SXC Health Solutions Announces Record Third Quarter Financial Results

Nov 03, 2011, 06:00 ET from SXC Health Solutions Corp.

LISLE, IL, Nov. 3, 2011 /PRNewswire/ - SXC Health Solutions Corp. ("SXC" or the "Company") (NASDAQ: SXCI, TSX: SXC), a leading provider of technology and pharmacy benefit management (PBM) services, announces its financial results for the three-month and nine-month periods ended September 30, 2011.

Q3 2011 Highlights

  • Revenue grew 163% on a year over year basis to $1.3 billion, compared to $489.9 million in Q3 2010
  • Gross profit increased 56% to $82.3 million, compared to $52.9 million in Q3 2010
  • Net income increased 56% to $25.3 million, or $0.40 per share (fully-diluted), compared to $16.2 million, or $0.26 per share (fully-diluted), in Q3 2010
  • Adjusted EBITDA¹ increased 58% to $48.0 million, compared to $30.4 million in Q3 2010
  • Non-GAAP adjusted earnings per share¹ (fully-diluted), which excludes all transaction-related amortization, increased 57% to $0.44, compared to $0.28 in Q3 2010
  • Adjusted prescription claim volume¹ for the PBM segment was 23.3 million, compared to 11.9 million in Q3 2010
  • Transaction processing volume for the HCIT segment was 100.1 million in the quarter
  • Generic dispense rate increased to 78% compared to 76% in Q3 2010
  • Successfully converted two HCIT clients to PBM services in the quarter
  • Launched the industry's first automated, enhanced Coordination of Benefits service in the State Fee-For-Service Medicaid market
  • Completed the acquisitions of PTRX, Inc., a full-service pharmacy benefit manager, and SaveDirectRx, Inc., its exclusive mail-order pharmacy provider, both previous clients of SXC, subsequent to the end of the period
  • Signed a five-year HCIT contract renewal with Catalyst Health Solutions, Inc. (NASDAQ: CHSI), subsequent to the end of the period
  • Ranked 1st in FORTUNE Magazine's 2011 "100 Fastest-Growing Companies" list

"Q3 was another strong quarter for SXC. Cash flow from operations was strong and we achieved record EBITDA growth. We just posted our best sales year in SXC's history - more than $1.4 billion of new sales, adding over 1 million new lives under management. The Company is very well positioned moving forward," said Mark Thierer, Chairman and CEO of SXC.

Subsequent to the end of the quarter, Cigna announced the acquisition of HealthSpring, SXC's largest customer based on revenues.  HealthSpring is in the first year of a five-year contract, which has a base three year term with two one-year extensions.  SXC has met the performance obligations under the contract and expects to service HealthSpring for the duration of the agreement.

Financial Review Revenue and Gross Profit segmented by PBM and HCIT: SXC evaluates segment performance based on revenue and gross profit. Reconciliations of the Company's business segments to the consolidated financial statements for the three and nine months ended September 30, 2011 and 2010 are as follows:

Three months ended September 30, (unaudited, in thousands)

    PBM   HCIT   Consolidated
    2011   2010   2011   2010   2011   2010
Revenue   $ 1,256,369   $    463,042   $    30,921   $    26,880   $ 1,287,290   $    489,922
Cost of  revenue 1,188,197   423,773   16,751   13,285   $ 1,204,948   437,058
Gross profit $      68,172   $      39,269   $    14,170   $    13,595   $      82,342   $      52,864
Gross profit % 5.4%   8.5%   45.8%   50.6%   6.4%   10.8%

Nine months ended September 30,  (unaudited, in thousands)

    PBM   HCIT   Consolidated
    2011   2010   2011   2010   2011   2010
Revenue   $ 3,511,148   $ 1,341,839   $    85,833   $    79,677   $ 3,596,981   $ 1,421,516
Cost of  revenue 3,330,886   1,225,620   45,973   39,064   3,376,859   1,264,684
Gross profit $    180,262   $    116,219   $    39,860   $    40,613   $    220,122   $    156,832
Gross profit % 5.1%   8.7%   46.4%   51.0%   6.1%   11.0%

Revenue Q3 2011 PBM revenue was $1.3 billion, compared to $463.0 million in Q3 2010. PBM revenue for the year-to-date (YTD) period was $3.5 billion, compared to $1.3 billion in the prior period. The increase in revenue on a year over year basis is primarily due to new customer starts, including HealthSpring on January 1, 2011 and Optima on April 1, 2011, as well as revenues generated from the acquisition of MedfusionRx, LLC ("MedfusionRx").

