Magellan Health Services Reports Third Quarter 2009 Financial Results

October 30, 2009 6:30 AM EDT

Company Expects 2009 Results in Upper Half of Guidance Range

Secures National Behavioral Health Agreement with WellCare

AVON, Conn.--(BUSINESS WIRE)-- Magellan Health Services, Inc. (Nasdaq: MGLN) today reported net income of $31.0 million, or $.88 per diluted common share, and segment profit of $64.5 million for the third quarter of 2009. The Company also increased guidance for the full year to the upper half of its previously disclosed range.

The Company attributed these results to strong revenue performance across all business segments and effective cost-of-care management. It also announced today that it has signed a binding letter of agreement with WellCare Health Plans, Inc. to expand management of behavioral health care for the plan's entire book of business, resulting in total annualized WellCare revenues in excess of $100 million.

Financial Results

For the quarter ended September 30, 2009, the Company reported net revenue of $667.6 million and net income of $31.0 million, or $.88 per diluted common share. For the prior year quarter, net revenue was $656.5 million and net income was $23.5 million or $.58 per diluted common share. Segment profit (which represents income from continuing operations before stock compensation expense, depreciation and amortization, interest expense, interest income, gain on sale of assets, special charges or benefits, and income taxes) for the current year quarter was $64.5 million, compared with $57.6 million in the prior year quarter. The Company ended the quarter with unrestricted cash and investments of $220.1 million, including the impact of stock repurchases as well as net cash used for the acquisition of First Health Services.

For the nine months ended September 30, 2009, the Company reported net revenue of $1.92 billion and net income of $62.9 million, or $1.77 per diluted common share. For the prior year period, the Company reported net revenue of $1.96 billion and net income of $62.6 million, or $1.55 per diluted common share. Segment profit for the first nine months of 2009 was $150.3 million versus $164.6 million for the prior year period.

See the attached tables detailing the Company's operating results, including results by segment.

Rene Lerer, M.D., chairman and chief executive officer, said, "Our financial performance in the third quarter was strong across all of our business segments, reflecting solid progress in maintaining and growing our customer relationships as well as our success in improving cost of care. By providing appropriate oversight and strong clinical care management, we have demonstrated success in achieving quality outcomes for our customers and their members while effectively controlling costs. This safeguarding of the quality and affordability of care is the foundation of our commitment. At the same time that we're focusing on these fundamentals, we're looking forward and investing in product development and innovation, expanding the depth and breadth of our service offerings and identifying new ways to deliver value to our customers."

Karen S. Rohan, president, said that the quarter's results demonstrated the progress and success of all businesses - behavioral health, radiology (NIA), specialty pharmacy (ICORE), and Medicaid administration (First Health Services).

"Our strategic focus on customer retention and business diversification is yielding results across all of our lines of business," Rohan said. "This includes contributions from our newest business, First Health Services, which has further diversified and expanded the breadth of our service to Medicaid customers. In addition, we learned recently that our public sector behavioral health contract in Maricopa County has been extended for a fourth full year, through August 31, 2011. We are exceptionally pleased to have received this vote of confidence in our efforts and to have the opportunity to continue strengthening and transforming this system of care."

WellCare Expansion

The Company also announced today the signing of a binding letter of agreement with WellCare Health Plans to manage behavioral health services for all WellCare markets. This three-year contract expands upon the Company's current agreement with WellCare in the state of Georgia and will add approximately 900,000 Medicare and Medicaid beneficiaries and incremental annual revenue of $60 million. Pending regulatory approvals in each state, the Company expects all markets to be fully implemented by the end of the first quarter. The parties will enter into separate definitive agreements for each market to be served by the Company and the parties have agreed that implementation of such definitive agreements is contingent upon the approval of the definitive agreement for Florida business by the Medicaid agency in Florida. Total revenues from all regions, including Georgia, are projected to be approximately $100 million.

"As health care payors across the nation consider business solutions available to manage financial risk and provide high quality, affordable care to their customers and members, we have an emerging opportunity to introduce the services we can provide across all lines of business," Lerer said. "This trend is highlighted by discussions with organizations that historically have in-sourced management of behavioral health benefits for their membership and who are once again considering the value of a focused, strategic, value-added partner."

Outlook

Jonathan N. Rubin, the Company's chief financial officer, said that the strong financial results through September 30, 2009 have led the Company to increase guidance for the full year to the upper half of its previously disclosed range. This guidance, including estimates for First Health Services, projects full-year segment profit in the range of $207.5 million to $217.5 million and net income of $85.3 million to $95.5 million. This equates to diluted EPS of $2.41 to $2.70. The Company's EPS guidance reflects the impact of the repurchase of 431,000 shares through close of business yesterday, but excludes any impact from repurchases that may occur during the remainder of the fourth quarter.

