MGLN Magellan Health Inc

Magellan Health, Inc. (NASDAQ: MGLN) today announced financial results for the fourth quarter and full year ended December 31, 2018, as summarized below:

              Three Months Ended Years Ended December 31 December 31 (In millions, except per share results)            

2018

2017

Chg

2018

2017

Chg

Net revenue $ 1,844.6 $ 1,694.4 8.9 % $ 7,314.2 $ 5,838.6 25.3 % Net income (loss) $ (28.0 ) $ 54.5 -151.3 % $ 24.2 $ 110.2 -78.1 % Segment profit [1] $ 16.0 $ 99.0 -83.8 % $ 228.0 $ 310.9 -26.7 % Adjusted net income (loss) [1] $ (18.6 ) $ 64.2 -128.9 % $ 61.7 $ 144.8 -57.4 % Per share results: Earnings (Loss) per share $ (1.16 ) $ 2.17 -153.5 % $ 0.97 $ 4.51 -78.5 % Adjusted earnings (loss) per share [1] $ (0.77 ) $ 2.55 -130.2 % $ 2.46 $ 5.92 -58.4 %   [1] Refer to the Basis of Presentation for a discussion of non-GAAP financial measures.  

Highlights Include:

• Net revenue for the year ended December 31, 2018 increased to $7.3 billion from 2017.
• Net income for the year ended December 31, 2018 decreased to $24.2 million from 2017.
• Segment profit for the year ended December 31, 2018 decreased to $228.0 million from 2017.
• Adjusted net income for the year ended December 31, 2018 decreased to $61.7 million from 2017.
• Unrestricted cash and investments were $130.4 million as of December 31, 2018. Approximately $63.3 million of the unrestricted cash and investments at December 31, 2018 is related to excess capital and undistributed earnings held at regulated entities.
• The Company is confirming its full year 2019 earnings guidance.

“Relative to our previous expectations, the fourth quarter was negatively impacted by approximately $50 million of both out-of-period and non-recurring items, primarily related to retrospective rate adjustments in New York which occurred subsequent to our guidance call in December. We do not expect these items to have a material impact on 2019 earnings and are therefore confirming 2019 guidance,” said Jonathan N. Rubin, chief financial officer of Magellan Health.

Barry M. Smith, chairman and chief executive officer of Magellan Health, said, “While 2018 was challenging, we are only mid-way through our work to create a stronger, more sustainable foundation for the Company. For decades, Magellan was the leader in the carve-out specialty and behavioral health space. While these capabilities remain valuable and relevant today, the reality is that the market has changed to a much more integrated model. We recognized this and proactively took steps to transform our business in a significant way. We have made solid progress in shifting our revenue stream into growth markets over the last five years.”

Mr. Smith continued, “Looking to the future, we are confident that we can address our operational issues and deliver profitable growth and value creation. We are implementing a multi-year margin improvement plan to increase adjusted net income margin to over 2 percent.”

Net Revenue

For the full year ended December 31, 2018, net revenue increased 25.3 percent to $7.3 billion from $5.8 billion for the year ended December 31, 2017. This increase was mainly driven by the full year impact of the acquisition of Senior Whole Health (SWH) and the impact of net business growth.

Segment Profit

For the year ended December 31, 2018, segment profit decreased 26.7 percent to $228.0 million from $310.9 million for the year ended December 31, 2017.

• Healthcare segment profit for the full year ended December 31, 2018, was $149.1 million versus $202.7 million in 2017. This 2018 decrease was primarily driven by cost of care pressure in Magellan Complete Care of Virginia, rate reductions in Magellan Complete Care of Florida, and unfavorable rate adjustments in New York, partially offset by a full year contribution of Massachusetts from the Senior Whole Health acquisition. Results in the quarter were unfavorably impacted by significant out-of-period and non-recurring adjustments to revenue for our New York contract.
• We reported Pharmacy Management segment profit of $104.4 million for the year ended December 31, 2018, which was a decrease from the $139.9 million in 2017. The year-over-year decrease was primarily due to the loss of specialty carve-out business during the first half of 2018 as well as $7 million of unfavorable non-recurring items in the fourth quarter related to inventory, rebate receivables, and prior year customer settlements.
• Regarding other financial results, corporate costs inclusive of eliminations, but excluding stock compensation expense, totaled $25.6 million for the year ended December 31, 2018, compared to $31.8 million in 2017. The decrease is mainly due to a lower discretionary benefits in 2018, higher corporate development costs in 2017 related to the SWH acquisition, and a litigation settlement recorded in 2017.

