MGLN Magellan Health Inc

Also Announces Leadership Succession Plan

Magellan Health, Inc. (NASDAQ: MGLN) today announced financial results for the second quarter ended June 30, 2019, as summarized below:

Three Months Ended Year to date June 30 June 30 (In millions, except per share amounts)

 

2019

 

2018

Chg

 

 

2019

 

2018

Chg

Net revenue

$

1,788.3

$

1,810.9

-1.2%

$

3,527.8

$

3,616.0

-2.4%

Net income

$

13.6

$

13.6

0.5%

$

14.0

$

25.0

-43.8%

Segment profit [1]

$

62.1

$

68.0

-8.7%

$

107.7

$

123.6

-12.9%

Adjusted net income [1]

$

21.1

$

23.3

-9.5%

$

30.6

$

44.1

-30.5%

Earnings per share

$

0.56

$

0.53

5.7%

$

0.58

$

0.98

-40.8%

Adjusted earnings per share [1]

$

0.86

$

0.92

-6.5%

$

1.26

$

1.73

-27.2%

  [1] Refer to the Basis of Presentation for a discussion of non-GAAP financial measures.

Leadership Succession Plan:

• Magellan Health announced that Barry M. Smith, chairman and chief executive officer of Magellan Health, has decided to retire. Mr. Smith will continue to serve as chief executive officer and as a member of the Board of Directors to ensure a smooth and orderly transition. The Board has engaged a search firm to begin a comprehensive search for a new CEO.
• Mr. Smith was elected to the Board in 2011 and was named chief executive officer in January 2013 and executive chairman in January 2014. He previously served as a director from 2004 to 2008.
• Steven J. Shulman, who currently serves on the Board as a director, has been elected Chairman of the Board. Mr. Shulman served as chairman and chief executive officer of Magellan Health from 2002 to 2008. He rejoined the Board as a director in March of this year.

“I want to thank the talented, dedicated team of professionals that I’ve had the pleasure of working with over these many years,” said Mr. Smith. “I am proud of the work we’ve done together to help transform healthcare and positively impact the lives of customers and members.”

“Steve is a highly respected leader in the healthcare industry,” continued Mr. Smith. “He is a former chief executive officer and Board member of Magellan with a great deal of understanding of Magellan’s specialized sector. I look forward to working with him and the Board throughout the search and transition process.”

“We thank Barry for his commitment and dedication to Magellan Health, its employees, members and customers,” said Mr. Shulman. “We are grateful for his leadership of the Company during a period of expansion through organic growth and strategic acquisitions. We are excited about the Company’s prospects and look forward to continuing our support of this important work as we find the right successor to lead this great Company through the next phase of growth.”

Second Quarter Highlights:

• Net revenue decreased 1.2 percent over the second quarter of 2018 to $1.8 billion.
• Net income increased 0.5 percent over the second quarter of 2018 to $13.6 million.
• Segment profit decreased 8.7 percent over the second quarter of 2018 to $62.1 million.
• Adjusted net income decreased 9.5 percent over the second quarter of 2018 to $21.1 million.
• Unrestricted cash and investments were $176.5 million as of June 30, 2019. Approximately $73.0 million of the unrestricted cash and investments at June 30, 2019 is related to excess capital and undistributed earnings held at regulated entities.
• The Company is maintaining its 2019 guidance from May 2, 2019.

“We made substantial progress during the second quarter in both Healthcare and Pharmacy, and we have a clear path to achieve our full year earnings guidance,” said Mr. Smith.

Net Revenue

For the quarter, revenue was $1.8 billion, which is roughly consistent with the same period in 2018. Growth in MCC Virginia and new business was essentially offset by MCC Florida and Medicare Part D footprint reductions as well as the previously discussed PBM healthplan contract loss due to an acquisition.

Segment Profit

Segment profit was $62.1 million for the second quarter, compared to $68.0 million in the prior year quarter.

