UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| |
(Mark One) | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended | |
Or | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File No. 1-6639
MAGELLAN HEALTH, INC.
(Exact name of registrant as specified in its charter)
Delaware | 58-1076937 |
4801 E. Washington Street | 85034 |
(800) 642-1716
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | MGLN | The NASDAQ Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | |
Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of Magellan Health, Inc.’s common stock outstanding as of JuneSeptember 30, 2021 was 26,264,925.26,332,073.
FORM 10-Q
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
INDEX
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2 | ||
| Consolidated Balance Sheets—December 31, 2020 and | 2 |
| 3 | |
| 4 | |
| Consolidated Statements of Cash Flows—For the | 5 |
| 6 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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1
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
| | | | | | |
| | | | | | |
| | December 31, | | June 30, | ||
| | 2020 |
| 2021 | ||
| | | | | (Unaudited) | |
ASSETS | | | | | | |
Current Assets: | | | | | | |
Cash and cash equivalents ($49,227 and $53,934 restricted at December 31, 2020 and June 30, 2021, respectively) | | $ | 1,144,450 | | $ | 678,507 |
Accounts receivable, net | |
| 743,502 | |
| 826,997 |
Short-term investments ($88,867 and $35,491 restricted at December 31, 2020 and June 30, 2021, respectively) | |
| 140,847 | |
| 325,581 |
Pharmaceutical inventory | |
| 43,334 | |
| 38,789 |
Other current assets ($43,547 and $82,110 restricted at December 31, 2020 and June 30, 2021, respectively) | |
| 84,264 | |
| 145,156 |
Total Current Assets | |
| 2,156,397 | |
| 2,015,030 |
Property and equipment, net | |
| 136,739 | |
| 141,628 |
Long-term investments ($1,026 and $1,810 restricted at December 31, 2020 and June 30, 2021, respectively) | |
| 2,612 | |
| 2,985 |
Deferred income taxes | | | 1,842 | | | — |
Other long-term assets | |
| 108,797 | |
| 120,046 |
Goodwill | |
| 873,779 | |
| 873,830 |
Other intangible assets, net | |
| 79,689 | |
| 64,410 |
Total Assets | | $ | 3,359,855 | | $ | 3,217,929 |
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY | | | | | | |
Current Liabilities: | | | | | | |
Accounts payable | | $ | 137,380 | | $ | 132,298 |
Accrued liabilities | |
| 354,906 | |
| 208,322 |
Medical claims payable | |
| 111,851 | |
| 147,555 |
Other medical liabilities | |
| 126,921 | |
| 138,279 |
Current debt, finance lease and deferred financing obligations | |
| 6,521 | |
| 3,176 |
Total Current Liabilities | |
| 737,579 | |
| 629,630 |
Long-term debt, finance lease and deferred financing obligations | |
| 631,855 | |
| 521,518 |
Deferred income taxes | | | 7,102 | | | 17,634 |
Tax contingencies | |
| 11,002 | |
| 12,734 |
Deferred credits and other long-term liabilities | |
| 69,283 | |
| 78,918 |
Total Liabilities | |
| 1,456,821 | |
| 1,260,434 |
Redeemable non-controlling interest | |
| 33,062 | |
| 33,674 |
Stockholder's Equity: | | | | | | |
Preferred stock, par value $.01 per share | | | | | | |
Authorized—10,000 shares at December 31, 2020 and June 30, 2021-Issued and outstanding-NaN | |
| — | |
| — |
Common stock, par value $.01 per share | | | | | | |
Authorized—100,000 shares at December 31, 2020 and June 30, 2021-Issued and outstanding-55,549 and 25,887 shares at December 31, 2020, respectively, and 55,927 and 26,265 shares at June 30, 2021, respectively | |
| 555 | |
| 559 |
Other Stockholders’ Equity: | | | | | | |
Additional paid-in capital | |
| 1,477,219 | |
| 1,503,718 |
Retained earnings | |
| 1,857,130 | |
| 1,884,291 |
Accumulated other comprehensive loss | |
| (205) | |
| (20) |
Treasury stock, at cost, 29,662 and 29,662 shares at December 31, 2020 and June 30, 2021, respectively | |
| (1,464,727) | |
| (1,464,727) |
Total Stockholders’ Equity | |
| 1,869,972 | |
| 1,923,821 |
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity | | $ | 3,359,855 | | $ | 3,217,929 |
| | | | | | |
| | | | | | |
| | December 31, | | September 30, | ||
| | 2020 |
| 2021 | ||
| | | | | (Unaudited) | |
ASSETS | | | | | | |
Current Assets: | | | | | | |
Cash and cash equivalents ($49,227 and $79,746 restricted at December 31, 2020 and September 30, 2021, respectively) | | $ | 1,144,450 | | $ | 1,038,458 |
Accounts receivable, net | |
| 743,502 | |
| 827,169 |
Short-term investments ($88,867 and $101,884 restricted at December 31, 2020 and September 30, 2021, respectively) | |
| 140,847 | |
| 155,518 |
Pharmaceutical inventory | |
| 43,334 | |
| 39,832 |
Other current assets ($43,547 and $74,385 restricted at December 31, 2020 and September 30, 2021, respectively) | |
| 84,264 | |
| 143,442 |
Total Current Assets | |
| 2,156,397 | |
| 2,204,419 |
Property and equipment, net | |
| 136,739 | |
| 137,046 |
Long-term investments ($1,026 and $0 restricted at December 31, 2020 and September 30, 2021, respectively) | |
| 2,612 | |
| — |
Deferred income taxes | | | 1,842 | | | — |
Other long-term assets | |
| 108,797 | |
| 81,008 |
Goodwill | |
| 873,779 | |
| 873,830 |
Other intangible assets, net | |
| 79,689 | |
| 57,147 |
Total Assets | | $ | 3,359,855 | | $ | 3,353,450 |
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY | | | | | | |
Current Liabilities: | | | | | | |
Accounts payable | | $ | 137,380 | | $ | 171,774 |
Accrued liabilities | |
| 354,906 | |
| 231,196 |
Medical claims payable | |
| 111,851 | |
| 187,177 |
Other medical liabilities | |
| 126,921 | |
| 162,658 |
Current debt, finance lease and deferred financing obligations | |
| 6,521 | |
| 3,214 |
Total Current Liabilities | |
| 737,579 | |
| 756,019 |
Long-term debt, finance lease and deferred financing obligations | |
| 631,855 | |
| 516,368 |
Deferred income taxes | | | 7,102 | | | 18,768 |
Tax contingencies | |
| 11,002 | |
| 12,913 |
Deferred credits and other long-term liabilities | |
| 69,283 | |
| 76,219 |
Total Liabilities | |
| 1,456,821 | |
| 1,380,287 |
Redeemable non-controlling interest | |
| 33,062 | |
| 39,261 |
Stockholder's Equity: | | | | | | |
Preferred stock, par value $.01 per share | | | | | | |
Authorized—10,000 shares at December 31, 2020 and September 30, 2021-Issued and outstanding-NaN | |
| — | |
| — |
Common stock, par value $.01 per share | | | | | | |
Authorized—100,000 shares at December 31, 2020 and September 30, 2021-Issued and outstanding-55,549 and 25,887 shares at December 31, 2020, respectively, and 55,994 and 26,332 shares at September 30, 2021, respectively | |
| 555 | |
| 560 |
Other Stockholders’ Equity: | | | | | | |
Additional paid-in capital | |
| 1,477,219 | |
| 1,512,919 |
Retained earnings | |
| 1,857,130 | |
| 1,885,194 |
Accumulated other comprehensive loss | |
| (205) | |
| (44) |
Treasury stock, at cost, 29,662 and 29,662 shares at December 31, 2020 and September 30, 2021, respectively | |
| (1,464,727) | |
| (1,464,727) |
Total Stockholders’ Equity | |
| 1,869,972 | |
| 1,933,902 |
Total Liabilities, Redeemable Non-Controlling Interest and Stockholders’ Equity | | $ | 3,359,855 | | $ | 3,353,450 |
See accompanying notes to consolidated financial statements.
2
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended | | Six Months Ended | |
|
| Three Months Ended | | Nine Months Ended | |
| ||||||||||||||||
| | June 30, | | June 30, | | | | September 30, | | September 30, | | | ||||||||||||||||
| | 2020 |
| 2021 |
| 2020 |
| 2021 |
| | | 2020 |
| 2021 |
| 2020 |
| 2021 |
| | ||||||||
Net revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Managed care and other | | $ | 548,711 | | $ | 676,041 | | $ | 1,101,879 | | $ | 1,302,117 | | | | $ | 568,688 | | $ | 668,591 | | $ | 1,670,567 | | $ | 1,970,708 | | |
PBM | |
| 551,364 | |
| 544,727 | |
| 1,120,575 | |
| 1,080,300 | | | |
| 601,429 | |
| 585,527 | |
| 1,722,004 | |
| 1,665,827 | | |
Total net revenue | |
| 1,100,075 | |
| 1,220,768 | |
| 2,222,454 | |
| 2,382,417 | | | |
| 1,170,117 | |
| 1,254,118 | |
| 3,392,571 | |
| 3,636,535 | | |
Costs, expenses and other income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of care | |
| 321,831 | |
| 430,735 | |
| 670,939 | |
| 809,926 | | | |
| 364,438 | |
| 437,308 | |
| 1,035,377 | |
| 1,247,234 | | |
Cost of goods sold | |
| 528,067 | |
| 520,514 | |
| 1,061,308 | |
| 1,012,884 | | | |
| 560,269 | |
| 546,337 | |
| 1,621,577 | |
| 1,559,221 | | |
Direct service costs and other operating expenses (1) | |
| 199,756 | |
| 243,573 | |
| 403,997 | |
| 474,594 | | | |
| 216,770 | |
| 238,471 | |
| 620,767 | |
| 713,065 | | |
Legal matter settlement | | | — | | | — | | | — | | | (9,000) | | | | | — | | | — | | | — | | | (9,000) | | |
Depreciation and amortization | |
| 23,888 | |
| 22,525 | |
| 47,246 | |
| 43,942 | | | |
| 24,730 | |
| 23,671 | |
| 71,976 | |
| 67,613 | | |
Interest expense | |
| 7,995 | |
| 6,234 | |
| 16,953 | |
| 12,660 | | | |
| 7,286 | |
| 5,969 | |
| 24,239 | |
| 18,629 | | |
Interest and other income | |
| (551) | |
| (208) | |
| (1,770) | |
| (549) | | | |
| (349) | |
| (299) | |
| (2,119) | |
| (848) | | |
Special charges and other | | | 8,309 | | | 5,054 | | | 8,309 | | | 6,205 | | | | | 16,599 | | | 1,914 | | | 24,908 | | | 8,119 | | |
Total costs, expenses and other income | |
| 1,089,295 | |
| 1,228,427 | |
| 2,206,982 | |
| 2,350,662 | | | |
| 1,189,743 | |
| 1,253,371 | |
| 3,396,725 | |
| 3,604,033 | | |
Income (loss) from continuing operations before income taxes | |
| 10,780 | |
| (7,659) | |
| 15,472 | |
| 31,755 | | | ||||||||||||||
(Loss) income from continuing operations before income taxes | |
| (19,626) | |
| 747 | |
| (4,154) | |
| 32,502 | | | ||||||||||||||
(Benefit) provision for income taxes | |
| (36,328) | |
| (1,196) | |
| (30,566) | |
| 9,709 | | | |
| (2,330) | |
| 861 | |
| (32,896) | |
| 10,570 | | |
Net income (loss) from continuing operations | | | 47,108 | | | (6,463) | | | 46,038 | | | 22,046 | | | ||||||||||||||
Net (loss) income from continuing operations | | | (17,296) | | | (114) | | | 28,742 | | | 21,932 | | | ||||||||||||||
Income from discontinued operations, net of tax | | | 36,397 | | | 5,797 | | | 55,717 | | | 5,115 | | | | | 28,943 | | | 6,050 | | | 84,660 | | | 11,165 | | |
Net income (loss) | | $ | 83,505 | | $ | (666) | | $ | 101,755 | | $ | 27,161 | | | ||||||||||||||
Net income | | $ | 11,647 | | $ | 5,936 | | $ | 113,402 | | $ | 33,097 | | | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic (See Note A) | | | | | | | | | | | | | | | ||||||||||||||
Basic (See Note B) | | | | | | | | | | | | | | | ||||||||||||||
Continuing operations | | $ | 1.88 | | $ | (0.25) | | $ | 1.85 | | $ | 0.85 | | | | $ | (0.68) | | $ | (0.20) | | $ | 1.15 | | $ | 0.65 | | |
Discontinued operations | | | 1.45 | | | 0.22 | | | 2.24 | | | 0.20 | | | | | 1.14 | | | 0.23 | | | 3.37 | | | 0.43 | | |
Consolidated operations | | $ | 3.33 | | $ | (0.03) | | $ | 4.09 | | $ | 1.05 | | | | $ | 0.46 | | $ | 0.03 | | $ | 4.52 | | $ | 1.08 | | |
Diluted (See Note A) | | | | | | | | | | | | | | | ||||||||||||||
Diluted (See Note B) | | | | | | | | | | | | | | | ||||||||||||||
Continuing operations | | $ | 1.86 | | $ | (0.25) | | $ | 1.84 | | $ | 0.83 | | | | $ | (0.68) | | $ | (0.20) | | $ | 1.14 | | $ | 0.63 | | |
Discontinued operations | | | 1.44 | | | 0.22 | | | 2.22 | | | 0.19 | | | | | 1.14 | | | 0.23 | | | 3.34 | | | 0.42 | | |
Consolidated operations | | $ | 3.30 | | $ | (0.03) | | $ | 4.06 | | $ | 1.02 | | | | $ | 0.46 | | $ | 0.03 | | $ | 4.48 | | $ | 1.05 | | |
Other comprehensive income (loss) | | | | | | | | | | | | | | | ||||||||||||||
Unrealized gains on available-for-sale securities (2) | |
| 659 | |
| 175 | |
| 458 | |
| 185 | | | ||||||||||||||
Comprehensive income (loss) | | $ | 84,164 | | $ | (491) | | $ | 102,213 | | $ | 27,346 | | | ||||||||||||||
Other comprehensive income | | | | | | | | | | | | | | | ||||||||||||||
Unrealized (losses) gains on available-for-sale securities (2) | |
| (481) | |
| (24) | |
| (23) | |
| 161 | | | ||||||||||||||
Comprehensive income | | $ | 11,166 | | $ | 5,912 | | $ | 113,379 | | $ | 33,258 | | |
(1) | Includes stock compensation expense of |
(2) | Net of income tax (benefit) provision of |
See accompanying notes to consolidated financial statements.