Rubin noted, "Looking ahead to next year, we are in the process of developing business plans and will provide 2010 guidance in December. In the meantime, we currently expect segment profit growth in 2010, which reflects the recognition of a full year's revenues from First Health Services and newly contracted businesses, offset by projected membership declines within our commercial behavioral health and radiology customer base and continued margin compression as a result of economic pressures faced by health plan and public sector clients in particular."

Earnings Results Conference Call

Management will host a conference call at 10:30 a.m. Eastern time on Friday, October 30. To participate in the conference call, interested parties should call 1-888-566-8408 and reference the passcode Third Quarter Earnings approximately 15 minutes before the start of the call.

The conference call also will be available via a live Webcast at Magellan's investor relations page at www.MagellanHealth.com.

A taped replay of the conference call will be available for one week following the call. Interested parties should call 800-229-6227 or 402-220-9679 (from outside the U.S.) to listen.

Those who plan to access the call or Webcast are encouraged to read Magellan's Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on February 27, 2009, and subsequent Quarterly Reports on Form 10-Q, for material information regarding Magellan's operational and financial results, including the section entitled "Risk Factors."

About Magellan: Headquartered in Avon, Conn., Magellan Health Services, Inc. (Nasdaq: MGLN) is a leading specialty health care management organization. Its customers include health plans, corporations and government agencies.

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, that 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 2009 segment profit, net income, earnings per share, care trends, estimates of revenue and market implementation timing related to the WellCare letter of agreement, future share repurchases pursuant to the announced $100 million share repurchase, and directional guidance regarding segment profit for 2010. 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; the impact of varying economic and market conditions on the Company's investment portfolio; the state of the national economy and adverse changes in economic conditions; 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 most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q filed with the SEC. 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, is included in the Company's most recent Annual Report on Form 10-K and subsequent reports on Form 10-Q filed with the SEC.

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

                 Three Months Ended September    Nine Months Ended September 30,
                 30,

                 2008          2009 (1)          2008            2009 (1)

Net revenue      $ 656,462     $ 667,589         $ 1,963,610     $ 1,922,905

Cost and
expenses:

Cost of care       456,584       435,007           1,368,748       1,309,773

Cost of goods      44,281        50,139            134,518         151,497
sold

Direct
service costs
and other          105,879       122,034           322,110         328,032
operating
expenses (2)

Depreciation
and                16,086        12,154            44,983          33,713
amortization

Interest           592           650               2,824           1,734
expense

Interest           (4,127  )     (1,215  )         (13,336   )     (5,260    )
income

                   619,295       618,769           1,859,847       1,819,489

Income from
continuing
operations         37,167        48,820            103,763         103,416
before income
taxes

Provision for      13,678        17,833            41,142          40,470
income taxes

Net income         23,489        30,987            62,621          62,946

Other
comprehensive      (1,590  )     52                (1,866    )     (168      )
(loss) income

Comprehensive    $ 21,899      $ 31,039          $ 60,755        $ 62,778
income

Weighted
average
number of          40,272        35,128            39,991          35,426
common shares
outstanding
-- basic

Weighted
average
number of          40,722        35,331            40,457          35,566
common shares
outstanding
-- diluted

Net income
per common       $ 0.58        $ 0.88            $ 1.57          $ 1.78
share --
basic

Net income
per common       $ 0.58        $ 0.88            $ 1.55          $ 1.77
share --
diluted

(1)  For a more detailed discussion of Magellan's results for the period ended
     September 30, 2009, refer to the Company's Quarterly Report on

     Form 10-Q which will be filed with the SEC on October 30, 2009, and the
     live broadcast or taped replay of the Company's earnings conference

     call on October 30, 2009, which will be available at
     www.MagellanHealth.com.

(2)  Includes stock compensation expense of $7,832 and $4,124 for the three
     months ended September 30, 2008 and 2009, respectively, and

     $26,349 and $16,724 for the nine months ended September 30, 2008 and 2009,
     respectively.

