Healthways Reports Second-Quarter Net Loss of $0.03 Per Share, Consistent with Established Guidance

  Healthways Reports Second-Quarter Net Loss of $0.03 Per Share, Consistent
  with Established Guidance

  Affirms 2013 Financial Guidance, Adjusted for Impact of Recent Convertible
                               Notes Placement

Business Wire

NASHVILLE, Tenn. -- July 24, 2013

Ben R. Leedle, Jr., president and chief executive officer of Healthways, Inc.
(NASDAQ: HWAY), today announced financial results for the second quarter ended
June 30, 2013. Total revenues for the quarter were $162.3 million compared
with $170.2million for the second quarter of 2012. There was a net loss of
$1.1 million, or $0.03 per share, for the second quarter of 2013 compared with
net income of $5.1 million, or $0.15 per diluted share, for the second quarter
of 2012.

“We are pleased with Healthways’ second-quarter progress toward achieving our
business goals for 2013,” said Leedle. “As expected, our comparable
second-quarter results reflected a negative impact from the termination of the
Cigna contract and one other health plan contract (the “two terminated
contracts”) at the end of 2012. Excluding the two terminated contracts from
both quarters, our revenues for the second quarter of 2013 increased $16.8
million, or 11.7%, compared to the second quarter of 2012 (see page 8 for a
reconciliation of non-GAAP financial measures).

“Compared with the first quarter, our second-quarter margins expanded on
slightly lower revenues. Although we expected a small amount of
sequential-quarter revenue growth for the second quarter, the impact of the
normal seasonal decline in our business was slightly more than anticipated,
and the revenue progression of certain large contracts during the quarter was
slightly slower than expected. Based on our current visibility into the
expected acceleration of revenue from these and other contracts, we expect
sequential-quarter growth in total revenues for the third and fourth quarters
of 2013, as well as continued sequential-quarter growth in margins.
Accordingly, our financial guidance for 2013 remains unchanged, adjusted for
the impact of the July convertible notes placement. We also remain confident
that the continued organic growth from our current contract base, along with
new contract signings, will produce profitable growth and margin expansion for
2014.

“Net cash flow from operations for the second quarter was $12.9 million, and
we reduced long-term debt during the second quarter by a net $3.2 million. We
continue to expect to produce net cash flows from operations of $70million to
$80 million for 2013, with anticipated capital expenditures of $45 million.”

Strengthening Market Position

Leedle continued, “The business development environment has continued to be
productive, leading to significant contracting success since the end of the
first quarter across all three of our domestic target markets – health plans,
health systems, and employers – as well as internationally. During the second
quarter, we signed 25 contracts, including two contracts with new customers,
11 contract expansions and 12 contract extensions. These signings include a
five-year renewal of our contract with Hospital Contributions Fund (HCF),
Australia’s largest not-for-profit private health insurer. We also announced
that Highmark Health Services, the fourth largest Blue Cross and Blue
Shield-affiliated company and a customer since 2004, again extended our
contract for our Silver Sneakers^® Fitness Program.

“Yesterday,” Leedle continued, “we also announced that Healthways has entered
into an exclusive partnership with Dr. Dean Ornish to operate and license the
suite of Ornish Lifestyle Management Programs. Dr. Ornish’s foundational work
has proven that comprehensive lifestyle changes mitigate and even reverse
severe coronary heart disease without drugs or surgery. As we deliver more of
Healthways’ capabilities, deeply integrated with physicians, to afford
effective and efficient solutions for population health, we will continue to
utilize the very best evidence-based, scientifically proven methods available.
The fact that Medicare agreed to cover the “Dr. Ornish’s Program for Reversing
Heart Disease^TM” as a branded program under a new benefit category,
“intensive cardiac rehabilitation” (ICR), and that this was the first such
integrative medicine program that Medicare covers, are an important
recognition of Dr. Ornish’s thirty years of research and program development.
This recognition supports that not only is lifestyle management key to
preventing disease, but is also proven to be a powerful treatment method for
managing and reversing the chronic diseases that are driving the majority of
medical cost and health-related productivity loss in our country. Our ability
to scale the Ornish programs presents a significant growth opportunity for
Healthways as we continue to partner with health systems, hospitals,
physicians, health plans and employers of all sizes.”