Cash Flow & Balance Sheet

Cash flow from operations for the year ended December 31, 2018, was $164.8 million, as compared to cash flow from operations of $162.3 million for the year ended December 31, 2017.

As of December 31, 2018, the Company’s unrestricted cash and investments totaled $130.4 million, which represents a decrease of $130.8 million from the balance at December 31, 2017, largely due to the pay down of debt and share repurchases. Approximately $63.3 million of the unrestricted cash and investments at December 31, 2018 is related to excess capital and undistributed earnings held at regulated entities.

Restricted cash and investments at December 31, 2018, of $527.7 million reflect an increase of $62.3 million from the balance at December 31, 2017. This increase is primarily attributable to the growth in MCC Virginia.

As a result of the shortfall in earnings during 2018, we recently amended our 2017 Credit Agreement with our lenders to allow for a maximum net leverage up to 3.25 times trailing 12 month EBITDA until September 30, 2019, 2.75 times at December 31, 2019, and 2.5 times thereafter.

Outlook

The Company is confirming its 2019 full year earnings guidance ranges.

          2019 Guidance

Low

High

Net revenue $

7,200.0

$ 7,500.0 Income before income taxes $ 75.0 $ 117.0 Net income $ 52.0 $ 79.0 Segment Profit[1] $ 270.0 $ 290.0 Adjusted net income[1] $ 90.0 $ 114.0   Per share results: Earnings per share[2] $ 2.14 $ 3.25 Adjusted earnings per share[1][2] $ 3.70 $ 4.69   [1]   Refer to the Basis of Presentation for a discussion of non-GAAP financial measures. [2] 2019 EPS and Adjusted EPS guidance includes share repurchases and option exercises through the close of business February 22, 2019, but excludes the impact of any potential future activity.  

Earnings Conference Call

Management will discuss the Company’s fourth quarter results on a conference call scheduled for Thursday, February 28, 2019 at 8:30 a.m. Eastern. To participate in the conference call, dial 1-800-857-1812 and use passcode “4th Quarter 2018 Earnings Call” approximately 10 minutes before the start of the call. The conference call will also be available live via webcast at Magellan's investor relations page at MagellanHealth.com. A telephonic replay will be available shortly after the conclusion of the call through March 28, 2019. This replay may be accessed by dialing 1-866-435-5412 (Domestic) or 1-203-369-1031 (International). A replay of the webcast will also be available at the site listed above for 30 days, beginning approximately two hours after its conclusion.

Basis of Presentation

In addition to results determined under Generally Accepted Accounting Principles (GAAP), Magellan provides certain non-GAAP financial measures that management believes are useful in assessing the Company’s performance. Following is a description of these important non-GAAP measures.

Segment profit is equal to net revenue less the sum of cost of care, cost of goods sold, direct service costs and other operating expenses, and includes income from unconsolidated subsidiaries, but excludes segment profit or loss from non-controlling interests held by other parties, stock compensation expense, special charges or benefits, as well as changes in the fair value of contingent consideration recorded in relation to acquisitions.

Adjusted net income and adjusted earnings per share reflect certain adjustments made for acquisitions completed after January 1, 2013, to exclude non-cash stock compensation expense resulting from restricted stock purchases by sellers, changes in the fair value of contingent consideration, amortization of identified acquisition intangibles, as well as impairment of identified acquisition intangibles.

Included in the tables issued with this press release are the reconciliations from GAAP measures to the corresponding non-GAAP measures.

About Magellan Health: Magellan Health, Inc., a Fortune 500 company, is a leader in managing the fastest growing, most complex areas of health, including special populations, complete pharmacy benefits and other specialty areas of healthcare. Magellan supports innovative ways of accessing better health through technology, while remaining focused on the critical personal relationships that are necessary to achieve a healthy, vibrant life. Magellan's customers include health plans and other managed care organizations, employers, labor unions, various military and governmental agencies and third-party administrators. For more information, visit MagellanHealth.com.