Q3 2011 HCIT revenue was $30.9 million, compared to $26.9 million in Q3 2010.  For the YTD period, HCIT revenue was $85.8 million, compared to $79.7 million in the prior period. The increase was primarily due to an increase in revenues earned from professional services and transaction processing as a result of increased utilization of these services by HCIT clients.

Gross Profit Consolidated gross profit for Q3 2011 was $82.3 million, an increase of $29.5 million compared to $52.9 million in Q3 2010.  For the YTD period, consolidated gross profit was $220.1 million, an increase of $63.3 million compared to $156.8 million in the prior period.  The increase is primarily due to incremental revenues from new customer starts and the MedfusionRx acquisition. Consolidated gross profit as a percentage of revenue was 6.4% in Q3 2011, compared to 10.8% in Q3 2010 and 6.1% compared to 11.0% for the YTD 2011 and 2010 periods, respectively.  Gross profit as a percentage of revenue has decreased due to new business wins carrying a lower gross profit percentage than the historical rates for the PBM segment.

PBM gross profit percentage increased in Q3 2011 compared to Q2 2011 due to higher utilization of generics and specialty medications.  The gross profit per adjusted prescription claim increased to $2.93 compared to $2.65 in the subsequent quarter.  Additionally, gross profit increased due to the recognition of $1.0 million in non-recurring revenue within the HCIT segment.

Selling, General and Administration ("SG&A") Costs SG&A costs for Q3 2011 were $33.8 million, compared to $21.6 million in Q3 2010. SG&A costs for the YTD period were $93.4 million, compared to $64.4 million in the prior period. The change in SG&A costs compared to prior periods was due to increased resources to support the Company's organic growth, increased stock-based compensation cost, and additional operating costs related to the MedfusionRx and MedMetrics acquisitions.

Adjusted EBITDA¹ Q3 2011 adjusted EBITDA increased 58% to $48.0 million, compared to $30.4 million in Q3 2010. Adjusted EBITDA for the YTD period was $124.6 million, compared to $89.6 million in the prior period. The growth in adjusted EBITDA was due primarily to new contract wins, HCIT-to-PBM conversions and additional business generated from the acquisitions of MedfusionRx and MedMetrics.

Net Income The Company reported Q3 2011 net income of $25.3 million, or $0.40 per share (fully-diluted), compared to $16.2 million, or $0.26 per share (fully-diluted), in Q3 2010. Net income for the YTD period was $65.1 million, or $1.03 per share (fully-diluted), compared to net income in the prior period of $48.1 million, or $0.77 per share (fully-diluted).

Non-GAAP Adjusted EPS¹ excludes amortization of intangible assets, net of tax.  The Company reported Q3 2011 adjusted EPS of $0.44 per share (fully-diluted), compared to $0.28 per share (fully-diluted), in Q3 2010.  Adjusted EPS for the YTD period was $1.15 per share (fully-diluted), compared to the prior period of $0.83 per share (fully-diluted).

Cash from Operations For Q3 2011, the Company generated $85.3 million of cash from operations, compared to $26.1 million generated in cash from operations during Q3 2010. For the YTD period, SXC generated cash from operations of $84.7 million, compared to $62.9 million in the prior period. The increased transaction volume in the PBM segment, propelled by new customer starts during 2011, as well as the additional business generated as a result of the Company's recent acquisitions, were the primary drivers of increased operating cash flow during the Q3 and YTD periods.

