016	 	2015	 	2016	 	2015	
 	(In millions, except net income per share)	
Numerator:	 	 	 	 	 	 	 	
Net income	$	42	
 	 	$	46	
 	 	$	99	
 	 	$	113	
 	
Denominator:	 	 	 	 	 	 	 	
Shares outstanding at the beginning of the period	56	
 	 	55	
 	 	55	
 	 	49	
 	
Weighted-average number of shares:	 	 	 	 	 	 	 	
Issued in common stock offering	—	
 	 	—	
 	 	—	
 	 	2	
 	
Denominator for basic net income per share	56	
 	 	55	
 	 	55	
 	 	51	
 	
Effect of dilutive securities:	 	 	 	 	 	 	 	
Share-based compensation	—	
 	 	—	
 	 	—	
 	 	1	
 	
Convertible senior notes (1)	—	
 	 	1	
 	 	—	
 	 	1	
 	
1.125% Warrants (1)	—	
 	 	4	
 	 	1	
 	 	2	
 	
Denominator for diluted net income per share	56	
 	 	60	
 	 	56	
 	 	55	

Net income per share (2):	 	 	 	 	 	 	 	
Basic	$	0.77	
 	 	$	0.84	
 	 	$	1.79	
 	 	$	2.21	
 	
Diluted	$	0.76	
 	 	$	0.77	
 	 	$	1.77	
 	 	$	2.07	
 	
______________________________
 	 	
(1)	For more information regarding the convertible senior notes, refer to Note 10, "Debt." For more information regarding the 1.125% Warrants, refer to Note 12, "Stockholders' Equity."	
 	 	
(2)	Source data for calculations in thousands.	
4. Business Combinations 
Health Plans Segment
In 2016, we closed on several business combinations in the Health Plans segment, consistent with our strategy to grow in our existing markets and expand into new markets. For all of these transactions, we applied the acquisition method of accounting, where the total purchase price was allocated, or preliminarily allocated, to tangible and intangible assets acquired, and liabilities assumed based on their respective fair values. For the Health Plans acquisitions described below, except New York, only intangible assets were acquired. All of these acquisitions were funded using available cash and acquisition-related costs were insignificant. The individual transactions were as follows:
Illinois. On January 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related to the Medicaid business of, Accountable Care Chicago, LLC, also known as MyCare Chicago. The final purchase price was approximately $30 million, and the Illinois health plan added approximately 50,000 Medicaid members as a result of this transaction.
On January 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related to the Medicaid business, of Loyola Physician Partners, LLC. The final purchase price was approximately $12 million, and the Illinois health plan added approximately 18,000 Medicaid members as a result of this transaction.
On March 1, 2016, our Illinois health plan closed on its acquisition of the Medicaid membership, and certain assets related to the Medicaid business, of Better Health Network, LLC. The final purchase price was approximately $15 million, and the Illinois health plan added approximately 28,000 Medicaid members as a result of this transaction.
Michigan. On January 1, 2016, our Michigan health plan closed on its acquisition of the Medicaid and MIChild membership, and certain Medicaid and MIChild assets, of HAP Midwest Health Plan, Inc. The final purchase price was approximately $31 million, and the Michigan health plan added approximately 68,000 Medicaid and MIChild members as a result of this transaction.

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New York. On August 1, 2016, we closed on our acquisition to acquire all outstanding equity interests of Today's Options of New York, Inc., which operates the Total Care Medicaid plan. The initial purchase price was approximately $38 million, and we now serve approximately 37,000 Medicaid members in upstate New York as a result of the transaction. As of September 30, 2016, the purchase price allocation was preliminary, subject to final purchase price adjustments as provided in the stock purchase agreement.
Washington. On January 1, 2016, our Washington health plan closed on its acquisition of the Medicaid contracts, and certain assets related to the operation of the Medicaid business, of Columbia United Providers, Inc. The final purchase price was approximately $28 million, and the Washington health plan added approximately 57,000 Medicaid members as a result of this transaction.
For these acquisitions, we recorded goodwill to the Health Plans segment amounting to $95 million in the aggregate, which relates to future economic benefits arising from expected synergies to be achieved. Such synergies include use of our existing infrastructure to support the added membership. In general, the amount recorded as goodwill is deductible for income tax purposes. For the New York acquisition, the tax deductibility of goodwill will be determined once the purchase price is finalized.
The following table presents the intangible assets identified in the transactions described above. The weighted-average amortization period, in the aggregate, is 5.7 years. For these acquisitions in the aggregate, we expect to record amortization of approximately $6 million in 2016, $8 million per year in the years 2017 through 2020, and $3 million in 2021.

 	Fair Value	 	Life	
 	(In millions)	 	(Years)	
Intangible asset type:	 	 	 	
Contract rights - member list	$	38	
 	 	5	
Provider network	7	
 	 	10	
 	$	45	
 	 	 	
Other Segment
Pathways.On November 1, 2015, we acquired the outstanding ownership interests in Pathways Health and Community Support LLC (Pathways). In the third quarter of 2016, we recorded a pre-acquisition contingent liability and corresponding indemnification asset in the amount of $14 million in connection with the Rodriguez Litigation matter defined and described further in Note 14, "Commitments and Contingencies." Also in the third quarter of 2016, certain tax elections were made such that approximately 50% of the goodwill recorded in this transaction is deductible for income tax purposes.
5. Fair Value Measurements 
We consider the carrying amounts of cash and cash equivalents and other current assets and current liabilities (not including derivatives and the current portion of long-term debt) to approximate their fair values because of the relatively short period of time between the origination of these instruments and their expected realization or payment. For our financial instruments measured at fair value on a recurring basis, we prioritize the inputs used in measuring fair value according to a three-tier fair value hierarchy as follows:
Level 1 — Observable Inputs. Level 1 financial instruments 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 — Directly or Indirectly Observable Inputs. Level 2 financial instruments are traded frequently though not necessarily daily. Fair value for these investments 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. Level 3 financial instruments are valued using unobservable inputs that represent management's best estimate of what market participants would use in pricing the financial instrument at the measurement date. Our Level 3 financial instruments include derivative financial instruments.
Derivative financial instruments include the 1.125% Call Option derivative asset and the 1.125% Conversion Option derivative liability. These derivatives are not actively traded and are valued based on an option pricing model that uses observable and unobservable market data for inputs. Significant market data inputs used to determine fair value as of September 30, 2016 included the price of our common stock, the time to maturity of the derivative instruments, the risk-free interest rate, and the implied volatility of our common stock. As described further in Note 11, “Derivatives,” the 1.125% Call Option asset and the 1.125% Conversion Option liability were designed such that changes in their fair values offset, with minimal impact to the

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consolidated statements of income. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such instruments is mitigated.
The changes in fair value of Level 3 financial instruments were insignificant to our results of operations for the nine months ended September 30, 2016.
Our financial instruments measured at fair value on a recurring basis at September 30, 2016, were as follows:

 	Total	 	Level 1	 	Level 2	 	Level 3	
 	(In millions)	
Corporate debt securities	$	1,127	
 	 	$	—	
 	 	$	1,127	
 	 	$	—	
 	
Government-sponsored enterprise securities (GSEs)	259	
 	 	259	
 	 	—	
 	 	—	
 	
Municipal securities	148	
 	 	—	
 	 	148	
 	 	—	
 	
Asset-backed securities	76	
 	 	—	
 	 	76	
 	 	—	
 	
U.S. treasury notes	65	
 	 	65	
 	 	—	
 	 	—	
 	
Certificates of deposit	60	
 	 	—	
 	 	60	
 	 	—	
 	
Subtotal - current investments	1,735	
 	 	324	
 	 	1,411	
 	 	—	
 	
1.125% Call Option derivative asset	314	
 	 	—	
 	 	—	
 	 	314	
 	
Total assets measured at fair value on a recurring basis	$	2,049	
 	 	$	324	
 	 	$	1,411	
 	 	$	314	

1.125% Conversion Option derivative liability	$	314	
 	 	$	—	
 	 	$	—	
 	 	$	314	
 	
Total liabilities measured at fair value on a recurring basis	$	314	
 	 	$	—	
 	 	$	—	
 	 	$	314	
 	
Our financial instruments measured at fair value on a recurring basis at December 31, 2015, were as follows:

 	Total	 	Level 1	 	Level 2	 	Level 3	
 	(In millions)	
Corporate debt securities	$	1,184	
 	 	$	—	
 	 	$	1,184	
 	 	$	—	
 	
GSEs	211	
 	 	211	
 	 	—	
 	 	—	
 	
Municipal securities	185	
 	 	—	
 	 	185	
 	 	—	
 	
Asset-backed securities	63	
 	 	—	
 	 	63	
 	 	—	
 	
U.S. treasury notes	78	
 	 	78	
 	 	—	
 	 	—	
 	
Certificates of deposit	80	
 	 	—	
 	 	80	
 	 	—	
 	
Subtotal - current investments	1,801	
 	 	289	
 	 	1,512	
 	 	—	
 	
1.125% Call Option derivative asset	374	
 	 	—	
 	 	—	
 	 	374	
 	
Total assets measured at fair value on a recurring basis	$	2,175	
 	 	$	289	
 	 	$	1,512	
 	 	$	374	

1.125% Conversion Option derivative liability	$	374	
 	 	$	—	
 	 	$	—	
 	 	$	374	
 	
Total liabilities measured at fair value on a recurring basis	$	374	
 	 	$	—	
 	 	$	—	
 	 	$	374	
 	
Fair Value Measurements – Disclosure Only
The carrying amounts and estimated fair values of our senior notes, which are classified as Level 2 financial instruments, are indicated in the following table.

 	September 30, 2016	 	December 31, 2015	
 	Carrying
Value	 	
Fair Value	 	Carrying
Value	 	
Fair Value	
 	(In millions)	
5.375% Notes	$	690	
 	 	$	725	
 	 	$	689	
 	 	$	700	
 	
1.125% Convertible Notes	466	
 	 	827	
 	 	448	
 	 	865	
 	
1.625% Convertible Notes	281	
 	 	358	
 	 	273	
 	 	365	
 	
 	$	1,437	
 	 	$	1,910	
 	 	$	1,410	
 	 	$	1,930	

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

 	September 30, 2016	
 	Amortized	 	Gross
Unrealized	 	Estimated
Fair	
 	Cost	 	Gains	 	Losses	 	Value	
 	(In millions)	
Corporate debt securities	$	1,123	
 	 	$	4	
 	 	$	—	
 	 	$	1,127	
 	
GSEs	259	
 	 	—	
 	 	—	
 	 	259	
 	
Municipal securities	147	
 	 	1	
 	 	—	
 	 	148	
 	
Asset-backed securities	76	
 	 	—	
 	 	—	
 	 	76	
 	
U.S. treasury notes	65	
 	 	—	
 	 	—	
 	 	65	
 	
Certificates of deposit	60	
 	 	—	
 	 	—	
 	 	60	
 	
 	$	1,730	
 	 	$	5	
 	 	$	—	
 	 	$	1,735	

 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	December 31, 2015	
 	Amortized	 	Gross
Unrealized	 	Estimated
Fair	
 	Cost	 	Gains	 	Losses	 	Value	
 	(In millions)	
Corporate debt securities	$	1,189	
 	 	$	—	
 	 	$	5	
 	 	$	1,184	
 	
GSEs	212	
 	 	—	
 	 	1	
 	 	211	
 	
Municipal securities	186	
 	 	—	
 	 	1	
 	 	185	
 	
Asset-backed securities	63	
 	 	—	
 	 	—	
 	 	63	
 	
U.S. treasury notes	78	
 	 	—	
 	 	—	
 	 	78	
 	
Certificates of deposit	80	
 	 	—	
 	 	—	
 	 	80	
 	
 	$	1,808	
 	 	$	—	
 	 	$	7	
 	 	$	1,801	
 	
The contractual maturities of our investments as of September 30, 2016 are summarized below:

 	Amortized Cost	 	Estimated
Fair Value	
 	(In millions)	
Due in one year or less	$	887	
 	 	$	887	
 	
Due after one year through five years	817	
 	 	821	
 	
Due after five years through ten years	26	
 	 	27	
 	
 	$	1,730	
 	 	$	1,735	
 	
Gross realized gains and losses from sales of available-for-sale securities are calculated under the specific identification method and are included in investment income. Gross realized investment gains and losses for the three and nine months ended September 30, 2016 and 2015 were insignificant.
We have determined that unrealized gains and losses at September 30, 2016 and December 31, 2015, are temporary in nature, because the change in market value for these securities resulted from fluctuating interest rates, rather than a deterioration of the creditworthiness of the issuers. So long as we maintain the intent and ability to hold these securities to maturity, we are unlikely to experience 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. 
There were no available-for-sale investments in a material continuous loss position as of September 30, 2016.

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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, 2015:

 	In a Continuous Loss Position
for Less than 12 Months	 	In a Continuous Loss Position
for 12 Months or More	
 	Estimated
Fair
Value	 	Unrealized
Losses	 	Total
Number of
Positions	 	Estimated
Fair
Value	 	Unrealized
Losses	 	Total
Number of
Positions	
 	(Dollars in millions)	
Corporate debt securities	$	825	
 	 	$	4	
 	 	588	
 	 	$	119	
 	 	$	1	
 	 	87	
 	
GSEs	182	
 	 	1	
 	 	77	
 	 	—	
 	 	—	
 	 	—	
 	
Municipal securities	128	
 	 	1	
 	 	181	
 	 	—	
 	 	—	
 	 	—	
 	
 	$	1,135	
 	 	$	6	
 	 	846	
 	 	$	119	
 	 	$	1	
 	 	87	
 	
7. Receivables 
Receivables consist primarily of amounts due from government Medicaid agencies, which may be subject to potential retroactive adjustments. Because all of our receivable amounts are readily determinable and substantially all of our creditors are governmental authorities, our allowance for doubtful accounts is immaterial. The information below is presented by segment.   

 	September 30,
2016	 	December 31,
2015	
 	(In millions)	
California	$	174	
 	 	$	104	
 	
Florida	79	
 	 	22	
 	
Illinois	81	
 	 	35	
 	
Michigan	71	
 	 	39	
 	
New Mexico	78	
 	 	51	
 	
New York	33	
 	 	—	
 	
Ohio	133	
 	 	66	
 	
Puerto Rico	82	
 	 	33	
 	
South Carolina	12	
 	 	6	
 	
Texas	62	
 	 	56	
 	
Utah	32	
 	 	18	
 	
Washington	94	
 	 	53	
 	
Wisconsin	27	
 	 	22	
 	
Direct delivery and other	3	
 	 	6	
 	
Total Health Plans segment	961	
 	 	511	
 	
Molina Medicaid Solutions segment	39	
 	 	37	
 	
Other segment	53	
 	 	49	
 	
 	$	1,053	
 	 	$	597	
 	
8. Restricted Investments 
Pursuant to the regulations governing our Health Plans segment subsidiaries, we maintain statutory deposits and deposits required by government authorities in certificates of deposit and U.S. treasury securities. We also maintain restricted investments as protection against the insolvency of certain capitated providers. The following table presents the balances of

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restricted investments:

 	September 30,
2016	 	December 31,
2015	
 	(In millions)	
Florida	$	28	
 	 	$	34	
 	
Illinois	3	
 	 	—	
 	
Michigan	1	
 	 	1	
 	
New Mexico	43	
 	 	43	
 	
New York	9	
 	 	—	
 	
Ohio	12	
 	 	12	
 	
Puerto Rico	10	
 	 	10	
 	
Texas	4	
 	 	4	
 	
Utah	4	
 	 	4	
 	
Wisconsin	1	
 	 	1	
 	
Other	1	
 	 	—	
 	
Total Health Plans segment	$	116	
 	 	$	109	
 	
The contractual maturities of our held-to-maturity restricted investments as of September 30, 2016 are summarized below:

 	Amortized
Cost	 	Estimated
Fair Value	
 	(In millions)	
Due in one year or less	$	115	
 	 	$	115	
 	
Due after one year through five years	1	
 	 	1	
 	
 	$	116	
 	 	$	116	
 	
9. Medical Claims and Benefits Payable 
The following table provides the details of our medical claims and benefits payable (including amounts payable for the provision of long-term services and supports, or LTSS) as of the dates indicated.

 	September 30,
2016	 	December 31,
2015	
 	(In millions)	
Fee-for-service claims incurred but not paid (IBNP)	$	1,333	
 	 	$	1,191	
 	
Pharmacy payable	114	
 	 	88	
 	
Capitation payable	27	
 	 	140	
 	
Other	397	
 	 	266	
 	
 	$	1,871	
 	 	$	1,685	
 	
"Other" medical claims and benefits payable include amounts payable to certain providers for which we act as an intermediary on behalf of various government agencies without assuming financial risk. Such receipts and payments do not impact our consolidated statements of income. Non-risk provider payables amounted to $237 million and $167 million as of September 30, 2016 and December 31, 2015, respectively.
The following table presents the components of the change in our medical claims and benefits payable for the periods indicated. The amounts presented for “Components of medical care costs related to: Prior periods” represent the amount by which our original estimate of medical claims and benefits payable at the beginning of the period were more than the actual amount of the liability based on information (principally the payment of claims) developed since that liability was first reported.

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 	Nine Months Ended September 30, 2016	 	Year Ended
December 31, 2015	
 	(Dollars in millions)	
Medical claims and benefits payable, beginning balance	$	1,685	
 	 	$	1,201	
 	
Components of medical care costs related to:	 	 	 	
Current period	11,120	
 	 	11,935	
 	
Prior periods	(190	)	 	(141	)	
Total medical care costs	10,930	
 	 	11,794	

Change in non-risk provider payables	70	
 	 	48	

Payments for medical care costs related to:	 	 	 	
Current period	9,536	
 	 	10,448	
 	
Prior periods	1,278	
 	 	910	
 	
Total paid	10,814	
 	 	11,358	
 	
Medical claims and benefits payable, ending balance	$	1,871	
 	 	$	1,685	
 	
Benefit from prior period as a percentage of:	 	 	 	
Balance at beginning of period	11.3	%	 	11.8	%	
Premium revenue, trailing twelve months	1.2	%	 	1.1	%	
Medical care costs, trailing twelve months	1.3	%	 	1.2	%	
As indicated above, the amounts ultimately paid out on our medical claims and benefits payable liabilities in fiscal years 2016 and 2015 were less than what we had expected when we had established those liabilities. The differences between our original estimates and the amounts ultimately paid out (or now expected to be ultimately paid out) for the most part related to IBNP. While many related factors working in conjunction with one another serve to determine the accuracy of our estimates, we are seldom able to quantify the impact that any single factor has on a change in estimate. In addition, given the variability inherent in the reserving process, we will only be able to identify specific factors if they represent a significant departure from expectations. As a result, we do not expect to be able to fully quantify the impact of individual factors on changes in estimates.
We believe that the most significant uncertainties surrounding our IBNP estimates at September 30, 2016 are as follows:
 	 	
•	Our New York health plan acquisition closed on August 1, 2016. This acquisition added approximately 37,000 new members. Because these members are new to Molina, our estimates of the liability we have incurred for services provided to these members are subject to more than the usual amount of uncertainty.	
 	 	
•	At our Florida, New Mexico, Puerto Rico, Utah and Washington health plans, we overpaid certain inpatient and outpatient facility claims. We adjusted our claims payment history to reflect the claims payment pattern that would have occurred without these overpayments. For this reason, our liability estimates at these health plans are subject to more than the usual amount of uncertainty.	
 	 	
•	At our Washington health plan, the covered benefits in two counties were expanded effective April 2016 to include behavioral health benefits under the state's new fully integrated managed care program, which impacted about 85,000 members. Because these are new benefits, our liability estimate at this health plan is subject to more than the usual amount of uncertainty.	
 	 	
•	Fluctuations in the volume of claims received in a paper format (rather than an electronic format) during the third quarter have created more than the usual amount of uncertainty regarding our estimate of the liability at our California health plan.	
We recognized favorable prior period claims development in the amount of $190 million for the nine months ended September 30, 2016. This amount represents our estimate, as of September 30, 2016, of the extent to which our initial estimate of medical claims and benefits payable at December 31, 2015 was more than the amount that will ultimately be paid out in satisfaction of that liability. We believe the overestimation was due primarily to the following factors:
 	 	
•	A new version of diagnostic codes was required for all claims with dates of service on October 1, 2015, and later. As a result, payment was delayed or denied for a significant number of claims due to provider submission of claims with diagnostic codes that were no longer valid. Once providers were able to submit claims with the correct diagnostic codes, our actual costs were ultimately less than expected.	

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•	At our New Mexico health plan, we overestimated the impact of several pending high-dollar claims, and our actual costs were ultimately less than expected.	
 	 	
•	At our Washington health plan, we overpaid certain outpatient facility claims in 2015 when the state converted to a new payment methodology. We did not include an estimate in the reserves for this potential recovery as of December 31, 2015.	
 	 	
•	At our California health plan, approximately 55,000 new members were added to our Medicaid Expansion product in 2015. For these new members, our actual costs were ultimately less than expected.	
10. Debt 
As of September 30, 2016, contractual maturities of debt for the years ending December 31 are as follows:

 	Total	 	2016	 	2017	 	2018	 	2019	 	2020	 	Thereafter	
 	(In millions)	
5.375% Notes	$	700	
 	 	$	—	
 	 	$	—	
 	 	$	—	
 	 	$	—	
 	 	$	—	
 	 	$	700	
 	
1.125% Convertible Notes	550	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	550	
 	 	—	
 	
1.625% Convertible Notes (1)	302	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	302	
 	
 	$	1,552	
 	 	$	—	
 	 	$	—	
 	 	$	—	
 	 	$	—	
 	 	$	550	
 	 	$	1,002	

(1)	The 1.625% Notes have a contractual maturity date in 2044; however, on contractually specified dates beginning in 2018, holders of the 1.625% Notes may require us to repurchase some or all of the 1.625% Notes, or we may redeem any or all of the 1.625% Notes.	
Substantially all of our debt is held at the parent, which is reported in the Other segment. The principal amounts, unamortized discount (net of premium related to the 1.625% Notes), unamortized issuance costs, and net carrying amounts of debt were as follows:

 	Principal Balance	 	Unamortized Discount	 	Unamortized Issuance Costs	 	Net Carrying Amount	
 	(In millions)	
September 30, 2016:	 	 	 	 	 	 	 	
5.375% Notes	$	700	
 	 	$	—	
 	 	$	10	
 	 	$	690	
 	
1.125% Convertible Notes	550	
 	 	78	
 	 	6	
 	 	466	
 	
1.625% Convertible Notes	302	
 	 	18	
 	 	3	
 	 	281	
 	
 	$	1,552	
 	 	$	96	
 	 	$	19	
 	 	$	1,437	
 	
December 31, 2015:	 	 	 	 	 	 	 	
5.375% Notes	$	700	
 	 	$	—	
 	 	$	11	
 	 	$	689	
 	
1.125% Convertible Notes	550	
 	 	95	
 	 	7	
 	 	448	
 	
1.625% Convertible Notes	302	
 	 	25	
 	 	4	
 	 	273	
 	
Other	1	
 	 	—	
 	 	—	
 	 	1	
 	
 	$	1,553	
 	 	$	120	
 	 	$	22	
 	 	$	1,411	
 	
Interest cost recognized relating to our convertible senior notes for the periods presented was as follows:

 	Three Months Ended September 30,	 	Nine Months Ended September 30,	
 	2016	 	2015	 	2016	 	2015	
 	(In millions)	
Contractual interest coupon rate	$	2	
 	 	$	3	
 	 	$	8	
 	 	$	9	
 	
Amortization of the discount	7	
 	 	7	
 	 	22	
 	 	21	
 	
 	$	9	
 	 	$	10	
 	 	$	30	
 	 	$	30	

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Debt Commitment Letter. On August 2, 2016, in connection with the Medicare Acquisition, we entered into a debt commitment letter with Barclays Bank PLC (Barclays). The primary terms of the debt commitment letter provide that Barclays will lend us up to $400 million which may be used as follows: to finance the Medicare Acquisition, including related transaction costs and regulatory or statutory capital requirements; to finance any ongoing working capital requirements; or for other general corporate purposes. 
5.375% Notes due 2022. On November 10, 2015, we completed the private offering of $700 million aggregate principal amount of senior notes (5.375% Notes) due November 15, 2022, unless earlier redeemed. In connection with their issuance and sale, we entered into a registration rights agreement to exchange the 5.375% Notes for registered notes having substantially identical terms, including guarantees. Such exchange was completed on September 16, 2016. Interest on the 5.375% Notes is payable semiannually in arrears on May 15 and November 15.
Certain of our wholly owned subsidiaries jointly and severally guarantee our obligations under the 5.375% Notes. The 5.375% Notes contain customary non-financial covenants and change of control provisions. At September 30, 2016, we were in compliance with all financial covenants under the 5.375% Notes.
Credit Facility. In June 2015, weentered into an unsecured $250 million revolving credit facility (Credit Facility). The Credit Facility has a term of five years and all amounts outstanding will be due and payable on June 12, 2020. Subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, we may increase the Credit Facility to up to $350 million. As of September 30, 2016, outstanding letters of credit amounting to $6 million reduced the borrowing capacity to $244 million, and no amounts were outstanding under the Credit Facility. 
Borrowings under the Credit Facility bear interest based, at our election, on a base rate or an adjusted London Interbank Offered Rate (LIBOR), plus in each case the applicable margin. In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the Credit Facility, we are required to pay a quarterly commitment fee.
Certain of our wholly owned subsidiaries jointly and severally guarantee our obligations under the Credit Facility. The Credit Facility contains customary non-financial and financial covenants, including a minimum fixed charge coverage ratio, a maximum debt-to-EBITDA ratio and minimum statutory net worth. At September 30, 2016, we were in compliance with all financial covenants under the Credit Facility.  
1.125% Cash Convertible Senior Notes due 2020.In February 2013, we issued $550 million aggregate principal amount of 1.125% cash convertible senior notes (1.125% Notes) due January 15, 2020, unless earlier repurchased or converted. 
Interest is payable semiannually in arrears on January 15 and July 15. The 1.125% Notes are convertible only into cash, and not into shares of our common stock or any other securities. The initial conversion rate for the 1.125% Notes is 24.5277 shares of our common stock per $1,000 principal amount of the 1.125% Notes. This represents an initial conversion price of approximately $40.77 per share of our common stock. The 1.125% Notes met the stock price trigger in the quarter ended September 30, 2016, and are convertible to cash through at least December 31, 2016. Because the 1.125% Notes may be converted into cash within 12 months, the $466 million carrying amount is reported in current portion of long-term debt as of September 30, 2016.
The 1.125% Notes contain an embedded cash conversion option (the 1.125% Conversion Option), which was separated from the 1.125% Notes and accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the 1.125% Conversion Option settles or expires. The initial fair value liability of the 1.125% Conversion Option simultaneously reduced the carrying value of the 1.125% Notes (effectively an original issuance discount). This discount is amortized to the 1.125% Notes' principal amount through the recognition of non-cash interest expense over the expected life of the debt. This has resulted in our recognition of interest expense on the 1.125% Notes at an effective rate of approximately 6%. As of September 30, 2016, the 1.125% Notes have a remaining amortization period of 3.3 years. The 1.125% Notes' if-converted value exceeded their principal amount by approximately $177 million and $332 million as of September 30, 2016 and December 31, 2015, respectively.
1.625% Convertible Senior Notes due 2044. In September 2014, we issued $125 million principal amount of 1.625% convertible senior notes (1.625% Notes) due August 15, 2044, unless earlier repurchased, redeemed or converted. Combined with the 1.625% Notes issued in an exchange transaction in 2014, the aggregate principal amount of 1.625% Notes issued was $302 million. Interest is payable semiannually in arrears on February 15 and August 15. The initial conversion rate for the 1.625% Notes is 17.2157 shares of our common stock per $1,000 principal amount of the 1.625% Notes. This represents an initial conversion price of approximately $58.09 per share of our common stock. As of September 30, 2016, the 1.625% Notes were not convertible.
Because the 1.625% Notes are net share settled and have cash settlement features, we have allocated the principal amount between a liability component and an equity component. The reduced carrying value on the 1.625% Notes resulted in a debt discount that is amortized back to the 1.625% Notes' principal amount through the recognition of non-cash interest expense over the expected life of the debt. The expected life of the debt is approximately four years, beginning on the issuance date and

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ending on the first date we may redeem the 1.625% Notes in August 2018. As of September 30, 2016, the 1.625% Notes have a remaining amortization period of 1.9 years. This has resulted in our recognition of interest expense on the 1.625% Notes at an effective rate approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued, or approximately 5%. The outstanding 1.625% Notes’ if-converted value did not exceed their principal amount at September 30, 2016 and exceeded their principal amount at December 31, 2015 by approximately $10 million. At September 30, 2016 and December 31, 2015, the equity component of the 1.625% Notes, including the impact of deferred taxes, was $23 million.
11. Derivatives 
The following table summarizes the fair values and the presentation of our derivative financial instruments (defined and discussed individually below) in the consolidated balance sheets:

 	Balance Sheet Location	 	September 30,
2016	 	December 31,
2015	
 	 	 	(In millions)	
Derivative asset:	 	 	 	 	 	
1.125% Call Option	Current assets: Derivative asset	 	$	314	
 	 	$	374	
 	
Derivative liability:	 	 	 	 	 	
1.125% Conversion Option	Current liabilities: Derivative liability	 	$	314	
 	 	$	374	
 	
Our derivative financial instruments do not qualify for hedge treatment; therefore the change in fair value of these instruments is recognized immediately in our consolidated statements of income, and reported in other expense, net. Gains and losses for our derivative financial instruments are presented individually in the consolidated statements of cash flows, supplemental cash flow information.
1.125% Notes Call Spread Overlay.Concurrent with the issuance of the 1.125% Notes in 2013, we entered into privately negotiated hedge transactions (collectively, the 1.125% Call Option) and warrant transactions (collectively, the 1.125% Warrants), with certain of the initial purchasers of the 1.125% Notes (the Counterparties). We refer to these transactions collectively as the Call Spread Overlay. Under the Call Spread Overlay, the cost of the 1.125% Call Option we purchased to cover the cash outlay upon conversion of the 1.125% Notes was reduced by proceeds from the sale of the 1.125% Warrants. Assuming full performance by the Counterparties (and 1.125% Warrants strike prices in excess of the conversion price of the 1.125% Notes), these transactions are intended to offset cash payments in excess of the principal amount of the 1.125% Notes due upon any conversion of the 1.125% Notes.
1.125% Call Option.The 1.125% Call Option, which is indexed to our common stock, is a derivative asset that requires mark-to-market accounting treatment due to cash settlement features until the 1.125% Call Option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Call Option, refer to Note 5, "Fair Value Measurements."
1.125% Conversion Option. The embedded cash conversion option within the 1.125% Notes is accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income until the cash conversion option settles or expires. For further discussion of the inputs used to determine the fair value of the 1.125% Conversion Option, refer to Note 5, "Fair Value Measurements."
As of September 30, 2016, the 1.125% Call Option and the 1.125% Conversion Option were classified as a current asset and current liability, respectively, because the 1.125% Notes may be converted within 12 months of September 30, 2016, as described in Note 10, "Debt."
12. Stockholders' Equity 
Stockholders' equity increased $134 million during the nine months ended September 30, 2016 compared with stockholders' equity at December 31, 2015. The increase was primarily due to net income of $99 million, $7 million of other comprehensive income and $28 million related to employee stock transactions.
1.125% Warrants. In connection with the Call Spread Overlay transaction described in Note 11, "Derivatives," in 2013, we issued 13,490,236 warrants with a strike price of $53.8475 per share. The number of warrants and the strike price are subject to adjustment under certain circumstances. If the market value per share of our common stock exceeds the strike price of the 1.125% Warrants on any trading day during the 160 trading day measurement period (beginning on April 15, 2020) under the 1.125% Warrants, we will be obligated to issue to the Counterparties a number of shares equal in value to the product of the amount by which such market value exceeds such strike price and 1/160th of the aggregate number of shares of our common

