##### Table of Contents



UNITED STATES
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 September 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. Employerincorporation or organization)
    
    Identification Number)
 2441 Warrenville Road, Suite 610, Lisle, IL 60532-3642
(Address of principal executive offices, zip code)
 (800) 282-3232
(Registrants phone number, including area code)
 
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATION
    
    3Item 1. Financial Statements (unaudited)
    
    3Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
    
    3Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009
    
    4Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2010 and 2009
    
    5Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009
    
    6Consolidated Statements of Shareholders Equity for the Nine Months Ended September 30, 2010 and 2009
    
    7Notes to Consolidated Financial Statements
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    24Item 4. Controls and Procedures
    
    24PART II  OTHER INFORMATION
    
    24Item 1. Legal Proceedings
    
    24Item 1A. Risk Factors
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    24Item 3. Defaults Upon Senior Securities
    
    24Item 4. Reserved
    
    24Item 5. Other Information
    
    25Item 6. Exhibits
    
    25SIGNATURE
    
    26Exhibit 10.1Exhibit 10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



Part I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Balance Sheets
 (in thousands, except share data)
 September 30,
    
    
    December 31,2010
    
    
    2009(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    379,061
    
    
    $
    304,370Restricted cash
    
    
    14,331
    
    
    
    14,169Short term investments
    
    
    
    
    
    
    4,639Accounts receivable, net of allowance for doubtful accounts of
$3,485 (2009  $2,871)
    
    
    110,519
    
    
    
    97,330Rebates receivable
    
    
    38,089
    
    
    
    17,630Prepaid expenses and other assets
    
    
    5,833
    
    
    
    4,828Inventory
    
    
    7,931
    
    
    
    7,106Deferred income taxes
    
    
    6,651
    
    
    
    9,875Total current assets
    
    
    562,415
    
    
    
    459,947Property and equipment, net of accumulated depreciation of
$33,732 (2009  $27,421)
    
    
    17,601
    
    
    
    19,880Goodwill
    
    
    141,787
    
    
    
    141,787Other intangible assets, net of accumulated amortization of $29,746
(2009  $23,831)
    
    
    31,659
    
    
    
    37,574Deferred income taxes
    
    
    846
    
    
    
    1,641Other assets
    
    
    252
    
    
    
    1,251Total assets
    
    $
    754,560
    
    
    $
    662,080LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    9,625
    
    
    $
    9,916Customer deposits
    
    
    15,324
    
    
    
    14,832Salaries and wages payable
    
    
    11,763
    
    
    
    12,349Accrued liabilities
    
    
    22,692
    
    
    
    30,786Pharmacy benefit management rebates payable
    
    
    63,783
    
    
    
    46,606Pharmacy benefit claim payments payable
    
    
    80,829
    
    
    
    61,669Deferred revenue
    
    
    9,622
    
    
    
    7,304Total current liabilities
    
    
    213,638
    
    
    
    183,462Deferred income taxes
    
    
    13,211
    
    
    
    13,597Deferred lease inducements
    
    
    2,392
    
    
    
    2,748Deferred rent
    
    
    1,328
    
    
    
    1,337Other liabilities
    
    
    1,745
    
    
    
    2,442Total liabilities
    
    
    232,314
    
    
    
    203,586Commitments and contingencies (Note 11)Shareholders equityCommon shares: no par value, unlimited shares authorized;
60,853,906 shares issued and outstanding at September 30,
2010 (December 31, 2009  60,114,562 shares)
    
    
    370,947
    
    
    
    361,530Additional paid-in capital
    
    
    21,374
    
    
    
    15,153Retained earnings
    
    
    129,925
    
    
    
    81,812Accumulated other comprehensive loss
    
    
    
    
    
    
    (1
    )Total shareholders equity
    
    
    522,246
    
    
    
    458,494Total liabilities and shareholders equity
    
    $
    754,560
    
    
    $
    662,080
 See accompanying notes to the unaudited consolidated financial statements.
  3




