Healthways Reports Third-Quarter Financial Results

  Healthways Reports Third-Quarter Financial Results

2013 Financial Guidance Reduced to Reflect Slower Pace in Market Transition of
                           Risk-Based Lives to ACOs

               Establishes Initial Financial Guidance for 2014

Business Wire

NASHVILLE, Tenn. -- October 24, 2013

Ben R. Leedle, Jr., president and chief executive officer of Healthways, Inc.
(NASDAQ: HWAY), today announced financial results for the third quarter ended
September 30, 2013. Total revenues for the quarter were $166.6 million, equal
to revenues for the third quarter of 2012. Net income for the third quarter of
2013 was $1.8 million, or $0.05 per diluted share, compared with $5.0 million,
or $0.15 per diluted share, for the third quarter of 2012.

Leedle commented, “Healthways’ financial results for the third quarter of 2013
were below our expectations, and we are lowering our financial guidance for
2013 for two primary reasons. The majority of the guidance change results from
a much lower number of risk lives available in 2013 for our total population
management services to health systems than was forecast in our previous
guidance. A smaller but still important impact came from the normal
fluctuations in the memberships of our commercial health plan customers, where
we experienced a net reduction in lives compared with our expectations.

“The rapid movement in 2012 and early 2013 toward value-based models of care
has slowed as both payers and providers confront the magnitude and complexity
of the change required across their enterprises for operating success. Our
previous expectations reflected the momentum we experienced in signing six
health system contracts and building an active pipeline of new potential
health system customers, but did not incorporate the impact of the slowdown.
For Healthways this slowdown has affected the ramp of lives at risk for
quality and financial outcomes management.

“This shortfall in the number of risk lives has resulted in delays in the
advancement and/or the launch of certain components of our total population
management solution, thus accounting for a significantly lower than
anticipated ramp of these contracts for 2013. This delay, which we believe is
a timing issue, is not related to any operating issues or achievement of
critical outcomes performance on the part of Healthways. In fact, we continue
to expect to add new health system clients through an array of well-being
improvement solutions.

“We have responded to the evolving needs of both our health system and health
plan customers by focusing on products and services to drive meaningful
revenues before, during and after the transition to value-based reimbursement.
For example, our exclusive agreement in July 2013 to operate and license Dr.
Dean Ornish’s Lifestyle Management Programs (Ornish Program) enables us to
provide immediate value to our customers. The Ornish Program affords revenue
growth for providers while creating strong medical savings for payers. These
characteristics make the Ornish Program valuable for all the stakeholders in
both fee for service and value-based reimbursement models.”

Solid Core Business Performance

“We have already renewed two of the three largest contracts up for renewal in
2013, and we expect to renew the third contract by year end,” said Leedle.
“Our third quarter results and reduced guidance for 2013 were not the result
of new contract terminations. Due to the continued solid operating performance
and revenue growth in our health plan, employer and fitness (primarily
SilverSneakers^®) markets, our third-quarter revenue growth offset the
termination at the end of 2012 of the Cigna contract and one other health plan
contract (the “two terminated contracts”). Excluding the two terminated
contracts, revenues for the third quarter of 2013 increased $20.7 million, or
14.2%, over the third quarter last year (see page 8 for a reconciliation of
non GAAP financial measures). We also produced net cash flow from operations
for the third quarter of $12.5 million.

“In addition, we expect the growth across our markets for full-year 2013 to
offset the $80 million 2013 impact of the two terminated contracts. We expect
this underlying growth for 2013 and the continuing strength of our business
development momentum, will lead to profitable growth for 2014.”

Business Development Momentum

“Supporting our outlook for the balance of 2013 and into 2014, the pace of our
business development remains intense,” continued Leedle. “During the third
quarter, we signed 23 contracts, including seven contracts with new customers,
five contract expansions and 11 contract extensions. These contracts covered
all of our markets: for example, the health systems market through our new
contract with Beacon Health Systems; international markets through a long-term
contract extension with Hospitals Contributions Fund in Australia; the large
employer market through our new contract with the Georgia Department of
Community Health’s State Health Benefit Plan; the commercial health plan
market through an extended contract with BlueCross BlueShield of Tennessee;
the Medicare Advantage market with new and extended contacts with Premera Blue
Cross and with Highmark Health Services, respectively; and the Medicaid risk
market through a contract extension with L.A. Care Health Plan.

