Attached files
file | filename |
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EX-10.1 - EXHIBIT 10.1 - Catamaran Corp | c04347exv10w1.htm |
EX-32.2 - EXHIBIT 32.2 - Catamaran Corp | c04347exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - Catamaran Corp | c04347exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - Catamaran Corp | c04347exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - Catamaran Corp | c04347exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended June 30, 2010 | ||
OR | ||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to . |
Commission file number: 000-52073
SXC HEALTH SOLUTIONS CORP.
(Exact name of registrant as specified in its charter)
Yukon Territory | 75-2578509 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) |
2441 Warrenville Road, Suite 610, Lisle, IL 60532-3642
(Address of principal executive offices, zip code)
(Address of principal executive offices, zip code)
(800) 282-3232
(Registrants phone number, including area code)
(Registrants phone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of July 31, 2010, there were 30,402,790 of the Registrants common shares, no par value per
share, outstanding.
TABLE OF CONTENTS
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Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SXC HEALTH SOLUTIONS CORP.
Consolidated Balance Sheets
(in thousands, except share data)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 352,624 | $ | 304,370 | ||||
Restricted cash |
14,321 | 14,169 | ||||||
Short term investments |
| 4,639 | ||||||
Accounts receivable, net of allowance for doubtful accounts of
$3,363 (2009 $2,871) |
103,938 | 97,330 | ||||||
Rebates receivable |
34,931 | 17,630 | ||||||
Prepaid expenses and other assets |
6,053 | 4,483 | ||||||
Inventory |
8,228 | 7,451 | ||||||
Deferred income taxes |
6,358 | 9,875 | ||||||
Total current assets |
526,453 | 459,947 | ||||||
Property and equipment, net of accumulated depreciation of
$31,655 (2009 $27,421) |
19,171 | 19,880 | ||||||
Goodwill |
141,787 | 141,787 | ||||||
Other intangible assets, net of accumulated amortization of $27,804
(2009 $23,831) |
33,601 | 37,574 | ||||||
Deferred income taxes |
1,294 | 1,641 | ||||||
Other assets |
252 | 1,251 | ||||||
Total assets |
$ | 722,558 | $ | 662,080 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 8,227 | $ | 9,916 | ||||
Customer deposits |
15,372 | 14,832 | ||||||
Salaries and wages payable |
9,343 | 12,349 | ||||||
Accrued liabilities |
23,792 | 30,786 | ||||||
Pharmacy benefit management rebates payable |
59,570 | 46,606 | ||||||
Pharmacy benefit claim payments payable |
72,915 | 61,669 | ||||||
Deferred revenue |
10,435 | 7,304 | ||||||
Total current liabilities |
199,654 | 183,462 | ||||||
Deferred income taxes |
13,676 | 13,597 | ||||||
Deferred lease inducements |
2,511 | 2,748 | ||||||
Deferred rent |
1,336 | 1,337 | ||||||
Other liabilities |
1,753 | 2,442 | ||||||
Total liabilities |
218,930 | 203,586 | ||||||
Commitments and contingencies (Note 10) |
||||||||
Shareholders equity |
||||||||
Common shares: no par value, unlimited shares authorized;
30,402,790 shares issued and outstanding at June 30, 2010
(December 31, 2009 30,057,281 shares) |
369,869 | 361,530 | ||||||
Additional paid-in capital |
20,010 | 15,153 | ||||||
Retained earnings |
113,749 | 81,812 | ||||||
Accumulated other comprehensive loss |
| (1 | ) | |||||
Total shareholders equity |
503,628 | 458,494 | ||||||
Total liabilities and shareholders equity |
$ | 722,558 | $ | 662,080 | ||||
See accompanying notes to the unaudited consolidated financial statements.
3
Table of Contents
SXC HEALTH SOLUTIONS CORP.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Revenue: |
||||||||||||||||
PBM |
$ | 451,295 | $ | 293,906 | $ | 878,797 | $ | 561,686 | ||||||||
HCIT |
28,151 | 26,923 | 52,797 | 50,103 | ||||||||||||
Total revenue |
479,446 | 320,829 | 931,594 | 611,789 | ||||||||||||
Cost of revenue: |
||||||||||||||||
PBM |
412,681 | 259,376 | 801,847 | 498,374 | ||||||||||||
HCIT |
13,026 | 14,242 | 25,780 | 27,020 | ||||||||||||
Total cost of revenue |
425,707 | 273,618 | 827,627 | 525,394 | ||||||||||||
Gross profit |
53,739 | 47,211 | 103,967 | 86,395 | ||||||||||||
Expenses: |
||||||||||||||||
Product development costs |
3,021 | 3,027 | 6,094 | 6,190 | ||||||||||||
Selling, general and administrative |
21,486 | 21,907 | 42,792 | 42,704 | ||||||||||||
Depreciation of property and equipment |
1,537 | 1,405 | 3,019 | 2,887 | ||||||||||||
Amortization of intangible assets |
1,978 | 2,415 | 3,973 | 5,240 | ||||||||||||
28,022 | 28,754 | 55,878 | 57,021 | |||||||||||||
Operating income |
25,717 | 18,457 | 48,089 | 29,374 | ||||||||||||
Interest income |
(175 | ) | (225 | ) | (324 | ) | (471 | ) | ||||||||
Interest expense |
318 | 1,204 | 712 | 2,160 | ||||||||||||
Net interest expense |
143 | 979 | 388 | 1,689 | ||||||||||||
Other expense (income), net |
60 | 283 | 259 | (42 | ) | |||||||||||
Income before income taxes |
25,514 | 17,195 | 47,442 | 27,727 | ||||||||||||
Income tax expense: |
||||||||||||||||
Current |
7,209 | 4,403 | 12,738 | 6,604 | ||||||||||||
Deferred |
1,160 | 815 | 2,767 | 1,464 | ||||||||||||
8,369 | 5,218 | 15,505 | 8,068 | |||||||||||||
Net income |
$ | 17,145 | $ | 11,977 | $ | 31,937 | $ | 19,659 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.56 | $ | 0.49 | $ | 1.06 | $ | 0.81 | ||||||||
Diluted |
$ | 0.55 | $ | 0.47 | $ | 1.02 | $ | 0.79 | ||||||||
Weighted average number of shares used
in computing earnings per share: |
||||||||||||||||
Basic |
30,346,466 | 24,638,986 | 30,220,682 | 24,417,241 | ||||||||||||
Diluted |
31,389,017 | 25,270,639 | 31,200,704 | 25,001,382 |
See accompanying notes to the unaudited consolidated financial statements.
4
Table of Contents
SXC HEALTH SOLUTIONS CORP.
Consolidated Statements of Comprehensive Income
(in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Net income |
$ | 17,145 | $ | 11,977 | $ | 31,937 | $ | 19,659 | ||||||||
Other comprehensive income, net of tax |
||||||||||||||||
Unrealized gain on cash flow hedges and other (net of income
tax expense of $29 for the three months ended June 30, 2009
and $1 and $38 for the six months ended June 30, 2010 and
2009, respectively) |
| 47 | 1 | 76 | ||||||||||||
Comprehensive income |
$ | 17,145 | $ | 12,024 | $ | 31,938 | $ | 19,735 | ||||||||
See accompanying notes to the unaudited consolidated financial statements.
5
Table of Contents
SXC HEALTH SOLUTIONS CORP.
Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 31,937 | $ | 19,659 | ||||
Items not involving cash: |
||||||||
Stock-based compensation |
2,881 | 1,430 | ||||||
Depreciation of property and equipment |
4,235 | 3,944 | ||||||
Amortization of intangible assets |
3,973 | 5,240 | ||||||
Deferred lease inducements and rent |
(238 | ) | (369 | ) | ||||
Deferred income taxes |
2,767 | 1,464 | ||||||
Tax benefit on stock-based compensation plans |
(5,588 | ) | (2,106 | ) | ||||
Changes in operating assets and liabilities, net of effects from acquisitions: |
||||||||
Accounts receivable |
(6,624 | ) | (374 | ) | ||||
Rebates receivable |
(17,301 | ) | 7,074 | |||||
Restricted cash |
(152 | ) | (1,637 | ) | ||||
Prepaid expenses and other assets |
(1,571 | ) | (1,164 | ) | ||||
Inventory |
(1,122 | ) | 597 | |||||
Income tax recoverable |
7,108 | 2,238 | ||||||
Accounts payable |
(1,685 | ) | 84 | |||||
Accrued liabilities |
(10,696 | ) | (6,016 | ) | ||||
Pharmacy benefit claim payments payable |
11,246 | (9,466 | ) | |||||
Pharmacy benefit management rebates payable |
12,964 | 9,530 | ||||||
Deferred revenue |
3,107 | 472 | ||||||
Customer deposits |
540 | 772 | ||||||
Other |
1,020 | 308 | ||||||
Net cash provided by operating activities |
36,801 | 31,680 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(3,526 | ) | (5,746 | ) | ||||
Sales of short term investments |
6,828 | | ||||||
Purchases of short term investments |
(2,208 | ) | | |||||
Acquisitions, net of cash acquired |
| (2,176 | ) | |||||
Net cash provided (used) by investing activities |
1,094 | (7,922 | ) | |||||
Cash flows from financing activities: |
||||||||
Proceeds from exercise of options |
4,727 | 4,349 | ||||||
Tax benefit on stock-based compensation plans |
5,588 | 2,106 | ||||||
Repayment of long-term debt |
| (1,320 | ) | |||||
Net cash provided by financing activities |
10,315 | 5,135 | ||||||
Effect of foreign exchange on cash balances |
44 | 26 | ||||||
Increase in cash and cash equivalents |
48,254 | 28,919 | ||||||
Cash and cash equivalents, beginning of period |
304,370 | 67,715 | ||||||
Cash and cash equivalents, end of period |
$ | 352,624 | $ | 96,634 | ||||
See accompanying notes to unaudited consolidated financial statements.
6
Table of Contents
SXC HEALTH SOLUTIONS CORP.
Consolidated Statements of Shareholders Equity
(in thousands, except share data)
Common Shares | Additional | Retained | Accumulated Other | |||||||||||||||||||||
Shares | Amount | Paid-in Capital | Earnings | Comprehensive Loss | Total | |||||||||||||||||||
Balance at December 31, 2009 |
30,057,281 | $ | 361,530 | $ | 15,153 | $ | 81,812 | $ | (1 | ) | $ | 458,494 | ||||||||||||
Activity during the period (unaudited): |
||||||||||||||||||||||||
Net income |
| | | 31,937 | | 31,937 | ||||||||||||||||||
Exercise of stock options |
322,780 | 6,719 | (1,992 | ) | | | 4,727 | |||||||||||||||||
Vesting of restricted stock units |
22,729 | 1,620 | (1,620 | ) | | | - | |||||||||||||||||
Tax benefit on options exercised |
| | 5,588 | | | 5,588 | ||||||||||||||||||
Stock-based compensation |
| | 2,881 | | | 2,881 | ||||||||||||||||||
Other comprehensive income, net of tax |
| | | | 1 | 1 | ||||||||||||||||||
Balance at June 30, 2010 (unaudited) |
30,402,790 | $ | 369,869 | $ | 20,010 | $ | 113,749 | $ | | $ | 503,628 | |||||||||||||
Balance at December 31, 2008 |
24,103,032 | $ | 146,988 | $ | 11,854 | $ | 35,751 | $ | (430 | ) | $ | 194,163 | ||||||||||||
Activity during the period (unaudited): |
| |||||||||||||||||||||||
Net income |
| | | 19,659 | | 19,659 | ||||||||||||||||||
Issuance of shares for acquisition |
21 | | | | | | ||||||||||||||||||
Exercise of stock options |
533,562 | 6,284 | (1,935 | ) | | | 4,349 | |||||||||||||||||
Vesting of restricted stock units |
2,478 | 48 | (48 | ) | | | | |||||||||||||||||
Tax benefit on options exercised |
| | 2,106 | | | 2,106 | ||||||||||||||||||
Stock-based compensation |
| | 1,430 | | | 1,430 | ||||||||||||||||||
Other comprehensive income, net of tax |
| | | | 76 | 76 | ||||||||||||||||||
Balance at June 30, 2009 (unaudited) |
24,639,093 | $ | 153,320 | $ | 13,407 | $ | 55,410 | $ | (354 | ) | $ | 221,783 | ||||||||||||
See accompanying notes to the unaudited consolidated financial statements.