Forward-Looking Statements

This release is intended to be disclosure through methods reasonably designed to provide broad, non-exclusionary distribution to the public in compliance with the Securities and Exchange Commission’s Fair Disclosure Regulation. This release contains forward-looking statements within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, as amended, which involve a number of risks and uncertainties, many of which are out of our control. All statements, other than statements of historical information provided herein, may be deemed to be forward-looking statements including, without limitation, statements regarding 2019 guidance for net revenue, income before income taxes, net income, earnings per share, segment profit, adjusted net income, adjusted earnings per share; and multi-year margin improvement plan, growth opportunities, business environment, long term opportunities and strategy. These statements are based on management’s analysis, judgment, belief and expectation only as of the date hereof, and are subject to uncertainty and changes in circumstances. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate,” “intend” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to, among other things, the possible election of certain of the Company’s customers to manage the healthcare services of their members directly; changes in rates paid to and/or by the Company by customers and/or providers; higher utilization of healthcare services by the Company’s risk members; delays, higher costs or inability to implement new business or other Company initiatives; the impact of changes in the contracting model for Medicaid contracts; termination or non-renewal of customer contracts; the impact of new or amended laws or regulations; governmental inquiries; litigation; competition; operational issues; healthcare reform; and general business conditions. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the “Risk Factors” section included within the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, to be filed with the Securities and Exchange Commission later today, and the Company’s subsequent Quarterly Reports on Form 10-Q to be filed during 2019. Readers are cautioned not to place undue reliance on these forward-looking statements. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this release. Segment profit, adjusted net income, and adjusted EPS information referred to herein may be considered a non-GAAP financial measure. Further information regarding these measures, including the reasons management considers this information useful to investors, are included in the Company’s most recent Annual Report on Form 10-K and on subsequent Form 10-Qs.

