Magellan Health Reports Fourth Quarter and Full Year 2018 Financial Results

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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 EndedYears Ended
December 31December 31
(In millions, except per share results)

2018

2017

Chg

2018

2017

Chg

Net revenue$1,844.6$1,694.48.9%$7,314.2$5,838.625.3%
Net income (loss)$(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 Companys 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 Companys 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 Companys 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 Commissions 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 managements 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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, 2017December 31, 2018
ASSETS
Current Assets:
Cash and cash equivalents$398,732$272,308
Accounts receivable, net660,775756,059
Short-term investments310,578382,582
Pharmaceutical inventory40,94540,818
Other current assets72,32395,400
Total Current Assets1,483,3531,547,167
Property and equipment, net158,638150,748
Long-term investments17,2873,161
Deferred income taxes8133,411
Other long-term assets22,56724,530
Goodwill1,006,2881,018,156
Other intangible assets, net268,288231,883
Total Assets$2,957,234$2,979,056
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable$74,300$72,077
Accrued liabilities193,635231,356
Short-term contingent consideration6,8928,000
Medical claims payable327,625393,547
Other medical liabilities177,002169,639
Current debt, capital lease and deferred financing obligations112,84924,274
Total Current Liabilities892,303898,893
Long-term debt, capital lease and deferred financing obligations740,888728,608
Deferred income taxes12,29811,167
Tax contingencies14,22616,478
Long-term contingent consideration1,9252,124
Deferred credits and other long-term liabilities19,10036,483
Total Liabilities1,680,7401,693,753
Stockholders Equity:
Ordinary common stock530535
Additional paid-in capital1,274,8111,326,645
Retained earnings1,399,4951,419,449
Accumulated other comprehensive loss(380)(324)
Ordinary common stock in treasury, at cost(1,397,962)(1,461,002)
Total Stockholders Equity1,276,4941,285,303
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 EndedYears Ended
December 31,December 31,
2017201820172018
(unaudited)(unaudited)
Net revenue:
Managed care and other$1,093,785$1,207,552$3,479,182$4,878,442
PBM600,630637,0932,359,4012,435,709
Total net revenue1,694,4151,844,6455,838,5837,314,151
Costs and expenses:
Cost of care779,146959,9062,413,7703,762,412
Cost of goods sold563,240593,7932,211,9102,283,022
Direct service costs and other operating expenses (1)(2)261,653277,835941,8831,071,535
Depreciation and amortization32,81035,358115,706132,660
Interest expense9,2669,36225,97735,396
Interest and other income(2,086)(4,090)(5,887)(14,068)
Total costs and expenses1,644,0291,872,1645,703,3597,270,957
Income (loss) before income taxes50,386(27,519)135,22443,194
Provision (benefit) for income taxes(4,123)44825,08319,013
Net income (loss)54,509(27,967)110,14124,181
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 basic23,92124,04823,33324,349
Weighted average number of common shares outstanding diluted25,11324,04824,44025,035
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)109,93624,237
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,
20172018
Cash flows from operating activities:
Net income$110,141$24,181
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization115,706132,660
Non-cash interest expense4,7571,221
Non-cash stock compensation expense39,11629,472
Non-cash income tax benefit(30,981)(1,725)
Non-cash amortization on investments3,9241,344
Changes in assets and liabilities, net of effects from acquisitions of businesses:
Accounts receivable, net(40,910)(99,295)
Pharmaceutical inventory17,605127
Other assets(4,565)(25,774)
Accounts payable and accrued liabilities(84,445)9,139
Medical claims payable and other medical liabilities26,23572,347
Contingent consideration6961,307
Tax contingencies1,6811,803
Deferred credits and other long-term liabilities3,21818,020
Other9517
Net cash provided by operating activities162,273164,844
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 investments423,118498,032
Net cash used in investing activities(316,390)(128,433)
Cash flows from financing activities:
Proceeds from issuance of debt1,041,736
Payments to acquire treasury stock(21,765)(62,640)
Proceeds from exercise of stock options44,35523,064
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 activities248,341(162,835)
Net increase (decrease) in cash and cash equivalents94,224(126,424)
Cash and cash equivalents at beginning of period304,508398,732
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 EndedYears Ended
December 31,December 31,
2017201820172018
(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)10,6896,982
Changes in fair value of contingent consideration (1)1,3278566961,307
Less: non-controlling interest loss (2)(56)
Healthcare segment profit67,893(2,339)202,747149,133

Pharmacy Management

Managed care and other revenue77,51958,017273,489240,427
PBM revenue634,188684,6912,491,0442,625,417
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)2,7871,20619,8815,458
Pharmacy Management segment profit38,38225,376139,910104,419

Corporate and Elimination (3)

Managed care and other revenue86(159)(584)(607)
PBM revenue(33,558)(47,598)(131,643)(189,708)
Cost of goods sold36,12947,050130,069185,148
Direct service costs and other(12,141)(8,032)(38,157)(37,456)
Stock compensation expense (1)2,1941,7368,54617,032
Less: non-controlling interest loss (2)(3)
Corporate and Elimination(7,290)(7,003)(31,766)(25,591)

Consolidated

Managed care and other revenue1,093,7851,207,5523,479,1824,878,442
PBM revenue600,630637,0932,359,4012,435,709
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)7,2822,06739,11629,472
Changes in fair value of contingent consideration (1)1,3278566961,307
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 expense7,2822,06739,11629,472
Changes in fair value of contingent consideration1,3278566961,307
Non-controlling interest segment (profit) loss59
Depreciation and amortization32,81035,358115,706132,660
Interest expense9,2669,36225,97735,396
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 Healthcares customers. In addition, Pharmacy Management provides pharmacy benefits management for the Companys 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 EndedYears Ended
December 31,December 31,
2017201820172018
(unaudited)(unaudited)
Net income (loss) attributable to Magellan$54,509$(27,967)$110,207$24,181
Adjusted for acquisitions starting in 2013
Stock compensation expense1,49716,215530
Changes in fair value of contingent consideration1,3278566961,307
Amortization of acquired intangibles12,07612,40237,26549,078
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 expense0.050.660.02
Changes in fair value of contingent consideration0.060.030.030.05
Amortization of acquired intangibles0.480.521.521.96
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)

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