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):
Three Months Ended Nine Months Ended September 30, Change September 30, Change Continuing Operations 2020 2021 '20 vs '21 2020 2021 '20 vs '21 Statement of Operations Data: Net revenue$ 1,170,117 $ 1,254,118 7.2%$ 3,392,571 $ 3,636,535 7.2% Cost of care 364,438 437,308 20.0% 1,035,377 1,247,234 20.5% Cost of goods sold 560,269 546,337 (2.5)% 1,621,577 1,559,221 (3.8)% Direct service costs and other operating expenses (1) 216,770 238,471 10.0% 620,767 713,065 14.9% Legal matter settlement - - N/A - (9,000) N/A Depreciation and amortization 24,730 23,671 (4.3)% 71,976 67,613 (6.1)% Interest expense 7,286 5,969 (18.1)% 24,239 18,629 (23.1)% Interest and other income (349) (299) (14.3)% (2,119) (848) (60.0)% Special charges and other 16,599 1,914 (88.5)% 24,908 8,119 (67.4)% (Loss) income before income taxes (19,626) 747 (103.8)% (4,154) 32,502 (882.4)% (Benefit) provision for income taxes (2,330) 861 (137.0)% (32,896) 10,570 (132.1)% Net (loss) income from continuing operations$ (17,296) $ (114) (99.3)%
Includes stock compensation expense of
the nine months endedSeptember 30, 2020 and 2021, respectively.
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 4.3 percent or$1.1 million from the PriorYear Quarter to theCurrent Year Quarter , primarily due to asset maturities, partially offset by normal asset additions after the PriorYear Quarter .
Interest expense
Interest expense decreased by 18.1 percent or$1.3 million from the PriorYear Quarter to theCurrent Year Quarter primarily due to lower interest rates and lower debt balances. 32 Table of Contents Interest and other income
Interest income decreased by
Special charges and other
Special charges and other decreased by$14.7 million from the PriorYear Quarter to theCurrent Year Quarter due to a reduction in special charges activity from the PriorYear Quarter , see Note G-"Special Charges and Other" for further discussion.
Income taxes
The Company's effective income tax rates from continuing operations were 11.9 percent and 115.3 percent for the PriorYear Quarter andCurrent Year Quarter , respectively. The effective income tax rate for the PriorYear Quarter is lower than the effective income tax rate for theCurrent Year Quarter primarily due to the relative increase in non-deductible permanent differences in theCurrent Year Quarter relative to pre-tax income. The effective income tax rate for theCurrent Year Quarter differs from the federal and state statutory rates primarily due to unfavorable permanent differences.
Nine months 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 6.1 percent or$4.4 million from the Prior Year Period, primarily due to asset maturities, partially offset by normal asset additions after the Prior Year Period.
Interest expense
Interest expense decreased by 23.1 percent or
Interest and other income
Interest income decreased by
Special charges and other
Special charges and other decreased by$16.8 million from the Prior Year Period to the Current Year Period due to a reduction in special charges activity from the Prior Year Period offset by the impairment of an investment in the Current Year Period, see Note G-"Special Charges and Other" for further discussion.
Income taxes
The Company's effective income tax rates from continuing operations were 791.9 percent and 32.5 percent for the Prior Year Period and Current Year Period, respectively. The effective income tax rate for the Prior Year Period differs from the effective income tax rate for the Current Year Period primarily due to the recognition of the nonrecurring tax benefit related to the divestiture in the Prior Year Period relative to the pre-tax loss for the Prior Year Period. The effective income tax rate for the Current Year Period differs from the federal and state statutory rates primarily due to unfavorable permanent differences. 33 Table of Contents 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):
Three Months Ended Nine Months Ended September 30, Change September 30, Change Healthcare Segment Results 2020 2021 '20 vs '21 2020 2021 '20 vs '21 Risk-based, non-EAP$ 352,442 $ 437,809 24.2%$ 1,046,486 $ 1,240,540 18.5% EAP risk-based 74,703 75,369 0.9% 232,060 245,634 5.8% ASO 62,306 67,100 7.7% 180,832 212,253 17.4% Managed care and other revenue 489,451 580,278 18.6% 1,459,378 1,698,427 16.4% Cost of care 364,438 437,308
20.0% 1,035,377 1,247,234 20.5%
125,013 142,970 14.4% 424,001 451,193 6.4% Direct service costs and other 104,610 123,843
18.4% 310,996 365,577 17.6%
20,403 19,127 (6.3)% 113,005 85,616 (24.2)% Stock compensation expense 833 1,465 75.9% 4,696 5,919 26.0% Segment Profit$ 21,236 $ 20,592
(3.0)%
Direct service cost as % of revenue 21.4% 21.3% 21.3% 21.5% MLR Behavioral & Specialty Health risk 89.2% 88.1% 83.7% 87.0% MLR Behavioral & Specialty Health EAP risk 66.6% 68.7%
68.6% 68.4% Membership Risk (1) 10,327 15,405 49.2% EAP risk 13,961 13,136 (5.9)% ASO 25,663 25,032 (2.5)% 49,951 53,573 7.3%
(1) May include some duplicate count of membership for customers that contract
with Magellan for both behavioral and other specialty management services.