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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Operations
 (in thousands, except share and per share data)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(unaudited)
    
    
    (unaudited)Revenue:PBM
    
    $
    463,042
    
    
    $
    357,473
    
    
    $
    1,341,839
    
    
    $
    919,158HCIT
    
    
    26,880
    
    
    
    26,056
    
    
    
    79,677
    
    
    
    76,160Total revenue
    
    
    489,922
    
    
    
    383,529
    
    
    
    1,421,516
    
    
    
    995,318Cost of revenue:PBM
    
    
    423,773
    
    
    
    321,234
    
    
    
    1,225,620
    
    
    
    819,608HCIT
    
    
    13,285
    
    
    
    14,615
    
    
    
    39,064
    
    
    
    41,634Total cost of revenue
    
    
    437,058
    
    
    
    335,849
    
    
    
    1,264,684
    
    
    
    861,242Gross profit
    
    
    52,864
    
    
    
    47,680
    
    
    
    156,832
    
    
    
    134,076Expenses:Product development costs
    
    
    3,075
    
    
    
    2,833
    
    
    
    9,169
    
    
    
    9,024Selling, general and administrative
    
    
    21,607
    
    
    
    22,153
    
    
    
    64,402
    
    
    
    64,857Depreciation of property and equipment
    
    
    1,463
    
    
    
    1,467
    
    
    
    4,482
    
    
    
    4,354Amortization of intangible assets
    
    
    1,942
    
    
    
    2,238
    
    
    
    5,916
    
    
    
    7,47828,087
    
    
    
    28,691
    
    
    
    83,969
    
    
    
    85,713Operating income
    
    
    24,777
    
    
    
    18,989
    
    
    
    72,863
    
    
    
    48,363Interest income
    
    
    (199
    )
    
    
    (101
    )
    
    
    (524
    )
    
    
    (572
    )Interest expense
    
    
    331
    
    
    
    1,088
    
    
    
    1,043
    
    
    
    3,248Net interest expense
    
    
    132
    
    
    
    987
    
    
    
    519
    
    
    
    2,676Other expense (income), net
    
    
    42
    
    
    
    (20
    )
    
    
    300
    
    
    
    (62
    )Income before income taxes
    
    
    24,603
    
    
    
    18,022
    
    
    
    72,044
    
    
    
    45,749Income tax expense (benefit):Current
    
    
    8,837
    
    
    
    9,215
    
    
    
    21,575
    
    
    
    15,818Deferred
    
    
    (410
    )
    
    
    (2,402
    )
    
    
    2,356
    
    
    
    (937
    )8,427
    
    
    
    6,813
    
    
    
    23,931
    
    
    
    14,881Net income
    
    $
    16,176
    
    
    $
    11,209
    
    
    $
    48,113
    
    
    $
    30,868Earnings per share:Basic
    
    $
    0.27
    
    
    $
    0.22
    
    
    $
    0.79
    
    
    $
    0.63Diluted
    
    $
    0.26
    
    
    $
    0.21
    
    
    $
    0.77
    
    
    $
    0.61Weighted average number of shares used
in computing earnings per share:Basic
    
    
    60,820,197
    
    
    
    50,223,526
    
    
    
    60,569,027
    
    
    
    49,302,586Diluted
    
    
    62,929,186
    
    
    
    52,218,404
    
    
    
    62,558,202
    
    
    
    50,636,698
 See accompanying notes to the unaudited consolidated financial statements.
  4




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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Comprehensive Income
 (in thousands)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(unaudited)
    
    
    (unaudited)Net income
    
    $
    16,176
    
    
    $
    11,209
    
    
    $
    48,113
    
    
    $
    30,868Other comprehensive income, net of taxUnrealized gain on cash flow hedges and other (net of income
tax benefit of $31 for the three months ended September 30,
2009 and net of income tax expense of $1 and $7 for the nine
months ended September 30, 2010 and 2009, respectively)
    
