Effective April 30, 2008, the Company, through a wholly-owned subsidiary, acquired all of the outstanding shares of National Medical Health Card Systems, Inc. (“NMHC”), based in Port Washington, New York, which provides PBM. The results of operations of the acquired business are included from the date of acquisition. The Company issued 5,571,920 shares of its common stock in connection with the acquisition.
The frequency with which the Company’s customer contracts come up for renewal, and the potential for one of the Company’s larger customers to terminate, or elect not to renew, its existing contract with the Company, create the risk that the Company’s results of operations may be volatile. The Company’s 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 Company’s 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 with the Company at the expiration of the current terms of those contracts, and in particular if one of the Company’s largest customers elects not to renew, the Company’s recurring revenue base will be
The Company recognized income tax expense of $32.8 million for the year ended December 31, 2010, representing an effective tax rate of 33.6%, compared to $22.0 million, representing an effective tax rate of 32.3%, for the same period in 2009. The effective tax rate increased during the year ended December 31, 2010 compared to the same period in 2009, primarily due to the diminishing impact of the income tax benefit produced from acquisitions, as well as an increase in taxable income and the difference in the proportion of overall income among jurisdictions.
Gross profit was $159.7 million for the year ended December 31, 2010 compared to $138.2 million for the same period in 2009. Gross profit increased $21.5 million, or 15.5%, due to growth in the customer base in 2010 compared to the same period in 2009. Gross profit percentage was 8.7% and 10.3% for the years ended December 31, 2010 and 2009, respectively. Gross profit percentage has decreased during 2010 as compared to 2009 due to newer business being added at lower margins. As noted above, new customer additions start at lower margins due to costs incurred to bring on new business.
Cost of revenue decreased 3.5% to $52.4 million for the year ended December 31, 2010 from $54.3 million for the year ended December 31, 2009. Cost of revenue includes the direct support costs for the HCIT business as well as depreciation expense of $2.4 million and $2.2 million for the years ended December 31, 2010 and 2009, respectively. In addition, cost of revenue includes stock-based compensation expense of $0.7 million in each of the years ended December 31, 2010 and 2009. Cost of revenue decreased during 2010 as compared to 2009 mainly due to the continued focus by the Company to contain costs, as well as the conversion of some HCIT customers' contracts to the PBM segment, which moved the associated revenue and costs to support these customers into the PBM segment.
The Company recognized income tax expense of $22.0 million for the year ended December 31, 2009, representing an effective tax rate of 32.3%, compared to $5.2 million, representing an effective tax rate of 25.6%, for the same period in 2008. The effective tax rate increased during the year ended December 31, 2009 compared to the same period in 2008, primarily due to the diminishing impact of the income tax benefit produced from the NMHC acquisition, as well as an increase in taxable income and the difference in the proportion of overall income among jurisdictions.
The Company manages its business in two segments, PBM and HCIT, and evaluates segment performance based on revenue and gross profit. Information about the Company's business segments for the years ended December 31, 2009 and 2008 is as follows (dollars in thousands):
The Company’s future capital requirements depend on many factors, including its product development programs. 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 Annual 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 or 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.
As of January 31, 2011, the Company had 61,795,318 common shares outstanding, 1,556,828 options outstanding and 519,092 restricted stock units (“RSUs”) outstanding. The options are exercisable on a one-for-one basis into common shares. The outstanding RSUs are subject to time-based and performance-based vesting restrictions. The number of outstanding RSUs as of January 31, 2011 assumes the associated performance targets will be met at the maximum level for the performance-based RSUs. Once vested, RSUs convert on a one-for-one basis into common shares.
We have audited the accompanying consolidated balance sheets of SXC Health Solutions Corp. (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the years in the three year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
Intangible assets with finite useful lives are amortized over their estimated useful lives on either a straight-line basis or in proportion to the economic benefits expected to be consumed. Customer relationships acquired with the acquisition of NMHC and MedfusionRx are amortized over 8 years and 5 years, respectively, based on projected cash flows associated with existing customers at the acquisition date. The
A committee of the Board of Directors determines award amounts, option prices and vesting periods, subject to the provisions of the LTIP. All officers, directors, employees and service providers of the Company are eligible to receive equity awards at the discretion of the
The total rental expense under operating leases for the years ended December 31, 2010, 2009, and 2008 was $5.7 million, $6.5 million, and $5.3 million, respectively. The lease renewal terms have not been factored into the commitments noted above as not renewing these leases would not have a detrimental impact on the Company. The Company terminated its Port Washington, New York lease effective May 2009, and paid an early termination fee of approximately $1.9 million. This cost was included in the purchase price of the NMHC acquisition in accordance with purchase accounting guidance in place at the time of the acquisition.
On December 28, 2010, the Company completed its acquisition of MedfusionRx, a leading independent specialty pharmacy provider. In October 2009, federal agents executed a search warrant at MedfusionRx’s Birmingham, Alabama facility and received information relating to the dispensing, ordering, billing, claim submission and payment of a type of hemophilia medication and MedfusionRx’s relationship with a former marketer and deliverer of such medication. Subsequent to the completion of the acquisition, MedfusionRx’s former accountants received a grand jury subpoena for certain tax records of MedfusionRx and its former owners. MedfusionRx intends to cooperate fully with any requests received from governmental officials. While the Company believes that it is entitled to indemnification with respect to any costs or expenses arising from or relating to this matter pursuant to the terms of the MedfusionRx purchase agreement, we can give no assurances that such indemnification will be sufficient to cover all potential civil/criminal penalties and claims arising therefrom or relating thereto. As of December 31, 2010, the Company had not recorded any contingent liability in the consolidated financial statements relating to this matter.
During 2010 and 2009 there were no movements of fair value measurements between levels 1, 2 and 3.
(1) Includes $2,645 as a result of the acquisition of NMHC