Magellan Health's earnings continue to sag, as do shares

Md. insurer seeking to restructure its debt

August 14, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

Magellan Health Services Inc. reported yesterday another quarter of lower earnings, reduced earnings guidance for the current quarter and said it is seeking to restructure its debt to avoid being out of compliance with its loan agreements.

Mark S. Dimilio, chief financial officer for the Columbia-based mental health insurer, said there was no danger of a missed payment but that the company expects to be out of compliance with bank agreements that call for its debt to be no higher than five times earnings by the end of next month.

Magellan shares closed yesterday at 99 cents, down 16 cents, or nearly 14 percent.

A year ago, Magellan traded at about $14 a share, but the stock has dropped steadily after a series of disappointing earnings reports.

FOR THE RECORD - Because of incorrect information provided by Magellan Health Services Inc., an article in the Business section Wednesday gave the wrong number of employees for the company. Spokeswoman Erin Somers said the correct figures for Magellan's employment in Columbia, where it has corporate headquarters and two regional service centers, are: as of July 31 last year: 1,052; as of July 31 this year, 931; as of the end of last week: 955. The Sun regrets the error.

Analysts disagreed on the seriousness of the debt-covenant problem but agreed that the company has work to do to get its profitability turned around.

For that matter, top management concurred that improvement will take time and work. In addition to refinancing debt, they said, the company is studying its operations with a goal of generating about $45 million in annual cost savings over the next 24 months.

"We're in the middle of a critical turnaround for the company," Daniel S. Messina, president and chief executive officer, said during a conference call with analysts and investors. "We do expect steady improvement, quarter over quarter, in the next several quarters."

In the three months that ended June 30, the third quarter in the company's fiscal year, Magellan earned $3.4 million, or 6 cents a share, from continuing operations, compared with $7.4 million, or 18 cents a share, in last year's third quarter.

Revenue was $437.1 million, 1 percent higher than the $432.9 million booked in the year-earlier quarter. The company also said fourth-quarter earnings will be lower than previously indicated.

"It's very weak earnings but not surprising. The company continues to have problems," said Todd Richter, an analyst with Banc of America Securities in New York.

He said he had expected earnings of 17 cents a share but added, "It's impossible to have confidence in any projections."

Formidable task

Eliezer J. Radinsky of Jeffries & Co. Inc. in New Jersey predicted that Magellan will find it difficult to rework its $1 billion in debt, which built up as the company acquired several competitors to become the largest in the industry.

"Given their high leverage, it may be necessary to restructure, in bankruptcy or out of bankruptcy," Radinsky said.

Thomas H. Shinkle, a high-yield debt analyst at Imperial Capital LLC in Beverly Hills, Calif., said Magellan's banks have tolerated a high debt-to-earnings ratio, and that, although the company isn't reducing the ratio as quickly as desired, "they're likely to work out a compromise, and I don't think they'll call a default."

For the past year or so, Magellan has been experiencing claims for mental health care rising at an annual rate of 6 percent to 8 percent. Initially, it attributed the surge in use to the terrorist attacks of Sept. 11.

"That effect is, for the most part, over," Messina said yesterday, but costs continue to rise. He attributed that to the economic downturn and to an "indirect effect" of the terrorism in the "destigmatization" of using mental health services.

While costs are rising, Shinkle said, many of Magellan's contracts with health plans are for three years, so it's difficult for the insurer to raise its prices quickly. Company officials said Magellan is seeking to renegotiate some of its contracts early.

Pricing pressure

Radinsky and Richter said competition in the industry is placing pricing pressure on Magellan; if its rates are too high, it will lose customers. Shinkle, however, said few competitors are big enough to service large contracts as well as Magellan, which covers 68 million people nationally.

The projected cost savings would be on top of about $5 million in annual savings this year, the company said. Erin Somers, a Magellan spokeswoman, said the company has 5,930 employees nationally, down from 6,150 a year ago.

In Columbia, where Magellan has two regional service centers and its corporate headquarters, employment has increased slightly in the past year, to 955 from 931.

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