7
Table of Contents
SXC HEALTH SOLUTIONS CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. | Description of Business |
SXC Health Solutions Corp. (the Company) is a leading provider of pharmacy benefits
management (PBM) services and healthcare information technology (HCIT) solutions to the
healthcare benefits management industry. The Companys product offerings and solutions combine
a wide range of PBM services, 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 federal, provincial, and state and local
governments, pharmacy benefit managers, managed care organizations, retail pharmacy chains and
other healthcare intermediaries. The Company is headquartered in Lisle, Illinois with several
locations in the U.S. and Canada. The Company trades on the Toronto Stock Exchange under
ticker symbol SXC and on the Nasdaq Global Market under ticker symbol SXCI. For more
information please visit www.sxc.com. |
2. | Basis of Presentation |
Basis of presentation: |
The unaudited interim consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States (U.S. GAAP),
pursuant to the Securities and Exchange Commissions (SEC) rules and regulations for
reporting on Form 10-Q, and following accounting policies consistent with the Companys
audited annual consolidated financial statements for the year ended December 31, 2009. The
unaudited interim consolidated financial statements of the Company include its majority-owned
subsidiaries and all significant intercompany transactions and balances have been eliminated
in consolidation. Amounts in the unaudited interim consolidated financial statements and
notes thereto are expressed in the Companys functional currency, U.S. dollars, except where
indicated. The financial information included herein reflects all adjustments (consisting only
of normal recurring adjustments), which, in the opinion of management, are necessary for a
fair presentation of the results for the interim periods presented. The results of operations
for the three and six-month periods ended June 30, 2010 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2010. As of the issuance date of
the Companys financial statements, no subsequent events have occurred that would require
adjustment to or disclosure in these unaudited interim consolidated financial statements in
accordance with Financial Accounting Standards Boards (FASB) guidance. |
Pursuant to the SEC rules and regulations for reporting on Form 10-Q, certain information and
note disclosures normally included in the annual financial statements prepared in accordance
with U.S. GAAP have been condensed or excluded. As a result, these unaudited interim
consolidated financial statements do not contain all the disclosures required to be included
in the annual consolidated financial statements and should be read in conjunction with the
most recent audited annual consolidated financial statements and notes thereto for the year
ended December 31, 2009. |
Use of estimates: |
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the period. Significant items subject to
such estimates and assumptions include revenue recognition, rebates, purchase price allocation
in connection with acquisitions, valuation of property and equipment, valuation of intangible
assets acquired and related amortization periods, impairment of goodwill, income tax
uncertainties, contingencies and valuation allowances for receivables and income taxes.
Actual results could differ from those estimates. |
3. | Recent Accounting Pronouncements |
Recent accounting standards implemented are summarized below: |
||
Revenue arrangements with multiple deliverables |
Effective January 1, 2010, the Company adopted the amendment to revenue recognition guidance
for transactions with multiple deliverables. The updated accounting guidance changes the
criteria necessary for a delivered item to be considered a separate element by removing the
requirement of using objective and reliable evidence of fair value in determining the amount
of revenue to recognize. In place of having objective and reliable evidence of fair value for
delivered and undelivered elements, a company may use its best estimate of selling price to
determine the amount of revenue to recognize. The new guidance did not have a material impact
on the Companys financial results. |
||
Revenue arrangements that include software elements |
Effective January 1, 2010, the Company adopted the amended revenue recognition guidance for
transactions involving tangible products that have software components. The new accounting
guidance removes the non-software components and software elements of the tangible product
from the scope of software revenue recognition accounting guidance. The new guidance did not
have a material impact on the Companys financial results. |
8
Table of Contents
4. | Cash and Cash Equivalents |
The components of cash and cash equivalents are as follows (in thousands): |
June 30, 2010 | December 31, 2009 | |||||||
Cash on deposit |
$ | 411,361 | $ | 86,384 | ||||
Payments in transit |
(58,756 | ) | (87,500 | ) | ||||
U.S. money market funds |
| 305,453 | ||||||
Canadian dollar deposits (June 30, 2010 Cdn. $20 at 1.0484 |
19 | 33 | ||||||
December 31, 2009 Cdn. $35 at 1.0517) |
$ | 352,624 | $ | 304,370 | ||||
The Company determined the carrying amount reported in the consolidated balance sheets as cash
and cash equivalents approximates fair value because of the short maturities of these
instruments, accordingly these instruments are considered Level 1 investments in the fair
value hierarchy. |
5. | Goodwill and Other Intangible Assets |
Goodwill and indefinite-lived intangible assets are reviewed for impairment annually or more
frequently if impairment indicators arise. The Company allocates goodwill to both the PBM and
HCIT segments. There were no impairments of goodwill or indefinite-lived intangible assets
during the three or six months ended June 30, 2010 and 2009. |
Definite-lived intangible assets are amortized over the useful lives of the related assets.
The components of intangible assets were as follows (in thousands): |
June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||||||||||
Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
Customer relationships |
$ | 53,760 | $ | 21,805 | $ | 31,955 | $ | 53,760 | $ | 18,116 | $ | 35,644 | ||||||||||||
Acquired software |
3,765 | 3,145 | 620 | 3,765 | 2,932 | 833 | ||||||||||||||||||
Trademarks/Trade names |
1,370 | 1,222 | 148 | 1,370 | 1,188 | 182 | ||||||||||||||||||
Non-compete agreements |
1,510 | 1,488 | 22 | 1,510 | 1,484 | 26 | ||||||||||||||||||
Licenses |
1,000 | 144 | 856 | 1,000 | 111 | 889 | ||||||||||||||||||
Total |
$ | 61,405 | $ | 27,804 | $ | 33,601 | $ | 61,405 | $ | 23,831 | $ | 37,574 | ||||||||||||
Amortization associated with intangible assets at June 30, 2010 is estimated to be $3.9
million for the remainder of 2010, $7.1 million in 2011, $6.5 million in 2012, $5.7 million in
2013, $5.2 million in 2014, and $5.2 million in total for years after 2014. |
6. | Shareholders equity |
(a) | Stock incentive plans: |
||
Effective on March 11, 2009, the Board of Directors of the Company adopted the SXC Health
Solutions Corp. Long-Term Incentive Plan (LTIP), which was approved by the shareholders
of the Company at the Annual and Special Meeting of Shareholders on May 13, 2009. The LTIP
provides for the grant of stock option awards, stock appreciation rights, restricted stock
awards, restricted stock unit awards, performance awards and other stock-based awards to
eligible persons, including executive officers and directors of the Company. The purpose
of the LTIP is to advance the interests of the Company by attracting and retaining high
caliber employees and other key individuals who perform services for the Company, a
subsidiary or an affiliate; align the interests of the Companys shareholders and
recipients of awards under the LTIP by increasing the proprietary interest of such
recipients in the Companys growth and success; and motivate award recipients to act in the
best long-term interest of the Company and its shareholders. The LTIP replaced the
previous stock option plan, and no further grants or awards will be issued under the
previous stock option plan. The LTIP provides for a maximum of 1,070,000 common shares of
the Company to be issued in addition to the common shares that remained available for
issuance under the previous stock option plan. |
|||
There were 1,261,650 stock options outstanding as of June 30, 2010 issued under the LTIP or
the Companys previous stock option plan. |
|||
(b) | Employee Stock Purchase Plan: |
||
The Company maintains an Employee Stock Purchase Plan (ESPP) which allows eligible
employees to withhold annually up to a maximum of 15% of their base salary, or $25,000,
subject to IRS limitations, for the purchase of the Companys common shares. Common shares
will be purchased on the last day of each offering period at a discount of 5% of the fair
market value of the common shares on such date. The aggregate number of common shares that
may be issued under the ESPP may not exceed 100,000 common shares. |
|||
During the first quarter of 2009, the ESPP was amended to require the common shares
available for purchase under the ESPP to be drawn from reacquired common shares purchased
on behalf of the Company in the open market. During the six months ended June 30, 2010 and
2009, there were 2,043 and 3,720 shares issued under the ESPP, respectively. |
|||
The ESPP is not considered compensatory as its purchase discount is not greater than 5%,
the plan is available to substantially all employees, and the plan does not incorporate
option features. Accordingly, no portion of the cost related to ESPP purchases is
included in the Companys stock-based compensation expense. |
9
Table of Contents
(c) | Outstanding shares and stock options: |
||
At June 30, 2010, the Company had outstanding common shares of 30,402,790 and stock options
outstanding of 1,261,650. At December 31, 2009, the Company had outstanding common shares
of 30,057,281 and stock options outstanding of 1,532,664. As of June 30, 2010, stock
options outstanding consisted of 259,781 options at a weighted-average exercise price of
Canadian $11.67 and 1,001,869 options at a weighted-average exercise price of U.S. $22.03. |
|||
(d) | Restricted stock units: |
||
During the six months ended June 30, 2010, the Company granted 58,860 time-based restricted
stock units (RSUs) and 44,440 performance based RSUs to its employees and non-employee
directors with a weighted average grant date fair value of $60.70 per share. At June 30,
2010, there were 177,616 time-based RSUs and 114,710 performance-based RSUs outstanding. |
|||
Time-based RSUs vest on a straight-line basis over a range of three to four years and
performance-based RSUs cliff vest based upon reaching agreed upon three-year performance
conditions. |
7. | Stock-based compensation |
During the six-month periods ended June 30, 2010 and 2009, the Company recorded stock-based
compensation expense of $2.9 million and $1.4 million, respectively. The Black-Scholes
option-pricing model was used to estimate the fair value of the stock options at the grant
date based on the following assumptions: |
Six months ended June 30, | ||||||||
2010 | 2009 | |||||||
Total stock options granted |
69,340 | 184,107 | ||||||
Volatility |
48.0-48.5 | % | 47.1-47.2 | % | ||||
Risk-free interest rate |
2.07-2.39 | % | 1.96-2.56 | % | ||||
Expected life |
4.5 years | 4.5 years | ||||||
Dividend yield |
| | ||||||
Weighted-average grant date fair value |
$ | 25.93 | $ | 10.67 |
8. | Segment information |
The Company reports in two operating segments: PBM and HCIT. The Company evaluates segment
performance based upon revenue and gross profit. Financial information by segment is
presented below (in thousands): |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
PBM: |
||||||||||||||||
Revenues |
$ | 451,295 | $ | 293,906 | $ | 878,797 | $ | 561,686 | ||||||||
Cost of revenue |
412,681 | 259,376 | 801,847 | 498,374 | ||||||||||||
Gross profit |
$ | 38,614 | $ | 34,530 | $ | 76,950 | $ | 63,312 | ||||||||
Total assets at June 30 |
$ | 473,046 | $ | 300,169 | ||||||||||||
HCIT: |
||||||||||||||||
Revenues |
$ | 28,151 | $ | 26,923 | $ | 52,797 | $ | 50,103 | ||||||||
Cost of revenue |
13,026 | 14,242 | 25,780 | 27,020 | ||||||||||||
Gross profit |
$ | 15,125 | $ | 12,681 | $ | 27,017 | $ | 23,083 | ||||||||
Total assets at June 30 |
$ | 249,512 | $ | 146,466 | ||||||||||||
Consolidated: |
||||||||||||||||
Revenues |
$ | 479,446 | $ | 320,829 | $ | 931,594 | $ | 611,789 | ||||||||
Cost of revenue |
425,707 | 273,618 | 827,627 | 525,394 | ||||||||||||
Gross profit |
$ | 53,739 | $ | 47,211 | $ | 103,967 | $ | 86,395 | ||||||||