• For our Healthcare business, segment profit for the second quarter of 2019 was $41.1 million, which represents a decrease of $2.8 million over the same period last year. Results include approximately $12 million of favorable out of period reserve development and $6 million of favorable retroactive membership and rate changes. This decrease in segment profit year-over-year is largely driven by lost business including the footprint reduction in Florida, a higher MLR in New York primarily due to the delay in receiving rates for the current fiscal year, and higher discretionary benefits. These decreases are partially offset by MLR improvements in Virginia and larger favorable out of period items in the current quarter versus the prior year quarter.

• Pharmacy Management segment profit was $30.8 million, which was an increase of $0.9 million from the second quarter of 2018. This year-over-year increase was a result of improved cost of goods sold in our PBM business and strong medical pharmacy results, partially off-set by the impact of previously discussed customer losses and higher discretionary benefit expenses.

• Corporate costs inclusive of eliminations, but excluding stock compensation expense, totaled $9.8 million, compared to $5.8 million in the prior year’s quarter. This change was largely due to higher discretionary benefit expenses.

Cash Flow & Balance Sheet

Cash flow from operations for the six months ended June 30, 2019, was $29.4 million, as compared to $21.1 million in 2018. The increase is mainly attributable to lower tax payments, partially offset by lower segment profit.

As of June 30, 2019, the Company’s unrestricted cash and investments totaled $176.5 million, which represents an increase of $46.1 million from the balance at December 31, 2018. Approximately $73.0 million of the unrestricted cash and investments at June 30, 2019 is related to excess capital and undistributed earnings held at regulated entities.

Restricted cash and investments at June 30, 2019, of $478.4 million reflect a decrease of $49.3 million from the balance at December 31, 2018.

“We are maintaining our guidance for full year 2019,” said Jonathan N. Rubin, chief financial officer of Magellan Health. “As we mentioned in the first quarter call, we expect our segment profit will be higher in the second half of the year as a result of estimated mid-year rate changes which are primarily in MCC of New York, new business to be implemented throughout the year, normal margin seasonality in our Pharmacy business, and the ongoing impact of our medical action plans.”

Outlook

The Company is maintaining its 2019 earnings guidance ranges.

Earnings Conference Call

Management will discuss the Company’s first quarter results on a conference call scheduled for Tuesday, July 30, 2019 at 10:00 a.m. Eastern. To participate in the conference call, dial 1-800-857-1812 and use passcode “2nd Quarter 2019 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 IR.MagellanHealth.com. A telephonic replay will be available shortly after the conclusion of the call through August 30, 2019. This replay may be accessed by dialing 1-866-485-0042 (Domestic) or 1-203-369-1614 (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, filed with the Securities and Exchange Commission on February 28, 2019, and the Company’s subsequent Quarterly Reports on Form 10-Q 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, 2018 June 30, 2019 (unaudited) ASSETS   Current Assets: Cash and cash equivalents

$

272,308

 

$

260,352

 

Accounts receivable, net

 

756,059

 

 

810,431

 

Short-term investments

 

382,582

 

 

371,678

 

Pharmaceutical inventory

 

40,818

 

 

45,611

 

Other current assets

 

95,400

 

 

96,529

 

Total Current Assets

 

1,547,167

 

 

1,584,601

 

Property and equipment, net

 

150,748

 

 

145,182

 

Long-term investments

 

3,161

 

 

22,841

 

Deferred income taxes

 

3,411

 

 

3,212

 

Other long-term assets

 

24,530

 

 

107,431

 

Goodwill

 

1,018,156

 

 

1,018,156

 

Other intangible assets, net

 

231,883

 

 

196,368

 

Total Assets

$

2,979,056

 

$

3,077,791

 

  LIABILITIES AND STOCKHOLDERS' EQUITY   Current Liabilities: Accounts payable

$

72,077

 

$

75,436

 

Accrued liabilities

 

231,356

 

 

260,980

 

Short-term contingent consideration

 

8,000

 

 

119

 

Medical claims payable

 

393,547

 

 

401,289

 

Other medical liabilities

 

169,639

 

 

166,226

 

Current debt, finance lease and deferred financing obligations

 

24,274

 

 

21,077

 

Total Current Liabilities

 

898,893

 

 

925,127

 

Long-term debt, finance lease and deferred financing obligations

 

728,608

 

 

712,650

 