    
    
    
    
    
    (50
    )
    
    
    1
    
    
    
    26Comprehensive income
    
    $
    16,176
    
    
    $
    11,159
    
    
    $
    48,114
    
    
    $
    30,894
 See accompanying notes to the unaudited consolidated financial statements.
  5




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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Cash Flows
 (in thousands)
 Nine Months Ended September 30,2010
    
    
    2009(unaudited)Cash flows from operating activities:Net income
    
    $
    48,113
    
    
    $
    30,868Items not involving cash:Stock-based compensation
    
    
    4,527
    
    
    
    2,477Depreciation of property and equipment
    
    
    6,312
    
    
    
    5,981Amortization of intangible assets
    
    
    5,915
    
    
    
    7,478Deferred lease inducements and rent
    
    
    (365
    )
    
    
    (484
    )Deferred income taxes
    
    
    2,356
    
    
    
    (937
    )Tax benefit on stock-based compensation plans
    
    
    (6,071
    )
    
    
    (3,447
    )Changes in operating assets and liabilities, net of effects from acquisitions:Accounts receivable
    
    
    (13,185
    )
    
    
    (9,444
    )Rebates receivable
    
    
    (20,459
    )
    
    
    9,009Restricted cash
    
    
    (162
    )
    
    
    65Prepaid expenses and other assets
    
    
    (1,350
    )
    
    
    (302
    )Inventory
    
    
    (825
    )
    
    
    (318
    )Income tax recoverable
    
    
    7,692
    
    
    
    5,205Accounts payable
    
    
    (288
    )
    
    
    (2,382
    )Accrued liabilities
    
    
    (9,376
    )
    
    
    (3,575
    )Pharmacy benefit claim payments payable
    
    
    19,160
    
    
    
    402Pharmacy benefit management rebates payable
    
    
    17,177
    
    
    
    7,504Deferred revenue
    
    
    2,191
    
    
    
    409Customer deposits
    
    
    492
    
    
    
    678Other
    
    
    1,020
    
    
    
    406Net cash provided by operating activities
    
    
    62,874
    
    
    
    49,593Cash flows from investing activities:Purchases of property and equipment
    
    
    (4,033
    )
    
    
    (6,611
    )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
    
    
    587
    
    
    
    (8,787
    )Cash flows from financing activities:Proceeds from exercise of options
    
    
    5,040
    
    
    
    5,917Tax benefit on stock-based compensation plans
    
    
    6,071
    
    
    
    3,447Proceeds from public offering, net of issuance costs
    
    
    
    
    
    
    204,107Repayment of long-term debt
    
    
    
    
    
    
    (2,520
    )Net cash provided by financing activities
    
    
    11,111
    
    
    
    210,951Effect of foreign exchange on cash balances
    
    
    119
    
    
    
    50Increase in cash and cash equivalents
    
    
    74,691
    
    
    
    251,807Cash and cash equivalents, beginning of period
    
    
    304,370
    
    
    
    67,715Cash and cash equivalents, end of period
    
    $
    379,061
    
    
    $
    319,522
 See accompanying notes to unaudited consolidated financial statements.
  6




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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Shareholders Equity
 (in thousands, except share data)
 Common Shares
    
    
    Additional
    
    
    Retained
    
    
    Accumulated OtherShares
    
    
    Amount
    
    
    Paid-in Capital
    
    
    Earnings
    
    
    Comprehensive Loss
    
    
    TotalBalance at December 31, 2009
    
    
    60,114,562
    
    
    $
    361,530
    
    
    $
    15,153
    
    
    $
    81,812
    
    
    $
    (1
    )
    
    $
    458,494Activity during the period (unaudited):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,113
    
    
    
    
    
    
    
    48,113Exercise of stock options
    
    
    677,886
    
    
    
    7,169
    
    
    