Total assets at June 30 |
$ | 722,558 | $ | 446,635 |
For the three and six-month periods ended June 30, 2010, no one customer accounted for 10%
or more of total revenues. For the three-month period ended June 30, 2009, one customer
accounted for 14.2% of total revenues. For the six-month period ended June 30, 2009, one
customer accounted for 14.7% of total revenues. |
At June 30, 2010 and December 31, 2009, no one customer accounted for 10% or more of the
outstanding accounts receivable balance. |
9. | Income Taxes |
The Companys effective tax rate for the three months ended June 30, 2010 and 2009 was
32.8% and 30.3%, respectively. The Companys effective tax rate for the six months ended June
30, 2010 and 2009 was 32.7% and 29.1%, respectively. The effective tax rate increased during
the three and six months ended June 30, 2010 compared to the same periods in 2009, primarily
due to the difference in the proportion of overall income among jurisdictions. |
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The Company and its subsidiaries file income tax returns in Canadian and U.S. federal
jurisdictions, and various provincial, state and local jurisdictions. With a few exceptions,
the Company is no longer subject to tax examinations by tax authorities for years prior to
2005. |
10. | Commitments and Contingencies |
From time to time in connection with its operations, the Company is named as a defendant in
actions for damages and costs allegedly sustained by the plaintiffs. The Company has
considered these proceedings and disputes in determining the necessity of any reserves for
losses that are probable and reasonably estimable. In addition, various aspects of the
Companys business may subject it to litigation and liability for damages arising from errors
in the processing of prescription drug claims, failure to meet performance measures within
certain contracts relating to its services, its ability to obtain certain levels of discounts
for rebates on prescription purchases from retail pharmacies and drug manufacturers or other
actions or omissions. The Companys recorded reserves are based on estimates developed with
consideration given to the potential merits of claims or quantification of any performance
obligations. The Company takes into account its history of claims, the limitations of any
insurance coverage, advice from outside counsel and managements strategy with regard to the
settlement or defense of such claims and obligations. While the ultimate outcome of those
claims, lawsuits or performance obligations cannot be predicted with certainty, the Company
believes, based on its understanding of the facts of these claims and performance obligations,
that adequate provisions have been recorded in the consolidated financial statements where
required. |
The Company provides routine indemnification to its customers against liability if the
Companys products infringe on a third partys intellectual property rights. The maximum
amount of potential indemnification liability cannot be reasonably estimated due to its
uncertain nature. Historically, the Company has not made payments related to these
indemnification provisions. |
11. | Derivative Instruments and Fair Value |
The Company used variable rate debt to assist in financing its acquisition of National Medical
Health Card Systems, Inc. (NMHC) in 2008. Prior to extinguishing the variable rate debt in
December 2009, the Company was subject to interest rate risk related to the variable rate
debt. When interest rates increased, interest expense could increase. Conversely, when
interest rates decreased, interest expense could also decrease. |
In order to manage fluctuations in cash flows resulting from interest rate risk attributable
to changes in the benchmark interest rates the Company entered into interest rate contracts
with notional amounts equal to 50% of the borrowed amount, or $24 million, for a three-year
period from the date of issue. The Company entered into a 3-year interest rate swap agreement
with a notional amount of $14 million to fix the variable London Inter-Bank Offered Rate
(LIBOR) rate on $14 million of the term loan at 4.31%, resulting in an effective rate of
7.56% after adding the 3.25% margin per the credit agreement. Under the interest rate swap,
the Company receives LIBOR-based variable interest rate payments and makes fixed interest rate
payments, thereby creating the equivalent to fixed-rate debt. Additionally, the Company
entered into a 3-year interest rate cap with a notional amount of $10 million to effectively
cap the LIBOR rate on $10 million of the term loan at 4.50%, resulting in a maximum effective
rate of 7.75% after adding the 3.25% margin per the credit agreement, excluding the associated
fees. These interest rate contract derivative instruments were designated as cash flow hedges
during 2008. After the Company repaid all of its long-term debt in the fourth quarter of
2009, the cash flow hedge treatment was discontinued as the future transactions that the
interest rate contracts were hedging were no longer probable of occurring. |
As of June 30, 2010, the interest rate contract derivative instruments are out of the money
and the Company is not currently exposed to any credit risk for amounts classified on the
consolidated balance sheet should the counterparty in the agreement fail to meet its
obligations under the agreement. The Company does not anticipate the instruments coming out
of the money prior to their expiration in 2011. To manage credit risks, the Company selects
counterparties based on credit assessments, limits overall exposure to any single
counterparty, and monitors the market position with each counterparty. The Company assesses
interest rate cash flow risk by continually identifying and monitoring changes in interest
rate exposures that may adversely impact expected future cash flows and by evaluating hedging
opportunities. The Company does not enter into derivative instruments for any purpose other
than hedging identified exposures. That is, the Company does not speculate using derivative
instruments and has not designated any instruments as fair value hedges or hedges of the
foreign currency exposure of a net investment in foreign operations. |
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Accounting guidance for fair value measurements defines a three-level hierarchy which
prioritizes the inputs to valuation techniques used to measure fair value into three broad
levels, with level 1 considered the most reliable. For assets and liabilities measured at
fair value on a recurring basis in the consolidated balance sheets, the table below
categorizes fair value measurements across the three levels as of June 30, 2010 and December
31, 2009 (in thousands): |
June 30, 2010 | ||||||||||||||||
Quoted Prices in | Significant Observable | Significant | ||||||||||||||
Active Markets | Inputs | Unobservable Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Liabilities: |
||||||||||||||||
Interest Rate Contract Derivatives |
$ | | $ | 507 | $ | | $ | 507 |
December 31, 2009 | ||||||||||||||||
Quoted Prices in | Significant Observable | Significant | ||||||||||||||
Active Markets | Inputs | Unobservable Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Assets: |
||||||||||||||||
Corporate debt securities |
$ | | $ | 2,490 | $ | | $ | 2,490 | ||||||||
Other short term investments |
$ | | $ | 2,149 | $ | | $ | 2,149 | ||||||||
Liabilities: |
||||||||||||||||
Interest Rate Contract Derivatives |
$ | | $ | 695 | $ | | $ | 695 |
When available and appropriate, the Company uses quoted market prices in active markets to
determine fair value, and classifies such items within Level 1. Level 1 values only include
instruments traded on a public exchange. Level 2 inputs are inputs other than quoted prices
included within Level 1 that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument. Level 2 inputs
include quoted prices for similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active, or inputs other
than quoted prices that are observable for the asset or liability or can be derived
principally from or corroborated by observable market data. If the Company were to use one or
more significant unobservable inputs for a model-derived valuation, the resulting valuation
would be classified in Level 3. |
The Company has classified derivative liabilities on the consolidated balance sheets within
accrued liabilities at June 30, 2010, and as other noncurrent liabilities at December 31,
2009. The interest rate contract derivatives fair values are derived from calculations using
observable interest rate inputs from a financial institution. The notional amounts of the
interest rate contracts are noted previously in this footnote. The total fair value
adjustment for the interest rate contract derivatives was insignificant for the three months
ended June 30, 2010, and $0.1 million for the six months ended June 30, 2010. The fair value
adjustments were recognized as other expense in the consolidated statements of operations.
Prior to December 2009, the Company was still applying hedge accounting to the interest rate
contract derivatives, and accordingly reclassified $0.1 and $0.2 million during the three and
six months ended June 30, 2009, respectively, into interest expense from accumulated other
comprehensive income for the effective portion of the loss on the interest rate contracts. |
The corporate debt securities are recorded in short-term investments in the consolidated
balance sheet at December 31, 2009; the Company does not hold any corporate debt securities as
of June 30, 2010. The fair values of these securities were based on quoted market prices for
the specific securities held based on a matrix of valuations received from several pricing
sources. Other short-term investments represent certificates of deposits and treasury bills
that mature in over 90 days. These are recorded in short-term investments in the consolidated
balance sheet at December 31, 2009; the Company does not hold these securities as of June 30,
2010. The fair values of the other short-term investments are based on quoted market prices
for the specific securities held based on a matrix of valuations received from several pricing
sources. The amortized cost for the debt securities and other short-term investments was $4.6
million as of December 31, 2009. |
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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Managements Discussion and
Analysis (MD&A) section of the Companys 2009 Annual Report on Form 10-K. Results of the interim
periods presented are not necessarily indicative of the results to be expected for the full year
ending December 31, 2010.
Caution Concerning Forward-Looking Statements
Certain information in this MD&A, in various filings with regulators, in reports to shareholders
and in other communications is forward-looking within the meaning of certain securities laws and is
subject to important risks, uncertainties and assumptions. This forward-looking information
includes, amongst others, information with respect to the Companys objectives and the strategies
to achieve those objectives, as well as information with respect to the Companys beliefs, plans,
expectations, anticipations, estimates and intentions. There are a number of important factors that
could cause actual results to differ materially from those indicated by such forward-looking
statements. Such factors include, but may not be limited to, the ability of the Company to
adequately address: the risks associated with further market acceptance of the Companys products
and services; its ability to manage its growth effectively; its reliance on and ability to retain
key customers and key personnel; industry conditions such as consolidation of customers,
competitors and acquisition targets; the Companys ability to acquire a company and manage
integration and potential dilution associated therewith; the impact of technology changes on its
products/service offerings, including impact on the intellectual property rights of others; the
effects of regulatory and legislative changes in the healthcare industry; and the sufficiency and
fluctuations of its liquidity and capital needs.
When relying on forward-looking information to make decisions, investors and others should
carefully consider the foregoing factors and other uncertainties and potential events. In making
the forward-looking statements contained in this MD&A, the Company does not assume any significant
acquisitions, dispositions or one-time items. It does assume, however, the renewal of certain
customer contracts. Every year, the Company has major customer contracts that come up for renewal.