3
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | Accumulated | |
|
| ||||||||||
| |
| | Common Stock | | Additional | | | | Other | | Total |
| |||||||||||
| | Common Stock | | | In Treasury | | Paid in | | Retained | | Comprehensive | | Stockholders’ |
| ||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| (Loss) Income |
| Equity |
| |||||||
Balance at March 31, 2020 | | 54,631 | | $ | 546 |
| | (29,662) | | $ | (1,464,727) | | $ | 1,402,797 | | $ | 1,493,044 | | $ | (57) | | $ | 1,431,603 | |
Stock compensation expense | | — | |
| — |
| | — | |
| — | |
| 6,958 | |
| — | |
| — | |
| 6,958 | |
Exercise of stock options | | 324 | |
| 4 |
| | — | |
| — | |
| 20,240 | |
| — | |
| — | |
| 20,244 | |
Issuance of equity | | 17 | |
| — |
| | — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Net income | | — | |
| — |
| | — | |
| — | |
| — | |
| 83,505 | |
| — | |
| 83,505 | |
Other comprehensive income—other | | — | | | — | | | — | | | — | | | — | | | — | | | 659 | |
| 659 | |
Balance at June 30, 2020 | | 54,972 | | $ | 550 | | | (29,662) | | $ | (1,464,727) | | $ | 1,429,995 | | $ | 1,576,549 | | $ | 602 | | $ | 1,542,969 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2021 | | 55,789 | | $ | 558 |
| | (29,662) | | $ | (1,464,727) | | $ | 1,488,975 | | $ | 1,884,957 | | $ | (195) | | $ | 1,909,568 | |
Stock compensation expense | | — | |
| — |
| | — | |
| — | |
| 6,353 | |
| — | |
| — | |
| 6,353 | |
Exercise of stock options | | 113 | |
| 1 |
| | — | |
| — | |
| 6,804 | |
| — | |
| — | |
| 6,805 | |
Issuance of equity | | 25 | |
| — |
| | — | |
| — | |
| 1,586 | |
| — | |
| — | |
| 1,586 | |
Net loss | | — | |
| — |
| | — | |
| — | |
| — | |
| (666) | |
| — | |
| (666) | |
Other comprehensive income—other | | — | | | — | | | — | | | — | | | — | | | — | | | 175 | | | 175 | |
Balance at June 30, 2021 | | 55,927 | | $ | 559 |
| | (29,662) | | $ | (1,464,727) | | $ | 1,503,718 | | $ | 1,884,291 | | $ | (20) | | $ | 1,923,821 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 |
| 54,285 | | $ | 543 |
| | (29,662) | | $ | (1,464,727) | | $ | 1,386,616 | | $ | 1,475,207 | | $ | 144 | | $ | 1,397,783 | |
Stock compensation expense |
| — | |
| — |
| | — | |
| — | |
| 13,015 | |
| — | |
| — | |
| 13,015 | |
Exercise of stock options |
| 540 | |
| 6 |
| | — | |
| — | |
| 31,501 | |
| — | |
| — | |
| 31,507 | |
Issuance of equity |
| 147 | |
| 1 |
| | — | |
| — | |
| (1,137) | |
| — | |
| — | |
| (1,136) | |
Net income |
| — | |
| — |
| | — | |
| — | |
| — | |
| 101,755 | |
| — | |
| 101,755 | |
Other comprehensive income—other | | — | | | — | | | — | | | — | | | — | | | — | | | 458 | |
| 458 | |
Adoption of ASC 326 |
| — | |
| — |
| | — | |
| — | |
| — | |
| (413) | |
| — | |
| (413) | |
Balance at June 30, 2020 | | 54,972 | | $ | 550 | | | (29,662) | | $ | (1,464,727) | | $ | 1,429,995 | | $ | 1,576,549 | | $ | 602 | | $ | 1,542,969 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2020 |
| 55,549 | | $ | 555 |
| | (29,662) | | $ | (1,464,727) | | $ | 1,477,219 | | $ | 1,857,130 | | $ | (205) | | $ | 1,869,972 | |
Stock compensation expense |
| — | |
| — |
| | — | |
| — | |
| 13,410 | |
| — | |
| — | |
| 13,410 | |
Exercise of stock options |
| 223 | |
| 3 |
| | — | |
| — | |
| 14,269 | |
| — | |
| — | |
| 14,272 | |
Issuance of equity |
| 155 | |
| 1 |
| | — | |
| — | |
| (1,180) | |
| — | |
| — | |
| (1,179) | |
Net income |
| — | |
| — |
| | — | |
| — | |
| — | |
| 27,161 | |
| — | |
| 27,161 | |
Other comprehensive income—other | | — | | | — | | | — | | | — | | | — | | | — | | | 185 | | | 185 | |
Balance at June 30, 2021 |
| 55,927 | | $ | 559 |
| | (29,662) | | $ | (1,464,727) | | $ | 1,503,718 | | $ | 1,884,291 | | $ | (20) | | $ | 1,923,821 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | Accumulated | |
|
| ||||||||||
| |
| | Common Stock | | Additional | | | | Other | | Total |
| |||||||||||
| | Common Stock | | | In Treasury | | Paid in | | Retained | | Comprehensive | | Stockholders’ |
| ||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| (Loss) Income |
| Equity |
| |||||||
Balance at June 30, 2020 | | 54,972 | | $ | 550 |
| | (29,662) | | $ | (1,464,727) | | $ | 1,429,995 | | $ | 1,576,549 | | $ | 602 | | $ | 1,542,969 | |
Stock compensation expense | | — | |
| — |
| | — | |
| — | |
| 5,839 | |
| — | |
| — | |
| 5,839 | |
Exercise of stock options | | 263 | |
| 3 |
| | — | |
| — | |
| 17,138 | |
| — | |
| — | |
| 17,141 | |
Issuance of equity | | 34 | |
| — |
| | — | |
| — | |
| 2,037 | |
| — | |
| — | |
| 2,037 | |
Net income | | — | |
| — |
| | — | |
| — | |
| — | |
| 11,647 | |
| — | |
| 11,647 | |
Other comprehensive loss—other | | — | | | — | | | — | | | — | | | — | | | — | | | (481) | |
| (481) | |
Balance at September 30, 2020 | | 55,269 | | $ | 553 | | | (29,662) | | $ | (1,464,727) | | $ | 1,455,009 | | $ | 1,588,196 | | $ | 121 | | $ | 1,579,152 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | | 55,927 | | $ | 559 |
| | (29,662) | | $ | (1,464,727) | | $ | 1,503,718 | | $ | 1,884,291 | | $ | (20) | | $ | 1,923,821 | |
Stock compensation expense | | — | |
| — |
| | — | |
| — | |
| 5,974 | |
| — | |
| — | |
| 5,974 | |
Exercise of stock options | | 54 | |
| 1 |
| | — | |
| — | |
| 3,485 | |
| — | |
| — | |
| 3,486 | |
Issuance of equity | | 13 | |
| — |
| | — | |
| — | |
| (258) | |
| — | |
| — | |
| (258) | |
Accretion of non-controlling interest | | — | | | — | | | — | | | — | | | — | | | (5,033) | | | — | | | (5,033) | |
Net income | | — | |
| — |
| | — | |
| — | |
| — | |
| 5,936 | |
| — | |
| 5,936 | |
Other comprehensive loss—other | | — | | | — | | | — | | | — | | | — | | | — | | | (24) | | | (24) | |
Balance at September 30, 2021 | | 55,994 | | $ | 560 |
| | (29,662) | | $ | (1,464,727) | | $ | 1,512,919 | | $ | 1,885,194 | | $ | (44) | | $ | 1,933,902 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 |
| 54,285 | | $ | 543 |
| | (29,662) | | $ | (1,464,727) | | $ | 1,386,616 | | $ | 1,475,207 | | $ | 144 | | $ | 1,397,783 | |
Stock compensation expense |
| — | |
| — |
| | — | |
| — | |
| 18,854 | |
| — | |
| — | |
| 18,854 | |
Exercise of stock options |
| 803 | |
| 9 |
| | — | |
| — | |
| 48,639 | |
| — | |
| — | |
| 48,648 | |
Issuance of equity |
| 181 | |
| 1 |
| | — | |
| — | |
| 900 | |
| — | |
| — | |
| 901 | |
Net income |
| — | |
| — |
| | — | |
| — | |
| — | |
| 113,402 | |
| — | |
| 113,402 | |
Other comprehensive loss—other | | — | | | — | | | — | | | — | | | — | | | — | | | (23) | |
| (23) | |
Adoption of ASC 326 |
| — | |
| — |
| | — | |
| — | |
| — | |
| (413) | |
| — | |
| (413) | |
Balance at September 30, 2020 | | 55,269 | | $ | 553 | | | (29,662) | | $ | (1,464,727) | | $ | 1,455,009 | | $ | 1,588,196 | | $ | 121 | | $ | 1,579,152 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2020 |
| 55,549 | | $ | 555 |
| | (29,662) | | $ | (1,464,727) | | $ | 1,477,219 | | $ | 1,857,130 | | $ | (205) | | $ | 1,869,972 | |
Stock compensation expense |
| — | |
| — |
| | — | |
| — | |
| 19,384 | |
| — | |
| — | |
| 19,384 | |
Exercise of stock options |
| 277 | |
| 4 |
| | — | |
| — | |
| 17,754 | |
| — | |
| — | |
| 17,758 | |
Issuance of equity |
| 168 | |
| 1 |
| | — | |
| — | |
| (1,438) | |
| — | |
| — | |
| (1,437) | |
Accretion of non-controlling interest | | — | | | — | | | — | | | — | | | — | | | (5,033) | | | — | | | (5,033) | |
Net income |
| — | |
| — |
| | — | |
| — | |
| — | |
| 33,097 | |
| — | |
| 33,097 | |
Other comprehensive income—other | | — | | | — | | | — | | | — | | | — | | | — | | | 161 | | | 161 | |
Balance at September 30, 2021 |
| 55,994 | | $ | 560 |
| | (29,662) | | $ | (1,464,727) | | $ | 1,512,919 | | $ | 1,885,194 | | $ | (44) | | $ | 1,933,902 | |
| | | | | | | |
See accompanying notes to consolidated financial statements.
