Magellan Health Reports Third Quarter 2018 Financial Results

SCOTTSDALE, Ariz.--(BUSINESS WIRE)-- Magellan Health, Inc. (NASDAQ: MGLN) today announced financial results for the third quarter ended September 30, 2018, as summarized below:

Highlights Include:

• Net revenue increased 31 percent over the third quarter of 2017 to $1.9 billion.
• Net income decreased 16 percent over the third quarter of 2017 to $27.1 million.
• Segment profit was $88.3 million compared to $87.7 million in the third quarter of 2017.
• Adjusted net income decreased 11 percent from the third quarter of 2017 to $36.2 million.
• Unrestricted cash and investments were $232.2 million as of September 30, 2018. Approximately $134.2 million of the unrestricted cash and investments at September 30, 2018 related to excess capital and undistributed earnings held at regulated entities.
• The Company is lowering its full year 2018 earnings guidance.

“In light of our recent performance and lowering of guidance, we acknowledge that our financial results have been below our expectations. In the short-term, we expect the environment to remain challenging, but we see significant long-term opportunity in both our Healthcare and Pharmacy businesses,” said Barry M. Smith, chairman and chief executive officer of Magellan Health. “We are focused on partnering with our customers to increase the quality of healthcare for our members while effectively managing both the cost of care and administrative expenses.”

Net Revenue

Net revenue for the third quarter ended September 30, 2018, was $1.9 billion, an increase of 31 percent over the same period in 2017. This increase was mainly driven by net business growth and the annualization of revenue from prior year acquisitions.

Segment Profit

Segment profit was $88.3 million for the third quarter, compared to $87.7 million in the prior year quarter.

• Healthcare segment profit was $61.7 million, which represents an increase of 7 percent compared to the third quarter of 2017. Healthcare results for the quarter include net favorable out of period adjustments of approximately $22 million, largely driven by favorable client settlements. Other material drivers of the quarterly change in segment profit included the incremental losses in Virginia and the impact of the October 2017 rate reduction in Florida, partially offset by the incremental earnings contribution from the Senior Whole Health acquisition that closed on October 31, 2017.
• Pharmacy management segment profit was $33.6 million, which was a decrease of 13 percent compared to the third quarter of 2017. This year over year decrease was primarily driven by a decline in earnings in our specialty carve-out business resulting from lost formulary management contracts.
• Corporate costs inclusive of eliminations, but excluding stock compensation expense, totaled $7.0 million, compared to $8.5 million in the third quarter of 2017. This change was due to costs in the prior year quarter related to the Senior Whole Health acquisition.

Cash Flow & Balance Sheet

Cash flow from operations for the nine months ended September 30, 2018, was $34.0 million versus $112.7 million in the nine months ended September 30, 2017. This year over year change is primarily related to the timing of receivable collections from states in the Company’s MCC businesses.

As of September 30, 2018, the Company’s unrestricted cash and investments totaled $232.2 million versus $261.2 million from the balance at December 31, 2017. Approximately $134.2 million of the unrestricted cash and investments at September 30, 2018, is related to excess capital and undistributed earnings held at regulated entities.

Restricted cash and investments at September 30, 2018, was $380.8 million versus the balance at December 31, 2017 of $465.4 million. This decrease was primarily due to accounts receivable increases as well as improved capital efficiency through substituting a letter of credit for statutory surplus in one of the Company’s MCC markets.

Year to date through October 31, 2018, we repurchased approximately 680,000 shares for $53.2 million. We have approximately $200 million remaining in our share repurchase authorization program which runs through October 22, 2020.

Outlook

The Company is lowering its 2018 full year earnings guidance ranges.

The reduction in earnings guidance reflects the following:

• Utilization pressures in our Healthcare business;
• In MCC of Virginia, the unfavorable update to the Company’s expected risk scores for 2018;
• Modestly lower margins in the Pharmacy business as a result of delayed timing of network rate improvement actions; and,
• As result of operating efficiency initiatives, an initial estimate of severance and other costs that the Company anticipates to recognize in 2018.

The Company now estimates net income for the full year 2018 to be in the range of $68 million to $88 million, adjusted net income in the range of $107 million to $123 million, EPS in the range of $2.71 to $3.51 and adjusted EPS in the range of $4.26 to $4.90. The full year segment profit guidance is expected to be in the range of $290 million to $310 million. The Company is maintaining its revenue range of $7.3 billion to $7.5 billion.

“After transforming our business and achieving strong top line growth over the past few years, we have significant earnings power in our current portfolio as we work to increase our margins to industry competitive levels,” said Jonathan N. Rubin, chief financial officer of Magellan Health.

Earnings Conference Call

Management will discuss the Company’s third quarter results on a conference call scheduled for Wednesday, November 7, 2018 at 8:00 a.m. Eastern. To participate in the conference call, dial 1-800-857-1812 and use passcode “3^rd Quarter 2018” 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 December 7, 2018. This replay may be accessed by dialing 1-866-501-2962 (Domestic) or 1-203-369-1830 (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 2018 guidance for net revenue, income before income taxes, net income, earnings per share, segment profit, adjusted net income, adjusted earnings per share, an initial estimate of severance and other costs that we anticipate to recognize in 2018, 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, 2017, filed with the Securities and Exchange Commission on March 1, 2018, and the Company’s subsequent Quarterly Reports on Form 10-Q filed during 2018. 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.

(MGLN-GEN)

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