Managed care and other revenue
Net revenue increased by 18.6 percent or$90.8 million from the PriorYear Quarter to theCurrent Year Quarter . The increase in revenue is primarily due to new contracts implemented after (or during) the PriorYear Quarter of$50.4 million , favorable rate and membership changes of$49.3 million and revenue from acquisitions that occurred after the PriorYear Quarter of$12.7 million . These increases were partially offset by terminated contracts of$12.8 34
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million, the revenue impact of favorable prior period medical claims development recorded in the PriorYear Quarter of$4.6 million , net revenue recorded for HIF fees in the PriorYear Quarter of$3.9 million and other net unfavorable variances of$0.3 million .
Cost of care
Cost of care increased by 20.0 percent or$72.9 million from the PriorYear Quarter to theCurrent Year Quarter . The increase is primarily due to care cost of new contracts implemented after (or during) the PriorYear Quarter of$35.5 million , rate and membership changes of$24.6 million , cost of care for acquisitions that occurred after the PriorYear Quarter of$6.7 million and care trends and other unfavorable variances of$18.2 million . These increases were partially offset by terminated contracts of$7.8 million and net unfavorable prior period medical claims development recorded in the PriorYear Quarter of$4.3 million . Cost of care as a percentage of risk revenue (excluding EAP business) decreased from 89.2 percent in the prior year quarter to 88.1 percent in theCurrent Year Quarter , mainly due to business mix.
Direct service costs and other
Direct service costs increased 18.4 percent or$19.2 million from the PriorYear Quarter to theCurrent Year Quarter primarily due to an increase in corporate investments. Direct services costs decreased slightly as a percentage of revenue from 21.4 percent in the PriorYear Quarter to 21.3 percent in theCurrent Year Quarter .
Current Year Period compared to the Prior Year Period
Managed care and other revenue
Net revenue increased by 16.4 percent or$239.0 million from the Prior Year Period to the Current Year Period. The increase in revenue is primarily due to favorable rate and membership changes of$140.5 million , new contracts implemented after (or during) the Prior Year Period of$115.7 million , revenue from acquisitions that occurred after the Prior Year Period of$35.9 million , the revenue impact of favorable prior period care development recorded in the Prior Year Period of$5.6 million and other net favorable variances of$3.6 million . These increases are partially offset by terminated contracts of$37.5 million , the revenue impact of program changes of$13.0 million and net revenue recorded for HIF fees in the Prior Year Period of$11.8 million .
Cost of care
Cost of care increased by 20.5 percent or$211.9 million from the Prior Year Period to the Current Year Period. The increase is primarily due to rate and membership changes of$90.8 million , care cost of new contracts implemented after (or during) the Prior Year Period of$75.7 million , cost of care for acquisitions that occurred after the Prior Year Period of$18.7 million , favorable prior period care development recorded in the Prior Year Period of$6.5 million and care trends and other unfavorable variances of$55.6 million . These increases were partially offset by terminated contracts of$24.3 million and program changes of$11.1 million . Cost of care as a percentage of risk revenue (excluding EAP business) increased from 83.7 percent in the Prior Year Period to 87.0 percent in the Current Year Period, mainly due to higher utilization and business mix.
Direct service costs and other
Direct service costs increased by 17.6 percent or$54.6 million from the Prior Year Period to the Current Year Period primarily due to an increase in corporate investments. Direct service costs increased as a percentage of revenue from 21.3 percent in the Prior Year Period to 21.5 percent in the Current Year Period, primarily due to the increase in corporate investments.
