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Magellan Health Services Reports Third Quarter 2012 Financial Results

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AVON, Conn.--(BUSINESS WIRE)--

Magellan Health Services Inc. (NASDAQ: MGLN) today reported financial results for the third quarter of 2012, as summarized below. For the quarter ended September 30, 2012, the company reported net revenue of $798.4 million, segment profit of $69.4 million, and net income of $66.3 million or $2.36 per diluted common share. Segment profit represents income from operations before stock compensation expense, depreciation and amortization, interest expense, interest income, gain on sale of assets, special charges or benefits, and income taxes.

Financial Results

                                                     
      Three Months Ended September 30       Nine Months Ended September 30

(Millions, except per share results)

     

2012

      2011       Increase/

(Decrease)

      2012       2011       Increase/

(Decrease)

Revenue $798.4       $686.8       16.2%       $2,377.1       $2,077.9       14.4%
Segment Profit 69.4 55.5 25.0% 189.6 207.2 (8.5)%
Net Income 66.3 31.4 111.1% 114.0 99.9 14.1%
Earnings per Share 2.36 1.03 129.1% 4.10 3.12 31.4%
 

As of September 30, 2012, the company had unrestricted cash and investments of $277.4 million.

“Magellan had strong performance during the quarter and we are well positioned to complete the year,” said René Lerer, M.D., chairman and chief executive officer. “I think it is particularly significant that we have been able to drive improved clinical outcomes for the millions of individuals we serve, invest in our growth strategy, and produce these financial results despite a constantly changing health care environment.

“We are pleased with our recent contract award to administer the Military and Family Life Counseling (MFLC) program for the U.S. Department of Defense, which gives us a stronger foothold in the military and Federal government space. We are also making important strides with our Medicaid strategy, which features our unique model of care and data analytic capabilities. Whether it is expanding our reach into new markets like MFLC, or executing on our Medicaid strategy, Magellan is innovating in order to provide current and potential customers with new solutions.”

“Magellan's strong financial results during the quarter reflect solid execution across all of our businesses,” said Jonathan N. Rubin, chief financial officer. “We saw continued improvements in cost of care across all geographies in our Commercial Behavioral Health segment. We have good momentum and strong cash flow, which gives us the opportunity to move forward with our plans to invest in our business for continued growth. I would note that our quarterly net income benefitted from the impact of a one-time reversal of tax contingencies, which increased EPS by approximately $1.24.”

Outlook

“Given these results, we are now expecting our full year segment profit to be at the upper end of the guidance range of $240 million to $260 million. Primarily as a result of our lower effective tax rate, we are increasing our net income guidance to a range of $135 million to $155 million, and our diluted earnings per share guidance to a range of $4.83 to $5.55. Our guidance does not assume the impact of any future share repurchases.

“Looking ahead, after adjusting the current 2012 guidance for approximately $15 million of favorable year-to-date out-of-period adjustments, we expect to see solid growth in segment profit in 2013. This expectation is driven by several factors including the impact of new business and the impact of our care management initiatives, primarily in the Commercial behavioral health segment, which will be partially offset by contract terminations, increased investments in our Pharmacy and Medicaid strategic initiatives, and continued margin pressure resulting from economic strains on health plan and state clients. We will provide detailed guidance during our December call.”

Earnings Results Conference Call

Management will host a conference call at 10:00 a.m. Eastern Time on Friday, October 26, 2012. To participate in the conference call, interested parties should call 1-888-566-8408 and reference the passcode Third Quarter 2012 Earnings Call 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 specialty pharmaceuticals, as well as public sector pharmacy benefits programs. Magellan delivers innovative solutions to improve quality outcomes and optimize the cost of care for those we serve. As of September 30, 2012, Magellan's customers include health plans, employers and government agencies, serving approximately 33.8 million members in our behavioral health business, 17.3 million members in our radiology benefits management segment, and 8 million members in our medical pharmacy management product. In addition, the specialty pharmaceutical segment served 40 health plans and several pharmaceutical manufacturers and state Medicaid programs. The company's Medicaid Administration segment served 24 states and the District of Columbia. 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 2012 net income, segment profit, earnings per share, 2013 segment profit, 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 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, 2011, filed with the Securities and Exchange Commission on February 28, 2012, and the company's subsequent Quarterly Report on Form 10-Q expected to be filed with the Securities and Exchange Commission and posted on the company's website later today. 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,
2011

