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TheStreet Open House

Magellan Health Services Reports Third Quarter 2013 Financial Results

Earnings Results Conference Call

Management will host a conference call at 10:00 a.m. Eastern Time on Thursday, October 24, 2013. To participate in the conference call, interested parties should call 1-800-857-1812 and reference the pass code Third Quarter Earnings Call 2013 approximately 15 minutes before the start of the call. The conference call will also be available via a live Webcast at Magellan’s investor relations page at www.MagellanHealth.com.

About Magellan Health Services: Headquartered in Avon, Conn.,  Magellan Health Services Inc. is a leading specialty health care management organization with expertise in managing behavioral health, radiology, and pharmacy benefits programs, as well as integrated health care programs for special populations. Magellan delivers innovative solutions to improve quality outcomes and optimize the cost of care for those we serve. As of September 30, 2013, Magellan’s customers include health plans, employers and government agencies, serving approximately 33.9 million members in our behavioral health business, 17.5 million members in our radiology benefits management segment, and approximately 9.2 million members in our medical pharmacy management product. In addition, the pharmacy solutions segment served 39 health plans and employers, 25 states and the District of Columbia, and several pharmaceutical manufacturers. For more information, visit www.MagellanHealth.com.

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 estimates of 2013 revenue, net income, segment profit, out-of-period adjustments, and earnings per share, 2014 segment profit, and strategy and growth. 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 health care 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, 2012, filed with the Securities and Exchange Commission on February 28, 2013, and the company’s subsequent Quarterly Reports on Form 10-Q filed during 2013. 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 information referred to herein may be considered a non-GAAP financial measure. Further information regarding this measure, 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 SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share amounts)
 
 
Three Months Ended September 30, Nine months Ended September 30,
2012

2013 (1)

2012

2013 (1)

 
Net revenue:
Managed care and other $ 711,092 $ 775,957 $ 2,114,149 $ 2,255,748
Dispensing   87,345     97,641     262,974     282,359  
Total net revenue   798,437     873,598     2,377,123     2,538,107  
 
Cost and expenses:
Cost of care 516,238 570,187 1,543,361 1,642,944
Cost of goods sold 81,662 91,853 245,555 265,440
Direct service costs and other operating expenses (2) 135,574 156,834 412,496 440,958
Depreciation and amortization 15,239 17,654 45,172 50,770
Interest expense 537 789 1,713 2,191
Interest income   (350 )   (291 )   (1,619 )   (1,002 )
  748,900     837,026     2,246,678     2,401,301  
Income before income taxes 49,537 36,572 130,445 136,806
(Benefit) provision for income taxes   (16,725 )   (10,660 )   16,420     30,036  
Net income 66,262 47,232 114,025 106,770
Other comprehensive income (loss) (3)   120     110     208     (37 )
Comprehensive income $ 66,382   $ 47,342   $ 114,233   $ 106,733  
 
Weighted average number of common shares outstanding — basic 27,521 26,990 27,346 26,976
Weighted average number of common shares outstanding — diluted 28,042 27,704 27,835 27,563
 
Net income per common share — basic $ 2.41   $ 1.75   $ 4.17   $ 3.96  
Net income per common share — diluted $ 2.36   $ 1.70   $ 4.10   $ 3.87  
 

(1)

For a more detailed discussion of Magellan's results for the quarterly period ended September 30, 2013, refer to the Company's Quarterly Report on Form 10-Q, which will be filed with the SEC on Thursday, October 24, 2013, and the live broadcast or taped replay of the Company's earnings conference call on Thursday, October 24, 2013, which will be available at www.MagellanHealth.com.

 

(2)

Includes stock compensation expense of $4,468 and $4,524 for the three months ended September 30, 2012 and 2013, respectively, and $13,935 and $14,764 for the nine months ended September 30, 2012 and 2013, respectively.

 

(3)

Net of income tax provision (benefit) of $78 and $74 for the three months ended September 30, 2012 and 2013, respectively, and $134 and $(25) for the nine months ended September 30, 2012 and 2013, respectively.

     
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Nine Months Ended September 30,
2012

2013 (1)

 
Cash flows from operating activities:
Net income $ 114,025 $ 106,770
 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 45,172

 

50,770
Non-cash interest expense 544 552
Non-cash stock compensation expense 13,935 14,764
Non-cash income tax expense (benefit) 12,395 (164 )
Non-cash amortization on investments 5,373 7,273

Cash flows from changes in assets and liabilities, net of effects from acquisitions of businesses:

Restricted cash (2) (59,777 ) 17,987
Accounts receivable, net 604 (19,231 )
Pharmaceutical inventory (2,002 ) (1,680 )
Other assets (4,218 ) (9,781 )
Accounts payable and accrued liabilities (17,854 ) 6,685
Medical claims payable and other medical liabilities 37,422 16,144
Tax contingencies (34,616 ) (22,981 )
Other   654     4,174  
Net cash provided by operating activities   111,657     171,282  
 
