Magellan Health Reports First Quarter 2019 Financial Results

SCOTTSDALE, Ariz.–(BUSINESS WIRE)–Magellan
Health, Inc. (NASDAQ: MGLN) today announced financial results for
the first quarter ended March 31, 2019, as summarized below:

			Three Months Ended
			March 31
(In millions, except per share amounts)
			2019			2018			Chg
Net revenue			$	1,739.5		$	1,805.1		-3.6	%
Net income			$	0.4		$	11.5		-96.2	%
Segment profit [1]			$	45.6		$	55.6		-18.0	%
Adjusted net income [1]			$	9.6		$	20.8		-54.0	%
Earnings per share			$	0.02		$	0.45		-95.6	%
Adjusted earnings per share [1]			$	0.40		$	0.81		-50.6	%
[1] Refer to the Basis of Presentation for a discussion of non-GAAP financial measures.

For First Quarter:

• Net revenue decreased 3.6 percent over the first quarter of 2018 to
  $1.7 billion.
• Net income decreased 96.2 percent over the first quarter of 2018 to
  $0.4 million.
• Segment profit decreased 18 percent over the first quarter of 2018 to
  $45.6 million.
• Adjusted net income decreased 54 percent over the first quarter of
  2018 to $9.6 million.
• Unrestricted cash and investments were $194.9 million as of March 31,
  2019. Approximately $88.4 million of the unrestricted cash and
  investments at March 31, 2019 is related to excess capital and
  undistributed earnings held at regulated entities.
• The Company is affirming its full year 2019 earnings guidance, but
  modestly lowering revenue guidance to a range of $7.0 to $7.2 billion.

“Overall, our Healthcare results were solid, and our Pharmacy results
for the quarter were impacted by some unfavorable out-of-period and
timing items related to network costs,” said Barry M. Smith, chairman
and chief executive officer of Magellan Health. “I’m pleased with the
actions we completed during the first quarter in 2019 which represent
significant progress towards achieving our margin improvement plan.
We’re seeing the benefits of the strong leadership we’ve put in place
over the last six months, particularly in our MCC segment. We have a
clear path to achieve our full year earnings guidance, and I’m confident
in the team and our ability to execute.”

Net Revenue

Net revenue for the first quarter ended March 31, 2019, was $1.7
billion, a decrease of 3.6 percent over the same period in 2018. This
decrease was mainly driven by our Magellan Complete Care (MCC) of
Florida and Medicare Part D footprint reductions as well as the
previously discussed PBM healthplan contract loss due to an acquisition,
partially offset by growth in MCC of Virginia and new PBM employer
business.

Segment Profit

Segment profit was $45.6 million for the first quarter, compared to
$55.6 million in the prior year quarter.

• Healthcare segment profit was $45.0 million, which represents a
  decrease of $0.9 million versus the first quarter of 2018. This
  decrease was mainly driven by the MCC of Florida footprint reduction
  and lower margins in New York, partially offset by margin improvements
  in Virginia.
• Pharmacy Management segment profit was $8.3 million, which was a
  decrease of $7.2 million from the first quarter of 2018. This
  year-over-year decrease was primarily driven by specialty formulary
  management contract losses, non-recurring items, and lower PBM
  membership.
• Corporate costs inclusive of eliminations, but excluding stock
  compensation expense, totaled $7.7 million, compared to $5.8 million
  in the prior year’s quarter. This change was largely due to lower
  discretionary benefit expenses in the prior year quarter.

Cash Flow & Balance Sheet

Cash flow from operations for the quarter ended March 31, 2019, was
$35.4 million, as compared to $81.0 million in the first quarter of
2018. The prior year’s quarterly cash flow was unusually high due to the
favorable timing of working capital.

As of March 31, 2019, the Company’s unrestricted cash and investments
totaled $194.9 million, which represents an increase of $64.5 million
from the balance at December 31, 2018, primarily due to the collection
of certain outstanding receivables. Approximately $88.4 million of the
unrestricted cash and investments at March 31, 2019 is related to excess
capital and undistributed earnings held at regulated entities.

Restricted cash and investments at March 31, 2019, of $468.8 million
reflect a decrease of $58.8 million from the balance at December 31,
2018 due to timing. During the quarter the Company repurchased
approximately 61 thousand shares for $3.7 million.

“The fundamentals of our business remain strong, and we are focused on
continuing to execute our margin improvement plan for the balance of the
year,” said Jonathan N. Rubin, chief financial officer of Magellan
Health. “I remain confident in our long-term growth strategy.”

Outlook

The Company is affirming its 2019 earnings guidance ranges, but modestly
lowering the revenue guidance to a range of $7.0 to $7.2 billion.

2019 Guidance
(In millions, except per share amounts)
				Low				High
Net revenue				$	7,000.0			$	7,200.0
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
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 April 26, 2019, but excludes the impact of any potential future activity.

