Magellan Health Reports Second Quarter 2015 Financial Results

SCOTTSDALE, Ariz.--()--Magellan Health, Inc. (NASDAQ:MGLN) today reported financial results for the second quarter of 2015, as summarized below. The company reported net revenue of $1,157.6 million, segment profit of $53.2 million, and net income of $4.6 million, or $0.17 per diluted share. In addition, the company reported adjusted net income of $14.7 million and adjusted earnings per share of $0.56.

Second Quarter Financial Results*

     

Three Months Ended
June 30

 

Six Months Ended
June 30

(Millions, except per share results)

      2015     2014  

Increase/
(Decrease)

  2015     2014  

Increase/
(Decrease)

             
Net Revenue $ 1,157.6 $ 888.0 30.4 % $ 2,138.6 $ 1,854.5 15.3 %

Segment Profit*

53.2 45.0 18.2 % 118.1 121.5 (2.8 )%

Adjusted Net Income*

14.7 11.8 24.6 % 39.1 39.1 0.0 %
Net Income 4.6 5.0 (8.0 )% 11.9 30.7 (61.2 )%

Per Share Results:

      Adjusted Earnings per Share*

0.56 0.42 33.3 % 1.47 1.39 5.8 %
Earnings per Share 0.17 0.18 (5.6 )% 0.45 1.10 (59.1 )%
 
 

*Refer to the Basis of Presentation for a discussion of non-GAAP financial measures.

 

Variances for three months ended June 30, 2015 vs. June 30, 2014:

  • The increase in revenue between periods resulted primarily from the inclusion of revenues from acquired entities, the impact of new business, and same store growth and rate increases, which were partially offset by the loss of revenues associated with previously announced contract terminations.
  • The increase in segment profit between periods is primarily due to new business, same store growth, and the impact of acquisitions, which were partially offset by previously announced contract terminations.
  • The increase in adjusted net income between periods is mainly due to increased segment profit.
  • The decrease in net income between periods is primarily due to higher non-cash expenses relating to acquisitions, partially offset by higher segment profit.

As of June 30, 2015, the company had unrestricted cash and investments of $270.6 million.

“Our results for this quarter reflect strong performance from our Pharmacy segment, solid results in Specialty Solutions, and some weakness in care results in the Commercial and Public Sector segments. We have plans in place to address these issues, and expect that the results will improve in the second half of the year,” said Barry M. Smith, chairman and chief executive officer of Magellan Health.

“The recent reorganization of the company into two business units – Magellan Healthcare and Magellan Rx Management - provides a unified approach to customers for our entire suite of healthcare products. This improved alignment will help drive enhanced services and solutions, as well as administrative efficiencies. This enables us to better align our resources across the enterprise in support of our health plan, employer and government clients.”

Results and Outlook

“Relative to full year 2015, we are maintaining our guidance, with the exception of updating our EPS guidance to reflect the impact of recent share repurchase activity. We now expect fully diluted EPS to be between $1.69 and $2.28, and fully diluted adjusted EPS between $3.45 and $3.90, based on average fully diluted shares of 26.7 million. This updated fully diluted share count reflects share repurchases and option exercises through July 22, 2015, but excludes any potential future activity.

“Compared to the first half of 2015, we expect the second half of the year to produce stronger earnings due to improved results in Magellan Complete Care, mainly driven by care management initiatives, network recontracting, and rates; the impact of business growth, primarily in our Pharmacy Management segment; and the seasonality and timing of care results and customer settlements across our businesses. We expect an increasing pattern of earnings over each of the last two quarters of the year.”

Earnings Conference Call

Management will host a conference call at 10 a.m. Eastern on Monday, July 27, 2015. To participate in the conference call, interested parties should call 1-800-857-1812 and reference the pass code Second Quarter 2015 Earnings Call approximately 15 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.

About Magellan Health: Headquartered in Scottsdale, Ariz., Magellan Health, Inc. 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 develops innovative solutions that combine advanced analytics, agile technology and clinical excellence to drive better decision making, positively impact health outcomes and optimize the cost of care for the members we serve — all within a customer-first culture. Magellan’s customers include health plans and other managed care organizations, employers, labor unions, various military and governmental agencies, third party administrators, consultants and brokers. For more information, visit MagellanHealth.com.

Basis of Presentation

In addition to results determined under 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 revenues 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, 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, as well as amortization of identified acquisition intangibles and changes in the fair value of contingent consideration recorded in relation to acquisitions.