“We have already signed additional new and renewed contracts in the fourth
quarter to date for large employers and commercial and Medicare health plans,
and we expect to sign further significant contracts before year end. In
addition, we have continued to expand our well-being value proposition. As
previously mentioned, in the third quarter we announced an exclusive
partnership with Dr. Dean Ornish to operate and license the Ornish Program. We
expect that our capability to scale the delivery of these programs will
accelerate the adoption of our well-being platform with health systems across
geographic markets and lead to a series of meaningful new commitments from
health plans and physician groups. The first commitments, listed in the table
below, are expected to be operational in either the fourth quarter of 2013 or
the first quarter of 2014. These are market leading organizations and are
indicative of the breadth and depth of demand for these solutions.”

                          ORNISH PROGRAM COMMITMENTS

                                                                 
 Organization                               Region         Status   
 Beacon Health System                         Indiana          Expanded 
 Beebe Medical Center                         Delaware         New      
 Beth Israel Medical Center                   New York         New      
 Cleveland Clinic                             Ohio             New      
 Hackensack University Medical Center         New Jersey       New      
 Hawaii Medical Service Association           Hawaii           Expanded 
  (BCBS)
 Texas Health Resources                       Texas            Expanded 
 UCLA Health System                           California       New      
 Wellmont Health System                     Tennessee      Expanded 
                                                              

Well-Being Improvement: Adoption, Endorsement and Expansion

Woodson Merrell, M.D., Chairman of the Department of Integrative Medicine and
Executive Director, Center for Health and Healing at Beth Israel Medical
Center said, “We are thrilled and honored to be offering Dr. Ornish’s Program
for Reversing Heart Disease at the Center for Health and Healing of the Beth
Israel Medical Center (part of the Mt. Sinai Health System). It is the leading
program in this space; there is not even a close second.”

“UCLA is fully committed to offering the Ornish program, and we are actively
developing our first site for the program,” said David T. Feinberg, M.D.,
M.B.A., President, UCLA Health System and CEO UCLA Hospital System.

Michael F. Roisen, M.D., Chief Wellness Officer, and Chair, Wellness Institute
ofthe Cleveland Clinic commented, “The Cleveland Clinic will feature the
Ornish program for reversing heart disease in its armamentarium for treating
heart and vascular disease.”

Dr. Jerry Blackwell, President of Wellmont CVA Heart Institute said, “Dr.
Ornish’s program is the only program scientifically proven to reverse heart
disease without drugs or surgery in randomized clinical trials. We are
thrilled to be offering this state of the art lifestyle program for our
patients. Medicare and other major insurance companies are covering Dr.
Ornish’s program so we can make it available to those who most need it.”

Leedle added, “In addition to the growing demand for the Ornish Program,
earlier this week we announced an exclusive agreement to deliver Dave Ramsey’s
CORE^TM Financial Wellness program as an integrated component of the
Healthways Well-Being Improvement Solution. We also extended and expanded our
strategic relationship with Dan Buettner and Blue Zones, announcing two new
Blue Zones projects, one in Fort Worth Texas with Texas Health Resources and
the other in Hawaii with Hawaii Medical Service Association (HMSA). These new
and expanded relationships represent additional growth opportunities and
further illustrate our strongly differentiated market position, built on our
unique ability to provide scaled and proven well-being improvement solutions
that quantifiably lower healthcare costs and enhance productivity.

“Our strong market position and the opportunities related to the transition to
value-based reimbursement have been further validated by two additional recent
announcements. Earlier this week we announced that Renaissance Health Network,
a leading clinically integrated primary care organization will use our
physician integration model, Well-Being Direct, to optimize population health
management for its 32,000 Medicare patients in its Pioneer ACO contract with
the Centers for Medicare and Medicaid Innovation. Renaissance already provides
value-based population health management to 150,000 lives, and their selection
of Well-Being Direct to deepen their population health capabilities and expand
their historic success as a value-based provider speaks to the significance of
our ability to partner with physician organizations.