          MAGELLAN HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)           December 31, 2017 December 31, 2018 ASSETS   Current Assets: Cash and cash equivalents $ 398,732 $ 272,308 Accounts receivable, net 660,775 756,059 Short-term investments 310,578 382,582 Pharmaceutical inventory 40,945 40,818 Other current assets   72,323     95,400   Total Current Assets 1,483,353 1,547,167 Property and equipment, net 158,638 150,748 Long-term investments 17,287 3,161 Deferred income taxes 813 3,411 Other long-term assets 22,567 24,530 Goodwill 1,006,288 1,018,156 Other intangible assets, net   268,288     231,883   Total Assets $ 2,957,234   $ 2,979,056     LIABILITIES AND STOCKHOLDERS' EQUITY   Current Liabilities: Accounts payable $ 74,300 $ 72,077 Accrued liabilities 193,635 231,356 Short-term contingent consideration 6,892 8,000 Medical claims payable 327,625 393,547 Other medical liabilities 177,002 169,639 Current debt, capital lease and deferred financing obligations   112,849     24,274   Total Current Liabilities 892,303 898,893 Long-term debt, capital lease and deferred financing obligations 740,888 728,608 Deferred income taxes 12,298 11,167 Tax contingencies 14,226 16,478 Long-term contingent consideration 1,925 2,124 Deferred credits and other long-term liabilities   19,100     36,483   Total Liabilities   1,680,740     1,693,753     Stockholders’ Equity: Ordinary common stock 530 535 Additional paid-in capital 1,274,811 1,326,645 Retained earnings 1,399,495 1,419,449 Accumulated other comprehensive loss (380 ) (324 ) Ordinary common stock in treasury, at cost   (1,397,962 )   (1,461,002 ) Total Stockholders’ Equity   1,276,494     1,285,303   Total Liabilities and Stockholders’ Equity $ 2,957,234   $ 2,979,056                       MAGELLAN HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands, except per share amounts)       Three Months Ended Years Ended December 31, December 31,   2017     2018     2017     2018   (unaudited) (unaudited) Net revenue: Managed care and other $ 1,093,785 $ 1,207,552 $ 3,479,182 $ 4,878,442 PBM   600,630     637,093     2,359,401     2,435,709   Total net revenue   1,694,415     1,844,645     5,838,583     7,314,151     Costs and expenses: Cost of care 779,146 959,906 2,413,770 3,762,412 Cost of goods sold 563,240 593,793 2,211,910 2,283,022 Direct service costs and other operating expenses (1)(2) 261,653 277,835 941,883 1,071,535 Depreciation and amortization 32,810 35,358 115,706 132,660 Interest expense 9,266 9,362 25,977 35,396 Interest and other income   (2,086 )   (4,090 )   (5,887 )   (14,068 ) Total costs and expenses   1,644,029     1,872,164     5,703,359     7,270,957   Income (loss) before income taxes 50,386 (27,519 ) 135,224 43,194 Provision (benefit) for income taxes   (4,123 )   448     25,083     19,013   Net income (loss) 54,509 (27,967 ) 110,141 24,181 Less: net loss attributable to non-controlling interest   -     -     (66 )   -   Net income (loss) attributable to Magellan $ 54,509   $ (27,967 ) $ 110,207   $ 24,181     Weighted average number of common shares outstanding — basic 23,921 24,048 23,333 24,349 Weighted average number of common shares outstanding — diluted 25,113 24,048 24,440 25,035   Net income (loss) attributable to Magellan per common share — basic $ 2.28 $ (1.16 ) $ 4.72 $ 0.99 Net income (loss) attributable to Magellan per common share — diluted $ 2.17 $ (1.16 ) $ 4.51 $ 0.97   Net income (loss) $ 54,509 $ (27,967 ) $ 110,141 $ 24,181 Other comprehensive income (loss): Unrealized gain (loss) on available-for-sale securities (3)   (232 )   48     (205 )   56   Comprehensive income (loss) 54,277 (27,919 ) 109,936 24,237 Less: comprehensive income (loss) attributable to non-controlling interest   -     -     (66 )   -   Comprehensive income (loss) attributable to Magellan $ 54,277   $ (27,919 ) $ 110,002   $ 24,237     (1) Includes stock compensation expense of $7,282 and $2,067 for the three months ended December 31, 2017 and 2018, respectively, and $39,116 and $29,472 for the twelve months ended December 31, 2017 and 2018, respectively.   (2) Includes changes in fair value of contingent consideration of $1,327 and $856 for the three months ended December 31, 2017 and 2018, respectively, and $696 and $1,307 for the twelve months ended December 31, 2017 and 2018, respectively.   (3) Net of income tax provision of ($26) and $15 for the three months ended December 31, 2017 and 2018, respectively, and ($8) and $18 for the twelve months ended December 31, 2017 and 2018, respectively.             MAGELLAN HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)     Years Ended December 31, 2017 2018 Cash flows from operating activities: Net income $ 110,141 $ 24,181 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 115,706 132,660 Non-cash interest expense 4,757 1,221 Non-cash stock compensation expense 39,116 29,472 Non-cash income tax benefit (30,981 ) (1,725 ) Non-cash amortization on investments 3,924 1,344 Changes in assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable, net (40,910 ) (99,295 ) Pharmaceutical inventory 17,605 127 Other assets (4,565 ) (25,774 ) Accounts payable and accrued liabilities (84,445 ) 9,139 Medical claims payable and other medical liabilities 26,235 72,347 Contingent consideration 696 1,307 Tax contingencies 1,681 1,803 Deferred credits and other long-term liabilities 3,218 18,020 Other   95     17   Net cash provided by operating activities   162,273     164,844     Cash flows from investing activities: Capital expenditures (57,232 ) (68,275 ) Acquisitions and investments in businesses, net of cash acquired (232,403 ) (958 ) Purchases of investments (449,873 ) (557,232 ) Proceeds from maturities and sales of investments   423,118     498,032   Net cash used in investing activities   (316,390 )   (128,433 )   Cash flows from financing activities: Proceeds from issuance of debt 1,041,736 - Payments to acquire treasury stock (21,765 ) (62,640 ) Proceeds from exercise of stock options 44,355 23,064 Payments on debt, capital lease and deferred financing obligations (803,393 ) (122,239 ) Payments on contingent consideration (3,032 ) - Other   (9,560 )   (1,020 ) Net cash provided by (used in) financing activities   248,341     (162,835 )   Net increase (decrease) in cash and cash equivalents 94,224 (126,424 ) Cash and cash equivalents at beginning of period   304,508     398,732   Cash and cash equivalents at end of period $ 398,732   $ 272,308                       MAGELLAN HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED OPERATING RESULTS BY BUSINESS SEGMENT (In thousands)     Three Months Ended Years Ended December 31, December 31,   2017     2018     2017     2018   (unaudited) (unaudited)

Healthcare

Managed care and other revenue $ 1,016,180 $ 1,149,694 $ 3,206,277 $ 4,638,622 Cost of care (779,146 ) (959,906 ) (2,413,770 ) (3,762,412 ) Direct service costs and other (172,769 ) (192,108 ) (601,201 ) (735,366 ) Stock compensation expense (1) 2,301 (875 ) 10,689 6,982 Changes in fair value of contingent consideration (1) 1,327 856 696 1,307 Less: non-controlling interest loss (2)   -     -     (56 )   -   Healthcare segment profit 67,893 (2,339 ) 202,747 149,133  