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stock underlying the 1.125% Warrants, subject to a share delivery cap. The 1.125% Warrants could separately have a dilutive effect to the extent that the market value per share of our common stock exceeds the applicable strike price of the 1.125% Warrants. Refer to Note 3, "Net Income per Share," for dilution information for the periods presented. We will not receive any additional proceeds if the 1.125% Warrants are exercised.
Securities Repurchase Program. Effective as of December 16, 2015, our board of directors authorized the repurchase of up to $50 million in aggregate of our common stock or senior notes. This repurchase program extends through December 31, 2016. 
Stock Incentive Plans. In connection with our equity incentive plans and employee stock purchase plan, approximately 467,000 shares of common stock were purchased or vested, net of shares used to settle employees’ income tax obligations, during the nine months ended September 30, 2016.
Charged to general and administrative expenses, total share-based compensation expense was as follows:

 	Three Months Ended September 30,	 	Nine Months Ended September 30,	
 	2016	 	2015	 	2016	 	2015	
 	(In millions)	
Restricted stock and performance awards	$	7	
 	 	$	6	
 	 	$	20	
 	 	$	13	
 	
Employee stock purchase plan and stock options	1	
 	 	1	
 	 	4	
 	 	3	
 	
 	$	8	
 	 	$	7	
 	 	$	24	
 	 	$	16	
 	
As of September 30, 2016, there was $38 million of total unrecognized compensation expense related to unvested restricted share awards, including those with performance conditions, which we expect to recognize over a remaining weighted-average period of 1.6 years. This unrecognized compensation cost assumes an estimated forfeiture rate of 4.3% for non-executive employees as of September 30, 2016.
Restricted stock. Restricted and performance stock activity for the nine months ended September 30, 2016 is summarized below:

 	Shares	 	Weighted
Average
Grant Date
Fair Value	
 	(In thousands)	 	 	
Unvested balance as of December 31, 2015	1,035	
 	 	$	46.68	
 	
Granted	517	
 	 	63.94	
 	
Vested	(342	)	 	41.79	
 	
Forfeited	(19	)	 	52.01	
 	
Unvested balance as of September 30, 2016	1,191	
 	 	55.50	
 	
The total fair value of restricted and performance awards granted during the nine months ended September 30, 2016 and 2015 was $33 million and $28 million, respectively. The total fair value of restricted awards, including those with performance and market conditions, which vested during the nine months ended September 30, 2016 and 2015 was $22 million and $25 million, respectively.
As of September 30, 2016, there were approximately 603,000 unvested restricted shares outstanding which contained one or more performance measures. In the event the vesting conditions are not achieved, the awards will lapse. Based on our assessment as of September 30, 2016, we expect the performance conditions for approximately 425,000 of these outstanding restricted share awards to be met in full.
13. Segment Information 
We have three reportable segments. These segments include our Health Plans segment, which comprises the vast majority of our operations; our Molina Medicaid Solutions segment; and our Other segment, which includes our behavioral health and social services subsidiary, Pathways. As of December 31, 2015, we changed our reporting structure as a result of the Pathways acquisition in November 2015. All prior periods reported conform to this presentation.
Our reportable segments are consistent with how we currently manage our business and view the markets we serve. The Health Plans segment consists of our health plans and our direct delivery business. Our health plans are operating segments that have been aggregated for reporting purposes because they share similar economic characteristics. The Molina Medicaid Solutions segment provides support to state government agencies in the administration of their Medicaid programs including business processing, information technology development, and administrative services. The Other segment includes businesses, such as

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our Pathways behavioral health and social services provider, which do not meet the quantitative thresholds for a reportable segment as defined by U.S. generally accepted accounting principles (GAAP), as well as corporate amounts not allocated to other reportable segments.
Gross margin is the appropriate earnings measure for our reportable segments, based on how our chief operating decision maker currently reviews results, assesses performance, and allocates resources.
Gross margin for our Health Plans segment is referred to as "Medical margin," and for our Molina Medicaid Solutions and Other segments, as "Service margin." Medical margin represents the amount earned by the Health Plans segment after medical costs are deducted from premium revenue. The medical care ratio represents the amount of medical care costs as a percentage of premium revenue, and is one of the key metrics used to assess the performance of the Health Plans segment. Therefore, the underlying medical margin is the most important measure of earnings reviewed by the chief operating decision maker. The service margin is equal to service revenue minus cost of service revenue.

 	 	Health Plans	 	Molina Medicaid Solutions	 	Other	 	Consolidated	 	
 	 	 	 	 	 	 	 	 	 	 	 	
 	 	(In millions)	 	 	 	
Three Months Ended September 30, 2016	 	 	 	 	 	 	 	 	 	 	 	
Total revenue (1)	 	$	4,412	
 	 	$	48	
 	 	$	86	
 	 	$	4,546	
 	 	 	 	
Gross margin	 	443	
 	 	6	
 	 	8	
 	 	457	

Nine Months Ended September 30, 2016	 	 	 	 	 	 	 	 	 	 	 	
Total revenue (1)	 	$	12,835	
 	 	$	146	
 	 	$	267	
 	 	$	13,248	
 	 	 	 	
Gross margin	 	1,285	
 	 	17	
 	 	29	
 	 	1,331	

Three Months Ended September 30, 2015	 	 	 	 	 	 	 	 	 	 	 	
Total revenue (1)	 	$	3,562	
 	 	$	47	
 	 	$	2	
 	 	$	3,611	
 	 	 	 	
Gross margin	 	361	
 	 	13	
 	 	—	
 	 	374	

Nine Months Ended September 30, 2015	 	 	 	 	 	 	 	 	 	 	 	
Total revenue (1)	 	$	10,155	
 	 	$	146	
 	 	$	6	
 	 	$	10,307	
 	 	 	 	
Gross margin	 	1,071	
 	 	43	
 	 	—	
 	 	1,114	

Total Assets	 	 	 	 	 	 	 	 	 	 	 	
September 30, 2016	 	$	5,891	
 	 	$	267	
 	 	$	1,412	
 	 	$	7,570	
 	 	 	 	
December 31, 2015	 	4,707	
 	 	213	
 	 	1,656	
 	 	6,576	
 	 	 	 	
______________________
 	 	
(1)	Total revenue consists primarily of premium revenue for the Health Plans segment, and service revenue for the Molina Medicaid Solutions and Other segments.	

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The following table reconciles gross margin by segment to consolidated income before income tax expense:

 	Three Months Ended September 30,	 	Nine Months Ended September 30,	
 	2016	 	2015	 	2016	 	2015	
 	(In millions)	
Gross margin:	 	 	 	 	 	 	 	
Health Plans	$	443	
 	 	$	361	
 	 	$	1,285	
 	 	$	1,071	
 	
Molina Medicaid Solutions	6	
 	 	13	
 	 	17	
 	 	43	
 	
Other	8	
 	 	—	
 	 	29	
 	 	—	
 	
Total gross margin	457	
 	 	374	
 	 	1,331	
 	 	1,114	
 	
Add: other operating revenues (1)	222	
 	 	187	
 	 	625	
 	 	509	
 	
Less: other operating expenses (2)	(561	)	 	(448	)	 	(1,644	)	 	(1,312	)	
Operating income	118	
 	 	113	
 	 	312	
 	 	311	
 	
Other expenses, net	(26	)	 	(15	)	 	(76	)	 	(45	)	
Income before income tax expense	$	92	
 	 	$	98	
 	 	$	236	
 	 	$	266	
 	
______________________
 	 	
(1)	Other operating revenues include premium tax revenue, health insurer fee revenue, investment income and other revenue.	
 	 	
(2)	Other operating expenses include general and administrative expenses, premium tax expenses, health insurer fee expenses and depreciation and amortization.	
14. Commitments and Contingencies 
Legal Proceedings.The health care and Medicaid-related business process outsourcing industries are subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. Penalties associated with violations of these laws and regulations include significant fines and penalties, exclusion from participating in publicly funded programs, and the repayment of previously billed and collected revenues.
We are involved in legal actions in the ordinary course of business, some of which seek monetary damages, including claims for punitive damages, which are not covered by insurance. We have accrued liabilities for certain matters for which we deem the loss to be both probable and estimable. Although we believe that our estimates of such losses are reasonable, these estimates could change as a result of further developments of these matters. The outcome of legal actions is inherently uncertain and such pending matters for which accruals have not been established have not progressed sufficiently through discovery and/or development of important factual information and legal issues to enable us to estimate a range of possible loss, if any. While it is not possible to accurately predict or determine the eventual outcomes of these items, an adverse determination in one or more of these pending matters could have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
State of Louisiana. On June 26, 2014, the state of Louisiana filed a Petition for Damages against Molina Medicaid Solutions, Molina Healthcare, Inc., Unisys, and Paramax Systems Corporation, a subsidiary of Unisys, in the Parish of Baton Rouge, 19th Judicial District, versus number 631612. The Petition alleges that between 1989 and 2012, the defendants utilized an incorrect reimbursement formula for the payment of pharmaceutical claims. We believe that, pursuant to a settlement with the state, this matter will be dismissed against Molina Medicaid Solutions with no liability.
United States of America, ex rel., Anita Silingo v. Mobile Medical Examination Services, Inc., et al. On or around October 14, 2014, Molina Healthcare of California, Molina Healthcare of California Partner Plan, Inc., Mobile Medical Examination Services, Inc. (MedXM), and other health plan defendants were served with a Complaint previously filed under seal in the Central District Court of California by Relator, Anita Silingo, Case No. SACV13-1348-FMO(SHx). The Complaint alleges that MedXM improperly modified medical records and otherwise took inappropriate steps to increase members’ risk adjustment scores, and that the defendants, including Molina Healthcare of California and Molina Healthcare of California Partner Plan, Inc., purportedly turned a “blind eye” to these unlawful practices. On October 22, 2015, the Relator filed a third amended complaint. On July 11, 2016, the District Court dismissed with prejudice the third amended complaint, without leave to amend. On September 23, 2016, the plaintiff filed an appeal with the Ninth Circuit Court of Appeals.
Rodriguez v. Providence Community Corrections.  On October 1, 2015, seven individuals, on behalf of themselves and all others similarly situated, filed a complaint in the District Court for the Middle District of Tennessee, Nashville Division, Case No. 3:15-cv-01048 (the Rodriquez Litigation), against Providence Community Corrections, Inc. (now known as Pathways Community Corrections, Inc., or PCC). Rutherford County, Tennessee formerly contracted with PCC for the administration of

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misdemeanor probation, which involved the collection of court costs and fees from probationers. The complaint alleges, among other things, that PCC illegally assessed fees and surcharges against probationers and made improper threats of arrest and probation revocation if the probationers did not pay such amounts. The plaintiffs in the Rodriguez Litigation seek alleged compensatory, treble, and punitive damages, plus attorneys’ fees, for alleged federal and state constitutional violations, as well as alleged violations of the Racketeer Influenced and Corrupt Organization Act. PCC’s agreement with Rutherford County terminated effective December 29, 2015. On November 1, 2015, one month after the Rodriguez Litigation had been commenced, we acquired PCC from The Providence Service Corporation (Providence) pursuant to a membership interest purchase agreement. In September 2016, the parties to the Rodriguez Litigation accepted a mediation proposal for settlement pursuant to which PCC would pay the plaintiffs $14 million. The parties are in the process of finalizing the settlement agreement. We expect to recover the full amount of the settlement under the indemnification provisions of the membership interest purchase agreement with Providence.
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.
States' Budgets. From time to time, the states in which our health plans operate may experience financial difficulties, which could lead to delays in premium payments. For example, the state of Illinois is currently operating under a stopgap budget that expires in January 2017. It is unclear when or if the state's budget difficulties will be resolved. As of September 30, 2016, our Illinois health plan served approximately 195,000 members and recorded premium revenue of approximately $466 million for the nine months ended September 30, 2016. As of October 24, 2016, the state of Illinois owed us approximately $43 million for May and June 2016 premiums.  
In another example, the Commonwealth of Puerto Rico's fiscal plan, issued on October 14, 2016, reported that current revenues are insufficient to support existing current operations and debt service. While the Commonwealth reports that it will prioritize health care spending, it stresses the need to address the cap on federal matching funds it receives for its participation in the Medicaid program. Among the fiscal issues expected to further exacerbate the Commonwealth's current debt crisis is the depletion of ACA funds, estimated to occur in the Commonwealth's fiscal year 2018. As of September 30, 2016, our Puerto Rico health plan served approximately 331,000 members and recorded premium revenue of approximately $535 million for the nine months ended September 30, 2016. As of October 24, 2016, the Commonwealth is current with its premium payments.    
Regulatory Capital and Dividend Restrictions. Our health plans, which are operated by our respective wholly owned subsidiaries in those states, are subject to state laws and regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state. Regulators in some states may also attempt to enforce capital requirements upon us that require the retention of net worth in excess of amounts formally required by statute or regulation. Such statutes, regulations and informal capital requirements also restrict the timing, payment, and amount of dividends and other distributions that may be paid to us as the sole stockholder. To the extent our subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to us.
Based on current statutes and regulations, the net assets in these subsidiaries (after intercompany eliminations) which may not be transferable to us in the form of loans, advances, or cash dividends was approximately $1,406 million at September 30, 2016, and $1,229 million at December 31, 2015. Because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us, the amount of retained earnings readily available to pay dividends to our stockholders is generally limited to cash, cash equivalents and investments held by the parent company – Molina Healthcare, Inc. Such cash, cash equivalents and investments amounted to $388 million and $612 million as of September 30, 2016 and December 31, 2015, respectively.
The National Association of Insurance Commissioners (NAIC) adopted rules effective December 31, 1998, which, if implemented by the states, set minimum capitalization requirements for insurance companies, HMOs, and other entities bearing risk for health care coverage. The requirements take the form of risk-based capital (RBC) rules which may vary from state to state.
As of September 30, 2016, our health plans had aggregate statutory capital and surplus of approximately $1,510 million compared with the required minimum aggregate statutory capital and surplus of approximately $857 million. All of our health plans were in compliance with the minimum capital requirements at September 30, 2016. 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.

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15. Related Party Transactions 
Refer to Note 16, "Variable Interest Entities (VIEs)," for a discussion of theJoseph M. Molina, M.D. Professional Corporations.
16. Variable Interest Entities (VIEs)  
Joseph M. Molina M.D., Professional Corporations
TheJoseph M. Molina, M.D. Professional Corporations (JMMPC) were created to further advance our direct delivery business. JMMPC's primary shareholder is Dr. J. Mario Molina, our chief executive officer, president, and chairman of the board of directors. Dr. Molina is paid no salary and receives no dividends in connection with his work for, or ownership of, JMMPC. JMMPC provides primary care medical services through its employed physicians and other medical professionals. JMMPC also provides certain specialty referral services to our California health plan members through a contracted provider network. Substantially all of the individuals served by JMMPC are members of our health plans. JMMPC does not have agreements to provide professional medical services with any other entities.
Our wholly owned subsidiary, Molina Medical Management, Inc. (MMM), has entered into services agreements with JMMPC to provide clinic facilities, clinic administrative support staff, patient scheduling services and medical supplies to JMMPC. The services agreements were designed such that JMMPC will operate at break even, ensuring the availability of quality care and access for our health plan members. The services agreements provide that the administrative fees charged to JMMPC by MMM are reviewed annually to assure the achievement of this goal.
Separately, our California, Florida, New Mexico, Utah and Washington health plans have entered into primary care services agreements with JMMPC. These agreements direct our health plans to perform a monthly reconciliation, to either fund JMMPC's operating deficits, or receive JMMPC's operating surpluses, such that JMMPC will derive no profit or loss. Because the MMM services agreements described above mitigate the likelihood of significant operating deficits or surpluses, such monthly reconciliation amounts are generally insignificant. For the three months ended September 30, 2016 and 2015, our health plans paid $31 million and $28 million, respectively, to JMMPC for health care services provided by JMMPC to the health plans' members. For the nine months ended September 30, 2016 and 2015, our health plans paid $92 million and $80 million, respectively, to JMMPC for health care services provided by JMMPC to the health plans' members.
We have determined that JMMPC is a VIE, and that we are its primary beneficiary. We have reached this conclusion under the power and benefits criterion model according to GAAP. Specifically, we have the power to direct the activities that most significantly affect JMMPC's economic performance, and the obligation to absorb losses or right to receive benefits that are potentially significant to the VIE, under the agreements described above. Because we are its primary beneficiary, we have consolidated JMMPC. JMMPC's assets may be used to settle only JMMPC's obligations, and JMMPC's creditors have no recourse to the general credit of Molina Healthcare, Inc. As of September 30, 2016, JMMPC had total assets of $16 million, and total liabilities of $15 million. As of December 31, 2015, JMMPC had total assets of $17 million, and total liabilities of $17 million.
Our maximum exposure to loss as a result of our involvement with JMMPC is generally limited to the amounts needed to fund JMMPC's ongoing payroll, employee benefits and medical care costs associated with JMMPC's specialty referral activities. We believe that such loss exposures will be immaterial to our consolidated operating results and cash flows for the foreseeable future.
17. Supplemental Condensed Consolidating Financial Information

As discussed in Note 10, "Debt," on November 10, 2015, we completed the private offering of $700 million aggregate principal amount of 5.375% Notes. In connection with their issuance and sale, we entered into a registration rights agreement to exchange the 5.375% Notes for registered notes having substantially identical terms, including guarantees. Such exchange was completed on September 16, 2016.

The 5.375% Notes are fully and unconditionally guaranteed by certain of our wholly owned subsidiaries on a joint and several basis, with exceptions considered customary for such guarantees. The 5.375% Notes and the guarantees are effectively subordinated to all existing and future secured debt of us and our guarantors to the extent of the assets securing such debt. In addition, the 5.375% Notes and the guarantees are structurally subordinated to all indebtedness and other liabilities and preferred stock of our subsidiaries that do not guarantee the 5.375% Notes.

The following condensed consolidating financial statements present Molina Healthcare, Inc. (as parent guarantor), the subsidiary guarantors, the subsidiary non-guarantors and eliminations. These condensed consolidating financial statements have been prepared and presented in accordance with SEC Regulation S-X Rule 3-10, "Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered."

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MOLINA HEALTHCARE, INC.
CONDENSED CONSOLIDATING BALANCE SHEET

 	September 30, 2016	
 	Parent Guarantor	 	Other Guarantors	 	Non-Guarantors	 	Eliminations	 	Consolidated	
 	(In millions)	
ASSETS	
Current assets:	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents	$	125	
 	 	$	37	
 	 	$	2,680	
 	 	$	—	
 	 	$	2,842	
 	
Investments	263	
 	 	—	
 	 	1,472	
 	 	—	
 	 	1,735	
 	
Receivables	3	
 	 	84	
 	 	966	
 	 	—	
 	 	1,053	
 	
Due from (to) affiliates	98	
 	 	(5	)	 	(93	)	 	—	
 	 	—	
 	
Prepaid expenses and other current assets	51	
 	 	37	
 	 	82	
 	 	(1	)	 	169	
 	
Derivative asset	314	
 	 	—	
 	 	—	
 	 	—	
 	 	314	
 	
Total current assets	854	
 	 	153	
 	 	5,107	
 	 	(1	)	 	6,113	
 	
Property, equipment, and capitalized software, net	300	
 	 	69	
 	 	81	
 	 	—	
 	 	450	
 	
Deferred contract costs	—	
 	 	83	
 	 	—	
 	 	—	
 	 	83	
 	
Intangible assets, net	7	
 	 	21	
 	 	121	
 	 	—	
 	 	149	
 	
Goodwill	51	
 	 	231	
 	 	337	
 	 	—	
 	 	619	
 	
Restricted investments	—	
 	 	—	
 	 	116	
 	 	—	
 	 	116	
 	
Investment in subsidiaries	2,526	
 	 	1	
 	 	—	
 	 	(2,527	)	 	—	
 	
Other assets	47	
 	 	4	
 	 	5	
 	 	(16	)	 	40	
 	
 	$	3,785	
 	 	$	562	
 	 	$	5,767	
 	 	$	(2,544	)	 	$	7,570	

LIABILITIES AND STOCKHOLDERS' EQUITY	
Current liabilities:	 	 	 	 	 	 	 	 	 	
Medical claims and benefits payable	$	—	
 	 	$	—	
 	 	$	1,871	
 	 	$	—	
 	 	$	1,871	
 	
Amounts due government agencies	—	
 	 	—	
 	 	1,232	
 	 	—	
 	 	1,232	
 	
Accounts payable and accrued liabilities	146	
 	 	53	
 	 	185	
 	 	(1	)	 	383	
 	
Deferred revenue	—	
 	 	42	
 	 	338	
 	 	—	
 	 	380	
 	
Income taxes payable	(13	)	 	(5	)	 	37	
 	 	—	
 	 	19	
 	
Current portion of long-term debt	466	
 	 	—	
 	 	—	
 	 	—	
 	 	466	
 	
Derivative liability	314	
 	 	—	
 	 	—	
 	 	—	
 	 	314	
 	
Total current liabilities	913	
 	 	90	
 	 	3,663	
 	 	(1	)	 	4,665	
 	
Long-term debt	1,169	
 	 	—	
 	 	16	
 	 	(16	)	 	1,169	
 	
Deferred income taxes	(7	)	 	41	
 	 	(28	)	 	—	
 	 	6	
 	
Other long-term liabilities	19	
 	 	2	
 	 	18	
 	 	—	
 	 	39	
 	
Total liabilities	2,094	
 	 	133	
 	 	3,669	
 	 	(17	)	 	5,879	
 	
Total stockholders’ equity	1,691	
 	 	429	
 	 	2,098	
 	 	(2,527	)	 	1,691	
 	
 	$	3,785	
 	 	$	562	
 	 	$	5,767	
 	 	$	(2,544	)	 	$	7,570	

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MOLINA HEALTHCARE, INC.
CONDENSED CONSOLIDATING BALANCE SHEET

 	December 31, 2015	
 	Parent Guarantor	 	Other Guarantors	 	Non-Guarantors	 	Eliminations	 	Consolidated	
 	(In millions)	
ASSETS	
Current assets:	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents	$	360	
 	 	$	42	
 	 	$	1,927	
 	 	$	—	
 	 	$	2,329	
 	
Investments	252	
 	 	—	
 	 	1,549	
 	 	—	
 	 	1,801	
 	
Receivables	—	
 	 	79	
 	 	518	
 	 	—	
 	 	597	
 	
Income tax refundable	7	
 	 	3	
 	 	3	
 	 	—	
 	 	13	
 	
Intercompany	86	
 	 	(4	)	 	(82	)	 	—	
 	 	—	
 	
Prepaid expenses and other current assets	46	
 	 	11	
 	 	136	
 	 	(1	)	 	192	
 	
Derivative asset	374	
 	 	—	
 	 	—	
 	 	—	
 	 	374	
 	
Total current assets	1,125	
 	 	131	
 	 	4,051	
 	 	(1	)	 	5,306	
 	
Property, equipment, and capitalized software, net	267	
 	 	52	
 	 	74	
 	 	—	
 	 	393	
 	
Deferred contract costs	—	
 	 	81	
 	 	—	
 	 	—	
 	 	81	
 	
Goodwill and intangible assets, net	61	
 	 	246	
 	 	334	
 	 	—	
 	 	641	
 	
Restricted investments	—	
 	 	—	
 	 	109	
 	 	—	
 	 	109	
 	
Investment in subsidiaries, net	2,205	
 	 	1	
 	 	—	
 	 	(2,206	)	 	—	
 	
Deferred income taxes	23	
 	 	(35	)	 	30	
 	 	—	
 	 	18	
 	
Other assets	36	
 	 	2	
 	 	6	
 	 	(16	)	 	28	
 	
 	$	3,717	
 	 	$	478	
 	 	$	4,604	
 	 	$	(2,223	)	 	$	6,576	

LIABILITIES AND STOCKHOLDERS' EQUITY	
Current liabilities:	 	 	 	 	 	 	 	 	 	
Medical claims and benefits payable	$	—	
 	 	$	3	
 	 	$	1,682	
 	 	$	—	
 	 	$	1,685	
 	
Amounts due government agencies	—	
 	 	1	
 	 	728	
 	 	—	
 	 	729	
 	
Accounts payable and accrued liabilities	157	
 	 	35	
 	 	170	
 	 	—	
 	 	362	
 	
Deferred revenue	—	
 	 	34	
 	 	189	
 	 	—	
 	 	223	
 	
Current portion of long-term debt	449	
 	 	—	
 	 	—	
 	 	—	
 	 	449	
 	
Derivative liability	374	
 	 	—	
 	 	—	
 	 	—	
 	 	374	
 	
Total current liabilities	980	
 	 	73	
 	 	2,769	
 	 	—	
 	 	3,822	
 	
Long-term debt	1,160	
 	 	—	
 	 	16	
 	 	(16	)	 	1,160	
 	
Other long-term liabilities	20	
 	 	2	
 	 	16	
 	 	(1	)	 	37	
 	
Total liabilities	2,160	
 	 	75	
 	 	2,801	
 	 	(17	)	 	5,019	
 	
Total stockholders’ equity	1,557	
 	 	403	
 	 	1,803	
 	 	(2,206	)	 	1,557	
 	
 	$	3,717	
 	 	$	478	
 	 	$	4,604	
 	 	$	(2,223	)	 	$	6,576	

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MOLINA HEALTHCARE, INC.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME

 	Three Months Ended September 30, 2016	
 	Parent Guarantor	 	Other Guarantors	 	Non-Guarantors	 	Eliminations	 	Consolidated	
 	(In millions)	
Revenue:	 	 	 	 	 	 	 	 	 	
Total revenue	$	274	
 	 	$	135	
 	 	$	4,424	
 	 	$	(287	)	 	$	4,546	
 	
Expenses:	 	 	 	 	 	 	 	 	 	
Medical care costs	19	
 	 	15	
 	 	3,727	
 	 	(13	)	 	3,748	
 	
Cost of service revenue	—	
 	 	109	
 	 	10	
 	 	—	
 	 	119	
 	
General and administrative expenses	223	
 	 	5	
 	 	389	
 	 	(274	)	 	343	
 	
Premium tax expenses	—	
 	 	—	
 	 	127	
 	 	—	
 	 	127	
 	
Health insurer fee expenses	—	
 	 	—	
 	 	55	
 	 	—	
 	 	55	
 	
Depreciation and amortization	25	
 	 	4	
 	 	7	
 	 	—	
 	 	36	
 	
Total operating expenses	267	
 	 	133	
 	 	4,315	
 	 	(287	)	 	4,428	
 	
Operating income	7	
 	 	2	
 	 	109	
 	 	—	
 	 	118	
 	
Interest expense	26	
 	 	—	
 	 	—	
 	 	—	
 	 	26	
 	
(Loss) income before income taxes	(19	)	 	2	
 	 	109	
 	 	—	
 	 	92	
 	
Income tax (benefit) expense	4	
 	 	(3	)	 	49	
 	 	—	
 	 	50	
 	
Net (loss) income before equity in earnings of subsidiaries	(23	)	 	5	
 	 	60	
 	 	—	
 	 	42	
 	
Equity in net earnings of subsidiaries	65	
 	 	—	
 	 	—	
 	 	(65	)	 	—	
 	
Net income	$	42	
 	 	$	5	
 	 	$	60	
 	 	$	(65	)	 	$	42	

 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Three Months Ended September 30, 2015	
 	Parent Guarantor	 	Other Guarantors	 	Non-Guarantors	 	Eliminations	 	Consolidated	
 	(In millions)	
Revenue:	 	 	 	 	 	 	 	 	 	
Total revenue	$	234	
 	 	$	60	
 	 	$	3,563	
 	 	$	(246	)	 	$	3,611	
 	
Expenses:	 	 	 	 	 	 	 	 	 	
Medical care costs	14	
 	 	9	
 	 	3,005	
 	 	(12	)	 	3,016	
 	
Cost of service revenue	—	
 	 	34	
 	 	—	
 	 	—	
 	 	34	
 	
General and administrative expenses	200	
 	 	8	
 	 	313	
 	 	(234	)	 	287	
 	
Premium tax expenses	—	
 	 	—	
 	 	99	
 	 	—	
 	 	99	
 	
Health insurer fee expenses	—	
 	 	—	
 	 	36	
 	 	—	
 	 	36	
 	
Depreciation and amortization	21	
 	 	1	
 	 	4	
 	 	—	
 	 	26	
 	
Total operating expenses	235	
 	 	52	
 	 	3,457	
 	 	(246	)	 	3,498	
 	
Operating (loss) income	(1	)	 	8	
 	 	106	
 	 	—	
 	 	113	
 	
Interest expense	15	
 	 	—	
 	 	—	
 	 	—	
 	 	15	
 	
(Loss) income before income taxes	(16	)	 	8	
 	 	106	
 	 	—	
 	 	98	
 	
Income tax (benefit) expense	3	
 	 	3	
 	 	46	
 	 	—	
 	 	52	
 	
Net (loss) income before equity in earnings of subsidiaries	(19	)	 	5	
 	 	60	
 	 	—	
 	 	46	
 	
Equity in net earnings of subsidiaries	65	
 	 	(1	)	 	—	
 	 	(64	)	 	—	
 	
Net income	$	46	
 	 	$	4	
 	 	$	60	
 	 	$	(64	)	 	$	46	

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MOLINA HEALTHCARE, INC.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Nine Months Ended September 30, 2016	
 	Parent Guarantor	 	Other Guarantors	 	Non-Guarantors	 	Eliminations	 	Consolidated	
 	(In millions)	
Revenue:	 	 	 	 	 	 	 	 	 	
Total revenue	$	786	
 	 	$	412	
 	 	$	12,874	
 	 	$	(824	)	 	$	13,248	
 	
Expenses:	 	 	 	 	 	 	 	 	 	
Medical care costs	50	
 	 	37	
 	 	10,884	
 	 	(41	)	 	10,930	
 	
Cost of service revenue	—	
 	 	330	
 	 	32	
 	 	—	
 	 	362	
 	
General and administrative expenses	659	
 	 	28	
 	 	1,130	
 	 	(783	)	 	1,034	
 	
Premium tax expenses	—	
 	 	—	
 	 	345	
 	 	—	
 	 	345	
 	
Health insurer fee expenses	—	
 	 	—	
 	 	163	
 	 	—	
 	 	163	
 	
Depreciation and amortization	70	
 	 	10	
 	 	22	
 	 	—	
 	 	102	
 	
Total expenses	779	
 	 	405	
 	 	12,576	
 	 	(824	)	 	12,936	
 	
Operating income	7	
 	 	7	
 	 	298	
 	 	—	
 	 	312	
 	
Interest expense	76	
 	 	—	
 	 	—	
 	 	—	
 	 	76	
 	
(Loss) income before income taxes	(69	)	 	7	
 	 	298	
 	 	—	
 	 	236	
 	
Income tax (benefit) expense	(24	)	 	(1	)	 	162	
 	 	—	
 	 	137	
 	
Net (loss) income before equity in earnings of subsidiaries	(45	)	 	8	
 	 	136	
 	 	—	
 	 	99	
 	