    (2,129
    )
    
    
    
    
    
    
    
    
    
    
    5,040Vesting of restricted stock units
    
    
    61,458
    
    
    
    2,248
    
    
    
    (2,248
    )
    
    
    
    
    
    
    
    
    
    
    Tax benefit on options exercised
    
    
    
    
    
    
    
    
    
    
    6,071
    
    
    
    
    
    
    
    
    
    
    
    6,071Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    4,527
    
    
    
    
    
    
    
    
    
    
    
    4,527Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Balance at September 30, 2010 (unaudited)
    
    
    60,853,906
    
    
    $
    370,947
    
    
    $
    21,374
    
    
    $
    129,925
    
    
    $
    
    
    
    $
    522,246Balance at December 31, 2008
    
    
    48,206,064
    
    
    $
    146,988
    
    
    $
    11,854
    
    
    $
    35,751
    
    
    $
    (430
    )
    
    $
    194,163Activity during the period (unaudited):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,868
    
    
    
    
    
    
    
    30,868Exercise of stock options
    
    
    1,374,090
    
    
    
    8,549
    
    
    
    (2,632
    )
    
    
    
    
    
    
    
    
    
    
    5,917Issuance of common shares
    
    
    10,350,000
    
    
    
    204,107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204,107Issuance of shares for acquisition
    
    
    280
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Vesting of restricted stock units
    
    
    27,904
    
    
    
    485
    
    
    
    (485
    )
    
    
    
    
    
    
    
    
    
    
    Tax benefit on options exercised
    
    
    
    
    
    
    
    
    
    
    3,447
    
    
    
    
    
    
    
    
    
    
    
    3,447Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,477
    
    
    
    
    
    
    
    
    
    
    
    2,477Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    26Balance at September 30, 2009 (unaudited)
    
    
    59,958,338
    
    
    $
    360,131
    
    
    $
    14,661
    
    
    $
    66,619
    
    
    $
    (404
    )
    
    $
    441,007
 See accompanying notes to the unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Description of Business
 www.sxc.com
 2.
    
    Basis of Presentation
 Basis of presentation
   Use of estimates
  3.
    
    Recent Accounting Pronouncements
  Revenue arrangements with multiple deliverables
  Revenue arrangements that include software elements
  4.
    
    Stock Split
   8




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##### Table of Contents



5.
    
    Cash and Cash Equivalents
  September 30, 2010
    
    
    December 31, 2009Cash on deposit
    
    $
    445,982
    
    
    $
    86,384Payments in transit
    
    
    (66,940
    )
    
    
    (87,500
    )U.S. money market funds
    
    
    
    
    
    
    305,453Canadian dollar deposits (September 30, 2010  Cdn. $20 at
1.0259; December 31, 2009  Cdn. $35 at 1.0517)
    
    
    19
    
    
    
    33$
    379,061
    
    
    $
    304,370
  6.
    
    Goodwill and Other Intangible Assets
   September 30, 2010
    
    
    December 31, 2009Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    53,760
    
    
    $
    23,648
    
    
    $
    30,112
    
    
    $
    53,760
    
    
    $
    18,116
    
    
    $
    35,644Acquired software
    
    
    3,765
    
    
    
    3,210
    
    
    
    555
    
    
    
    3,765
    
    
    
    2,932
    
    
    
    833Trademarks/Trade names
    
    
    1,370
    
    
    
    1,237
    
    
    
    133
    
    
    
    1,370
    
    
    
    1,188
    
    
    
    182Non-compete agreements
    
    
    1,510
    
    
    
    1,490
    
    
    
    20
    
    
    
    1,510
    
    
    
    1,484
    
    
    
    26Licenses
    
    
    1,000
    
    
    
    161
    
    
    
    839
    
    
    
    1,000
    
    
    
    111
    
    
    
    889Total
    
    $
    61,405
    
    
    $
    29,746
    
    
    $
    31,659
    
    
    $
    61,405
    
    
    $
    23,831
    
    
    $
    37,574
  7.
    