In addition, today Healthways is announcing an exclusive strategic partnership
with Beacon Health System. Beacon Health System is the nonprofit parent
organization of Elkhart General Hospital and Memorial Hospital of South Bend,
providing world-class care throughout North Central Indiana and Southwestern
Michigan. Beacon’s mission is, “To enhance the physical, mental, emotional and
spiritual well-being of the communities we serve as the community’s provider
of outstanding quality, superior value and comprehensive health care
services.”

Phil Newbold, President and CEO, Beacon Health System, said, “Beacon is
committed to lighting the way to wellness and this innovative partnership with
Healthways will ensure we continue to be the region’s leader in health and
well-being.”

Leedle added, “Beacon is the established leader in the markets it serves as a
result of strategic collaboration and consolidation to obtain those
capabilities required to excel in the emerging pay-for-value reimbursement
construct. We are excited to partner with such a forward-thinking organization
as they transform into the leading model for population health management in
their region. Our first order of work together is to assess market
opportunities and design the deployment of proactive population health
solutions.”

Leedle concluded, “Based on our ongoing market engagement, we believe
Healthways remains in a strongly differentiated market position. The
healthcare industry’s transition to a focus on longitudinal health and
well-being improvement, and associated health-related cost reduction,
continues to intensify. Healthways stands alone in its ability to provide the
market with scaled and proven well-being improvement solutions, delivering a
quantifiable value of lower healthcare costs and enhanced productivity.”

Healthways Completes $150 Million Convertible Notes Placement

On July 16, 2013, Healthways completed a private placement of an aggregate
$150 million 1.50% cash convertible senior notes due 2018 (the “Convertible
Notes”). The majority of the net proceeds of $143.9 million from the offering
was used to pay the net cost of certain hedge transactions associated with the
offering and to fully reduce outstanding indebtedness under the Company’s
existing revolving credit facility. Healthways intends to use the remaining
proceeds to reduce outstanding term loan indebtedness and for other corporate
purposes, as further described below. In conjunction with the Convertible
Notes, on July 1, 2013, the Company completed an amendment of its credit
agreement, which increased the Company’s borrowing capacity at the end of the
second quarter by approximately $80 million. The combination of the credit
agreement amendment and the Convertible Notes provides Healthways increased
flexibility to pursue strategic opportunities, including acquisitions of,
investments in or partnerships with other business or capabilities to enhance
the Company’s ability to meet its long-term growth objectives. While
Healthways expects total interest and other expenses as calculated under GAAP
to increase by $0.07 per diluted share for the second half of 2013, included
in this increase is $3.1 million in non-cash imputed interest expense,
calculated under Accounting Standards Codification Topic 470, as well as $1.1
million in offering-related charges specific to the third quarter of 2013.

“We are very pleased with the terms we achieved with the Convertible Notes and
the overall strengthening it provides to our capital structure,” commented
Alfred Lumsdaine, Healthways’ chief financial officer. “While the
authoritative accounting literature requires us to recognize incremental
non-cash interest expense that impacts GAAP earnings per diluted share, the
operating performance of the business is unchanged, and we expect the
Convertible Notes to have a significant positive impact of $5 million to $6
million annually on our operating cash flows. In addition, we believe that the
structure of the warrant transaction we completed, which effectively increases
the conversion price of the Convertible Notes to a 60% premium to the stock
price on July 1, 2013, illustrates the confidence we have in Healthways’
return to sustainable profitable growth.”

Financial Guidance

Based on the Company’s financial and operating results for the first half of
2013 and its outlook for the remainder of the year, Healthways today affirmed
its previously issued financial guidance for 2013, adjusted for the impact of
the Convertible Notes.

The Company’s guidance for 2013 revenues remains in a range of $710 million to
$750 million. This range represents a 5% to 11% increase over 2012 revenues,
despite reduced revenues of approximately $80million for 2013, compared with
2012, from the two terminated contracts. The Company expects its revenues to
grow sequentially for the third and fourth quarters of 2013, driven primarily
by the continued revenue expansion of significant contracts signed in 2012. In
addition, a majority of the Company’s performance-based revenue for 2013 is
expected to be recognized in the second half of the year, and new contract
starts during the second half of 2013 are also expected to generate further
revenues.

The Company’s guidance for 2013 EBITDA margin remains in a range of 10.5% to
12.5%, compared to an EBITDA margin of 11.9% for 2012.