At September 30, 2011 and December 31, 2010, SXC had cash and cash equivalents totalling $405.1 million and $321.3 million, respectively.  The Company believes that its cash on hand, together with cash generated from operating activities, will be sufficient to support planned operations for the foreseeable future.  Subsequent to the end of the quarter, the Company utilized $77 million of cash on hand to close the acquisitions of PTRX and SaveDirectRx.

2011 Full Year Financial Guidance With today's announcement, SXC is revising certain of its 2011 full year financial targets:

  • Revenue of $4.7 to $4.8 billion, versus prior estimate of $4.6 to $4.7 billion.  The mid-point of the range implies an increase of $100 million versus the prior estimate's mid-point.
  • Adjusted EBITDA1 of $172 to $173 million, versus prior estimate of $168 to $172 million. The mid-point of the range implies an increase of $2.5 million versus the prior estimate's mid-point.
  • GAAP EPS (fully-diluted) of $1.46 to $1.47, versus prior estimate of $1.43 to $1.47. The mid-point of the range implies an increase of $0.015 versus the prior estimate's mid-point.
  • Adjusted EPS1 (fully-diluted) of $1.62 to $1.63 versus prior estimate of $1.58 to $1.62 (excluding all transaction-related amortization).  The mid-point of the range implies an increase of $0.025 versus the prior estimate's mid-point.

Notice of Conference Call SXC will host a conference call on Thursday, November 3, 2011, at 8:30 a.m. ET to discuss its financial results.  Mark Thierer, Chairman and CEO, and Jeff Park, EVP and CFO, will co-chair the call. All interested parties can join the call by dialing 1-888-231-8191 or 647-427-7450. Please dial in 15 minutes prior to the call to secure a line. The conference call will be archived for replay until Thursday, November 10, 2011 at midnight. To access the archived conference call, please dial 1-855-859-2056 or 416-849-0833 and enter the reservation code 20404937.

A live audio webcast of the conference call will be available at and  Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast.  An archived replay of the webcast will be available for 365 days.

1Non-GAAP Financial Measures SXC reports its financial results in accordance with generally accepted accounting principles in the United States ("GAAP"). SXC's management also evaluates and makes operating decisions using various other measures. Two such measures are adjusted EPS and adjusted EBITDA, which are non-GAAP financial measures. SXC's management believes that these two measures provide useful supplemental information regarding the performance of SXC's business operations.

Adjusted EPS adds back the impact of all amortization of intangible asset expenses, net of tax. Amortization of intangible asset expense arises from the acquisition of intangible assets in connection with the Company's business acquisitions. SXC excludes acquisition-related amortization expense from non-GAAP adjusted EPS because it believes (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of SXC's business operations and (ii) such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets. Investors should note that the use of these intangible assets contributes to revenue in the periods presented as well as future periods and should also note that such expenses will recur in future periods.

Adjusted EBITDA is a non-GAAP measure that management believes is a useful supplemental measure of operating performance prior to interest income, interest expense and other expense, income taxes, depreciation, amortization and stock-based compensation expenses. Management believes it is useful to exclude these expenses as they are essentially fixed amounts that cannot be influenced by management in the short term. In addition, management believes it is useful to exclude stock-based compensation as this is a non-cash expense.

The 2011 full year guidance of adjusted EBITDA was computed using the Company's estimated 2011 earnings before interest, taxes, depreciation and amortization as well as estimated stock-based compensation expense of approximately $9 million. Adjusted EPS was computed by taking the Company's GAAP EPS (fully-diluted) guidance and adding back the expected impact of all acquisition-related amortization expense totaling approximately $17 million less an estimated 34% tax rate.

Adjusted prescription claim volume equals SXC's Mail Service prescriptions multiplied by three, plus its retail and specialty prescriptions. The Mail Service prescriptions are multiplied by three to adjust for the fact that they typically include approximately three times the amount of product days supplied compared with retail prescriptions.