Pharmacy Management
The Pharmacy Management segment comprises products and solutions that provide clinical and financial management of pharmaceuticals paid under medical and pharmacy benefit programs. Pharmacy Management's services include: (i) PBM services; (ii) PBA for state Medicaid and other government sponsored programs; (iii) pharmaceutical dispensing operations; (iv) clinical and formulary management programs; (v) medical pharmacy management programs; and (vi) programs for the integrated management of specialty drugs. Pharmacy Management's services are provided 35 Table of Contents
under contracts with health plans, employers, state Medicaid programs, and other government agencies.
The following table summarizes, for the periods indicated, operating results for the Pharmacy Management segment (in thousands, except state count):
Three Months Ended Nine Months Ended September 30, Change September 30, Change Pharmacy Segment Results 2020 2021 '20 vs '21 2020 2021 '20 vs '21 Formulary management$ 31,327 $ 34,734 10.9%$ 78,550 $ 96,979 23.5% PBA and other 48,055 53,754 11.9% 133,134 175,782 32.0% Managed care and other revenue 79,382 88,488 11.5% 211,684 272,761 28.9% PBM, including dispensing 540,615 587,622
8.7% 1,558,211 1,673,245 7.4% Medicare Part D 65,931 1,229 (98.1)% 178,308 2,913 (98.4)% PBM revenue 606,546 588,851 (2.9)% 1,736,519 1,676,158 (3.5)% Total net revenue 685,928 677,339 (1.3)% 1,948,203 1,948,919 0.0% Cost of goods sold 565,121 549,472 (2.8)% 1,635,380 1,568,998 (4.1)% 120,807 127,867 5.8% 312,823 379,921 21.4% Direct service costs and other 91,012 101,037
11.0% 252,960 310,189 22.6%
29,795 26,830 (10.0)% 59,863 69,732 16.5% Stock compensation expense 1,615 2,125 31.6% 5,661 7,167 26.6% Legal matter settlement - - - 9,000 100.0% Segment Profit$ 31,410 $ 28,955
(7.8)%
Direct service cost as % of revenue 13.3% 14.9% 13.0% 15.9% COGS as % of PBM revenue 93.2% 93.3% 94.2% 93.6% Pharmacy Operational Statistics Adjusted commercial network claims
20,770 19,550 Adjusted PBA claims 39,602 40,515 Total adjusted claims 60,372 60,065 Generic dispensing rate 88.5% 89.0%
Commercial PBM covered lives 1,870 2,034 Medical pharmacy covered lives 15,903 16,197 Total states and DC that participate in PBA
26 26
Managed care and other revenue
Managed care and other revenue increased by 11.5 percent or$9.1 million from the PriorYear Quarter to theCurrent Year Quarter primarily due to increased government pharmacy revenue of$4.2 million mainly due to increased membership, formulary management revenue of$3.4 million mainly due to utilization and other favorable variances of$1.5 million .
PBM revenue
PBM revenue decreased by 2.9 percent or$17.7 million from the PriorYear Quarter to theCurrent Year Quarter . The decrease is primarily due to terminated contracts of$64.2 million and other net unfavorable variances of$0.1 million . The decrease is partially offset by new business of$32.3 million and increased membership and utilization of$14.3 million . 36 Table of Contents Cost of goods sold
Cost of goods sold decreased by 2.8 percent or$15.6 million from the PriorYear Quarter to theCurrent Year Quarter . This decrease is primarily due to terminated contracts of$61.1 million and other net favorable variances of$1.1 million . These decreases were partially offset by new business of$31.6 million and an increase in membership and utilization of$15.0 million . As a percentage of the portion of net revenue that relates to PBM, cost of goods sold increased from 93.2 percent in the PriorYear Quarter to 93.3 percent in theCurrent Year Quarter , mainly due to business mix.
Direct service costs and other
Direct service costs increased by 11.0 percent or$10.0 million from the PriorYear Quarter to theCurrent Year Quarter primarily due to an increase in corporate investments and new contract implementation costs. Direct service costs increased as a percentage of revenue from 13.3 percent in the PriorYear Quarter to 14.9 percent in theCurrent Year Quarter primarily due to an increase in corporate investments and new contract implementation costs.