Equity in net earnings of subsidiaries	144	
 	 	—	
 	 	—	
 	 	(144	)	 	—	
 	
Net income	$	99	
 	 	$	8	
 	 	$	136	
 	 	$	(144	)	 	$	99	

 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Nine Months Ended September 30, 2015	
 	Parent Guarantor	 	Other Guarantors	 	Non-Guarantors	 	Eliminations	 	Consolidated	
 	(In millions)	
Revenue:	 	 	 	 	 	 	 	 	 	
Total revenue	$	677	
 	 	$	183	
 	 	$	10,159	
 	 	$	(712	)	 	$	10,307	
 	
Expenses:	 	 	 	 	 	 	 	 	 	
Medical care costs	40	
 	 	26	
 	 	8,552	
 	 	(37	)	 	8,581	
 	
Cost of service revenue	—	
 	 	103	
 	 	—	
 	 	—	
 	 	103	
 	
General and administrative expenses	577	
 	 	23	
 	 	905	
 	 	(675	)	 	830	
 	
Premium tax expenses	—	
 	 	—	
 	 	289	
 	 	—	
 	 	289	
 	
Health insurer fee expenses	—	
 	 	—	
 	 	117	
 	 	—	
 	 	117	
 	
Depreciation and amortization	62	
 	 	2	
 	 	12	
 	 	—	
 	 	76	
 	
Total expenses	679	
 	 	154	
 	 	9,875	
 	 	(712	)	 	9,996	
 	
Operating (loss) income	(2	)	 	29	
 	 	284	
 	 	—	
 	 	311	
 	
Interest expense	45	
 	 	—	
 	 	—	
 	 	—	
 	 	45	
 	
(Loss) income before income taxes	(47	)	 	29	
 	 	284	
 	 	—	
 	 	266	
 	
Income tax (benefit) expense	(4	)	 	11	
 	 	146	
 	 	—	
 	 	153	
 	
Net (loss) income before equity in earnings of subsidiaries	(43	)	 	18	
 	 	138	
 	 	—	
 	 	113	
 	
Equity in net earnings of subsidiaries	156	
 	 	(1	)	 	—	
 	 	(155	)	 	—	
 	
Net income	$	113	
 	 	$	17	
 	 	$	138	
 	 	$	(155	)	 	$	113	

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MOLINA HEALTHCARE, INC.
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Three Months Ended September 30, 2016	
 	Parent Guarantor	 	Other Guarantors	 	Non-Guarantors	 	Eliminations	 	Consolidated	
 	(In millions)	
Net income	$	42	
 	 	$	5	
 	 	$	60	
 	 	$	(65	)	 	$	42	
 	
Other comprehensive loss, net of tax	(1	)	 	—	
 	 	(1	)	 	1	
 	 	(1	)	
Comprehensive income	$	41	
 	 	$	5	
 	 	$	59	
 	 	$	(64	)	 	$	41	

 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Three Months Ended September 30, 2015	
 	Parent Guarantor	 	Other Guarantors	 	Non-Guarantors	 	Eliminations	 	Consolidated	
 	(In millions)	
Net income	$	46	
 	 	$	4	
 	 	$	60	
 	 	$	(64	)	 	$	46	
 	
Other comprehensive income, net of tax	2	
 	 	—	
 	 	1	
 	 	(1	)	 	2	
 	
Comprehensive income	$	48	
 	 	$	4	
 	 	$	61	
 	 	$	(65	)	 	$	48	

 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Nine Months Ended September 30, 2016	
 	Parent Guarantor	 	Other Guarantors	 	Non-Guarantors	 	Eliminations	 	Consolidated	
 	(In millions)	
Net income	$	99	
 	 	$	8	
 	 	$	136	
 	 	$	(144	)	 	$	99	
 	
Other comprehensive income, net of tax	7	
 	 	—	
 	 	6	
 	 	(6	)	 	7	
 	
Comprehensive income	$	106	
 	 	$	8	
 	 	$	142	
 	 	$	(150	)	 	$	106	

 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Nine Months Ended September 30, 2015	
 	Parent Guarantor	 	Other Guarantors	 	Non-Guarantors	 	Eliminations	 	Consolidated	
 	(In millions)	
Net income	$	113	
 	 	$	17	
 	 	$	138	
 	 	$	(155	)	 	$	113	
 	
Other comprehensive income, net of tax	1	
 	 	—	
 	 	—	
 	 	—	
 	 	1	
 	
Comprehensive income	$	114	
 	 	$	17	
 	 	$	138	
 	 	$	(155	)	 	$	114	

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MOLINA HEALTHCARE, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

 	Nine Months Ended September 30, 2016	
 	Parent Guarantor	 	Other Guarantors	 	Non-Guarantors	 	Eliminations	 	Consolidated	
 	(In millions)	
Operating activities:	 	 	 	 	 	 	 	 	 	
Net cash provided by operating activities	$	43	
 	 	35	
 	 	555	
 	 	—	
 	 	$	633	
 	
Investing activities:	 	 	 	 	 	 	 	 	 	
Purchases of investments	(114	)	 	—	
 	 	(1,330	)	 	—	
 	 	(1,444	)	
Proceeds from sales and maturities of investments	103	
 	 	—	
 	 	1,409	
 	 	—	
 	 	1,512	
 	
Purchases of property, equipment and capitalized software	(102	)	 	(28	)	 	(13	)	 	—	
 	 	(143	)	
Decrease in restricted investments	—	
 	 	—	
 	 	4	
 	 	—	
 	 	4	
 	
Net cash paid in business combinations	—	
 	 	(11	)	 	(37	)	 	—	
 	 	(48	)	
Capital contributions to subsidiaries	(221	)	 	18	
 	 	203	
 	 	—	
 	 	—	
 	
Dividends received from subsidiaries	50	
 	 	—	
 	 	(50	)	 	—	
 	 	—	
 	
Change in amounts due to/from affiliates	(12	)	 	1	
 	 	11	
 	 	—	
 	 	—	
 	
Other, net	6	
 	 	(19	)	 	1	
 	 	—	
 	 	(12	)	
Net cash (used in) provided by investing activities	(290	)	 	(39	)	 	198	
 	 	—	
 	 	(131	)	
Financing activities:	 	 	 	 	 	 	 	 	 	
Proceeds from employee stock plans	10	
 	 	—	
 	 	—	
 	 	—	
 	 	10	
 	
Other, net	2	
 	 	(1	)	 	—	
 	 	—	
 	 	1	
 	
Net cash provided by (used in) financing activities	12	
 	 	(1	)	 	—	
 	 	—	
 	 	11	
 	
Net (decrease) increase in cash and cash equivalents	(235	)	 	(5	)	 	753	
 	 	—	
 	 	513	
 	
Cash and cash equivalents at beginning of period	360	
 	 	42	
 	 	1,927	
 	 	—	
 	 	2,329	
 	
Cash and cash equivalents at end of period	$	125	
 	 	$	37	
 	 	$	2,680	
 	 	$	—	
 	 	$	2,842	

 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Nine Months Ended September 30, 2015	
 	Parent Guarantor	 	Other Guarantors	 	Non-Guarantors	 	Eliminations	 	Consolidated	
 	(In millions)	
Operating activities:	 	 	 	 	 	 	 	 	 	
Net cash provided by operating activities	$	93	
 	 	70	
 	 	743	
 	 	—	
 	 	$	906	
 	
Investing activities:	 	 	 	 	 	 	 	 	 	
Purchases of investments	(23	)	 	—	
 	 	(1,288	)	 	—	
 	 	(1,311	)	
Proceeds from sales and maturities of investments	90	
 	 	—	
 	 	773	
 	 	—	
 	 	863	
 	
Purchases of property, equipment and capitalized software	(68	)	 	(19	)	 	(14	)	 	—	
 	 	(101	)	
Decrease in restricted investments	—	
 	 	5	
 	 	(10	)	 	—	
 	 	(5	)	
Net cash paid in business combinations	—	
 	 	—	
 	 	(77	)	 	—	
 	 	(77	)	
Capital contributions to subsidiaries	(167	)	 	3	
 	 	164	
 	 	—	
 	 	—	
 	
Dividends received from subsidiaries	42	
 	 	(17	)	 	(25	)	 	—	
 	 	—	
 	
Change in amounts due to/from affiliates	(15	)	 	—	
 	 	15	
 	 	—	
 	 	—	
 	
Other, net	(1	)	 	(25	)	 	(8	)	 	—	
 	 	(34	)	
Net cash used in investing activities	(142	)	 	(53	)	 	(470	)	 	—	
 	 	(665	)	
Financing activities:	 	 	 	 	 	 	 	 	 	
Proceeds from common stock offering, net of issuance costs	373	
 	 	—	
 	 	—	
 	 	—	
 	 	373	
 	
Proceeds from employee stock plans	8	
 	 	—	
 	 	—	
 	 	—	
 	 	8	
 	
Other, net	3	
 	 	—	
 	 	—	
 	 	—	
 	 	3	
 	
Net cash provided by financing activities	384	
 	 	—	
 	 	—	
 	 	—	
 	 	384	
 	
Net increase in cash and cash equivalents	335	
 	 	17	
 	 	273	
 	 	—	
 	 	625	
 	
Cash and cash equivalents at beginning of period	75	
 	 	15	
 	 	1,449	
 	 	—	
 	 	1,539	
 	
Cash and cash equivalents at end of period	$	410	
 	 	$	32	
 	 	$	1,722	
 	 	$	—	
 	 	$	2,164	

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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 harbor 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 harbor 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. Any forward-looking statement made by us in this Quarterly Report is based only on information currently available to us and speaks only as of the date on which it is made. 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. Those known risks and uncertainties include, but are not limited to, the following:
 	 	
•	the success of our profit improvement and cost-cutting initiatives;  	
 	 	
•	uncertainties and evolving market and provider economics associated with the implementation of the Affordable Care Act (the “ACA”), the Medicaid expansion, the insurance marketplaces, the effect of various implementing regulations, and uncertainties regarding the Medicare-Medicaid dual eligible demonstration programs in California, Illinois, Michigan, Ohio, South Carolina, and Texas;	
 	 	
•	management of our medical costs, including our ability to reduce over time the high medical costs commonly associated with new patient populations;  	
 	 	
•	our ability to predict with a reasonable degree of accuracy utilization rates, including utilization rates in new plans, geographies, and programs where we have less experience with patient and provider populations, and also including utilization rates associated with seasonal flu patterns or other newly emergent diseases;	
 	 	
•	our ability to manage growth, including maintaining and creating adequate internal systems and controls relating to authorizations, approvals, provider payments, and the overall success of our care management initiatives;	
 	 	
•	our ability to consummate and realize benefits from proposed acquisitions, including the pending Aetna-Humana Medicare Advantage divestiture transaction;	
 	 	
•	our receipt of adequate premium rates to support increasing pharmacy costs, including costs associated with specialty drugs and costs resulting from formulary changes that allow the option of higher-priced non-generic drugs;	
 	 	
•	our ability to operate profitably in an environment where the trend in premium rate increases lags behind the trend in increasing medical costs;	
 	 	
•	the interpretation and implementation of federal or state medical cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, profit sharing arrangements, and risk adjustment provisions;  	
 	 	
•	our estimates of amounts owed for such cost expenditure floors, administrative cost and profit ceilings, premium stabilization programs, profit-sharing arrangements, and risk adjustment provisions, including but not limited to cost-plus reimbursement for retroactively eligible members in New Mexico, the Medicaid expansion cost corridors in New Mexico and Washington, and any other retroactive adjustment to revenue where methodologies and procedures are subject to interpretation, or are at least partially dependent upon information about the health status of state or federal program participants who are not Molina members; 	
 	 	
•	the interpretation and implementation of at-risk premium rules regarding the achievement of certain quality measures, and our ability to recognize revenue amounts associated therewith;	
 	 	
•	the interpretation and implementation of state contract performance requirements regarding the achievement of certain quality measures, and our ability to avoid liquidated damages associated therewith; 	
 	 	
•	cyber-attacks or other privacy or data security incidents resulting in an inadvertent unauthorized disclosure of protected health information;	

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•	the success of our health plan in Puerto Rico, including the resolution of the Puerto Rico debt crisis, payment of all amounts due under our Medicaid contract, the effect of the newly enacted PROMESA law, and our efforts to better manage the health care costs of our Puerto Rico health plan;	
 	 	
•	significant budget pressures on state governments and their potential inability to maintain current rates, to implement expected rate increases, or to maintain existing benefit packages or membership eligibility thresholds or criteria, including the resolution of the Illinois budget impasse and continued payment of all amounts due to our Illinois health plan;	
 	 	
•	the accurate estimation of incurred but not reported or paid medical costs across our health plans;	
 	 	
•	subsequent adjustments to reported premium revenue based upon subsequent developments or new information, including changes to estimated amounts payable or receivable related to Marketplace risk adjustment/risk transfer, risk corridors, and reinsurance;	
 	 	
•	efforts by states to recoup previously paid amounts; 	
 	 	
•	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;	
 	 	
•	the continuation and renewal of the government contracts of our health plans, Molina Medicaid Solutions, and Pathways, and the terms under which such contracts are renewed;	
 	 	
•	complications, member confusion, or enrollment backlogs related to the annual renewal of Medicaid coverage;	
 	 	
•	government audits and reviews, and any fine, enrollment freeze, or monitoring program that may result therefrom;	
 	 	
•	changes with respect to our provider contracts and the loss of providers;	
 	 	
•	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;	
 	 	
•	the relatively small number of states in which we operate health plans;  	
 	 	
•	the availability of adequate financing on acceptable terms to fund and capitalize our expansion and growth, repay our outstanding indebtedness at maturity and meet our liquidity needs, including the interest expense and other costs associated with such financing;	
 	 	
•	the failure of a state in which we operate to renew its federal Medicaid waiver;   	
 	 	
•	changes generally affecting the managed care or Medicaid management information systems industries;	
 	 	
•	increases in government surcharges, taxes, and assessments, including but not limited to the deductibility of certain compensation costs;	
 	 	
•	newly emergent viruses or widespread epidemics, including the Zika virus, public catastrophes or terrorist attacks, and associated public alarm;	
 	 	
•	changes in general economic conditions, including unemployment rates;	
 	 	
•	the sufficiency of our funds on hand to pay the amounts due upon conversion of our outstanding notes; and	
 	 	
•	increasing competition and consolidation in the Medicaid industry.	
Investors should refer to Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 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, 2015.

Company Overview
Molina Healthcare, Inc. provides quality managed health care to people receiving government assistance. We offer cost-effective Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist government agencies in their administration of the Medicaid program. We have three reportable segments. These segments include our Health Plans segment, which comprises the vast majority of our operations; our Molina Medicaid Solutions segment; and our Other segment, which includes our behavioral health and social services subsidiary, Pathways. As of December 31, 2015, we changed our reporting structure as a result of the Pathways acquisition in November 2015. All prior periods reported conform to this presentation.

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Update on 2016 Financial Performance
Third Quarter 2016 Compared with Second Quarter 2016
Third quarter 2016 financial performance improved significantly when compared with the second quarter of 2016. Earnings per diluted share increased to $0.76 in the third quarter of 2016 from $0.58 in the second quarter. Adjusted earnings per diluted share increased to $0.85 in the third quarter of 2016 from $0.67 in the second quarter. 
Higher profitability in the third quarter of 2016, when compared with the second quarter of 2016, was primarily the result of:
 	 	
•	Improved profitability among products other than the Marketplace, partially offset by lower profitability for the Marketplace product. Excluding adjustments related to 2015 dates of service, the medical care ratio for all products combined (excluding Marketplace) declined to 89.6% in the third quarter from 90.3% in the second quarter. The medical care ratio for the Marketplace program (also excluding adjustments related to 2015 dates of service) increased to 89.0% in the third quarter from 79.7% in the second quarter. Although third quarter results for the Marketplace business were lower than anticipated, we believe that Marketplace performance for full year 2016 dates of service will be approximately breakeven. We continue to record substantial liabilities for Marketplace risk transfer payments under the risk adjustment program. We estimate that such payments reduced our Marketplace premium revenue by approximately 25% for the nine months ended September 30, 2016. We have recommended that the risk transfer formula be modified so that payments between health plans are allocated based solely upon medical costs, rather than upon premiums. Such a change would have lowered the percentage of premium revenue returned as a result of risk transfer from 25% to 20% for the nine months ended September 30, 2016. We believe that the methodology used to calculate Marketplace risk transfer payments penalizes comparatively efficient and affordable health plans and, as a result, those purchasing affordable Marketplace policies ultimately pay higher premiums.	
 	 	
•	Improved administrative efficiency. Our general and administrative expense ratio fell to 7.6% in the third quarter of 2016 from 8.1% in the second quarter.	
 	 	
•	Lower effective tax rate. The benefit of approximately $5 million in discrete items reduced our effective tax rate to 54.0% in the third quarter of 2016, from 59.8% in the second quarter.	
Management Expectations for Full Year 2016 Results
As previously disclosed, we expect the following factors, among others, to affect our financial performance in the rest of 2016:
 	 	
•	The ultimate savings to be realized from various cost savings initiatives and the speed at which such savings will be realized.	
 	 	
•	Medicaid rate increases (excluding Medicaid Expansion) of approximately 3.0% in California (effective July 1, 2016); approximately 2.5% in Puerto Rico (effective July 1, 2016); approximately 3.0% in Texas (effective September 1, 2016); and approximately 4.0% in Florida (effective September 1, 2016). All rate changes are consistent with our previous expectations.	
 	 	
•	Medicaid Expansion rate decreases of approximately 11.0% in California (effective July 1, 2016) and approximately 2.0% in Ohio (effective July 1, 2016). All rate changes are consistent with our previous expectations.	
 	 	
•	The implementation of a medical care ratio floor of 86.0% for the South Carolina Medicaid program effective July 1, 2016.	
 	 	
•	Declining margins for our Marketplace business during the second half of 2016 due to normal membership attrition; the addition of higher cost members through the special enrollment process; higher costs as members reach the limits of the cost-sharing provisions of their insurance coverage; and increasing utilization as members become more engaged with our care networks.	
Market Updates
Refer to Part I, Item 1 of this Form 10-Q, Notes to Consolidated Financial Statements, Note 1, "Basis of Presentation," for a discussion of the current year market updates.
Understanding Our Business
Health Plans Segment
The Health Plans segment consists of health plans in 12 states and the Commonwealth of Puerto Rico, and includes our direct delivery business. As of September 30, 2016, these health plans served 4.2 million members eligible for Medicaid, Medicare, and other government-sponsored health care programs for low-income families and individuals. This membership includes Health Insurance Marketplace (Marketplace) members, most of whom receive government premium subsidies.

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Health Plans Segment Membership by Health Plan and Program.The following tables set forth our Health Plans membership as of the dates indicated:

 	September 30,
2016	 	December 31,
2015	 	September 30,
2015	
Ending Membership by Health Plan:	 	 	 	 	 	
California	683,000	
 	 	620,000	
 	 	611,000	
 	
Florida	563,000	
 	 	440,000	
 	 	349,000	
 	
Illinois	195,000	
 	 	98,000	
 	 	101,000	
 	
Michigan	387,000	
 	 	328,000	
 	 	340,000	
 	
New Mexico	253,000	
 	 	231,000	
 	 	231,000	
 	
New York (1)	37,000	
 	 	—	
 	 	—	
 	
Ohio	339,000	
 	 	327,000	
 	 	344,000	
 	
Puerto Rico	331,000	
 	 	348,000	
 	 	356,000	
 	
South Carolina	109,000	
 	 	99,000	
 	 	102,000	
 	
Texas	352,000	
 	 	260,000	
 	 	263,000	
 	
Utah	150,000	
 	 	102,000	
 	 	102,000	
 	
Washington	716,000	
 	 	582,000	
 	 	568,000	
 	
Wisconsin	131,000	
 	 	98,000	
 	 	103,000	
 	
 	4,246,000	
 	 	3,533,000	
 	 	3,470,000	
 	
Ending Membership by Program:	 	 	 	 	 	
Temporary Assistance for Needy Families (TANF) and Children's Health Insurance Program (CHIP)	2,529,000	
 	 	2,312,000	
 	 	2,249,000	
 	
Medicaid Expansion	658,000	
 	 	557,000	
 	 	540,000	
 	
Marketplace	568,000	
 	 	205,000	
 	 	226,000	
 	
Aged, Blind or Disabled (ABD)	395,000	
 	 	366,000	
 	 	359,000	
 	
Medicare-Medicaid Plan (MMP) – Integrated (2)	51,000	
 	 	51,000	
 	 	56,000	
 	
Medicare Special Needs Plans (Medicare)	45,000	
 	 	42,000	
 	 	40,000	
 	
 	4,246,000	
 	 	3,533,000	
 	 	3,470,000	
 	
_________________________
 	 	
(1)	The New York health plan was acquired on August 1, 2016.	
 	 	
(2)	MMP members who receive both Medicaid and Medicare coverage from Molina Healthcare.	

Health Plans Segment Premiums by Program.The amount of the premiums paid to our health plans may vary substantially between states and among various government programs. The following table sets forth the ranges of premiums paid to our state health plans by program on a per-member per-month (PMPM) basis, for the nine months ended September 30, 2016. The "Consolidated" column represents the weighted-average amounts for our total membership by program.

 	PMPM Premiums	
 	Low	 	High	 	Consolidated	
TANF and CHIP	$	120.00	
 	 	$	320.00	
 	 	$	180.00	
 	
Medicaid Expansion	320.00	
 	 	480.00	
 	 	380.00	
 	
Marketplace	160.00	
 	 	360.00	
 	 	230.00	
 	
ABD	390.00	
 	 	1,530.00	
 	 	990.00	
 	
MMP – Integrated	1,170.00	
 	 	3,290.00	
 	 	2,160.00	
 	
Medicare	780.00	
 	 	1,110.00	
 	 	1,020.00	

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Health Plans Segment Medical Care Costs by Type. The following table provides the details of consolidated medical care costs by type for the periods indicated (dollars in millions except PMPM amounts):

 	Three Months Ended September 30,	
 	2016	 	2015	
 	Amount	 	PMPM	 	% of Total	 	Amount	 	PMPM	 	% of Total	
Fee for service	$	2,799	
 	 	$	220.29	
 	 	74.7	%	 	$	2,224	
 	 	$	218.69	
 	 	73.8	%	
Pharmacy	567	
 	 	44.65	
 	 	15.1	
 	 	418	
 	 	41.07	
 	 	13.9	
 	
Capitation	302	
 	 	23.83	
 	 	8.1	
 	 	260	
 	 	25.57	
 	 	8.6	
 	
Direct delivery	21	
 	 	1.66	
 	 	0.5	
 	 	31	
 	 	2.97	
 	 	1.0	
 	
Other	59	
 	 	4.58	
 	 	1.6	
 	 	83	
 	 	8.19	
 	 	2.7	
 	
 	$	3,748	
 	 	$	295.01	
 	 	100.0	%	 	$	3,016	
 	 	$	296.49	
 	 	100.0	%	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Nine Months Ended September 30,	
 	2016	 	2015	
 	Amount	 	PMPM	 	% of
Total	 	Amount	 	PMPM	 	% of
Total	
Fee for service	$	8,156	
 	 	$	215.96	
 	 	74.6	%	 	$	6,275	
 	 	$	217.63	
 	 	73.1	%	
Pharmacy	1,621	
 	 	42.93	
 	 	14.8	
 	 	1,161	
 	 	40.26	
 	 	13.5	
 	
Capitation	901	
 	 	23.86	
 	 	8.3	
 	 	725	
 	 	25.13	
 	 	8.5	
 	
Direct delivery	55	
 	 	1.46	
 	 	0.5	
 	 	85	
 	 	2.94	
 	 	1.0	
 	
Other	197	
 	 	5.20	
 	 	1.8	
 	 	335	
 	 	11.62	
 	 	3.9	
 	
 	$	10,930	
 	 	$	289.41	
 	 	100.0	%	 	$	8,581	
 	 	$	297.58	
 	 	100.0	%	
Molina Medicaid Solutions Segment
The Molina Medicaid Solutions segment provides support to state government agencies in the administration of their Medicaid programs including business processing, information technology development, and administrative services. Molina Medicaid Solutions is under contract with the Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, West Virginia, and the U.S. Virgin Islands, and drug rebate administration services in Florida.  
Other Segment
The Other segment includes businesses, such as our Pathways behavioral health and social services provider, which do not meet the quantitative thresholds for a reportable segment as defined by U.S. generally accepted accounting principles (GAAP), as well as corporate amounts not allocated to other reportable segments.
How We Assess Performance
One of the key metrics used to assess the performance of our most significant segment, the Health Plans segment, is the medical care ratio. The medical care ratio represents the amount of medical care costs as a percentage of premium revenue. Therefore, the underlying gross margin, or the amount earned by the Health Plans segment after medical costs are deducted from premium revenue, is the most important measure of earnings reviewed by management.
Gross margin for our Health Plans segment is referred to as "Medical margin," and for our Molina Medicaid Solutions and Other segments, as "Service margin." The service margin is equal to service revenue minus cost of service revenue. The following table presents gross margin for our segments. Management's discussion and analysis of the changes in the individual components of gross margin, by reportable segment, is presented below under "Results of Operations."

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 	Three Months Ended September 30,	 	Change	 	Nine Months Ended September 30,	 	Change	
 	2016	 	2015	 	$	 	%	 	2016	 	2015	 	$	 	%	
 	(Dollars in millions)	
Health Plans:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Premium revenue	$	4,191	
 	 	$	3,377	
 	 	$	814	
 	 	24	 %	 	$	12,215	
 	 	$	9,652	
 	 	$	2,563	
 	 	27	 %	
Less: medical care costs	3,748	
 	 	3,016	
 	 	732	
 	 	24	
 	 	10,930	
 	 	8,581	
 	 	2,349	
 	 	27	
 	
Medical margin	$	443	
 	 	$	361	
 	 	$	82	
 	 	23	
 	 	$	1,285	
 	 	$	1,071	
 	 	$	214	
 	 	20	
 	
Medical care ratio	89.4	%	 	89.3	%	 	 	 	 	 	89.5	%	 	88.9	%	 	 	 	 	
Molina Medicaid Solutions:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Service revenue	$	48	
 	 	$	47	
 	 	$	1	
 	 	2	
 	 	$	146	
 	 	$	146	
 	 	$	—	
 	 	—	
 	
Less: cost of service revenue	42	
 	 	34	
 	 	8	
 	 	24	
 	 	129	
 	 	103	
 	 	26	
 	 	25	
 	
Service margin	$	6	
 	 	$	13	
 	 	$	(7	)	 	(54	)	 	$	17	
 	 	$	43	
 	 	$	(26	)	 	(60	)	
Service cost ratio	86.7	%	 	72.7	%	 	 	 	 	 	88.3	%	 	70.4	%	 	 	 	 	
Other:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Service revenue	$	85	
 	 	$	—	
 	 	
 	 	 	 	$	262	
 	 	$	—	

 	
Less: cost of service revenue	77	
 	 	—	
 	 	
 	 	 	 	233	
 	 	—	

 	
Service margin	$	8	
 	 	$	—	
 	 	
 	 	 	 	$	29	
 	 	$	—	

 	
Service cost ratio	90.3	%	 	—	%	 	 	 	 	 	89.0	%	 	—	%	 	 	 	 	
Our Use of Non-GAAP Financial Measures
We use two non-GAAP financial measures as supplemental metrics in evaluating our financial performance, making financing and business decisions, and forecasting and planning for future periods. For these reasons, management believes such measures are useful supplemental measures to investors in comparing our performance to the performance of other public companies in the health care industry. These non-GAAP financial measures should be considered as supplements to, and not as substitutes for or superior to, GAAP measures. The year over year changes for the individual components of both of these measures are described below in "Results of Operations."
The first of these non-GAAP measures is earnings before interest, taxes, depreciation and amortization (EBITDA). We believe that EBITDA is particularly helpful in assessing our ability to meet the cash demands of our operating units. The following table reconciles net income, which we believe to be the most comparable GAAP measure, to EBITDA. 

 	Three Months Ended September 30,	 	Nine Months Ended September 30,	 	
 	2016	 	2015	 	2016	 	2015	 	
 	(In millions)	 	
Net income	$	42	
 	 	$	46	
 	 	$	99	
 	 	$	113	
 	 	
Adjustments:	 	 	 	 	 	 	 	 	
Depreciation, and amortization of intangible assets and capitalized software	42	
 	 	29	
 	 	118	
 	 	87	
 	 	
Interest expense	26	
 	 	15	
 	 	76	
 	 	45	
 	 	
Income tax expense	50	
 	 	52	
 	 	137	
 	 	153	
 	 	
EBITDA	$	160	
 	 	$	142	
 	 	$	430	
 	 	$	398	
 	 	
The second of these non-GAAP measures is adjusted net income (including adjusted net income per diluted share). We believe that adjusted net income per diluted share is very helpful in assessing our financial performance exclusive of the non-cash impact of the amortization of purchased intangibles. The following table reconciles net income, which we believe to be the most comparable GAAP measure, to adjusted net income.

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 	Three Months Ended September 30,	 	Nine Months Ended September 30,	 	
 	2016	 	2015	 	2016	 	2015	 	
 	(In millions, except diluted per-share amounts)	 	
Net income	$	42	
 	 	$	0.76	
 	 	$	46	
 	 	$	0.77	
 	 	$	99	
 	 	$	1.77	
 	 	$	113	
 	 	2.07	
 	 	
Adjustment, net of tax:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Amortization of intangible assets	5	
 	 	0.09	
 	 	2	
 	 	0.04	
 	 	15	
 	 	0.26	
 	 	8	
 	 	0.15	
 	 	
Adjusted net income (1)	$	47	
 	 	$	0.85	
 	 	$	48	
 	 	$	0.81	
 	 	$	114	
 	 	$	2.03	
 	 	$	121	
 	 	$	2.22	
 	 	
__________________________
 	 	
(1)	Beginning in the first quarter of 2016, we revised our calculation of adjusted net income. We no longer subtract “Amortization of convertible senior notes and lease financing obligations” from net income to arrive at adjusted net income. We made this change because various capital transactions completed in 2015 reduced our relative reliance on convertible notes and lease financing as sources of capital. We believe that this change enhances the comparability of these non-GAAP measures with the corresponding non-GAAP measures used by our competitors. All periods presented conform to this presentation.	

Results of Operations
Health Plans Segment
Three Months Ended September 30, 2016 Compared with Three Months Ended September 30, 2015
Strong enrollment growth generated approximately $814 million, or 24%, more premium revenue in the third quarter of 2016 compared with the third quarter of 2015. Enrollment growth was primarily due to increased Marketplace enrollment, and acquisitions that added Medicaid membership. Consolidated premium revenue measured on a PMPM basis was essentially unchanged in the third quarter of 2016 when compared with the third quarter of 2015.
The medical care ratio increased slightly to 89.4% in the third quarter of 2016, from 89.3% in the third quarter of 2015. This increase was driven by lower percentage margins for Medicaid Expansion and Marketplace membership which more than offset higher margins for TANF and ABD combined. Consolidated medical care costs measured on a PMPM basis were nearly constant in the third quarter of 2016 when compared with the third quarter of 2015.
Financial Performance by Program. The following tables present the components of premium revenue and medical care costs by program (PMPM amounts are in whole dollars; member months and other dollar amounts are in millions).