In addition, the Company also assumes new customer contracts. In this regard, the Company is
pursuing large opportunities that present a very long and complex sales cycle which substantially
affects its forecasting abilities. The Company has assumed certain timing for the realization of
these opportunities which it thinks is reasonable but which may not be achieved. Furthermore, the
pursuit of these larger opportunities does not ensure a linear progression of revenue and earnings
since they may involve significant up-front costs followed by renewals and cancellations of
existing contracts. The Company has assumed certain revenues which may not be realized. The
Company has also assumed that the material factors referred to in the previous paragraph will not
cause such forward-looking information to differ materially from actual results or events. The
foregoing list of factors is not exhaustive and is subject to change and there can be no assurance
that such assumptions will reflect the actual outcome of such items or factors. For additional
information with respect to certain of these and other factors, refer to the Risk Factors section
contained in Item 1A of the Companys 2009 Annual Report on Form 10-K.
THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS MD&A REPRESENTS THE COMPANYS CURRENT
EXPECTATIONS AND, ACCORDINGLY, IS SUBJECT TO CHANGE. HOWEVER, THE COMPANY EXPRESSLY DISCLAIMS ANY
INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING INFORMATION, WHETHER AS A RESULT OF
NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS REQUIRED BY APPLICABLE LAW.
Overview
PBM Business
The Company provides comprehensive PBM services to customers, which include managed care
organizations, local governments, unions, corporations, HMOs, employers, workers compensation
plans, third party health care plan administrators and federal and state government programs
through its network of licensed pharmacies throughout the United States. The PBM services include
electronic point-of-sale pharmacy claims management, retail pharmacy network management, mail
service pharmacy, specialty pharmacy, Medicare Part D services, benefit design consultation,
preferred drug management programs, drug review and analysis, consulting services, data access and
reporting and information analysis. The Company owns a mail service pharmacy (Mail Service) and
a specialty service pharmacy (Specialty Service). In addition, the Company is a national
provider of drug benefits to its customers under the federal governments Medicare Part D program.
Revenue primarily consists of sales of prescription drugs, together with any associated
administrative fees, to customers and participants, either through the Companys nationwide network
of retail pharmacies, Mail Service pharmacy or Specialty Service pharmacy. Revenue related to the
sale of prescription drugs is recognized when the claims are adjudicated and the prescription drugs
are shipped. Claims are adjudicated at the point-of-sale using an on-line processing system.
Profitability of the PBM segment is largely dependent on the volume and type of prescription drug
claims adjudicated and sold. Growth in revenue and profitability of the PBM segment is dependent
upon attracting new customers, retaining the Companys current customers and providing additional
services to the Companys current customer base by offering a flexible and cost-effective
alternative to traditional PBM offerings. The Companys PBM offerings allow its customers to gain
increased control of their pharmacy benefit dollars and maximize cost savings and quality of care
through a full range of pharmacy spend management services, including: formulary administration,
benefit plan design and management, pharmacy network management, drug utilization review, clinical
services and consulting, reporting and information analysis solutions, mail services and specialty
pharmacy and consumer web services.
Under the Companys customer contracts, the pharmacy is solely obligated to collect the co-payments
from the participants. As such, the Company does not include participant co-payments to retail
pharmacies in revenue or cost of revenue. If these amounts were included in revenue and cost of
revenue, operating income and net income would not have been affected.
The Company evaluates customer contracts to determine whether it acts as a principal or as an agent
in the fulfillment of prescriptions through its retail pharmacy network. The Company acts as a
principal in most of its transactions with customers and revenue is recognized at the prescription
price (ingredient cost plus dispensing fee) negotiated with customers, plus an administrative fee,
if applicable (gross reporting). Gross reporting is appropriate when the Company (i) has separate
contractual relationships with customers and with pharmacies, (ii) is responsible to validate and
manage a claim through the claims adjudication process, (iii) commits to set prescription prices
for the pharmacy, including instructing the pharmacy as to
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how that price is to be settled
(co-payment requirements), (iv) manages the overall prescription drug relationship with the
patients, who are participants of customers plans, and (v) has credit risk for the price due from
the customer. In instances where the Company merely administers a customers network pharmacy
contract to which the Company is not a party and under which the Company does not assume pricing
risk and credit risk, among other factors, the Company only records an administrative fee as
revenue. For these customers, the Company earns an administrative fee for collecting payments from
the customer and remitting the corresponding amount to the pharmacies in the customers network.
In these transactions, the Company acts as an agent for the customer. As the Company is not the
principal in these transactions, the drug ingredient cost is not included in revenue or in cost of
revenue (net reporting). As such, there is no impact to gross profit based upon whether gross or
net reporting is used.
HCIT Business
The Company is also a leading provider of HCIT solutions and services to providers, payors, and
other participants in the pharmaceutical supply chain in North America. The Companys product
offerings include a wide range of software products for managing prescription drug programs and for
drug prescribing and dispensing. The Companys solutions are available on a license basis with
on-going maintenance and support or on a transaction fee basis using an ASP model. The Companys
payor customers include managed care organizations, health plans, government agencies, employers
and intermediaries such as pharmacy benefit managers. The solutions offered by the Companys
services assist both payors and providers in managing the complexity and reducing the cost of their
prescription drug programs and dispensing activities.
Profitability of the HCIT business depends primarily on revenue derived from transaction processing
services, software license sales, hardware sales, maintenance and professional services. Recurring
revenue remains a cornerstone of the Companys business model and consists of transaction
processing services and maintenance. Growth in revenue from recurring sources has been driven
primarily by growth in the Companys transaction processing business in the form of claims
processing for its payor customers and switching services for its provider customers. Through the
Companys transaction processing business, where the Company is generally paid based on the volume
of transactions processed, the Company continues to benefit from the growth in pharmaceutical drug
use in the United States. The Company believes that aging demographics and increased use of
prescription drugs will continue to generate demand in the transaction processing business. In
addition to benefiting from this industry growth, the Company continues to focus on increasing
recurring revenue in the transaction processing area by adding new transaction processing customers
to its existing customer base. The recognition of revenue in the HCIT business depends on various
factors including the type of service provided, contract parameters and any undelivered elements.
Operating Expenses
The Companys operating expenses primarily consist of cost of revenue, product development costs,
selling, general and administrative (SG&A) costs, depreciation and amortization. Cost of revenue
includes the costs of drugs dispensed and shipped as well as costs related to the products and
services provided to customers in the HCIT segment and costs associated with the operation and
maintenance of the transaction processing centers. These costs include salaries and related
expenses for professional services personnel, transaction processing centers personnel, customer
support personnel, any hardware or equipment sold to customers and depreciation expense related to
data center operations. Product development costs consist of staffing expenses to produce
enhancements and new initiatives. SG&A costs relate to selling expenses, commissions, marketing,
network administration and administrative costs, including legal, accounting, investor relations
and corporate development costs. Depreciation expense relates to the depreciation of property and
equipment used by the Company. Amortization expense relates to definite-lived intangible assets
from business acquisitions.
Industry Overview
The PBM industry is intensely competitive, generally resulting in continuous pressure on gross
profit as a percentage of total revenue. In recent years, industry consolidation and dramatic
growth in managed healthcare have led to increasingly aggressive pricing of PBM services. Given
the pressure on all parties to reduce healthcare costs, the Company expects this competitive
environment to continue for the foreseeable future. In order to remain competitive, the Company
looks to continue to drive purchasing efficiencies of pharmaceuticals to improve operating margins
and target the acquisition of other businesses to achieve its strategy of expanding its product
offerings and customer base. The Company also looks to retain and expand its customer base by
improving the quality of service provided by enhancing its solutions and lowering the total drug
spend for customers.
The HCIT industry is increasingly competitive as technologies continue to advance and new products
continue to emerge. This rapidly developing industry requires the Company to perpetually improve
its offerings to meet customers rising product standards. Recent governmental stimulus
initiatives to improve the countrys electronic health records should assist the growth of the
industry, but it may also increase competition as more players enter the expanding market.
The complicated environment in which the Company operates presents it with opportunities,
challenges, and risks. The Companys clients are paramount to its success; the retention of
existing clients and winning of new clients and members pose the greatest opportunities, and the
loss thereof represents an ongoing risk. The preservation of the Companys relationships with
pharmaceutical manufacturers and retail pharmacies is very important to the execution of its
business strategies. The Companys future success will hinge on its ability to drive mail volume
and increase generic dispensing rates in light of the significant brand-name drug patent
expirations expected to occur over the next several years. The Companys ability to continue to
provide innovative and competitive clinical and other services to clients and patients, including
the Companys active participation in the Medicare Part D benefit and the rapidly growing specialty
pharmacy industry, also plays an important part in the Companys future success.
The frequency with which the Companys customer contracts come up for renewal, and the potential
for one of the Companys larger customers to terminate or elect not to renew its existing contract
with the Company, creates the risk that the Companys results of operations may be volatile. The
Companys customer contracts generally do not have terms longer than three years and, in some
cases, are terminable by the customer on relatively short notice. The Companys larger customers
generally seek bids from other PBM providers in advance of the expiration of their contracts. If
existing customers elect not to renew their contracts at the same service levels previously
provided with the Company at the expiration of the current terms of those contracts, and in
particular if one of the Companys largest customers elects not to renew, the Companys recurring
revenue base will be reduced and results of operations will be adversely affected.
The Company operates in a competitive environment where clients and other payors seek to control
the growth in the cost of providing prescription drug benefits. The Companys business model is
designed to reduce the level of drug cost. The Company helps manage drug cost primarily by its
programs designed to maximize the substitution of expensive brand drugs with equivalent but much
lower cost generic drugs, obtaining competitive discounts from suppliers, securing rebates from
pharmaceutical manufacturers and third party rebate administrators, securing discounts from retail
pharmacies, applying the Companys sophisticated clinical programs and efficiently administering
prescriptions dispensed through the Companys Mail Service and Specialty Service pharmacies.
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Various aspects of the Companys business are governed by federal and state laws and regulations,
and because sanctions may be imposed for violations of these laws, compliance is a significant
operational requirement. The Company believes it is in substantial compliance with all existing
legal requirements material to the operation of its business. There are, however, significant
uncertainties involving the application of many of these legal requirements to its business.
The U.S. health care reform legislation enacted in March 2010 could provide drug coverage for
millions of people in the form of expanded Medicaid coverage. The Company is active in this market
and believes that expansion could create growth opportunities for the Company. In addition, the
reform bill provides a pathway for follow-on biologic development, giving more cost effective
generic options to clients and the potential opportunity for margin expansion for the Company. As
many aspects of the reform bill do not go into effect for several years, the Company cannot predict
the overall impact the legislation will have on the Companys financial results. In addition, there
are numerous proposed health care laws and regulations at the federal and state levels, many of
which could adversely affect the Companys business, results of operations and financial condition.
The Company is unable to predict what additional federal or state legislation or regulatory
initiatives may be enacted in the future relating to its business or the health care industry in
general, or what effect any such legislation or regulations might have on it. The Company also
cannot provide any assurance that federal or state governments will not impose additional
restrictions or adopt interpretations of existing laws or regulations that could have a material
adverse effect on its business or financial performance.