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

Cautionary Statement

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. All statements, other than statements of historical information provided herein, may be deemed to be forward‐looking statements including, without limitation, statements regarding 2015 guidance, estimates of 2015 earnings per share and adjusted earnings per share, anticipated stronger financial performance for the second half of 2015, growth 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 health care 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; health care 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, 2014, filed with the Securities and Exchange Commission on February 26, 2015, and the company’s subsequent Quarterly Reports on Form 10‐Q filed during 2015. 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 earnings per share information referred to herein may be considered to be non‐GAAP financial measures. 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 STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share amounts)
 
 
Three Months Ended June 30, Six Months Ended June 30,
  2014  

 

2015 (1)

 

  2014    

2015 (1)

 

 
Net revenue:
Managed care and other $ 682,274 $ 776,240 $ 1,511,865 $ 1,524,890
PBM and dispensing   205,740     381,367     342,624     613,685  
Total net revenue   888,014     1,157,607     1,854,489     2,138,575  
 
Costs and expenses:
Cost of care 481,617 568,288 1,087,325 1,090,616
Cost of goods sold 192,566 361,409 317,864 579,616
Direct service costs and other operating expenses (2)(3) 179,034 191,455 343,756 395,905
Depreciation and amortization 22,480 25,022 42,709 48,518
Interest expense 2,004 1,653 2,840 3,279
Interest income   (275 )   (500 )   (586 )   (966 )
Total costs and expenses   877,426     1,147,327     1,793,908     2,116,968  
Income before income taxes 10,588 10,280 60,581 21,607
Provision for income taxes   6,261     5,987     31,874     10,120  
Net income 4,327 4,293 28,707 11,487
Less: net income (loss) attributable to non-controlling interest   (659 )   (350 )   (1,999 )   (444 )
Net income attributable to Magellan Health, Inc. $ 4,986   $ 4,643   $ 30,706   $ 11,931  
 
Weighted average number of common shares outstanding — basic 27,144 25,684 27,257 25,502
Weighted average number of common shares outstanding — diluted 27,765 26,776 27,908 26,588
 
Net income per common share attributable to Magellan Health, Inc. - basic $ 0.18 $ 0.18 $ 1.13 $ 0.47
Net income per common share attributable to Magellan Health, Inc. - diluted $ 0.18 $ 0.17 $ 1.10 $ 0.45
 
Net income $ 4,327 $ 4,293 $ 28,707 $ 11,487
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities (4)   70     (93 )   113     (24 )
Comprehensive income 4,397 4,200 28,820 11,463
Less: comprehensive income (loss) attributable to non-controlling interest   (659 )   (350 )   (1,999 )   (444 )
Comprehensive income attributable to Magellan Health, Inc. $ 5,056   $ 4,550   $ 30,819   $ 11,907  
 
  (1)   For a more detailed discussion of Magellan Health's results for the quarterly period ended June 30, 2015, refer to the Company's Quarterly
Report on Form 10-Q, which will be filed with the SEC on, or shortly after, Monday, July 27, 2015, and the live broadcast or taped replay of the

Company's earnings conference call on Monday, July 27, 2015, which will be available at  www.MagellanHealth.com.

 
(2) Includes stock compensation expense of $9,550 and $13,795 for the three months ended June 30, 2014 and 2015, respectively,
and $14,022 and $27,696 for the six months ended June 30, 2014 and 2015, respectively.
 
(3) Includes changes in fair value of contingent consideration of $2,567 and $17,536 for the three and six months ended June 30, 2015, respectively.
 
(4) Net of income tax provision (benefit) of $46 and $(48) for the three months ended June 30, 2014 and 2015, respectively, and
$75 and $(2) for the six months ended June 30, 2014 and 2015, respectively.
 
             
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NON-GAAP MEASURES
(Unaudited)
(In thousands, except per share amounts)
 
 
Three Months Ended June 30, Six Months Ended June 30,
  2014    

2015 (1)

 

  2014    

2015 (1)

 

 
Adjusted Net Income $ 11,773 $ 14,722 $ 39,078 $ 39,106
Adjusted for acquisitions starting in 2013
Stock compensation relating to acquisitions (6,373 ) (8,498 ) (7,311 ) (16,836 )
Changes in fair value of contingent consideration (1,204 ) (2,567 ) (1,204 ) (17,536 )
Amortization of acquired intangibles (3,426 ) (5,260 ) (5,059 ) (9,643 )
Tax impact   4,216     6,246     5,202     16,840  
Net income attributable to Magellan Health, Inc. $ 4,986   $ 4,643   $ 30,706   $ 11,931  
 
