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Healthways Reports Third-Quarter 2015 Financial Results

The following excerpt is from the company's SEC filing.

Announces Restructuring Plan to Decentralize Operations and Rationalize Cost Structure

Affirms Guidance for 2015 Adjusted Net Income per Diluted Share

Healthways (NASDAQ: HWAY) today announced financial results for the third quarter and nine months ended September 30, 2015, and a reorganization and cost rationalization plan designed to increase efficiency and improve performance.

Third-Quarter 2015 Financial Highlights

Revenues of $196.4 million, up 5.8% from $185.7 million for the third quarter of 2014;

Net loss of $9.0 million, or $0.2 5 per share, compared with net income of $2.0 million, or $0.05 per diluted share, for the third quarter last year; and

Adjusted net income per diluted share of $0.14 compared with $0.08 for the third quarter of 2014. The adjusted results for the third quarter of 2015 exclude $1.8 million of restructuring charges, $1.8 million of non-cash interest expense, and $19.6 million in aggregate for an impairment of a joint venture investment and a related loss on the remaining investment commitment ("JV losses"). The adjusted results for the third quarter of last year exclude $1.7 million of non-cash interest expense.

HEALTHWAYS, INC.

(In millions, except per-share data)

See page 11 for a reconciliation of non-GAAP financial measures

Three Months Ended

Nine Months Ended

September 30,

Net income (loss)

Net income (loss) per share, GAAP basis

(0.25

Non-cash interest expense per share

Restructuring charges per share

JV losses per share

CEO transition-related expenses per share

Contract dispute settlement charge per share

Adjusted net income per share

Basic

Figures may not add due to rounding and use of basic or diluted shares in calculation

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HWAY Reports Third-Quarter Results

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Alfred Lumsdaine, Chief Financial and Administrative Officer of Healthways, commented, "Our operational results for the third quarter were consistent with our expectations. As was the case with our second-quarter results, the early recognition of performance-based revenues positively impacted our third-quarter revenues and earnings. For the third quarter, we recognized $3.6 million in performance-based revenues that we previously expected to realize in the fourth quarter of 2015. Cash flow from operations was $9.8 million for the third quarter, while capital expenditures were $9.1 million."

Reorganization and Cost Rationalization Plan

Healthways also announced today a structural reorganization, moving from an organization focused on five customer end-markets to a structure that will be centered on two primary businesses – Population Health Services and Network Solutions. In addition to the reorganization, the Company intends to improve efficiency through the implementation of a plan to rationalize costs, primarily within the Population Health Services business unit. This reorganization and cost rationalization plan (the "Plan") is the result of a comprehensive review of the Company's operations and cost structure that began in June, led by Mr. Lumsdaine with support and oversight from the Board of Directors and the assistance of Alvarez & Marsal, a leading professional consulting firm.

"The new decentralized operational structure is designed to deliver greater value to our customers," said Healthways President and Chief Executive Officer, Donato Tramuto. "The Population Health Services business unit will deliver interventions directly to members of sponsored populations. These interventions are designed to improve people's health and well-being, drive improved performance and lower health-related costs by keeping healthy people healthy, eliminating or reducing lifestyle risks that lead to disease, and optimizing care for people with persistent conditions or chronic disease. The Network Solutions business unit will manage our interventions, like our SilverSneakers® Fitness program, that are delivered through the networks that we organize." Mr. Tramuto added, "We expect our cost rationalization efforts within the Population Health Services business unit to

enhance our efficiency and cost effectiveness, while sharpening our focus on our core capabilities."

The reorganization is expected to be largely complete early in 2016. As part of the reorganization, the Company's international operations will become part of the Population Health Services business unit. As a result of the elimination of his role, Peter Choueiri, President of International, will depart Healthways. In addition, the Company has entered into a definitive agreement to sell its Navvis subsidiary to Mike Farris, the Company's Chief Commercial Officer, effective on November 1, 2015. Mr. Farris is expected to step down as part of the sale, approximately two months earlier than the expiration of his employment agreement.

The Company expects to implement the cost rationalization portion of the Plan in two work streams to be complete in 2016. One work stream will focus on the Company's business technology architecture and the second work stream will focus on the cost effective deployment of human capital and optimization of our facilities infrastructure.

"The changes coming from the Plan are designed to improve the support and satisfaction of our current and future customers by refocusing and reinvigorating the entire Company," said Mr. Tramuto. "Our new structure will empower our two business units to deepen customer relationships and deliver improved performance with a strong focus on results and accountability. We also expect these changes to provide more growth opportunities for our tremendously skilled employees and drive greater long-term value for our stockholders.

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"I want to express my gratitude and that of our entire Board to Alfred Lumsdaine for his leadership of the Company during this time and specifically his collaboration in spearheading the development of the Plan. We are looking forward to Alfred's continued leadership in his expanded role. Additionally, we are excited to have Sid Stolz join the team, as President, Network Solutions (see biographical information below). His decision to come to Healthways is but one example of our intent to recruit and retain the industry's best talent."

Healthways expects to incur a total of approximately $20 million to $25 million in restructuring charges related to the Plan. A majority of the charges are expected to be incurred in the fourth quarter of 2015. This Plan is designed to create significant cost savings beginning in 2016, with total annualized savings of approximately $35 million to $45 million anticipated in 2017.

"Although the actions announced today are of a structural and cost rationalization nature, we are not yet complete with our strategic efforts," added Mr. Tramuto. "Moving forward past this initial work, which might best be described as a turnaround situation

as it relates to our Population Health Services business, we will invest in opportunities within and outside the Company that we believe will grow the business, provide acceptable returns, position us as number one or two in our markets, and produce improved stockholder value."

In connection with the Plan, Healthways has also completed an amendment to its existing credit facility. Under the terms of the amendment, a combined total of $27.5 million of cash restructuring costs that fit the GAAP definition of restructuring and additional cash advisory services costs will be excluded from the covenant calculations for total debt to EBITDA and the fixed charge coverage. As calculated under the amended credit facility,

the Company's ratio of total debt to EBITDA was 2.8 at the end of the third quarter.

During the third quarter, as a product of the ongoing review of the Company's operations following changes in its executive leadership team, the Company observed indicators that its investment in a joint venture with Gallup might be impaired. "We recently...


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