Deferred income taxes

 

11,167

 

 

11,998

 

Tax contingencies

 

16,478

 

 

17,264

 

Long-term contingent consideration

 

2,124

 

 

-

 

Deferred credits and other long-term liabilities

 

36,483

 

 

76,482

 

Total Liabilities

 

1,693,753

 

 

1,743,521

 

  Stockholders’ Equity: Ordinary common stock

535

 

541

 

Additional paid-in capital

 

1,326,645

 

 

1,364,693

 

Retained earnings

 

1,419,449

 

 

1,433,348

 

Accumulated other comprehensive (loss) income

 

(324

)

 

415

 

Ordinary common stock in treasury, at cost

 

(1,461,002

)

 

(1,464,727

)

Total Stockholders’ Equity

 

1,285,303

 

 

1,334,270

 

Total Liabilities and Stockholders’ Equity

$

2,979,056

 

$

3,077,791

 

MAGELLAN HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands, except per share amounts)       Three Months Ended Six Months Ended June 30, June 30,

 

2018

 

 

 

 

2019

 

 

 

2018

 

 

 

 

2019

 

Net revenue: Managed care and other

$

1,215,340

 

$

1,283,143

 

$

2,435,103

 

$

2,507,122

 

PBM

 

595,583

 

 

505,193

 

 

1,180,897

 

 

1,020,703

 

Total net revenue

 

1,810,923

 

 

1,788,336

 

 

3,616,000

 

 

3,527,825

 

  Costs and expenses: Cost of care

 

935,814

 

 

1,001,886

 

 

1,864,475

 

 

1,943,847

 

Cost of goods sold

 

558,419

 

 

461,187

 

 

1,118,084

 

 

950,980

 

Direct service costs and other operating expenses (1)(2)

 

259,152

 

 

266,434

 

 

528,229

 

 

538,358

 

Depreciation and amortization

 

33,848

 

 

33,490

 

 

64,255

 

 

64,198

 

Interest expense

 

8,678

 

 

9,141

 

 

17,044

 

 

18,248

 

Interest and other income

 

(3,363

)

 

(5,021

)

 

(5,839

)

 

(9,995

)

Total costs and expenses

 

1,792,548

 

 

1,767,117

 

 

3,586,248

 

 

3,505,636

 

Income before income taxes

 

18,375

 

 

21,219

 

 

29,752

 

 

22,189

 

(Benefit) Provision for income taxes

 

4,824

 

 

7,606

 

 

4,749

 

 

8,145

 

Net income

$

13,551

 

$

13,613

 

$

25,003

 

$

14,044

 

  Weighted average number of common shares outstanding — basic

 

24,569

 

 

24,101

 

 

24,460

 

 

24,024

 

Weighted average number of common shares outstanding — diluted

 

25,407

 

 

24,416

 

 

25,510

 

 

24,315

 

  Net income per common share — basic

$

0.55

 

$

0.56

 

$

1.02

 

$

0.58

 

Net income per common share — diluted

$

0.53

 

$

0.56

 

$

0.98

 

$

0.58

 

  Net income

$

13,551

 

$

13,613

 

$

25,003

 

$

14,044

 

Other comprehensive income: Unrealized gains (losses) on available-for-sale securities (3)

 

132

 

 

419

 

 

(187

)

 

739

 

Comprehensive income

$

13,683

 

$

14,032

 

$

24,816

 

$

14,783

 

(1) Includes stock compensation expense of $10,439 and $5,414 for the three months ended June 30, 2018 and 2019, respectively, and $18,085 and $15,021 for the six months ended June 30, 2018 and 2019, respectively.

(2) Includes changes in fair value of contingent consideration of $70 and $(2,149) for the three months ended June 30, 2018 and 2019, respectively, and $303 and $(2,005) for the six months ended June 30, 2018 and 2019, respectively.

(3) Net of income tax provision (benefit) of $42 and $131 for the three months ended June 30, 2018 and 2019, respectively, and $(59) and $231 for the six months ended June 30, 2018 and 2019, respectively.