Management believes that adjusted EPS, adjusted EBITDA and adjusted prescription claim volume provide useful supplemental information to management and investors regarding the performance of the Company's business operations and facilitate comparisons to its historical operating results. Management also uses this information internally for forecasting and budgeting as it believes that the measures are indicative of the Company's core operating results. Note, however, that these items are performance measures only, and do not provide any measure of the Company's cash flow or liquidity. Non-GAAP financial measures should not be considered as a substitute for measures of financial performance in accordance with GAAP, and investors and potential investors are encouraged to review the reconciliations of adjusted EPS and adjusted EBITDA to their most directly comparable GAAP measure.

Adjusted EPS and adjusted EBITDA do not have standardized meanings prescribed by GAAP. The Company's method of calculating these items may differ from the methods used by other companies and, accordingly, may not be comparable to similarly titled measures used by other companies. Reconciliations of adjusted EBITDA to net income and GAAP EPS (fully-diluted) to adjusted EPS (fully-diluted) are shown below:

Adjusted EBITDA Reconciliation                
(in thousands)                
      Three Months Ended   Nine Months Ended
      September 30,    September 30, 
      2011   2010   2011   2010
      (unaudited)   (unaudited)
Net Income (GAAP)    $ 25,266    $ 16,176    $ 65,102    $ 48,113
  Amortization of Intangible Assets   3,899   1,942   11,125   5,915
  Depreciation of Property & Equipment   2,235   2,077   6,815   6,312
  Stock-Based Compensation   2,404   1,646   6,507   4,527
  Interest Income   (115)   (199)   (375)   (524)
  Interest Expense and Other Expense, Net 1,221   373   2,351   1,343
  Income Tax Expense   13,112   8,427   33,091   23,931
Adjusted EBITDA    $ 48,022    $ 30,442    $ 124,616    $ 89,617

Adjusted EPS Reconciliation                              
(in thousands, except per share data)                              
    Three Months Ended September 30,   Nine Months Ended September 30,
    2011   2010   2011   2010
    Operational Results   Per Diluted Share   Operational Results   Per Diluted Share   Operational Results   Per Diluted Share   Operational Results   Per Diluted Share
    (unaudited)   (unaudited)
Net Income (GAAP) $ 25,266   $ 0.40   $ 16,176   $ 0.26   $ 65,102   $ 1.03   $ 48,113   $ 0.77
Amortization of Intangible Assets 3,899   0.06   1,942   0.03   11,125   0.18   5,915   0.09
Tax Effect of Reconciling Item (1,333)   (0.02)   (666)   (0.01)   (3,749)   (0.06)   (1,964)   (0.03)
Non-GAAP Net Income $ 27,832   $ 0.44   $ 17,452   $ 0.28   $ 72,478   $ 1.15   $ 52,064   $ 0.83

About SXC Health Solutions Corp. SXC Health Solutions Corp. is a leading provider of pharmacy benefits management (PBM) services and Health Care Information Technology (HCIT) solutions to the healthcare benefits management industry. The Company's product offerings and solutions combine a wide range of PBM services and software applications, application service provider (ASP) processing services and professional services, designed for many of the largest organizations in the pharmaceutical supply chain, such as health plans, employers, federal, provincial, and, state and local governments, pharmacy benefit managers, retail pharmacy chains and other healthcare intermediaries. SXC is headquartered in Lisle, Illinois with multiple locations in the US and Canada.

