Magellan Health Services Reports Fourth Quarter and Full Year 2013 Financial Results

AVON, Conn.--(BUSINESS WIRE)--Magellan Health Services, Inc. (NASDAQ:MGLN) today reported financial results for the fourth quarter and full year 2013, as summarized below. For the year ended December 31, 2013, the company reported net revenue of $3.5 billion, segment profit of $259.4 million, and net income of $125.3 million, or $4.53 per diluted common share. Segment profit is equal to net revenues 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 income from non-controlling interests held by other parties, as well as stock compensation expense.

Financial Results
	Three Months Ended December 31				Year Ended December 31
(Millions, except per share results)	2013	2012	Increase/ (Decrease)		2013	2012	Increase/ (Decrease)
Revenue	$1,008.2	$830.3	21.4	%	$3,546.3	$3,207.4	10.6	%
Segment Profit	55.9	77.7	(28.1	)%	259.4	267.4	(3.0	)%
Net Income	18.5	37.0	(50.0	)%	125.3	151.0	(17.0	)%
Earnings per Share	0.67	1.32	(49.2	)%	4.53	5.42	(16.4	)%

As of December 31, 2013, the company had unrestricted cash and investments of $261.4 million.

“Magellan Health Services is a very different company today than it was a year ago,” said Barry M. Smith, chairman and chief executive officer of Magellan Health Services. “While our core businesses continue to perform admirably, we have made significant advancements in our two strategic initiatives. Magellan Complete Care is operational and continues to expand. In addition, we now have a single, integrated and growing pharmacy operation with a complete set of product offerings. The two acquisitions completed last year, Partners Rx and AlphaCare, have given us additional scale, capabilities, and market focus to further these strategies.

“In addition, we’ve implemented changes to our operations and products to ensure that Magellan is nimble, competitive and poised to respond quickly to the changing health care marketplace. We are moving closer to our vision of becoming a growth company.”

Outlook

“Magellan Health Services posted solid financial results during 2013, and the continued progress on our strategic growth initiatives will position us for future success,” said Jonathan N. Rubin, chief financial officer. “Additionally, while we continue to invest in our business, we also returned capital to shareholders through our share repurchase program.

“Relative to 2014, we are maintaining the ranges discussed in our December guidance call for net revenue of $3.6 billion to $3.8 billion, net income of $57 million to $73 million, and segment profit of $215 million to $235 million. We are also maintaining our guidance for cash flow from operations in the range of $181 million to $203 million. Taking into account the impact of share repurchase activity through February 26, 2014, but not considering any potential future share repurchases, our guidance range for fully diluted EPS is estimated to be $2.02 to $2.58 per fully diluted share.”