The Company has revised its 2013 guidance for net income per diluted share to
a range of $0.18 to $0.28, compared with a prior range of $0.25 to $0.35,
solely to incorporate the impact of the Convertible Notes, as described above.
The Company continues to expect net income per diluted share to increase
through the sequential quarters of 2013, returning to profitability in the
third quarter.

Summary

Leedle concluded, “With the completion of the second quarter, our visibility
toward performing within our guidance range for 2013 and toward our prospects
for producing profitable growth and margin expansion for 2014 and beyond has
improved. While the revenue ramp associated with some large, complex, new and
expanded contracts was modestly less during the second quarter than originally
anticipated, we continue to see positive trends with regard to the revenue
growth and improved margins implicit in our 2013 guidance, including our
return to profitability in the third quarter. These trends, along with our
ongoing business development success to date for 2013, support our
expectations for future sustainable profitable growth.”

Conference Call

Healthways will hold a conference call to discuss this release today at 5:00
p.m. Eastern Time. Investors will have the opportunity to listen to the
conference call live over the Internet by going to www.healthways.com and
clicking Investor Relations, or by going to www.earnings.com, at least 15
minutes early to register, download and install any necessary audio software.
For those who cannot listen to the live broadcast, a telephonic replay will be
available for one week at 719-457-0820, code 8508552, and the replay will also
be available on the Company’s web site for the next 12 months.

Safe Harbor Provisions

This press release contains forward-looking statements, including our guidance
and financial expectations for future periods, which are based upon current
expectations, involve a number of risks and uncertainties and are subject to
the “safe harbor” provisions of the Private Securities Litigation Reform Act
of 1995. Those forward-looking statements include all statements that are not
historical statements of fact and those regarding the intent, belief or
expectations of the Company, including, without limitation, all statements
regarding the Company’s future earnings and results of operations. Those
forward-looking statements are subject to the finalization of the Company’s
quarterly financial accounting procedures and may be affected by certain risks
and uncertainties, including, but not limited to:

  *the effectiveness of management’s strategies and decisions;
  *the Company’s ability to sign and implement new contracts for our
    solutions;
  *the Company’s ability to accurately forecast the costs required to
    successfully implement new contracts;
  *the Company’s ability to accurately forecast the costs necessary to
    integrate new or acquired businesses, services (including outsourced
    services) or technologies into the Company’s business;
  *the Company’s ability to achieve estimated annualized revenue in backlog
    in the manner and within the timeframe we expect, which is based on
    certain estimates regarding the implementation of our services;
  *the Company’s ability to anticipate change and respond to emerging trends
    in the domestic and international markets for healthcare and the impact of
    the same on demand for the Company’s services;
  *the Company’s ability to implement its integrated data and technology
    solutions platform within the required time frame and expected cost
    estimates and to develop and enhance this platform and/or other
    technologies to meet evolving customer and market needs;
  *the Company’s ability to renew and/or maintain contracts with its
    customers under existing terms or restructure these contracts on terms
    that would not have a material negative impact on the Company’s results of
    operations;
  *the Company’s ability to accurately forecast the Company’s revenues,
    margins, earnings and net income, as well as any potential charges that
    the Company may incur as a result of changes in its business;
  *the Company’s ability to accurately forecast performance and the timing of
    revenue recognition under the terms of its customer contracts ahead of
    data collection and reconciliation;
  *the Company’s ability to accurately forecast enrollment and participation
    rates in services and programs offered within the Company’s contracts;
  *the risks associated with deriving a significant concentration of revenues
    from a limited number of customers;
  *the risks associated with foreign currency exchange rate fluctuations;
  *the ability of the Company’s customers to provide timely and accurate data
    that is essential to the operation and measurement of the Company’s
    performance;
  *the Company’s ability to achieve the contractually required cost savings
    and clinical outcomes improvements and reach mutual agreement with
    customers with respect to cost savings, or to achieve such savings and
    improvements within the time frames it contemplates;
  *the risks associated with changes in macroeconomic conditions;
  *the risks associated with data privacy or security breaches, computer
    hacking, network penetration and other illegal intrusions;
  *the Company’s ability to effectively compete against other entities, whose
    financial, research, staff, and marketing resources may exceed our
    resources;
  *the Company’s ability to service its debt and remain in compliance with
    its debt covenants;
  *counterparty risk associated with our interest rate swap agreements and
    foreign currency exchanged contracts;
  *the impact of litigation involving the Company and/or its subsidiaries;
  *the impact of future state, federal and international legislation and
    regulations applicable to the Company’s business, including the Patient
    Protection and Affordable Care Act, as amended by the Health Care and
    Education Reconciliation Act of 2010 on the Company’s operations and/or
    demand for its services; and
  *other risks detailed in the Company’s Annual Report on Form 10-K for the
    fiscal year ended December 31, 2012, and other filings with the Securities
    and Exchange Commission.