For more information please visit

Forward-Looking Statements Certain statements included herein, including those that express management's expectations or estimates of our future performance, constitute "forward-looking statements" within the meaning of applicable securities laws.   Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management at this time, are inherently subject to significant business, economic and competitive uncertainties and contingencies.   We caution that such forward-looking statements involve known and unknown risks, uncertainties and other risks that may cause our actual financial results, performance, or achievements to be materially different from our estimated future results, performance or achievements expressed or implied by those forward-looking statements.   Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including without limitation, our ability to achieve increased market acceptance for our product offerings and penetrate new markets; consolidation in the healthcare industry; the existence of undetected errors or similar problems in our software products; our ability to identify and complete acquisitions, manage our growth and integrate acquisitions; our ability to compete successfully; potential liability for the use of incorrect or incomplete data; the length of the sales cycle for our healthcare software solutions; interruption of our operations due to outside sources; our dependence on key customers; maintaining our intellectual property rights and litigation involving intellectual property rights; our ability to obtain, use or successfully integrate third-party licensed technology; compliance with existing laws, regulations and industry initiatives and future change in laws or regulations in the healthcare industry; breach of our security by third parties; our dependence on the expertise of our key personnel; our access to sufficient capital to fund our future requirements; and potential write-offs of goodwill or other intangible assets.  This list is not exhaustive of the factors that may affect any of our forward-looking statements.  Other factors that should be considered are discussed from time to time in SXC's filings with the U.S. Securities and Exchange Commission, including the risks and uncertainties discussed under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2010 Annual Report on Form 10-K and subsequent Form 10-Qs, which are available at  Investors are cautioned not to put undue reliance on forward-looking statements.  All subsequent written and oral forward-looking statements attributable to SXC or persons acting on our behalf are expressly qualified in their entirety by this notice.  We disclaim any intent or obligation to update publicly these forward-looking statements, whether as a result of new information, future events or otherwise.  

Certain of the assumptions made in preparing forward-looking information and management's expectations include: maintenance of our existing customers and contracts, our ability to market our products successfully to anticipated customers, the impact of increasing competition, the growth of prescription drug utilization rates at predicted levels, the retention of our key personnel, our customers continuing to process transactions at historical levels, that our systems will not be interrupted for any significant period of time, that our products will perform free of major errors, our ability to obtain financing on acceptable terms and that there will be no significant changes in the regulation of our business.

Consolidated Balance Sheets
(in thousands, except share data)
      September 30, 2011   December 31, 2010
Current assets        
  Cash and cash equivalents   $ 405,111   $ 321,284
  Restricted cash   14,971   13,790
  Accounts receivable, net of allowance for doubtful accounts of  $3,215 (2010 - $3,553)   217,791   122,175
  Rebates receivable   32,439   34,249
  Prepaid expenses and other current assets   6,676   10,173
  Inventory   15,222   8,736
  Deferred income taxes   5,583   6,647
    Total current assets   697,793   517,054
    Property and equipment, net of accumulated depreciation of $40,628 (2010 - $35,861)    17,146   20,896
    Goodwill   229,193   220,597
    Other intangible assets, net of accumulated amortization of  $42,812 (2010 - $31,687)   49,657   56,282
    Other assets   3,309   1,961
Total assets   $ 997,098   $ 816,790
Current liabilities        
  Accounts payable   $ 15,092   $ 30,930
  Accrued liabilities and other current liabilities   69,471   61,038
  Pharmacy benefit management rebates payable    58,866   61,364
  Pharmacy benefit claims payable    190,210   84,599
    Total current liabilities   333,639   237,931
Deferred income taxes   13,890   15,111
Other liabilities   10,091   10,492
    Total liabilities   357,620   263,534
Shareholders' equity         
  Common shares: no par value, unlimited shares authorized; 62,287,716 shares issue and outstanding at September 30, 2011 (December 31, 2010 - 61,602,997 shares)   393,616   381,736
  Additional paid-in capital   34,213   24,973
  Retained earnings   211,649   146,547
    Total shareholders' equity   639,478   553,256
Total liabilities and shareholders' equity    $ 997,098    $ 816,790