Competitive Strengths
The Company has demonstrated its ability to serve a broad range of clients from large managed care
organizations and state governments to employer groups with fewer than a thousand members. The
Company believes its principal competitive strengths are:
Flexible, customized and independent services: The Company believes a key differentiator between
itself and its competitors is not only the Companys ability to provide innovative PBM services,
but also to deliver these services on an à la carte basis. The informedRx suite offers the
flexibility of broad product choice along the entire PBM continuum, enabling enhanced customer
control, solutions tailored to the customers specific requirements, and flexible pricing. The
market for the Companys products is divided between large customers that have the sophisticated
technology infrastructure and staff required to operate a 24-hour data center and other customers
that are not able or willing to operate these sophisticated systems.
The Companys business model allows its large customers to license the Companys products and
operate the Companys systems themselves (with or without taking advantage of the Companys
significant customization, consulting and systems implementation services) and allows its other
customers to utilize the Companys systems capabilities on a fee-per-transaction or subscription
basis through ASP processing from the Companys data center.
Leading technology and platform: The Companys technology is robust, scaleable and web-enabled. The
Companys payor offerings efficiently supported over 400 million transactions in 2009. The platform
is able to instantly cross-check multiple processes, such as reviewing claim eligibility and
adverse drug reaction and properly calculating member, pharmacy and payor payments. The Companys
technology is built on flexible, database-driven rule sets and broad functionality applicable for
most any type of business. The Company believes it has one of the most comprehensive claims
processing platforms in the market.
The Companys technology platform allows it to provide more comprehensive PBM services through
informedRx by offering customers a selection of services to choose from to meet their unique needs
versus requiring them to accept a one-size-fits-all solution. The Company believes this à la carte
offering is a key differentiator from its competitors.
Measurable cost savings for customers: The Company provides its customers with increased control
over prescription drug costs and drug benefit programs. The Companys pricing model and flexible
product offerings are designed to deliver measurable cost savings to the Companys customers. The
Company believes its pricing model is a key differentiator from its competitors for the Companys
customers who want to gain control of their prescription drug costs. For example, the Companys
pharmacy network contracts and manufacturer rebate agreements are made available by the Company to
each customer. For customers who select the Companys pharmacy network and manufacturer rebate
services on a fixed fee per transaction basis, there is clarity to the rebates and other fees
payable to the client. The Company believes that its pricing model together with the flexibility to
select from a broad range of customizable services helps customers realize measurable results and
cost savings.
Selected financial highlights for the three and six months ended June 30, 2010 compared to the same
periods in 2009
Selected financial highlights for the three months ended June 30, 2010 and 2009 are noted below:
| Total revenue in the three months ended June 30, 2010 was $479.4 million as compared to
$320.8 million for the same period in 2009. The increase is largely attributable to an
increase in PBM revenue of $157.4 million compared to the same period in 2009. PBM
revenues increased primarily due to growth in the customer base throughout 2010 and the
second half of 2009. The increased customer base was complemented by additional services
sold to existing customers. |
| Operating income increased $7.2 million, or 39.3%, in the second quarter of 2010 to
$25.7 million as compared to $18.5 million for the same period in 2009. This increase was
driven by increased gross profits from operations coupled with a decrease in operating
expenses as compared to the same period in 2009. |
| The Company reported net income of $17.1 million, or $0.55 per share (fully-diluted),
for the three months ended June 30, 2010, compared to $12.0 million, or $0.47 per share
(fully-diluted), for the same period in 2009. The increase is driven by higher gross
profit attributable to an increase in PBM revenues, operating cost savings from synergies
obtained after the successful integration of NMHC, and lower interest expense due to
extinguishing the Companys long-term debt in December 2009. These increases are partially
offset by an increase in income taxes. |
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Selected financial highlights for the six months ended June 30, 2010 and 2009 are noted below:
| Total revenue in the six months ended June 30, 2010 was $931.6 million as compared to
$611.8 million for the same period in 2009. The increase is largely attributable to an
increase in PBM revenue of $317.1 million compared to the same period in 2009. PBM
revenues increased primarily due to growth in the customer base throughout 2010 and the
second half of 2009. The increased customer base was complemented by additional services
sold to existing customers. |
| Operating income increased $18.7 million, or 63.7%, for the six months ended June 30,
2010 to $48.1 million as compared to $29.4 million for the same period in 2009. This
increase was driven by increased gross profits from operations coupled with a decrease in
operating expenses as compared to the same period in 2009. |
| The Company reported net income of $31.9 million, or $1.02 per share (fully-diluted),
for the six months ended June 30, 2010, compared to $19.7 million, or $0.79 per share
(fully-diluted), for the same period in 2009. The increase is driven by higher gross
profit attributable to an increase in PBM revenues, operating cost savings from synergies
obtained after the successful integration of NMHC, and lower interest expense due to
extinguishing the Companys long-term debt in December 2009. These increases are partially
offset by an increase in income taxes. |
| The Company generated $36.8 million in cash from operations for the six months ended
June 30, 2010, an increase of $5.1 million from the same period in 2009, driven by an
increase in net income. |
| On March 4, 2010, the Company announced a new agreement with HealthSpring Inc. pursuant
to which the Companys informedRx subsidiary will provide HealthSpring with its full suite
of PBM services, and therefore manage significant drug spend. The initial term of the
agreement is three years with provisions for two additional one-year
extensions. HealthSpring will deploy mail and specialty pharmacy services beginning in
mid-2010, with implementation of the full PBM services on January 1, 2011. For financial
statement reporting purposes with respect to the agreement, the Company expects that
margins related to this agreement will be materially lower than historical margins because
of the volume related to this agreement. |
Results of Operations
Three months ended June 30, 2010 as compared to the three months ended June 30, 2009
Three months ended June 30, | ||||||||
In thousands, except per share data | 2010 | 2009 | ||||||
Revenue |
$ | 479,446 | $ | 320,829 | ||||
Cost of revenue |
425,707 | 273,618 | ||||||
Gross profit |
53,739 | 47,211 | ||||||
Product development costs |
3,021 | 3,027 | ||||||
SG&A |
21,486 | 21,907 | ||||||
Depreciation of property and equipment |
1,537 | 1,405 | ||||||
Amortization of intangible assets |
1,978 | 2,415 | ||||||
Operating income |
25,717 | 18,457 | ||||||
Net interest expense |
143 | 979 | ||||||
Other expense (income), net |
60 | 283 | ||||||
Income before income taxes |
25,514 | 17,195 | ||||||
Income tax expense |
8,369 | 5,218 | ||||||
Net income |
$ | 17,145 | $ | 11,977 | ||||
Diluted earnings per share |
$ | 0.55 | $ | 0.47 |
Revenue
Revenue increased $158.6 million to $479.4 million for the three months ended June 30, 2010,
primarily due to new customer starts as of January 1, 2010, as well as other customers added during
2009. Revenues have also increased as compared to the same period in 2009 due to an increase in new
PBM services sold to several existing HCIT customers during 2010 and the second half of 2009.
Overall, these changes are a result of synergies between the HCIT and PBM segments which have
allowed the Company to focus on offering a broader array of products and services to the Companys
customers.
Cost of Revenue
Cost of revenue increased $152.1 million to $425.7 million for the three months ended June 30,
2010, primarily due to increased PBM transaction volumes in 2010 driven by the increased customer
base. Cost of revenue in the PBM segment substantially relates to the actual cost of the
prescription drugs sold, plus any applicable shipping costs. Costs of revenue have increased in
line with the increase in PBM revenues which are driven by the cost of prescription drugs sold.
Gross Profit
Gross profit increased $6.5 million to $53.7 million for the three months ended June 30, 2010,
mostly due to increased margins earned from incremental PBM revenues as compared to the same period
in 2009. Gross margin as a percentage of revenue has decreased from 14.7% of revenue to 11.2% of
revenue as a result of the PBM business producing a greater percentage of the Companys total gross
profit. PBM revenues carry a lower margin percentage as compared to HCIT revenues. As PBM
revenues grow as a percentage of the Companys total revenues and costs, gross margin as a
percentage of revenue may decrease.
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Table of Contents
Product Development Costs
Product development costs were $3.0 million for the three months ended June 30, 2010 and 2009, respectively.
Product development continues to be a key focus of the Company as it continues to pursue
enhancements of existing products, as well as the development of new offerings, to support its
market expansion.
SG&A Costs
SG&A costs for the three months ended June 30, 2010 were $21.5 million compared to $21.9 million
for the three months ended June 30, 2009. SG&A costs consist primarily of employee costs in
addition to professional services costs, facilities and costs not related to cost of revenue. SG&A
costs also include stock-based compensation cost of $1.3 million and $0.6 million for the three
months ended June 30, 2010 and 2009, respectively. Due to the Companys increased focus on
controlling its costs throughout 2009 and into 2010, the Company was able to reduce SG&A costs
during the current period as compared to the same period in 2009. The increase in stock-based
compensation during the three months ended June 30, 2010 as compared to the same period in 2009 is
due to additional awards granted to the Companys employees, and an increase in the value of those
awards. The increase in the stock-based compensation valuations is directly attributable to the
increase in the market value of the Companys common shares as compared to the value at, and prior
to, June 30, 2009.
Depreciation
Depreciation expense relates to property and equipment used in all areas of the Company except for
those depreciable assets directly related to the generation of revenue, which is included in cost
of revenue in the consolidated statements of operations. Depreciation expense was $1.5 million and
$1.4 million for the three-month periods ended June 30, 2010 and 2009, respectively. The expense
increased due to new asset purchases in 2010 and 2009 to expand the Companys data centers and
information technology network capacity.
Amortization
Amortization expense for the three months ended June 30, 2010 and 2009 was $2.0 million and $2.4
million, respectively. Amortization expense has decreased due to the amortization methodology for
the intangible assets attained from the NMHC acquisition. These intangible assets are amortized in
line with their estimated future economic benefits, which for certain assets is greater at the
beginning of their life versus the end. Accordingly, over time amortization will decrease.
Amortization expense on all the Companys intangible assets is expected to be approximately $3.9
million for the remainder of 2010. Refer to Note 5-Goodwill and Other Intangible Assets in the
notes to the unaudited consolidated financial statements for more information on amortization
expected in future years.
Interest Income and Expense
Interest income decreased $0.1 million for the three months ended June 30, 2010 as compared to the
same period in 2009, due primarily to lower interest rates. Interest expense decreased to $0.3
million for the three months ended June 30, 2010 from $1.2 million in the same period in 2009,
primarily due to the Company extinguishing its long-term debt in December 2009.
Income Taxes
The Company recognized income tax expense of $8.4 million for the three months ended June 30, 2010,
representing an effective tax rate of 32.8%, compared to a $5.2 million income tax expense,
representing an effective tax rate of 30.3%, for the same period in 2009. The effective tax rate
increased during the three months ended June 30, 2010 compared to the same period in 2009,
primarily due to the difference in the proportion of overall income among jurisdictions.