4
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30,
(Unaudited)
| | | | | | | | | | | | | | |
|
| 2020 |
| 2021 | |
| 2020 |
| 2021 | | ||||
Cash flows from operating activities: | | | | | | | | | | | | | | |
Net income | | $ | 101,755 | | $ | 27,161 | | | $ | 113,402 | | $ | 33,097 | |
Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | | | | | | | |
Depreciation and amortization | |
| 57,951 | |
| 43,942 | | |
| 88,061 | |
| 67,613 | |
Special charges and other | | | 8,309 | | | 6,205 | | | | 24,908 | | | 8,119 | |
Gain on sale of MCC | | | — | | | (8,000) | | | | — | | | (16,713) | |
Non-cash interest expense | |
| 941 | |
| 710 | | |
| 1,297 | |
| 1,066 | |
Non-cash stock compensation expense | |
| 13,015 | |
| 13,410 | | |
| 18,854 | |
| 19,384 | |
Non-cash income tax (benefit) provision | |
| (29,443) | |
| 12,699 | | |
| (26,537) | |
| 13,883 | |
Non-cash accretion on investments | |
| 907 | |
| 1,603 | | |
| 2,371 | |
| 2,271 | |
Changes in assets and liabilities, net of effects from acquisitions of businesses: | | | | | | | | | | | | | | |
Accounts receivable, net | |
| (24,535) | |
| (75,506) | | |
| (78,682) | |
| (30,846) | |
Pharmaceutical inventory | |
| 8,268 | |
| 4,545 | | |
| 7,325 | |
| 3,502 | |
Other assets | |
| (38,322) | |
| (78,329) | | |
| (66,612) | |
| (75,253) | |
Accounts payable and accrued liabilities | |
| 62,970 | |
| (151,549) | | |
| 110,710 | |
| (89,065) | |
Medical claims payable and other medical liabilities | |
| 10,510 | |
| 47,062 | | |
| 47,478 | |
| 111,063 | |
Tax contingencies | |
| 1,343 | |
| 1,339 | | |
| 1,914 | |
| 1,478 | |
Deferred credits and other long-term liabilities | |
| (2,537) | |
| 9,635 | | |
| (11,572) | |
| 6,936 | |
Other | |
| (289) | |
| 2,388 | | |
| (965) | |
| 3,521 | |
Net cash provided by (used in) operating activities | | | 170,843 | | | (142,685) | | |||||||
Net cash provided by operating activities | | | 231,952 | | | 60,056 | | |||||||
Net cash provided by operating activities from discontinued operations | | | 178,326 | | | — | | | | 177,800 | | | — | |
Net cash used in operating activities from continuing operations | |
| (7,483) | |
| (142,685) | | |||||||
Net cash provided by operating activities from continuing operations | |
| 54,152 | |
| 60,056 | | |||||||
Cash flows from investing activities: | | | | | | | | | | | | | | |
Capital expenditures | |
| (38,305) | |
| (35,105) | | |
| (56,006) | |
| (48,000) | |
Acquisitions and investments in businesses, net of cash acquired | |
| (369) | |
| (2,372) | | |
| (2,066) | |
| (2,373) | |
Purchases of investments | |
| (417,688) | |
| (680,347) | | |
| (661,004) | |
| (779,758) | |
Proceeds from maturities and sales of investments | |
| 288,137 | |
| 493,711 | | |
| 500,660 | |
| 765,468 | |
Net cash used in investing activities | | | (168,225) | | | (224,113) | | | | (218,416) | | | (64,663) | |
Net cash used in investing activities from discontinued operations | | | (156,800) | | | — | | | | (164,836) | | | — | |
Net cash used in investing activities from continuing operations | |
| (11,425) | |
| (224,113) | | |
| (53,580) | |
| (64,663) | |
Cash flows from financing activities: | | | | | | | | | | | | | | |
Proceeds from borrowings on revolving line of credit | |
| 80,000 | |
| — | | |
| 80,000 | |
| — | |
Proceeds from exercise of stock options | |
| 29,825 | |
| 14,271 | | |
| 48,284 | |
| 17,758 | |
Payments on debt, finance lease and deferred financing obligations | | | (40,264) | | | (112,238) | | | | (126,110) | | | (117,706) | |
Other | |
| (1,136) | |
| (1,178) | | |
| 902 | |
| (1,437) | |
Net cash provided by (used in) financing activities | | | 68,425 | | | (99,145) | | | | 3,076 | | | (101,385) | |
Net cash provided by financing activities from discontinued operations | | | 4,850 | | | — | | |||||||
Net cash used in financing activities from discontinued operations | | | (32,650) | | | — | | |||||||
Net cash provided by (used in) financing activities from continuing operations | |
| 63,575 | |
| (99,145) | | |
| 35,726 | |
| (101,385) | |
Net increase (decrease) in cash and cash equivalents from continuing operations | |
| 44,667 | |
| (465,943) | | |
| 36,298 | |
| (105,992) | |
Cash and cash equivalents at beginning of period | |
| 115,752 | |
| 1,144,450 | | |
| 115,752 | |
| 1,144,450 | |
Cash and cash equivalents at end of period | | $ | 160,419 | | $ | 678,507 | | | $ | 152,050 | | $ | 1,038,458 | |
| | | | | | | | | | | | | | |
Supplemental cash flow data: | | | | | | | | | | | | | | |
Non-cash investing activities: | | | | | | | | | | | | | | |
Assets acquired under finance leases and deferred financing obligations | | $ | 3,599 | | $ | — | | | $ | 3,599 | | $ | — | |
See accompanying notes to consolidated financial statements.
5
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JuneSeptember 30, 2021
(Unaudited)
NOTE A—General
Basis of Presentation
The accompanying unaudited consolidated financial statements of Magellan Health, Inc., a Delaware corporation (“Magellan”), include Magellan and its subsidiaries (together with Magellan, the “Company”). The financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the Securities and Exchange Commission’s (the “SEC”) instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. The results of operations for the three and sixnine months ended JuneSeptember 30, 2021 are not necessarily indicative of the results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated in consolidation.
On December 31, 2020, Magellan completed the sale of its Magellan Complete Care business (the “MCC Business”) to Molina Healthcare, Inc. (“Molina”), pursuant to a Stock and Asset Purchase Agreement, dated as of April 30, 2020, by and between the Company and Molina, for cash in the amount of $850 million plus closing adjustments of $158 million (subject to post-closing adjustments, if any), and the assumption by Molina of liabilities of the MCC Business (the “MCC Sale”). The MCC Business was the Company’s business of contracting with state Medicaid agencies and the U.S. Centers for Medicare and Medicaid Services (“CMS”) to manage total medical benefits or long-term support services for Medicaid and dual eligible Medicaid and Medicare populations.
On January 4, 2021, the Company and Centene Corporation (“Centene”) entered into an Agreement of Plan of Merger (the “Merger Agreement”) by and among the Company, Centene, and Mayflower Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Centene (“Merger Sub”), pursuant to which, subject to the terms and conditions set forth therein, Merger Sub will merge with and into the Company, with the Company surviving such merger (the “Merger”) as a wholly-owned subsidiary of Centene. Pursuant to the Merger Agreement, each issued and outstanding share of the Company’s common stock will be automatically canceled and converted into the right to receive $95.00 in cash. The Company expects to complete the transaction in the second halffourth quarter of 2021.
The Merger has been approved by the Company’s board of directors, the Company’s stockholders and Centene’s board of directors. The completion of the Merger is subject to customary closing conditions, including, among others, the receipt of various regulatory approvals. For additional information on the Merger Agreement and the Merger, please refer to the Company’s Current Reports on Forms 8-K, filed with the SEC on January 4, 2021 and March 31, 2021, and our definitive proxy statement filed with the SEC on February 19, 2021 (the “Proxy Statement”). The Company cannot guarantee that the Merger will be completed on a timely basis or at all or that, if completed, it will be completed on the terms set forth in the Merger Agreement.
These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2020 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2021.
Business Overview
The Company provides managed care and pharmacy solutions for some of the most complex areas of healthcare. The Company offers innovative solutions that combine analytics, technology and clinical rigor to drive better decision making, positively impact members’ health outcomes and optimize the cost of care for the customers Magellan serves. The Company provides services to health plans and other managed care organizations (“MCOs”), employers, labor unions, various military and governmental agencies and third-party administrators (“TPAs”). Magellan operates 3 segments: Healthcare, Pharmacy Management and Corporate.
6
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JuneSeptember 30, 2021
(Unaudited)
Healthcare Segment
The Healthcare Segment (“Healthcare”) customers include health plans, accountable care organizations (“ACOs”), employers, the United States military and various federal government agencies for whom Magellan provides carve-out management services for (i) behavioral health, (ii) employee assistance plans (“EAP”) and (iii) other areas of specialty healthcare including diagnostic imaging, musculoskeletal management, cardiac and physical medicine. These management services can be applied broadly across commercial, Medicaid and Medicare populations, or on a more targeted basis for our health plans and ACO customers. The segment also includes Magellan’s carve-out behavioral health contracts with various state Medicaid agencies, as well as certain provider assets that deliver primary care and behavioral healthcare services through an integrated approach.
Magellan’s coordination and management of these healthcare services are provided through its comprehensive network of medical and behavioral health professionals, clinics, hospitals, skilled nursing facilities, home care agencies and ancillary service providers. This network of credentialed providers is integrated with clinical and quality improvement programs to improve access to care and enhance the healthcare experience for individuals in need of care, while at the same time making the cost of these services more affordable for our customers. In addition to the Company’s provider assets where it provides treatment services in certain geographies, the Company also employs licensed behavioral health counselors to deliver non-medical counseling under certain government contracts.
The Company provides its Healthcare management services primarily through: (i) risk-based contractual arrangements, where the Company assumes all or a substantial portion of the responsibility for the cost of providing treatment services in exchange for a fixed per member per month (“PMPM”) fee, or (ii) administrative services only (“ASO”) contractual arrangements, where the Company provides services such as utilization review, claims administration and/or provider network management, but does not assume full responsibility for the cost of the treatment services, in exchange for an administrative fee and, in some instances, a gain share.
Pharmacy Management Segment
The Pharmacy Management segment (“Pharmacy Management”) is comprised of services that provide clinical and financial management of pharmaceuticals paid under both the medical and the pharmacy benefit. Pharmacy Management’s customer solutions include: (i) pharmacy benefit management (“PBM”) services, including pharmaceutical dispensing operations; (ii) pharmacy benefit administration (“PBA”) for state Medicaid and other government sponsored programs; (iii) clinical and formulary management programs; (iv) medical pharmacy management programs; and (v) programs for the integrated management of specialty drugs across both the medical and pharmacy benefit that treat complex conditions, regardless of site of service, method of delivery, or benefit reimbursement.
These services are available individually, in combination, or in a fully integrated manner. The Company markets its pharmacy management services to managed care organizations, employers, third party administrators, state governments, and other government agencies, exchanges, brokers and consultants. In addition, the Company will continue to upsell its pharmacy services to its existing customers and market its pharmacy solutions to the Healthcare customer base, including through integrated Pharmacy Management and Healthcare service offerings.
Pharmacy Management contracts with its customers for services using risk-based, gain share or ASO arrangements. In addition, Pharmacy Management provides services for most of the MCC business.