    Shareholders equity
 (a)
    
    Stock incentive plans:
   (b)
    
    Employee Stock Purchase Plan:
    9




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##### Table of Contents



(c)
    
    Outstanding shares and stock options:
  (d)
    
    Restricted stock units:
   8.
    
    Stock-based compensation
  Nine months ended September 30,2010
    
    
    2009Total stock options granted
    
    
    176,280
    
    
    
    383,214Volatility
    
    
    47.9%48.5
    %
    
    
    47.1%48.0
    %Risk-free interest rate
    
    
    1.41%2.39
    %
    
    
    1.96%2.75
    %Expected life
    
    4.5 years
    
    
    4.5 yearsDividend yield
    
    
    
    
    
    
    Weighted-average grant date fair value
    
    $
    13.67
    
    
    $
    5.45
  9.
    
    Segment information
  Three Months Ended September 30,
    
    

Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009PBM:Revenues
    
    $
    463,042
    
    
    $
    357,473
    
    
    $
    1,341,839
    
    
    $
    919,158Cost of revenue
    
    
    423,773
    
    
    
    321,234
    
    
    
    1,225,620
    
    
    
    819,608Gross profit
    
    $
    39,269
    
    
    $
    36,239
    
    
    $
    116,219
    
    
    $
    99,550Total assets at September 30
    
    $
    491,117
    
    
    $
    420,677HCIT:Revenues
    
    $
    26,880
    
    
    $
    26,056
    
    
    $
    79,677
    
    
    $
    76,160Cost of revenue
    
    
    13,285
    
    
    
    14,615
    
    
    
    39,064
    
    
    
    41,634Gross profit
    
    $
    13,595
    
    
    $
    11,441
    
    
    $
    40,613
    
    
    $
    34,526Total assets at September 30
    
    $
    263,443
    
    
    $
    249,039Consolidated:Revenues
    
    $
    489,922
    
    
    $
    383,529
    
    
    $
    1,421,516
    
    
    $
    995,318Cost of revenue
    
    
    437,058
    
    
    
    335,849
    
    
    
    1,264,684
    
    
    
    861,242Gross profit
    
    $
    52,864
    
    
    $
    47,680
    
    
    $
    156,832
    
    
    $
    134,076Total assets at September 30
    
    $
    754,560
    
    
    $
    669,716
  10




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##### Table of Contents



10.
    
    Income Taxes
   11.
    
    Commitments and Contingencies
   12.
    
    Derivative Instruments and Fair Value
     11




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##### Table of Contents



September 30, 2010Quoted Prices in Active
    
    
    Significant Observable
    
    
    Significant UnobservableMarkets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalLiabilities:Interest rate contract derivatives
    
    $
    
    
    
    $
    417
    
    
    $
    
    
    
    $
    417
 December 31, 2009Quoted Prices in Active
    
    
    Significant Observable
    
    
    Significant UnobservableMarkets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    TotalAssets:Corporate debt securities
    
    $
    
    
    
    $
    2,490
    
    
    $
    
    
    
    $
    2,490Other short term investments
    
    $
    
    
    
    $
    2,149
    
    
    $
    
    
    
    $
    2,149Liabilities:Interest rate contract derivatives
    
    $
    
    
    
    $
    695
    
    
    $
    
    
    
    $
    695
    13.
    