 	Three Months Ended September 30, 2016	 	
 	Member
Months(1)	 	Premium Revenue	 	Medical Care Costs	 	MCR(2)	 	Medical Margin	 	
 	 	 	Total	 	PMPM	 	Total	 	PMPM	 	 	 	 	 	 	
TANF and CHIP	7.6	
 	 	$	1,373	
 	 	$	180.74	
 	 	$	1,246	
 	 	$	164.04	
 	 	90.8	%	 	$	127	
 	 	 	
Medicaid Expansion	2.0	
 	 	763	
 	 	386.98	
 	 	642	
 	 	325.68	
 	 	84.2	
 	 	121	
 	 	 	
Marketplace	1.7	
 	 	399	
 	 	238.86	
 	 	352	
 	 	210.38	
 	 	88.1	
 	 	47	
 	 	 	
ABD	1.1	
 	 	1,186	
 	 	1,008.28	
 	 	1,094	
 	 	929.93	
 	 	92.2	
 	 	92	
 	 	 	
MMP	0.2	
 	 	334	
 	 	2,165.26	
 	 	280	
 	 	1,818.75	
 	 	84.0	
 	 	54	
 	 	 	
Medicare	0.1	
 	 	136	
 	 	1,019.19	
 	 	134	
 	 	1,003.85	
 	 	98.5	
 	 	2	
 	 	 	
 	12.7	
 	 	$	4,191	
 	 	$	329.88	
 	 	$	3,748	
 	 	$	295.01	
 	 	89.4	%	 	$	443	

 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Three Months Ended September 30, 2015	 	
 	Member
Months(1)	 	Premium Revenue	 	Medical Care Costs	 	MCR(2)	 	Medical Margin	 	
 	 	 	Total	 	PMPM	 	Total	 	PMPM	 	 	 	 	 	 	
TANF and CHIP	6.6	
 	 	$	1,139	
 	 	$	171.16	
 	 	$	1,070	
 	 	$	160.85	
 	 	94.0	%	 	$	69	
 	 	 	
Medicaid Expansion	1.5	
 	 	565	
 	 	366.80	
 	 	458	
 	 	297.16	
 	 	81.0	
 	 	107	
 	 	 	
Marketplace	0.6	
 	 	170	
 	 	262.74	
 	 	124	
 	 	192.21	
 	 	73.2	
 	 	46	
 	 	 	
ABD	1.1	
 	 	1,070	
 	 	1,017.68	
 	 	979	
 	 	931.11	
 	 	91.5	
 	 	91	
 	 	 	
MMP	0.2	
 	 	310	
 	 	1,975.10	
 	 	271	
 	 	1,718.13	
 	 	87.0	
 	 	39	
 	 	 	
Medicare	0.1	
 	 	123	
 	 	1,002.50	
 	 	114	
 	 	930.43	
 	 	92.8	
 	 	9	
 	 	 	
 	10.1	
 	 	$	3,377	
 	 	$	332.05	
 	 	$	3,016	
 	 	$	296.49	
 	 	89.3	%	 	$	361	

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____________________
 	 	
(1)	A member month is defined as the aggregate of each month’s ending membership for the period presented.	
 	 	
(2)	"MCR" represents medical costs as a percentage of premium revenue.	

The following discussion highlights the primary drivers of our performance, by program.
Medicaid TANF, CHIP and ABD. Medical care ratios for the TANF, CHIP and ABD programs fluctuated among health plans between the third quarters of 2016 and 2015. The medical care ratio on a consolidated basis for the ABD program was consistent between the third quarters of 2016 and 2015. The medical care ratio on a consolidated basis for the TANF and CHIP programs combined fell in the third quarter of 2016 when compared to the third quarter of 2015. Lower medical care ratios for the Florida, Illinois and New Mexico health plans more than offset higher or flat medical care ratios in other health plans.
Medicaid Expansion. Member months increased 28% in the third quarter of 2016, when compared with the third quarter of 2015, as a result of membership growth in all states, but higher medical care ratios in Michigan, New Mexico, Ohio and Washington led to an increase in the consolidated medical care ratio for the Expansion program, when compared with the third quarter of 2015.
Marketplace. Marketplace member months increased by almost 160% in the third quarter of 2016 when compared with the third quarter of 2015. The medical care ratio of aggregate Marketplace membership increased substantially in the third quarter of 2016 when compared with the third quarter of 2015, primarily as a result of lower revenue due to increased liabilities for the Marketplace risk adjustment program.
MMP and Medicare. Membership, revenue and medical care ratios were consistent on a consolidated basis for the MMP and Medicare programs when comparing the third quarter of 2016 with the third quarter of 2015.

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Financial Performance by State Health Plan. The following tables summarize member months, premium revenue, medical care costs, medical care ratio, and medical margin by state health plan for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar amounts are in millions):

 	Three Months Ended September 30, 2016	 	
 	Member
Months(1)	 	Premium Revenue	 	Medical Care Costs	 	MCR(2)	 	Medical Margin	 	
 	 	 	Total	 	PMPM	 	Total	 	PMPM	 	 	 	 	 	 	 	
California	2.1	
 	 	$	612	
 	 	$	298.05	
 	 	$	523	
 	 	$	254.11	
 	 	85.3	%	 	$	89	
 	 	 	 	
Florida	1.6	
 	 	494	
 	 	297.24	
 	 	462	
 	 	277.79	
 	 	93.5	
 	 	32	
 	 	 	 	
Illinois	0.6	
 	 	163	
 	 	275.26	
 	 	145	
 	 	244.86	
 	 	89.0	
 	 	18	
 	 	 	 	
Michigan	1.2	
 	 	387	
 	 	334.25	
 	 	337	
 	 	290.16	
 	 	86.8	
 	 	50	
 	 	 	 	
New Mexico	0.8	
 	 	338	
 	 	440.12	
 	 	304	
 	 	396.35	
 	 	90.1	
 	 	34	
 	 	 	 	
New York (3)	0.1	
 	 	32	
 	 	427.40	
 	 	30	
 	 	403.71	
 	 	94.5	
 	 	2	
 	 	 	 	
Ohio	1.0	
 	 	501	
 	 	491.51	
 	 	424	
 	 	415.87	
 	 	84.6	
 	 	77	
 	 	 	 	
Puerto Rico	1.0	
 	 	184	
 	 	183.46	
 	 	167	
 	 	167.44	
 	 	91.3	
 	 	17	
 	 	 	 	
South Carolina	0.3	
 	 	102	
 	 	312.28	
 	 	94	
 	 	285.97	
 	 	91.6	
 	 	8	
 	 	 	 	
Texas	1.1	
 	 	597	
 	 	559.98	
 	 	525	
 	 	493.07	
 	 	88.1	
 	 	72	
 	 	 	 	
Utah	0.4	
 	 	106	
 	 	236.31	
 	 	104	
 	 	230.53	
 	 	97.6	
 	 	2	
 	 	 	 	
Washington	2.1	
 	 	569	
 	 	265.48	
 	 	521	
 	 	243.49	
 	 	91.7	
 	 	48	
 	 	 	 	
Wisconsin	0.4	
 	 	103	
 	 	262.32	
 	 	90	
 	 	231.86	
 	 	88.4	
 	 	13	
 	 	 	 	
Other (4)	—	
 	 	3	
 	 	—	
 	 	22	
 	 	—	
 	 	—	
 	 	(19	)	 	 	 	
 	12.7	
 	 	$	4,191	
 	 	$	329.88	
 	 	$	3,748	
 	 	$	295.01	
 	 	89.4	%	 	$	443	

 	Three Months Ended September 30, 2015	 	 	 	
 	Member
Months(1)	 	Premium Revenue	 	Medical Care Costs	 	MCR(2)	 	Medical Margin	 	 	 	
 	 	 	Total	 	PMPM	 	Total	 	PMPM	 	 	 	 	 	 	 	 	
California	1.9	
 	 	$	524	
 	 	$	288.45	
 	 	$	438	
 	 	$	241.09	
 	 	83.6	%	 	$	86	
 	 	 	 	 	
Florida	0.9	
 	 	300	
 	 	299.33	
 	 	265	
 	 	264.39	
 	 	88.3	
 	 	35	
 	 	 	 	 	
Illinois	0.3	
 	 	106	
 	 	347.34	
 	 	100	
 	 	327.61	
 	 	94.3	
 	 	6	
 	 	 	 	 	
Michigan	0.9	
 	 	281	
 	 	330.00	
 	 	236	
 	 	276.61	
 	 	83.8	
 	 	45	
 	 	 	 	 	
New Mexico	0.7	
 	 	297	
 	 	421.76	
 	 	275	
 	 	390.26	
 	 	92.5	
 	 	22	
 	 	 	 	 	
New York (3)	—	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	 	 	 	
Ohio	1.0	
 	 	510	
 	 	498.36	
 	 	436	
 	 	425.98	
 	 	85.5	
 	 	74	
 	 	 	 	 	
Puerto Rico	1.0	
 	 	181	
 	 	170.91	
 	 	162	
 	 	152.69	
 	 	89.3	
 	 	19	
 	 	 	 	 	
South Carolina	0.3	
 	 	86	
 	 	264.37	
 	 	68	
 	 	211.76	
 	 	80.1	
 	 	18	
 	 	 	 	 	
Texas	0.8	
 	 	524	
 	 	661.69	
 	 	493	
 	 	622.84	
 	 	94.1	
 	 	31	
 	 	 	 	 	
Utah	0.3	
 	 	85	
 	 	276.72	
 	 	77	
 	 	250.50	
 	 	90.5	
 	 	8	
 	 	 	 	 	
Washington	1.7	
 	 	400	
 	 	238.03	
 	 	371	
 	 	221.14	
 	 	92.9	
 	 	29	
 	 	 	 	 	
Wisconsin	0.3	
 	 	71	
 	 	232.32	
 	 	57	
 	 	184.94	
 	 	79.6	
 	 	14	
 	 	 	 	 	
Other (4)	—	
 	 	12	
 	 	—	
 	 	38	
 	 	—	
 	 	—	
 	 	(26	)	 	 	 	 	
 	10.1	
 	 	$	3,377	
 	 	$	332.05	
 	 	$	3,016	
 	 	$	296.49	
 	 	89.3	%	 	$	361	

 	 	
(1)	A member month is defined as the aggregate of each month’s ending membership for the period presented.	
 	 	
(2)	"MCR" represents medical costs as a percentage of premium revenue.	
 	 	
(3)	The New York health plan was acquired effective August 1, 2016.	
 	 	
(4)	"Other" medical care costs include primarily medically related administrative costs of the parent company, and direct delivery costs.	
The following discussion highlights the primary drivers of our performance, by health plan.
California. Premium revenue grew to $612 million in the third quarter of 2016, from $524 million in the third quarter of 2015, as a result of higher membership in the TANF, Medicaid Expansion and Marketplace programs. The medical care ratio increased to 85.3% in the third quarter of 2016, from 83.6% in the third quarter of 2015, due to a higher medical care ratio in the TANF and ABD programs, partially offset by a decrease in the medical care ratio for the Medicaid Expansion program.

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Florida. Premium revenue grew to $494 million in the third quarter of 2016, from $300 million in the third quarter of 2015, due to increased Marketplace membership and the addition of over 100,000 members from Medicaid contract acquisitions, most of which closed in the fourth quarter of 2015. The medical care ratio increased to 93.5% in the third quarter of 2016, from 88.3% in the third quarter of 2015, primarily as a result of an increase in the medical care ratio for the Marketplace membership, which more than offset a decrease to the medical care ratio for the TANF membership.
Illinois. Premium revenue grew to $163 million in the third quarter of 2016, from $106 million in the third quarter of 2015. The plan added approximately 100,000 members from Medicaid contract acquisitions in the first quarter of 2016. The medical care ratio decreased to 89.0% in the third quarter of 2016, from 94.3% in the third quarter of 2015. The decrease in the medical care ratio was primarily due to higher margins for TANF and Medicaid Expansion members.
Michigan. Premium revenue grew $106 million, or 38%, in the third quarter of 2016 compared with the third quarter of 2015, due to the addition of over 100,000 members from Medicaid contract acquisitions closed in the third quarter of 2015 and the first quarter of 2016. The medical care ratio increased to 86.8% in the third quarter of 2016, from 83.8% in the third quarter of 2015, primarily as a result of lower margins for TANF and Medicaid Expansion membership.
New Mexico. The medical care ratio decreased to 90.1% in the third quarter of 2016, from 92.5% in the third quarter of 2015, primarily as a result of a lower medical care ratio for the health plan's TANF membership, partially offset by an increase to the medical care ratio for the Medicaid Expansion membership.
New York. The medical care ratio was 94.5% in the third quarter of 2016. Our New York health plan was acquired effective August 1, 2016 and is the smallest of our health plans.
Ohio. Premium revenue declined $9 million, or 2%, in the third quarter of 2016 compared with the third quarter of 2015, despite a slight increase in enrollment. Medicaid premium rates decreased effective January 1, 2016, by approximately 2.5% (including a 5% decrease in Medicaid Expansion rates). Despite lower per member per month premiums, the medical care ratio decreased to 84.6% in the third quarter of 2016, from 85.5% in the third quarter of 2015.
Puerto Rico. The medical care ratio increased to 91.3% in the third quarter of 2016, from 89.3% in the third quarter of 2015.
South Carolina. The medical care ratio increased to 91.6% in the third quarter of 2016, from 80.1% in the third quarter of 2015. Premium increases in South Carolina have not been sufficient to cover the cost of expanded benefits.
Texas. Premium revenue grew $73 million, or 14%, in the third quarter of 2016 compared with the third quarter of 2015. The medical care ratio decreased to 88.1% in the third quarter of 2016 compared with 94.1% in the third quarter of 2015, primarily due to a decline in the medical care ratio for ABD membership and growth in Marketplace membership, which has a lower medical care ratio than the health plan's other membership.
Utah. Premium revenue grew $21 million, or 25%, in the third quarter of September 30, 2016 compared with the third quarter of 2015, primarily due to higher Marketplace enrollment. The medical care ratio increased to 97.6% in the third quarter of 2016, from 90.5% in the third quarter of 2015, primarily due to an increase in the medical care ratio of the growing Marketplace program.
Washington. Premium revenue grew $169 million, or 42%, in the third quarter of 2016 compared with the third quarter of 2015, primarily due to membership growth in the Medicaid (both TANF and ABD) and Medicaid Expansion programs. The medical care ratio decreased to 91.7% in the third quarter of 2016, from 92.9% in the third quarter of 2015.
Wisconsin. Premium revenue grew $32 million, or 44%, in the third quarter of 2016 when compared with the third quarter of 2015 as a result of increased Marketplace enrollment. The medical care ratio increased to 88.4% in the third quarter of 2016, from 79.6% in the third quarter of 2015 due to an increase in the medical care ratio of the Marketplace membership.

Nine Months Ended September 30, 2016 Compared with Nine Months Ended September 30, 2015
In the nine months ended September 30, 2016, a 30% increase in membership, partially offset by a 3% decrease in revenue PMPM, resulted in increased premium revenue of approximately 27%, or $2.6 billion, when compared with the nine months ended September 30, 2015. The decline in PMPM premium revenue was primarily the result of lower PMPM premiums for Medicaid Expansion membership and an increase in the percentage of our premium revenue derived from TANF and Marketplace membership.
Medical care costs as a percent of premium revenue increased to 89.5% in the nine months ended September 30, 2016, from 88.9% in the nine months ended September 30, 2015. The increase in our medical care ratio was driven primarily by lower percentage margins for Medicaid Expansion and Marketplace membership. Medical margin (measured in absolute dollars) increased 20% in the nine months ended September 30, 2016 over the nine months ended September 30, 2015.

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Financial Performance by Program. The following tables present the components of premium revenue and medical care costs by program (PMPM amounts are in whole dollars; member months and other dollar amounts are in millions).

 	Nine Months Ended September 30, 2016	 	
 	Member
Months(1)	 	Premium Revenue	 	Medical Care Costs	 	MCR(2)	 	Medical Margin	 	
 	 	 	Total	 	PMPM	 	Total	 	PMPM	 	 	 	 	 	 	
TANF and CHIP	22.5	
 	 	$	3,999	
 	 	$	177.60	
 	 	$	3,646	
 	 	$	161.93	
 	 	91.2	%	 	$	353	
 	 	 	
Medicaid Expansion	5.8	
 	 	2,184	
 	 	376.98	
 	 	1,850	
 	 	319.38	
 	 	84.7	
 	 	334	
 	 	 	
Marketplace	5.1	
 	 	1,181	
 	 	231.69	
 	 	1,009	
 	 	197.77	
 	 	85.4	
 	 	172	
 	 	 	
ABD	3.5	
 	 	3,466	
 	 	987.20	
 	 	3,173	
 	 	903.85	
 	 	91.6	
 	 	293	
 	 	 	
MMP	0.5	
 	 	989	
 	 	2,160.14	
 	 	867	
 	 	1,894.38	
 	 	87.7	
 	 	122	
 	 	 	
Medicare	0.4	
 	 	396	
 	 	1,015.14	
 	 	385	
 	 	986.40	
 	 	97.2	
 	 	11	
 	 	 	
 	37.8	
 	 	$	12,215	
 	 	$	323.44	
 	 	$	10,930	
 	 	$	289.41	
 	 	89.5	%	 	$	1,285	

 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	Nine Months Ended September 30, 2015	 	
 	Member
Months(1)	 	Premium Revenue	 	Medical Care Costs	 	MCR(2)	 	Medical Margin	 	
 	 	 	Total	 	PMPM	 	Total	 	PMPM	 	 	 	 	 	 	
TANF and CHIP	18.6	
 	 	$	3,280	
 	 	$	175.52	
 	 	$	3,030	
 	 	$	162.16	
 	 	92.4	%	 	$	250	
 	 	 	
Medicaid Expansion	4.2	
 	 	1,654	
 	 	393.71	
 	 	1,325	
 	 	315.33	
 	 	80.1	
 	 	329	
 	 	 	
Marketplace	2.0	
 	 	525	
 	 	259.97	
 	 	370	
 	 	183.33	
 	 	70.5	
 	 	155	
 	 	 	
ABD	3.2	
 	 	3,063	
 	 	965.91	
 	 	2,789	
 	 	879.27	
 	 	91.0	
 	 	274	
 	 	 	
MMP	0.4	
 	 	733	
 	 	1,981.40	
 	 	684	
 	 	1,847.03	
 	 	93.2	
 	 	49	
 	 	 	
Medicare	0.4	
 	 	397	
 	 	1,026.00	
 	 	383	
 	 	991.53	
 	 	96.6	
 	 	14	
 	 	 	
 	28.8	
 	 	$	9,652	
 	 	$	334.74	
 	 	$	8,581	
 	 	$	297.58	
 	 	88.9	%	 	$	1,071	
 	 	 	
_____________________
 	 	
(1)	A member month is defined as the aggregate of each month’s ending membership for the period presented.	
 	 	
(2)	"MCR" represents medical costs as a percentage of premium revenue.	

The following discussion highlights the primary drivers of our performance, by program.
Medicaid TANF, CHIP and ABD. TANF, CHIP and ABD revenue increased in the nine months ended September 30, 2016 when compared with the nine months ended September 30, 2015, due to health plan acquisitions in late 2015 and early 2016, as well as the inclusion of a full three quarters of Puerto Rico operations year to date in 2016 (Puerto Rico began operations effective April 1, 2015). The slight decline in the medical care ratio for these programs on a consolidated basis when comparing the nine months ended September 30, 2016 with the same period in 2015 is not significant given normal margin fluctuations observed when performance is reviewed at this level of detail.
Medicaid Expansion. Member months increased 38% in the nine months ended September 30, 2016, when compared with the same period in 2015 as a result of membership growth in all states; but higher medical care ratios in Illinois, Michigan, New Mexico and Ohio led to an increase in the consolidated medical care ratio for the Expansion program.
Marketplace. Marketplace member months increased by over 150% in the nine months ended September 30, 2016, when compared with the same period in 2015. The medical care ratio of aggregate Marketplace membership increased substantially in 2016 when compared to 2015, primarily as a result of lower revenue due to increased liabilities for the Marketplace risk adjustment program.
MMP and Medicare. Membership and revenue increased on a consolidated basis for the MMP and Medicare programs when comparing the nine months ended September 30, 2016 with the same period in 2015. The medical care ratio for these programs decreased on a consolidated basis due to higher margins for the MMP program.

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Financial Performance by State Health Plan. The following tables summarize member months, premium revenue, medical care costs, medical care ratio, and medical margin by state health plan for the periods indicated (PMPM amounts are in whole dollars; member months and other dollar amounts are in millions):

 	Nine Months Ended September 30, 2016	 	
 	Member
Months(1)	 	Premium Revenue	 	Medical Care Costs	 	MCR(2)	 	Medical Margin	 	
 	 	 	Total	 	PMPM	 	Total	 	PMPM	 	 	 	 	 	 	 	
California	6.1	
 	 	$	1,707	
 	 	$	280.21	
 	 	$	1,485	
 	 	$	243.64	
 	 	86.9	%	 	$	222	
 	 	 	 	
Florida	5.0	
 	 	1,447	
 	 	288.74	
 	 	1,301	
 	 	259.60	
 	 	89.9	
 	 	146	
 	 	 	 	
Illinois	1.8	
 	 	466	
 	 	266.11	
 	 	414	
 	 	236.39	
 	 	88.8	
 	 	52	
 	 	 	 	
Michigan	3.6	
 	 	1,143	
 	 	322.08	
 	 	1,018	
 	 	286.77	
 	 	89.0	
 	 	125	
 	 	 	 	
New Mexico	2.3	
 	 	1,016	
 	 	447.07	
 	 	905	
 	 	398.22	
 	 	89.1	
 	 	111	
 	 	 	 	
New York (3)	0.1	
 	 	32	
 	 	427.40	
 	 	30	
 	 	403.71	
 	 	94.5	
 	 	2	
 	 	 	 	
Ohio	3.0	
 	 	1,472	
 	 	484.82	
 	 	1,306	
 	 	430.14	
 	 	88.7	
 	 	166	
 	 	 	 	
Puerto Rico	3.0	
 	 	535	
 	 	176.44	
 	 	516	
 	 	170.46	
 	 	96.6	
 	 	19	
 	 	 	 	
South Carolina	0.9	
 	 	273	
 	 	288.93	
 	 	232	
 	 	245.13	
 	 	84.8	
 	 	41	
 	 	 	 	
Texas	3.3	
 	 	1,852	
 	 	570.65	
 	 	1,599	
 	 	492.79	
 	 	86.4	
 	 	253	
 	 	 	 	
Utah	1.3	
 	 	330	
 	 	246.78	
 	 	312	
 	 	233.14	
 	 	94.5	
 	 	18	
 	 	 	 	
Washington	6.2	
 	 	1,634	
 	 	261.91	
 	 	1,479	
 	 	237.15	
 	 	90.5	
 	 	155	
 	 	 	 	
Wisconsin	1.2	
 	 	299	
 	 	252.45	
 	 	278	
 	 	235.25	
 	 	93.2	
 	 	21	
 	 	 	 	
Other (4)	—	
 	 	9	
 	 	—	
 	 	55	
 	 	—	
 	 	—	
 	 	(46	)	 	 	 	
 	37.8	
 	 	$	12,215	
 	 	$	323.44	
 	 	$	10,930	
 	 	$	289.41	
 	 	89.5	%	 	$	1,285	

 	Nine Months Ended September 30, 2015	 	 	 	
 	Member
Months(1)	 	Premium Revenue	 	Medical Care Costs	 	MCR(2)	 	Medical Margin	 	 	 	
 	 	 	Total	 	PMPM	 	Total	 	PMPM	 	 	 	 	 	 	 	 	 	
California	5.3	
 	 	$	1,538	
 	 	$	292.64	
 	 	$	1,349	
 	 	$	256.71	
 	 	87.7	%	 	$	189	
 	 	 	 	 	 	
Florida	2.9	
 	 	868	
 	 	294.05	
 	 	763	
 	 	258.49	
 	 	87.9	
 	 	105	
 	 	 	 	 	 	
Illinois	0.9	
 	 	312	
 	 	342.27	
 	 	288	
 	 	315.68	
 	 	92.2	
 	 	24	
 	 	 	 	 	 	
Michigan	2.4	
 	 	738	
 	 	310.01	
 	 	621	
 	 	260.53	
 	 	84.0	
 	 	117	
 	 	 	 	 	 	
New Mexico	2.1	
 	 	933	
 	 	448.75	
 	 	843	
 	 	405.60	
 	 	90.4	
 	 	90	
 	 	 	 	 	 	
New York (3)	—	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	—	
 	 	 	 	 	 	
Ohio	3.1	
 	 	1,534	
 	 	498.76	
 	 	1,281	
 	 	416.69	
 	 	83.5	
 	 	253	
 	 	 	 	 	 	
Puerto Rico	2.1	
 	 	375	
 	 	175.17	
 	 	346	
 	 	161.60	
 	 	92.3	
 	 	29	
 	 	 	 	 	 	
South Carolina	1.0	
 	 	270	
 	 	269.11	
 	 	209	
 	 	208.45	
 	 	77.5	
 	 	61	
 	 	 	 	 	 	
Texas	2.4	
 	 	1,418	
 	 	597.53	
 	 	1,313	
 	 	553.35	
 	 	92.6	
 	 	105	
 	 	 	 	 	 	
Utah	0.8	
 	 	242	
 	 	284.83	
 	 	223	
 	 	262.14	
 	 	92.0	
 	 	19	
 	 	 	 	 	 	
Washington	4.9	
 	 	1,186	
 	 	242.75	
 	 	1,094	
 	 	223.99	
 	 	92.3	
 	 	92	
 	 	 	 	 	 	
Wisconsin	0.9	
 	 	206	
 	 	221.97	
 	 	162	
 	 	173.99	
 	 	78.4	
 	 	44	
 	 	 	 	 	 	
Other (4)	—	
 	 	32	
 	 	—	
 	 	89	
 	 	—	
 	 	—	
 	 	(57	)	 	 	 	 	 	
 	28.8	
 	 	$	9,652	
 	 	$	334.74	
 	 	$	8,581	
 	 	$	297.58	
 	 	88.9	%	 	$	1,071	

 	 	
(1)	A member month is defined as the aggregate of each month’s ending membership for the period presented.	
 	 	
(2)	"MCR" represents medical costs as a percentage of premium revenue.	
 	 	
(3)	The New York health plan was acquired effective August 1, 2016.	
 	 	
(4)	"Other" medical care costs include primarily medically related administrative costs of the parent company, and direct delivery costs.	
California. Premium revenue grew to $1,707 million in the nine months ended September 30, 2016, from $1,538 million in the nine months ended September 30, 2015, as a result of higher membership in the TANF, Medicaid Expansion and Marketplace programs. The medical care ratio decreased to 86.9% in the nine months ended September 30, 2016, from 87.7% in the nine months ended September 30, 2015, due to improvements in the medical care ratios for the TANF, Medicaid Expansion and MMP membership. These improvements more than offset a higher medical care ratio for the ABD membership.
Florida. Premium revenue grew to $1,447 million in the nine months ended September 30, 2016, from $868 million in the nine months ended September 30, 2015, primarily due to increased Marketplace membership, and the addition of over 100,000

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members from Medicaid contract acquisitions, most of which closed in the fourth quarter of 2015. The medical care ratio increased to 89.9% in the nine months ended September 30, 2016, from 87.9% in the nine months ended September 30, 2015, primarily as a result of an increase in the medical care ratio for the Marketplace membership, which more than offset a decrease in the medical care ratio for the TANF and ABD membership.
Illinois. Premium revenue grew to $466 million in the nine months ended September 30, 2016, from $312 million in the nine months ended September 30, 2015. The health plan added approximately 100,000 members from Medicaid contract acquisitions in the first quarter of 2016. The health plan's medical care ratio decreased to 88.8% for the nine months ended September 30, 2016, from 92.2% for the nine months ended September 30, 2015. The decrease in the medical care ratio was primarily due to higher margins for the health plan's TANF membership.
Michigan. Premium revenue grew $405 million, or 55%, in the nine months ended September 30, 2016 compared with the nine months ended September 30, 2015, due to the addition of over 100,000 members from Medicaid contract acquisitions in the third quarter of 2015 and the first quarter of 2016. The medical care ratio increased to 89.0% in the nine months ended September 30, 2016, from 84.0% in the nine months ended September 30, 2015, primarily as a result of lower margins for TANF and Medicaid Expansion membership.
New Mexico. The medical care ratio decreased to 89.1% in the nine months ended September 30, 2016, from 90.4% in the nine months ended September 30, 2015, due to a lower medical care ratio for the TANF membership, partially offset by an increase in the medical care ratio for the Medicaid Expansion membership.
New York. As noted above, the New York health plan was acquired effective August 1, 2016.
Ohio. Premium revenue declined $62 million, or 4%, in the nine months ended September 30, 2016 compared with the nine months ended September 30, 2015, due to reduced overall state Medicaid enrollment and a Medicaid premium rate decrease effective January 1, 2016 of approximately 2.5% (which included a 5% decrease in Medicaid Expansion rates). The medical care ratio increased to 88.7% in the nine months ended September 30, 2016, from 83.5% in the nine months ended September 30, 2015, as a result of the rate decrease noted above and less favorable development of prior period medical liability estimates year to date in 2016 compared with 2015.
Puerto Rico. The medical care ratio increased to 96.6% in the nine months ended September 30, 2016, from 92.3% in the nine months ended September 30, 2015, primarily due to increased pharmacy costs, and reductions to revenue previously recorded for 2015 dates of service which decreased pretax income by approximately $11 million in the second quarter of 2016. The plan served its first members effective April 1, 2015.
South Carolina. The medical care ratio increased to 84.8% in the nine months ended September 30, 2016, from 77.5% in the nine months ended September 30, 2015. Premium increases in South Carolina have not been sufficient to cover the cost of expanded benefits.
Texas. Premium revenue grew $434 million, or 31%, in the nine months ended September 30, 2016 compared with the nine months ended September 30, 2015. Growth in premium revenue was primarily the result of increased Marketplace enrollment; the revenue associated with additional nursing home services provided to some ABD members effective March 1, 2015; the start-up of the Texas MMP program on that same date; and the recognition (in the second quarter of 2016) of approximately $44 million in out-of-period quality revenue relating to 2015 and 2014 dates of service. The plan's medical care ratio decreased to 86.4% for the nine months ended September 30, 2016, from 92.6% for the nine months ended September 30, 2015. Without the benefit of out-of-period quality revenue, the medical care ratio of the Texas health plan would have been approximately 88% in the nine months ended September 30, 2016.
Utah. Premium revenue grew $88 million, or 36%, in the nine months ended September 30, 2016 compared with the nine months ended September 30, 2015, primarily due to higher Marketplace enrollment. The medical care ratio increased to 94.5% in the nine months ended September 30, 2016, from 92.0% in the nine months ended September 30, 2015, primarily due to an increase in the medical care ratio of the growing Marketplace program.
Washington. Premium revenue grew $448 million, or 38%, in the nine months ended September 30, 2016 compared with the nine months ended September 30, 2015, primarily due to membership growth in the Marketplace, TANF and Medicaid Expansion programs. The medical care ratio decreased to 90.5% in the nine months ended September 30, 2016, from 92.3% in the nine months ended September 30, 2015, due to improved medical cost efficiency across nearly all programs.
Wisconsin. Premium revenue grew $93 million, or 45%, in the nine months ended September 30, 2016 when compared with the nine months ended September 30, 2015 as a result of increased Marketplace enrollment. The medical care ratio increased to 93.2% for the nine months ended September 30, 2016, from 78.4% for the nine months ended September 30, 2015 due to an increase in the medical care ratio of the Marketplace membership.

