Feb 28, 2019
Magellan Health Reports Fourth Quarter and Full Year 2018 Financial Results

SCOTTSDALE, Ariz.--(BUSINESS WIRE)--Feb. 28, 2019-- 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 Ended     Years Ended
        December 31     December 31
(In millions, except per share results)                                      
       

2018

     

2017

   

Chg

   

2018

   

2017

   

Chg

Net revenue       $ 1,844.6       $ 1,694.4     8.9 %     $ 7,314.2     $ 5,838.6     25.3 %
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 Company’s 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 Company’s 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 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, to be filed with the Securities and Exchange Commission later today, and the Company’s 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 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, 2017     December 31, 2018
ASSETS              
                 
Current Assets:              
Cash and cash equivalents       $ 398,732       $ 272,308  
Accounts receivable, net         660,775         756,059  
Short-term investments         310,578         382,582  
Pharmaceutical inventory         40,945         40,818  
Other current assets         72,323         95,400  
Total Current Assets         1,483,353         1,547,167  
Property and equipment, net         158,638         150,748  
Long-term investments         17,287         3,161  
Deferred income taxes         813         3,411  
Other long-term assets         22,567         24,530  
Goodwill         1,006,288         1,018,156  
Other intangible assets, net         268,288         231,883  
Total Assets       $ 2,957,234       $ 2,979,056  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY              
                 
Current Liabilities:              
Accounts payable       $ 74,300       $ 72,077  
Accrued liabilities         193,635         231,356  
Short-term contingent consideration         6,892         8,000  
Medical claims payable         327,625         393,547  
Other medical liabilities         177,002         169,639  
Current debt, capital lease and deferred financing obligations         112,849         24,274  
Total Current Liabilities         892,303         898,893  
Long-term debt, capital lease and deferred financing obligations         740,888         728,608  
Deferred income taxes         12,298         11,167  
Tax contingencies         14,226         16,478  
Long-term contingent consideration         1,925         2,124  
Deferred credits and other long-term liabilities         19,100         36,483  
Total Liabilities         1,680,740         1,693,753  
                 
Stockholders’ Equity:              
Ordinary common stock         530         535  
Additional paid-in capital         1,274,811         1,326,645  
Retained earnings         1,399,495         1,419,449  
Accumulated other comprehensive loss         (380 )       (324 )
Ordinary common stock in treasury, at cost         (1,397,962 )       (1,461,002 )
Total Stockholders’ Equity         1,276,494         1,285,303  
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 Ended     Years Ended
        December 31,     December 31,
          2017         2018         2017         2018  
        (unaudited)     (unaudited)            
Net revenue:                          
Managed care and other       $ 1,093,785       $ 1,207,552       $ 3,479,182       $ 4,878,442  
PBM         600,630         637,093         2,359,401         2,435,709  
Total net revenue         1,694,415         1,844,645         5,838,583         7,314,151  
                           
Costs and expenses:                          
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 operating expenses (1)(2)         261,653         277,835         941,883         1,071,535  
Depreciation and amortization         32,810         35,358         115,706         132,660  
Interest expense         9,266         9,362         25,977         35,396  
Interest and other income         (2,086 )       (4,090 )       (5,887 )       (14,068 )
Total costs and expenses         1,644,029         1,872,164         5,703,359         7,270,957  
Income (loss) before income taxes         50,386         (27,519 )       135,224         43,194  
Provision (benefit) for income taxes         (4,123 )       448         25,083         19,013  
Net income (loss)         54,509         (27,967 )       110,141         24,181  
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 — basic         23,921         24,048         23,333         24,349  
Weighted average number of common shares outstanding — diluted         25,113         24,048         24,440         25,035  
                           