Current Year Period compared to Prior Year Period
Managed care and other revenue
Managed care and other revenue increased by 28.9 percent or$61.1 million from the Prior Year Period to the Current Year Period primarily due to increased government pharmacy revenue of$36.8 million mainly due to increased membership, formulary management revenue of$18.4 million and other net favorable variances of$5.9 million . PBM revenue PBM revenue decreased by 3.5 percent or$60.4 million from the Prior Year Period to the Current Year Period. The decrease is primarily due to terminated contracts of$178.1 million , which decrease is partially offset by an increase in membership and utilization of$80.3 million , new business of$34.0 million and other net favorable variances of$3.4 million .
Cost of goods sold
Cost of goods sold decreased by 4.1 percent or$66.4 million from the Prior Year Period to the Current Year Period. This decrease is primarily due to terminated contracts of$173.8 million and other net favorable variances of$0.3 million . These decreases were partially offset by an increase in membership and utilization of$74.3 million and new business of$33.4 million . As a percentage of the portion of net revenue that relates to PBM, cost of goods sold decreased from 94.2 percent in the Prior Year Period to 93.6 percent in the Current Year Period, mainly due to business mix.
Direct service costs and other
Direct service costs increased by 22.6 percent or$57.2 million from the Prior Year Period to the Current Year Period primarily due to an increase in corporate investments and new contract implementation costs. Direct service costs increased as a percentage of revenue from 13.0 percent in the Prior Year Period to 15.9 percent in the Current Year Period primarily due to an increase in corporate investments and new contract implementation costs.
Legal matter settlement
In the Current Year Period, the Company recognized a
Corporate Segment
The Corporate segment of the Company is comprised primarily of amounts not allocated to the Healthcare and Pharmacy Management segments, and that are largely associated with costs related to being a publicly traded company.
37 Table of Contents
The following table summarizes, for the periods indicated, operating results for the Corporate segment (in thousands):
Three Months Ended Nine Months Ended September 30, Change September 30, Change
Corporate Segment & Eliminations 2020 2021 '20 vs '21 2020 2021 '20 vs '21
Managed care and other revenue
(495)$ (480) (3.0)% PBM revenue (5,117) (3,324) (35.0)% (14,515) (10,331) (28.8)% Cost of goods sold 4,852 3,135 (35.4)%
13,803 9,777 (29.2)%
(410) (364) (11.2)%
(1,207) (1,034) (14.3)% Direct service costs and other 21,148 13,591 (35.7)% 56,811 37,299 (34.3)%
(21,558) (13,955) (35.3)% (58,018) (38,333) (33.9)% Stock compensation expense 2,994 2,384 (20.4)%
7,474 6,298 (15.7)% Segment Loss$ (18,564) $ (11,571) (37.7)%$ (50,544) $ (32,035) (36.6)%
The Corporate segment loss decreased by 37.7 percent or$7.0 million from the PriorYear Quarter to theCurrent Year Quarter , mainly due to stranded corporate overhead expenses in the PriorYear Quarter related to the sale of the MCC Business. As a percentage of revenue, the Corporate segment loss decreased from 1.6 percent in the PriorYear Quarter to 0.9 percent in theCurrent Year Quarter , mainly due to increased revenue and stranded overhead expense in the PriorYear Quarter .
Current Year Period compared to the Prior Year Period
The Corporate segment loss decreased by 36.6 percent or$18.5 million from the Prior Year Period to the Current Year Period, mainly due to stranded corporate overhead expenses in the Prior Year Period related to the sale of the MCC Business. As a percentage of revenue, the Corporate segment loss decreased from 1.5 percent for the Prior Year Period to 0.9 the Current Year Period, mainly due to increased revenue and stranded overhead expense in the Prior Year Period.
