General (Tables)

9 Months Ended

Sep. 30, 2018

Summary of impacts of adoption of ASC 606

The cumulative effect of changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09 were as follows (in thousands):


	Balance at December 31, 2017		Adjustments Due to ASC 606		Balance at January 1, 2018
Assets
Other current assets	$	72,323	$	(667)	$	71,656
Total Current Assets		1,483,353		(667)		1,482,686
Deferred income taxes		813		1,335		2,148
Other long-term assets		22,567		(1,333)		21,234
Total Assets		2,957,234		(665)		2,956,569

Liabilities and Stockholders' Equity
Accrued liabilities		193,635		(2,182)		191,453
Total Current Liabilities		892,303		(2,182)		890,121
Deferred credits and other long-term liabilities		19,100		5,744		24,844
Total Liabilities		1,680,740		3,562		1,684,302
Retained earnings		1,399,495		(4,227)		1,395,268
Total Stockholders' Equity		1,276,494		(4,227)		1,272,267
Total Liabilities and Stockholders' Equity		2,957,234		(665)		2,956,569

The impact of the adoption of ASC 606 on our consolidated balance sheet as of September 30, 2018 was as follows (in thousands):


	As Reported		Adjustments		Balance Without ASC 606 Adoption
Assets
Accounts receivable	$	820,748	$	(12,119)	$	808,629
Other current assets		102,829		1,116		103,945
Total Current Assets		1,576,545		(11,003)		1,565,542
Other long-term assets		51,391		4,667		56,058
Total Assets		3,048,515		(6,336)		3,042,179

Liabilities and Stockholders' Equity
Accrued liabilities		209,012		(3,377)		205,635
Other medical liabilities		162,009		119		162,128
Total Current Liabilities		918,571		(3,258)		915,313
Deferred credits and other long-term liabilities		34,959		(7,380)		27,579
Total Liabilities		1,716,764		(10,638)		1,706,126
Retained earnings		1,447,416		4,302		1,451,718
Total Stockholders' Equity		1,331,751		4,302		1,336,053
Total Liabilities and Stockholders' Equity		3,048,515		(6,336)		3,042,179

The impact of the adoption of ASC 606 on our consolidated income statement for the three months ended September 30, 2018 was as follows (in thousands):


	As Reported		Adjustments		Balance Without ASC 606 Adoption
Managed care and other	$	1,235,787	$	(1,588)	$	1,234,199
PBM		617,719		(3,714)		614,005
Total net revenue		1,853,506		(5,302)		1,848,204
Cost of goods sold		571,145		651		571,796
Total costs and expenses		1,812,545		651		1,813,196
Income before income taxes		40,961		(5,953)		35,008
Provision for income taxes		13,816		(1,566)		12,250
Net income		27,145		(4,387)		22,758
Net income attributable to Magellan		27,145		(4,387)		22,758

The impact of the adoption of ASC 606 on our consolidated income statement for the nine months ended September 30, 2018 was as follows (in thousands):


	As Reported		Adjustments		Balance Without ASC 606 Adoption
Managed care and other	$	3,670,890	$	(5,543)	$	3,665,347
PBM		1,798,616		4,485		1,803,101
Total net revenue		5,469,506		(1,058)		5,468,448
Cost of goods sold		1,689,229		651		1,689,880
Total costs and expenses		5,398,793		651		5,399,444
Income before income taxes		70,713		(1,709)		69,004
Provision for income taxes		18,565		(449)		18,116
Net income		52,148		(1,260)		50,888
Net income attributable to Magellan		52,148		(1,260)		50,888

Schedule of disaggregation of revenue by major service line, type of customer and timing of revenue recognition

The following tables disaggregate our revenue for the three and nine months ended September 30, 2018 by major service line, type of customer and timing of revenue recognition (in thousands):


	Three Months Ended September 30, 2018
	Healthcare		Pharmacy Management		Elimination		Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP	$	377,615	$	—	$	(82)	$	377,533
EAP risk-based		79,854		—		—		79,854
ASO		65,326		9,143		(70)		74,399
Magellan Complete Care
Risk-based, non-EAP		639,584		—		—		639,584
ASO		14,060		—		—		14,060
PBM, including dispensing		—		549,508		(48,015)		501,493
Medicare Part D		—		116,226		—		116,226
PBA		—		33,158		—		33,158
Formulary management		—		16,601		—		16,601
Other		—		598		—		598
Total net revenue	$	1,176,439	$	725,234	$	(48,167)	$	1,853,506