2012 (1)

2011

2012 (1)

 
Net revenue $ 686,843 $ 798,437 $ 2,077,936 $ 2,377,123
 
Cost and expenses:
Cost of care 448,051 516,238 1,323,197 1,543,361
Cost of goods sold 57,636 81,662 167,559 245,555
Direct service costs and other operating expenses (2) 130,038 135,574 393,384 412,496
Depreciation and amortization 15,069 15,239 43,288 45,172
Interest expense 457 537 1,422 1,713
Interest income   (592 )   (350 )   (2,265 )   (1,619 )
  650,659     748,900     1,926,585     2,246,678  
Income before income taxes 36,184 49,537 151,351 130,445
Provision (benefit) for income taxes   4,829     (16,725 )   51,467     16,420  
Net income 31,355 66,262 99,884 114,025
Other comprehensive (loss) income (3)   (380 )   120     (302 )   208  
Comprehensive income $ 30,975   $ 66,382   $ 99,582   $ 114,233  
 
Weighted average number of common shares outstanding — basic   29,900     27,521     31,406     27,346  
Weighted average number of common shares outstanding — diluted   30,438     28,042     31,988     27,835  
 
Net income per common share — basic $

1.05

  $ 2.41   $ 3.18   $ 4.17  
Net income per common share — diluted $ 1.03   $ 2.36   $ 3.12   $ 4.10  
 
 

(1)

For a more detailed discussion of Magellan's results for the quarterly period ended September 30, 2012, refer to the Company's Quarterly Report on Form 10-Q, which will be filed with the SEC on Friday, October 26, 2012, and the live broadcast or taped replay of the Company's earnings conference call on Friday, October 26, 2012, which will be available at www.MagellanHealth.com.

 

(2)

Includes stock compensation expense of $4,425 and $4,468 for the three months ended September 30, 2011 and 2012, respectively, and $13,408 and $13,935 for the nine months ended September 30, 2011 and 2012, respectively.

 

(3)

Amounts are net of income tax provision (benefit) of $(238) and $78 for the three months ended September 30, 2011 and 2012, respectively, and $(189) and $134 for the nine months ended September 30, 2011 and 2012, respectively.

     
MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
 
Nine Months Ended September 30,
2011

2012 (1)

 
Cash flows from operating activities:
Net income $ 99,884 $ 114,025
 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 43,288

 

45,172
Non-cash interest expense 320 544
Non-cash stock compensation expense 13,408 13,935
Non-cash income tax expense 7,259 12,395
Non-cash amortization on investments 9,660 5,373

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

Restricted cash (2) (38,825 ) (59,777 )
Accounts receivable, net (8,439 ) 604
Pharmaceutical inventory (3,697 ) (2,002 )
Other assets 2,680 (4,218 )
Accounts payable and accrued liabilities (10,216 ) (17,854 )
Medical claims payable and other medical liabilities (15,463 ) 37,422
Tax contingencies (7,241 ) (34,616 )
Other   3,501     654  
Net cash provided by operating activities   96,119     111,657  
 
Cash flows from investing activities:
Capital expenditures (38,468 ) (53,049 )
Acquisitions and investments in businesses, net of cash acquired (376 ) -
Purchase of investments (210,890 ) (197,525 )
Maturity of investments   231,093     215,150  
Net cash used in investing activities   (18,641 )   (35,424 )
 
Cash flows from financing activities:
Payments to acquire treasury stock (327,886 ) -
Proceeds from issuance of equity 20,000 -
Proceeds from exercise of stock options and warrants 34,755 13,092
Other   839     135  
Net cash (used in) provided by financing activities   (272,292 )   13,227  
 
Net (decrease) increase in cash and cash equivalents (194,814 ) 89,460
Cash and cash equivalents at beginning of period   337,179     119,862  
Cash and cash equivalents at end of period $ 142,365   $ 209,322  
 
 

(1)

The Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 will be filed with the SEC on October 26, 2012.