On May 11, 2020, the Company announced its decision to exitof the Medicarenon-renewal of Pharmacy Management’s individual Part D businessPrescription Drug Plan (“PDP”) at the end of 2020. Any activity related to Medicare Part D business reflected in the sixnine months ended JuneSeptember 30, 2021 is related to final run-out of the 2020 Part D contract provision and is included in continuing operations. The Company continues to retain its Medicare Employer Group Waiver Plan as well as full capabilities to serve the PBM needs of its existing and prospective Medicare customers.
7
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JuneSeptember 30, 2021
(Unaudited)
Corporate
This segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy Management segments that are largely associated with costs related to being a publicly traded company.
Summary of Significant Accounting Policies
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 was effective for the Company beginning in the first quarter of 2021. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company can include, among other things, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. In addition, the Company also makes estimates in relation to revenue recognition under Accounting Standard Codification 606 (“ASC 606”) which are explained in more detail in “Revenue Recognition” below. Actual results could differ from those estimates.
8
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JuneSeptember 30, 2021
(Unaudited)
Revenue Recognition
Virtually all of the Company’s revenues are derived from business in North America. The following tables disaggregate our revenue for the three and sixnine months ended JuneSeptember 30, 2020 and 2021 by major service line, type of customer and timing of revenue recognition (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | Three Months Ended September 30, 2020 | ||||||||||||||||||||
| Healthcare |
| Pharmacy Management |
| Elimination |
| Total | Healthcare |
| Pharmacy Management |
| Elimination |
| Total | ||||||||
Major Service Lines | | | | | | | | | | | | | | | | | | | | | | |
Behavioral & Specialty Health | | | | | | | | | | | | | | | | | | | | | | |
Risk-based, non-EAP | $ | 344,199 | | $ | — | | $ | (92) | | $ | 344,107 | $ | 352,442 | | $ | — | | $ | (95) | | $ | 352,347 |
EAP risk-based | | 77,419 | | | — | | | — | | | 77,419 | | 74,703 | | | — | | | — | | | 74,703 |
ASO | | 59,403 | | | 12,271 | | | (85) | | | 71,589 | | 62,306 | | | 11,631 | | | (50) | | | 73,887 |
PBM, including dispensing | | — | | | 499,484 | | | (4,831) | | | 494,653 | | — | | | 540,615 | | | (5,117) | | | 535,498 |
Medicare Part D | | — | | | 56,711 | | | — | | | 56,711 | | — | | | 65,931 | | | — | | | 65,931 |
PBA | | — | | | 30,811 | | | — | | | 30,811 | | — | | | 35,068 | | | — | | | 35,068 |
Formulary management | | — | | | 25,061 | | | — | | | 25,061 | | — | | | 31,327 | | | — | | | 31,327 |
Other | | — | | | (276) | | | — | | | (276) | | — | | | 1,356 | | | — | | | 1,356 |
Total net revenue | $ | 481,021 | | $ | 624,062 | | $ | (5,008) | | $ | 1,100,075 | $ | 489,451 | | $ | 685,928 | | $ | (5,262) | | $ | 1,170,117 |
| | | | | | | | | | | | | | | | | | | | | | |
Type of Customer | | | | | | | | | | | | | | | | | | | | | | |
Government | $ | 222,393 | | $ | 208,989 | | $ | — | | $ | 431,382 | $ | 240,845 | | $ | 210,040 | | $ | — | | $ | 450,885 |
Non-government | | 258,628 | | | 415,073 | | | (5,008) | | | 668,693 | | 248,606 | | | 475,888 | | | (5,262) | | | 719,232 |
Total net revenue | $ | 481,021 | | $ | 624,062 | | $ | (5,008) | | $ | 1,100,075 | $ | 489,451 | | $ | 685,928 | | $ | (5,262) | | $ | 1,170,117 |
| | | | | | | | | | | | | | | | | | | | | | |
Timing of Revenue Recognition | | | | | | | | | | | | | | | | | | | | | | |
Transferred at a point in time | $ | — | | $ | 556,195 | | $ | (4,831) | | $ | 551,364 | $ | — | | $ | 606,546 | | $ | (5,117) | | $ | 601,429 |
Transferred over time | | 481,021 | | | 67,867 | | | (177) | | | 548,711 | | 489,451 | | | 79,382 | | | (145) | | | 568,688 |
Total net revenue | $ | 481,021 | | $ | 624,062 | | $ | (5,008) | | $ | 1,100,075 | $ | 489,451 | | $ | 685,928 | | $ | (5,262) | | $ | 1,170,117 |
9
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JuneSeptember 30, 2021
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 | Three Months Ended September 30, 2021 | ||||||||||||||||||||
| Healthcare |
| Pharmacy Management |
| Elimination |
| Total | Healthcare |
| Pharmacy Management |
| Elimination |
| Total | ||||||||
Major Service Lines | | | | | | | | | | | | | | | | | | | | | | |
Behavioral & Specialty Health | | | | | | | | | | | | | | | | | | | | | | |
Risk-based, non-EAP | $ | 429,289 | | $ | — | | $ | (92) | | $ | 429,197 | $ | 437,809 | | $ | — | | $ | (78) | | $ | 437,731 |
EAP risk-based | | 82,145 | | | — | | | — | | | 82,145 | | 75,369 | | | — | | | — | | | 75,369 |
ASO | | 73,705 | | | 12,353 | | | (52) | | | 86,006 | | 67,100 | | | 11,834 | | | (97) | | | 78,837 |
PBM, including dispensing | | — | | | 546,827 | | | (3,608) | | | 543,219 | | — | | | 587,622 | | | (3,324) | | | 584,298 |
Medicare Part D | | — | | | 1,508 | | | — | | | 1,508 | | — | | | 1,229 | | | — | | | 1,229 |
PBA | | — | | | 43,470 | | | — | | | 43,470 | | — | | | 39,206 | | | — | | | 39,206 |
Formulary management | | — | | | 33,062 | | | — | | | 33,062 | | — | | | 34,734 | | | — | | | 34,734 |
Other | | — | | | 2,161 | | | — | | | 2,161 | | — | | | 2,714 | | | — | | | 2,714 |
Total net revenue | $ | 585,139 | | $ | 639,381 | | $ | (3,752) | | $ | 1,220,768 | $ | 580,278 | | $ | 677,339 | | $ | (3,499) | | $ | 1,254,118 |
| | | | | | | | | | | | | | | | | | | | | | |
Type of Customer | | | | | | | | | | | | | | | | | | | | | | |
Government | $ | 249,324 | | $ | 154,370 | | $ | — | | $ | 403,694 | $ | 235,636 | | $ | 142,642 | | $ | — | | $ | 378,278 |
Non-government | | 335,815 | | | 485,011 | | | (3,752) | | | 817,074 | | 344,642 | | | 534,697 | | | (3,499) | | | 875,840 |
Total net revenue | $ | 585,139 | | $ | 639,381 | | $ | (3,752) | | $ | 1,220,768 | $ | 580,278 | | $ | 677,339 | | $ | (3,499) | | $ | 1,254,118 |
| | | | | | | | | | | | | | | | | | | | | | |
Timing of Revenue Recognition | | | | | | | | | | | | | | | | | | | | | | |
Transferred at a point in time | $ | — | | $ | 548,335 | | $ | (3,608) | | $ | 544,727 | $ | — | | $ | 588,851 | | $ | (3,324) | | $ | 585,527 |
Transferred over time | | 585,139 | | | 91,046 | | | (144) | | | 676,041 | | 580,278 | | | 88,488 | | | (175) | | | 668,591 |
Total net revenue | $ | 585,139 | | $ | 639,381 | | $ | (3,752) | | $ | 1,220,768 | $ | 580,278 | | $ | 677,339 | | $ | (3,499) | | $ | 1,254,118 |
| | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 | Nine Months Ended September 30, 2020 | ||||||||||||||||||||
| Healthcare |
| Pharmacy Management |
| Elimination |
| Total | Healthcare |
| Pharmacy Management |
| Elimination |
| Total | ||||||||
Major Service Lines | | | | | | | | | | | | | | | | | | | | | | |
Behavioral & Specialty Health | | | | | | | | | | | | | | | | | | | | | | |
Risk-based, non-EAP | $ | 694,044 | | $ | — | | $ | (182) | | $ | 693,862 | $ | 1,046,486 | | $ | — | | $ | (277) | | $ | 1,046,209 |
EAP risk-based | | 157,357 | | | — | | | — | | | 157,357 | | 232,060 | | | — | | | — | | | 232,060 |
ASO | | 118,526 | | | 23,805 | | | (168) | | | 142,163 | | 180,832 | | | 35,436 | | | (218) | | | 216,050 |
PBM, including dispensing | | — | | | 1,017,596 | | | (9,398) | | | 1,008,198 | | — | | | 1,558,211 | | | (14,515) | | | 1,543,696 |
Medicare Part D | | — | | | 112,377 | | | — | | | 112,377 | | — | | | 178,308 | | | — | | | 178,308 |
PBA | | — | | | 60,940 | | | — | | | 60,940 | | — | | | 96,008 | | | — | | | 96,008 |
Formulary management | | — | | | 47,222 | | | — | | | 47,222 | | — | | | 78,550 | | | — | | | 78,550 |
Other | | — | | | 335 | | | — | | | 335 | | — | | | 1,690 | | | — | | | 1,690 |
Total net revenue | $ | 969,927 | | $ | 1,262,275 | | $ | (9,748) | | $ | 2,222,454 | $ | 1,459,378 | | $ | 1,948,203 | | $ | (15,010) | | $ | 3,392,571 |
| | | | | | | | | | | | | | | | | | | | | | |
Type of Customer | | | | | | | | | | | | | | | | | | | | | | |
Government | $ | 449,495 | | $ | 412,946 | | $ | — | | $ | 862,441 | $ | 690,340 | | $ | 622,986 | | $ | — | | $ | 1,313,326 |
Non-government | | 520,432 | | | 849,329 | | | (9,748) | | | 1,360,013 | | 769,038 | | | 1,325,217 | | | (15,010) | | | 2,079,245 |
Total net revenue | $ | 969,927 | | $ | 1,262,275 | | $ | (9,748) | | $ | 2,222,454 | $ | 1,459,378 | | $ | 1,948,203 | | $ | (15,010) | | $ | 3,392,571 |
| | | | | | | | | | | | | | | | | | | | | | |
Timing of Revenue Recognition | | | | | | | | | | | | | | | | | | | | | | |
Transferred at a point in time | $ | — | | $ | 1,129,973 | | $ | (9,398) | | $ | 1,120,575 | $ | — | | $ | 1,736,519 | | $ | (14,515) | | $ | 1,722,004 |
Transferred over time | | 969,927 | | | 132,302 | | | (350) | | | 1,101,879 | | 1,459,378 | | | 211,684 | | | (495) | | | 1,670,567 |
Total net revenue | $ | 969,927 | | $ | 1,262,275 | | $ | (9,748) | | $ | 2,222,454 | $ | 1,459,378 | | $ | 1,948,203 | | $ | (15,010) | | $ | 3,392,571 |
10
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JuneSeptember 30, 2021
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||
| Healthcare |
| Pharmacy Management |
| Elimination |
| Total | Healthcare |
| Pharmacy Management |
| Elimination |
| Total | ||||||||
Major Service Lines | | | | | | | | | | | | | | | | | | | | | | |
Behavioral & Specialty Health | | | | | | | | | | | | | | | | | | | | | | |
Risk-based, non-EAP | $ | 802,731 | | $ | — | | $ | (178) | | $ | 802,553 | $ | 1,240,540 | | $ | — | | $ | (256) | | $ | 1,240,284 |
EAP risk-based | | 170,266 | | | — | | | — | | | 170,266 | | 245,634 | | | — | | | — | | | 245,634 |
ASO | | 145,152 | | | 24,170 | | | (127) | | | 169,195 | | 212,253 | | | 36,004 | | | (224) | | | 248,033 |
PBM, including dispensing | | — | | | 1,085,622 | | | (7,007) | | | 1,078,615 | | — | | | 1,673,245 | | | (10,331) | | | 1,662,914 |
Medicare Part D | | — | | | 1,685 | | | — | | | 1,685 | | — | | | 2,913 | | | — | | | 2,913 |
PBA | | — | | | 93,352 | | | — | | | 93,352 | | — | | | 132,558 | | | — | | | 132,558 |
Formulary management | | — | | | 62,244 | | | — | | | 62,244 | | — | | | 96,979 | | | — | | | 96,979 |
Other | | — | | | 4,507 | | | — | | | 4,507 | | — | | | 7,220 | | | — | | | 7,220 |
Total net revenue | $ | 1,118,149 | | $ | 1,271,580 | | $ | (7,312) | | $ | 2,382,417 | $ | 1,698,427 | | $ | 1,948,919 | | $ | (10,811) | | $ | 3,636,535 |
| | | | | | | | | | | | | | | | | | | | | | |
Type of Customer | | | | | | | | | | | | | | | | | | | | | | |
Government | $ | 505,616 | | $ | 310,408 | | $ | — | | $ | 816,024 | $ | 741,252 | | $ | 453,050 | | $ | — | | $ | 1,194,302 |
Non-government | | 612,533 | | | 961,172 | | | (7,312) | | | 1,566,393 | | 957,175 | | | 1,495,869 | | | (10,811) | | | 2,442,233 |
Total net revenue | $ | 1,118,149 | | $ | 1,271,580 | | $ | (7,312) | | $ | 2,382,417 | $ | 1,698,427 | | $ | 1,948,919 | | $ | (10,811) | | $ | 3,636,535 |
| | | | | | | | | | | | | | | | | | | | | | |
Timing of Revenue Recognition | | | | | | | | | | | | | | | | | | | | | | |
Transferred at a point in time | $ | — | | $ | 1,087,307 | | $ | (7,007) | | $ | 1,080,300 | $ | — | | $ | 1,676,158 | | $ | (10,331) | | $ | 1,665,827 |
Transferred over time | | 1,118,149 | | | 184,273 | | | (305) | | | 1,302,117 | | 1,698,427 | | | 272,761 | | | (480) | | | 1,970,708 |
Total net revenue | $ | 1,118,149 | | $ | 1,271,580 | | $ | (7,312) | | $ | 2,382,417 | $ | 1,698,427 | | $ | 1,948,919 | | $ | (10,811) | | $ | 3,636,535 |
Per Member Per Month (“PMPM”) Revenue. Almost all of the Healthcare revenue and a small portion of the Pharmacy Management revenue is paid on a PMPM basis. PMPM revenue is inclusive of revenue from the Company’s risk, EAP and ASO contracts and primarily relates to managed care contracts for services such as the provision of behavioral healthcare, specialty healthcare or pharmacy management. PMPM contracts generally have a term of one year or longer, with the exception of government contracts where the customer can terminate with as little as 30 days’ notice for no significant penalty. All managed care contracts have a single performance obligation that constitutes a series for the provision of managed healthcare services for a population of enrolled members for the duration of the contract. The transaction price for PMPM contracts is entirely variable as it primarily includes PMPM fees associated with unspecified membership that fluctuates throughout the contract. In certain contracts, PMPM fees also include adjustments for things such as performance incentives, performance guarantees and risk shares. The Company generally estimates the transaction price using an expected value methodology and amounts are only included in the net transaction price to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. The majority of the Company’s net PMPM transaction price relates specifically to its efforts to transfer the service for a distinct increment of the series (e.g. day or month) and is recognized as revenue in the month in which members are entitled to service. The remaining transaction price is recognized over the contract period (or portion of the series to which it specifically relates) based upon estimated membership as a measure of progress.