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Molina Medicaid Solutions Segment
Service margin declined $7 million in the third quarter of 2016 compared with the third quarter of 2015, and $26 million in the nine months ended September 30, 2016 compared with the nine months ended September 30, 2015, primarily due to increased service costs associated with legacy state contracts that were re-procured.
Other Segment
Service margin was $8 million and $29 million for the three and nine months ended September 30, 2016, respectively. Because we acquired our Pathways behavioral health and social services provider in the fourth quarter of 2015, there was no service margin in the Other segment for the three and nine months ended September 30, 2015.
Income Statement Components that are Not Unique to Individual Segments
General and Administrative Expenses.General and administrative expenses as a percentage of total revenue (the “general and administrative expense ratio”) decreased to 7.6% in the third quarter of 2016, from 8.0% in the third quarter of 2015. The general and administrative expense ratio decreased to 7.8% for the nine months ended September 30, 2016, compared with 8.1% for the nine months ended September 30, 2015. In both the three and nine months ended September 30, 2016, the increase in total revenue outpaced the increase in general and administrative expenses.
Premium Tax Expenses.The premium tax ratio (premium tax expense as a percentage of premium revenue plus premium tax revenue) decreased to 2.7% in the nine months ended September 30, 2016, compared with 2.9% in the nine months ended September 30, 2015, primarily due to the significant revenue growth at our Florida health plan, which operates in a state with no premium tax, and growth in MMP revenue. The Medicare portion of MMP revenue is not subject to premium tax.
Health Insurer Fee Revenue and Expenses. HIF revenue, as a percentage of premium revenue, decreased to 2.0% in the third quarter of 2016, from 2.4% in the third quarter of 2015. In the third quarter of 2015, we recognized reimbursement of certain HIF revenue related to prior periods. The total amount of out-of-period HIF revenue recognized in the third quarter of 2015 represented approximately $8 million ($0.08 per diluted share) of HIF revenue related to 2014 and approximately $17 million ($0.18 per diluted share) related to the first two quarters of 2015. There was no such out-of-period recognition of HIF revenue in the third quarter of 2016. Year to date 2016 HIF revenue recognized, as a percentage of premium revenue, was consistent with year to date 2015 at 2.1%. In 2015, our Puerto Rico health plan was not subject to the HIF because it was not operational during the previous year (2014).
Depreciation and Amortization.When measured as a percentage of total revenue, the year over year change in depreciation and amortization was insignificant.
Interest Expense.Interest expense increased to $26 million for the third quarter of 2016, from $15 million for the third quarter of 2015. Interest expense increased to $76 million for the nine months ended September 30, 2016, from $45 million for the nine months ended September 30, 2015. The increase was primarily due to our issuance of $700 million aggregate principal amount of senior notes (5.375% Notes) due November 15, 2022, in the fourth quarter of 2015.
Interest expense includes non-cash interest expense relating primarily to the amortization of the discount on our convertible senior notes, which amounted to $8 million and $7 million for the third quarters of 2016 and 2015, respectively, and $23 million and $22 million for the nine months ended September 30, 2016 and 2015, respectively.
Income Tax Expense.The provision for income taxes was recorded at an effective rate of 54.0% for the third quarter of 2016, compared with 52.6% for the third quarter of 2015, and 58.0% for the nine months ended September 30, 2016 compared with 57.3% for the nine months ended September 30, 2015. Differences in the effective tax rate between periods are the result of different amounts of non-deductible expenses and discrete tax events.

Liquidity and Capital Resources
Introduction
We manage our cash, investments, and capital structure to meet the short- and long-term obligations of our business while maintaining liquidity and financial flexibility. Our regulated subsidiaries generate significant cash flows from premium revenue. Such cash flows are our primary sources of liquidity. Thus, any future decline in our profitability may have a negative impact on our liquidity. We generally receive premium revenue a short time before we pay for the related health care services. A majority of the assets held by our regulated subsidiaries is in the form of cash, cash equivalents, and investments. After considering expected cash flows from operating activities, we generally invest the cash of our regulated subsidiaries that exceeds our expected short-term obligations in longer term, investment-grade, and marketable debt securities to improve our overall investment return. These investments are made pursuant to board-approved investment policies that conform to applicable state laws and regulations.

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As of September 30, 2016, a substantial portion of our cash was invested in a portfolio of highly liquid money market securities, and our investments consisted solely of investment-grade debt securities. All of our investments are classified as current assets, except for our restricted investments, which are classified as non-current assets. Our restricted investments are invested principally in certificates of deposit and U.S. treasury securities. Investments and restricted investments are subject to interest rate risk and will decrease in value if market rates increase. We have the ability to hold our restricted investments until maturity. Declines in interest rates over time will reduce our investment income.
Investment income increased to $25 million for the nine months ended September 30, 2016, compared with $12 million for the nine months ended September 30, 2015, primarily due to an increase in invested assets.
Cash in excess of the capital needs of our regulated health plans is generally paid to us in the form of dividends, when and as permitted by applicable regulations, for general corporate use. For the nine months ended September 30, 2016, we received $50 million in dividends from our regulated health plan subsidiaries. For the nine months ended September 30, 2015, we received $25 million in dividends from our regulated health plan subsidiaries, and $17 million from our unregulated subsidiaries.
Liquidity
A condensed schedule of cash flows to facilitate our discussion of liquidity follows:

 	Nine Months Ended September 30,	
 	2016	 	2015	 	Change	
 	(In millions)	
Net cash provided by operating activities	$	633	
 	 	$	906	
 	 	$	(273	)	
Net cash used in investing activities	(131	)	 	(665	)	 	534	
 	
Net cash provided by financing activities	11	
 	 	384	
 	 	(373	)	
Net increase in cash and cash equivalents	$	513	
 	 	$	625	
 	 	$	(112	)	
Operating Activities. Net cash provided by operating activities decreased $273 million in the nine months ended September 30, 2016 compared with the nine months ended September 30, 2015.
The year over year changes in the following accounts decreased cash provided by operating activities:
 	 	
•	Receivables and deferred revenue. Cash flows from operations in each year were impacted by the timing of payments we receive from our states. In general, states may delay our premium payment, which we record as a receivable, or they may prepay the following month premium payment, which we record as deferred revenue. We typically receive capitation payments monthly; however, the states in which we operate may decide to adjust their payment schedules which could positively or negatively impact our reported cash flows from operating activities in any given period. In the current year, the net effect of the timing of premiums received in California and Washington negatively impacted our cash flows from operating activities.	
 	 	
•	Medical claims and benefits payable. In the nine months ended September 30, 2016, medical claims and benefits payable increased at a slower pace than the same period in 2015. In particular, our Puerto Rico health plan commenced operations on April 1, 2015, leading to a significant increase in medical claims and benefits payable at September 30, 2015, compared with a much smaller increase in the current year as the membership base has stabilized.	
Investing Activities. Net cash used in investing activities was $131 million in the nine months ended September 30, 2016, compared with $665 million in the nine months ended September 30, 2015. Net cash used in investing activities was higher in 2015 than in 2016 largely due to the investment in 2015 of a large portion of the $373 million in proceeds, net of issuance costs, that we received from the June 2015 offering of 5.75 million shares of our common stock.
Financing Activities. Net cash provided by financing activities decreased $373 million in the nine months ended September 30, 2016 compared with the nine months ended September 30, 2015, primarily due to our 2015 common stock offering.
Financial Condition
We believe that our cash resources, internally generated funds and committed acquisition bridge financing (see below under "Commitment Letter" ) will be sufficient to support our operations, planned acquisitions, regulatory requirements, and capital expenditures for at least the next 12 months.
On a consolidated basis, at September 30, 2016, our working capital was $1,448 million, compared with $1,484 million at December 31, 2015. At September 30, 2016, our cash and investments amounted to $4,695 million, compared with $4,241 million at December 31, 2015. Cash, cash equivalents and investments held by the parent company (Molina Healthcare, Inc.) amounted to $388 million and $612 million as of September 30, 2016 and December 31, 2015, respectively.

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Regulatory Capital and Dividend Restrictions. For more information on our regulatory capital and dividend restrictions, refer to Part I, Item 1 of this Form 10-Q, Notes to Consolidated Financial Statements, Note 14, "Commitments and Contingencies."
Debt Ratings. Our 5.375% Notes are rated "BB" by Standard & Poor's, and "Ba3" by Moody's Investor Service, Inc. A downgrade in our ratings could adversely affect our borrowing capacity and costs.
Future Sources and Uses of Liquidity
Proposed Acquisition. As described in Part I, Item 1 of this Form 10-Q, Notes to Consolidated Financial Statements, Note 1, "Basis of Presentation," we announced the Medicare Acquisition on August 2, 2016, which is expected to close in 2017. The purchase price is currently estimated to be $117 million, subject to certain closing adjustments.
Commitment Letter. As described in Part I, Item 1 of this Form 10-Q, Notes to Consolidated Financial Statements, Note 10, "Debt," we entered into a debt commitment letter with Barclays Bank PLC (Barclays). The primary terms of the debt commitment letter provide that Barclays will lend us up to $400 million which may be used as follows: to finance the Medicare Acquisition, including related transaction costs and regulatory or statutory capital requirements; to finance any ongoing working capital requirements; or for other general corporate purposes.
States' Budgets. From time to time, the states in which our health plans operate may experience financial difficulties, which could lead to delays in premium payments. For example, the state of Illinois is currently operating under a stopgap budget that expires in January 2017. It is unclear when or if the state's budget difficulties will be resolved. As of September 30, 2016, our Illinois health plan served approximately 195,000 members and recorded premium revenue of approximately $466 million for the nine months ended September 30, 2016. As of October 24, 2016, the state of Illinois owed us approximately $43 million for May and June 2016 premiums.  
In another example, the Commonwealth of Puerto Rico's fiscal plan, issued on October 14, 2016, reported that current revenues are insufficient to support existing current operations and debt service. While the Commonwealth reports that it will prioritize health care spending, it stresses the need to address the cap on federal matching funds it receives for its participation in the Medicaid program. Among the fiscal issues expected to further exacerbate the Commonwealth's current debt crisis is the depletion of ACA funds, estimated to occur in the Commonwealth's fiscal year 2018. As of September 30, 2016, our Puerto Rico health plan served approximately 331,000 members and recorded premium revenue of approximately $535 million for the nine months ended September 30, 2016. As of October 24, 2016, the Commonwealth is current with its premium payments.   
Credit Facility. In June 2015, weentered into an unsecured $250 million revolving credit facility (Credit Facility). Borrowings under the Credit Facility bear interest based, at our election, on a base rate or an adjusted London Interbank Offered Rate (LIBOR), plus in each case the applicable margin. The Credit Facility has a term of five years and all amounts outstanding will be due and payable on June 12, 2020. Subject to obtaining commitments from existing or new lenders and satisfaction of other specified conditions, we may increase the Credit Facility to up to $350 million. Our ability to borrow under the Credit Facility is subject to compliance with certain financial covenants. At September 30, 2016, we were in compliance with all financial covenants under the Credit Facility.  As of September 30, 2016, outstanding letters of credit amounting to $6 million reduced the borrowing capacity to $244 million, and no amounts were outstanding under the Credit Facility.
Convertible Senior Notes. In February 2013, we issued $550 million aggregate principal amount of 1.125% cash convertible senior notes (1.125% Notes) due January 15, 2020, unless earlier repurchased or converted.  In September 2014, we issued $302 million aggregate principal amount of 1.625% convertible senior notes due August 15, 2044 (1.625% Notes), unless earlier repurchased, redeemed, or converted. The principal amounts of both the 1.125% Notes and the 1.625% Notes are convertible into cash prior to their respective maturity dates under certain circumstances, one of which relates to the closing price of our common stock over a specified period. We refer to this conversion trigger as the stock price trigger.
The 1.125% Notes met their $53.00 stock price trigger in the quarter ended September 30, 2016, therefore, the 1.125% Notes were convertible as of September 30, 2016. The 1.625% Notes did not meet their $75.52 stock price trigger in the quarter ended September 30, 2016, therefore, the 1.625% Notes were not convertible as of September 30, 2016.
Securities Repurchase Program. Effective as of December 16, 2015, our board of directors authorized the repurchase of up to $50 million in aggregate of our common stock or senior notes. This repurchase program extends through December 31, 2016.
Shelf Registration Statement. We have a shelf registration statement on file with the Securities and Exchange Commission to register an unlimited amount of any combination of debt or equity securities in one or more offerings. Specific information regarding the terms and securities being offered will be provided at the time of an offering. Proceeds from future offerings are expected to be used for general corporate purposes, including, but not limited to, the repayment of debt, investments in or extensions of credit to our subsidiaries and the financing of possible acquisitions or business expansion.

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Contractual Obligations
A summary of future obligations under our various contractual obligations and commitments as of December 31, 2015, was disclosed in our 2015 Annual Report on Form 10-K. There were no material changes to this previously filed information outside the ordinary course of business during the nine months ended September 30, 2016. For further discussion and maturities of our long-term debt, refer to Part I, Item 1 of this Form 10-Q, Notes to Consolidated Financial Statements, in Note 10, "Debt."
Critical Accounting Estimates
When we prepare our consolidated financial statements, we use estimates and assumptions that may affect reported amounts and disclosures; actual results could differ from these estimates. Our critical accounting estimates relate to:
 	 	
•	Health Plans segment medical claims and benefits payable. Refer to Part I, Item 1 of this Form 10-Q, Notes to Consolidated Financial Statements, Note 9, "Medical Claims and Benefits Payable," for a table which presents the components of the change in medical claims and benefits payable, and for additional information regarding the factors used to determine our changes in estimates for all periods presented in the accompanying consolidated financial statements. Other than the discussion as noted above, there have been no significant changes during the nine months ended September 30, 2016, to our disclosure reported in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.	
 	 	
•	Health Plans segment contractual provisions that may adjust or limit revenue or profit. For a discussion of this topic, including amounts recorded to our consolidated financial statements, refer to Part I, Item 1 of this Form 10-Q, Notes to Consolidated Financial Statements, Note 2, "Significant Accounting Policies."	
 	 	
•	Health Plans segment quality incentives. For a discussion of this topic, including amounts recorded to our consolidated financial statements, refer to Part I, Item 1 of this Form 10-Q, Notes to Consolidated Financial Statements, Note 2, "Significant Accounting Policies."	
 	 	
•	Molina Medicaid Solutions segment revenue and cost recognition. There have been no significant changes during the nine months ended September 30, 2016, to our disclosure reported in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.	

Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding market risk, see Part I, Item 1 of this Form 10-Q, Notes to Consolidated Financial Statements, Note 2, "Significant Accounting Policies," Note 5, "Fair Value Measurements," and Note 6, "Investments."
Inflation
We use various strategies to mitigate the negative effects of health care cost inflation. Specifically, our health plans try to control medical and hospital costs through contracts with independent providers of health care services. Through these contracted providers, our health plans emphasize preventive health care and appropriate use of specialty and hospital services. There can be no assurance, however, that our strategies to mitigate health care cost inflation will be successful. Competitive pressures, new health care and pharmaceutical product introductions, demands from health care providers and customers, applicable regulations, or other factors may affect our ability to control health care costs.
Compliance Costs
Our health plans are regulated by both state and federal government agencies. Regulation of managed care products and health care services is an evolving area of law that varies from jurisdiction to jurisdiction. Regulatory agencies generally have discretion to issue regulations and interpret and enforce laws and rules. Changes in applicable laws and rules occur frequently. Compliance with such laws and rules may lead to additional costs related to the implementation of additional systems, procedures and programs that we have not yet identified.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: Our management, with the participation of our chief executive officer and our chief financial officer, has concluded, based upon its evaluation as of the end of the period covered by this report, that the Company’s "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

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Changes in Internal Control Over Financial Reporting: There has been no change in our internal control over financial reporting during the fiscal quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION
Item 1.    Legal Proceedings
For information regarding legal proceedings, see Part I, Item 1 of this Form 10-Q, Note 14, "Commitments and Contingencies."
Item 1A. Risk Factors
Certain risk factors may have a material adverse effect on our business, financial condition, cash flows, or results of operations, and you should carefully consider them. In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A – Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2015 and under Part II, Item 1A – Risk Factors, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016. The risk factors described in our 2015 Annual Report and 2016 first quarter Quarterly Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, cash flows, or results of operations.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Issuances of Equity Securities
None.
Issuer Purchases of Equity Securities
Share repurchase activity during the three months ended September 30, 2016 was as follows:

 	Total Number
of Shares
Purchased (a)	 	Average Price 
Paid per Share	 	Total Number of Shares
Purchased as Part of
Publicly 
Announced 
Plans or
Programs	 	Maximum 
Number (or Approximate 
Dollar Value)
of Shares that May Yet Be
Purchased Under the Plans
or Programs (b)	
July 1 - July 31	667	
 	 	$	49.83	
 	 	—	
 	 	$	50,000,000	
 	
August 1 - August 31	573	
 	 	$	56.16	
 	 	—	
 	 	$	50,000,000	
 	
September 1 - September 30	329	
 	 	$	53.54	
 	 	—	
 	 	$	50,000,000	
 	
Total	1,569	
 	 	$	52.92	
 	 	—	

(a)	During the three months ended September 30, 2016, we withheld 1,569 shares of common stock under our 2011 Equity Incentive Plan to settle our employees' income tax obligations.	
 	 	
(b)	Effective as of December 16, 2015, our board of directors authorized the repurchase of up to $50 million in aggregate of our common stock or senior notes. This repurchase program extends through December 31, 2016.	
Item 3.    Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5.    Other Information
None.
Item 6.    Exhibits
Reference is made to the accompanying Index to Exhibits.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 	 	 	MOLINA HEALTHCARE, INC.	
 	 	 	(Registrant)	
 	 	 	
Dated:	October 27, 2016	 	/s/ JOSEPH M. MOLINA, M.D.	
 	 	 	Joseph M. Molina, M.D.	
 	 	 	Chairman of the Board,	
 	 	 	Chief Executive Officer and President	
 	 	 	(Principal Executive Officer)	
 	 	 	
Dated:	October 27, 2016	 	/s/ JOHN C. MOLINA, J.D.	
 	 	 	John C. Molina, J.D.	
 	 	 	Chief Financial Officer and Treasurer	
 	 	 	(Principal Financial Officer)	

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INDEX TO EXHIBITS

 	 	 	
Exhibit No.	 	Title	
 	 	
2.1	 	Asset Purchase Agreement, dated as of August 6, 2016, between Molina Healthcare, Inc. and Aetna Inc. (Incorporated herein by reference to Exhibit 2.1 to Molina Healthcare, Inc.'s Current Report on Form 8-K filed on August 5, 2016.)	
 	 	 	
2.2	 	Asset Purchase Agreement, dated as of August 6, 2016, between Molina Healthcare, Inc. and Humana Inc. (Incorporated herein by reference to Exhibit 2.2 to Molina Healthcare, Inc.'s Current Report on Form 8-K filed on August 5, 2016.)	
 	 	 	
10.1	 	Commitment Letter, dated August 2, 2016, between Molina Healthcare, Inc. and Barclays Bank PLC (Incorporated herein by reference to Exhibit 10.1 to Molina Healthcare, Inc.'s Current Report on Form 8-K filed August 5, 2016.)	
 	 	 	
10.2*	 	Molina Healthcare, Inc. 2011 Employee Stock Purchase Plan (Filed to reflect immaterial amendments approved by the Board of Directors on July 26, 2016).	
 	 	 	
10.3*	 	Amendment No. 3, dated as of August 8, 2016, to the Molina Healthcare, Inc. Amended and Restated Deferred Compensation Plan (2013).	
 	 	 	
10.4*	 	Molina Healthcare, Inc. 2011 Equity Incentive Plan (Filed to reflect amendment to Section 16.2 approved by the Compensation Committee on October 25, 2016).	
 	 	 	
31.1	 	Certification of Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.	
 	 	
31.2	 	Certification of Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.	
 	 	
32.1	 	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	 	
32.2	 	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	 	
101.INS 	 	XBRL Taxonomy Instance Document.	
 	 	
101.SCH 	 	XBRL Taxonomy Extension Schema Document.	
 	 	
101.CAL 	 	XBRL Taxonomy Extension Calculation Linkbase Document.	
 	 	
101.DEF 	 	XBRL Taxonomy Extension Definition Linkbase Document.	
 	 	
101.LAB 	 	XBRL Taxonomy Extension Label Linkbase Document.	
 	 	
101.PRE 	 	XBRL Taxonomy Extension Presentation Linkbase Document.	

* Management contract or compensatory plan or arrangement.

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MOLINA HEALTHCARE, INC.

2011 EMPLOYEE STOCK PURCHASE PLAN* 

1.Establishment of Plan.Molina Healthcare, Inc., a Delaware corporation (the “ Company ”), proposes to grant options to purchase shares of the Company’s common stock, $0.001 par value per share (the “ Common Stock ”), to eligible employees of the Company and its Participating Affiliates (as defined below) pursuant to this 2011 Employee Stock Purchase Plan (this “ Plan ”). For purposes of this Plan, “ Parent Corporation ” and “ Subsidiary Corporation ” shall have the same meanings as “parent corporation” and “subsidiary corporation” in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the “ Code ”). “ Participating Affiliates ” are Parent Corporations or Subsidiary Corporations that the Board of Directors of the Company (the “ Board ”) designates from time to time as corporations that shall participate in this Plan. Affiliates may be designated as Participating Affiliates either before or after this Plan is approved by the Company’s stockholders as provided in Section 22. The Company intends this Plan to qualify as an “employee stock purchase plan” under Section 423 of the Code (including any amendments to or replacements of such Section), and this Plan shall be so construed. Any term not expressly defined in this Plan but defined for purposes of Section 423 of the Code shall have the same definition herein. A total of three million (3,000,000) 1  shares of the Common Stock are reserved for issuance under this Plan.
2.    Purpose.The purpose of this Plan is to provide eligible employees of the Company and Participating Affiliates with a convenient means of acquiring an equity interest in the Company through payroll deductions, to enhance such employees’ sense of participation in the affairs of the Company and Participating Affiliates, and to provide an incentive for continued employment.
3.    Administration
(a)    This Plan shall be administered by the Compensation Committee of the Board (the “ Committee ”). Subject to the provisions of this Plan and the limitations of Section 423 of the Code or any successor provision in the Code, all questions of interpretation or application of this Plan shall be determined by the Committee in its sole discretion and its decisions shall be final and binding upon all participants. Members of the Committee shall receive no compensation for their services in connection with the administration of this Plan, other than standard fees as established from time to time by the Board for services rendered by Board members serving on Board committees. All expenses incurred in connection with the administration of this Plan shall be paid by the Company.

 	 	 	 	
*As amended on July 26, 2016.
1 Represents the number of shares adjusted for the 3-for-2 common stock split in the form of a stock dividend that was effective May 20, 2011.

(b)    The Committee may, from time to time, consistent with this Plan and the requirements of Section 423 of the Code, establish, change or terminate such rules, guidelines, policies, procedures, limitations, or adjustments as deemed advisable by the Company, in its sole discretion, for the proper administration of this Plan, including, without limitation: (a) a minimum payroll deduction amount required for participation in an Offering Period, (b) a limitation on the frequency or number of changes permitted in the rate of payroll deduction during an Offering Period, (c) a payroll deduction greater or less than the amount designated by a participant in order to adjust for the Company’s delay or mistake in processing an Enrollment Form or in otherwise effecting a participant’s election under this Plan or as advisable to comply with the requirements of Section 423 of the Code, (d) determination of the date and manner by which the Fair Market Value of the Common Stock is determined for purposes of administration of this Plan, (e) delegate responsibility for Plan operation, management and administration, subject to the Committee’s oversight and control, on such terms as the Committee may establish, and (f) delegate to other persons the responsibility for performing appropriate functions as necessary, desirable or appropriate to further the purposes of this Plan.
4.    Eligibility.Any individual employed by the Company or the Participating Affiliates on the “Offering Date” of an “Offering Period” (each as defined in Section 5 below) is eligible to participate in such Offering Period except the following:
(a)    employees who are customarily employed for less than (20) hours per week; and
(b)    employees who, together with any other person whose stock would be attributed to such employee pursuant to Section 424(d) of the Code, own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Affiliates or who, as a result of being granted an option under this Plan with respect to such Offering Period, would own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined power or value of all classes of stock of the Company or any of its Participating Affiliates; and
(c)    individuals who provide services to the Company or any of its Participating Affiliates as independent contractors who are reclassified as common law employees for any reason  except for  federal income and employment tax purposes.
5.    Offering Periods.The offering periods of this Plan (each, an “Offering Period”) shall be of six (6) months duration commencing on January 1 and July 1 of the Company’s fiscal year.  The  first day of each Offering Period is referred to as the “ Offering Date .” The last day of each Offering Period is referred to as the “ Purchase Date .” The Committee shall have the power to change the Offering Dates or Purchase Dates and the duration of Offering Periods without stockholder approval if such change is announced prior to the start of the relevant Offering Period, or prior to such other time period as specified by the Committee; provided, however, that no Offering Period may have a duration exceeding twenty-seven (27) months. If the first or last day of an Offering Period is not a day on which the New York

2

2011 Employee Stock Purchase Plan

Stock Exchange is open for trading, the Company shall specify the trading day that will be deemed the first or last day, as the case may be, of the Offering Period.
6.    Participation in this Plan.An employee may participate during an Offering Period on the first Offering Date after such employee satisfies the eligibility requirements set forth in Section 4 above and delivers an appropriate enrollment form (the “ Enrollment Form ”) to the Company prior to such Offering Date, or such other time period as specified by the Committee. Notwithstanding the foregoing, the Committee may set a later time for filing the Enrollment Form authorizing payroll deductions for all eligible employees with respect to a given Offering Period. An eligible employee who does not timely deliver an Enrollment Form to the Company after becoming eligible to participate in such Offering Period shall not participate in that Offering Period or any subsequent Offering Period until filing an Enrollment Form with the Company prior to the applicable Offering Date, or such other time period as specified by the Committee. Once an employee becomes a participant in an Offering Period, such employee will automatically participate in the Offering Period commencing immediately following the last day of the prior Offering Period unless the employee withdraws or is deemed to withdraw from this Plan or terminates further participation in the Offering Period as set forth in Section 11 below. A participant who has not otherwise withdrawn from this Plan under Section 11 is not required to file any additional Enrollment Form in order to continue participation in this Plan. However a participant may deliver a new Enrollment Form for a subsequent Offering Period in accordance with applicable rules and procedures if the participant wishes to change any of the elections contained in the participant’s then effective Enrollment Form.
7.    Grant of Option on Enrollment.Enrollment by an eligible employee in an Offering Period under this Plan will constitute the grant (as of the Offering Date for such Offering Period) by the Company to such employee of an option to purchase on the Purchase Date up to that number of shares of Common Stock of the Company determined by dividing (a) the amount accumulated in such employee’s payroll deduction account during such Offering Period by (b) the Per Share Purchase Price as determined pursuant to Section 8 below (but in no event less than the par value of a share of Company’s Common Stock),  provided ,  however , that the number of shares of the Company’s Common Stock subject to any option granted pursuant to this Plan shall not exceed the maximum number of shares which may be purchased pursuant to Section 10 below with respect to the applicable Purchase Date. The Fair Market Value of a share of the Company’s Common Stock shall be determined as provided in Section 8 below.
8.    Purchase Price. The purchase price per share (“Per Share Purchase Price”) at which a share of Common Stock will be sold in any Offering Period shall be eighty-five percent (85%) of the lesser of:
(a)    The Fair Market Value on the Offering Date; or
(b)    The Fair Market Value on the Purchase Date.

3

2011 Employee Stock Purchase Plan

For purposes of this Plan, the term “Fair Market Value” of the Common Stock on any given date means (i) the last reported closing price for a share of Stock on the New York Stock Exchange or, (ii) in the absence of reported sales on the New York Stock Exchange on a given date, the closing price of the New York Stock Exchange on the last date on which a sale occurred prior to such date; or (iii) if the stock is no longer publicly traded on the New York Stock Exchange, the Committee in good faith shall determine Fair Market Value;  provided that,  if the date for which the Fair Market Value is determined is the first day when trading prices for the Stock are reported on the New York Stock Exchange, the Fair Market Value shall be the public offering price set forth on the cover page for the final prospectus relating to the Company’s Initial Public Offering.
9.    Payment of Purchase Price; Changes in Payroll Deductions; Issuance of Shares.
(a)    The purchase price of the shares shall be accumulated by regular payroll deductions made during each Offering Period. The deductions are made as a percentage of the participant’s Compensation in one percent (1%) increments not less than one percent (1%) (except as a result of an election pursuant to Section 9(c) to stop payroll deductions during an Offering Period), nor greater than fifteen percent (15%) or such lower limit set by the Committee. “ Compensation ” shall mean all W-2 cash compensation, including base salary, wages, commissions, overtime, shift premiums and bonuses,  provided ,  however , that for purposes of determining a participant’s compensation, any election by such participant to reduce his or her regular cash remuneration under Sections 125 or 401(k) of the Code shall be treated as if the participant did not make such election. Notwithstanding the foregoing, Compensation shall not include reimbursements of expenses, allowances, long-term disability, workers’ compensation or any amount deemed received without the actual transfer of cash or any amounts directly or indirectly paid pursuant to this Plan or any other stock purchase or stock option plan, or any other compensation not included above. Payroll deductions shall commence on the first payday of the Offering Period and shall continue to the end of the Offering Period unless sooner altered or terminated as provided in this Plan.
(b)    A participant may increase or decrease the rate of payroll deductions during an Offering Period by providing to the Company a new Enrollment Form, in which case the new rate shall become effective for the next payroll period commencing after the Company’s receipt of the Enrollment Form and shall continue for the remainder of the Offering Period unless changed as described below. Such change in the rate of payroll deductions may be made at any time during an Offering Period, but not more than one (1) increase and one (1) decrease in the rate of payroll deductions may be made during any Offering Period. A participant may increase or decrease the rate of payroll deductions for any subsequent Offering Period by filing with the Company a new Enrollment Form prior to the beginning of such Offering Period, or prior to such other time period as specified by the Committee. Any changes to the rate of payroll deductions during an Offering Period which are received by the Company after the commencement of the enrollment period for a new Offering Period will be made by the Company at its discretion, only to the extent such changes are administratively possible.