    Earnings Per Share
  Three months ended September 30,
    
    

Nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Weighted average number of shares used in computing basic EPS
    
    
    60,820,197
    
    
    
    50,223,526
    
    
    
    60,569,027
    
    
    
    49,302,586Add dilutive common stock equivalents:Outstanding stock options
    
    
    1,821,815
    
    
    
    1,781,664
    
    
    
    1,739,424
    
    
    
    1,247,504Outstanding restricted stock units
    
    
    287,174
    
    
    
    213,214
    
    
    
    249,751
    
    
    
    86,608Weighted average number of shares used in computing diluted EPS
    
    
    62,929,186
    
    
    
    52,218,404
    
    
    
    62,558,202
    
    
    
    50,636,698
  12




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  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, among other things, information with respect to the Companys objectives and the
strategies to achieve those objectives, as well as information with respect to the Companys
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 Companys
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 Companys 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 Companys 2009 Annual Report on Form 10-K .
 THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS MD&A REPRESENTS THE COMPANYS 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
     13




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##### Table of Contents



HCIT Business
   Operating Expenses
  Industry Overview
     
  14




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##### Table of Contents



Competitive Strengths
  Flexible, customized and independent services:
  Leading technology and platform:
  Measurable cost savings for customers:
 Selected financial highlights for the three and nine months ended September 30, 2010 compared to
the same periods in 2009
  
    
    Total revenue in the three months ended September 30, 2010 was $489.9 million as
compared to $383.5 million for the same period in 2009. The increase is largely
attributable to an increase in PBM revenue of $105.6 million compared to the same period in
2009. PBM revenues increased primarily due to growth in the customer base throughout 2010
and the end of 2009. The increased customer base was complemented by additional services
sold to existing customers.
 
    
    Operating income increased $5.8 million, or 30.5%, in the third quarter of 2010 to $24.8
million as compared to $19.0 million for the same period in 2009. This increase was driven
by increased gross profits in both the PBM and HCIT segments coupled with a decrease in
operating expenses as compared to the same period in 2009.
 
    
    The Company reported net income of $16.2 million, or $0.26 per share (fully-diluted),
for the three months ended September 30, 2010, compared to $11.2 million, or $0.21 per
share (fully-diluted), for the same period in 2009. The increase is driven primarily by
higher gross profit attributable to an increase in PBM revenues, plus lower interest
expense due to the extinguishment of the Companys long-term debt in December 2009. These
increases are partially offset by an increase in income taxes.
 
    
    The Company executed a two-for-one stock split effected by a dividend on the issued and
outstanding common shares of the Company on September 17, 2010. The stock split will help
improve access to ownership for investors by increasing the number of shares available for
purchase and reducing the market price per share.
  15




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##### Table of Contents




    
    Total revenue in the nine months ended September 30, 2010 was $1.4 billion as compared
to $995.3 million for the same period in 2009. The increase is largely attributable to an
increase in PBM revenue of $422.7 million during 2010 as compared to the same period in
2009. PBM revenues increased primarily due to growth in the customer base throughout 2010
and the end of 2009. The increased customer base was complemented by additional services
sold to existing customers.
 
    
    Operating income increased $24.5 million, or 50.7%, for the nine months ended September
30, 2010 to $72.9 million as compared to $48.4 million for the same period in 2009. This
increase was driven by increased gross profits in both the PBM and HCIT segments coupled
with a decrease in operating expenses as compared to the same period in 2009.
 
    
    The Company reported net income of $48.1 million, or $0.77 per share (fully-diluted),
for the nine months ended September 30, 2010, compared to $30.9 million, or $0.61 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 a Company
wide focus on cost containment in 2010, and lower interest expense due to extinguishing the
Companys long-term debt in December 2009. These improvements are partially offset by an
increase in income taxes.
 
    
    The Company generated $62.9 million in cash from operations for the nine months ended
September 30, 2010, an increase of $13.3 million from the same period in 2009, driven
mostly by an increase in net income.
 
