Magellan Health Services Reports Fourth Quarter and Full Year 2012 Financial Results

AVON, Conn. --(Business Wire)--

Magellan Health Services Inc. (NASDAQ: MGLN) today reported financial results for the fourth quarter and full year 2012, as summarized below. For the year ended December 31, 2012, the company reported net revenue of $3,207.4 million, segment profit of $267.4 million, and net income of $151.0 million or $5.42 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 December 31			Year Ended December 31
			Increase/			Increase/
(Millions, except per share results)	2012	2011	(Decrease)	2012	2011	(Decrease)
Revenue	$830.3	$721.5	15.1%	$3,207.4	$2,799.4	14.6%
Segment Profit	77.7	63.2	22.9%	267.4	270.4	(1.1)%
Net Income	37.0	29.7	24.6%	151.0	129.6	16.5%
Earnings per Share	1.32	1.05	25.7%	5.42	4.17	30.0%

As of December 31, 2012, the company had unrestricted cash and investments of $302.3 million.

"Magellan had a strong fourth quarter, and completed a successful 2012," said Barry M. Smith, chief executive officer. "Each of our business units contributed to our success with significant accomplishments including solid financial results, product innovation, and new business sales.

"This is an exciting time as we enter a new phase of growth. The next twenty-four to thirty-six months will be especially dynamic, as the industry consolidates and the Affordable Care Act is implemented with Medicaid expansion and the creation of state, federal and commercial exchanges. As a result of these changes, we foresee market disruption for the traditional players, allowing for significant growth opportunities for innovative, agile companies such as Magellan.

"During 2013, we will continue investing to expand our presence in the Pharmacy marketplace as well as in Medicaid. In Pharmacy, customers face a fragmented and inefficient system which compromises quality care and increases costs. Our vision is to create an entirely new approach, so that we can lower the total drug spend while improving the health of the patients we serve. We offer a suite of clinical and cost management solutions that integrate our specialty, medical pharmacy, and PBM capabilities. Our solutions offer customers a comprehensive approach to managing the quality and cost of pharmaceutical care, for any drug, at any provider site of service, under any benefit.

"We are also gaining traction on our Medicaid initiatives where we have created new models of care for special populations that integrate the pharmaceutical, physical and behavioral health management of individuals with Serious Mental Illness as well as those dually eligible for Medicaid and Medicare. Whether through our traditional businesses or through innovating and implementing new strategies for growth, Magellan is well positioned to shape the future of health care."

Outlook

"We completed a strong 2012, exceeding our segment profit guidance for the year," said Jonathan N. Rubin, chief financial officer. "We posted high quality results, reflecting key new business implementations, improved cost of care management, and a lower administrative expense ratio. We achieved these results, while making significant investments in our Medicaid and Pharmacy strategies. Combined with our financial strength, this positions us well for 2013 and beyond.

"We are reaffirming our guidance for 2013, which calls for net revenue in the range of $3.56 billion to $3.74 billion, and net income in the range of $91 million to $109 million. Additionally, we expect segment profit for 2013 to be in the range of $250 million to $270 million. Based upon the impact of share repurchase activity through February 22, 2013, but not considering any potential future share repurchases, we are adjusting our diluted weighted average shares outstanding for the year to 27.8 million, resulting in an EPS range of $3.27 to $3.92."

Earnings Results Conference Call

Management will host a conference call at 10:00 a.m. Eastern Time on Thursday, February 28, 2013. To participate in the conference call, interested parties should call 1-888-566-8408 and reference the pass code Fourth Quarter Earnings Call 2012 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 December 31, 2012, Magellan's customers include health plans, employers and government agencies, serving approximately 33.8 million members in our behavioral health business, 17.2 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 41 health plans and employers, 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 2013 revenue, net income, segment profit, earnings per share, strategy and growth. 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, the company's subsequent Quarterly Reports on Form 10-Q filed during 2012 and the company's Annual Report on Form 10-K for the year ended December 31, 2012, 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,
	2011			2012 (1)			2011			2012 (1)
	(unaudited)			(unaudited)