 

(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, 2011 and 2012, restricted investments of $45,749 and $27,421, respectively, were shifted to restricted cash that resulted in an operating cash flow use.

 
           
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,
2011

2012 (1)

2011

2012 (1)

 
Net revenue
- Commercial $ 135,365 $ 176,713 $ 425,086 $ 535,464
- Public Sector 362,104 407,265 1,074,904 1,206,289
- Radiology Benefits Management 78,659 88,126 258,479 253,809
- Specialty Pharmaceutical Management 73,792 101,503 213,388 303,677
- Medicaid Administration (2) 57,692 40,263 167,622 131,143
- Elimination (2)   (20,769 )   (15,433 )   (61,543 )   (53,259 )
Total net revenue   686,843     798,437     2,077,936     2,377,123  
 
Cost of care
- Commercial 81,503 100,973 235,938 323,992
- Public Sector (2) 318,807 358,959 933,662 1,058,384
- Radiology Benefits Management 49,186 58,080 157,731 166,364
- Medicaid Administration 19,324 13,659 57,409 47,880
- Elimination (2)   (20,769 )   (15,433 )   (61,543 )   (53,259 )
Total cost of care   448,051     516,238     1,323,197     1,543,361  
 
Cost of goods sold - Specialty Pharmaceutical Management   57,636     81,662     167,559     245,555  
 
Direct service costs and other operating expenses
- Commercial 36,582 43,007 113,502 127,825
- Public Sector 16,741 22,948 50,203 66,850
- Radiology Benefits Management 14,717 14,045 47,280 41,113
- Specialty Pharmaceutical Management 6,563 7,071 18,658 19,744
- Medicaid Administration 26,221 20,494 78,056 63,788
- Corporate   29,214     28,009     85,685     93,176  

Total direct service costs and other operating expenses

  130,038     135,574     393,384     412,496  
 
Stock compensation expense (3)
- Commercial (208 ) (293 ) (677 ) (830 )
- Public Sector (218 ) (278 ) (654 ) (835 )
- Radiology Benefits Management (355 ) (419 ) (1,238 ) (1,179 )
- Specialty Pharmaceutical Management (380 ) (121 ) (639 ) (445 )
- Medicaid Administration (36 ) (117 ) (100 ) (259 )
- Corporate   (3,228 )   (3,240 )   (10,100 )   (10,387 )
Total stock compensation expense   (4,425 )   (4,468 )   (13,408 )   (13,935 )
 
Segment profit (loss)
- Commercial 17,488 33,026 76,323 84,477
- Public Sector 26,774 25,636 91,693 81,890
- Radiology Benefits Management 15,111 16,420 54,706 47,511
- Specialty Pharmaceutical Management 9,973 12,891 27,810 38,823
- Medicaid Administration 12,183 6,227 32,257 19,734
- Corporate and Elimination   (25,986 )   (24,769 )   (75,585 )   (82,789 )
Total segment profit $ 55,543   $ 69,431   $ 207,204   $ 189,646  
 

 

Reconciliation of segment profit to income before income taxes:

Segment profit $ 55,543 $ 69,431 $ 207,204 $ 189,646
Stock compensation expense (4,425 ) (4,468 ) (13,408 ) (13,935 )
Depreciation and amortization (15,069 ) (15,239 ) (43,288 ) (45,172 )
Interest expense (457 ) (537 ) (1,422 ) (1,713 )
Interest income   592     350     2,265     1,619  
Income before income taxes $ 36,184   $ 49,537   $ 151,351   $ 130,445  
 
 

(1)

The Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 will be filed with the SEC on October 26, 2012.

 

(2)

Public Sector has subcontracted with Medicaid Administration 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.

 

Magellan Health Services Inc.
Media Contact:
David Carter, 860-507-1909
dwcarter@magellanhealth.com
or
Investor Contact:
Renie Shapiro, 877-645-6464
rshapiro@magellanhealth.com

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