    
    On March 4, 2010, the Company announced a new agreement with HealthSpring Inc.
(HealthSpring) pursuant to which the Companys 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 began to deploy specialty pharmacy services in mid-2010,
with implementation of the full PBM services starting on January 1, 2011. For financial
statement reporting purposes the Company expects that margins related to this agreement
will be significantly lower than historical margins because of the volume related to this
agreement.
 Results of Operations
 Three months ended September 30, 2010 as compared to the three months ended September 30, 2009
 Three months ended September 30,In thousands, except per share data
    
    2010
    
    
    2009Revenue
    
    $
    489,922
    
    
    $
    383,529Cost of revenue
    
    
    437,058
    
    
    
    335,849Gross profit
    
    
    52,864
    
    
    
    47,680Product development costs
    
    
    3,075
    
    
    
    2,833SG&A
    
    
    21,607
    
    
    
    22,153Depreciation of property and equipment
    
    
    1,463
    
    
    
    1,467Amortization of intangible assets
    
    
    1,942
    
    
    
    2,238Operating income
    
    
    24,777
    
    
    
    18,989Net interest expense
    
    
    132
    
    
    
    987Other expense (income), net
    
    
    42
    
    
    
    (20
    )Income before income taxes
    
    
    24,603
    
    
    
    18,022Income tax expense
    
    
    8,427
    
    
    
    6,813Net income
    
    $
    16,176
    
    
    $
    11,209Diluted earnings per share
    
    $
    0.26
    
    
    $
    0.21
 Revenue
  Cost of Revenue
   16




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##### Table of Contents



Gross Profit
  Product Development Costs
  SG&A Costs
  Depreciation
  Amortization
  Interest Income and Expense
  Income Taxes
  Segment Analysis
  PBM
    
    
    HCIT
    
    
    Consolidated2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    $
    463,042
    
    
    $
    357,473
    
    
    $
    26,880
    
    
    $
    26,056
    
    
    $
    489,922
    
    
    $
    383,529Cost of revenue
    
    
    423,773
    
    
    
    321,234
    
    
    
    13,285
    
    
    
    14,615
    
    
    
    437,058
    
    
    
    335,849Gross profit
    
    $
    39,269
    
    
    $
    36,239
    
    
    $
    13,595
    
    
    $
    11,441
    
    
    $
    52,864
    
    
    $
    47,680Gross profit %
    
    
    8.5
    %
    
    
    10.1
    %
    
    
    50.6
    %
    
    
    43.9
    %
    
    
    10.8
    %
    
    
    12.4
    %
  17




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##### Table of Contents



PBM
     HCIT
      18




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##### Table of Contents



Nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009
 Nine
months ended September 30,In thousands, except per share data
    
    2010
    
    
    2009Revenue
    
    $
    1,421,516
    
    
    $
    995,318Cost of revenue
    
    
    1,264,684
    
    
    
    861,242Gross profit
    
    
    156,832
    
    
    
    134,076Product development costs
    
    
    9,169
    
    
    
    9,024SG&A
    
    
    64,402
    
    
    
    64,857Depreciation of property and equipment
    
    
    4,482
    
    
    
    4,354Amortization of intangible assets
    
    
    5,916
    
    
    
    7,478Operating income
    
    
    72,863
    
    
    
    48,363Net interest expense
    
    
    519
    
    
    
    2,676Other expense (income), net
    
    
    300
    
    
    
    (62
    )Income before income taxes
    
    
    72,044
    
    
    
    45,749Income tax expense
    
    
    23,931
    
    
    
    14,881Net income
    
    $
    48,113
    
    
    $
    30,868Diluted earnings per share
    
    $
    0.77
    
    
    $
    0.61
 Revenue
  Cost of Revenue
  Gross Profit
  Product Development Costs
  SG&A Costs
  Depreciation
  Amortization
   19




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##### Table of Contents



Interest Income and Expense
  Income Taxes
  Segment Analysis
  PBM
    
    
    HCIT
    
    
    Consolidated2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    $
    1,341,839
    
    
    $
    919,158
    
    
    $
    79,677
    
    
    $
    76,160
    
    
    $
    1,421,516
    
    
    $
    995,318Cost of revenue
    
    
    1,225,620
    
    
    
    819,608
    
    
    