Net revenue:
Managed care and other	$	652,804		$	742,950		$	2,551,991		$	2,857,099
Dispensing		68,660			87,324			247,409			350,298
Total net revenue		721,464			830,274			2,799,400			3,207,397

Cost and expenses:
Cost of care		461,527			528,529			1,784,724			2,071,890
Cost of goods sold		64,479			82,859			232,038			328,414
Direct service costs and other operating expenses (2)		136,250			145,016			529,634			557,512
Depreciation and amortization		15,335			15,316			58,623			60,488
Interest expense		1,080			534			2,502			2,247
Interest income		(516	)		(400	)		(2,781	)		(2,019	)
Total costs and expenses		678,155			771,854			2,604,740			3,018,532
Income before income taxes		43,309			58,420			194,660			188,865
Provision for income taxes		13,570			21,418			65,037			37,838
Net income		29,739			37,002			129,623			151,027
Other comprehensive income (loss) (3)		143			(93	)		(159	)		115
Comprehensive income	$	29,882		$	36,909		$	129,464		$	151,142

Weighted average number of common shares outstanding - basic		27,724			27,505			30,478			27,386
Weighted average number of common shares outstanding - diluted		28,300			28,020			31,058			27,882

Net income per common share - basic	$	1.07		$	1.35		$	4.25		$	5.51
Net income per common share - diluted	$	1.05		$	1.32		$	4.17		$	5.42

(1)		For a more detailed discussion of Magellan's results for the period ended December 31, 2012, refer to the Company's Annual Report on Form 10-K, which will be filed with the SEC on Thursday, February 28, 2013, and the live broadcast or taped replay of the Company's earnings conference call on Thursday, February 28, 2013, which will be available at www.MagellanHealth.com.

(2)		Includes stock compensation expense of $4,010 and $3,848 for the three months ended December 31, 2011 and 2012, respectively, and $17,418 and $17,783 for the years ended December 31, 2011 and 2012, respectively.

(3)		Net of income tax provision (benefit) of $87 and $(61) for the three months ended December 31, 2011 and 2012, respectively, and $(102) and $73 for the years ended December 31, 2011 and 2012, respectively.


MAGELLAN HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)



	Year Ended December 31,
	2011			2012 (1)

Cash flows from operating activities:
Net income	$	129,623		$	151,027

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		58,623#			60,488
Non-cash interest expense		1,033			728
Non-cash stock compensation expense		17,418			17,783
Non-cash income tax expense		8,285			17,306
Non-cash amortization on investments		12,309			7,193
Cash flows from changes in assets and liabilities, net of effects from acquisitions of businesses:
Restricted cash (2)		(69,060	)		(40,760	)
Accounts receivable, net		(15,609	)		(16,411	)
Pharmaceutical inventory		(11,657	)		(6,160	)
Other assets		3,804			414
Accounts payable and accrued liabilities		(7,251	)		(8,321	)
Medical claims payable and other medical liabilities		(7,905	)		31,292
Tax contingencies		(9,453	)		(35,376	)
Other		1,843			2,090
Net cash provided by operating activities		112,003			181,293

Cash flows from investing activities:
Capital expenditures		(54,394	)		(69,549	)
Acquisitions and investments in businesses, net of cash acquired		(376	)		-
Purchase of investments		(259,552	)		(321,541	)
Maturity of investments		330,583			281,748
Investment in equity method joint ventures		-			(1,225	)
Net cash provided by (used in) investing activities		16,261			(110,567	)

Cash flows from financing activities:
Payments on long-term debt and capital lease obligations		(559	)		-
Payments to acquire treasury stock		(407,645	)		(21,868	)
Proceeds from issuance of equity		20,000			-
Proceeds from exercise of stock options and warrants		41,796			20,486
Tax benefit from exercise of stock options and vesting of stock awards		2,038			990
Other		(1,211	)		(732	)
Net cash used in financing activities		(345,581	)		(1,124	)

Net (decrease) increase in cash and cash equivalents		(217,317	)		69,602
Cash and cash equivalents at beginning of period		337,179			119,862
Cash and cash equivalents at end of period	$	119,862		$	189,464

(1)		The Company's Annual Report on Form 10-K for the year ended December 31, 2012 will be filed with the SEC on Thursday, February 28, 2013.