Pharmacy Benefit Management Revenue. The Company’s customers for PBM business, including pharmaceutical dispensing operations, are generally comprised of MCOs, employer groups and health plans. PBM relationships generally have an expected term of one year or longer. A master services arrangement (“MSA”) is executed by the Company and the customer, which outlines the terms and conditions of the PBM services to be provided. When a member in the customer’s organization submits a prescription, a claim is created which is presented for approval. The acceptance of each individual claim creates enforceable rights and obligations for each party and represents a separate contract. For each individual claim, the performance obligations are limited to the processing and adjudication of the claim, or dispensing of the products purchased. Generally, the transaction price for PBM services is explicitly listed in each contract and does not represent variable consideration. The Company recognizes PBM revenue, which consists of a negotiated prescription price (ingredient cost plus dispensing fee), co-payments and any associated administrative fees,
11
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JuneSeptember 30, 2021
(Unaudited)
when claims are adjudicated or the drugs are shipped. The Company recognizes PBM revenue on a gross basis (i.e. including drug costs and co-payments) as it is acting as the principal in the arrangement, controls the underlying service, and is contractually obligated to its clients and network pharmacies, which is a primary indicator of gross reporting. In addition, the Company is solely responsible for the claims adjudication process, negotiating the prescription price for the pharmacy, collecting payments from the client for drugs dispensed by the pharmacy, and managing the total prescription drug relationship with the client’s members. If the Company enters into a contract where it is only an administrator, and does not assume any of the risks previously noted, revenue will be recognized on a net basis. For dispensing, at the time of shipment, the earnings process is complete; the obligation of the Company’s customer to pay for the specialty pharmaceutical drugs is fixed, and, due to the nature of the product, the member may neither return the specialty pharmaceutical drugs nor receive a refund.
Pharmacy Benefit Administration Revenue. The Company provides Medicaid pharmacy services to states and other government sponsored programs. PBA contracts are generally multi-year arrangements but include language regarding early termination for convenience without material penalty provisions that results in enforceable rights and obligations on a month-to-month basis. In PBA arrangements, the Company is generally paid a fixed fee per month to provide PBA services. In addition, some PBA contracts contain upfront fees that constitute a material right. For contracts without an upfront fee, there is a single performance obligation to stand ready to provide the PBA services required for the contracted period. The Company believes that the customer receives the PBA benefits each day from access to the claims processing activities, and has concluded that a time-based measure is appropriate for recognizing PBA revenue. For contracts with an upfront fee, the material right represents an additional performance obligation. Amounts allocated to the material right are initially recorded as a contract liability and recognized as revenue over the anticipated period of benefit of the material right, which generally ranges from 2 to 10 years.
Formulary Management Revenue. The Company administers formulary management programs for certain clients through which the Company coordinates the achievement, calculation and collection of rebates and administrative fees from pharmaceutical manufacturers on behalf of clients. Formulary management contracts generally have a term of one year or longer. All formulary management contracts have a single performance obligation that constitutes a series for the provision of rebate services for a drug, with utilization measured and settled on a quarterly basis, for the duration of the arrangement. The Company retains its administrative fee and/or a percentage of rebates that is included in its contract with the client from collecting the rebate from the manufacturer. While the administrative fee and/or the percentage of rebates retained is fixed, there is an unknown quantity of pharmaceutical purchases (utilization) during each quarter; therefore the transaction price itself is variable. The Company uses the expected value methodology to estimate the total rebates earned each quarter based on estimated volumes of pharmaceutical purchases by the Company’s clients during the quarter, as well as historical and/or anticipated retained rebate percentages. The Company does not record as rebate revenue any rebates that are passed through to its clients.
In relation to the Company’s PBM business, the Company administers rebate programs through which it receives rebates from pharmaceutical manufacturers that are shared with its customers. The Company recognizes rebates when the Company is entitled to them and when the amounts of the rebates are determinable. The amount recorded for rebates earned by the Company from the pharmaceutical manufacturers is recorded as a reduction of cost of goods sold.
Government EAP Risk-Based Revenue. The Company has certain contracts with federal customers for the provision of various managed care services, which are classified as EAP risk-based business. These contracts are generally multi-year arrangements. The Company’s federal contracts are reimbursed on either a fixed fee basis or a cost reimbursement basis. The performance obligation on a fixed fee contract is to stand ready to provide the staffing required for the contracted period. For fixed fee contracts, the Company believes the invoiced amount corresponds directly with the value to the customer of the Company’s performance completed to date; therefore, the Company is utilizing the “right to invoice” practical expedient, with revenue recognition in the amount for which the Company has the right to invoice.
The performance obligation on a cost reimbursement contract is to stand ready to provide the activity or services purchased by the customer, such as the operation of a counseling services group or call center. The performance obligation represents a series for the duration of the arrangement. The reimbursement rate is fixed per the contract; however, the level of activity (e.g., number of hours, number of counselors or number of units) is variable. A majority of
12
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JuneSeptember 30, 2021
(Unaudited)
the Company’s cost reimbursement transaction price relates specifically to its efforts to transfer the service for a distinct increment of the series (e.g. day or month) and is recognized as revenue when the portion of the series for which it relates has been provided (i.e. as the Company provides hours, counselors or units of service).
In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the contracts in the Company’s PBM business, these reporting requirements are not applicable. The majority of the Company’s remaining contracts meet certain exemptions as defined in ASC 606-10-50-14 through 606-10-50-14A, including (i) performance obligation is part of a contract that has an original expected duration of one year or less; (ii) the right to invoice practical expedient; and (iii) variable consideration related to unsatisfied performance obligations that is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation, and the terms of that variable consideration relate specifically to our efforts to transfer the distinct service, or to a specific outcome from transferring the distinct service. For the Company’s contracts that pertain to these exemptions: (i) the remaining performance obligations primarily relate to the provision of managed healthcare services to the customers’ membership; (ii) the estimated remaining duration of these performance obligations ranges from the remainder of the current calendar year to three years; and (iii) variable consideration for these contracts primarily includes net PMPM fees associated with unspecified membership that fluctuates throughout the contract.
Accounts Receivable, Contract Assets and Contract Liabilities
Accounts receivable, contract assets and contract liabilities consisted of the following (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| June 30, |
| |
| |
| December 31, |
| September 30, |
| |
| |
| ||||||||
| 2020 | | 2021 | | $ Change | | % Change | | 2020 | | 2021 | | $ Change | | % Change | | ||||||||
Accounts receivable | $ | 799,803 | | $ | 911,571 | | $ | 111,768 | | | 14.0% | | $ | 799,803 | | $ | 856,059 | | $ | 56,256 | | | 7.0% | |
Contract assets | | 3,566 | | | 6,171 | | | 2,605 | | | 73.1% | | | 3,566 | | | 8,114 | | | 4,548 | | | 127.5% | |
Contract liabilities - current | | 6,772 | | | 6,891 | | | 119 | | | 1.8% | | | 6,772 | | | 7,287 | | | 515 | | | 7.6% | |
Contract liabilities - long-term | | 11,073 | | | 11,136 | | | 63 | | | 0.6% | | | 11,073 | | | 11,290 | | | 217 | | | 2.0% | |
Accounts receivable, which are included in accounts receivable, other current assets and other long-term assets on the consolidated balance sheets, increased by $111.8$56.3 million, mainly due to timing of receipts. Contract assets, which are included in other current assets on the consolidated balance sheets, increased by $2.6$4.5 million, mainly due to the timing of accrual of certain performance incentives. Contract liabilities – current, which are included in accrued liabilities on the consolidated balance sheets, increased by $0.1$0.5 million, mainly due to certain revenue payments received in advance. Contract liabilities – long-term, which are included in deferred credits and other long-term liabilities on the consolidated balance sheets, increased by $0.1$0.2 million mainly due to payments received for which recognition will be long term partially offset by certain balances which became current.
During the three months ended JuneSeptember 30, 2021, the Company recognized revenue of $2.1$2.0 million that was included in current contract liabilities at March 31,June 30, 2021. During the sixnine months ended JuneSeptember 30, 2021, the Company recognized revenue of $3.2$5.9 million that was included in current contract liabilities at December 31, 2020. The estimated timing of recognition of amounts included in contract liabilities at JuneSeptember 30, 2021 are as follows: 2021—$4.82.1 million; 2022—$4.26.5 million; 2023—$3.74.2 million; 2024 and beyond—$5.35.8 million. During the three and sixnine months ended JuneSeptember 30, 2021, the revenue the Company recognized related to performance obligations that were satisfied, or partially satisfied, in previous periods was not material.
The Company’s accounts receivable consists of amounts due from customers throughout the United States. Collateral is generally not required. A majority of the Company’s contracts have payment terms in the month of service, or within a few months thereafter. The timing of payments from customers from time to time generates contract assets or contract liabilities; however, these amounts are immaterial.