The Company undertakes no obligation to update or revise any such
forward-looking statements.

About Healthways

Healthways is the largest independent global provider of well-being
improvement solutions. Dedicated to creating a healthier world one person at a
time, the Company uses the science of behavior change to produce and measure
positive change in well-being for our customers, which include employers,
integrated health systems, hospitals, physicians, health plans, communities
and government entities. We provide highly specific and personalized support
for each individual and their team of experts to optimize each participant’s
health and productivity and to reduce health-related costs. Results are
achieved by addressing longitudinal health risks and care needs of everyone in
a given population. The Company has scaled its proprietary technology
infrastructure and delivery capabilities developed over 30 years and now
serves approximately 45 million people on four continents. Learn more at
www.healthways.com.

                                                                                         
HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)
                                                                                         
                  Three Months Ended                Six Months Ended
                    June 30,                            June 30,                      
                    2013            2012            2013            2012      
                                                                          
Revenues             $ 162,270           $ 170,214         $ 327,435           $ 335,432
Cost of
services
(exclusive of
depreciation
and
amortization
of $8,886,             133,468             129,305           274,726             269,540
$8,848,
$17,712, and
$17,531,
respectively,
included
below)
Selling,
general &              14,279              14,989            27,377              28,729
administrative
expenses
Depreciation
and                  13,015          12,801         26,548          24,974  
amortization
                                                                                         
Operating              1,508               13,119            (1,216  )           12,189
income (loss)
Interest             3,158           4,387          6,479           7,572   
expense
                                                                                         
Income (loss)
before income          (1,650  )           8,732             (7,695  )           4,617
taxes
Income tax
expense              (549    )        3,675          (2,644  )        2,225   
(benefit)
                                                                                         
Net income          $ (1,101  )       $ 5,057         $ (5,051  )       $ 2,392   
(loss)
                                                                                         
Earnings
(loss) per
share:
Basic               $ (0.03   )       $ 0.15          $ (0.15   )       $ 0.07    
                                                                                         
Diluted             $ (0.03   )       $ 0.15          $ (0.15   )       $ 0.07    
                                                                                         
Weighted
average common
shares and
equivalents:
Basic                  34,188              33,424            34,089              33,385
Diluted ^(1)           34,188              33,525            34,089              33,524
                                                                                         
(1) The assumed exercise of stock-based compensation awards for the three and six months
ended June 30, 2013 was not considered because the impact would be anti-dilutive.
                                                                                         

                                                                             
Healthways, Inc.

Reconciliation of Non-GAAP Measures to GAAP Measures

(Unaudited)

Reconciliation of Revenues Excluding the Two Terminated Contracts

to Revenues, GAAP Basis
                                                                             
                                    Three Months       Three Months
                                       Ended                  Ended
                                      June 30, 2013        June 30, 2012  
Revenues excluding the two             $     161.0            $     144.2
terminated contracts ^(1)
Revenues attributable to the two           1.3                 26.0     
terminated contracts ^(2)
Revenues, GAAP basis                  $     162.3          $     170.2    
                                                                             

(1) Revenues excluding the two terminated contracts is a non-GAAP financial
measure. The Company excludes revenues attributable to the two terminated
contracts from this measure because of the significance of these terminated
contracts. The Company believes it is useful to investors to provide
disclosures of its operating results and guidance on the same basis as that
used by management. You should not consider revenues excluding the two
terminated contracts in isolation or as a substitute for revenues determined
in accordance with accounting principles generally accepted in the United
States.

(2) Revenues attributable to the two terminated contracts consist of pre-tax
revenues of $1.3 million and $26.0million for the three months ended June 30,
2013 and 2012, respectively.