Earnings Results Conference Call

Management will host a conference call at 10:00 a.m. Eastern Time on Monday, March 3, 2014. To participate in the conference call, interested parties should call 1-800-857-1812 and reference the pass code Fourth 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 health care management company that focuses on fast-growing, complex and high-cost areas of health care, with an emphasis on special population management. Magellan delivers innovative solutions to improve quality outcomes and optimize the cost of care for those we serve. Magellan’s customers include health plans, managed care organizations, insurance companies, employers, labor unions, various military and government agencies, third party administrators, and brokers. As of December 31, 2013, the company served approximately 34.3 million members in our managed healthcare segments and 17.7 million members in our specialty solutions segment. Our pharmacy management segment processed over 69 million adjusted claims on behalf of 0.4 million commercial PBM members, 9.5 million medical pharmacy members and 25 states and the District of Columbia in our PBA business. 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 2014 net revenue, net income, segment profit, cash flow from operations, earnings per share, growth 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, 2012, filed with the Securities and Exchange Commission on February 28, 2013, the company’s subsequent Quarterly Reports on Form 10-Q filed during 2013 and the company’s Annual Report on Form 10-K for the year ended December 31, 2013, 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
(In thousands, except per share amounts)
	Three Months Ended December 31,						Year Ended December 31,
		2012			2013 (1)			2012			2013 (1)
	(unaudited)			(unaudited)
Net revenue:
Managed care and other	$	742,950		$	823,627		$	2,857,099		$	3,063,049
PBM and dispensing		87,324			184,583			350,298			483,268
Total net revenue		830,274			1,008,210			3,207,397			3,546,317
Costs and expenses:
Cost of care		528,529			605,782			2,071,890			2,232,976
Cost of goods sold		82,859			174,411			328,414			455,601
Direct service costs and other operating expenses (2)		145,016			178,588			557,512			619,546
Depreciation and amortization		15,316			21,224			60,488			71,994
Interest expense		534			809			2,247			3,000
Interest and other income		(400	)		(983	)		(2,019	)		(1,985	)
Total costs and expenses		771,854			979,831			3,018,532			3,381,132
Income before income taxes		58,420			28,379			188,865			165,185
Provision for income taxes		21,418			9,888			37,838			39,924
Net income		37,002			18,491			151,027			125,261
Other comprehensive (loss) income (3)		(93	)		(21	)		115			(58	)
Comprehensive income	$	36,909		$	18,470		$	151,142		$	125,203
Weighted average number of common shares outstanding — basic		27,505			27,285			27,386			27,054
Weighted average number of common shares outstanding — diluted		28,020			28,008			27,882			27,675
Net income per common share — basic	$	1.35		$	0.68		$	5.51		$	4.63
Net income per common share — diluted	$	1.32		$	0.67		$	5.42		$	4.53

(1)	For a more detailed discussion of Magellan's results for the year ended December 31, 2013, refer to the Company's Annual Report on Form 10-K, which will be filed with the SEC on Monday, March 3, 2014, and the live broadcast or taped replay of the Company's earnings conference call on Monday, March 3, 2014, which will be available at www.MagellanHealth.com.
(2)	Includes stock compensation expense of $3,848 and $6,488 for the three months ended December 31, 2012 and 2013, respectively, and $17,783 and $21,252 for the years ended December 31, 2012 and 2013, respectively.
(3)	Net of income tax (benefit) provision of $(61) and $(13) for the three months ended December 31, 2012 and 2013, respectively, and $73 and $(38) for the years ended December 31, 2012 and 2013, respectively.

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
	Year Ended December 31,
		2012			2013 (1)
Cash flows from operating activities:
Net income	$	151,027		$	125,261
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		60,488			71,994
Non-cash interest expense		728			736
Non-cash stock compensation expense		17,783			21,252
Non-cash income tax expense (benefits)		17,306			(1,212	)
Non-cash amortization on investments		7,193			9,107
Cash flows from changes in assets and liabilities, net of effects
from acquisitions of businesses:
Restricted cash (2)		(40,760	)		(2,242	)
Accounts receivable, net		(16,411	)		(40,804	)
Pharmaceutical inventory		(6,160	)		(3,882	)
Other assets		414			(9,293	)
Accounts payable and accrued liabilities		(8,321	)		3,593
Medical claims payable and other medical liabilities		31,292			17,866
Tax contingencies		(35,376	)		(22,960	)
Deferred credits and other long-term liabilities		1,901			10,988
Other		189			2,757
Net cash provided by operating activities		181,293			183,161
Cash flows from investing activities:
Capital expenditures		(69,549	)		(64,542	)
Acquisitions and investments in businesses, net of cash acquired		-			(107,541	)
Purchase of investments		(321,541	)		(323,253	)
Maturity of investments		281,748			339,428
Other		(1,225	)		-
Net cash used in investing activities		(110,567	)		(155,908	)
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations		-			(3,001	)
Payments to acquire treasury stock		(21,868	)		(60,677	)
Proceeds from exercise of stock options and warrants		20,486			47,529
Tax benefit from exercise of stock options and vesting of stock awards		990			3,212
Other		(732	)		(593	)
Net cash used in financing activities		(1,124	)		(13,530	)
Net increase in cash and cash equivalents		69,602			13,723
Cash and cash equivalents at beginning of period		119,862			189,464
Cash and cash equivalents at end of period	$	189,464		$	203,187

(1)

The Company's Annual Report on Form 10-K for the year ended December 31, 2013 will be filed with the SEC on Monday, March 3, 2014.