Segment Analysis
The Company reports in two operating segments: PBM and HCIT. The Company evaluates segment
performance based on revenue and gross profit. A reconciliation of the Companys business
segments to the unaudited consolidated financial statements for the three months ended June 30,
2010 and 2009 is as follows (in thousands):
PBM | HCIT | Consolidated | ||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
Revenue |
$ | 451,295 | $ | 293,906 | $ | 28,151 | $ | 26,923 | $ | 479,446 | $ | 320,829 | ||||||||||||
Cost of revenue |
412,681 | 259,376 | 13,026 | 14,242 | 425,707 | 273,618 | ||||||||||||||||||
Gross profit |
$ | 38,614 | $ | 34,530 | $ | 15,125 | $ | 12,681 | $ | 53,739 | $ | 47,211 | ||||||||||||
Gross profit % |
8.6 | % | 11.7 | % | 53.7 | % | 47.1 | % | 11.2 | % | 14.7 | % |
PBM
Revenue was $451.3 million for the three months ended June 30, 2010, an increase of $157.4 million
compared to the same period in 2009. The increase in revenue is primarily due to new customer
starts as of January 1, 2010, as well as other customers added during 2009. Revenues have also
increased as compared to the same period in 2009 due to an increase in new PBM services sold to
several existing HCIT customers during 2010 and the second half of 2009. Due to the type of the
additional services provided, revenue from these customers contracts has moved from the HCIT
segment to the PBM segment. Overall, these changes are a result of synergies between the HCIT and
PBM segments which have allowed the Company to focus on offering a broader array of products and
services to the Companys customers.
For the three months ended June 30, 2010 and 2009, there were $4.9 million and $2.8 million of
co-payments, respectively, included in revenue related to prescriptions filled at the Companys
Mail and Specialty Service pharmacies. Co-payments retained by retail pharmacies on prescriptions
filled for participants are not included in revenue for the respective periods. Under customer
contracts, the pharmacy is solely obligated to collect the co-payments from the participants and as
such, the Company does not assume liability for participant co-payments in retail pharmacy
transactions. Therefore, the Company does not include participant co-payments to retail pharmacies
in revenue or cost of revenue.
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Table of Contents
Cost of revenue was $412.7 million for the three months ended June 30, 2010 compared to $259.4
million for the same period in 2009. Cost of revenue has increased in line with the increase in
PBM revenues, and is predominantly comprised of the cost of prescription drugs. As a percentage of
revenue, cost of revenue was 91.4% and 88.3% for the three months ended June 30, 2010 and 2009,
respectively. The increase in the cost of revenue as a percentage of revenue was due to lower
margins earned on new customer additions in 2010 and the second half of 2009. Generally, new
customer additions come in at lower margins due to costs incurred to bring in the new business.
This was partially offset by the increased use of lower cost generic drugs. Generic drug usage
continues to be a focus of the industry and the Company to help drive down health care costs. The
Company will continue to seek opportunities for increased generic prescription drug usage to help
reduce overall prescription drug costs to its customers and the Company.
Gross profit was $38.6 million for the three months ended June 30, 2010 compared to $34.5 million
for the same period in 2009. Gross profit increased due to the larger customer base in the second
quarter of 2010 versus the same period in 2009. Gross profit margin percentage was 8.6% and 11.7%
for the three months ended June 30, 2010 and 2009, respectively. Gross profit margin percentage has
decreased in the three months ended June 30, 2010 as compared to the same period in 2009 due to
newer business being added at lower margins. As noted above, new customer additions come in at
lower margins due to costs incurred to bring in the new business.
HCIT
HCIT revenue consists of transaction processing, professional services, system sales and
maintenance contracts on system sales. Total HCIT revenue increased $1.3 million to $28.2 million
for the three months ended June 30, 2010 as compared to $26.9 million for the same period in 2009,
primarily due to an increase in transaction processing revenue, as well as $2.8 million earned for
meeting certain contractual performance conditions. These increases were offset by decreases in
professional services and system sales.
Transaction processing revenue consists of claims processing and generally increases as a result of
the launch of new contracts as well as increased volumes of services provided to existing
customers. The increase in transaction processing revenue from new contracts and increased volumes
of services provided to existing customers was offset by a decrease in revenue generated from
contracts with HCIT customers which converted to the PBM segment in 2010 and the second half of
2009. As discussed previously, the revenues earned from the contracts with these customers have
moved to the PBM segment due to the type of additional services provided.
Professional services revenue is derived from providing support projects for both system sales and
transaction processing clients, on an as-needed basis. This revenue is dependent on customers
initiating new projects and system enhancements which require the Company to assist them on both a
fixed bid and time and materials basis.
System sales are derived from license upgrades and additional applications for existing and new
clients, as well as software and hardware sales to pharmacies that purchase the Companys pharmacy
system. Maintenance revenue is generated from maintenance services provided on related system or
license sales. These revenue streams are dependent on the Company acquiring new customers or
selling license upgrades or additional applications to existing customers and such revenue streams
will fluctuate accordingly as new customers are added, or license upgrades and additional
applications are sold to existing customers.
Cost of revenue was $13.0 million and $14.2 million for the three months ended June 30, 2010 and
2009. Cost of revenue includes the direct support costs for the HCIT business as well as
depreciation expense of $0.6 million for the three months ended June 30, 2010 and 2009. Cost of
revenue decreased during 2010 versus 2009 mainly due to the conversion of some HCIT customers
revenue contracts into the PBM segment which moved the associated costs to support these customers
to the PBM segment. Refer to the PBM revenue discussion for further analysis on the contracts that
have moved from HCIT to PBM.
Gross profit margin percentage was 53.7% for the three months ended June 30, 2010 compared to 47.1%
for the three months ended June 30, 2009, increasing gross profit by $2.4 million to $15.1 million
for the three months ended June 30, 2010 as compared to $12.7 million for the same period in 2009.
Gross profit margin, and the gross profit margin percentage, increased for the three months ended
June 30, 2010, compared to the same period in 2009, due to the increasing transaction processing
revenues that are able to leverage a fixed cost base, as well as due to additional revenues earned
for meeting certain contractual performance conditions. These increases were offset by decreases in
revenues earned from professional services and system sales. The additional revenue and margin
earned for meeting the contractual performance conditions is not expected to recur during the
remainder of this year.
Six months ended June 30, 2010 as compared to the six months ended June 30, 2009
Six months ended June 30, | ||||||||
In thousands, except per share data | 2010 | 2009 | ||||||
Revenue |
$ | 931,594 | $ | 611,789 | ||||
Cost of revenue |
827,627 | 525,394 | ||||||
Gross profit |
103,967 | 86,395 | ||||||
Product development costs |
6,094 | 6,190 | ||||||
SG&A |
42,792 | 42,704 | ||||||
Depreciation of property and equipment |
3,019 | 2,887 | ||||||
Amortization of intangible assets |
3,973 | 5,240 | ||||||
Operating income |
48,089 | 29,374 | ||||||
Net interest expense |
388 | 1,689 | ||||||
Other expense (income), net |
259 | (42 | ) | |||||
Income before income taxes |
47,442 | 27,727 | ||||||
Income tax expense |
15,505 | 8,068 | ||||||
Net income |
$ | 31,937 | $ | 19,659 | ||||
Diluted earnings per share |
$ | 1.02 | $ | 0.79 |
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Table of Contents
Revenue
Revenue increased $319.8 million to $931.6 million for the six months ended June 30, 2010, from
$611.8 million in the same period of 2009, primarily due to new customer starts as of January 1,
2010, as well as other customers added during the second half of 2009. Revenues have also increased
as compared to the same period in 2009 due to an increase in new PBM services sold to several
existing HCIT customers during 2010 and the second half of 2009. Overall, these changes are a
result of synergies between the HCIT and PBM segments which have allowed the Company to focus on
offering a broader array of products and services to the Companys customers.
Cost of Revenue
Cost of revenue increased $302.2 million to $827.6 million for the six months ended June 30, 2010,
primarily due to increased PBM transaction volumes in 2010 driven by the increased customer base.
Cost of revenue in the PBM segment substantially relates to the actual cost of the prescription
drugs sold, plus any applicable shipping costs. Costs of revenue have increased in line with the
increase in PBM revenues, which are driven by the cost of prescription drugs sold.
Gross Profit
Gross profit increased $17.6 million to $104.0 million for the six months ended June 30, 2010,
mostly due to increased margins earned from incremental PBM revenues as compared to the same period
in 2009. Gross margin as a percentage of revenue has decreased from 14.1% of revenue to 11.2% of
revenue for the six months ended June 30, 2010 and 2009, respectively, as a result of the PBM
business producing a greater percentage of the Companys total gross profit. PBM revenues carry a
lower margin percentage as compared to HCIT revenues. As PBM revenues grow as a percentage of the
Companys total revenues and gross profit, gross margin as a percentage of revenue may decrease.
Product Development Costs
Product development costs for the six months ended June 30, 2010 were $6.1 million compared to $6.2
million for the six months ended June 30, 2009. Product development continues to be a key focus of
the Company as it continues to pursue enhancements of existing products, as well as the development
of new offerings, to support its market expansion.
SG&A Costs
SG&A costs for the six months ended June 30, 2010 were $42.8 million compared to $42.7 million for
the six months ended June 30, 2009. SG&A costs consist primarily of employee costs in addition to
professional services costs, facilities and costs not related to cost of revenue. SG&A costs also
include stock-based compensation cost of $2.4 million and $1.1 million for the six months ended
June 30, 2010 and 2009, respectively. Although stock-based compensation costs have increased during
the six months ended June 30, 2010 as compared to the same period in 2009, the Companys focus on
controlling its costs throughout 2009 and into 2010 enabled it to contain SG&A costs during the
current period as compared to the same period in 2009. The increase in stock-based compensation
during the six months ended June 30, 2010 as compared to the same period in 2009 is due to
additional awards granted to the Companys employees, and an increase in the value of those awards.
The increase in the stock-based compensation valuations are driven by the increase in the market
value of the Companys common shares as compared to the value at, and prior to, June 30, 2009.
Depreciation
Depreciation expense relates to property and equipment used in all areas of the Company except for
those depreciable assets directly related to the generation of revenue, which is included in the
cost of revenue in the consolidated statements of operations. Depreciation expense was $3.0
million and $2.9 million for the six-month periods ended June 30, 2010 and 2009, respectively. The
expense remained consistent as a result of new asset purchases in 2010 and 2009 to expand the
Companys data centers and information technology network capacity, which were offset by assets
that reached full depreciation at the end of 2009 and the beginning of 2010.
Amortization
Amortization expense for the six months ended June 30, 2010 and 2009 was $4.0 million and $5.2
million, respectively. Amortization expense has decreased due to the amortization methodology for
the intangible assets attained from the NMHC acquisition. These intangible assets are amortized in
line with their estimated future economic benefits, which for certain assets is greater at the
beginning of their life versus the end. Accordingly, over time amortization will decrease.
Amortization expense on all the Companys intangible assets is expected to be approximately $3.9
million for the remainder of 2010. Refer to Note 5-Goodwill and Other Intangible Assets in the
notes to the unaudited consolidated financial statements for more information on amortization
expected in future years.
Interest Income and Expense
Interest income decreased $0.1 million for the six months ended June 30, 2010 as compared to the
same period in 2009, due primarily to lower interest rates. Interest expense decreased to $0.7
million for the six months ended June 30, 2010 from $2.2 million in the same period in 2009,
primarily due to the Company extinguishing its long-term debt in December 2009.