MAGELLAN HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)   Six Months Ended June 30,

 

2018

 

2019

Cash flows from operating activities: Net income

$

25,003

$

14,044

Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization

 

64,255

 

64,198

Non-cash interest expense

 

614

 

679

Non-cash stock compensation expense

 

18,085

 

15,021

Non-cash income tax (benefit) provision

 

(100)

 

1,026

Non-cash amortization on investments

 

1,171

 

(327)

Changes in assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable, net

 

(179,350)

 

(51,544)

Pharmaceutical inventory

 

(9,388)

 

(4,793)

Other assets

 

(57,398)

 

(23,890)

Accounts payable and accrued liabilities

 

50,322

 

20,821

Medical claims payable and other medical liabilities

 

89,932

 

4,329

Contingent consideration

 

303

 

(3,758)

Tax contingencies

 

721

 

610

Deferred credits and other long-term liabilities

 

16,884

 

(7,429)

Other

 

69

 

372

Net cash provided by operating activities

 

21,123

 

29,359

  Cash flows from investing activities: Capital expenditures

 

(37,132)

 

(27,804)

Acquisitions and investments in businesses, net of cash acquired

 

-

 

(320)

Purchases of investments

 

(334,250)

 

(295,768)

Proceeds from maturities and sales of investments

 

227,446

 

288,290

Net cash used in investing activities

 

(143,936)

 

(35,602)

  Cash flows from financing activities: Payments to acquire treasury stock

 

(14,323)

 

(4,124)

Proceeds from exercise of stock options

 

21,476

 

20,647

Payments on debt, finance lease and deferred financing obligations

 

(33,912)

 

(15,543)

Payments on contingent consideration

 

-

 

(6,247)

Other

 

(3,051)

 

(446)

Net cash used in financing activities

 

(29,810)

 

(5,713)

  Net decrease in cash and cash equivalents

 

(152,623)

 

(11,956)

Cash and cash equivalents at beginning of period

 

398,732

 

272,308

Cash and cash equivalents at end of period

$

246,109

$

260,352

MAGELLAN HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED OPERATING RESULTS BY BUSINESS SEGMENT (Unaudited) (In thousands)     Three Months Ended Six Months Ended June 30, June 30,

 

2018

 

 

 

 

2019

 

 

 

2018

 

 

 

 

2019

 

Healthcare Managed care and other revenue

$

1,154,888

 

$

1,220,642

 

$

2,312,489

 

$

2,384,895

 

Cost of care

 

(935,814

)

 

(1,001,886

)

 

(1,864,475

)

 

(1,943,847

)

Direct service costs and other

 

(177,990

)

 

(177,948

)

 

(364,236

)

 

(357,138

)

Stock compensation expense (1)

 

2,742

 

 

2,444

 

 

5,692

 

 

4,194

 

Changes in fair value of contingent consideration (1)

 

70

 

 

(2,149

)

 

303

 

 

(2,005

)

Healthcare segment profit

 

43,896

 

 

41,103

 

 

89,773

 

 

86,099

 

  Pharmacy Management Managed care and other revenue

 

60,603

 

 

62,648

 

 

122,910

 

 

122,543

 

PBM revenue

 

642,794

 

 

550,010

 

 

1,274,992

 

 

1,106,575

 

Cost of goods sold

 

(603,951

)

 

(505,203

)

 

(1,208,864

)

 

(1,035,410

)

Direct service costs and other

 

(70,941

)

 

(78,776

)

 

(146,527

)

 

(158,411

)

Stock compensation expense (1)

 

1,408

 

 

2,124

 

 

2,893

 

 

3,796

 

Pharmacy Management segment profit

 

29,913

 

 

30,803

 

 

45,404

 

 

39,093

 

  Corporate and Elimination (2) Managed care and other revenue

 

(151

)

 

(147

)

 

(296

)

 

(316

)

PBM revenue

 

(47,211

)

 

(44,817

)

 

(94,095

)

 

(85,872

)

Cost of goods sold

 

45,532

 

 

44,016

 

 

90,780

 

 

84,430

 

Direct service costs and other

 

(10,221

)

 

(9,710

)

 

(17,466

)

 

(22,809

)