    39,064
    
    
    
    41,634
    
    
    
    1,264,684
    
    
    
    861,242Gross profit
    
    $
    116,219
    
    
    $
    99,550
    
    
    $
    40,613
    
    
    $
    34,526
    
    
    $
    156,832
    
    
    $
    134,076Gross profit %
    
    
    8.7
    %
    
    
    10.8
    %
    
    
    51.0
    %
    
    
    45.3
    %
    
    
    11.0
    %
    
    
    13.5
    %
 PBM
     HCIT
    20




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##### Table of Contents



Liquidity and Capital Resources
    Consolidated Balance Sheets
  
    
    Cash and cash-equivalents totaled $379.1 million, up $74.7 million from $304.4
million at December 31, 2009. The increase was primarily driven by profitable
operations of the Company. The Companys 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 $13.2 million to $110.5 million
at September 30, 2010 from $97.3 million at December 31, 2009, driven by increases in
revenue during the nine-month period ended September 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 $38.1 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 $20.5 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 Companys inventory balance of $7.9 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 customers 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 $17.2 million
to $63.8 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 $80.8 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 Companys
customers when the Company is the principal contracting party with the pharmacy.
Pharmacy benefit claim payments payable increased $19.2 million to $80.8 million from
$61.7 million at December 31, 2009 due to increased prescription drug sales
transactions, as well as the timing of payments to the retail pharmacies.
 
    
    Deferred revenue increased $2.3 million to $9.6 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.
  21




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##### Table of Contents




    
    Accrued liabilities decreased $8.1 million to $22.7 million at September 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.
 
    
    Salaries and wages payable decreased $0.6 million to $11.7 million at September 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 Companys 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
      Cash flows from investing activities
    Cash flows from financing activities
     22




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##### Table of Contents



Future Capital Requirements
    Contingencies
    Contractual Obligations
  Outstanding Securities
  Critical Accounting Estimates
  Recent Accounting Standards
   23




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##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   
 ITEM 4. Controls and Procedures
    
 PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Reserved
   24




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##### Table of Contents



ITEM 5. Other Information
 Executive
Stock Trading Plans
  Employment Termination
  
 ITEM 6. Exhibits
 ExhibitNumber
    
    Description of Document
    
    Reference10.1
    
    
    Second Amendment to the Employment Agreement, effective as of September 1, 2010, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Mark Thierer.
    
    Filed herewith10.2
    
    
    Second Amendment to the Employment Agreement, effective as of September 1, 2010, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Jeffrey G. Park
    
    Filed herewith31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
    
    Filed herewith31.2
    
    
    Rule 13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
    
    Filed herewith32.1
    
    
    Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act
    
    Filed herewith32.2
    
    
    Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act
    
    Filed herewith
 
    
    Indicates management contract or compensatory plan.  25




---



##### Table of Contents



SXC Health Solutions Corp.November 4, 2010
    By:
    /s/ Jeff ParkJeffrey ParkChief Financial Officer
(on behalf of the registrant and
as Chief Accounting Officer)  26




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document
    
    Reference10.1
    
    
    Second Amendment to the Employment Agreement, effective as of September 1, 2010, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Mark Thierer.
    
    Filed herewith10.2
    
    
    Second Amendment to the Employment Agreement, effective as of September 1, 2010, among SXC Health Solutions Corp., SXC Health Solutions, Inc. and Jeffrey G. Park
    
    Filed herewith31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
    
    Filed herewith31.2
    
    
    Rule 13a-14(a)/15d-14(a) Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
    
    Filed herewith32.1
    
    
    Section 1350 Certification of CEO as adopted by Section 906 of the Sarbanes-Oxley Act
    
    Filed herewith32.2
    
    
    Section 1350 Certification of CFO as adopted by Section 906 of the Sarbanes-Oxley Act
    
    Filed herewith
 
    
    Indicates management contract or compensatory plan.  27