4

2011 Employee Stock Purchase Plan

(c)    A participant may reduce his or her payroll deduction percentage to zero during an Offering Period by providing to the Company a revised Enrollment Form. Such reduction shall be effective beginning with the next payroll period after the Company’s receipt of the request and no further payroll deductions will be made for the duration of the Offering Period. Payroll deductions credited to the participant’s account prior to the effective date of the request shall be used to purchase shares of Common Stock in accordance with Section (e) below. Notwithstanding Section 9(b), a participant may not resume making payroll deductions during the Offering Period in which he or she reduced his or her payroll deductions to zero. Any reduction to a participant’s payroll deduction percentage to zero during an Offering Period which is received by the Company after the commencement of the enrollment period for a new Offering Period will be made by the Company at its discretion, only to the extent such changes are administratively possible.
(d)    All payroll deductions made for a participant are credited to his or her account under this Plan and are deposited with the general funds of the Company. No interest accrues on the payroll deductions. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions.
(e)    On each Purchase Date, so long as this Plan remains in effect and provided that the participant has not submitted a revised Enrollment Form withdrawing from this Plan before such Purchase Date in accordance with Section 11, the Company shall apply the funds then in the participant’s account (or, if applicable, the lump sum cash payment received from the participant) to the purchase of whole shares of Common Stock reserved under the option granted to such participant with respect to the Offering Period to the extent that such option is exercisable on the Purchase Date. The Per Share Purchase Price shall be as specified in Section 8. Any cash remaining in such participant’s account on a Purchase Date which is less than the amount necessary to purchase a full share of Common Stock of the Company shall be refunded without interest. If this Plan has been oversubscribed, all funds not used to purchase shares on the Purchase Date shall be returned to the participant, without interest. No Common Stock shall be purchased on a Purchase Date on behalf of any employee whose participation in this Plan has terminated prior to such Purchase Date.
(f)    As promptly as practicable after the Purchase Date, the Company shall issue shares for the participant’s benefit representing the shares purchased upon exercise of his or her option, subject to compliance with Section 24 below.
(g)    During a participant’s lifetime, his or her option to purchase shares hereunder is exercisable only by him or her. The participant will have no interest or voting right in shares covered by his or her option until such option has been exercised.
1.    Limitations on Shares to be Purchased.
(a)    No participant shall be entitled to purchase Common Stock under this Plan at a rate which, when aggregated with his or her rights to purchase stock under all other employee stock purchase plans of the Company or any Parent Corporation or Subsidiary

5

2011 Employee Stock Purchase Plan

Corporation, exceeds $25,000 in Fair Market Value, determined as of the Offering Date (or such other limit as may be imposed by the Code) for each calendar year in which the employee participates in this Plan. The Company shall automatically suspend the payroll deductions of any participant as necessary to enforce such limit;  provided  that when the Company automatically resumes such payroll deductions, the Company must apply the rate in effect immediately prior to such suspension.
(b)    No participant shall be entitled to purchase more than the Maximum Share Amount (as defined below) on any single Purchase Date. Prior to the commencement of any Offering Period or before such time period as specified by the Committee, the Committee may, in its sole discretion, set a maximum number of shares which may be purchased by any employee at any single Purchase Date (the “ Maximum Share Amount ”). Until otherwise determined by the Committee, there shall be no Maximum Share Amount. If a new Maximum Share Amount is set, then all participants must be notified of such Maximum Share Amount before commencing the next Offering Period. The Maximum Share Amount shall continue to apply with respect to all succeeding Purchase Dates and Offering Periods unless revised by the Committee as set forth above.
(c)    If the number of shares to be purchased on a Purchase Date by all employees participating in this Plan exceeds the number of shares then available for issuance under this Plan, then the Company will make a pro rata allocation of the remaining shares in as uniform a manner as shall be reasonably practicable and as the Committee shall determine to be equitable.
(d)    Any payroll deductions accumulated in a participant’s account which are not used to purchase stock due to the limitations in this Section 10 shall be returned to the participant as soon as practicable after the end of the applicable Offering Period, without interest, including any amount remaining in such participant’s account which is less than the amount necessary to purchase a full share of Common Stock of the Company.
2.    Withdrawal.
(a)    Each participant may withdraw from an Offering Period under this Plan by signing and delivering to the Company a revised Enrollment Form indicating such participant’s intention to withdraw. Such withdrawal may be elected at any time prior to the end of an Offering Period, or such other time period as specified by the Committee.
(b)    Upon withdrawal from this Plan, the accumulated payroll deductions shall be returned to the withdrawn participant, without interest, and his or her interest in this Plan shall terminate. If a participant voluntarily elects to withdraw from this Plan, he or she may not resume his or her participation in this Plan during the same Offering Period, but he or she may participate in any Offering Period under this Plan commencing after such withdrawal by filing a new authorization for payroll deductions in the same manner as set forth in Section 6 above for initial participation in this Plan.

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2011 Employee Stock Purchase Plan

3.    Termination of Employment.Termination of a participant’s employment for any reason, including retirement, death or the failure of a participant to remain an eligible employee of the Company or of a Participating Affiliate, immediately terminates his or her participation in this Plan. In such event, the payroll deductions credited to the participant’s account will be returned to him or her or, in the case of his or her death, to his or her legal representative, without interest. For purposes of this Section 12, an employee will not be deemed to have terminated employment or failed to remain in the continuous employ of the Company or of a Participating Affiliate in the case of sick leave, military leave, or any other leave of absence approved by the Board;  provided  that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute.
4.    Return of Payroll Deductions.If a participant’s interest in this Plan is terminated by withdrawal, termination of employment or otherwise, or if this Plan is terminated by the Board, the Company shall deliver to the participant all payroll deductions credited to such participant’s account. No interest shall accrue on the payroll deductions of a participant in this Plan.
5.    Capital Changes.Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each option under this Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under this Plan but have not yet been placed under option (collectively, the “ Reserves ”), as well as the price per share of Common Stock covered by each option under this Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from a stock split or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of issued and outstanding shares of Common Stock effected without receipt of any consideration by the Company;  provided ,  however , that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration”. Notwithstanding the foregoing, any fractional shares resulting from an adjustment pursuant to this Section 14 shall be rounded down to the nearest whole number, and in no event may the Per Share Purchase Price be decreased to an amount less than the par value, if any, of the Common Stock. Such adjustment shall be made by the Committee, whose determination shall be final, binding and conclusive.
In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in its sole discretion in such instances, declare that this Plan shall terminate as of a date fixed by the Committee and either give each participant the right to purchase shares under this Plan prior to such termination or return all accumulated payroll deductions to each participant, without interest. In the event of (i) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings, provided that the options under this Plan are assumed, converted or replaced by the successor

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2011 Employee Stock Purchase Plan

corporation, which assumption will be binding on all participants), (ii) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (iii) the sale of all or substantially all of the assets of the Company or (iv) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, (each a “ Sale Event ”) the Company shall apply the funds contributed under this Plan to the purchase of shares of Common Stock pursuant to the provisions of Section 9 immediately prior to the effective date of such Sale Event. Notwithstanding the foregoing, the surviving, continuing, successor or purchasing corporation or parent corporation thereof (the “ Acquiring Corporation ”), may elect to assume the Company’s rights and obligations under this Plan and, in that event, there shall be no purchase before the end of the Offering Period in which the Sale Event occurs.
The Committee may, if it so determines in its sole discretion, also make provision for adjusting the share reserve set forth in Section 1, as well as the price per share of Common Stock covered by each outstanding option, solely in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, or in the event of the Company being consolidated with or merged into any other corporation.
6.    Withholding. The participant shall make adequate provision for the foreign, federal, state and local tax withholding obligations of the Company or any of its Participating Affiliates, if any, which arise in connection with participation in this Plan. The Company and its Participating Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant.
7.    Nonassignability.Neither payroll deductions credited to a participant’s account nor any rights with regard to the exercise of an option or to receive shares under this Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 23 below) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be void and without effect.
8.    Reports.Individual accounts will be maintained for each participant in this Plan. Each participant shall receive as soon as practicable after the end of each Offering Period a report of his or her account setting forth the total payroll deductions accumulated, the number of shares purchased, the per share price thereof and the remaining cash balance, if any, carried forward to the next Offering Period.
9.    Notice of Disqualifying Disposition.Each participant shall notify the Company in writing if the participant disposes of any of the shares purchased in any Offering Period pursuant to this Plan if such disposition occurs within two (2) years from the Offering Date or within one (1) year from the Purchase Date on which such shares were purchased (the “ Notice Period ”). The Company may, at any time during the Notice Period, place a legend or legends on any certificate representing shares acquired pursuant to this Plan requesting the

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2011 Employee Stock Purchase Plan

Company’s transfer agent to notify the Company of any transfer of the shares. The obligation of the participant to provide such notice shall continue notwithstanding the placement of any such legend on the certificates.
10.    No Rights as Stockholder or to Continued Employment.A participant shall have no rights as a stockholder by virtue of participation in this Plan until the date of the issuance of a certificate for the shares purchased pursuant to the exercise of the participant’s purchase right (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 14. Neither this Plan nor the grant of any option hereunder shall confer any right on any employee to remain in the employ of the Company or any Participating Affiliate, or restrict the right of the Company or any Participating Affiliate to terminate such employee’s employment at any time.
11.    Equal Rights and Privileges.All eligible employees shall have equal rights and privileges with respect to this Plan so that this Plan qualifies as an “employee stock purchase plan” within the meaning of Section 423 or any successor provision of the Code and the related regulations. Any provision of this Plan which is inconsistent with Section 423 or any successor provision of the Code shall, without further act or amendment by the Company, the Committee or the Board, be reformed to comply with the requirements of Section 423. This Section 20 shall take precedence over all other provisions in this Plan.
12.    Notices.All notices or other communications by a participant to the Company under or in connection with this Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.
13.    Term; Stockholder Approval.This Plan was adopted by the Board of Directors of the Company on March 18, 2011, effective as of July 1, 2011 (the “ Effective Date ”), and shall apply to any purchase right granted, or stock transferred pursuant to any purchase right granted, on or after the Effective Date. This Plan shall continue until the earlier to occur of (a) termination of this Plan by the Board (which termination may be effected by the Board at any time), (b) issuance of all of the shares of Common Stock reserved for issuance under this Plan, or (c) April 27, 2021.
14.    Designation of Beneficiary
(a)    A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant’s account under this Plan in the event of such participant’s death subsequent to the end of any Offering Period but prior to delivery to him of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant’s account under this Plan in the event of such participant’s death prior to a Purchase Date.

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2011 Employee Stock Purchase Plan

(b)    Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under this Plan who is living at the time of such participant’s death, the Company shall deliver such shares or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.
15.    Conditions Upon Issuance of Shares; Limitation on Sale of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.
16.    Applicable Law.This Plan shall be governed by the substantive laws (excluding the conflict of laws rules) of the State of California.
17.    Amendment or Termination of this Plan.The Board may at any time amend, terminate or extend the term of this Plan, except that (i) any such termination cannot affect options previously granted under this Plan unless the Board determines that the termination of this Plan immediately following any Purchase Date is in the best interests of the Company and its stockholders, (ii) any amendment may not adversely affect the previously granted purchase right of any participant unless permitted by this Plan or as may be necessary to qualify this Plan as an employee stock purchase plan pursuant to Section 423 of the Code or to obtain qualification or registration of the Common Stock under applicable federal, state or foreign securities laws, and (iii) any amendment must be approved by the stockholders of the Company in accordance with Section 2 above within twelve (12) months of the adoption of such amendment (or earlier if required by Section 22) if such amendment would:
(a)    increase the number of shares that may be issued under this Plan;
(b)    change the designation of the employees (or class of employees) eligible for participation in this Plan; or
(c)    any other action taken by the Board that, by its terms, is contingent on stockholder approval.
Notwithstanding the foregoing, the Board may make such amendments to this Plan as the Board determines to be advisable, if the continuation of this Plan or any Offering Period would result in financial accounting treatment for this Plan that is different from the financial accounting treatment in effect on the Effective Date.

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2011 Employee Stock Purchase Plan

AMENDMENT NO. 3
TO THE
MOLINA HEALTHCARE, INC.
AMENDED AND RESTATED DEFERRED COMPENSATION PLAN (2013)

WHEREAS, Molina Healthcare, Inc., a Delaware corporation (“Company”), has previously adopted the Molina Healthcare, Inc. Amended and Restated Deferred Compensation Plan (2013), as amended by Amendments No. 1 and No. 2 to the Amended and Restated Deferred Compensation Plan executed on November 14, 2013 and October 29, 2014 respectively (“ Plan ”) for the benefit of a select group of employees of the Company;

WHEREAS, the Company desires to amend the Plan to (1) permit daily changes in the notional asset value of Participant Accounts, effective as of September 1, 2016 (or as soon as administratively practicable thereafter); (2) replace the $5,000 minimum dollar deferral of combined base salary and bonus pay with a minimum deferral of 3% of base salary and bonus pay effective for Plan Years commencing after the date of adoption of the Plan amendment; and (3) reduce the maximum base salary deferral from 100% to 75% effective for Plan Years commencing after the date of adoption of the Plan amendment;

WHEREAS, Section 7.1 of the Plan permits the Company to amend the Plan; and

WHEREAS, the Board of Directors of the Company has approved this Amendment and authorized and directed the appropriate officers of the Company to execute this Amendment and to take such other actions as they deem necessary or appropriate to implement this Amendment.

NOW, THEREFORE, the Plan is amended as follows effective as set forth herein:
 	 	
1.	Effective for Plan Years commencing on or after January 1, 2017, Section 2.3.b. is deleted in its entirety and replaced in its stead with the following:	

b.	A Participant must provide a separate Written Election for each subsequent Plan Year that specifies the percentage of Plan Year Compensation that Participant has determined to defer for each such Plan Year. Such Written Election is only effective for the Plan Year for which the election is made and if no Written Election to defer Plan Year Compensation is executed in relation to a subsequent Plan Year, no Plan Year Compensation will be deferred for such subsequent Plan Year. Any election of the amount of Plan Year Compensation to defer for a given Plan Year shall be irrevocable on and after the first day of the Plan Year for which the election was made.	

2.	Effective as of September 1, 2016, Section 2.3.c. is deleted in its entirety and replaced in its stead with the following:	

c.	A Participant may change the investment vehicle(s) in which the Participant desires to have that portion of the Participant’s Account attributable to Plan Year Compensation and investment income invested and the percentage of the Participant’s Account allocated to each investment vehicle by completing and	

submitting any form or forms required by the Company. Changes in investment vehicle(s) will be made as of the applicable business day (or as soon as practicable thereafter) following the date that the change is requested.
 	 	
3.	Effective for Plan Years commencing on or after January 1, 2017, Section 3.1 is deleted in its entirety and replaced in its stead with the following:	

3.1.	Participant Contributions. A Participant may elect to defer a portion of (i) up to 75% of Plan Year Compensation constituting base pay and (ii) up to 100% of all other Plan Year Compensation eligible for deferral under this Plan (including bonus pay). For a Participant’s initial Plan Year of participation, the minimum deferral percentage for base pay and bonus pay must be 3% for each such component. For succeeding years of participation, a Participant may not defer an amount less than the minimum percentage established from year to year by the Plan Committee. A written election must be submitted, pursuant to the terms of Section 2.3, specifying the percentage of Plan Year Compensation constituting base pay the Participant has chosen to defer. A separate written election must be submitted, pursuant to the terms of Section 2.3, specifying the percentage of all other Plan Year Compensation eligible for deferral under this Plan (including bonus pay) the employee has chosen to defer. Once a Participant’s contributions for a Plan Year reach the Participant’s elected percentage, such Participant shall not be allowed to defer additional portions of such Participant’s Plan Year Compensation for the remainder of the Plan Year. Any amounts in excess of the Participant’s elected percentage inadvertently deferred shall be refunded to the Participant as soon as practicable.	

4.	Effective as of September 1, 2016, Section 3.5 is deleted in its entirety and replaced in its stead with the following:	

3.5.	Credited Earnings. The Account of each Participant (which includes such Participant’s Participant Deferral Account established under Section 3.1 and such Participant’s Company Contribution Account established under Section 3.2) shall be credited as of each applicable business day with the actual earnings on the investments allocated to the Participant’s Account.	

IN WITNESS WHEREOF, this Amendment is executed this 8th day of August, 2016.

MOLINA HEALTHCARE, INC.

By: /s/ Joseph M. Molina, M.D.
Joseph M. Molina, M.D.
Chief Executive Officer

Molina Healthcare, Inc. 2011 Equity Incentive Plan*

1.ESTABLISHMENT, PURPOSE AND TERM OF PLAN.

1.1    Establishment. The Molina Healthcare, Inc. 2011 Equity Incentive Plan (the “ Plan ” ) is hereby established effective as of April 27, 2011, the date of its approval by the stockholders of the Company (the  “ Effective Date ” ).

1.2    Purpose. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. The Plan seeks to achieve this purpose by providing for Awards in the form of Options, Stock Appreciation Rights, Restricted Stock Purchase Rights, Restricted Stock Bonuses, Restricted Stock Units, Performance Shares, Performance Units, Cash-Based Awards and Other Stock-Based Awards.

1.3    Term of Plan. The Plan shall continue in effect until its termination by the Committee; provided, however, that all Awards shall be granted, if at all, within ten (10) years from the Effective Date.
 	 	
2.	DEFINITIONS AND CONSTRUCTION .	

2.1    Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below:

(a)    “Affiliate” means (i) a parent entity, other than a Parent Corporation, that directly, or indirectly through one or more intermediary entities, controls the Company or (ii) a subsidiary entity, other than a Subsidiary Corporation, that is controlled by the Company directly or indirectly through one or more intermediary entities. For this purpose, the terms “parent,” “subsidiary,” “control” and “controlled by” shall have the meanings assigned such terms for the purposes of registration of securities on Form S-8 under the Securities Act.

(b)    “Award” means any Option, Stock Appreciation Right, Restricted Stock Purchase Right, Restricted Stock Bonus, Restricted Stock Unit, Performance Share, Performance Unit, Cash-Based Award or Other Stock-Based Award granted under the Plan.

(c)    “Award Agreement” means a written or electronic agreement between the Company and a Participant setting forth the terms, conditions and restrictions applicable to an Award.

(d)    “Board” means the Board of Directors of the Company.

(e)    “Cash-Based Award” means an Award denominated in cash and granted pursuant to Section 11.

 	 	 	 	
* As amended as of October 25, 2016.

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(f)    “Cause” means, unless such term or an equivalent term is otherwise defined by the applicable Award Agreement or other written agreement between a Participant and a Participating Company applicable to an Award, any of the following: (i) the Participant’s theft, dishonesty, willful misconduct, breach of fiduciary duty for personal profit, or falsification of any Participating Company documents or records; (ii) the Participant’s material failure to abide by a Participating Company’s code of conduct or other policies (including, without limitation, policies relating to confidentiality and reasonable workplace conduct); (iii) the Participant’s unauthorized use, misappropriation, destruction or diversion of any tangible or intangible asset or corporate opportunity of a Participating Company (including, without limitation, the Participant’s improper use or disclosure of a Participating Company’s confidential or proprietary information); (iv) any intentional act by the Participant which has a material detrimental effect on a Participating Company’s reputation or business; (v) the Participant’s repeated failure or inability to perform any reasonable assigned duties after written notice from a Participating Company of, and a reasonable opportunity to cure, such failure or inability; (vi) any material breach by the Participant of any employment, service, non-disclosure, non-competition, non-solicitation or other similar agreement between the Participant and a Participating Company, which breach is not cured pursuant to the terms of such agreement; or (vii) the Participant’s conviction (including any plea of guilty or  nolo contendere ) of any criminal act involving fraud, dishonesty, misappropriation or moral turpitude, or which impairs the Participant’s ability to perform his or her duties with a Participating Company.

(g)    “Change in Control” means, unless such term or an equivalent term is otherwise defined by the applicable Award Agreement or other written agreement between the Participant and a Participating Company applicable to an Award, the occurrence of any of the following:

(i)any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total Fair Market Value or total combined voting power of the Company’s then-outstanding securities entitled to vote generally in the election of Directors; provided, however, that a Change in Control shall not be deemed to have occurred if such degree of beneficial ownership results from any of the following: (A) an acquisition by any person who on the Effective Date is the beneficial owner of more than fifty percent (50%) of such voting power, (B) any acquisition directly from the Company, including, without limitation, pursuant to or in connection with a public offering of securities, (C) any acquisition by the Company, (D) any acquisition by a trustee or other fiduciary under an employee benefit plan of a Participating Company or (E) any acquisition by an entity owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the voting securities of the Company; or

(ii)an Ownership Change Event or series of related Ownership Change Events (collectively, a  “ Transaction ” ) in which the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding securities entitled to vote generally in the election of Directors or, in the case of an Ownership Change Event described in Section 2.1(cc)(iii), the entity to which the assets of the Company were transferred (the “ Transferee ” ), as the case may be; or

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(iii)approval by the stockholders of a plan of complete liquidation or dissolution of the Company;

provided, however, that a Change in Control shall be deemed not to include a transaction described in subsections (i) or (ii) of this Section 2.1(g) in which a majority of the members of the board of directors of the continuing, surviving or successor entity, or parent thereof, immediately after such transaction is comprised of Incumbent Directors.

For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business entities which own the Company or the Transferee, as the case may be, either directly or through one or more subsidiary corporations or other business entities. The Committee shall determine whether multiple sales or exchanges of the voting securities of the Company or multiple Ownership Change Events are related, and its determination shall be final, binding and conclusive.

(h)    “Code” means the Internal Revenue Code of 1986, as amended, and any applicable regulations or administrative guidelines promulgated thereunder.

(i)    “Committee” means the Compensation Committee and such other committee or subcommittee of the Board, if any, duly appointed to administer the Plan and having such powers in each instance as shall be specified by the Board. If, at any time, there is no committee of the Board then authorized or properly constituted to administer the Plan, the Board shall exercise all of the powers of the Committee granted herein, and, in any event, the Board may in its discretion exercise any or all of such powers.

(j)    “Company” means Molina Healthcare, Inc., a Delaware corporation, or any successor corporation thereto.

(k)    “Consultant” means a person engaged to provide consulting or advisory services (other than as an Employee or a member of the Board) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on registration on Form S-8 under the Securities Act.

(l)    “Covered Employee” means, at any time the Plan is subject to Section 162(m), any Employee who is or may reasonably be expected to become a “covered employee” as defined in Section 162(m), or any successor statute, and who is designated, either as an individual Employee or a member of a class of Employees, by the Committee no later than the earlier of (i) the date that is ninety (90) days after the beginning of the Performance Period, or (ii) the date on which twenty-five percent (25%) of the Performance Period has elapsed, as a “Covered Employee” under this Plan for such applicable Performance Period.

(m)    “Director” means a member of the Board.

(n)    “Disability” means the permanent and total disability of the Participant, within the meaning of Section 22(e)(3) of the Code.

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(o)    “Dividend Equivalent Right” means the right of a Participant, granted at the discretion of the Committee or as otherwise provided by the Plan, to receive a credit for the account of such Participant in an amount equal to the cash dividends paid on one share of Stock for each share of Stock represented by an Award held by such Participant.

(p)    “Employee” means any person treated as an employee (including an Officer or a member of the Board who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a member of the Board nor payment of a director’s fee shall be sufficient to constitute employment for purposes of the Plan. The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee and the effective date of such individual’s employment or termination of employment, as the case may be. For purposes of an individual’s rights, if any, under the terms of the Plan as of the time of the Company’s determination of whether or not the individual is an Employee, all such determinations by the Company shall be final, binding and conclusive as to such rights, if any, notwithstanding that the Company or any court of law or governmental agency subsequently makes a contrary determination as to such individual’s status as an Employee.

(q)    “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(r)    “Fair Market Value” means, as of any date, the value of a share of Stock or other property as determined by the Committee, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following:

(i)Except as otherwise determined by the Committee, if, on such date, the Stock is listed or quoted on a national or regional securities exchange or quotation system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock as quoted on the national or regional securities exchange or quotation system constituting the primary market for the Stock, as reported in  The Wall Street Journal  or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or quotation system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded or quoted prior to the relevant date, or such other appropriate day as shall be determined by the Committee, in its discretion.

(ii)    Notwithstanding the foregoing, the Committee may, in its discretion, determine the Fair Market Value of a share of Stock on the basis of the opening, closing, or average of the high and low sale prices of a share of Stock on such date or the preceding trading day, the actual sale price of a share of Stock received by a Participant, any other reasonable basis using actual transactions in the Stock as reported on a national or regional securities exchange or quotation system, or on any other basis consistent with the requirements of Section 409A. The Committee may vary its method of determination of the Fair Market Value as provided in this Section for different purposes under the Plan to the extent consistent with the requirements of Section 409A.

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(iii)    If, on such date, the Stock is not listed or quoted on a national or regional securities exchange or quotation system, the Fair Market Value of a share of Stock shall be as determined by the Committee in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse, and in a manner consistent with the requirements of Section 409A.

(s)    “Full Value Award” means any Award settled in Stock, other than (i) an Option, (ii) a Stock Appreciation Right, or (iii) a Restricted Stock Purchase Right or an Other Stock-Based Award under which the Company will receive monetary consideration equal to the Fair Market Value (determined on the effective date of grant) of the shares subject to such Award.

(t)    “Incentive Stock Option” means an Option intended to be (as set forth in the Award Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code.

(u)    “Incumbent Director” means a director who either (i) is a member of the Board as of the Effective Date or (ii)    is elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but excluding a director who was elected or nominated in connection with an actual or threatened proxy contest relating to the election of directors of the Company).

(v)    “Insider” means an Officer, Director or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act.

(w)    “Net Exercise” means a procedure pursuant to which (i) the Company will reduce the number of shares otherwise issuable to a Participant upon the exercise of an Option by the largest whole number of shares having a Fair Market Value that does not exceed the aggregate exercise price for the shares with respect to which the Option is exercised, and (ii) the Participant shall pay to the Company in cash the remaining balance of such aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued.

(x)    “Nonemployee Director” means a Director who is not an Employee.

(y)    “Nonstatutory Stock Option” means an Option not intended to be (as set forth in the Award Agreement) or which does not qualify as an incentive stock option within the meaning of Section 422(b) of the Code.

(z)    “Officer” means any person designated by the Board as an officer of the Company.

(aa)    “Option” means an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan.

(bb)    “Other Stock-Based Award” means an Award denominated in shares of Stock and granted pursuant to Section 11.

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(cc)    “Ownership Change Event” means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of securities of the Company representing more than fifty percent (50%) of the total combined voting power of the Company’s then-outstanding securities entitled to vote generally in the election of Directors; (ii) a merger or consolidation in which the Company is a party; or (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company (other than a sale, exchange or transfer to one or more subsidiaries of the Company).

(dd)    “Parent Corporation” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

(ee)     “Participant” means any eligible person who has been granted one or more Awards.

(ff)    “Participating Company” means the Company or any Parent Corporation, Subsidiary Corporation or Affiliate.

(gg)    “Participating Company Group” means, at any point in time, the Company and all other entities collectively which are then Participating Companies.

(hh)    “Performance Award” means an Award of Performance Shares or Performance Units.

(ii)    “Performance Award Formula” means, for any Performance Award, a formula or table established by the Committee pursuant to Section 10.3 which provides the basis for computing the value of a Performance Award at one or more levels of attainment of applicable Performance Goal(s) measured as of the end of the applicable Performance Period.

(jj)    “Performance-Based Compensation” means compensation under an Award that satisfies the requirements of Section 162(m) for certain performance-based compensation paid to Covered Employees.

(kk)    “Performance Goal” means a performance goal established by the Committee pursuant to Section 10.3.

(ll)    “Performance Period” means a period established by the Committee pursuant to Section 10.3 at the end of which one or more Performance Goals are to be measured.

(mm)    “Performance Share” means a right granted to a Participant pursuant to Section 10 to receive a payment equal to the value of a Performance Share, as determined by the Committee, based upon attainment of applicable Performance Goal(s).

(nn)    “Performance Unit” means a right granted to a Participant pursuant to Section 10 to receive a payment equal to the value of a Performance Unit, as determined by the Committee, based upon attainment of applicable Performance Goal(s).

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(oo)    “Restricted Stock Award” means an Award of a Restricted Stock Bonus or a Restricted Stock Purchase Right.

(pp)    “Restricted Stock Bonus” means Stock granted to a Participant pursuant to Section 8.

(qq)    “Restricted Stock Purchase Right” means a right to purchase Stock granted to a Participant pursuant to Section 8.

(rr)    “Restricted Stock Unit” means a right granted to a Participant pursuant to Section 9 to receive on a future date or event a share of Stock or cash in lieu thereof, as determined by the Committee.

(ss)    “Rule 16b-3” means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation.

(tt)    “SAR” or “Stock Appreciation Right” means a right granted to a Participant pursuant to Section 7 to receive payment, for each share of Stock subject to such Award, of an amount equal to the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the Award over the exercise price thereof.

(uu)    “Section 162(m)” means Section 162(m) of the Code.

(vv)    “Section 409A” means Section 409A of the Code.

(ww)    “Section 409A Deferred Compensation” means compensation provided pursuant to an Award that constitutes nonqualified deferred compensation within the meaning of Section 409A.

(xx)    “Securities Act” means the Securities Act of 1933, as amended.

(yy)    “Service” means a Participant’s employment or service with the Participating Company Group, whether as an Employee, a Director or a Consultant. Unless otherwise provided by the Committee, a Participant’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders such Service or a change in the Participating Company for which the Participant renders such Service, provided that there is no interruption or termination of the Participant’s Service. Furthermore, a Participant’s Service shall not be deemed to have been interrupted or terminated if the Participant takes any military leave, sick leave, or other bona fide leave of absence approved by the Company. However, unless otherwise provided by the Committee, if any such leave taken by a Participant exceeds ninety (90) days, then on the ninety-first (91st) day following the commencement of such leave the Participant’s Service shall be deemed to have terminated, unless the Participant’s right to return to Service is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, an unpaid leave of absence shall not be treated as Service for purposes of determining vesting under the Participant’s Award Agreement. A Participant’s Service shall be deemed to have terminated either upon an actual termination of Service or upon the business entity for which the Participant performs Service ceasing to be a Participating Company. Subject

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to the foregoing, the Company, in its discretion, shall determine whether the Participant’s Service has terminated and the effective date of such termination.

(zz)    “Stock” means the common stock of the Company, as adjusted from time to time in accordance with Section 4.2.

(aaa)    “Subsidiary Corporation” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

(bbb)    “Ten Percent Owner” means a Participant who, at the time an Option is granted to the Participant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company (other than an Affiliate) within the meaning of Section 422(b)(6) of the Code.

(ccc)    “Trading Compliance Policy” means the written policy of the Company pertaining to the purchase, sale, transfer or other disposition of the Company’s equity securities by Directors, Officers, Employees or other service providers who may possess material, nonpublic information regarding the Company or its securities.

(ddd)    “Vesting Conditions” mean those conditions established in accordance with the Plan prior to the satisfaction of which shares subject to an Award remain subject to forfeiture or a repurchase option in favor of the Company exercisable for the Participant’s monetary purchase price, if any, for such shares upon the Participant’s termination of Service.

2.2    Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.
 	 	
3.	ADMINISTRATION.	

3.1    Administration by the Committee. The Plan shall be administered by the Committee. All questions of interpretation of the Plan, of any Award Agreement or of any other form of agreement or other document employed by the Company in the administration of the Plan or of any Award shall be determined by the Committee, and such determinations shall be final, binding and conclusive upon all persons having an interest in the Plan or such Award, unless fraudulent or made in bad faith. Any and all actions, decisions and determinations taken or made by the Committee in the exercise of its discretion pursuant to the Plan or Award Agreement or other agreement thereunder (other than determining questions of interpretation pursuant to the preceding sentence) shall be final, binding and conclusive upon all persons having an interest therein. All expenses incurred in the administration of the Plan shall be paid by the Company.

3.2    Authority of Officers. Any Officer shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election which is the responsibility of or which is allocated to the Company herein, provided the Officer has apparent authority with respect to such matter, right, obligation, determination or election. To the extent permitted by applicable law, the Committee may, in its discretion, delegate to a committee comprised

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of one or more Officers the authority to grant one or more Awards, without further approval of the Committee, to any Employee, other than a person who, at the time of such grant, is an Insider or a Covered Employee, and to exercise such other powers under the Plan as the Committee may determine; provided, however, that (a) the Committee shall fix the maximum number of shares subject to Awards that may be granted by such Officers, (b) each such Award shall be subject to the terms and conditions of the appropriate standard form of Award Agreement approved by the Board or the Committee and shall conform to the provisions of the Plan, and (c) each such Award shall conform to such other limits and guidelines as may be established from time to time by the Committee.