 
Adjusted EPS $ 0.42 $ 0.56 $ 1.39 $ 1.47
Adjusted for acquisitions starting in 2013
Stock compensation relating to acquisitions (0.23 ) (0.32 ) (0.26 ) (0.63 )
Changes in fair value of contingent consideration (0.04 ) (0.10 ) (0.04 ) (0.66 )
Amortization of acquired intangibles (0.12 ) (0.20 ) (0.18 ) (0.36 )
Tax impact   0.15     0.23     0.19     0.63  
Net income per common share attributable to Magellan Health, Inc. - diluted $ 0.18   $ 0.17   $ 1.10   $ 0.45  
 
  (1)   The Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 will be filed with the SEC on, or shortly after, Monday, July 27, 2015.
 
       
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Six Months Ended June 30,
  2014    

2015 (1)

 

 
Cash flows from operating activities:
Net income $ 28,707 $ 11,487
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 42,709 48,518
Non-cash interest expense 1,572 197
Non-cash stock compensation expense 14,022 27,696
Non-cash income tax benefit (1,558 ) (3,323 )
Non-cash amortization on investments 2,653 2,966
Cash flows from changes in assets and liabilities, net of effects
from acquisitions of businesses:
Restricted cash (2) 69,383 84,004
Accounts receivable, net (15,752 ) (32,064 )
Pharmaceutical inventory 5,332 (2,919 )
Other assets (27,675 ) (31,551 )
Accounts payable and accrued liabilities (5,434 ) (49,898 )
Medical claims payable and other medical liabilities 18,657 45,544
Tax contingencies 1,164 (578 )
Deferred credits and other long-term liabilities 3,366 12,645
Other   (95 )   (48 )
Net cash provided by operating activities   137,051     112,676  
 
Cash flows from investing activities:
Capital expenditures (32,007 ) (37,653 )
Acquisitions and investments in businesses, net of cash acquired (124,995 ) (55,943 )
Purchase of investments (112,088 ) (293,348 )
Maturity of investments   146,532     215,984  
Net cash used in investing activities   (122,558 )   (170,960 )
 
Cash flows from financing activities:
Payments to acquire treasury stock (65,254 ) (68,783 )
Proceeds from exercise of stock options and warrants 34,197 49,170
Payments on long-term debt and capital lease obligations (2,087 ) (8,299 )
Payments on contingent consideration - (4,439 )
Tax benefit from exercise of stock options and vesting of stock awards 2,384 3,774
Other   (1,143 )   (616 )
Net cash used in financing activities   (31,903 )   (29,193 )
 
Net decrease in cash and cash equivalents (17,410 ) (87,477 )
Cash and cash equivalents at beginning of period   203,187     255,303  
Cash and cash equivalents at end of period $ 185,777   $ 167,826  
 
  (1)   The Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 will be filed with the SEC on,
or shortly after, Monday, July 27, 2015.
 
(2) Includes the net shift of restricted funds between cash and investments that results in an operating cash flow change that
is directly offset by an investing cash flow change. During the six months ended June 30, 2014 and 2015, restricted cash
of $12,319 and $63,167, respectively, was shifted to restricted investments that resulted in an operating cash flow source.
 
             
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED OPERATING RESULTS BY BUSINESS SEGMENT
(Unaudited)
(In thousands)
 
 
Three Months Ended June 30, Six Months Ended June 30,
  2014    

2015 (1)

 

  2014    

2015 (1)

 

 
Managed care and other revenue
- Commercial $ 198,025 $ 150,658 $ 386,916 $ 303,183
- Public Sector 319,954 439,858 817,897 862,835
- Specialty Solutions 119,326 132,227 224,760 256,569
- Pharmacy Management (2) 44,969 53,782 100,347 102,850
- Elimination (2)   -     (285 )   (18,055 )   (547 )
Total managed care and other revenue   682,274     776,240     1,511,865     1,524,890  
 
PBM and dispensing revenue
- Pharmacy Management (2) 209,265 408,924 348,889 667,717
- Elimination (2)   (3,525 )   (27,557 )   (6,265 )   (54,032 )
Total PBM and dispensing revenue   205,740     381,367     342,624     613,685  
 