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 )       109,936         24,237  
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,
        2017     2018
Cash flows from operating activities:              
Net income       $ 110,141       $ 24,181  
Adjustments to reconcile net income to net cash from operating activities:              
Depreciation and amortization         115,706         132,660  
Non-cash interest expense         4,757         1,221  
Non-cash stock compensation expense         39,116         29,472  
Non-cash income tax benefit         (30,981 )       (1,725 )
Non-cash amortization on investments         3,924         1,344  
Changes in assets and liabilities, net of effects from acquisitions of businesses:        
Accounts receivable, net         (40,910 )       (99,295 )
Pharmaceutical inventory         17,605         127  
Other assets         (4,565 )       (25,774 )
Accounts payable and accrued liabilities         (84,445 )       9,139  
Medical claims payable and other medical liabilities         26,235         72,347  
Contingent consideration         696         1,307  
Tax contingencies         1,681         1,803  
Deferred credits and other long-term liabilities         3,218         18,020  
Other         95         17  
Net cash provided by operating activities         162,273         164,844  
               
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 investments         423,118         498,032  
Net cash used in investing activities         (316,390 )       (128,433 )
               
Cash flows from financing activities:              
Proceeds from issuance of debt         1,041,736         -  
Payments to acquire treasury stock         (21,765 )       (62,640 )
Proceeds from exercise of stock options         44,355         23,064  
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 activities         248,341         (162,835 )
               
Net increase (decrease) in cash and cash equivalents         94,224         (126,424 )
Cash and cash equivalents at beginning of period         304,508         398,732  
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 Ended     Years Ended
        December 31,     December 31,
          2017         2018         2017         2018  
        (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 )       10,689         6,982  
Changes in fair value of contingent consideration (1)         1,327         856         696         1,307  
Less: non-controlling interest loss (2)         -         -         (56 )       -  
Healthcare segment profit         67,893         (2,339 )       202,747         149,133  
                           

Pharmacy Management

                         
Managed care and other revenue         77,519         58,017         273,489         240,427  
PBM revenue         634,188         684,691         2,491,044         2,625,417  
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)         2,787         1,206         19,881         5,458  
Pharmacy Management segment profit         38,382         25,376         139,910         104,419  
                           

Corporate and Elimination (3)

                         
Managed care and other revenue         86         (159 )       (584 )       (607 )
PBM revenue         (33,558 )       (47,598 )       (131,643 )       (189,708 )
Cost of goods sold         36,129         47,050         130,069         185,148  
Direct service costs and other         (12,141 )       (8,032 )       (38,157 )       (37,456 )
Stock compensation expense (1)         2,194         1,736         8,546         17,032  
Less: non-controlling interest loss (2)         -         -         (3 )       -  
Corporate and Elimination         (7,290 )       (7,003 )       (31,766 )       (25,591 )
                           

Consolidated

                         
Managed care and other revenue         1,093,785         1,207,552         3,479,182         4,878,442  
PBM revenue         600,630         637,093         2,359,401         2,435,709  
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)         7,282         2,067         39,116         29,472  
Changes in fair value of contingent consideration (1)         1,327         856         696         1,307  
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 expense         7,282         2,067         39,116         29,472  
Changes in fair value of contingent consideration         1,327         856         696         1,307  
Non-controlling interest segment (profit) loss         -         -         59         -  
Depreciation and amortization         32,810         35,358         115,706         132,660  
Interest expense         9,266         9,362         25,977         35,396  
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 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
(In thousands, except per share amounts)
                           
                           
        Three Months Ended     Years Ended
        December 31,     December 31,
          2017         2018         2017         2018  
        (unaudited)     (unaudited)            
                           
Net income (loss) attributable to Magellan       $ 54,509       $ (27,967 )     $ 110,207       $ 24,181  
Adjusted for acquisitions starting in 2013                          
Stock compensation expense         1,497         -         16,215         530  
Changes in fair value of contingent consideration         1,327         856         696         1,307  
Amortization of acquired intangibles         12,076         12,402         37,265         49,078  
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 expense         0.05         -         0.66         0.02  
Changes in fair value of contingent consideration         0.06         0.03         0.03         0.05  
Amortization of acquired intangibles         0.48         0.52         1.52         1.96  
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)

 

Source: Magellan Health, Inc.

Media: Lilly Ackley, ackleyl@magellanhealth.com, (860) 507-1923
Investors: Joe Bogdan, jbogdan@magellanhealth.com,(860) 507-1910