Cash flows from investing activities:
Capital expenditures (53,049 ) (42,091 )
Purchase of investments (197,525 ) (235,946 )
Maturity of investments 215,150 233,723
Other   -     (7,900 )
Net cash used in investing activities   (35,424 )   (52,214 )
 
Cash flows from financing activities:
Payments to acquire treasury stock - (49,462 )
Proceeds from exercise of stock options and warrants 13,092 24,548
Payments on capital lease obligations - (2,310 )
Other   135     484  
Net cash provided by (used in) financing activities   13,227     (26,740 )
 
Net increase in cash and cash equivalents 89,460 92,328
Cash and cash equivalents at beginning of period   119,862     189,464  
Cash and cash equivalents at end of period $ 209,322   $ 281,792  
 

(1)

The Company's Quarterly Report on Form 10-Q for the nine months ended September 30, 2013 will be filed with the SEC on Thursday, October 24, 2013.

 

(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 nine months ended September 30, 2012, restricted investments of $27,421 were shifted to restricted cash that resulted in an operating cash flow use, with restricted cash of $33,610 shifted to restricted investments during the nine months ended September 30, 2013 that resulted in an operating cash flow source.

             
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED OPERATING RESULTS BY BUSINESS SEGMENT
(Unaudited)
(In thousands)
 
 
Three Months Ended September 30, Nine Months Ended September 30,
2012 2013 (1) 2012 2013 (1)
 
Managed care and other revenue
- Commercial $ 176,713 $ 190,655 $ 535,464 $ 578,030
- Public Sector 407,265 445,260 1,206,289 1,266,739
- Radiology Benefits Management 88,126 94,125 253,809 277,118
- Pharmacy Solutions (2) 54,421 63,008 171,846 182,418
- Elimination (2)   (15,433 )   (17,091 )   (53,259 )   (48,557 )
Total managed care and other revenue   711,092     775,957     2,114,149     2,255,748  
 
Dispensing revenue - Pharmacy Solutions   87,345     97,641     262,974     282,359  
 
Cost of care
- Commercial 100,973 118,022 323,992 354,520
- Public Sector (2) 358,959 382,913 1,058,384 1,095,694
- Radiology Benefits Management 58,080 65,403 166,364 182,212
- Pharmacy Solutions 13,659 20,940 47,880 59,075
- Elimination (2)   (15,433 )   (17,091 )   (53,259 )   (48,557 )
Total cost of care   516,238     570,187     1,543,361     1,642,944  
 
Cost of goods sold - Pharmacy Solutions   81,662     91,853     245,555     265,440  
 
Direct service costs and other operating expenses
- Commercial 43,007 47,032 127,825 129,823
- Public Sector 22,948 27,826 66,850 82,403
- Radiology Benefits Management 14,045 13,990 41,113 41,224
- Pharmacy Solutions 27,565 32,281 83,532 93,216
- Corporate   28,009     35,705     93,176     94,292  
Total direct service costs and other operating expenses   135,574     156,834     412,496     440,958  
 
Stock compensation expense (3)
- Commercial (293 ) (124 ) (830 ) (390 )
- Public Sector (278 ) (259 ) (835 ) (833 )
- Radiology Benefits Management (419 ) (384 ) (1,179 ) (1,275 )
- Pharmacy Solutions (238 ) (198 ) (704 ) (898 )
- Corporate   (3,240 )   (3,559 )   (10,387 )   (11,368 )
Total stock compensation expense   (4,468 )   (4,524 )   (13,935 )   (14,764 )
 
Segment profit (loss)
- Commercial 33,026 25,725 84,477 94,077
- Public Sector 25,636 34,780 81,890 89,475
- Radiology Benefits Management 16,420 15,116 47,511 54,957
- Pharmacy Solutions 19,118 15,773 58,557 47,944
- Corporate and Elimination   (24,769 )   (32,146 )   (82,789 )   (82,924 )
Total segment profit $ 69,431   $ 59,248   $ 189,646   $ 203,529  
 
 

Reconciliation of segment profit to income before income taxes:

Segment profit $ 69,431 $ 59,248 $ 189,646 $ 203,529
Stock compensation expense (4,468 ) (4,524 ) (13,935 ) (14,764 )
Depreciation and amortization (15,239 ) (17,654 ) (45,172 ) (50,770 )
Interest expense (537 ) (789 ) (1,713 ) (2,191 )
Interest income   350     291     1,619     1,002  
Income before income taxes $ 49,537   $ 36,572   $ 130,445   $ 136,806  
 

(1)

The Company's Quarterly Report on Form 10-Q for the nine months ended September 30, 2013 will be filed with the SEC on Thursday, October 24, 2013.

 

(2)

Public Sector has subcontracted with Pharmacy Solutions to provide pharmacy benefits management services on a limited risk basis for one of Public Sector's customers. As such, revenue and cost of care related to this intersegment arrangement are eliminated.

 

(3)

Stock compensation expense is included in direct service costs and other operating expenses; however, this amount is excluded from the computation of segment profit since it is managed on a consolidated basis.





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