Magellan Health Services, Inc. (NASDAQ: MGLN) today reported financial results for the first quarter 2014, as summarized below. For the quarter ended March 31, 2014, the company reported net revenue of $966.5 million, segment profit of $76.5 million, and net income of $25.7 million, or $0.92 earnings per share (EPS). Segment profit is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs and other operating expenses, and includes income from unconsolidated subsidiaries, but excludes segment profit (loss) from non-controlling interests held by other parties, as well as stock compensation expense.
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Revenue increased due to the inclusion of Partners Rx in the current year quarter, new business and rate increases, partially offset by loss of revenues associated with terminated contracts.
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Segment profit increased mainly due to strong results in the commercial and public sector segments.
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Net income decreased mainly due to higher depreciation and amortization resulting from asset additions after the prior year quarter and acquisition activity, and a higher effective tax rate as a result of non-deductibility of health insurance fees, offset by higher segment profit.
As of March 31, 2014, the company had unrestricted cash and investments of $291.8 million. Through last Friday, April 25, Magellan repurchased approximately 470,000 shares, for a total cost of $27.3 million, and to date, has completed roughly 48 percent of the current $300 million authorization.
"It has been an exciting quarter for our pharmacy business, with the announcement of a new acquisition," said Barry M. Smith, chairman and chief executive officer of Magellan Health Services. "The acquisition of CDMI demonstrates Magellan's continued execution on our strategy to create a robust pharmaceutical operation that will drive future profitable growth. CDMI will enhance our capabilities and customer relationships, as we strengthen our total drug offering, managing any drug, under any benefit, at any site of service."
"We also continue to make strides in our Magellan Complete Care strategy as we prepare to go live with our SMI Specialty Plan in Florida," Smith said.
With the company's growing presence in Arizona following the acquisition of Partners Rx, Magellan announced today that its headquarters would be moving from Avon, Conn. to Scottsdale, Ariz. over the course of the next few months. Chairman and CEO Barry Smith will be joined there by certain executive leaders, including the chief financial officer. After thoughtful consideration, CFO Jon Rubin has chosen not to relocate and will be leaving the company. Rubin has agreed to stay for up to a year so that a new CFO may be recruited and oriented. Magellan will maintain its business operations in many current locations, including its office in Connecticut.
Results and Outlook
"Magellan posted strong results during the first quarter of 2014, particularly in our managed healthcare and specialty solutions businesses," said Rubin.
"We expect to close the CDMI acquisition tomorrow. For the remainder of 2014, CDMI is expected to generate revenues of $28 million and segment profit of $23 million. This acquisition will have a significant tax benefit to Magellan that is estimated to be approximately $80 million, assuming a base purchase price of $205 million, and which will be recognized over 15 years. The tax benefit will increase if there are additional earn-out payments. The purchase price includes $80 million of restricted stock that has service and performance requirements, and which will result in stock compensation expense of approximately $20 million for the remainder of 2014. Depreciation and amortization are estimated to be $9.5 million for 2014. In the current year, the CDMI acquisition is expected to be dilutive to EPS by approximately $0.14 per share, due to the non-cash stock compensation expense and amortization of acquisition intangibles. Excluding the impact of these non-cash items on EPS, the CDMI acquisition is expected to be accretive by approximately $0.50 per share in 2014.
"Relative to 2014, we are updating our guidance to reflect the impact of the CDMI acquisition as well as share repurchase activity. Our full year 2014 expectations are for revenue of $3.6 billion to $3.8 billion, net income of $53 million to $69 million, and segment profit of $238 million to $258 million. We are increasing our guidance for cash flow from operations to a range of $204 million to $226 million. Taking into account the impact of share repurchase activity through April 25, 2014, but not considering any potential future share repurchases, our guidance range for fully diluted EPS is estimated to be $1.89 to $2.46 based on 28.1 million average fully diluted shares. Included in our projected EPS estimates is dilution of approximately $0.64 per share related to amortization of acquisition intangibles and stock compensation expense resulting from restricted stock purchases by sellers in the CDMI acquisition."