                                                                             
HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

ASSETS
                                                                             
                                        June 30,         December 31,
                                          2013               2012         
Current assets:
Cash and cash equivalents                  $ 2,251              $ 1,759
Accounts receivable, net                     82,455               108,337
Prepaid expenses                             11,580               9,727
Other current assets                         12,503               7,227
Income taxes receivable                      4,378                5,920
Deferred tax asset                         8,451            8,839     
Total current assets                         121,618              141,809
                                                                             
Property and equipment:
Leasehold improvements                       38,316               40,679
Computer equipment and related               275,164              267,902
software
Furniture and office equipment               23,532               23,552
Capital projects in process                19,745           11,799    
                                             356,757              343,932
Less accumulated depreciation              (201,253 )        (187,438 ) 
                                             155,504              156,494
                                                                             
Other assets                                 21,602               21,042
                                                                             
Intangible assets, net                       84,408               90,228
Goodwill, net                              339,132          338,695   
                                                                             
Total assets                              $ 722,264         $ 748,268   
                                                                             

                                                                             
HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY
                                                                             
                                         June 30,        December 31,
                                           2013              2012         
Current liabilities:
Accounts payable                            $ 35,304            $  26,343
Accrued salaries and benefits                 17,345               24,909
Accrued liabilities                           36,512               39,234
Deferred revenue                              6,252                5,643
Contract billings in excess of earned         19,064               14,793
revenue
Current portion of long-term debt             12,877               11,801
Current portion of long-term                3,325            5,535    
liabilities
Total current liabilities                     130,679              128,258
                                                                             
Long-term debt                                253,990              278,534
Long-term deferred tax liability              33,545               36,053
Other long-term liabilities                   25,302               26,602
                                                                             
Stockholders’ equity:
Preferred stock
$.001 par value, 5,000,000 shares             —                    —
authorized, none outstanding
Common stock
$.001 par value, 120,000,000 shares
authorized, 34,288,207 and 33,924,464         34                   34
shares outstanding
Additional paid-in capital                    256,172              251,357
Retained earnings                             51,490               56,541
Treasury stock, at cost, 2,254,953            (28,182 )            (28,182 )
shares in treasury
Accumulated other comprehensive loss        (766    )         (929    ) 
Total stockholders’ equity                  278,748          278,821  
                                                                             
Total liabilities and stockholders’        $ 722,264        $  748,268  
equity
                                                                             


HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

                                               Six Months Ended
                                                 June 30,
                                                 2013           2012
Cash flows from operating activities:
Net income (loss)                                $ (5,051   )     $ 2,392
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities, net of business acquisitions:
Depreciation and amortization                      26,548           24,974
Amortization and write-off of deferred loan        483              1,870
costs
Share-based employee compensation expense          3,458            2,730
Deferred income taxes                              500              (1,510   )
Excess tax benefits from share-based payment       (231     )       (3       )
arrangements
Decrease (increase) in accounts receivable,        26,613           (7,820   )
net
(Increase) decrease in other current assets        (3,917   )       1,741
Decrease in accounts payable                       (1,611   )       (6,930   )
Decrease in accrued salaries and benefits          (8,090   )       (12,260  )
Increase in other current liabilities              293              9,646
Other                                             (96      )      (3,621   )
Net cash flows provided by operating              38,899         11,209   
activities
                                                                  
Cash flows from investing activities:
Acquisition of property and equipment              (19,579  )       (27,790  )
Business acquisitions, net of cash acquired        (830     )       (4,693   )
Other                                             (3,843   )      (4,279   )
Net cash flows used in investing activities       (24,252  )      (36,762  )
                                                                  
Cash flows from financing activities:
Proceeds from issuance of long-term debt           228,625          569,675
Payments of long-term debt                         (254,252 )       (545,280 )
Deferred loan costs                                (1,180   )       (2,547   )
Excess tax benefits from share-based payment       231              3
arrangements
Exercise of stock options                          2,164            9
Change in outstanding checks and other            11,366         4,190    
Net cash flows (used in) provided by              (13,046  )      26,050   
financing activities
                                                                  
Effect of exchange rate changes on cash           (1,109   )      (39      )
                                                                  
Net increase in cash and cash equivalents         492            458      
                                                                  
Cash and cash equivalents, beginning of           1,759          864      
period
                                                                  
Cash and cash equivalents, end of period         $ 2,251         $ 1,322    
                                                                             

Contact:

Healthways, Inc.
Chip Wochomurka, 615-614-4493
chip.wochomurka@healthways.com
 
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