Type of Customer
Government	$	874,135	$	238,175	$	—	$	1,112,310
Non-government		302,304		487,059		(48,167)		741,196
Total net revenue	$	1,176,439	$	725,234	$	(48,167)	$	1,853,506

Timing of Revenue Recognition
Transferred at a point in time	$	—	$	665,734	$	(48,015)	$	617,719
Transferred over time		1,176,439		59,500		(152)		1,235,787
Total net revenue	$	1,176,439	$	725,234	$	(48,167)	$	1,853,506


	Nine Months Ended September 30, 2018
	Healthcare		Pharmacy Management		Elimination		Total
Major Service Lines
Behavioral & Specialty Health
Risk-based, non-EAP	$	1,128,743	$	—	$	(196)	$	1,128,547
EAP risk-based		265,787		—		—		265,787
ASO		189,241		24,972		(252)		213,961
Magellan Complete Care
Risk-based, non-EAP		1,863,771		—		—		1,863,771
ASO		41,386		—		—		41,386
PBM, including dispensing		—		1,619,431		(142,110)		1,477,321
Medicare Part D		—		321,295		—		321,295
PBA		—		99,792		—		99,792
Formulary management		—		55,326		—		55,326
Other		—		2,320		—		2,320
Total net revenue	$	3,488,928	$	2,123,136	$	(142,558)	$	5,469,506

Type of Customer
Government	$	2,585,525	$	696,172	$	—	$	3,281,697
Non-government		903,403		1,426,964		(142,558)		2,187,809
Total net revenue	$	3,488,928	$	2,123,136	$	(142,558)	$	5,469,506

Timing of Revenue Recognition
Transferred at a point in time	$	—	$	1,940,726	$	(142,110)	$	1,798,616
Transferred over time		3,488,928		182,410		(448)		3,670,890
Total net revenue	$	3,488,928	$	2,123,136	$	(142,558)	$	5,469,506

Schedule of accounts receivable, contract assets and contract liabilities


	January 1,		September 30,
	2018		2018		$ Change		% Change
Accounts receivable	$	679,269	$	864,860	$	185,591		27.3%
Contract assets		8,564		24,118		15,554		181.6%
Contract liabilities - current		14,299		21,536		7,237		50.6%
Contract liabilities - long-term		12,303		12,577		274		2.2%

Schedule of customers generating in excess of ten percent of net revenues for respective segment


Segment	Term Date	2017			2018

Healthcare
Customer A	(1)	$	131,539	*	$	534,483
Customer B	December 31, 2018 to December 31, 2020 (2)		—			506,204

Pharmacy Management
Customer C	March 31, 2019		266,795			259,514

Revenue amount did not exceed 10 percent of net revenues for the respective segment for the year presented. Amount is shown for comparative purposes only.

(1)

The Company, along with other participating managed care plans in this state, continues to provide services while a new contract is being finalized.

The customer has more than one contract. The individual contracts are scheduled to terminate at various points during the time period indicated above.

Schedule of fair value of financial assets and liabilities

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s assets and liabilities that are required to be measured at fair value as of December 31, 2017 and September 30, 2018 (in thousands):


	December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (1)	$	—	$	284,064	$	—	$	284,064
Investments:
U.S. Government and agency securities		28,231		—		—		28,231
Obligations of government-sponsored enterprises (2)		—		22,088		—		22,088
Corporate debt securities		—		269,788		—		269,788
Taxable municipal bonds		—		5,000		—		5,000
Certificates of deposit		—		2,758		—		2,758
Total assets held at fair value	$	28,231	$	583,698	$	—	$	611,929

Liabilities
Contingent consideration	$	—	$	—	$	8,817	$	8,817
Total liabilities held at fair value	$	—	$	—	$	8,817	$	8,817


	September 30, 2018
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (3)	$	—	$	213,295	$	—	$	213,295
Investments:
U.S. Government and agency securities		57,384		—		—		57,384
Obligations of government-sponsored enterprises (2)		—		7,965		—		7,965
Corporate debt securities		—		292,760		—		292,760
Certificates of deposit		—		20,650		—		20,650
Total assets held at fair value	$	57,384	$	534,670	$	—	$	592,054

Liabilities
Contingent consideration	$	—	$	—	$	9,268	$	9,268
Total liabilities held at fair value	$	—	$	—	$	9,268	$	9,268

(1)

Excludes $114.7 million of cash held in bank accounts by the Company.