The Company’s accounts receivable is net of an allowance for credit losses. The estimate of current expected
13
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JuneSeptember 30, 2021
(Unaudited)
credit losses on trade receivables considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management elected to disaggregate trade receivables into business segments due to risk characteristics unique to each platform given the individual lines of business and market. Pooling was further disaggregated based on either geography or product type.
The Company leveraged historical write offs over a defined lookback period in deriving a historical loss rate. The expected credit loss model further considers current conditions and reasonable and supportable forecasts through the use of an adjustment for current and projected macroeconomic factors. Management identified appropriate macroeconomic indicators based on tangible correlation to historical losses, giving consideration to the location and risks associated with the Company’s customers.
Significant Customers
Customers exceeding ten percent of the consolidated Company’s net revenues
The Company had no customers that exceeded ten percent of the Company’s net revenues from continuing operations.
Customers exceeding ten percent of segment net revenues
The following customers generated in excess of ten percent of net revenues from continuing operations for the respective segment for the sixnine months ended JuneSeptember 30, 2020 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | |
Segment |
| Term Date |
| 2020 |
| 2021 |
|
| Term Date |
| 2020 |
| 2021 |
| ||||
Healthcare | | | | | | | | | | | | | | | | | | |
Customer A | | December 31, 2021 | | $ | 175,107 | | $ | 188,177 | | | December 31, 2021 | | $ | 259,286 | | $ | 283,373 | |
Customer B | | December 31, 2022 | | | 96,657 | | | 172,248 | | | December 31, 2024 | | | 147,177 | | | 300,450 | |
| | | | | | | | | | | | | | | | | | |
Pharmacy Management | | | | | | | | | | | | | | | | | | |
Customer C | | March 31, 2024 | | | 195,930 | | | 169,371 | | | March 31, 2024 | | | 284,697 | | | 247,786 | |
Concentration of Business
The Company also has a significant concentration of business with various counties in the State of Pennsylvania (the “Pennsylvania Counties”) which are part of the Pennsylvania Medicaid program, with members under its contract with Centers for Medicare and Medicaid Services (“CMS”)CMS and with various agencies and departments of the United States federal government. Net revenues from the Pennsylvania Counties in the aggregate totaled $272.2$428.6 million and $299.8$448.1 million for the sixnine months ended JuneSeptember 30, 2020 and 2021, respectively. The contract for 1 of the Pennsylvania Counties, which represents net revenues of $58.8$93.7 million and $65.0$99.2 million for the sixnine months ended JuneSeptember 30, 2020 and 2021, respectively, is scheduled to terminate on December 31, 2021. Net revenues from members in relation to its contracts with CMS in aggregate totaled $112.3$178.3 million and $1.7$2.9 million for the sixnine months ended JuneSeptember 30, 2020 and 2021, respectively. As of December 31, 2020 and JuneSeptember 30, 2021, the Company had $69.6 million and $41.2$40.7 million, respectively, in net receivables associated with Medicare Part D from CMS and other parties related to this business. In May 2020, the Company announced its decision to exitof the non-renewal of Pharmacy Management’s individual Part D businessPDP at the end of 2020. Net revenues from contracts with various agencies and departments of the United States federal government in aggregate totaled $136.1$200.1 million and $150.0$215.4 million for the sixnine months ended JuneSeptember 30, 2020 and 2021, respectively.
The Company’s contracts with customers typically have stated terms of one to three years, and in certain cases contain renewal provisions (at the customer’s option) for successive terms of between one and two years (unless terminated earlier). Substantially all of these contracts may be immediately terminated with cause and many of the Company’s contracts are terminable without cause by the customer or the Company either upon the giving of requisite notice and the passage of a specified period of time (typically between 30 and 180 days) or upon the occurrence of other specified events. In addition, the Company’s contracts with federal, state and local governmental agencies generally are
14
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JuneSeptember 30, 2021
(Unaudited)
conditioned on legislative appropriations. These contracts generally can be terminated or modified by the customer if such appropriations are not made.
Leases
The Company leases certain office space, distribution centers, land and equipment. We assess each contract to determine if it contains a lease. This assessment is based on (i) the right to control the use of an identified asset; (ii) the right to obtain substantially all of the economic benefits from the use of the identified asset; and (iii) the right to use the identified asset. The Company elected the short-term lease practical expedient; thus, leases with an initial term of twelve months or less are not capitalized and the expense is recognized on a straight-line basis. Most leases include 1 or more options to renew, with renewal terms that can extend the lease from one to ten years. The exercise of renewal options areis at the sole discretion of the Company. Renewal options that the Company is reasonably certain to accept are recognized as part of the right-of-use (“ROU”) asset.
Operating leases are included in other long-term assets, accrued liabilities and deferred credits and other long-term liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, current debt, finance lease deferred financing obligations and long-term debt, finance lease and deferred financing obligations in the consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments per the lease. Operating lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. As the rate implicit in most of our leases is not readily determinable, the Company used its incremental borrowing rate to determine the present value of lease payments.
The following table shows the components of lease expenses for the three and sixnine months ended JuneSeptember 30, 2021 (in thousands):
| | | | | | | | | | | | |
| Three Months Ended |
| Six Months Ended |
| Three Months Ended September 30, 2021 |
| Nine Months Ended September 30, 2021 |
| ||||
Operating lease cost | $ | 2,340 | | $ | 4,748 | | $ | 2,292 | | $ | 7,040 | |
Finance lease cost: | | | | | | | | | | | | |
Amortization of right-of-use asset | | 565 | | | 1,272 | | | 471 | | | 1,743 | |
Interest on lease liabilities | | 155 | | | 321 | | | 144 | | | 465 | |
Total finance lease cost | | 720 | | | 1,593 | | | 615 | | | 2,208 | |
Short-term lease cost | | 41 | | | 81 | | | 42 | | | 123 | |
Variable lease cost | | 539 | | | 763 | | | 527 | | | 1,290 | |
Total lease cost | | 3,640 | | | 7,185 | | | 3,476 | | | 10,661 | |
Sublease income | | — | | | (7) | | | — | | | (7) | |
Net lease cost | $ | 3,640 | | $ | 7,178 | | $ | 3,476 | | $ | 10,654 | |
| | | | | | | | | | | | |
15
MAGELLAN HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JuneSeptember 30, 2021
(Unaudited)
The following table shows the components of the lease assets and liabilities as of JuneSeptember 30, 2021 (in thousands):
| | | | |
| June 30, 2021 | September 30, 2021 | ||
Operating leases: | | | | |
Other long-term assets | $ | 31,998 | $ | 30,411 |
| | | | |
Accrued liabilities | $ | 10,939 | $ | 10,994 |
Deferred credits and other long-term liabilities | | 32,880 | | 32,063 |
Total operating lease liabilities | $ | 43,819 | $ | 43,057 |
| | | | |
Finance leases: | | | | |
Property and equipment, net | $ | 11,290 | $ | 9,637 |
| | | | |
Current debt, finance lease and deferred financing obligations | $ | 4,483 | $ | 4,493 |
Long-term debt, finance lease and deferred financing obligations | | 9,670 | | 8,524 |
Total finance lease liabilities | $ | 14,153 | $ | 13,017 |
| | | | |
The maturity dates of the Company’s leases as of JuneSeptember 30, 2021 are summarized below (in thousands):
| | | | |
| June 30, 2021 | September 30, 2021 | ||
2021 | $ | 8,238 | $ | 4,334 |
2022 | | 15,442 | | 15,795 |
2023 | | 12,718 | | 13,178 |
2024 | | 10,943 | | 11,392 |
2025 | | 5,725 | | 6,085 |
2026 and beyond | | 5,933 | | 6,171 |
Total lease payments | | 58,999 | | 56,955 |
Less interest | | (1,027) | | (881) |
Present value of lease liabilities | $ | 57,972 | $ | 56,074 |
| | | | |
The following table shows the weighted average remaining lease term and discount rate as of JuneSeptember 30, 2021:
Supplemental cash flow information relating to leases is as follows (in thousands):
16 MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Fair Value Measurements The Company has certain assets and liabilities that are required to be measured at fair value on a recurring basis. These assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, which are as follows: Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs). Level 3—Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including the Company’s data. In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s assets that are required to be measured at fair value as of December 31, 2020 and
For the The carrying values of financial instruments, including accounts receivable and accounts payable, approximate their fair values due to their short-term maturities. The fair value of the Notes (as defined below) of 17 MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited) fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future. All of the Company’s investments are classified as “available-for-sale” and are carried at fair value. Cash and Cash Equivalents Cash equivalents are short-term, highly liquid interest-bearing investments with maturity dates of three months or less when purchased, consisting primarily of money market instruments. Book overdrafts are reflected within accounts payable on the balance sheets. At Investments If a debt security is in an unrealized loss position and the Company has the intent to sell the debt security, or it is more likely than not that the Company will have to sell the debt security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to other-than-temporary impairment losses recognized in income in the consolidated statements of comprehensive income. For impaired debt securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in other-than-temporary impairment losses recognized in net income and the non-credit component of the other-than-temporary impairment is recognized in other comprehensive income in the consolidated statements of comprehensive income. As of December 31, 2020 and
18 MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited) The maturity dates of the Company’s investments as of September 30, 2021 are summarized below (in thousands):
Income Taxes The Company’s effective income tax rates from continuing operations were The Company files a consolidated federal income tax return with its eighty-percent or more controlled subsidiaries. The Company and its subsidiaries also file income tax returns in various state and local jurisdictions. The Coronavirus Aid, Relief, and Economic Security Act was signed into law on March 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law on December 27, 2020 and The American Rescue Plan Act of 2021 was signed March 11, 2021. All three acts provide widespread emergency relief for the economy and aid to corporations including several significant provisions related to taxes. As of Net Operating Loss Carryforwards The Company and its subsidiaries have $75.0 million of net operating loss carryforwards (“NOLs”) available to reduce state and local taxable income at certain subsidiaries in 2021 and subsequent years. Most of these NOLs will expire in 2021 and subsequent years if not used and are subject to examination and adjustment by the respective tax authorities. In addition, the Company’s utilization of certain of these NOLs is subject to limitations as to the timing and amount. Other than those considered in determining the valuation allowances discussed below, the Company does not believe these limitations will restrict the Company’s ability to use any of these state and local NOLs before they expire. Deferred tax assets as of December 31, 2020 and Health Care Reform The Patient Protection and the Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Law”), imposed a mandatory annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The Company obtained rate adjustments from customers to cover the direct costs of these fees and the impact from non-deductibility of such fees for federal and state income tax 19 MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2021 (Unaudited) purposes. Congress repealed the HIF fee effective for plan years after December 31, 2020. For 2020 the HIF fee was $36.2 million, of which $12.4 related to continuing operations, and was paid in 2020. Stock Compensation At December 31, 2020 and For the nine months ended September 30, 2020, tax expense on deficiencies (net of the tax deductions in excess of recognized stock compensation expense) was $2.2 million, which was included as an increase to income tax expense. For the nine months ended September 30, 2021, the benefit of tax deductions in excess of recognized stock compensation expense (net of deficiencies) was $2.0 million, which was included as a reduction of income tax expense. Summarized information related to the Company’s stock options for the nine months ended September 30, 2021 is as follows:
Summarized information related to the Company’s nonvested restricted stock awards (“RSAs”) for the nine months ended September 30, 2021 is as follows:
MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Summarized information related to the Company’s nonvested restricted stock units (“RSUs”) for the
Grants of RSAs vest on the anniversary of the grant. In general, RSUs vest ratably on each anniversary over the three years subsequent to grant.