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 afterJanuary 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. 38
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The following table reconciles (loss) income from continuing operations before income taxes to Segment Profit from continuing operations (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, 2020 2021 2020 2021 (Loss) income from continuing operations before income taxes$ (19,626) $ 747 $ (4,154) $ 32,502 Stock compensation expense 5,442 5,974 17,831 19,384 Depreciation and amortization 24,730 23,671 71,976 67,613 Interest expense 7,286 5,969 24,239 18,629 Interest and other income (349) (299) (2,119) (848) Special charges and other 16,599 1,914 24,908 8,119 Segment Profit from continuing operations$ 34,082 $ 37,976 $ 132,681 $ 145,399
The following table reconciles net (loss) income from continuing operations to Adjusted Net Income from continuing operations (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, 2020 2021 2020 2021 Net (loss) income from continuing operations$ (17,296) $ (114) $ 28,742 $ 21,932 Adjustments Stock compensation expense - 252 - 747
Amortization of acquired intangibles 9,924 6,090
29,183 21,736 Special charges and other 16,599 1,914 24,908 8,119 Tax impact (6,975) (2,176) (14,388) (8,064) Nonrecurring tax benefit - divestiture (105) - (39,012) - Adjusted Net Income from continuing operations$ 2,147 $ 5,966 $ 29,433 $ 44,470
The following table reconciles net (loss) income from continuing operations per common share-diluted to Adjusted EPS from continuing operations:
Three Months Ended Nine Months Ended September 30, September 30, 2020 2021 2020 2021 Net (loss) income from continuing operations per common share-diluted (1)$ (0.68) $ (0.20) $ 1.14 $ 0.63 Adjustments Stock compensation expense - 0.01 - 0.03 Amortization of acquired intangibles 0.39 0.23 1.15 0.82 Special charges and other 0.65 0.07 0.98 0.30 Tax impact (0.27) (0.08) (0.57) (0.30) Nonrecurring tax benefit - divestiture (0.01) - (1.54) - Adjusted EPS from continuing operations (1)$ 0.08 $ 0.03 $ 1.16 $ 1.48
During the three months ended
million adjustment to increase the carrying value of redeemable
(1) non-controlling interest with an off-setting entry to retained earnings which
is reflected in the earnings per share calculation, but is not recorded as a
charge to net income from continuing operations. 39 Table of Contents
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 ofSeptember 30, 2021 , a hypothetical 10 percent increase or decrease in the interest rate associated with these instruments, with all other variables held constant, would not materially affect the Company's future earnings and cash outflows.
Historical-Liquidity and Capital Resources
Operating Activities. The Company reported net cash provided by operating activities of$232.0 million and net cash used in operating activities of$60.1 million for the Prior Year Period and the Current Year Period, respectively. The$171.9 million decrease in operating cash flows from the Prior Year Period is mainly attributable to segment profit of$144.0 million from discontinued operations in the Prior Year Period, increased tax payments and unfavorable working capital changes between periods. The net unfavorable impact of working capital changes between periods totaled$22.7 million . For the Prior Year Period, operating cash flows were impacted by net favorable working capital changes of$17.0 million , mainly attributable to the timing of receivable and payables. For the Current Year Period, operating cash flows were impacted by net unfavorable working capital changes of$5.7 million , mainly attributable to the timing of receivables and payables. In relation to continuing operations, the Company reported net cash provided by operating activities of$54.2 million and$60.1 million for the Prior Year Period and Current Year Period, respectively. The change is mainly due to timing of accounts receivable and other working capital changes, partially offset by higher tax payments. Investing Activities. The Company utilized$56.0 million and$48.0 million during the Prior Year Period and the Current Year Period, respectively, for capital expenditures. The additions related to hard assets (equipment, furniture, and leaseholds) and capitalized software for the Prior Year Period were$15.4 million and$40.6 million , respectively, as compared to additions for the Current Year Period related to hard assets and capitalized software of$12.4 million and$35.6 million , respectively. During the Prior Year Period and the Current Year Period, the Company used$160.3 million and$14.3 million for the net purchase of "available-for-sale" securities. During the Prior Year Period and the Current Year Period, the Company used net cash of$2.1 million and$2.4 million for investments in other non-consolidated subsidiaries. 40
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Financing Activities. During the Prior Year Period, the Company received$80.0 million from borrowings under our revolving line of credit,$48.3 million from the exercise of stock options and other net favorable items of$0.9 million . In addition, the Company paid$122.0 million under debt obligations and$4.1 million for payments on finance lease obligations.
During the Current Year Period, the Company paid
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. AtSeptember 30, 2021 , the Company had no revolving loans with a borrowing capacity of$400.0 million of the revolving credit facility still available to the Company for additional drawdown. The Company plans to maintain its current investment strategy of investing in a diversified, high quality, liquid portfolio of investments and continues to closely monitor the financial markets. The Company estimates that it has no risk of any material permanent loss on its investment portfolio; however, there can be no assurance the Company will not experience any such losses in the future. 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 throughNovember 15, 2021 . As ofSeptember 30, 2021 , the remaining capacity under the Repurchase Program was$186.3 million . See Part II, Item 2-"Unregistered Sales ofEquity Securities and Use of Proceeds" for more information on the Company's share repurchase program.