(2)

Includes investments in notes issued by the Federal Home Loan Bank, Federal Farm Credit Banks and Federal National Mortgage Association.

(3)

Excludes $21.0 million of cash held in bank accounts by the Company.

Summary of the Company's liability for contingent consideration

The following table summarizes the Company’s liability for contingent consideration for the nine months ended September 30, 2018 (in thousands):


	September 30,
	2018
Balance as of beginning of period	$	8,817
Changes in fair value		451
Payments		—
Balance as of end of period	$	9,268

Summary of short-term and long-term investments

The following is a summary of short‑term and long‑term investments at December 31, 2017 and September 30, 2018 (in thousands):


	December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
U.S. Government and agency securities	$	28,313	$	—	$	(82)	$	28,231
Obligations of government-sponsored enterprises (1)		22,139		—		(51)		22,088
Corporate debt securities		270,154		1		(367)		269,788
Taxable municipal bonds		5,000		—		—		5,000
Certificates of deposit		2,758		—		—		2,758
Total investments at December 31, 2017	$	328,364	$	1	$	(500)	$	327,865


	September 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
U.S. Government and agency securities	$	57,507	$	—	$	(123)	$	57,384
Obligations of government-sponsored enterprises (1)		8,009		—		(44)		7,965
Corporate debt securities		293,084		9		(333)		292,760
Certificates of deposit		20,650		—		—		20,650
Total investments at September 30, 2018	$	379,250	$	9	$	(500)	$	378,759

(1)

Includes investments in notes issued by the Federal Home Loan Bank, Federal National Mortgage Association and Federal Farm Credit Banks.

Summary of maturity dates of investments

The maturity dates of the Company’s investments as of September 30, 2018 are summarized below (in thousands):


	Amortized		Estimated
	Cost		Fair Value
2018	$	65,167	$	65,132
2019		313,016		312,563
2020		1,067		1,064
Total investments at September 30, 2018	$	379,250	$	378,759

Schedule of stock option activity

Summarized information related to the Company’s stock options for the nine months ended September 30, 2018 is as follows:


		Weighted
		Average
		Exercise
	Options	Price
Outstanding, beginning of period	2,458,237	$	61.50
Granted	451,456		98.45
Forfeited	(59,427)		77.53
Exercised	(400,869)		56.35
Outstanding, end of period	2,449,397	$	68.77
Vested and expected to vest at end of period	2,434,842	$	68.66
Exercisable, end of period	1,512,481	$	60.31

Schedule of nonvested restricted stock award activity

Summarized information related to the Company’s nonvested restricted stock awards (“RSAs”) for the nine months ended September 30, 2018 is as follows:



		Weighted
		Average
		Grant Date
	Shares	Fair Value
Outstanding, beginning of period	31,102	$	68.00
Awarded	11,795		89.05
Vested	(31,102)		68.00
Forfeited	—		—
Outstanding, ending of period	11,795		89.05

Schedule of nonvested restricted stock units

Summarized information related to the Company’s nonvested restricted stock units (“RSUs”) for the nine months ended September 30, 2018 is as follows:



		Weighted
		Average
		Grant Date
	Shares	Fair Value
Outstanding, beginning of period	163,289	$	66.46
Awarded	111,033		99.29
Vested	(82,207)		65.54
Forfeited	(18,231)		83.93
Outstanding, ending of period	173,884		86.03

Schedule of nonvested restricted performance stock units

Summarized information related to the Company’s nonvested restricted performance stock units (“PSUs”) for the nine months ended September 30, 2018 is as follows:


	2018
		Weighted
		Average
		Grant Date
	Shares	Fair Value
Outstanding, beginning of period	202,315	$	84.63
Awarded	80,502		141.61
Vested	(33,592)		85.00
Forfeited	(1,865)		97.25
Outstanding, end of period	247,360		103.03