Stock compensation expense (1)

 

6,289

 

 

846

 

 

9,500

 

 

7,031

 

Corporate and Elimination

 

(5,762

)

 

(9,812

)

 

(11,577

)

 

(17,536

)

  Consolidated Managed care and other revenue

 

1,215,340

 

 

1,283,143

 

 

2,435,103

 

 

2,507,122

 

PBM revenue

 

595,583

 

 

505,193

 

 

1,180,897

 

 

1,020,703

 

Cost of care

 

(935,814

)

 

(1,001,886

)

 

(1,864,475

)

 

(1,943,847

)

Cost of goods sold

 

(558,419

)

 

(461,187

)

 

(1,118,084

)

 

(950,980

)

Direct service costs and other

 

(259,152

)

 

(266,434

)

 

(528,229

)

 

(538,358

)

Stock compensation expense (1)

 

10,439

 

 

5,414

 

 

18,085

 

 

15,021

 

Changes in fair value of contingent consideration (1)

 

70

 

 

(2,149

)

 

303

 

 

(2,005

)

Consolidated segment profit

$

68,047

 

$

62,094

 

$

123,600

 

$

107,656

 

    Reconciliation of income before income taxes to segment profit: Income before income taxes

$

18,375

 

$

21,219

 

$

29,752

 

$

22,189

 

Stock compensation expense

 

10,439

 

 

5,414

 

 

18,085

 

 

15,021

 

Changes in fair value of contingent consideration

 

70

 

 

(2,149

)

 

303

 

 

(2,005

)

Depreciation and amortization

 

33,848

 

 

33,490

 

 

64,255

 

 

64,198

 

Interest expense

 

8,678

 

 

9,141

 

 

17,044

 

 

18,248

 

Interest and other income

 

(3,363

)

 

(5,021

)

 

(5,839

)

 

(9,995

)

Segment profit

$

68,047

 

$

62,094

 

$

123,600

 

$

107,656

 

(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) 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 (Unaudited) (In thousands, except per share amounts)     Three Months Ended Six Months Ended  June 30, June 30,

 

2018

 

 

 

 

2019

 

 

 

2018

 

 

 

 

2019

 

    Net income 

 $

          13,551

 

 

 $

          13,613

 

 $

          25,003

 

 

 $

          14,044

 

Adjusted for acquisitions starting in 2013     Stock compensation expense

 

                  268

 

 

 

                       -

 

 

                  530

 

 

 

                       -

 

Changes in fair value of contingent consideration

 

                    70

 

 

 

              (2,149

)

 

                  303

 

 

 

              (2,005

)

Amortization of acquired intangibles

 

             12,726

 

 

 

             12,272

 

 

             24,597

 

 

 

             24,545

 

Tax impact

 

              (3,344

)

 

 

              (2,675

)

 

              (6,357

)

 

 

              (5,957

)

Adjusted net income

 $

          23,271

 

 

 $

          21,061

 

 $

          44,076

 

 

 $

          30,627

 

        Net income per common share—diluted

 $

              0.53

 

 

 $

              0.56

 

 $

              0.98

 

 

 $

              0.58

 

Adjusted for acquisitions starting in 2013     Stock compensation expense

 

                 0.01

 

 

 

                       -

 

 

                 0.02

 

 

 

                       -

 

Changes in fair value of contingent consideration

 

                       -

 

 

 

                (0.09

)

 

                 0.01

 

 

 

                (0.08

)

Amortization of acquired intangibles

 

                 0.51

 

 

 

                 0.50

 

 

                 0.97

 

 

 

                 1.01

 

Tax impact

 

                (0.13

)

 

 

                (0.11

)

 

                (0.25

)

 

 

                (0.25

)

Adjusted earnings per share

 $

              0.92

 

 

 $

              0.86

 

 $

              1.73

 

 

 $

              1.26

(MGLN-GEN)

View source version on businesswire.com: https://www.businesswire.com/news/home/20190730005361/en/

Media: Lilly Ackley, ackleyl@magellanhealth.com, (860) 507-1923 Investors: Joe Bogdan, jbogdan@magellanhealth.com, (860) 507-191