Off-Balance Sheet Arrangements. As of
Credit Agreement. OnSeptember 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. OnAugust 13, 2018 , the Company entered into an amendment to the 2017 Credit Agreement, which extended the maturity date by one year. OnFebruary 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 onSeptember 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:
? incur or guarantee additional indebtedness or issue preferred or redeemable
stock;
? pay dividends and make other distributions;
? repurchase equity interests;
? make certain advances, investments and loans;
? enter into sale and leaseback transactions;
? create liens;
? sell and otherwise dispose of assets;
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? acquire or merge or consolidate with another company; and
? enter into some types of transactions with affiliates.
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 ofSeptember 30, 2021 , the Company was in compliance with all covenants, including financial covenants, under the 2017 Credit Agreement.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe 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 theSEC
onFebruary 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:
? the Company's inability to renegotiate or extend expiring customer contracts,
or the termination of customer contracts;
changes in business practices of the industry, including the possibility that
certain of the Company's managed care customers could seek to provide managed
healthcare services directly to their subscribers, instead of contracting with
? the Company for such services, particularly as a result of further
consolidation in the managed care industry and especially regarding managed
healthcare customers that have already done so with a portion of their
membership;
the impact of changes in the contracting model for Medicaid contracts,
? including certain changes in the contracting model used by states for managed
healthcare services contracts relating to Medicaid lives;
? the Company's ability to accurately predict and control healthcare costs, and
to properly price the Company's services;
the Company's ability to accurately underwrite and control healthcare costs
? associated with its expansion into clinically integrated management of special
populations eligible for Medicaid and Medicare, including individuals with
serious mental illness and other unique high-cost populations;
? the Company's ability to maintain or secure cost-effective healthcare provider contracts; 42 Table of Contents
? the Company's ability to maintain relationships with key pharmacy providers,
vendors and manufacturers;
? the Company's dependence on government spending for managed healthcare,
including changes in federal, state and local healthcare policies;
? restrictive covenants in the Company's debt instruments;
? present or future state regulations and contractual requirements that the
Company provide financial assurance of its ability to meet its obligations;
the impact of the competitive environment in the managed healthcare services
? industry which may limit the Company's ability to maintain or obtain contracts,
as well as its ability to maintain or increase its rates;
? the Mental Health and Substance Abuse Benefit Parity Law and Regulations;
? government regulation;
? proposed changes to current Federal law and regulations;
? noncompliance with regulations;
? the Company's participation in Medicare Part D is subject to government
regulation;
? the unauthorized disclosure of sensitive or confidential member or other
information;
? a breach or failure in the Company's operational security systems or
infrastructure, or those of third parties with which it does business;
? risk associated with outsourcing services and functions to third parties;
? the possible impact of additional regulatory scrutiny and liability associated
with the Company's Pharmacy Management segment;
? the inability to realize the value of goodwill and intangible assets;
? pending or future actions or claims for professional liability;
? claims brought against the Company that either exceed the scope of the
Company's liability coverage or result in denial of coverage;
? class action suits and other legal proceedings;
? negative publicity;
? the impact of governmental investigations;
? the impact of varying economic and market conditions on the Company's
investment portfolio;
? the state of the national economy and adverse changes in economic conditions;
? tax matters, including changes in corporate tax rates, disagreements with
taxing authorities and imposition of new taxes; 43 Table of Contents
the impact of an epidemic or health crisis such as the COVID-19 pandemic,
? natural disasters, political disruptions, acts of war or terrorism,
cybersecurity attacks or other data breaches or intrusions and other
extraordinary events;
the Company's amended bylaws provide that the
? be the exclusive forums for substantially all disputes between us and our
stockholders, which could limit our stockholders' ability to obtain a favorable
judicial forum for disputes with us or our directors, officers, or employees;
? the Company's ability to attract and retain employees and manage the succession
and retention of key executives; and
risks relating to the Company's proposed Merger with Centene, including the
ability to obtain regulatory approvals for the transaction and to satisfy other
closing conditions, business uncertainties and contractual restrictions while
? the Merger is pending, provisions of the Merger Agreement may limit the
Company's ability to pursue alternatives to the Merger, litigation against the
Company or Centene could prevent or delay the completion of the Merger, and the
ability of the parties to close the transaction in the anticipated timeframe.
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 endedDecember 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.
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