3.3    Administration with Respect to Insiders. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3.

3.4    Committee Complying with Section 162(m). If the Company is a “publicly held corporation” within the meaning of Section 162(m), the Board may establish a Committee of “outside directors” within the meaning of Section 162 (m) to approve the grant of any Award intended to result in the payment of Performance-Based Compensation.

3.5    Powers of the Committee. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Committee shall have the full and final power and authority, in its discretion:

(a)to determine the persons to whom, and the time or times at which, Awards shall be granted and the number of shares of Stock, units or monetary value to be subject to each Award;

(b)    to determine the type of Award granted;

(c)    to determine the Fair Market Value of shares of Stock or other property;

(d)    to determine the terms, conditions and restrictions applicable to each Award (which need not be identical) and any shares acquired pursuant thereto, including, without limitation, (i) the exercise or purchase price of shares pursuant to any Award, (ii) the method of payment for shares purchased pursuant to any Award, (iii) the method for satisfaction of any tax withholding obligation arising in connection with any Award, including by the withholding or delivery of shares of Stock, (iv) the timing, terms and conditions of the exercisability or vesting of any Award or any shares acquired pursuant thereto, (v) the Performance Measures, Performance Period, Performance Award Formula and Performance Goals applicable to any Award and the extent to which such Performance Goals have been attained, (vi) the time of the expiration of any Award, (vii) the effect of the Participant’s termination of Service on any of the foregoing, and (viii) all other terms, conditions and restrictions applicable to any Award or shares acquired pursuant thereto not inconsistent with the terms of the Plan;

(e)    to determine whether an Award will be settled in shares of Stock, cash, other property, or in any combination thereof;

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(f)    to approve one or more forms of Award Agreement;

(g)    to amend, modify, extend, cancel or renew any Award or to waive any restrictions or conditions applicable to any Award or any shares acquired pursuant thereto;

(h)    to accelerate, continue, extend or defer the exercisability or vesting of any Award or any shares acquired pursuant thereto, including with respect to the period following a Participant’s termination of Service;

(i)to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt sub-plans or supplements to, or alternative versions of, the Plan, including, without limitation, as the Committee deems necessary or desirable to comply with the laws or regulations of or to accommodate the tax policy, accounting principles or custom of, foreign jurisdictions whose citizens may be granted Awards; and

(j)    to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award Agreement and to make all other determinations and take such other actions with respect to the Plan or any Award as the Committee may deem advisable to the extent not inconsistent with the provisions of the Plan or applicable law.

3.6    Option or SAR Repricing. Without the affirmative vote of holders of a majority of the shares of Stock cast in person or by proxy at a meeting of the stockholders of the Company at which a quorum representing a majority of all outstanding shares of Stock is present or represented by proxy, the Committee shall not approve a program providing for either (a) the cancellation of outstanding Options or SARs having exercise prices per share greater than the then Fair Market Value of a share of Stock ( “ Underwater Awards ” ) and the grant in substitution therefore of new Options or SARs having a lower exercise price, Full Value Awards or payments in cash, or (b) the amendment of outstanding Underwater Awards to reduce the exercise price thereof. This Section shall not apply to adjustments pursuant to the assumption of or substitution for an Option or SAR in a manner that would comply with Section 424(a) or Section 409A of the Code or to an adjustment pursuant to Section 4.2.

3.7    Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or the Committee or as officers or employees of the Participating Company Group, members of the Board or the Committee and any officers or employees of the Participating Company Group to whom authority to act for the Board, the Committee or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60)

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days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same.

4.    SHARES SUBJECT TO PLAN.

4.1    Maximum Number of Shares Issuable. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be four million five hundred thousand (4,500,000) and shall consist of authorized but unissued shares of Stock, and the shares of Stock underlying any Awards which are reacquired by the Company, forfeited, or cancelled, satisfied without the issuance of Stock, or otherwise terminated (other than by exercise) without the issuance of Stock, or any combination thereof.

4.2    Adjustments for Changes in Capital Structure. Subject to any required action by the stockholders of the Company and the requirements of Sections 409A and 424 of the Code to the extent applicable, in the event of any change in the Stock effected without receipt of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the stockholders of the Company in a form other than Stock (excepting regular, periodic cash dividends) that has a material effect on the Fair Market Value of shares of Stock, appropriate and proportionate adjustments shall be made in the number and kind of shares subject to the Plan and to any outstanding Awards, in the Award limits set forth in Section 5.3 and in the exercise or purchase price per share under any outstanding Award in order to prevent dilution or enlargement of Participants’ rights under the Plan. For purposes of the foregoing, conversion of any convertible securities of the Company shall not be treated as “effected without receipt of consideration by the Company.” If a majority of the shares which are of the same class as the shares that are subject to outstanding Awards are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the  “ New Shares ” ), the Committee may unilaterally amend the outstanding Awards to provide that such Awards are for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise or purchase price per share of, the outstanding Awards shall be adjusted in a fair and equitable manner as determined by the Committee, in its discretion. Any fractional share resulting from an adjustment pursuant to this Section shall be rounded down to the nearest whole number, and in no event may the exercise or purchase price under any Award be decreased to an amount less than the par value, if any, of the stock subject to such Award. The Committee in its discretion, may also make such adjustments in the terms of any Award to reflect, or related to, such changes in the capital structure of the Company or distributions as it deems appropriate, including modification of Performance Goals, Performance Award Formulas and Performance Periods. The adjustments determined by the Committee pursuant to this Section shall be final, binding and conclusive.

4.3    Assumption or Substitution of Awards. The Committee may, without affecting the number of shares of Stock available pursuant to Section 4.1, authorize the issuance or assumption of benefits under this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate, subject to compliance with Section 409A and any other applicable provisions of the Code.

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5.    ELIGIBILITY, PARTICIPATION AND AWARD LIMITATIONS.

5.1    Persons Eligible for Awards. Awards may be granted only to Employees, Consultants and Directors.

5.2    Participation in the Plan. Awards are granted solely at the discretion of the Committee. Eligible persons may be granted more than one Award. However, eligibility in accordance with this Section shall not entitle any person to be granted an Award, or, having been granted an Award, to be granted an additional Award.

5.3    Award Limitations.

(a)Incentive Stock Option Limitations.

(i)Maximum Number of Shares Issuable Pursuant to Incentive Stock Options. Subject to adjustment as provided in Section 4.2, the maximum aggregate number of shares of Stock that may be issued under the Plan pursuant to the exercise of Incentive Stock Options shall not exceed four million five hundred thousand (4,500,000). The maximum aggregate number of shares of Stock that may be issued under the Plan pursuant to all Awards other than Incentive Stock Options shall be the number of shares determined in accordance with Section 4.1.

(ii)Persons Eligible. An Incentive Stock Option may be granted only to a person who, on the effective date of grant, is an Employee of the Company, a Parent Corporation or a Subsidiary Corporation (each being an  “ ISO-Qualifying Corporation ” ). Any person who is not an Employee of an ISO-Qualifying Corporation on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option.

(iii)Fair Market Value Limitation. To the extent that options designated as Incentive Stock Options (granted under all stock option plans of the Participating Company Group, including the Plan) become exercisable by a Participant for the first time during any calendar year for stock having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a limitation different from that set forth in this Section, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section, the Participant may designate which portion of such Option the Participant is exercising. In the absence of such designation, the Participant shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Upon exercise, shares issued pursuant to each such portion shall be separately identified.

(b)    Section 162(m) Award Limits. Subject to adjustment as provided in Section 4.2, no Employee shall be granted within any fiscal year of the Company one or more Awards

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intended to qualify for treatment as Performance-Based Compensation which in the aggregate are for more than seven hundred and fifty thousand (750,000) shares.

6.    STOCK OPTIONS.

Options shall be evidenced by Award Agreements specifying the number of shares of Stock covered thereby, in such form as the Committee shall from time to time establish. Award Agreements evidencing Options may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

6.1    Exercise Price. The exercise price for each Option shall be established in the discretion of the Committee; provided, however, that (a) the exercise price per share shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option and (b) no Incentive Stock Option granted to a Ten Percent Owner shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price lower than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner that would qualify under the provisions of Section 409A or 424(a) of the Code.
 
6.2    Exercisability and Term of Options. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the Award Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option and (c) no Option granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, shall be first exercisable until at least six (6) months following the date of grant of such Option (except in the event of such Employee’s death, disability or retirement, upon a Change in Control, or as otherwise permitted by the Worker Economic Opportunity Act). Subject to the foregoing, unless otherwise specified by the Committee in the grant of an Option, each Option shall terminate ten (10) years after the effective date of grant of the Option, unless earlier terminated in accordance with its provisions.

6.3    Payment of Exercise Price.

(a)    Forms of Consideration Authorized. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check or in cash equivalent, (ii) by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Participant having a Fair Market Value not less than the exercise price (a “ Stock Tender Exercise ” ), (iii) by delivery of a properly executed notice of exercise together with irrevocable instructions to a broker providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of

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Governors of the Federal Reserve System) (a “Cashless Exercise”), (iv) by delivery of a properly executed notice electing a Net Exercise, (v) by such other consideration as may be approved by the Committee from time to time to the extent permitted by applicable law, or (vi) by any combination thereof. The Committee may at any time or from time to time grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration.

(b)Limitations on Forms of Consideration.

(i)Stock Tender Exercise. Notwithstanding the foregoing, a Stock Tender Exercise shall not be permitted if it would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. If required by the Company, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Participant for a period of time required by the Company (and not used for another option exercise by attestation during such period) or were not acquired, directly or indirectly, from the Company.

(ii)Cashless Exercise. The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise, including with respect to one or more Participants specified by the Company notwithstanding that such program or procedures may be available to other Participants.

6.4    Effect of Termination of Service.

(a)    Option Exercisability. Subject to earlier termination of the Option as otherwise provided herein and unless otherwise provided by the Committee, an Option shall terminate immediately upon the Participant’s termination of Service to the extent that it is then unvested and shall be exercisable after the Participant’s termination of Service to the extent it is then vested only during the applicable time period determined in accordance with this Section and thereafter shall terminate.

(i)    Disability. If the Participant’s Service terminates because of the Disability of the Participant, the Option, to the extent unexercised and exercisable for vested shares on the date on which the Participant’s Service terminated, may be exercised by the Participant (or the Participant’s guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Participant’s Service terminated, but in any event no later than the date of expiration of the Option’s term as set forth in the Award Agreement evidencing such Option (the  “ Option Expiration Date ” ).

(ii)    Death. If the Participant’s Service terminates because of the death of the Participant, then (A) the Option, to the extent unexercised and exercisable for vested shares on the date on which the Participant’s Service terminated, may be exercised by the Participant’s legal representative or other person who acquired the right to exercise the Option by reason of the Participant’s death at any time prior to the expiration of twelve (12) months after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date, and (B) solely for the purposes of determining the number of vested shares subject to the Option as of

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the date on which the Participant’s Service terminated, the Participant shall be credited with an additional twelve (12) months of Service. The Participant’s Service shall be deemed to have terminated on account of death if the Participant dies within three (3) months after the Participant’s termination of Service; provided, however, that the Participant shall not be credited with additional months of Service if the Participant dies after the Participant’s Service has otherwise terminated.

(iii)Termination for Cause. Notwithstanding any other provision of the Plan to the contrary, if the Participant’s Service is terminated for Cause or if, following the Participant’s termination of Service and during any period in which the Option otherwise would remain exercisable, the Participant engages in any act that would constitute Cause, the Option shall terminate in its entirety and cease to be exercisable immediately upon such termination of Service or act.

(iv)    Other Termination of Service. If the Participant’s Service terminates for any reason, except Disability, death or Cause, the Option, to the extent unexercised and exercisable for vested shares on the date on which the Participant’s Service terminated, may be exercised by the Participant at any time prior to the expiration of three (3) months after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date.

(b)    Extension if Exercise Prevented by Law. Notwithstanding the foregoing, other than termination of Service for Cause, if the exercise of an Option within the applicable time periods set forth in Section 6.4(a) is prevented by the provisions of Section 14 below, the Option shall remain exercisable until the later of (i) thirty (30) days after the date such exercise first would no longer be prevented by such provisions or (ii) the end of the applicable time period under Section 6.4 (a), but in any event no later than the Option Expiration Date.

6.5    Transferability of Options. During the lifetime of the Participant, an Option shall be exercisable only by the Participant or the Participant’s guardian or legal representative. An Option shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in its discretion, and set forth in the Award Agreement evidencing such Option, an Option shall be assignable or transferable subject to the applicable limitations, if any, described in the General Instructions to Form S-8 under the Securities Act or, in the case of an Incentive Stock Option, only as permitted by applicable regulations under Section 421 of the Code in a manner that does not disqualify such Option as an Incentive Stock Option.

7.    STOCK APPRECIATION RIGHTS.

Stock Appreciation Rights shall be evidenced by Award Agreements specifying the number of shares of Stock subject to the Award, in such form as the Committee shall from time to time establish. Award Agreements evidencing SARs may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

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7.1    Types of SARs Authorized. SARs may be granted in tandem with all or any portion of a related Option (a  “ Tandem SAR ” ) or may be granted independently of any Option (a “ Freestanding SAR ” ). A Tandem SAR may only be granted concurrently with the grant of the related Option.

7.2    Exercise Price. The exercise price for each SAR shall be established in the discretion of the Committee; provided, however, that (a) the exercise price per share subject to a Tandem SAR shall be the exercise price per share under the related Option and (b) the exercise price per share subject to a Freestanding SAR shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the SAR. Notwithstanding the foregoing, a an SAR may be granted with an exercise price lower than the minimum exercise price set forth above if such SAR is granted pursuant to an assumption or substitution for another stock appreciation right in a manner that would qualify under the provisions of Section 409A of the Code.

7.3    Exercisability and Term of SARs.

(a)Tandem SARs. Tandem SARs shall be exercisable only at the time and to the extent, and only to the extent, that the related Option is exercisable, subject to such provisions as the Committee may specify where the Tandem SAR is granted with respect to less than the full number of shares of Stock subject to the related Option. The Committee may, in its discretion, provide in any Award Agreement evidencing a Tandem SAR that such SAR may not be exercised without the advance approval of the Company and, if such approval is not given, then the Option shall nevertheless remain exercisable in accordance with its terms. A Tandem SAR shall terminate and cease to be exercisable no later than the date on which the related Option expires or is terminated or canceled. Upon the exercise of a Tandem SAR with respect to some or all of the shares subject to such SAR, the related Option shall be canceled automatically as to the number of shares with respect to which the Tandem SAR was exercised. Upon the exercise of an Option related to a Tandem SAR as to some or all of the shares subject to such Option, the related Tandem SAR shall be canceled automatically as to the number of shares with respect to which the related Option was exercised.

(b)    Freestanding SARs. Freestanding SARs shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the Award Agreement evidencing such SAR; provided, however, that (i) no Freestanding SAR shall be exercisable after the expiration of ten (10) years after the effective date of grant of such SAR and (b) no Freestanding SAR granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, shall be first exercisable until at least six (6) months following the date of grant of such SAR (except in the event of such Employee’s death, disability or retirement, upon a Change in Control, or as otherwise permitted by the Worker Economic Opportunity Act). Subject to the foregoing, unless otherwise specified by the Committee in the grant of a Freestanding SAR, each Freestanding SAR shall terminate ten (10) years after the effective date of grant of the SAR, unless earlier terminated in accordance with its provisions.

7.4    Exercise of SARs. Upon the exercise (or deemed exercise pursuant to Section 7.5) of an SAR, the Participant (or the Participant’s legal representative or other person who acquired the right to exercise the SAR by reason of the Participant’s death) shall be entitled to receive payment

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of an amount for each share with respect to which the SAR is exercised equal to the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the SAR over the exercise price. Payment of such amount shall be made (a) in the case of a Tandem SAR, solely in shares of Stock in a lump sum upon the date of exercise of the SAR and (b) in the case of a Freestanding SAR, in cash, shares of Stock, or any combination thereof as determined by the Committee, in a lump sum upon the date of exercise of the SAR. When payment is to be made in shares of Stock, the number of shares to be issued shall be determined on the basis of the Fair Market Value of a share of Stock on the date of exercise of the SAR. For purposes of Section 7, an SAR shall be deemed exercised on the date on which the Company receives notice of exercise from the Participant or as otherwise provided in Section 7.5.

7.5    Deemed Exercise of SARs. If, on the date on which an SAR would otherwise terminate or expire, the SAR by its terms remains exercisable immediately prior to such termination or expiration and, if so exercised, would result in a payment to the holder of such SAR, then any portion of such SAR which has not previously been exercised shall automatically be deemed to be exercised as of such date with respect to such portion.

7.6    Effect of Termination of Service. Subject to earlier termination of the SAR as otherwise provided herein and unless otherwise provided by the Committee, an SAR shall be exercisable after a Participant’s termination of Service only to the extent and during the applicable time period determined in accordance with Section 6.4 (treating the SAR as if it were an Option) and thereafter shall terminate.

7.7    Transferability of SARs. During the lifetime of the Participant, an SAR shall be exercisable only by the Participant or the Participant’s guardian or legal representative. An SAR shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in its discretion, and set forth in the Award Agreement evidencing such Award, a Tandem SAR related to a Nonstatutory Stock Option or a Freestanding SAR shall be assignable or transferable subject to the applicable limitations, if any, described in the General Instructions to Form S-8 under the Securities Act.

8.    RESTRICTED STOCK AWARDS.

Restricted Stock Awards shall be evidenced by Award Agreements specifying whether the Award is a Restricted Stock Bonus or a Restricted Stock Purchase Right and the number of shares of Stock subject to the Award, in such form as the Committee shall from time to time establish. Award Agreements evidencing Restricted Stock Awards may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

8.1    Types of Restricted Stock Awards Authorized. Restricted Stock Awards may be granted in the form of either a Restricted Stock Bonus or a Restricted Stock Purchase Right. Restricted Stock Awards may be granted upon such conditions as the Committee shall determine, including, without limitation, upon the attainment of one or more Performance Goals described in Section 10.4. If either the grant of or satisfaction of Vesting Conditions applicable to a Restricted Stock Award is to be contingent upon the attainment of one or more Performance Goals, the

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Committee shall follow procedures substantially equivalent to those set forth in Sections 10.3 through 10.5(a).

8.2    Purchase Price. The purchase price for shares of Stock issuable under each Restricted Stock Purchase Right shall be established by the Committee in its discretion. No monetary payment (other than applicable tax withholding) shall be required as a condition of receiving shares of Stock pursuant to a Restricted Stock Bonus, the consideration for which shall be services actually rendered to a Participating Company or for its benefit. Notwithstanding the foregoing, if required by applicable state corporate law, the Participant shall furnish consideration in the form of cash or past services rendered to a Participating Company or for its benefit having a value not less than the par value of the shares of Stock subject to a Restricted Stock Award.

8.3    Purchase Period. A Restricted Stock Purchase Right shall be exercisable within a period established by the Committee, which shall in no event exceed thirty (30) days from the effective date of the grant of the Restricted Stock Purchase Right.

8.4    Payment of Purchase Price. Except as otherwise provided below, payment of the purchase price for the number of shares of Stock being purchased pursuant to any Restricted Stock Purchase Right shall be made (a) in cash, by check or in cash equivalent, (b) by such other consideration as may be approved by the Committee from time to time to the extent permitted by applicable law, or (c) by any combination thereof.

8.5    Vesting and Restrictions on Transfer. Shares issued pursuant to any Restricted Stock Award shall be made subject to Vesting Conditions based upon the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award; provided that, with respect to all Restricted Stock Awards other than those made to any Nonemployee Director, (i) the Vesting Conditions for non-performance based Restricted Stock Awards shall provide that the vesting period be at least three years, over which period vesting may be pro-rata in the manner specified in the Award Agreement and (ii) the Vesting Conditions for performance-based Restricted Stock Awards shall provide that the vesting period be at least one year.

During any period in which shares acquired pursuant to a Restricted Stock Award remain subject to Vesting Conditions, such shares may not be sold, exchanged, transferred, pledged, assigned or otherwise disposed of other than pursuant to an Ownership Change Event or as provided in Section 8.8. The Committee, in its discretion, may provide in any Award Agreement evidencing a Restricted Stock Award that, if the satisfaction of Vesting Conditions with respect to any shares subject to such Restricted Stock Award would otherwise occur on a day on which the sale of such shares would violate the provisions of the Trading Compliance Policy, then satisfaction of the Vesting Conditions automatically shall be determined on the next trading day on which the sale of such shares would not violate the Trading Compliance Policy. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.

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8.6    Voting Rights; Dividends and Distributions. Except as provided in this Section, Section 8.5 and any Award Agreement, during any period in which shares acquired pursuant to a Restricted Stock Award remain subject to Vesting Conditions, the Participant shall have all of the rights of a stockholder of the Company holding shares of Stock, including the right to vote such shares and to receive all dividends and other distributions paid with respect to such shares; provided, however, that if so determined by the Committee and provided by the Award Agreement, such dividends and distributions shall be subject to the same Vesting Conditions as the shares subject to the Restricted Stock Award with respect to which such dividends or distributions were paid, and otherwise shall be paid no later than the end of the calendar year in which such dividends or distributions are paid to stockholders (or, if later, the 15th day of the third month following the date such dividends or distributions are paid to stockholders). In the event of a dividend or distribution paid in shares of Stock or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.2, any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant is entitled by reason of the Participant’s Restricted Stock Award shall be immediately subject to the same Vesting Conditions as the shares subject to the Restricted Stock Award with respect to which such dividends or distributions were paid or adjustments were made.

8.7    Effect of Termination of Service. Unless otherwise provided by the Committee in the Award Agreement evidencing a Restricted Stock Award, if a Participant’s Service terminates for any reason, whether voluntary or involuntary (including the Participant’s death or disability), then (a) the Company shall have the option to repurchase for the purchase price paid by the Participant any shares acquired by the Participant pursuant to a Restricted Stock Purchase Right which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service and (b) the Participant shall forfeit to the Company any shares acquired by the Participant pursuant to a Restricted Stock Bonus which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company.

8.8    Nontransferability of Restricted Stock Award Rights. Rights to acquire shares of Stock pursuant to a Restricted Stock Award shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or the laws of descent and distribution. All rights with respect to a Restricted Stock Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

9.    RESTRICTED STOCK UNIT AWARDS.

Restricted Stock Unit Awards shall be evidenced by Award Agreements specifying the number of Restricted Stock Units subject to the Award, in such form as the Committee shall from time to time establish. Award Agreements evidencing Restricted Stock Units may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

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9.1    Grant of Restricted Stock Unit Awards. Restricted Stock Unit Awards may be granted upon such conditions as the Committee shall determine, including, without limitation, upon the attainment of one or more Performance Goals described in Section 10.4. If either the grant of a Restricted Stock Unit Award or the Vesting Conditions with respect to such Award is to be contingent upon the attainment of one or more Performance Goals, the Committee shall follow procedures substantially equivalent to those set forth in Sections 10.3 through 10.5(a).

9.2    Purchase Price. No monetary payment (other than applicable tax withholding, if any) shall be required as a condition of receiving a Restricted Stock Unit Award, the consideration for which shall be services actually rendered to a Participating Company or for its benefit. Notwithstanding the foregoing, if required by applicable state corporate law, the Participant shall furnish consideration in the form of cash or past services rendered to a Participating Company or for its benefit having a value not less than the par value of the shares of Stock issued upon settlement of the Restricted Stock Unit Award.

9.3    Vesting. Restricted Stock Unit Awards may (but need not) be made subject to Vesting Conditions based upon the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award. The Committee, in its discretion, may provide in any Award Agreement evidencing a Restricted Stock Unit Award that, if the satisfaction of Vesting Conditions with respect to any shares subject to the Award would otherwise occur on a day on which the sale of such shares would violate the provisions of the Trading Compliance Policy, then the satisfaction of the Vesting Conditions automatically shall be determined on the first to occur of (a) the next trading day on which the sale of such shares would not violate the Trading Compliance Policy or (b) the later of (i) last day of the calendar year in which the original vesting date occurred or (ii) the last day of the Company’s taxable year in which the original vesting date occurred.

9.4    Voting Rights, Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to shares of Stock represented by Restricted Stock Units until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Restricted Stock Unit Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date such Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date the Award is settled or the date on which it is terminated. Such Dividend Equivalent Rights, if any, shall be paid by crediting the Participant with additional whole Restricted Stock Units as of the date of payment of such cash dividends on Stock. The number of additional Restricted Stock Units (rounded to the nearest whole number) to be so credited shall be determined by dividing (a) the amount of cash dividends paid on such date with respect to the number of shares of Stock represented by the Restricted Stock Units previously credited to the Participant by (b) the Fair Market Value per share of Stock on such date. Such additional Restricted Stock Units shall be subject to the same terms and conditions and shall be settled in the same manner and at the same time as the Restricted Stock Units originally subject to the Restricted Stock Unit Award. In the event of a dividend or distribution paid in shares of Stock or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.2, appropriate adjustments shall be made in the Participant’s Restricted

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Stock Unit Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon settlement of the Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Vesting Conditions as are applicable to the Award.

9.5    Effect of Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement evidencing a Restricted Stock Unit Award, if a Participant’s Service terminates for any reason, whether voluntary or involuntary (including the Participant’s death or disability), then the Participant shall forfeit to the Company any Restricted Stock Units pursuant to the Award which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service.

9.6    Settlement of Restricted Stock Unit Awards. The Company shall issue to a Participant on the date on which Restricted Stock Units subject to the Participant’s Restricted Stock Unit Award vest or on such other date determined by the Committee, in its discretion, and set forth in the Award Agreement one (1) share of Stock (and/or any other new, substituted or additional securities or other property pursuant to an adjustment described in Section 9.4) for each Restricted Stock Unit then becoming vested or otherwise to be settled on such date, subject to the withholding of applicable taxes, if any. If permitted by the Committee, the Participant may elect, consistent with the requirements of Section 409A, to defer receipt of all or any portion of the shares of Stock or other property otherwise issuable to the Participant pursuant to this Section, and such deferred issuance date(s) and amount(s) elected by the Participant shall be set forth in the Award Agreement. Notwithstanding the foregoing, the Committee, in its discretion, may provide for settlement of any Restricted Stock Unit Award by payment to the Participant in cash of an amount equal to the Fair Market Value on the payment date of the shares of Stock or other property otherwise issuable to the Participant pursuant to this Section.

9.7    Nontransferability of Restricted Stock Unit Awards. The right to receive shares pursuant to a Restricted Stock Unit Award shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with respect to a Restricted Stock Unit Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

10.    PERFORMANCE AWARDS.

Performance Awards shall be evidenced by Award Agreements in such form as the Committee shall from time to time establish. Award Agreements evidencing Performance Awards may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

10.1    Types of Performance Awards Authorized. Performance Awards may be granted in the form of either Performance Shares or Performance Units. Each Award Agreement evidencing a Performance Award shall specify the number of Performance Shares or Performance Units subject

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thereto, the Performance Award Formula, the Performance Goal(s) and Performance Period applicable to the Award, and the other terms, conditions and restrictions of the Award.

10.2    Initial Value of Performance Shares and Performance Units. Unless otherwise provided by the Committee in granting a Performance Award, each Performance Share shall have an initial monetary value equal to the Fair Market Value of one (1) share of Stock, subject to adjustment as provided in Section 4.2, on the effective date of grant of the Performance Share, and each Performance Unit shall have an initial monetary value established by the Committee at the time of grant. The final value payable to the Participant in settlement of a Performance Award determined on the basis of the applicable Performance Award Formula will depend on the extent to which Performance Goals established by the Committee are attained within the applicable Performance Period established by the Committee.

10.3    Establishment of Performance Period, Performance Goals and Performance Award Formula.  In granting each Performance Award, the Committee shall establish in writing the applicable Performance Period, Performance Award Formula and one or more Performance Goals which, when measured at the end of the Performance Period, shall determine on the basis of the Performance Award Formula the final value of the Performance Award to be paid to the Participant. Unless otherwise permitted in compliance with the requirements under Section 162(m) with respect to each Performance Award intended to result in the payment of Performance-Based Compensation, the Committee shall establish the Performance Goal(s) and Performance Award Formula applicable to each Performance Award no later than the earlier of (a) the date ninety (90) days after the commencement of the applicable Performance Period or (b) the date on which 25% of the Performance Period has elapsed, and, in any event, at a time when the outcome of the Performance Goals remains substantially uncertain. Once established, the Performance Goals and Performance Award Formula applicable to a Covered Employee shall not be changed during the Performance Period. The Company shall notify each Participant granted a Performance Award of the terms of such Award, including the Performance Period, Performance Goal(s) and Performance Award Formula.

10.4    Measurement of Performance Goals. Performance Goals shall be established by the Committee on the basis of targets to be attained ( “ Performance Targets ” ) with respect to one or more measures of business or financial performance (each, a  “ Performance Measure ” ), subject to the following:

(a)    Performance Measures. Performance Measures shall be calculated in accordance with the Company’s financial statements, or, if such terms are not used in the Company’s financial statements, they shall be calculated in accordance with generally accepted accounting principles, a method used generally in the Company’s industry, or in accordance with a methodology established by the Committee prior to the grant of the Performance Award. Performance Measures shall be calculated with respect to the Company and each Subsidiary Corporation consolidated therewith for financial reporting purposes or such division or other business unit as may be selected by the Committee. Unless otherwise determined by the Committee prior to the grant of the Performance Award, the Performance Measures applicable to the Performance Award shall be calculated prior to the accrual of expense for any Performance Award for the same Performance Period and excluding the effect (whether positive or negative) on the Performance Measures of any change in accounting standards or any extraordinary, unusual or nonrecurring item, as determined

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by the Committee, occurring after the establishment of the Performance Goals applicable to the Performance Award. Each such adjustment, if any, shall be made solely for the purpose of providing a consistent basis from period to period for the calculation of Performance Measures in order to prevent the dilution or enlargement of the Participant’s rights with respect to a Performance Award. Performance Measures may be one or more of the following, as determined by the Committee:

(i)revenue;

(ii)sales;

(iii)expenses;

(iv)operating income;

(v)gross margin;

(vi)operating margin;

(vii)earnings before any one or more of: stock-based compensation expense, interest, taxes, depreciation and amortization;

(viii)pre-tax profit;

(ix)net operating income;

(x)net income;

(xi)economic value added;

(xii)free cash flow;

(xiii)operating cash flow;

(xiv)balance of cash, cash equivalents and marketable securities;

(xv)stock price;

(xvi)    earnings per share;

(xvii)    return on stockholder equity;

(xviii)    return on capital;

(xix)    return on assets;

(xx)    return on investment;

(xxi)    total stockholder return;

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(xxii)    employee satisfaction;

(xxiii)    employee retention;

(xxiv)    market share;

(xxv)    customer satisfaction;

(xxvi)    product development;

(xxvii)    research and development expenses;

(xxviii)    completion of an identified special project; and

(xxix)    completion of a joint venture or other corporate transaction.

(b)Performance Targets. Performance Targets may include a minimum, maximum, target level and intermediate levels of performance, with the final value of a Performance Award determined under the applicable Performance Award Formula by the level attained during the applicable Performance Period. A Performance Target may be stated as an absolute value, a growth or reduction in a value, or as a value determined relative to an index, budget or other standard selected by the Committee.

10.5    Settlement of Performance Awards.

(a)    Determination of Final Value. As soon as practicable following the completion of the Performance Period applicable to a Performance Award, the Committee shall certify in writing the extent to which the applicable Performance Goals have been attained and the resulting final value of the Award earned by the Participant and to be paid upon its settlement in accordance with the applicable Performance Award Formula.