Income Taxes
The Company recognized income tax expense of $15.5 million for the six months ended June 30, 2010,
representing an effective tax rate of 32.7%, compared to an $8.1 million income tax expense,
representing an effective tax rate of 29.1%, for the same period in 2009. The effective tax rate
increased during the six months ended June 30, 2010 compared to the same period in 2009, primarily
due to the difference in the proportion of overall income among jurisdictions.
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Table of Contents
Segment Analysis
The Company reports in two operating segments: PBM and HCIT. The Company evaluates segment
performance based on revenue and gross profit. A reconciliation of the Companys business
segments to the consolidated financial statements for the six months ended June 30, 2010 and 2009
is as follows (in thousands):
PBM | HCIT | Consolidated | ||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
Revenue |
$ | 878,797 | $ | 561,686 | $ | 52,797 | $ | 50,103 | $ | 931,594 | $ | 611,789 | ||||||||||||
Cost of revenue |
801,847 | 498,374 | 25,780 | 27,020 | 827,627 | 525,394 | ||||||||||||||||||
Gross profit |
$ | 76,950 | $ | 63,312 | $ | 27,017 | $ | 23,083 | $ | 103,967 | $ | 86,395 | ||||||||||||
Gross profit % |
8.8 | % | 11.3 | % | 51.2 | % | 46.1 | % | 11.2 | % | 14.1 | % |
PBM
Revenue was $878.8 million for the six months ended June 30, 2010, an increase of $317.1 million
from $561.7 million in the same period in 2009. The increase in revenue is primarily due to new
customer starts as of January 1, 2010, as well as other customers added during 2009. Revenues have
also increased as compared to the same period in 2009 due to an increase in PBM services sold to
several HCIT customers during 2010 and the second half of 2009. Due to the additional type of
services provided, these customers moved from the HCIT segment to the PBM segment.
For the six months ended June 30, 2010 and 2009, there were $9.7 million and $5.7 million of
co-payments, respectively, included in revenue related to prescriptions filled at the Companys
Mail and Specialty Service pharmacies. Co-payments retained by retail pharmacies on prescriptions
filled for participants are not included in revenue for the respective periods. Under customer
contracts, the pharmacy is solely obligated to collect the co-payments from the participants and as
such, the Company does not assume liability for participant co-payments in retail pharmacy
transactions. Therefore, the Company does not include participant co-payments to retail pharmacies
in revenue or cost of revenue.
Cost of revenue was $801.8 million for the six months ended June 30, 2010 compared to $498.4
million for the same period in 2009. Cost of revenue has increased in line with the increase in
PBM revenues, and is predominantly comprised of the cost of prescription drugs. As a percentage of
revenue, cost of revenue was 91.2% and 88.7% for the six months ended June 30, 2010 and 2009,
respectively. The increase in the cost of revenue as a percentage of revenue was due to lower
margins earned on new customer additions in 2010 and the second half of 2009. Generally, new
customer additions come in at lower margins due to costs incurred to bring in the new business.
This was partially offset by the increased use of lower cost generic drugs. Generic drug usage
continues to be a focus of the industry, and the Company, to help drive down health care costs.
The Company will continue to seek opportunities for increased generic prescription drug usage to
help reduce overall prescription drug costs to its customers and the Company.
Gross profit was $77.0 million for the six months ended June 30, 2010 compared to $63.3 million for
the same period in 2009. Gross profit increased due to growth in the customer base in 2010
compared to the same period in 2009. Gross profit margin percentage was 8.8% and 11.3% for the six
months ended June 30, 2010 and 2009, respectively. Gross profit margin percentage has decreased in
the six months ended June 30, 2010 as compared to the same period in 2009 due to newer business
being added at lower margins. As noted above, new customer additions come in at lower margins due
to costs incurred to bring on new business.
HCIT
HCIT revenue consists of transaction processing, professional services, system sales and
maintenance contracts on system sales. Total HCIT revenue increased $2.7 million for the six months
ended June 30, 2010 as compared to the same period in 2009, primarily due to an increase in
transaction processing revenue, as well as $2.8 million earned for meeting certain contractual
performance conditions. These increases were offset by decreases in professional services and
system sales.
Transaction processing revenue consists of claims processing and generally increases due to the
launch of new contracts as well as increased volumes of services provided to existing customers.
The increase in transaction processing revenue from new contracts and increased volumes of services
provided to existing customers were offset by a decrease in revenue generated from contracts with
HCIT customers which converted to the PBM segment in 2010 and the second half of 2009. As
discussed previously, the revenues earned from the contracts with these customers have moved to the
PBM segment due to the type of additional services provided.
Professional services revenue is derived from providing support projects for both system sales and
transaction processing clients, on an as-needed basis. This revenue is dependent on customers
initiating new projects and system enhancements which require the Company to assist them on both a
fixed bid and time and materials basis.
System sales are derived from license upgrades and additional applications for existing and new
clients, as well as software and hardware sales to pharmacies that purchase the Companys pharmacy
system. Maintenance revenue is generated from maintenance services provided on related system or
license sales. These revenue streams are dependent on the Company acquiring new customers or
selling license upgrades or additional applications to existing customers and such revenue streams
will fluctuate accordingly as new customers are added, or license upgrades and additional
applications are sold to existing customers.
Cost of revenue was $25.8 million and $27.0 million for the six months ended June 30, 2010 and
2009, respectively. Cost of revenue includes the direct support costs for the HCIT business, as
well as depreciation expense of $1.2 million for the six months ended June 30, 2010 and $1.1
million for the same period in 2009. Cost of revenue decreased during 2010 versus 2009 mainly due
to the conversion of some HCIT customers revenue contracts into the PBM segment, which moved the
associated costs to support these customers to the PBM segment. Refer to the PBM revenue
discussion for further analysis on the customer contracts which have moved from HCIT to PBM.
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Table of Contents
Gross profit margin percentage was 51.2% for the six months ended June 30, 2010 compared to 46.1%
for the six months ended June 30, 2009, and overall gross profit margin increased $3.9 million to
$27.0 million for the six months ended June 30, 2010 as compared to $23.1 million for the same
period in 2009. Gross profit margin and gross profit margin percentage increased for the six months
ended June 30, 2010, compared to the same period in 2009, due to the increasing transaction
processing revenues that are able to leverage a fixed cost base, as well as due to additional
revenues earned for meeting certain contractual performance conditions discussed earlier. These
increases were offset by decreases in revenue earned from professional services and system sales.
The additional revenue and margin earned for meeting the contractual performance conditions is not
expected to recur during the remainder of this year.
Liquidity and Capital Resources
The Companys sources of liquidity have primarily been cash provided by operating activities,
proceeds from its public offerings, and proceeds from credit facilities. The Companys principal
uses of cash have been to fund working capital, finance capital expenditures, satisfy contractual
obligations and to meet acquisition and investment needs. The Company anticipates that these uses
will continue to be the principal demands on cash in the future.
At June 30, 2010 and December 31, 2009, the Company had cash and cash equivalents totalling $352.6
million and $304.4 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. At June 30, 2010, cash and cash equivalents consist of cash on hand,
deposits in banks, and bank term deposits with original maturities of 90 days or less. During the
first quarter of 2010, the Company repositioned its funds previously placed in money market funds
and moved the funds into cash on deposit accounts. The Company assessed that it would earn a
greater return from cash on deposit accounts due to the historically low rates currently paid on
the U.S. money market funds. Further, the Company reduced expenses by moving the funds to cash on
deposit accounts as the fees charged for those accounts are lower than the U.S. money market fund
accounts.
As of June 30, 2010, all of the Companys cash and cash equivalents were exposed to market risks,
primarily changes in U.S. interest rates. Declines in interest rates over time would reduce
interest income related to these balances.
Consolidated Balance Sheets
Selected balance sheet highlights at June 30, 2010 are as follows:
| Cash and cash-equivalents totaled $352.6 million, up $48.3 million from $304.4
million at December 31, 2009. The increase was primarly driven by profitable
operations of the Company. The Companys cash is primarily held in deposit accounts
with major financial institutions with high credit ratings. |
| Accounts receivable are made up of trade accounts receivable from both the PBM and
HCIT segment customers. Accounts receivable increased $6.6 million to $103.9 million
at June 30, 2010 from $97.3 million at December 31, 2009, driven by increases in
revenue during the six month-period ended June 30, 2010. The accounts receivable
balance is impacted by changes in revenues, as well as timing of collections, and is
continually monitored by the Company to ensure timely collections and to assess the
need for any changes to the allowance for doubtful accounts. |
| Rebates receivable of $34.9 million relate to billed and unbilled PBM receivables
from pharmaceutical manufacturers and third party administrators in connection with the
administration of the rebate program where the Company is the principal contracting
party. The receivable and related payables are based on estimates, which are subject
to final settlement. Rebates receivable increased $17.3 million from $17.6 million at
December 31, 2009, due primarily to increased rebate volumes driven by increased
prescription drug sales transactions, as well as an increase in the amount paid per
rebate transaction due to renegotiated contract terms with pharmaceutical manufacturers
and third party administrators. |
| The Companys inventory balance of $8.2 million consists predominantly of
prescription drugs and medical supplies at its Mail Service and Specialty Service
pharmacies. Changes in the inventory balance from period to period are caused by some
seasonality in certain products, taking advantage of buying opportunities and changing
inventory levels to properly support new customers. |
| Pharmacy benefit management rebates payable represents amounts owed to customers for
rebates from pharmaceutical manufacturers and third party administrators where the
Company administers the rebate program on the customers behalf, and the Company is the
principal contracting party. The payables are based on estimates, which are subject to
final settlement. Pharmacy benefit management rebates payable increased $13.0 million
to $59.6 million from $46.6 million at December 31, 2009 due to increased rebate
volumes driven by increased prescription drug sales transactions. The rebate amounts
payable are also higher due to an increase in the amount of rebates received per rebate
transaction as a result of renegotiated contract terms with pharmaceutical
manufacturers and third party administrators. As the amount of rebates receivable
increases, the amounts due to customers will also increase. |
| Pharmacy benefit claim payments payable of $72.9 million predominantly relates to
amounts owed to retail pharmacies for prescription drug costs and dispensing fees in
connection with prescriptions dispensed by the retail pharmacies to the Companys
customers when the Company is the principal contracting party with the pharmacy. |
| Deferred revenue increased $3.1 million to $10.4 million from $7.3 million as of
December 31, 2009, due to an increase of payments received in advance of services
provided. Deferred revenues mostly relate to payments secured in advance for
professional services, ASP processing, or annual software maintenance. Deferred
revenues are released to income once professional services have been performed or as
ASP and maintenance services are provided. |
| Accrued liabilities decreased $7.0 million to $23.8 million at June 30, 2010 from
$30.8 million at December 31, 2009 due primarily to the timing of payments made to
customers in relation to contract performance guarantees and payments made related to
assumed liabilities from the NMHC acquisition. |
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| Salaries and wages payable decreased $3.0 million to $9.3 million at June 30, 2010
as compared to $12.3 million at December 31, 2009 due to timing of payroll payments
relative to the period end. Salaries and wages payable will fluctuate based on the
timing of the period end relative to the Companys payment period. Payment periods
that fall closer to the end of a period will cause the salaries and wages payable
account to decrease; whereas, when the payment period falls further from the period
end, the balance will be higher. |
Cash flows from operating activities:
For the six months ended June 30, 2010, the Company generated $36.8 million of cash through its
operations, an increase of $5.1 million as compared to the same period in 2009. Cash provided by
operating activities has increased mainly due to increased net income, offset by an increase in
rebates receivable due to the higher rebate volumes. Cash from operations consisted of net income
of $31.9 million adjusted for $8.2 million in depreciation and amortization, $2.9 million in
stock-based compensation expense, an increase in deferred revenue of $3.1 million driven by
up-front payments for professional services contracts, an increase in rebates payable of $13.0
million and an increase in pharmacy claims payable of $11.2 million. These were offset by an
increase in rebates receivable of $17.3 million, an increase of accounts receivable in $6.6
million, a reduction in accrued liabilities of $10.7 million, a decrease in accounts payable of
$1.7 million, and a $5.6 million tax benefit from option exercises.