Pharmacy Management

Managed care and other revenue 77,519 58,017 273,489 240,427 PBM revenue 634,188 684,691 2,491,044 2,625,417 Cost of goods sold (599,369 ) (640,843 ) (2,341,979 ) (2,468,170 ) Direct service costs and other (76,743 ) (77,695 ) (302,525 ) (298,713 ) Stock compensation expense (1)   2,787     1,206     19,881     5,458   Pharmacy Management segment profit 38,382 25,376 139,910 104,419  

Corporate and Elimination (3)

Managed care and other revenue 86 (159 ) (584 ) (607 ) PBM revenue (33,558 ) (47,598 ) (131,643 ) (189,708 ) Cost of goods sold 36,129 47,050 130,069 185,148 Direct service costs and other (12,141 ) (8,032 ) (38,157 ) (37,456 ) Stock compensation expense (1) 2,194 1,736 8,546 17,032 Less: non-controlling interest loss (2)   -     -     (3 )   -   Corporate and Elimination (7,290 ) (7,003 ) (31,766 ) (25,591 )  

Consolidated

Managed care and other revenue 1,093,785 1,207,552 3,479,182 4,878,442 PBM revenue 600,630 637,093 2,359,401 2,435,709 Cost of care (779,146 ) (959,906 ) (2,413,770 ) (3,762,412 ) Cost of goods sold (563,240 ) (593,793 ) (2,211,910 ) (2,283,022 ) Direct service costs and other (261,653 ) (277,835 ) (941,883 ) (1,071,535 ) Stock compensation expense (1) 7,282 2,067 39,116 29,472 Changes in fair value of contingent consideration (1) 1,327 856 696 1,307 Less: non-controlling interest loss (2)   -     -     (59 )   -   Consolidated segment profit $ 98,985   $ 16,034   $ 310,891   $ 227,961       Reconciliation of income before income taxes to segment profit: Income (loss) before income taxes $ 50,386 $ (27,519 ) $ 135,224 $ 43,194 Stock compensation expense 7,282 2,067 39,116 29,472 Changes in fair value of contingent consideration 1,327 856 696 1,307 Non-controlling interest segment (profit) loss - - 59 - Depreciation and amortization 32,810 35,358 115,706 132,660 Interest expense 9,266 9,362 25,977 35,396 Interest and other income   (2,086 )   (4,090 )   (5,887 )   (14,068 ) Segment profit $ 98,985   $ 16,034   $ 310,891   $ 227,961     (1) Stock compensation expense, changes in the fair value of contingent consideration recorded in relation to acquisitions and impairment of intangible assets are included in direct service costs and other operating expenses; however, these amounts are excluded from the computation of segment profit.   (2) The non-controlling portion of AlphaCare's segment loss is excluded from the computation of segment profit.   (3) Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain of Healthcare’s customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company’s employees covered under its medical plan. As such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated.                     MAGELLAN HEALTH, INC. AND SUBSIDIARIES NON-GAAP MEASURES (In thousands, except per share amounts)     Three Months Ended Years Ended December 31, December 31,   2017     2018     2017     2018   (unaudited) (unaudited)   Net income (loss) attributable to Magellan $ 54,509 $ (27,967 ) $ 110,207 $ 24,181 Adjusted for acquisitions starting in 2013 Stock compensation expense 1,497 - 16,215 530 Changes in fair value of contingent consideration 1,327 856 696 1,307 Amortization of acquired intangibles 12,076 12,402 37,265 49,078 Tax impact   (5,186 )   (3,858 )   (19,558 )   (13,435 ) Adjusted net income (loss) $ 64,223   $ (18,567 ) $ 144,825   $ 61,661       Net income (loss) per common share attributable to Magellan —diluted $ 2.17 $ (1.16 ) $ 4.51 $ 0.97 Adjusted for acquisitions starting in 2013 Stock compensation expense 0.05 - 0.66 0.02 Changes in fair value of contingent consideration 0.06 0.03 0.03 0.05 Amortization of acquired intangibles 0.48 0.52 1.52 1.96 Tax impact   (0.21 )   (0.16 )   (0.80 )   (0.54 ) Adjusted earnings (loss) per share $ 2.55   $ (0.77 ) $ 5.92   $ 2.46    

(MGLN-GEN)

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Media: Lilly Ackley, ackleyl@magellanhealth.com, (860) 507-1923Investors: Joe Bogdan, jbogdan@magellanhealth.com, (860) 507-1910