(b)    Discretionary Adjustment of Award Formula. In its discretion, the Committee may, either at the time it grants a Performance Award or at any time thereafter, provide for the positive or negative adjustment of the Performance Award Formula applicable to a Performance Award granted to any Participant who is not a Covered Employee to reflect such Participant’s individual performance in his or her position with the Company or such other factors as the Committee may determine. If permitted under a Covered Employee’s Award Agreement, the Committee shall have the discretion, on the basis of such criteria as may be established by the Committee, to reduce some or all of the value of the Performance Award that would otherwise be paid to the Covered Employee upon its settlement notwithstanding the attainment of any Performance Goal and the resulting value of the Performance Award determined in accordance with the Performance Award Formula. No such reduction may result in an increase in the amount payable upon settlement of another Participant’s Performance Award that is intended to result in Performance-Based Compensation.

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(c)Effect of Leaves of Absence. Unless otherwise required by law or a Participant’s Award Agreement, payment of the final value, if any, of a Performance Award held by a Participant who has taken in excess of thirty (30) days in unpaid leaves of absence during a Performance Period shall be prorated on the basis of the number of days of the Participant’s Service during the Performance Period during which the Participant was not on an unpaid leave of absence.

(d)    Notice to Participants. As soon as practicable following the Committee’s determination and certification in accordance with Sections 10.5(a) and (b), the Company shall notify each Participant of the determination of the Committee.

(e)    Payment in Settlement of Performance Awards. As soon as practicable following the Committee’s determination and certification in accordance with Sections 10.5(a) and (b), but in any event within the Short-Term Deferral Period described in Section 15.1 (except as otherwise provided below or consistent with the requirements of Section 409A), payment shall be made to each eligible Participant (or such Participant’s legal representative or other person who acquired the right to receive such payment by reason of the Participant’s death) of the final value of the Participant’s Performance Award. Payment of such amount shall be made in cash, shares of Stock, or a combination thereof as determined by the Committee. Unless otherwise provided in the Award Agreement evidencing a Performance Award, payment shall be made in a lump sum. If permitted by the Committee, the Participant may elect, consistent with the requirements of Section 409A, to defer receipt of all or any portion of the payment to be made to the Participant pursuant to this Section, and such deferred payment date(s) elected by the Participant shall be set forth in the Award Agreement. If any payment is to be made on a deferred basis, the Committee may, but shall not be obligated to, provide for the payment during the deferral period of Dividend Equivalent Rights or interest.

(f)    Provisions Applicable to Payment in Shares. If payment is to be made in shares of Stock, the number of such shares shall be determined by dividing the final value of the Performance Award by the Fair Market Value of a share of Stock determined by the method specified in the Award Agreement. Shares of Stock issued in payment of any Performance Award may be fully vested and freely transferable shares or may be shares of Stock subject to Vesting Conditions as provided in Section 8.5. Any shares subject to Vesting Conditions shall be evidenced by an appropriate Award Agreement and shall be subject to the provisions of Sections 8.5 through 8.8 above.

10.6    Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to shares of Stock represented by Performance Share Awards until the date of the issuance of such shares, if any (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Performance Share Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date the Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date on which the Performance Shares are settled or the date on which they are forfeited. Such Dividend Equivalent Rights, if any, shall be credited to the Participant in the form of additional whole Performance Shares as of the date of payment of such cash dividends on Stock. The number of additional Performance Shares (rounded to the nearest whole number) to be so credited shall be determined by dividing (a)

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the amount of cash dividends paid on the dividend payment date with respect to the number of shares of Stock represented by the Performance Shares previously credited to the Participant by (b) the Fair Market Value per share of Stock on such date. Dividend Equivalent Rights may be paid currently or may be accumulated and paid to the extent that Performance Shares become nonforfeitable, as determined by the Committee. Settlement of Dividend Equivalent Rights may be made in cash, shares of Stock, or a combination thereof as determined by the Committee, and may be paid on the same basis as settlement of the related Performance Share as provided in Section 10.5. Dividend Equivalent Rights shall not be paid with respect to Performance Units. In the event of a dividend or distribution paid in shares of Stock or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.2, appropriate adjustments shall be made in the Participant’s Performance Share Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon settlement of the Performance Share Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Performance Goals as are applicable to the Award.

10.7    Effect of Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement evidencing a Performance Award, the effect of a Participant’s termination of Service on the Performance Award shall be as follows:

(a)Death or Disability. If the Participant’s Service terminates because of the death or Disability of the Participant before the completion of the Performance Period applicable to the Performance Award, the final value of the Participant’s Performance Award shall be determined by the extent to which the applicable Performance Goals have been attained with respect to the entire Performance Period and shall be prorated based on the number of months of the Participant’s Service during the Performance Period. Payment shall be made following the end of the Performance Period in any manner permitted by Section 10.5.

(b)    Other Termination of Service. If the Participant’s Service terminates for any reason except death or Disability before the completion of the Performance Period applicable to the Performance Award, such Award shall be forfeited in its entirety; provided, however, that in the event of an involuntary termination of the Participant’s Service, the Committee, in its discretion, may waive the automatic forfeiture of all or any portion of any such Award and determine the final value of the Performance Award in the manner provided by Section 10.7(a). Payment of any amount pursuant to this Section shall be made following the end of the Performance Period in any manner permitted by Section 10.5.

10.8    Nontransferability of Performance Awards. Prior to settlement in accordance with the provisions of the Plan, no Performance Award shall be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with respect to a Performance Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

11.    CASH-BASED AWARDS AND OTHER STOCK-BASED AWARDS.

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Cash-Based Awards and Other Stock-Based Awards shall be evidenced by Award Agreements in such form as the Committee shall from time to time establish. Award Agreements evidencing Cash-Based Awards and Other Stock-Based Awards may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

11.1    Grant of Cash-Based Awards. Subject to the provisions of the Plan, the Committee, at any time and from time to time, may grant Cash-Based Awards to Participants in such amounts and upon such terms and conditions, including the achievement of performance criteria, as the Committee may determine.

11.2    Grant of Other Stock-Based Awards. The Committee may grant other types of equity-based or equity-related Awards not otherwise described by the terms of this Plan (including the grant or offer for sale of unrestricted securities, stock-equivalent units, stock appreciation units, securities or debentures convertible into common stock or other forms determined by the Committee) in such amounts and subject to such terms and conditions as the Committee shall determine. Other Stock-Based Awards may be made available as a form of payment in the settlement of other Awards or as payment in lieu of compensation to which a Participant is otherwise entitled. Other Stock-Based Awards may involve the transfer of actual shares of Stock to Participants, or payment in cash or otherwise of amounts based on the value of Stock and may include, without limitation, Awards designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States.

11.3    Value of Cash-Based and Other Stock-Based Awards. Each Cash-Based Award shall specify a monetary payment amount or payment range as determined by the Committee. Each Other Stock-Based Award shall be expressed in terms of shares of Stock or units based on such shares of Stock, as determined by the Committee. The Committee may require the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award. If the Committee exercises its discretion to establish performance criteria, the final value of Cash-Based Awards or Other Stock-Based Awards that will be paid to the Participant will depend on the extent to which the performance criteria are met. The establishment of performance criteria with respect to the grant or vesting of any Cash-Based Award or Other Stock-Based Award intended to result in Performance-Based Compensation shall follow procedures substantially equivalent to those applicable to Performance Awards set forth in Section 10.

11.4    Payment or Settlement of Cash-Based Awards and Other Stock-Based Awards. Payment or settlement, if any, with respect to a Cash-Based Award or an Other Stock-Based Award shall be made in accordance with the terms of the Award, in cash, shares of Stock or other securities or any combination thereof as the Committee determines. The determination and certification of the final value with respect to any Cash-Based Award or Other Stock-Based Award intended to result in Performance-Based Compensation shall comply with the requirements applicable to Performance Awards set forth in Section 10. To the extent applicable, payment or settlement with respect to each Cash-Based Award and Other Stock-Based Award shall be made in compliance with the requirements of Section 409A.

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11.5    Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to shares of Stock represented by Other Stock-Based Awards until the date of the issuance of such shares of Stock (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), if any, in settlement of such Award. However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Other Stock-Based Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date such Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date the Award is settled or the date on which it is terminated. Such Dividend Equivalent Rights, if any, shall be paid in accordance with the provisions set forth in Section 9.4. Dividend Equivalent Rights shall not be granted with respect to Cash-Based Awards. In the event of a dividend or distribution paid in shares of Stock or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.2, appropriate adjustments shall be made in the Participant’s Other Stock-Based Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon settlement of such Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Vesting Conditions and performance criteria, if any, as are applicable to the Award.

11.6    Effect of Termination of Service. Each Award Agreement evidencing a Cash-Based Award or Other Stock-Based Award shall set forth the extent to which the Participant shall have the right to retain such Award following termination of the Participant’s Service. Such provisions shall be determined in the discretion of the Committee, need not be uniform among all Cash-Based Awards or Other Stock-Based Awards, and may reflect distinctions based on the reasons for termination, subject to the requirements of Section 409A, if applicable.

11.7    Nontransferability of Cash-Based Awards and Other Stock-Based Awards. Prior to the payment or settlement of a Cash-Based Award or Other Stock-Based Award, the Award shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. The Committee may impose such additional restrictions on any shares of Stock issued in settlement of Cash-Based Awards and Other Stock-Based Awards as it may deem advisable, including, without limitation, minimum holding period requirements, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such shares of Stock are then listed and/or traded, or under any state securities laws or foreign law applicable to such shares of Stock.

12.    STANDARD FORMS OF AWARD AGREEMENT.

12.1    Award Agreements. Each Award shall comply with and be subject to the terms and conditions set forth in the appropriate form of Award Agreement approved by the Committee and as amended from time to time. No Award or purported Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement, which execution may be evidenced by electronic means. Any Award Agreement may consist of an appropriate form of Notice

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of Grant and a form of Agreement incorporated therein by reference, or such other form or forms, including electronic media, as the Committee may approve from time to time.

12.2    Authority to Vary Terms. The Committee shall have the authority from time to time to vary the terms of any standard form of Award Agreement either in connection with the grant or amendment of an individual Award or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Award Agreement are not inconsistent with the terms of the Plan.

13.    CHANGE IN CONTROL.

13.1    Effect of Change in Control on Awards. Subject to the requirements and limitations of Section 409A, if applicable, the Committee may provide for any one or more of the following:

(a)    Accelerated Vesting. In its discretion, the Committee may provide in the grant of any Award or at any other time may take such action as it deems appropriate to provide for acceleration of the exercisability, vesting and/or settlement in connection with a Change in Control of each or any outstanding Award or portion thereof and shares acquired pursuant thereto upon such conditions, including termination of the Participant’s Service prior to, upon, or following such Change in Control, and to such extent as the Committee shall determine.

(b)Assumption, Continuation or Substitution. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case may be (the  “ Acquiror ” ), may, without the consent of any Participant, either assume or continue the Company’s rights and obligations under each or any Award or portion thereof outstanding immediately prior to the Change in Control or substitute for each or any such outstanding Award or portion thereof a substantially equivalent award with respect to the Acquiror’s stock, as applicable. For purposes of this Section, if so determined by the Committee in its discretion, an Award denominated in shares of Stock shall be deemed assumed if, following the Change in Control, the Award confers the right to receive, subject to the terms and conditions of the Plan and the applicable Award Agreement, for each share of Stock subject to the Award immediately prior to the Change in Control, the consideration (whether stock, cash, other securities or property or a combination thereof) to which a holder of a share of Stock on the effective date of the Change in Control was entitled (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Stock); provided, however, that if such consideration is not solely common stock of the Acquiror, the Committee may, with the consent of the Acquiror, provide for the consideration to be received upon the exercise or settlement of the Award, for each share of Stock subject to the Award, to consist solely of common stock of the Acquiror equal in Fair Market Value to the per share consideration received by holders of Stock pursuant to the Change in Control. Any Award or portion thereof which is neither assumed or continued by the Acquiror in connection with the Change in Control nor exercised or settled as of the time of consummation of the Change in Control shall terminate and cease to be outstanding effective as of the time of consummation of the Change in Control.

(c)    Cash-Out of Outstanding Stock-Based Awards. The Committee may, in its discretion and without the consent of any Participant, determine that, upon the occurrence of a Change in Control, each or any Award denominated in shares of Stock or portion thereof outstanding

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immediately prior to the Change in Control and not previously exercised or settled shall be canceled in exchange for a payment with respect to each vested share (and each unvested share, if so determined by the Committee) of Stock subject to such canceled Award in (i) cash, (ii) stock of the Company or of a corporation or other business entity a party to the Change in Control, or (iii) other property which, in any such case, shall be in an amount having a Fair Market Value equal to the Fair Market Value of the consideration to be paid per share of Stock in the Change in Control, reduced (but not below zero) by the exercise or purchase price per share, if any, under such Award. In the event such determination is made by the Committee, an Award having an exercise or purchase price per share equal to or greater than the Fair Market Value of the consideration to be paid per share of Stock in the Change in Control may be canceled without payment of consideration to the holder thereof. Payment pursuant to this Section (reduced by applicable withholding taxes, if any) shall be made to Participants in respect of the vested portions of their canceled Awards as soon as practicable following the date of the Change in Control and in respect of the unvested portions of their canceled Awards in accordance with the vesting schedules applicable to such Awards.

13.2    Federal Excise Tax Under Section 4999 of the Code.

(a)    Excess Parachute Payment. In the event that any acceleration of vesting pursuant to an Award and any other payment or benefit received or to be received by a Participant would subject the Participant to any excise tax pursuant to Section 4999 of the Code due to the characterization of such acceleration of vesting, payment or benefit as an “excess parachute payment” under Section 280G of the Code, the Participant may elect to reduce the amount of any acceleration of vesting called for under the Award in order to avoid such characterization.

(b)    Determination by Independent Accountants. To aid the Participant in making any election called for under Section 13.2(a), no later than the date of the occurrence of any event that might reasonably be anticipated to result in an “excess parachute payment” to the Participant as described in Section 13.2(a), the Company shall request a determination in writing by independent public accountants selected by the Company (the  “ Accountants ” ). As soon as practicable thereafter, the Accountants shall determine and report to the Company and the Participant the amount of such acceleration of vesting, payments and benefits which would produce the greatest after-tax benefit to the Participant. For the purposes of such determination, the Accountants may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Participant shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make their required determination. The Company shall bear all fees and expenses the Accountants charge in connection with their services contemplated by this Section.

14.    COMPLIANCE WITH SECURITIES LAW.

The grant of Awards and the issuance of shares of Stock pursuant to any Award shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities and the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Award may be exercised or shares issued pursuant to an Award unless (a) a registration statement under the Securities Act shall at the time of such exercise or issuance be in effect with respect to the shares issuable pursuant to the Award, or (b) in the opinion of legal counsel to the Company, the shares issuable pursuant to the Award may be issued in

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accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to issuance of any Stock, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

15.    COMPLIANCE WITH SECTION 409A.

15.1    Awards Subject to Section 409A. The Company intends that Awards granted pursuant to the Plan shall either be exempt from or comply with Section 409A, and the Plan shall be so construed. The provisions of this Section 15 shall apply to any Award or portion thereof that constitutes or provides for payment of Section 409A Deferred Compensation. Such Awards may include, without limitation:

(a)A Nonstatutory Stock Option or SAR that includes any feature for the deferral of compensation other than the deferral of recognition of income until the later of (i) the exercise or disposition of the Award or (ii) the time the stock acquired pursuant to the exercise of the Award first becomes substantially vested.

(b)Any Restricted Stock Unit Award, Performance Award, Cash-Based Award or Other Stock-Based Award that either (i) provides by its terms for settlement of all or any portion of the Award at a time or upon an event that will or may occur later than the end of the Short-Term Deferral Period (as defined below) or (ii) permits the Participant granted the Award to elect one or more dates or events upon which the Award will be settled after the end of the Short-Term Deferral Period.

Subject to the provisions of Section 409A, the term “Short-Term Deferral Period” means the 2½ month period ending on the later of (i) the 15th day of the third month following the end of the Participant’s taxable year in which the right to payment under the applicable portion of the Award is no longer subject to a substantial risk of forfeiture or (ii) the 15th day of the third month following the end of the Company’s taxable year in which the right to payment under the applicable portion of the Award is no longer subject to a substantial risk of forfeiture. For this purpose, the term “substantial risk of forfeiture” shall have the meaning provided by Section 409A.

15.2    Deferral and/or Distribution Elections. Except as otherwise permitted or required by Section 409A, the following rules shall apply to any compensation deferral and/or payment elections (each, an “ Election ”) that may be permitted or required by the Committee pursuant to an Award providing Section 409A Deferred Compensation:

(a)Elections must be in writing and specify the amount of the payment in settlement of an Award being deferred, as well as the time and form of payment as permitted by this Plan.

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(b)    Elections shall be made by the end of the Participant’s taxable year prior to the year in which services commence for which an Award may be granted to such Participant.

(c)Elections shall continue in effect until a written revocation or change in Election is received by the Company, except that a written revocation or change in Election must be received by the Company prior to the last day for making the Election determined in accordance with paragraph (b) above or as permitted by Section 15.3.

15.3    Subsequent Elections. Except as otherwise permitted or required by Section 409A, any Award providing Section 409A Deferred Compensation which permits a subsequent Election to delay the payment or change the form of payment in settlement of such Award shall comply with the following requirements:

(a)    No subsequent Election may take effect until at least twelve (12) months after the date on which the subsequent Election is made.

(b)Each subsequent Election related to a payment in settlement of an Award not described in Section 15.4(a)(ii), 15.4(a)(iii) or 15.4(a)(vi) must result in a delay of the payment for a period of not less than five (5) years from the date on which such payment would otherwise have been made.

(c)    No subsequent Election related to a payment pursuant to Section 15.4(a)(iv) shall be made less than twelve (12) months before the date on which such payment would otherwise have been made.

(d)Subsequent Elections shall continue in effect until a written revocation or change in the subsequent Election is received by the Company, except that a written revocation or change in a subsequent Election must be received by the Company prior to the last day for making the subsequent Election determined in accordance the preceding paragraphs of this Section 15.3.

15.4    Payment of Section 409A Deferred Compensation.

(a)Permissible Payments. Except as otherwise permitted or required by Section 409A, an Award providing Section 409A Deferred Compensation must provide for payment in settlement of the Award only upon one or more of the following:

(i)    The Participant’s “separation from service” (as such term is defined by Section 409A);

(ii)The Participant’s becoming “disabled” (as such term is defined by Section 409A);

(iii)    The Participant’s death;

(iv)A time or fixed schedule that is either (i) specified by the Committee upon the grant of an Award and set forth in the Award Agreement evidencing such Award or (ii)

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specified by the Participant in an Election complying with the requirements of Section 15.2 or 15.3, as applicable;

(v)    A change in the ownership or effective control or the Company or in the ownership of a substantial portion of the assets of the Company determined in accordance with Section 409A; or

(vi)    The occurrence of an “unforeseeable emergency” (as such term is defined by Section 409A).

(b)    Installment Payments. It is the intent of this Plan that any right of a Participant to receive installment payments (within the meaning of Section 409A) shall, for all purposes of Section 409A, be treated as a right to a series of separate payments.

(c)Required Delay in Payment to Specified Employee Pursuant to Separation from Service. Notwithstanding any provision of the Plan or an Award Agreement to the contrary, except as otherwise permitted by Section 409A, no payment pursuant to Section 15.4(a)(i) in settlement of an Award providing for Section 409A Deferred Compensation may be made to a Participant who is a “specified employee” (as such term is defined by Section 409A) as of the date of the Participant’s separation from service before the date (the “ Delayed Payment Date ”) that is six (6) months after the date of such Participant’s separation from service, or, if earlier, the date of the Participant’s death. All such amounts that would, but for this paragraph, become payable prior to the Delayed Payment Date shall be accumulated and paid on the Delayed Payment Date.

(d)    Payment Upon Disability. All distributions payable by reason of a Participant becoming disabled shall be paid in a lump sum or in periodic installments as established by the Participant’s Election. If the Participant has made no Election with respect to distributions upon becoming disabled, all such distributions shall be paid in a lump sum upon the determination that the Participant has become disabled.

(e)Payment Upon Death. If a Participant dies before complete distribution of amounts payable upon settlement of an Award subject to Section 409A, such undistributed amounts shall be distributed to his or her beneficiary under the distribution method for death established by the Participant’s Election upon receipt by the Committee of satisfactory notice and confirmation of the Participant’s death. If the Participant has made no Election with respect to distributions upon death, all such distributions shall be paid in a lump sum upon receipt by the Committee of satisfactory notice and confirmation of the Participant’s death.

(f)    Payment Upon Change in Control. Notwithstanding any provision of the Plan or an Award Agreement to the contrary, to the extent that any amount constituting Section 409A Deferred Compensation would become payable under this Plan by reason of a Change in Control, such amount shall become payable only if the event constituting a Change in Control would also constitute a change in ownership or effective control of the Company or a change in the ownership of a substantial portion of the assets of the Company within the meaning of Section 409A. Any Award which constitutes Section 409A Deferred Compensation and which would vest and otherwise become payable upon a Change in Control as a result of the failure of the Acquiror to assume, continue or substitute for such Award in accordance with Section 13.1(b) shall vest to the extent

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provided by such Award but shall be converted automatically at the effective time of such Change in Control into a right to receive, in cash on the date or dates such award would have been settled in accordance with its then existing settlement schedule (or as required by Section 15.4(c)), an amount or amounts equal in the aggregate to the intrinsic value of the Award at the time of the Change in Control.

(g)    Payment Upon Unforeseeable Emergency. The Committee shall have the authority to provide in the Award Agreement evidencing any Award providing for Section 409A Deferred Compensation for payment in settlement of all or a portion of such Award in the event that a Participant establishes, to the satisfaction of the Committee, the occurrence of an unforeseeable emergency. In such event, the amount(s) distributed with respect to such unforeseeable emergency cannot exceed the amounts reasonably necessary to satisfy the emergency need plus amounts necessary to pay taxes reasonably anticipated as a result of such distribution(s), after taking into account the extent to which such emergency need is or may be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship) or by cessation of deferrals under the Award. All distributions with respect to an unforeseeable emergency shall be made in a lump sum upon the Committee’s determination that an unforeseeable emergency has occurred. The Committee’s decision with respect to whether an unforeseeable emergency has occurred and the manner in which, if at all, the payment in settlement of an Award shall be altered or modified, shall be final, conclusive, and not subject to approval or appeal.

(h)    Prohibition of Acceleration of Payments. Notwithstanding any provision of the Plan or an Award Agreement to the contrary, this Plan does not permit the acceleration of the time or schedule of any payment under an Award providing Section 409A Deferred Compensation, except as permitted by Section 409A.

(i)No Representation Regarding Section 409A Compliance. Notwithstanding any other provision of the Plan, the Company makes no representation that Awards shall be exempt from or comply with Section 409A. No Participating Company shall be liable for any tax, penalty or interest imposed on a Participant by Section 409A.

16.    TAX WITHHOLDING.

16.1    Tax Withholding in General. The Company shall have the right to deduct from any and all payments made under the Plan, or to require the Participant, through payroll withholding, cash payment or otherwise, to make adequate provision for, the federal, state, local and foreign taxes (including social insurance), if any, required by law to be withheld by any Participating Company with respect to an Award or the shares acquired pursuant thereto. The Company shall have no obligation to deliver shares of Stock, to release shares of Stock from an escrow established pursuant to an Award Agreement, or to make any payment in cash under the Plan until the Participating Company Group’s tax withholding obligations have been satisfied by the Participant.

16.2    Withholding in or Directed Sale of Shares. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable to a Participant upon the exercise or settlement of an Award, or to accept from the Participant the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of

34

the tax withholding obligations of any Participating Company as determined under applicable provisions of the Code.  Prior to January 1, 2017, the Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined by the applicable minimum statutory withholding rates. Effective January 1, 2017, the Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined by the applicable maximum statutory withholding rates.  The Company may require a Participant to direct a broker, upon the vesting, exercise or settlement of an Award, to sell a portion of the shares subject to the Award determined by the Company in its discretion to be sufficient to cover the tax withholding obligations of any Participating Company and to remit an amount equal to such tax withholding obligations to the Company in cash.

17.    AMENDMENT, SUSPENSION OR TERMINATION OF PLAN.

The Committee may amend, suspend or terminate the Plan at any time. However, without the approval of the Company’s stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company’s stockholders under any applicable law, regulation or rule, including the rules of any stock exchange or quotation system upon which the Stock may then be listed or quoted. No amendment, suspension or termination of the Plan shall affect any then outstanding Award unless expressly provided by the Committee. Except as provided by the next sentence, no amendment, suspension or termination of the Plan may adversely affect any then outstanding Award without the consent of the Participant. Notwithstanding any other provision of the Plan to the contrary, the Committee may, in its sole and absolute discretion and without the consent of any Participant, amend the Plan or any Award Agreement, to take effect retroactively or otherwise, as it deems necessary or advisable for the purpose of conforming the Plan or such Award Agreement to any present or future law, regulation or rule applicable to the Plan, including, but not limited to, Section 409A.

18.    MISCELLANEOUS PROVISIONS.

18.1    Repurchase Rights. Shares issued under the Plan may be subject to one or more repurchase options, or other conditions and restrictions as determined by the Committee in its discretion at the time the Award is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.

18.2    Forfeiture Events.

(a)    The Committee may specify in an Award Agreement that the Participant’s rights, payments, and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence of specified events, in addition to any otherwise

35

applicable vesting or performance conditions of an Award. Such events may include, but shall not be limited to, termination of Service for Cause or any act by a Participant, whether before or after termination of Service, that would constitute Cause for termination of Service.

(b)    If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws, any Participant who knowingly or through gross negligence engaged in the misconduct, or who knowingly or through gross negligence failed to prevent the misconduct, and any Participant who is one of the individuals subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002, shall reimburse the Company for (i) the amount of any payment in settlement of an Award received by such Participant during the twelve-(12-) month period following the first public issuance or filing with the United States Securities and Exchange Commission (whichever first occurred) of the financial document embodying such financial reporting requirement, and (ii) any profits realized by such Participant from the sale of securities of the Company during such twelve-(12-) month period.

18.3    Provision of Information. Each Participant shall be given access to information concerning the Company equivalent to that information generally made available to the Company’s common stockholders.

18.4    Rights as Employee, Consultant or Director. No person, even though eligible pursuant to Section 5, shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a Participant. Nothing in the Plan or any Award granted under the Plan shall confer on any Participant a right to remain an Employee, Consultant or Director or interfere with or limit in any way any right of a Participating Company to terminate the Participant’s Service at any time. To the extent that an Employee of a Participating Company other than the Company receives an Award under the Plan, that Award shall in no event be understood or interpreted to mean that the Company is the Employee’s employer or that the Employee has an employment relationship with the Company.

18.5    Rights as a Stockholder. A Participant shall have no rights as a stockholder with respect to any shares covered by an Award until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such shares are issued, except as provided in Section 4.2 or another provision of the Plan.

18.6    Delivery of Title to Shares. Subject to any governing rules or regulations, the Company shall issue or cause to be issued the shares of Stock acquired pursuant to an Award and shall deliver such shares to or for the benefit of the Participant by means of one or more of the following: (a) by delivering to the Participant evidence of book entry shares of Stock credited to the account of the Participant, (b) by depositing such shares of Stock for the benefit of the Participant with any broker with which the Participant has an account relationship, or (c) by delivering such shares of Stock to the Participant in certificate form.

18.7    Fractional Shares. The Company shall not be required to issue fractional shares upon the exercise or settlement of any Award.

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18.8    Retirement and Welfare Plans. Neither Awards made under this Plan nor shares of Stock or cash paid pursuant to such Awards may be included as “compensation” for purposes of computing the benefits payable to any Participant under any Participating Company’s retirement plans (both qualified and non-qualified) or welfare benefit plans unless such other plan expressly provides that such compensation shall be taken into account in computing a Participant’s benefit.

18.9    Beneficiary Designation. Subject to local laws and procedures, each Participant may file with the Company a written designation of a beneficiary who is to receive any benefit under the Plan to which the Participant is entitled in the event of such Participant’s death before he or she receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. If a married Participant designates a beneficiary other than the Participant’s spouse, the effectiveness of such designation may be subject to the consent of the Participant’s spouse. If a Participant dies without an effective designation of a beneficiary who is living at the time of the Participant’s death, the Company will pay any remaining unpaid benefits to the Participant’s legal representative.

18.10    Severability. If any one or more of the provisions (or any part thereof) of this Plan shall be held invalid, illegal or unenforceable in any respect, such provision shall be modified so as to make it valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions (or any part thereof) of the Plan shall not in any way be affected or impaired thereby.

18.11    No Constraint on Corporate Action. Nothing in this Plan shall be construed to: (a) limit, impair, or otherwise affect the Company’s or another Participating Company’s right or power to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets; or (b) limit the right or power of the Company or another Participating Company to take any action which such entity deems to be necessary or appropriate.

18.12    Unfunded Obligation. Participants shall have the status of general unsecured creditors of the Company. Any amounts payable to Participants pursuant to the Plan shall be considered unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974. No Participating Company shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Participant account shall not create or constitute a trust or fiduciary relationship between the Committee or any Participating Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or the Participant’s creditors in any assets of any Participating Company. The Participants shall have no claim against any Participating Company for any changes in the value of any assets which may be invested or reinvested by the Company with respect to the Plan.

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18.13    Choice of Law. Except to the extent governed by applicable federal law, the validity, interpretation, construction and performance of the Plan and each Award Agreement shall be governed by the laws of the State of California, without regard to its conflict of law rules

IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing sets forth the Molina Healthcare, Inc. 2011 Equity Incentive Plan as duly adopted by the Board.

/s/ Jeff D. Barlow            
Corporate Secretary

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EXHIBIT 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a)/15d-14(a)
UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED
I, Joseph M. Molina, M.D., certify that:
1. I have reviewed the annual report on Form 10-K for the period ended September 30, 2016 of Molina Healthcare, Inc.;
2. Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), and internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended), for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period for which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and
(d) Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 	 	 	
 	 	 	
Dated: October 27, 2016	 	/s/ Joseph M. Molina	
 	 	Joseph M. Molina	
 	 	Chairman of the Board,	
 	 	Chief Executive Officer and President	

EXHIBIT 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a)/15d-14(a)
UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED
I, John C. Molina, J.D., certify that:
1. I have reviewed this annual report on Form 10-K for the period ended September 30, 2016 of Molina Healthcare, Inc.;
2. Based on my knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), and internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended), for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period for which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and
(d) Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 	 	 	
 	 	 	
Dated: October 27, 2016	 	/s/ John C. Molina	
 	 	John C. Molina, J.D.	
 	 	Chief Financial Officer and Treasurer	

EXHIBIT 32.1
CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the report of Molina Healthcare, Inc. (the “Company”) on Form 10-K for the period ended September 30, 2016 (the “Report”), I, Joseph M. Molina, M.D., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 	 	 	
 	 	 	
Dated: October 27, 2016	 	/s/ Joseph M. Molina	
 	 	Joseph M. Molina, M.D.	
 	 	Chairman of the Board,	
 	 	Chief Executive Officer and President	

EXHIBIT 32.2
CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the report of Molina Healthcare, Inc. (the “Company”) on Form 10-K for the period ended September 30, 2016 (the “Report”), I, John C. Molina, J.D., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 	 	 	
 	 	 	
Dated: October 27, 2016	 	/s/ John C. Molina	
 	 	John C. Molina, J.D.	
 	 	Chief Financial Officer and Treasurer