SXC Health Solutions reports 2009 financial results

SXC Health Solutions Corp. ("SXC" or the "Company") ( SXCI, TSX: SXC), announces its financial results for the three- and twelve-month periods ended December 31, 2009. Financial references are in U.S. dollars unless otherwise indicated.

2009 Financial Highlights ------------------------- - Revenue was $1.4 billion in 2009 compared to $862.9 million in 2008 - Gross profit was $186.6 million in 2009 compared to $115.5 million in 2008 - Adjusted EBITDA(1) was $94.7 million in 2009 compared to $42.5 million in 2008 - GAAP net income increased to $46.1 million, or $1.72 per share (fully-diluted), in 2009 compared to $15.1 million, or $0.65 per share (fully-diluted), in 2008 - Non-GAAP adjusted earnings per share(1) (diluted), which excludes the NMHC transaction-related amortization net of tax, was $1.91 in 2009 compared to $0.89 in 2008 - Cash from operations was $86.4 million in 2009 compared to $41.6 million in 2008 - Adjusted prescription claim volume(1) for the PBM segment was 11.1 million in Q4-2009 compared to 9.9 million in Q3-2009 - Gross margin per adjusted prescription for the PBM segment was $3.47 in Q4-2009 compared to $3.35 in Q4-2008 - Mail order penetration increased to 11% in Q4-2009 compared to 9.5% in Q3-2009 - Transaction processing volume for the HCIT segment was 94.6 million in Q4-2009 compared to 92.0 million in Q3-2009 2009 Corporate Highlights ------------------------- - Awarded new business with the Ohio Bureau of Workers' Compensation, the UFCW & Employers Benefit Trust, the Commonwealth of Virginia, Presbyterian Health Plan, Spectral Solutions, Prime Therapeutics LLC and PharMerica Corporation - Renewed a multi-year PBM contract with the Employer-Union Health Benefits Trust Fund of Hawaii - Entered into a strategic relationship with Allscripts Misys to enhance the E-Prescribing options available to SXC's clients - Completed a public offering of 5,175,000 common shares at a price of $41.50 per share resulting in net proceeds of approximately $203.1 million

"2009 was an outstanding year with record financial and operational achievements for SXC," said Mark Thierer, President and CEO. "We won new contracts with industry leaders, locked-in new commitments with existing customers and completed a $203 million equity financing that will help us capitalize on future growth opportunities, both organically and through acquisitions. As we enter 2010, the healthcare system is under intense scrutiny to provide enhanced services while improving efficiencies. The rate of change is extreme which opens new opportunities to agile and expert players in our industry. We are well positioned at the leading edge of this curve with a unique business model for providing technology solutions and PBM services that enable us to meet the individual needs of a diverse and growing set of payor customers."

Financial Review ----------------

SXC evaluates segment performance based on revenue and gross profit. A reconciliation of the Company's business segments to the consolidated financial statements for the three- and twelve-month periods ended December 31, 2009 and 2008 is as follows(2):

Three months ended December 31, (in thousands)

PBM HCIT Consolidated

--------------------- --------------------- ---------------------

2009 2008 2009 2008 2009 2008

---------- ---------- ---------- ---------- ---------- ----------

Revenue $ 416,803 $ 269,802 $ 26,513 $ 22,964 $ 443,316 $ 292,766

revenue 378,149 241,633 12,643 13,853 390,792 255,486

---------- ---------- ---------- ---------- ---------- ----------

profit $ 38,654 $ 28,169 $ 13,870 $ 9,111 $ 52,524 $ 37,280

profit % 9.3% 10.4% 52.3% 39.7% 11.8% 12.7%

Twelve months ended December 31, (in thousands)

PBM HCIT Consolidated

--------------------- --------------------- ---------------------

2009 2008 2009 2008 2009 2008

---------- ---------- ---------- ---------- ---------- ----------

Revenue $1,335,961 $ 771,840 $ 102,673 $ 91,099 $1,438,634 $ 862,939

revenue 1,197,757 702,333 54,277 45,120 1,252,034 747,453

profit $ 138,204 $ 69,507 $ 48,396 $ 45,979 $ 186,600 $ 115,486

profit % 10.3% 9.0% 47.1% 50.5% 13.0% 13.4%

PBM Revenue

PBM revenue increased 73% to $1.3 billion in 2009, compared to $771.8 million in 2008. PBM revenue was $416.8 million in Q4-2009 compared to $269.8 million in Q4-2008. PBM revenue increased due to the inclusion of a full year of revenue related to the NMHC business as compared to only eight months for the same period in 2008. In addition, the Company successfully converted several HCIT customers to full-service PBM customers.