“In addition, we recently announced a $20 million investment in Healthways by
CareFirst BlueCross BlueShield, a large, long-term customer. Our population
health management capabilities are an integral part of CareFirst’s Patient
Centered Medical Home program, which equips primary care physicians with the
resources to provide higher quality, lower cost care to over one million
CareFirst members. The structure of the investment incentivizes both parties
to grow our relationship and expand it to third-party payors and providers.
Given our deep, long-term integration with CareFirst, their investment
represents a strong validation of our value proposition and growth potential.”

Financial Guidance

Healthways has reduced its financial guidance for 2013, based on the Company’s
financial and operating results for the first nine months of 2013 and
expectations for a continued slower than expected ramping of fourth-quarter
revenues under certain contracts. The Company’s guidance for 2013 revenues
includes a sequential-quarter increase in fourth-quarter revenue, to a range
of $171 million to $181 million, and total 2013 revenues in a range of $665
million to $675 million. Further, the Company expects fourth-quarter 2013 net
income per diluted share in a range of $0.00 to $0.06 and total 2013 net loss
per share in a range of $0.10 to $0.04.

Healthways also has initially established its guidance for 2014 revenues in a
range of $725 million to $760 million. Healthways continues to expect EBITDA
margins to expand sequentially in 2014 and beyond.

Summary

Leedle concluded, “Although our reduction in 2013 guidance was driven
predominately by a shortfall in risk-life aggregation with certain health
systems, we fully expect the risk-life volume to accelerate over time and for
health system total population management to be a significant growth
opportunity. In addition to expected growth in our health systems market, we
continue to expect solid performance from our core markets with resulting
growth in revenues and margins for 2014 and beyond.”

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 6885653, 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          Nine Months Ended
                       September 30,                 September 30,
                       2013          2012          2013          2012
                                                                     
Revenues               $ 166,615       $ 166,559     $ 494,049       $ 501,990
Cost of services
(exclusive of
depreciation and
amortization of
$9,115, $9,158,          131,109         126,782       405,835         396,321
$26,826, and
$26,689,
respectively,
included below)
Selling, general
and administrative       16,440          14,727        43,816          43,455
expenses
Depreciation and        12,952        13,259       39,499        38,233
amortization
                                                                     
Operating income         6,114           11,791        4,899           23,981
Interest expense        5,006         3,249        11,486        10,822
                                                                     
Income (loss)
before income            1,108           8,542         (6,587  )       13,159
taxes
Income tax expense      (691    )      3,514        (3,336  )      5,739
(benefit)
                                                                     
Net income (loss)      $ 1,799        $ 5,028       $ (3,251  )     $ 7,420
                                                                     
Earnings (loss)
per share:
Basic                  $ 0.05         $ 0.15        $ (0.09   )     $ 0.22
                                                                     
Diluted                $ 0.05         $ 0.15        $ (0.09   )     $ 0.22
                                                                     
Comprehensive          $ 2,444        $ 4,909       $ (2,444  )     $ 7,688
income (loss)
                                                                     
Weighted average
common shares and
equivalents:
Basic                    34,682          33,683        34,288          33,485
Diluted ^(1)             35,834          34,068        34,288          33,706
                                                                     
^(1) The assumed exercise of stock-based compensation awards for the nine
months ended September 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 Ended   Three Months Ended
                                     September 30, 2013     September 30, 2012
Revenues excluding the two           $       166.0          $       145.3
terminated contracts ^(1)
Revenues attributable to the two            0.6                   21.3
terminated contracts ^(2)
Revenues, GAAP basis                 $       166.6          $       166.6
                                                                    

^(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 $0.6 million and $21.3 million for the three months ended
September 30, 2013 and 2012, respectively.


HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

ASSETS

                                          September 30,   December 31,
                                            2013              2012
Current assets:
Cash and cash equivalents                   $  2,815          $ 1,759
Accounts receivable, net                       85,731           108,337
Prepaid expenses                               13,283           9,727
Other current assets                           6,648            7,227
Income taxes receivable                        5,653            5,920
Deferred tax asset                            8,169          8,839    
Total current assets                           122,299          141,809
                                                              
Property and equipment:
Leasehold improvements                         38,406           40,679
Computer equipment and related software        283,707          267,902
Furniture and office equipment                 23,591           23,552
Capital projects in process                   23,612         11,799   
                                               369,316          343,932
Less accumulated depreciation                 (211,355 )      (187,438 )
                                               157,961          156,494
                                                              
Other assets                                   69,546           21,042
Intangible assets, net                         81,809           90,228
Goodwill, net                                 339,132        338,695  
                                                              
Total assets                                $  770,747       $ 748,268  
                                                                         


HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY

                                              September 30,   December 31,
                                                2013              2012
Current liabilities:
Accounts payable                                $  20,547         $  26,343
Accrued salaries and benefits                      15,848            24,909
Accrued liabilities                                36,095            39,234
Deferred revenue                                   5,197             5,643
Contract billings in excess of earned              19,263            14,793
revenue
Current portion of long-term debt                  13,737            11,801
Current portion of long-term liabilities          3,181           5,535   
Total current liabilities                          113,868           128,258
                                                                  
Long-term debt                                     246,926           278,534
Long-term deferred tax liability                   35,461            36,053
Other long-term liabilities                        67,287            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, 35,024,421 and 33,924,464              35                34
shares outstanding
Additional paid-in capital                         282,184           251,357
Retained earnings                                  53,290            56,541
Treasury stock, at cost, 2,254,953 shares          (28,182  )        (28,182 )
in treasury
Accumulated other comprehensive loss              (122     )       (929    )
Total stockholders’ equity                        307,205         278,821 
                                                                  
Total liabilities and stockholders’ equity      $  770,747       $  748,268 
                                                                             


HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

                                               Nine Months Ended
                                                 September 30,
                                                 2013           2012
Cash flows from operating activities:
Net income (loss)                                $ (3,251   )     $ 7,420
Adjustments to reconcile net income (loss)
to net cash flows provided by operating
activities, net of business acquisitions:
Depreciation and amortization                      39,499           38,233
Amortization and write-off of deferred loan        1,096            2,077
costs
Amortization of debt discount                      1,497            —
Share-based employee compensation expense          5,207            4,652
Deferred income taxes                              45               (1,517   )
Excess tax benefits from share-based payment       (572     )       (477     )
arrangements
Decrease (increase) in accounts receivable,        23,185           (17,081  )
net
Decrease in other current assets                   138              779
Decrease in accounts payable                       (4,363   )       (6,029   )
Decrease in accrued salaries and benefits          (9,777   )       (14,454  )
(Decrease) increase in other current               (398     )       12,912
liabilities
Other                                             (941     )      (3,124   )
Net cash flows provided by operating              51,365         23,391   
activities
                                                                  
Cash flows from investing activities:
Acquisition of property and equipment              (32,833  )       (40,735  )
Business acquisitions, net of cash acquired        (830     )       (4,693   )
Other                                             (5,754   )      (6,075   )
Net cash flows used in investing activities       (39,417  )      (51,503  )
                                                                  
Cash flows from financing activities:
Proceeds from issuance of long-term debt           314,800          653,874
Payments of long-term debt                         (461,380 )       (631,315 )
Deferred loan costs                                (5,210   )       (2,547   )
Excess tax benefits from share-based payment       572              477
arrangements
Exercise of stock options                          12,562           2,835
Proceeds from cash convertible senior notes        150,000          —
Proceeds from sale of warrants                     15,150           —
Payments for convertible note hedge                (36,750  )       —
transactions
Change in outstanding checks and other            104            6,471    
Net cash flows (used in) provided by              (10,152  )      29,795   
financing activities
                                                                  
Effect of exchange rate changes on cash           (740     )      24       
                                                                  
Net increase in cash and cash equivalents         1,056          1,707    
                                                                  
Cash and cash equivalents, beginning of           1,759          864      
period
                                                                  
Cash and cash equivalents, end of period         $ 2,815         $ 2,571    
                                                                             

Contact:

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