Consolidated Statements of Operations
(in thousands, except  share and per share data)
      Three Months Ended September 30,   Nine Months Ended September 30,  
      2011   2010   2011   2010  
      (unaudited)   (unaudited)  
  PBM   $ 1,256,369   $ 463,042   $ 3,511,148   $ 1,341,839  
  HCIT   30,921   26,880   85,833   79,677  
Total revenue   1,287,290   489,922   3,596,981   1,421,516  
Cost of revenue:                  
  PBM   1,188,197   423,773   3,330,886   1,225,620  
  HCIT   16,751   13,285   45,973   39,064  
Total cost of revenue    1,204,948   437,058   3,376,859   1,264,684  
Gross profit   82,342   52,864   220,122   156,832  
  Product development costs   3,598   3,075   10,624   9,169  
  Selling, general and administrative   33,773   21,607   93,440   64,403  
  Depreciation of property and equipment   1,588   1,463   4,764   4,482  
  Amortization of intangible assets   3,899   1,942   11,125   5,915  
      42,858   28,087   119,953   83,969  
Operating income   39,484   24,777   100,169   72,863  
Interest income   (115)   (199)   (375)   (524)  
Interest expense and other expense, net   1,221   373   2,351   1,343  
Income before income taxes    38,378   24,603   98,193   72,044  
Income tax expense (benefit):                   
  Current   14,289   8,837   34,587   21,575  
  Deferred   (1,177)   (410)   (1,496)   2,356  
      13,112   8,427   33,091   23,931  
Net income   $ 25,266   $ 16,176   $ 65,102   $ 48,113  
Earnings per share:                   
  Basic     $ 0.41    $ 0.27    $ 1.05    $ 0.79  
  Diluted    $ 0.40    $ 0.26    $ 1.03    $ 0.77  
Weighted average number of shares used in computing earnings per share:                  
  Basic   62,271,267   60,820,197   62,050,573   60,569,027  
  Diluted   63,070,519   62,929,186   62,907,064   62,558,202  

Consolidated Statements of Cash Flows
(in thousands)
      Three Months Ended September 30,   Nine Months Ended September 30,  
      2011   2010   2011   2010  
      (unaudited)   (unaudited)  
Cash flows from operating activities:                
  Net income $ 25,266   $ 16,176   $ 65,102   $ 48,113  
  Items not involving cash:                  
    Stock-based compensation 2,404   1,646   6,507   4,527  
    Depreciation of property and equipment 2,235   2,077   6,815   6,312  
    Amortization of intangible assets 3,899   1,942   11,125   5,915  
    Deferred lease inducements and rent (150)   (127)   (397)   (365)  
    Deferred income taxes (1,177)   (410)   (1,496)   2,356  
    Tax benefit on option exercises (304)   (483)   (9,322)   (6,071)  
  Changes in operating assets and liabilities,   net of effects from acquisitions:                  
    Accounts receivable 9,211   (6,561)   (93,838)   (13,185)  
    Rebates receivable 5,017   (3,158)   4,616   (20,459)  
    Restricted cash (9)   (10)   (1,181)   (162)  
    Prepaid expenses and other current assets 1,201   221   (1,742)   (1,350)  
    Inventory (2,999)   297   (6,486)   (825)  
    Income tax  11,725   582   24,586   7,692  
    Accounts payable (23,430)   1,397   (17,107)   (288)  
    Accrued liabilities 4,895   357   (1,308)   (6,693)  
    Pharmacy benefit claims payable 45,282   7,914   105,611   19,160  
    Pharmacy benefit management rebates payable 2,528   4,213   (5,304)   17,177  
    Other   (286)   -   (1,469)   1,020  
      Net cash provided by operating activities 85,308   26,073   84,712   62,874  
Cash flows from investing activities:                
  Acquisitions 564   -   (12,421)   -  
  Purchases of property and equipment (978)   (507)   (3,073)   (4,033)  
  Proceeds from sale of short term investments -   -   -   6,828  
  Purchases of short term investments -   -   -   (2,208)  
    Net cash (used) provided by investing activities (414)   (507)   (15,494)   587  
Cash flows from financing activities:                
  Tax benefit on option exercises 304   483   9,322   6,071  
  Proceeds from exercise of options 185   313   5,291   5,040  
    Net cash provided by financing activities 489   796   14,613   11,111  
Effect of foreign exchange on cash balances     21   75   (4)   119  
Increase in cash and cash equivalents     85,404   26,437   83,827   74,691  
Cash and cash equivalents, beginning of period     319,707   352,624   321,284   304,370  
Cash and cash equivalents, end of period     $ 405,111   $ 379,061   $ 405,111   $ 379,061  


SOURCE SXC Health Solutions Corp.