Earnings Conference Call

Management will discuss the Company’s first quarter results on a
conference call scheduled for Thursday, May 2, 2019 at 7:30 a.m.
Eastern. To participate in the conference call, dial 1-800-857-1812 and
use passcode “1st 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 June 2, 2019. This replay may be accessed by dialing
1-800-324-4693 (Domestic) or 1-203-369-3245 (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					March 31, 2019
								(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents			$	272,308				$	233,401
Accounts receivable, net				756,059					779,863
Short-term investments				382,582					412,732
Pharmaceutical inventory				40,818					47,151
Other current assets				95,400					99,908
Total Current Assets				1,547,167					1,573,055
Property and equipment, net				150,748					149,520
Long-term investments				3,161					17,639
Deferred income taxes				3,411					3,581
Other long-term assets				24,530					90,997
Goodwill				1,018,156					1,018,156
Other intangible assets, net				231,883					218,209
Total Assets			$	2,979,056				$	3,071,157
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable			$	72,077				$	75,041
Accrued liabilities				231,356					260,954
Short-term contingent consideration				8,000					–
Medical claims payable				393,547					399,055
Other medical liabilities				169,639					183,802
Current debt, finance lease and deferred financing obligations				24,274					25,006
Total Current Liabilities				898,893					943,858
Long-term debt, finance lease and deferred financing obligations				728,608					722,925
Deferred income taxes				11,167					11,105
Tax contingencies				16,478					16,589
Long-term contingent consideration				2,124					2,268
Deferred credits and other long-term liabilities				36,483					81,022
Total Liabilities				1,693,753					1,777,767
Stockholders’ Equity:
Ordinary common stock				535					537
Additional paid-in capital				1,326,645					1,337,849
Retained earnings				1,419,449					1,419,735
Accumulated other comprehensive loss				(324	)				(4	)
Ordinary common stock in treasury, at cost				(1,461,002	)				(1,464,727	)
Total Stockholders’ Equity				1,285,303					1,293,390
Total Liabilities and Stockholders’ Equity			$	2,979,056				$	3,071,157

MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share amounts)
			Three Months Ended
			March 31,
			2018					2019
Net revenue:
Managed care and other			$	1,219,763				$	1,223,979
PBM				585,314					515,510
Total net revenue				1,805,077					1,739,489
Costs and expenses:
Cost of care				928,661					941,961
Cost of goods sold				559,665					489,793
Direct service costs and other operating expenses (1)(2)				269,077					271,924
Depreciation and amortization				30,407					30,708
Interest expense				8,366					9,107
Interest and other income				(2,476	)				(4,974	)
Total costs and expenses				1,793,700					1,738,519
Income before income taxes				11,377					970
(Benefit) provision for income taxes				(75	)				539
Net income			$	11,452				$	431
Weighted average number of common shares outstanding — basic				24,349					23,946
Weighted average number of common shares outstanding — diluted				25,612					24,213
Net income per common share — basic			$	0.47				$	0.02
Net income per common share — diluted			$	0.45				$	0.02
Net income			$	11,452				$	431
Other comprehensive income:
Unrealized (losses) gains on available-for-sale securities (3)				(319	)				320
Comprehensive income			$	11,133				$	751

(1) Includes stock compensation expense of $7,646 and $9,607 for the three months ended March 31, 2018 and 2019, respectively.

(2) Includes changes in fair value of contingent consideration of $233 and $144 for the three months ended March 31, 2018 and 2019, respectively.

(3) Net of income tax (benefit) provision of ($101) and $100 for the three months ended March 31, 2018 and 2019, respectively.

MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
			Three Months Ended
			March 31,
			2018					2019
Cash flows from operating activities:
Net income			$	11,452				$	431
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization				30,407					30,708
Non-cash interest expense				307					326
Non-cash stock compensation expense				7,646					9,607
Non-cash income tax provision (benefit)				62					(250	)
Non-cash amortization on investments				809					(192	)
Changes in assets and liabilities, net of effects from acquisitions of businesses:
Accounts receivable, net				(87,178	)				(23,804	)
Pharmaceutical inventory				3,067					(6,333	)
Other assets				(37,914	)				(10,835	)
Accounts payable and accrued liabilities				26,529					20,399
Medical claims payable and other medical liabilities				107,569					19,671
Contingent consideration				233					(1,609	)
Tax contingencies				448					83
Deferred credits and other long-term liabilities				17,685					(2,889	)
Other				(90	)				111
Net cash provided by operating activities				81,032					35,424
Cash flows from investing activities:
Capital expenditures				(19,502	)				(12,642	)
Acquisitions and investments in businesses, net of cash acquired				–					(320	)
Purchases of investments				(142,886	)				(172,766	)
Proceeds from maturities and sales of investments				118,999					128,748
Net cash used in investing activities				(43,389	)				(56,980	)
Cash flows from financing activities:
Payments to acquire treasury stock				–					(4,124	)
Proceeds from exercise of stock options				16,897					2,045
Payments on debt, finance lease and deferred financing obligations				(55,895	)				(7,323	)
Payments on contingent consideration				–					(6,247	)
Other				(3,051	)				(1,702	)
Net cash used in financing activities				(42,049	)				(17,351	)
Net decrease in cash and cash equivalents				(4,406	)				(38,907	)
Cash and cash equivalents at beginning of period				398,732					272,308
Cash and cash equivalents at end of period			$	394,326				$	233,401

MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED OPERATING RESULTS BY BUSINESS SEGMENT
(Unaudited)
(In thousands)
			Three Months Ended
			March 31,
			2018					2019
Healthcare
Managed care and other revenue			$	1,157,601				$	1,164,253
Cost of care				(928,661	)				(941,961	)
Direct service costs and other				(186,246	)				(179,190	)
Stock compensation expense (1)				2,950					1,750
Changes in fair value of contingent consideration (1)				233					144
Healthcare segment profit				45,877					44,996
Pharmacy Management
Managed care and other revenue				62,307					59,895
PBM revenue				632,198					556,565
Cost of goods sold				(604,913	)				(530,207	)
Direct service costs and other				(75,586	)				(79,635	)
Stock compensation expense (1)				1,485					1,672
Pharmacy Management segment profit				15,491					8,290
Corporate and Elimination (2)
Managed care and other revenue				(145	)				(169	)
PBM revenue				(46,884	)				(41,055	)
Cost of goods sold				45,248					40,414
Direct service costs and other				(7,245	)				(13,099	)
Stock compensation expense (1)				3,211					6,185
Corporate and Elimination				(5,815	)				(7,724	)
Consolidated
Managed care and other revenue				1,219,763					1,223,979
PBM revenue				585,314					515,510
Cost of care				(928,661	)				(941,961	)
Cost of goods sold				(559,665	)				(489,793	)
Direct service costs and other				(269,077	)				(271,924	)
Stock compensation expense (1)				7,646					9,607
Changes in fair value of contingent consideration (1)				233					144
Consolidated segment profit			$	55,553				$	45,562
Reconciliation of income before income taxes to segment profit:
Income before income taxes			$	11,377				$	970
Stock compensation expense				7,646					9,607
Changes in fair value of contingent consideration				233					144
Depreciation and amortization				30,407					30,708
Interest expense				8,366					9,107
Interest and other income				(2,476	)				(4,974	)
Segment profit			$	55,553				$	45,562

(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
			March 31,
			2018					2019
Net income			$	11,452				$	431
Adjusted for acquisitions starting in 2013
Stock compensation expense				262					–
Changes in fair value of contingent consideration				233					144
Amortization of acquired intangibles				11,871					12,272
Tax impact				(3,013	)				(3,282	)
Adjusted net income			$	20,805				$	9,565
Net income per common share — diluted			$	0.45				$	0.02
Adjusted for acquisitions starting in 2013
Stock compensation expense				0.01					–
Changes in fair value of contingent consideration				0.01					0.01
Amortization of acquired intangibles				0.46					0.50
Tax impact				(0.12	)				(0.13	)
Adjusted earnings per share			$	0.81				$	0.40

MAGELLAN HEALTH, INC. AND SUBSIDIARIES
FISCAL 2019 GUIDANCE
RECONCILIATION OF GAAP TO NON-GAAP MEASURES
(In millions, except per share amounts)
			Low					High
Net income attributable to Magellan			$	52.0				$	79.0
Adjusted for acquisitions starting in 2013
Stock compensation expense				–					–
Changes in fair value of contingent consideration				–					–
Amortization of acquired intangibles				52.0					47.0
Tax impact				(14.0	)				(12.0	)
Adjusted net income			$	90.0				$	114.0
Net income per common share attributable to Magellan —Diluted			$	2.14				$	3.25
Adjusted for acquisitions starting in 2013
Stock compensation expense				–					–
Changes in fair value of contingent consideration				–					–
Amortization of acquired intangibles				2.14					1.93
Tax impact				(0.58	)				(0.49	)
Adjusted earnings per share			$	3.70				$	4.69
Reconciliation of income before income taxes to segment profit:
Income before income taxes			$	75.0				$	117.0
Stock compensation expense				33.0					29.0
Changes in fair value of contingent consideration				–					–
Depreciation and amortization				136.0					126.0
Interest expense				38.0					34.0
Interest income				(12.0	)				(16.0	)
Segment profit			$	270.0				$	290.0

(MGLN-GEN)

Contacts

Media Contact: Lilly Ackley, [email protected],
(860) 507-1923
Investor Contact: Joe Bogdan, [email protected],
(860) 507-1910