HCIT Revenue

HCIT revenue increased 12.7% to $102.7 million in 2009, compared to $91.1 million in 2008. Recurring revenue in 2009 consisted of transaction processing revenue of $61.2 million, compared to $52.8 million in 2008, and maintenance revenue of $18.4 million, compared to $16.4 million in 2008. Recurring revenue accounted for 78% of HCIT revenue in 2009, compared to 76% in 2008. Non-recurring revenue in 2009 consisted of professional service revenue of $15.3 million, compared to $13.5 million in 2008, and system sales revenue of $7.7 million, compared to $8.4 million in 2008.

HCIT revenue increased 15.5% to $26.5 million in Q4-2009, compared to $23.0 million in Q4-2008. Transaction processing revenue was $15.4 million in Q4-2009, compared to $14.6 million in Q4-2008. Maintenance revenue was $4.7 million in Q4-2009, compared to $4.1 million in Q4-2008. Recurring revenue accounted for 76% of HCIT revenue in Q4-2009, compared to 81% in Q4-2008. Professional services revenue was $4.7 million in Q4-2009, compared to $2.8 million in Q4-2008. System sales revenue was $1.7 million in Q4-2009, compared to $1.5 million in Q4-2008.

Product Development Costs

Product development costs were $12.0 million in 2009, compared to $10.1 million in 2008. Product development costs were $2.9 million Q4-2009, compared to $2.7 million in Q4-2008. Product development remains a key priority for SXC as the Company seeks to develop enhancements to existing products and launch new offerings to support its market expansion.

Selling, General and Administration ("SG&A") Costs

SG&A costs were $85.8 million in 2009, compared to $68.8 million in 2008. SG&A costs were $20.9 million Q4-2009, compared to $21.5 million in Q4-2008. On a quarter-over-quarter basis, the Company has added a significant amount of new business while keeping SG&A costs relatively flat. The change in the year-over-year comparison period is largely attributable to the increase in operating expenses related to the acquisition of NMHC.

Adjusted EBITDA(1)

Adjusted EBITDA was $94.7 million in 2009, compared to $42.5 million in 2008. Adjusted EBITDA was $30.4 million in Q4-2009, compared to $14.7 million in Q4-2008. The year-over-year growth in adjusted EBITDA was related primarily to new contract wins, improved purchasing efficiencies on prescription drugs, the acquisition of the NMHC business, and cost and revenue synergies generated from the acquisition.

Adjusted EBITDA benefited by $3.0 million in the quarter due to unusually high professional services in the HCIT segment as well as recoveries for bad debts and other reserves due to improved collections and reduced employee benefits in the fourth quarter.

Income Taxes

The Company's effective tax rate was 32.3% in 2009, compared to an effective tax rate of 25.6% in 2008. The effective income tax rate increased year-over-year primarily due to greater pre-tax income due to the growth in the business.

Net Income

SXC reported net income of $46.1 million in 2009, or $1.72 per share (fully-diluted), which included $5.1 million of intangible amortization related to the purchase of NMHC, compared to $15.1 million in 2008, or $0.65 per share (fully-diluted), which included $5.8 million of intangible amortization related to the purchase of NMHC. Net income was $15.2 million in Q4-2009, or $0.49 per share (fully-diluted), which included $1.1 million of intangible amortization related to the purchase of NMHC, compared to net income of $5.0 million in Q4-2008, or $0.20 per share (fully-diluted), which included $2.0 million of NMHC intangible amortization.

In Q4-2009, the Company repaid all its outstanding debt in the amount of $45.1 million. The repayment of the debt resulted in one-time charges totalling $1.5 million related to the write-off of deferred financing costs and other debt extinguishment costs that were recorded in interest expense and other income/expense.

Cash from Operations

SXC continues to generate strong cash from operations. SXC generated cash from operations of $86.4 million in 2009, compared to $41.6 million in 2008. The Company's quarterly cash flows can be impacted by the timing of pharmacy deposits and rebate payments it receives for certain customers. The Company generated $36.8 million of cash through its operations in Q4-2009, compared to $21.0 million in Q4-2008.