(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 years ended December 31, 2011 and 2012, restricted investments of $62,298 and $16,660, 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
(In thousands)



	Three Months Ended December 31,						Years Ended December 31,
	2011			2012 (1)			2011			2012 (1)
	(unaudited)			(unaudited)

Managed care and other revenue
- Commercial	$	136,694		$	193,048		$	561,780		$	728,512
- Public Sector		384,755			414,586			1,459,659			1,620,875
- Radiology Benefits Management		85,856			95,324			344,335			349,133
- Specialty Pharmaceutical Management		13,895			14,475			48,534			55,178
- Medicaid Administration (2)		52,831			41,348			220,453			172,491
- Elimination (2)		(21,227	)		(15,831	)		(82,770	)		(69,090	)
Total managed care and other revenue		652,804			742,950			2,551,991			2,857,099

Dispensing revenue - Specialty Pharmaceutical Management		68,660			87,324			247,409			350,298

Cost of care
- Commercial		78,240			113,526			314,178			437,518
- Public Sector (2)		337,870			354,936			1,271,532			1,413,320
- Radiology Benefits Management		47,509			62,019			205,240			228,383
- Medicaid Administration		19,135			13,879			76,544			61,759
- Elimination (2)		(21,227	)		(15,831	)		(82,770	)		(69,090	)
Total cost of care		461,527			528,529			1,784,724			2,071,890

Cost of goods sold - Specialty Pharmaceutical Management		64,479			82,859			232,038			328,414

Direct service costs and other operating expenses
- Commercial		39,258			44,210			152,760			172,035
- Public Sector		17,024			22,279			67,227			89,129
- Radiology Benefits Management		14,401			14,305			61,681			55,418
- Specialty Pharmaceutical Management		5,686			6,965			24,344			26,709
- Medicaid Administration		25,198			21,096			103,254			84,884
- Corporate		34,683			36,161			120,368			129,337
Total direct service costs and other operating expenses		136,250			145,016			529,634			557,512

Stock compensation expense (3)
- Commercial		(162	)		298			(839	)		(532	)
- Public Sector		(218	)		(276	)		(872	)		(1,111	)
- Radiology Benefits Management		(325	)		(388	)		(1,563	)		(1,567	)
- Specialty Pharmaceutical Management		(54	)		(227	)		(693	)		(672	)
- Medicaid Administration		(24	)		(76	)		(124	)		(335	)
- Corporate		(3,227	)		(3,179	)		(13,327	)		(13,566	)
Total stock compensation expense		(4,010	)		(3,848	)		(17,418	)		(17,783	)

Segment profit (loss)
- Commercial		19,358			35,014			95,681			119,491
- Public Sector		30,079			37,647			121,772			119,537
- Radiology Benefits Management		24,271			19,388			78,977			66,899
- Specialty Pharmaceutical Management		12,444			12,202			40,254			51,025
- Medicaid Administration		8,522			6,449			40,779			26,183
- Corporate and Elimination		(31,456	)		(32,982	)		(107,041	)		(115,771	)
Total segment profit	$	63,218		$	77,718		$	270,422		$	267,364


Reconciliation of segment profit to income before income taxes:
Segment profit	$	63,218		$	77,718		$	270,422		$	267,364
Stock compensation expense		(4,010	)		(3,848	)		(17,418	)		(17,783	)
Depreciation and amortization		(15,335	)		(15,316	)		(58,623	)		(60,488	)
Interest expense		(1,080	)		(534	)		(2,502	)		(2,247	)
Interest income		516			400			2,781			2,019
Income before income taxes	$	43,309		$	58,420		$	194,660		$	188,865

(1)		The Company's Annual Report on Form 10-K for the year ended December 31, 2012 will be filed with the SEC on Thursday, February 28, 2013.

(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.