Discontinued Operations

9 Months Ended

Sep. 30, 2020

Discontinued Operations

Discontinued Operations

NOTE E—Discontinued Operations

Magellan Complete Care – Stock and Asset Purchase Agreement

As discussed in Note A— “General”, on April 30, 2020, the Company and Molina entered into the Purchase Agreement pursuant to which the Company has agreed to sell its MCC business to Molina for $850.0 million in cash, subject to certain adjustments, and Molina has agreed to assume liabilities of the MCC business.

The consummation of the MCC Sale is subject to customary closing conditions, including: (i) the expiration of the waiting period applicable to the Purchase Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (ii) the absence of any law or governmental order prohibiting the MCC Sale, (iii) obtaining all required consents, authorizations, permits and approvals under Health Regulatory Laws (as defined in the Purchase Agreement), (iv) no material adverse effect on the Company having occurred since the signing of the Purchase Agreement, and (v) the accuracy of the representations and warranties of each party (subject to materiality qualifiers) in

the Purchase Agreement and the compliance by each party with its covenants in all material respects. The consummation of the MCC Sale is not subject to any financing contingency.

In connection with the MCC Sale, the Company and Molina are entering into commercial agreements for certain behavioral health, utilization management and related services to be provided by the Company to Molina and the MCC business. In addition, the parties will enter into a transition services agreement pursuant to which the Company and certain of its affiliates will provide, or cause third parties to provide, certain services to accommodate the transition of the MCC business to 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 major classes of assets and liabilities held for sale that were included in the Company’s consolidated balance sheets as of December 31, 2019 and September 30, 2020 (in thousands):

	December 31,		September 30,
	2019		2020
Assets Held For Sale
Cash and cash equivalents ($95,202 and $33,986 restricted at December 31, 2019 and September 30, 2020, respectively)	$	209,497	$	189,811
Accounts receivable, net		209,496		199,951
Short-term and long-term investments ($243,496 and $358,742 restricted at December 31, 2019 and September 30, 2020, respectively)		243,496		404,790
Property and equipment, net		6,710		6,741
Goodwill		211,735		211,735
Other intangible assets, net		85,669		72,108
Other current and long-term assets ($2,387 and $2,387 restricted at December 31, 2019 and September 30, 2020, respectively)		32,386		58,896
Total Assets Held For Sale		998,989		1,144,032
Less: current portion		663,276		1,144,032
Total Assets Held For Sale, Less Current Portion	$	335,713	$	—
Liabilities Held For Sale
Accounts payable	$	4,625	$	3,889
Accrued liabilities		92,170		124,595
Medical claims payable		281,419		284,171
Other medical liabilities		31,769		54,397
Deferred income taxes		15,063		13,804
Tax contingencies		5,388		5,563
Deferred credits and other long-term liabilities		16,850		9,853
Total Liabilities Held For Sale		447,284		496,272
Less: current portion		409,983		496,272
Total Liabilities Held For Sale, Less Current Portion	$	37,301	$	—

The following table summarizes the components of income from discontinued operations that is included in the Company’s consolidated income statements for the three and nine months ended September 30, 2019 and 2020 (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2020		2019		2020
Managed care and other revenue	$	713,089	$	744,741	$	2,045,474	$	2,200,132
Costs and expenses:
Cost of care		615,309		615,390		1,781,148		1,791,298
Direct service costs and other operating expenses (1)(2)(3)		71,473		89,282		213,064		265,857
Depreciation and amortization		5,267		5,380		15,857		16,085
Interest expense		72		—		213		89
Interest and other income		(3,271)		(901)		(9,686)		(4,919)
Total costs and expenses		688,850		709,151		2,000,596		2,068,410
Income from discontinued operation before income taxes		24,239		35,590		44,878		131,722
Provision for income taxes		7,086		6,647		12,705		47,062
Net income from discontinued operations	$	17,153	$	28,943	$	32,173	$	84,660

(1) Includes stock compensation expense of $207 and $397 for the three months ended September 30, 2019 and 2020, respectively, and $621 and $1,023 for the nine months ended September 30, 2019 and 2020, respectively.

(2) Includes changes in fair value of contingent consideration of $4 and $(2,001) for the three and nine months ended September 30, 2019, respectively.

(3) Includes divestiture related expenses of $2,195 and $6,154 for the three and nine months ended September 30, 2020, respectively.

The Company has retained corporate overhead expenses previously allocated to MCC of $8.0 million and $7.2 million for the three months ended September 30, 2019 and 2020, respectively, and $25.6 million and $21.0 million for the nine months ended September 30, 2019 and 2020, respectively.

At September 30, 2020, the Company’s excess capital and undistributed earnings for the Company’s regulated subsidiaries is approximately $165 million which are included in assets held for sale. During the three and nine months ended September 30, 2020, the Company distributed $37.5 million in excess capital and undistributed earnings in discontinued operations regulated subsidiaries to the parent.