At December 31, 2009 and 2008, SXC had cash and cash equivalents totalling $304.4 million and $67.7 million, respectively. In Q4-2009, SXC repaid all its outstanding long-term debt obligations. On September 23, 2009, SXC completed a public offering of 5,175,000 of its common shares, including 675,000 shares sold pursuant to the exercise of the underwriters' over-allotment option, for net proceeds to the Company of approximately $203.1 million.

2010 Full Year Financial Guidance

SXC has set the following financial targets for 2010: - Revenue of $1.9 to $2.0 billion - Gross profit of $195 to $205 million - Adjusted EBITDA of $108 to $112 million - Fully-diluted GAAP EPS of $1.79 to $1.87 - Adjusted EPS of $1.92 to $2.00

The full year 2010 guidance as compared to the Q4-09 run rate is reflective of the full dilution of the equity raise completed in September 2009, the repayment of the Company's debt, and takes into account the Q4 benefits outlined above, as well as the impacts related to the Company's known successful renewals.

Notice of Conference Call

SXC will host a conference call on Thursday, March 4, 2010 at 8:30 a.m. EST to discuss its financial results. Mark Thierer, President and CEO, and Jeff Park, EVP and CFO will co-chair the call. All interested parties can join the call by dialing 1-888-231-8191 or 647-427-7450. Please dial in 15 minutes prior to the call to secure a line. The conference call will be archived for replay until Thursday, March 11, 2010 at midnight. To access the archived conference call, please dial 1-800-642-1687 or 416-849-0833 and enter the reservation code 52168294.

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

(1)Non-GAAP Financial Measures

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

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

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

The 2010 full year guidance of adjusted EBITDA was computed by taking the Company's earnings before interest, taxes, depreciation and amortization as well as estimated stock compensation expense of $5 million. Adjusted EPS was computed by taking the Company's GAAP EPS (fully-diluted) guidance and adding back the expected impact of NMHC acquisition-related amortization expense totaling $4.0 million (net of an estimated 34% tax rate).

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

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

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

For the three For the twelve months ended months ended December 31, December 31, 2009 2008 2009 2008 -------- -------- -------- -------- (in thousands) Adjusted EBITDA $30,413 $14,679 $94,712 $42,474 Amortization of Intangible Assets (2,246) (3,088) (9,724) (9,365) Depreciation of Property & Equipment (2,033) (1,900) (8,014) (6,615) Stock-Based Compensation (1,180) (1,074) (3,657) (4,080) Other Income (Expense) (651) (734) (589) (719) Interest Income (Expense), Net (1,967) (1,193) (4,643) (1,391) Income Tax (Expense) (7,143) (1,740) (22,024) (5,191) -------- -------- -------- -------- Net Income $15,193 $ 4,950 $46,061 $15,113 -------- -------- -------- -------- -------- -------- -------- -------- For the three For the twelve months ended months ended Non-GAAP Adjusted Earnings Per Share December 31, December 31, (in thousands, except per share data) 2009 2008 2009 2008 -------- -------- -------- -------- Net Income $15,193 $ 4,950 $46,061 $15,113 Amortization of NMHC Intangibles 1,679 2,680 7,583 7,769 Tax effect of NMHC Intangibles (537) (697) (2,453) (1,986) -------- -------- -------- -------- Adjusted net income $16,335 $ 6,933 $51,191 $20,896 -------- -------- -------- -------- -------- -------- -------- -------- Adjusted EPS $ 0.52 $ 0.28 $ 1.91 $ 0.89 (2) On April 30, 2008, SXC closed the acquisition of NMHC. As a result, SXC has introduced new segmentation and presentation of its financial results. Revenue is now segmented into two groups: Pharmacy Benefits Management ("PBM") which includes informedRx as well as mail-order and specialty pharmacies, and Healthcare Information Technology ("HCIT"). SXC records PBM revenue from NMHC exclusively on a gross basis which equates to the prescription price paid by consumers plus an administrative fee. The HCIT business records revenue only on the basis of the administrative fee; drug ingredient cost is not included in revenues or cost of claims.

The net effect is that SXC's year-over-year revenues have increased dramatically while gross profit margin and adjusted EBITDA have increased in absolute dollar terms, but have declined as a percentage of total sales. These changes do not affect profitability on an absolute dollar or per share basis.