Changes in the Companys cash from operations results primarily from increased gross profits and
the timing of payments on accounts receivable, rebates receivable, and the payment or processing of
its various accounts payable and accrued liabilities. The Company continually monitors its balance
of trade accounts receivable and devotes ample resources to collection efforts on those balances.
Rebates receivable and the related payable are primarily estimates based on claims submitted.
Rebates are typically paid to customers on a quarterly basis upon receipt of the billed funds from
the third-party rebate administrators and pharmaceutical manufacturers. The timing of the rebate
payments to customers and collections of rebates from third-party rebate administrators and
pharmaceutical manufacturers causes fluctuations on the balance sheet, as well as in the Companys
cash from operating activities.
Changes in non-cash items such as depreciation and amortization are caused by the purchase and
acquisition of capital and intangible assets. In addition, as assets become fully depreciated or
amortized, the related expenses will decrease.
Changes in operating assets and liabilities, as well as non-cash items related to income taxes,
will fluctuate based on working capital requirements and the tax provision, which is determined by
examining taxes actually paid or owed, as well as amounts expected to be paid or owed in the
future.
For the six months ended June 30, 2009, the Company generated $31.7 million of cash through its
operations. Cash from operations consisted of net income of $19.7 million adjusted for $9.2
million in depreciation and amortization, $1.4 million in stock-based compensation expense, a
reduction in rebates receivable of $7.1 million, an increase in deferred revenue of $0.5 million,
an increase in rebates payable of $9.5 million and an increase in customer deposits of $0.8
million. These were partially offset by a reduction in accrued liabilities of $6.0 million, an
increase in prepaid expenses of $1.2 million and an increase in restricted cash of $1.6 million.
Cash flows from investing activities
For the six months ended June 30, 2010, the Company generated $1.1 million of cash from investing
activities, which consisted primarily of $6.8 million from the sale of short-term investments,
offset by $2.2 million in purchases of short-term investments. The Company sold all the short-term
investments it held during the first quarter of 2010 and moved those funds into cash on deposit
accounts. The Company also used $3.5 million for purchases of property and equipment to support
the increase in business.
As the Company grows, it continues to purchase capital assets to support increases in network
capacity and personnel. The Company monitors and budgets these costs to ensure that the
expenditures aid in its strategic growth plan.
For the six months ended June 30, 2009, the Company used $7.9 million of cash for investing
activities, which consisted primarily of purchases of property and equipment to support the
business. In addition, the Company used $2.0 million to purchase the assets of a small pharmacy
system in June 2009.
Cash flows from financing activities
For the six months ended June 30, 2010, the Company generated $10.3 million of cash from financing
activities, which mainly consisted of proceeds from the exercise of stock options of $4.7 million
and a $5.6 million tax benefit from stock-based compensation plans.
Cash flows from financing activities generally fluctuate based on the timing of option exercises by
the Companys employees, which are affected by market prices, vesting dates and expiration dates.
For the six months ended June 30, 2009, the Company generated $5.1 million of cash from financing
activities, which consisted of proceeds from the exercise of stock options of $4.3 million and a
$2.1 million tax benefit on the exercise of stock options, partially offset by repayments of
long-term debt of $1.3 million.
Future Capital Requirements
The Companys future capital requirements depend on many factors, including its product development
programs and data center operations. The Company expects to fund its operating and working capital
needs and business growth requirements through cash flow from operations and its cash and cash
equivalents on hand. The Company expects that purchases of property and equipment will remain
consistent with prior years. The Company cannot provide assurance that its actual cash
requirements will not be greater than expected as of the date of this report. In order to meet
business growth goals, the Company will, from time to time, consider the acquisition of, or
investment in, complementary businesses, products, services and technologies, which might impact
liquidity requirements or cause the issuance of additional equity or debt securities. Any issuance
of additional equity securities or convertible debt securities may result in dilution to
shareholders, and the Company cannot be certain that additional public or private financing will be
available in amounts or on terms acceptable to the Company, or at all.
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If sources of liquidity are not available or if it cannot generate sufficient cash flow from
operations during the next twelve months, the Company might be required to obtain additional funds
through operating improvements, capital markets transactions, asset sales or financing from third
parties or a combination thereof. The Company cannot provide assurance that these additional
sources of funds will be available or, if available, will be available on terms acceptable to the
Company.
If adequate funds are not available, the Company may have to substantially reduce or eliminate
expenditures for marketing, research and development, and testing of proposed products, or obtain
funds through arrangements with partners that require the Company to relinquish rights to certain
of its technologies or products. There can be no assurance that the Company will be able to raise
additional capital if its capital resources are exhausted. A lack of liquidity and an inability to
raise capital when needed may have a material adverse impact on the Companys ability to continue
its operations or expand its business.
Contingencies
From time to time in connection with its operations, the Company is named as a defendant in actions
for damages and costs allegedly sustained by the plaintiffs. The Company has considered these
proceedings and disputes in determining the necessity of any reserves for losses that are probable
and reasonably estimable. In addition, various aspects of the Companys business may subject it to
litigation and liability for damages arising from errors in processing prescription drug claims,
failure to meet performance measures within certain contracts relating to its services or its
ability to obtain certain levels of discounts or rebates on prescription purchases from retail
pharmacies and drug manufacturers or other actions or omissions. The Companys recorded reserves
are based on estimates developed with consideration given to the potential merits of claims or
quantification of any performance obligations. The Company takes into account its history of
claims, the limitations of any insurance coverage, advice from outside counsel, and managements
strategy with regard to the settlement or defense of such claims and obligations. While the
ultimate outcome of those claims, lawsuits or performance obligations cannot be predicted with
certainty, the Company believes, based on its understanding of the facts of these claims and
performance obligations, that adequate provisions have been recorded in the accounts where
required.
The Company provides routine indemnification to its customers against liability if the Companys
products infringe on a third partys intellectual property rights. The maximum amount of potential
indemnification liability cannot be reasonably estimated due to its uncertain nature. Historically,
the Company has not made payments related to these indemnification provisions.
During the routine course of securing new clients, the Company is sometimes required to provide
payment and performance bonds to cover client transaction fees and any funds and pharmacy benefit
claim payments provided by the client in the event that the Company does not perform its duties
under the contract. The terms of these payment and performance bonds are typically one year in
duration.
Contractual Obligations
For the six months ended June 30, 2010, there have been no significant changes to the Companys
contractual obligations as disclosed in its 2009 Annual Report on Form 10-K.
Outstanding Securities
As of July 31, 2010, the Company had 30,402,790 common shares outstanding, 1,261,650 options
outstanding and 292,326 restricted stock units outstanding. The options are exercisable on a
one-for-one basis into common shares and, upon vesting, the restricted stock units convert into
common shares on a one-for-one basis.
Critical Accounting Estimates
See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Estimates in the 2009 Annual Report on Form 10-K for a discussion of the
Companys critical accounting estimates.
Recent Accounting Standards
See Note 3 Recent Accounting Pronouncements in the notes to the unaudited consolidated financial
statements for information on recent accounting pronouncements. The Company is currently assessing
the impact on its financial condition and future operating results of recently issued accounting
guidance, and does not currently expect the recently issued guidance to have a significant impact
on the Companys financial condition or future results of operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk in the normal course of its business operations, including
the risk of loss arising from adverse changes in interest rates and foreign exchange rates with
Canada.
There has been no material change in the Companys exposure to market risk during the three months
ended June 30, 2010.
ITEM 4. Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of the
Companys management, including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls and procedures as of
the end of the period covered by this Quarterly Report on Form 10-Q (the Evaluation).
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In designing and evaluating the disclosure controls and procedures, management recognizes that any
disclosure controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management is required to
apply its judgment
in evaluating the cost-benefit relationship of possible disclosure controls and
procedures. Based on the Evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures, as of the end of the
period covered by this Quarterly Report on Form 10-Q, were effective at the reasonable assurance
level to ensure that information required to be disclosed by the Company in reports that it files
or submits under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed,
summarized and reported within the time periods specified in United States Securities and Exchange
Commission rules and forms, and were effective to ensure that the information required to be
disclosed in the reports filed or submitted by the Company under the Exchange Act, was accumulated
and communicated to management, including to the Chief Executive Officer and the Chief Financial
Officer, to allow timely decisions regarding required disclosure.
There has been no change in the Companys internal controls over financial reporting (as such term
is defined in Exchange Act Rules 13a-15(f)) during the Companys most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the Companys internal
controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time we become subject to legal proceedings and claims in the ordinary course of
business. Such claims, even if without merit, could result in the significant expenditure of our
financial and managerial resources. It is possible that future results of operations or cash flows
for any particular quarterly or annual period could be materially affected by an unfavorable
resolution of such a claim. We are not aware of any legal proceedings or claims that we believe
will, individually or in the aggregate, materially harm our business, results of operations,
financial condition or cash flows.
ITEM 1A. Risk Factors
In the second quarter of 2010, there have been no material changes from the risk factors previously
disclosed in Item 1A of the Companys 2009 Annual Report on Form 10-K.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Reserved
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
Exhibit | |||||
Number | Description of Document | Reference | |||
10.1
|
| Employment Agreement, effective as of June 22, 2010, among SXC Health Solutions Inc., and Joel Saban. | Filed herewith | ||
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act | Filed herewith | |||
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act | Filed herewith | |||
32.1
|
Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act | Filed herewith | |||
32.2
|
Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act | Filed herewith |
| Indicates management contract or compensatory plan. |
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SXC Health Solutions Corp. |
||||
August 5, 2010 | By: | /s/ Jeffrey Park | ||
Jeffrey Park | ||||
Chief Financial Officer (on behalf of the registrant and as Chief Accounting Officer) |
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EXHIBIT INDEX
Exhibit | |||||
Number | Description of Document | Reference | |||
10.1
|
| Employment Agreement, effective as of June 22, 2010, among SXC Health Solutions Inc., and Joel Saban. | Filed herewith | ||
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act | Filed herewith | |||
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act | Filed herewith | |||
32.1
|
Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act | Filed herewith | |||
32.2
|
Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act | Filed herewith |
| Indicates management contract or compensatory plan. |
26