Cost of care
- Commercial 116,852 88,200 228,054 170,330
- Public Sector (2) 275,108 380,580 697,626 727,510
- Specialty Solutions 89,753 99,508 163,405 192,781
- Pharmacy Management (96 ) - 16,295 (5 )
- Elimination (2)   -     -     (18,055 )   -  
Total cost of care   481,617     568,288     1,087,325     1,090,616  
 
Cost of goods sold
- Pharmacy Management (2) 196,080 387,828 324,111 631,366
- Elimination (2)   (3,514 )   (26,419 )   (6,247 )   (51,750 )
Total cost of goods sold   192,566     361,409     317,864     579,616  
 
Direct service costs and other
- Commercial 42,530 37,915 82,806 77,125
- Public Sector 45,391 49,944 88,349 101,331
- Specialty Solutions 17,897 19,913 33,038 40,087
- Pharmacy Management 41,605 56,430 77,156 119,978
- Corporate 31,622 28,676 62,425 60,213
- Elimination (2)   (11 )   (1,423 )   (18 )   (2,829 )
Total direct service costs and other   179,034     191,455     343,756     395,905  
 
Stock compensation expense (3)
- Commercial (157 ) (233 ) (312 ) (404 )
- Public Sector (230 ) (240 ) (504 ) (549 )
- Specialty Solutions (354 ) (21 ) (768 ) (530 )
- Pharmacy Management (5,556 ) (10,016 ) (5,859 ) (18,872 )
- Corporate   (3,253 )   (3,285 )   (6,579 )   (7,341 )
Total stock compensation expense   (9,550 )   (13,795 )   (14,022 )   (27,696 )
 
Changes in fair value of contingent consideration (3)
- Commercial - (71 ) - (171 )
- Pharmacy Management   -     (2,496 )   -     (17,365 )
Total changes in fair value of contingent consideration   -     (2,567 )   -     (17,536 )
 
Less: non-controlling interest segment profit (loss) (4)
- Public Sector (648 ) (273 ) (1,978 ) (393 )
- Corporate   -     (77 )   -     (51 )
Total non-controlling interest segment profit (loss)   (648 )   (350 )   (1,978 )   (444 )
 
 
Segment profit (loss)
- Commercial 38,800 24,847 76,368 56,303
- Public Sector 333 9,847 34,404 34,936
- Specialty Solutions 12,030 12,827 29,085 24,231
- Pharmacy Management 22,201 30,960 37,533 55,465
- Corporate and Elimination   (28,369 )   (25,314 )   (55,846 )   (52,821 )
Total segment profit $ 44,995   $ 53,167   $ 121,544   $ 118,114  
 
 
Reconciliation of segment profit to income
before income taxes:
Segment profit $ 44,995 $ 53,167 $ 121,544 $ 118,114
Stock compensation expense (9,550 ) (13,795 ) (14,022 ) (27,696 )
Changes in fair value of contingent consideration - (2,567 ) - (17,536 )
Non-controlling interest segment profit (loss) (648 ) (350 ) (1,978 ) (444 )
Depreciation and amortization (22,480 ) (25,022 ) (42,709 ) (48,518 )
Interest expense (2,004 ) (1,653 ) (2,840 ) (3,279 )
Interest income   275     500     586     966  
Income before income taxes $ 10,588   $ 10,280   $ 60,581   $ 21,607  
 
  (1)   The Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 will be filed with the SEC on, or shortly after, Monday, July 27, 2015.
 
(2) Public Sector subcontracts with Pharmacy Management and Specialty Solutions to provide pharmacy benefits management services and radiology benefits
management services for certain of Public Sector'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 care, cost of goods sold, direct service costs, and other costs related to these
arrangements are eliminated.
 
(3) Stock compensation expense, as well as changes in the fair value of contingent consideration recorded in relation to the acquisitions, are included in direct
service costs and other operating expenses; however, these amounts are excluded from the computation of Segment Profit.
 
(4) The non-controlling portion of AlphaCare's segment profit (loss) is excluded from the computation of segment profit.

Contacts

Magellan Health, Inc.
Media:
Colleen Flanagan Johnson, 860-507-1923
cefjohnson@magellanhealth.com
or
Investors:
Renie Shapiro Silver, 877-645-6464
rshapiro@magellanhealth.com

Release Summary

Magellan Health, Inc. (NASDAQ: MGLN) today reported financial results for the second quarter of 2015.

Contacts

Magellan Health, Inc.
Media:
Colleen Flanagan Johnson, 860-507-1923
cefjohnson@magellanhealth.com
or
Investors:
Renie Shapiro Silver, 877-645-6464
rshapiro@magellanhealth.com