Summarized information related to the Company’s nonvested restricted performance stock units (“PSUs”) for the
Long-Term Debt and Finance Lease Obligations The following table shows the components of debt and finance lease obligations, including the current component, at December 31, 2020 and
Senior Notes On September 22, 2017, the Company completed the public offering of $400.0 million aggregate principal amount of its 4.400% Senior Notes due 2024 (the “Notes”). The Notes are governed by an indenture dated as of September 22, 2017 (the “Base Indenture”), between the Company, as issuer, and U.S. Bank National Association, as trustee, and is supplemented by a first supplemental indenture dated as of September 22, 2017 (the “First Supplemental Indenture” together, with the Base Indenture, the “Indenture”), between the Company, as issuer, and U.S. Bank National Association, as trustee. Since the public offering, the Company purchased and subsequently retired $40.0 million of its Notes, of which $28.9 million was purchased and subsequently retired in March 2020 that resulted in a loss on retirement of $0.7 million that is included in interest expense. The Notes were issued at a discount and had a carrying value of $359.6 million and $359.7 million at December 31, 2020 and 21 MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2021 (Unaudited) The Notes bear interest payable semiannually in cash in arrears on March 22 and September 22 of each year, commencing on March 22, 2018, which rate is subject to an interest rate adjustment upon the occurrence of certain credit rating events. The interest rate on the Notes on The Indenture also contains certain covenants which restrict the Company’s ability to, among other things, create liens on its and its subsidiaries’ assets; engage in sale and lease-back transactions; and engage in a consolidation, merger or sale of assets. Credit Agreement On September 22, 2017, the Company entered into a credit agreement with various lenders that provides for a
Under the 2017 Credit Agreement, the annual interest rate on the loan borrowing is equal to (i) in the case of base rate loans, the sum of an initial borrowing margin of 0.500 percent plus the higher of the prime rate, one-half of one percent in excess of the overnight “federal funds” rate, or the Eurodollar rate for one month plus 1.000 percent, or (ii) in the case of Eurodollar rate loans, the sum of an initial borrowing margin of 1.500 percent plus the Eurodollar rate for the selected interest period. The borrowing margin is subject to adjustment based on the Company’s debt rating as provided by certain rating agencies. The Company has the option to borrow in base rate loans or Eurodollar rate loans at its discretion. The Company has elected to borrow in Eurodollar rate loans that currently have a borrowing margin of 1.75 percent plus the Eurodollar rate for the selected interest period. For three and In March 2021, the Company made voluntary term loan repayments of $100.0 million. As of Letter of Credit Agreement On August 22, 2017, the Company entered into a Continuing Agreement for Standby Letters of Credit with The Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”), as issuer (the “L/C Agreement”), under which BTMU, at its sole discretion, may provide stand-by letter of credit to the Company. The Company had letters of credit outstanding under the L/C Agreement as of December 31, 2020 and Finance Lease and Deferred Financing Obligations There were $16.4 million and 22 MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2021 (Unaudited) obligations represent amounts due under leases for certain properties, computer software (acquired prior to the prospective adoption of ASU 2015-05 on January 1, 2016) and equipment. The recorded gross cost of finance lease assets was $43.0 million and Redeemable Non-Controlling Interest As of
redemption value. The carrying value of the non-controlling interest as of December 31, 2020 and 23 MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2021 (Unaudited) NOTE B—Net Income per Common Share Attributable to Magellan Health, Inc. The following table reconciles income attributable to common shareholders (numerator) and shares (denominator) used in the computations of net income per share attributable to common shareholders (in thousands, except per share data) for the three and
The weighted average number of common shares outstanding for the three and The Company had additional potential dilutive securities outstanding representing
NOTE C—Business Segment Information The accounting policies of the Company’s segments are the same as those described in Note A—“General.” The Company evaluates performance of its segments based on profit or loss from operations before stock compensation expense, depreciation and amortization, interest expense, interest and other income, changes in the fair value of contingent consideration recorded in relation to acquisitions, gain on sale of assets, special charges or benefits, and income taxes (“Segment Profit”). Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk 24 MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 2021 (Unaudited) assessment and employee compensation, among other matters. Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain of Healthcare’s customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company’s employees covered under its medical plan. As such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated. The Company’s segments are defined in Note A—“General.” The following tables summarize, for the periods indicated, operating results by business segment (in thousands):
MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table reconciles (loss) income
NOTE D—Commitments and Contingencies Legal The Company’s operating activities entail significant risks of liability. From time to time, the Company is subject to various actions and claims arising from the acts or omissions of its employees, network providers or other parties. In the normal course of business, the Company receives reports relating to deaths and other serious incidents involving patients for whom the Company provides managed care services. Such incidents occasionally give rise to malpractice, professional negligence and other related actions and claims against the Company or its network providers. Many of these actions and claims received by the Company seek substantial damages and, therefore, require the Company to incur significant fees and costs related to their defense. The Company is also subject to or party to certain class actions and other litigation and claims relating to its operations or business practices including employment practices, and privacy and data protection. The Company maintains a program of insurance coverage against a broad range of risks in the Company’s business, including certain of the class actions and other litigation and claims asserted against the Company, subject to deductibles and self-insured retentions as is described more fully in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 26, 2021. The Company has recorded reserves that, in the opinion of management, are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably estimable. Management
MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited) believes that the resolution of such litigation and claims will not have a material adverse effect on the Company’s financial condition or results of operations; however, there can be no assurance in this regard. Regulatory Issues The managed healthcare industry is subject to numerous laws and regulations. The subjects of such laws and regulations cover, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirements, information privacy and security, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Over the past several years, government activity has increased with respect to investigations and/or allegations concerning possible violations of fraud and abuse and false claims statutes and/or regulations by healthcare organizations and insurers. Entities that are found to have violated these laws and regulations may be excluded from participating in government healthcare programs, subjected to fines or penalties or required to repay amounts received from the government for previously billed patient services. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time. The Company is subject to various federal, state and other laws and rules regarding the use, storage, protection and disclosure of confidential member and protected personal or health information, including the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) and other applicable laws. The Company has experienced data security incidents resulting in disclosure of confidential or protected personal or health information. We have notified government agencies as appropriate and are cooperating with investigations and requests for information. Noncompliance with any applicable privacy or data security laws and regulations could result in enforcement actions, fines, penalties, and reputational and financial harm to the Company. In addition, regulators of certain of the Company’s subsidiaries may exercise certain discretionary rights under regulations including increasing their supervision of such entities, requiring additional restricted cash or other security or seizing or otherwise taking control of the assets and operations of such subsidiaries. The Company is subject to certain federal laws and regulations in connection with its contracts with the federal government. These laws and regulations affect how the Company conducts business with its federal agency customers and may impose added costs on its business. The Company’s failure to comply with federal procurement laws and regulations could cause it to lose business, incur additional costs and subject it to a variety of civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, harm to reputation, suspension of payments, fines, and suspension or debarment from doing business with federal government agencies. The Company’s wholly owned subsidiary, Armed Forces Services Corporation (“AFSC”), conducts business with federal agency customers and federal contractors to such agencies. The Company investigated, with the assistance of outside counsel, matters relating to compliance by AFSC with Small Business Administration ( “SBA”) regulations and other federal laws applicable to government contractors and reported findings to the SBA and the Department of Defense, including facts indicating violations of SBA regulations and other federal laws, such as the Anti-Kickback Act, by former AFSC executives, none of which was disclosed to Magellan prior to its acquisition of AFSC. The Company voluntarily responded to government requests for further information regarding the Company’s investigation. As a result of the Company's disclosure and the ensuing government investigation, a former AFSC executive pleaded guilty in the United States District Court for the Eastern District of Virginia to one count of honest services fraud, and at sentencing in September 2020, the Court ordered the former AFSC executive to pay restitution to AFSC as the victim of that offense. In June 2020, the United States Attorney’s Office for the Eastern District of Virginia (“U.S. Attorney’s Office”) informed the Company of a civil investigation regarding the Company and AFSC related to potential violations of the False Claims Act and/or the Anti-Kickback Act also stemming from the matters self-disclosed by the Company. In June 2021, AFSC resolved the civil investigation’s allegations of potential violations by entering into a settlement with the U.S. Attorney’s Office and paying $4.3 million in restitution for the kickback payments received by the former AFSC executives which were identified through the Company’s disclosures to the government. The civil claims resolved by the settlement agreement were allegations only; there was 0 determination of civil liability. Management believes that the civil settlement with the U.S. Attorney’s Office resolves all pending investigations arising from the matters that the Company self-reported; however, there can be no assurance in this regard.
MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited) Stock Repurchases The Company’s board of directors has previously authorized a series of stock repurchase plans. Stock repurchases for each such plan could be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deemed appropriate. Each stock repurchase program could be limited or terminated at any time without prior notice. Pursuant to the terms of the Merger Agreement, the Company suspended its stock repurchase programs on January 4, 2021, the date we announced our planned merger with Centene. The Company’s board of directors approved, and subsequently amended, a stock repurchase plan which authorizes the Company to purchase up to $400 million of its outstanding common stock through November 15, 2021 (the “Repurchase Program”). As of Pursuant to the Stock Repurchase Program, the Company made purchases as follows (aggregate cost excludes broker commissions and is reflected in millions):
The Company made 0 share repurchases from NOTE E—Acquisition Acquisition of Aurelia Health, LLC Pursuant to the December 18, 2020 purchase agreement (the “Bayless Agreement”) between Bella Vista Enterprises, Inc., Aurelia Health, LLC and the Company, on December 21, 2020 the Company acquired 70 percent of the outstanding membership interests of Aurelia Health, LLC and its subsidiary Michael B. Bayless, LLC (collectively “Bayless”) (the “Bayless Acquisition”). The base purchase price for the Bayless Acquisition per the Bayless Agreement was $78.4 million. The Company reports the results of operations of Bayless within its Healthcare segment. During the
MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited) NOTE F—Discontinued Operations Magellan Complete Care – Stock and Asset Purchase Agreement On December 31, 2020, the Company completed the sale of its MCC Business to Molina, pursuant to a Stock and Asset Purchase Agreement, dated as of April 30, 2020, by and between the Company and Molina, for cash in the amount of $850 million plus closing adjustments of $158 million (subject to post-closing adjustments, if any), and the assumption by Molina of liabilities of the MCC Business. In connection with the MCC Sale, the Company and Molina The foregoing description of the Purchase Agreement and the MCC Sale does not purport to be complete and is qualified in its entirety by the terms and conditions of the Purchase Agreement, which was filed as Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q which was filed with the SEC on May 11, 2020, and any related agreements. The accounting requirements for reporting a business to be divested as a discontinued operation were met during the second quarter of 2020. Accordingly, the accompanying consolidated financial statements for all periods presented reflect the MCC business as a discontinued operation. The following table summarizes the components of income from discontinued operations that is included in the Company’s consolidated statements of comprehensive income
MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited) The Company recognized a gain of $8.7 million and $16.7 million in the three and nine months ended September 30, 2021, respectively, related to the MCC Sale. This gain represents final determination of the working capital receivable pursuant to the Stock and Asset Purchase Agreement with Molina. The Company has retained corporate overhead expenses previously allocated to MCC of NOTE G—Special Charges and Other In 2020, the Company established a transformation office which has an initiative (the “Transformation Initiative”) to lower our operating costs and reinvest in our business by improving and automating processes, leveraging technology, consolidating platforms and reducing any friction our customers, providers and members experience when doing business with us. As part of the Transformation Initiative, the Company is in the process of restructuring certain operating activities which has resulted in the Company recording an adjustment to severance of In addition, the Company reevaluated its current office lease footprint. Recoverability of existing operating right-of-use lease assets, and the related fixed assets held at the office locations, to be held and used are measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Any lease terminations or abandonments initiated as a result of the Transformation Initiative that result in an impairment of such right-of-use assets and the location’s related fixtures will be reported as special charges. For the The following table summarizes the components of special charges that are included in the Company’s consolidated statement of comprehensive income
MAGELLAN HEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited) A roll-forward of the Transformation Initiative liabilities is as follows (in thousands):
The Company has an investment of $8.5 million in a healthcare company that is accounted for on a cost basis. In the
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Business Overview The Company is engaged in the healthcare management business, and is focused on meeting needs in areas of healthcare that are fast growing, highly complex and high cost, with an emphasis on special population management. The Company provides services to health plans and other MCOs, employers, labor unions, various military and governmental agencies, TPAs, consultants and brokers. The Company’s business is divided into three segments, based on the services it provides and/or the customers that it serves. See Item 1—“Business” for more information on the Company’s business segments. Results of Operations The following table summarizes, for the periods indicated, operating results from continuing operations (in thousands):
Quarter ended Net revenue, Cost of care, Cost of goods sold and Direct service costs and other operating expenses Net revenue, cost of care, cost of goods sold and direct service costs and other operating expense variances are addressed within the segment results that follow. Depreciation and amortization Depreciation and amortization expense decreased by Interest expense Interest expense decreased by
Interest and other income Interest income decreased by Special charges and other Special charges and other decreased by Income taxes The Company’s effective income tax rates from continuing operations were
Net revenue, Cost of care, Cost of goods sold and Direct service costs and other operating expenses Net revenue, cost of care, cost of goods sold and direct service costs and other operating expense variances are addressed within the segment results that follow. Depreciation and amortization Depreciation and amortization expense decreased by Interest expense Interest expense decreased by Interest and other income Interest income decreased by Special charges and other Special charges and other decreased by Income taxes The Company’s effective income tax rates from continuing operations were
Segment Results The Company manages and measures operational performance through three segments: Healthcare, Pharmacy Management and Corporate. The Company evaluates performance of its segments based on Segment Profit. Management uses Segment Profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Stock compensation expense and changes in fair value of contingent consideration recorded in relation to acquisitions are included in direct service costs and other operating expenses; however, these amounts are excluded from the computation of Segment Profit. Healthcare The Healthcare segment includes the Company’s: (i) management of behavioral healthcare services and EAP services and (ii) management of other specialty areas including diagnostic imaging and musculoskeletal management. The Healthcare segment provides management services to health plans, accountable care organizations, employers, state Medicaid agencies, the United States military and various federal government agencies for whom Magellan provides carve-out management services for behavioral health, employee assistance plans, and other areas of specialty healthcare including diagnostic imaging, musculoskeletal management, cardiac, and physical medicine. The following table summarizes, for the periods indicated, operating results for the Healthcare segment (in thousands):
Current Year Quarter compared to the Prior Year Quarter Managed care and other revenue Net revenue increased by
million, the revenue impact of favorable prior period medical claims development recorded in the Prior Year Quarter of Cost of care Cost of care increased by Direct service costs and other Direct service costs increased Current Year Period compared to the Prior Year Period Managed care and other revenue Net revenue increased by Cost of care Cost of care increased by Direct service costs and other Direct service costs increased by Pharmacy Management The Pharmacy Management segment comprises products and solutions that provide clinical and financial management of pharmaceuticals paid under medical and pharmacy benefit programs. Pharmacy Management’s services include: (i) PBM services; (ii) PBA for state Medicaid and other government sponsored programs; (iii) pharmaceutical dispensing operations; (iv) clinical and formulary management programs; (v) medical pharmacy management programs;
and (vi) programs for the integrated management of specialty drugs. Pharmacy Management’s services are provided 35 under contracts with health plans, employers, state Medicaid programs, and other government agencies. The following table summarizes, for the periods indicated, operating results for the Pharmacy Management segment (in thousands, except state count):
Current Year Quarter compared to the Prior Year Quarter Managed care and other revenue Managed care and other revenue increased by PBM revenue PBM revenue decreased by
Cost of goods sold Cost of goods sold decreased by Direct service costs and other Direct service costs increased by Current Year Period compared to Prior Year Period Managed care and other revenue Managed care and other revenue increased by PBM revenue PBM revenue decreased by Cost of goods sold Cost of goods sold decreased by Direct service costs and other Direct service costs increased by Legal matter settlement In the Current Year Period, the Company recognized a $9.0 million recovery in connection with the resolution of a legal matter. Corporate Segment The Corporate segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy Management segments, and that are largely associated with costs related to being a publicly traded company.