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

                                                 Nine Months Ended September 30,

                                                 2008           2009

Cash flows from operating activities:

Net income                                       $ 62,621       $ 62,946

Adjustments to reconcile net income to net
cash provided by operating activities:

Depreciation and amortization                      44,983         33,713

Non-cash interest expense                          1,730          675

Non-cash stock compensation expense                26,349         16,724

Non-cash income tax expense                        32,339         28,696

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

Restricted cash                                    103,604        10,702

Accounts receivable, net                           (24,960  )     (7,139   )

Other assets                                       (6,012   )     (22,945  )

Accounts payable and accrued liabilities           3,752          (18,466  )

Medical claims payable and other medical           (7,571   )     (6,669   )
liabilities

Other                                              (68      )     2,386

Net cash provided by operating activities          236,767        100,623

Cash flows from investing activities:

Capital expenditures                               (23,955  )     (25,808  )

Acquisitions and investments in businesses,        (425     )     (115,438 )
net of cash acquired

Purchase of investments                            (345,702 )     (213,377 )

Maturity of investments                            92,992         247,631

Net cash used in investing activities              (277,090 )     (106,992 )

Cash flows from financing activities:

Payments on long-term debt and capital lease       (12,686  )     (3       )
obligations

Payments to acquire treasury stock                 (13,523  )     (67,070  )

Proceeds from exercise of stock options and        12,587         1,101
warrants

Tax benefit from exercise of stock options         5,443          2,980

Other                                              (1,365   )     (259     )

Net cash used in financing activities              (9,544   )     (63,251  )

Net decrease in cash and cash equivalents          (49,867  )     (69,620  )

Cash and cash equivalents at beginning of          312,372        211,825
period

Cash and cash equivalents at end of period       $ 262,505      $ 142,205

MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except membership amounts in millions)

                  Three Months Ended           Nine Months Ended September 30,
                  September 30,

                  2008          2009           2008            2009

Net revenue

- Commercial      $ 163,240     $ 162,060      $ 486,792       $ 481,003

- Public            363,798       336,327        1,084,808       1,001,368
Sector

- Radiology
Benefits            72,692        78,279         223,890         222,403
Management

- Specialty
Pharmaceutical      56,732        65,111         168,120         192,319
Management

- Medicaid          -             25,812         -               25,812
Administration

Total net           656,462       667,589        1,963,610       1,922,905
revenue

Cost of care

- Commercial        85,867        86,031         252,569         264,668

- Public            320,479       294,233        963,374         896,149
Sector

- Radiology
Benefits            50,238        54,743         152,805         148,956
Management

Total cost of       456,584       435,007        1,368,748       1,309,773
care

Cost of goods
sold -
Specialty           44,281        50,139         134,518         151,497
Pharmaceutical
Management

Direct service
costs and
other
operating
expenses

- Commercial        38,018        37,843         113,588         114,376

- Public            17,668        16,440         51,135          50,646
Sector

- Radiology
Benefits            14,104        12,880         41,408          38,387
Management

- Specialty
Pharmaceutical      6,713         5,516          18,764          18,780
Management

- Medicaid          -             22,138         -               22,138
Administration

- Corporate &       29,376        27,217         97,215          83,705
Other

Total direct
services costs
and other           105,879       122,034        322,110         328,032
operating
expenses

Stock
compensation
expense (1)

- Commercial        (424    )     (211    )      (1,097    )     (731      )

- Public            (231    )     (112    )      (598      )     (556      )
Sector

- Radiology
Benefits            (452    )     (152    )      (1,096    )     (946      )
Management

- Specialty
Pharmaceutical      (2,325  )     (429    )      (6,445    )     (4,647    )
Management

- Medicaid          -             (358    )      -               (358      )
Administration

- Corporate &       (4,400  )     (2,862  )      (17,113   )     (9,486    )
Other

Total stock
compensation        (7,832  )     (4,124  )      (26,349   )     (16,724   )
expense

Segment profit
(loss)

- Commercial        39,779        38,397         121,732         102,690

- Public            25,882        25,766         70,897          55,129
Sector

- Radiology
Benefits            8,802         10,808         30,773          36,006
Management

- Specialty
Pharmaceutical      8,063         9,885          21,283          26,689
Management

- Medicaid          -             4,032          -               4,032
Administration

- Corporate &       (24,976 )     (24,355 )      (80,102   )     (74,219   )
Other

Total segment     $ 57,550      $ 64,533       $ 164,583       $ 150,327
profit

Reconciliation
of segment
profit to
income from
continuing

operations
before income
taxes:

Segment profit    $ 57,550      $ 64,533       $ 164,583       $ 150,327

Stock
compensation        (7,832  )     (4,124  )      (26,349   )     (16,724   )
expense

Depreciation
and                 (16,086 )     (12,154 )      (44,983   )     (33,713   )
amortization

Interest            (592    )     (650    )      (2,824    )     (1,734    )
expense

Interest            4,127         1,215          13,336          5,260
income

Income from
continuing
operations        $ 37,167      $ 48,820       $ 103,763       $ 103,416
before income
taxes

Membership

- Commercial                                                     37.7

- Public                                                         1.8
Sector

- Radiology
Benefits                                                         17.7
Management

Total                                                            57.2
membership

(1)  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.

    Source: Magellan Health Services, Inc.

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