(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 year ended December 31, 2012, restricted investments of $16,660 were shifted to restricted cash that resulted in an operating cash flow use, with restricted cash of $29,208 shifted to restricted investments during the year ended December 31, 2013 that resulted in an operating cash flow source.

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED OPERATING RESULTS BY BUSINESS SEGMENT
(In thousands)
	Three Months Ended December 31,						Year Ended December 31,
		2012			2013 (1)			2012			2013 (1)
	(Unaudited)			(Unaudited)
Managed care and other revenue
- Commercial	$	193,048		$	188,811		$	728,512		$	766,841
- Public Sector		414,586			491,194			1,620,875			1,757,933
- Specialty Solutions		95,324			98,700			349,133			375,818
- Pharmacy Management (2)		55,823			62,613			227,669			228,705
- Elimination (2)		(15,831	)		(17,691	)		(69,090	)		(66,248	)
Total managed care and other revenue		742,950			823,627			2,857,099			3,063,049
PBM and dispensing revenue - Pharmacy Management		87,324			184,583			350,298			483,268
Cost of care
- Commercial		113,526			114,958			437,518			469,478
- Public Sector (2)		354,936			427,329			1,413,320			1,523,023
- Specialty Solutions		62,019			65,284			228,383			247,496
- Pharmacy Management		13,879			15,902			61,759			59,227
- Elimination (2)		(15,831	)		(17,691	)		(69,090	)		(66,248	)
Total cost of care		528,529			605,782			2,071,890			2,232,976
Cost of goods sold - Pharmacy Management		82,859			174,411			328,414			455,601
Direct service costs and other operating expenses
- Commercial		44,210			42,668			172,035			172,491
- Public Sector		22,279			40,416			89,129			122,819
- Specialty Solutions		14,305			16,110			55,418			57,334
- Pharmacy Management		28,061			35,211			111,593			128,427
- Corporate		36,161			44,183			129,337			138,475
Total direct service costs and other operating expenses		145,016			178,588			557,512			619,546
Stock compensation expense (3)
- Commercial		298			(113	)		(532	)		(503	)
- Public Sector		(276	)		(205	)		(1,111	)		(1,038	)
- Specialty Solutions		(388	)		(355	)		(1,567	)		(1,630	)
- Pharmacy Management		(303	)		(274	)		(1,007	)		(1,172	)
- Corporate		(3,179	)		(5,541	)		(13,566	)		(16,909	)
Total stock compensation expense		(3,848	)		(6,488	)		(17,783	)		(21,252	)
Segment profit (loss)
- Commercial		35,014			31,298			119,491			125,375
- Public Sector		37,647			23,654			119,537			113,129
- Specialty Solutions		19,388			17,661			66,899			72,618
- Pharmacy Management		18,651			21,946			77,208			69,890
- Corporate and Elimination		(32,982	)		(38,642	)		(115,771	)		(121,566	)
Total segment profit	$	77,718		$	55,917		$	267,364		$	259,446
Reconciliation of segment profit to income
before income taxes:
Segment profit	$	77,718		$	55,917		$	267,364		$	259,446
Stock compensation expense		(3,848	)		(6,488	)		(17,783	)		(21,252	)
Depreciation and amortization		(15,316	)		(21,224	)		(60,488	)		(71,994	)
Interest expense		(534	)		(809	)		(2,247	)		(3,000	)
Interest and other income		400			983			2,019			1,985
Income before income taxes	$	58,420		$	28,379		$	188,865		$	165,185

(1)	The Company's Form 10-K for the year ended December 31, 2013 will be filed with the SEC on Monday, March 3, 2014.
(2)	Public Sector subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain 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.