The following table summarizes, for the periods indicated, operating results for the Corporate segment (in thousands):
Current Year Quarter compared to the Prior Year Quarter The Corporate segment loss decreased by Current Year Period compared to the Prior Year Period The Corporate segment loss decreased by Inter segment revenues and expenses Healthcare subcontracts with Pharmacy Management to provide pharmacy benefits management services for certain Healthcare customers. In addition, Pharmacy Management provides pharmacy benefits management for the Company’s employees covered under its medical plan. As such, revenue, cost of goods sold and direct service costs and other related to these arrangements are eliminated within the Corporate segment. Non-GAAP Measures The Company reports its financial results in accordance with GAAP; however, the Company’s management also assesses business performance and makes business decisions regarding the Company’s operations using certain non-GAAP measures. In addition to Segment Profit, as defined above, the Company also uses adjusted net income attributable to Magellan (“Adjusted Net Income”) and adjusted net income per common share attributable to Magellan on a diluted basis (“Adjusted EPS”). Adjusted Net Income and Adjusted EPS 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, special charges and any impact related to the sale of MCC. The Company believes these non-GAAP measures provide a more useful comparison of the Company’s underlying business performance from period to period and are more representative of the earnings capacity of the Company. Non-GAAP financial measures disclosed, such as Segment Profit, Adjusted Net Income and Adjusted EPS, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.
The following table reconciles (loss) income
The following table reconciles net (loss) income
The following table reconciles net (loss) income
39 Outlook—Results of Operations The Company’s Segment Profit and net income are subject to significant fluctuations from period to period. These fluctuations may result from a variety of factors such as those set forth under Item 1A—“Risk Factors” as well as a variety of other factors including: (i) changes in utilization levels by enrolled members of the Company’s risk-based contracts, including seasonal utilization patterns; (ii) contractual adjustments and settlements; (iii) retrospective membership adjustments; (iv) timing of implementation of new contracts, enrollment changes and contract terminations; (v) pricing adjustments upon contract renewals (and price competition in general); (vi) the timing of acquisitions;
(vii) changes in estimates regarding medical costs and IBNR; (viii) the timing of recognition of pharmacy revenues, including rebates; and (ix) changes in the estimates of contingent consideration. A portion of the Company’s business is subject to rising care costs due to an increase in the number and frequency of covered members seeking healthcare services and higher costs of such services. Many of these factors are beyond the Company’s control. Future results of operations will be heavily dependent on management’s ability to obtain customer rate increases that are consistent with care cost increases and/or to reduce operating expenses. Interest Rate Risk. Changes in interest rates affect interest income earned on the Company’s cash equivalents and investments, as well as interest expense on the variable interest rate borrowings under the 2017 Credit Agreement. In addition, interest rates on the Notes are subject to adjustment upon the occurrence of certain credit rating events. Based on the amount of cash equivalents and investments, the borrowing levels under the 2017 Credit Agreement and the principal amount of the Notes as of Historical—Liquidity and Capital Resources Operating Activities. The Company reported net cash provided by operating activities of The net unfavorable impact of working capital changes between periods totaled In relation to continuing operations, the Company reported net cash Investing Activities. The Company utilized During the Prior Year Period and the Current Year 40 Financing Activities. During the Prior Year Period, the Company received $80.0 million from borrowings under our revolving line of credit, During the Current Year Outlook—Liquidity and Capital Resources Liquidity. The Company may draw on the 2017 Credit Agreement (discussed further below) as required to
meet working capital needs associated with the timing of receivables and payables, fund share repurchases or support acquisition activities. The Company currently expects to have adequate liquidity to satisfy its existing financial commitments over the periods in which they will become due. At Stock Repurchases. The Company’s board of directors approved, and subsequently amended, a stock repurchase plan which authorizes the Company to purchase up to $400 million of its outstanding common stock through November 15, 2021. As of Off-Balance Sheet Arrangements. As of Credit Agreement. On September 22, 2017, the Company entered into the 2017 Credit Agreement with various lenders that provides for a $400.0 million senior unsecured revolving credit facility and a $350.0 million senior unsecured term loan facility to the Company, as the borrower. On August 13, 2018, the Company entered into an amendment to the 2017 Credit Agreement, which extended the maturity date by one year. On February 27, 2019, the Company entered into a second amendment to the 2017 Credit Agreement, which amended the total leverage ratio covenant, and which was necessary in order for the Company to remain in compliance with the terms of the 2017 Credit Agreement. The 2017 Credit Agreement is scheduled to mature on September 22, 2023. See Note A—“General” for more information on the 2017 Credit Agreement. Restrictive Covenants in Debt Agreements. The 2017 Credit Agreement contains covenants that potentially limit management’s discretion in operating the Company’s business by, in certain circumstances, restricting or limiting the Company’s ability, among other things, to:
41
These restrictions could adversely affect the Company’s ability to finance future operations or capital needs or engage in other business activities that may be in the Company’s interest. The 2017 Credit Agreement also requires the Company to comply with specified financial ratios and tests. Failure to do so, unless waived by the lenders under the 2017 Credit Agreement pursuant to its terms, or amended, would result in an event of default under the 2017 Credit Agreement. As of
Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates of the Company can include, among other things, valuation of goodwill and intangible assets, medical claims payable, other medical liabilities, stock compensation assumptions, tax contingencies and legal liabilities. In addition, the Company also makes estimates in relation to revenue recognition under ASC 606 which are explained in more detail in Note A—“General – Revenue Recognition.” Actual results could differ from those estimates. Except as noted above, the Company’s critical accounting policies are summarized in the Company’s Annual Report on Form 10-K, filed with the SEC on February 26, 2021. Forward-Looking Statements This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although the Company believes that its plans, intentions and expectations as reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Existing and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include:
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Further discussion of factors currently known to management that could cause actual results to differ materially from those in forward-looking statements is set forth under the heading “Risk Factors” in Item 1A of Magellan’s Annual Report on Form 10-K for the year ended December 31, 2020 and in Item 1A of this Quarterly Report on Form 10-Q. When used in this Quarterly Report on Form 10-Q, the words “estimate,” “anticipate,” “expect,” “believe,” “should,” and similar expressions are intended to be forward-looking statements. Magellan undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, except as required by law. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Changes in interest rates affect interest income earned on the Company’s cash equivalents and investments, as well as interest expense on the variable interest rate borrowings under the 2017 Credit Agreement. In addition, interest rates on the Notes is subject to adjustment upon the occurrence of certain credit rating events. Based on the amount of cash equivalents and investments, the borrowing levels under the 2017 Credit Agreement and the principal amount of the Notes as of Item 4. Controls and Procedures. a)The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of b)Under the supervision and with the participation of management, including the Company’s principal executive and principal financial officers, the Company has determined that there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s quarter ended
PART II—OTHER INFORMATION Item 1. Legal Proceedings. The Company’s operating activities entail significant risks of liability. From time to time, the Company is subject to various actions and claims arising from the acts or omissions of its employees, network providers or other parties. In the normal course of business, the Company receives reports relating to deaths and other serious incidents involving patients for whom the Company provides managed care services. Such incidents occasionally give rise to malpractice, professional negligence and other related actions and claims against the Company or its network providers. Many of these actions and claims received by the Company seek substantial damages and, therefore, require the Company to incur significant fees and costs related to their defense. The Company is also subject to or party to certain class actions and other litigation and claims relating to its operations or business practices including employment practices, and privacy and data protection. The Company maintains a program of insurance coverage against a broad range of risks in the Company’s business, including certain of the class actions and other litigation and claims asserted against the Company, subject to deductibles and self-insured retentions as is described more fully in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 26, 2021. The Company has recorded reserves that, in the opinion of management, are adequate to cover litigation, claims or assessments that have been or may be asserted against the Company, and for which the outcome is probable and reasonably estimable. Management believes that the resolution of such litigation and claims will not have a material adverse effect on the Company’s financial condition or results of operations; however, there can be no assurance in this regard. Item 1A. Risk Factors. There have been no material changes in the risk factors as disclosed in Part I—Item 1A—“Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 26, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. The Company’s board of directors has previously authorized a series of stock repurchase plans. Stock repurchases for each such plan could be executed through open market repurchases, privately negotiated transactions, accelerated share repurchases or other means. The board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deemed appropriate. Each stock repurchase program could be limited or terminated at any time without prior notice. Pursuant to the terms of the Merger Agreement, the Company suspended its stock repurchase programs on January 4, 2021, the date we announced our planned merger with Centene. The Company’s board of directors approved, and subsequently amended, a stock repurchase plan which authorizes the Company to purchase up to $400 million of its outstanding common stock through November 15, 2021. The Company made no repurchases during the Item 3. Defaults Upon Senior Securities. None. Item 4. Mine Safety Disclosures. None.
C Exhibit Index
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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