##### 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 March 31, 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.
  
 Yukon Territory
(State or other jurisdiction of 
incorporation or organization)
    
    75-2578509
(I.R.S. Employer
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)
 
 Yes þ No o
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 Yes o No þ




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TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    
    3Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009
    
    
    4Consolidated Statements of Comprehensive Income for the Three months ended March 31, 2010 and 2009
    
    
    5Consolidated Statements of Cash Flows for the Three months ended March 31, 2010 and 2009
    
    
    6Consolidated Statements of Shareholders Equity for the Three months ended March 31, 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
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Reserved
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22SIGNATURE
    
    
    23Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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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)
 March 31,
    
    
    December 31,2010
    
    
    2009(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    313,241
    
    
    $
    304,370Restricted cash
    
    
    14,305
    
    
    
    14,169Short term investments
    
    
    
    
    
    
    4,639Accounts receivable, net of allowance for doubtful accounts of $2,928 (2009  $2,871)
    
    
    108,609
    
    
    
    97,330Rebates receivable
    
    
    32,130
    
    
    
    17,630Prepaid expenses and other assets
    
    
    4,641
    
    
    
    4,483Inventory
    
    
    8,239
    
    
    
    7,106Income tax recoverable
    
    
    1,606
    
    
    
    345Deferred income taxes
    
    
    8,031
    
    
    
    9,875Total current assets
    
    
    490,802
    
    
    
    459,947Property and equipment, net of accumulated depreciation of $29,510 (2009  $27,421)
    
    
    18,761
    
    
    
    19,880Goodwill
    
    
    141,787
    
    
    
    141,787Other intangible assets, net of accumulated amortization of $25,826 (2009  $23,831)
    
    
    35,579
    
    
    
    37,574Deferred income taxes
    
    
    1,385
    
    
    
    1,641Other assets
    
    
    1,169
    
    
    
    1,251Total assets
    
    $
    689,483
    
    
    $
    662,080LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    7,533
    
    
    $
    9,916Customer deposits
    
    
    15,483
    
    
    
    14,832Salaries and wages payable
    
    
    7,732
    
    
    
    12,349Accrued liabilities
    
    
    24,668
    
    
    
    30,786Pharmacy benefit management rebates payable
    
    
    58,603
    
    
    
    46,606Pharmacy benefit claim payments payable
    
    
    64,006
    
    
    
    61,669Deferred revenue
    
    
    8,716
    
    
    
    7,304Total current liabilities
    
    
    186,741
    
    
    
    183,462Deferred income taxes
    
    
    13,930
    
    
    
    13,597Deferred lease inducements
    
    
    2,630
    
    
    
    2,748Deferred rent
    
    
    1,334
    
    
    
    1,337Other liabilities
    
    
    2,448
    
    
    
    2,442Total liabilities
    
    
    207,083
    
    
    
    203,586Commitments and contingencies (Note 10)Shareholders equityCommon shares: no par value, unlimited shares authorized;
30,318,618 shares issued and outstanding at March 31, 2010
(December 31, 2009  30,057,281 shares)
    
    
    366,908
    
    
    
    361,530Additional paid-in capital
    
    
    18,888
    
    
    
    15,153Retained earnings
    
    
    96,604
    
    
    
    81,812Accumulated other comprehensive loss
    
    
    
    
    
    
    (1
    )Total shareholders equity
    
    
    482,400
    
    
    
    458,494Total liabilities and shareholders equity
    
    $
    689,483
    
    
    $
    662,080
 See accompanying notes to the unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Operations
 (in thousands, except share and per share data)
 Three months ended March 31,2010
    
    
    2009(unaudited)Revenue:PBM
    
    $
    427,502
    
    
    $
    267,780HCIT
    
    
    24,646
    
    
    
    23,180Total revenue
    
    
    452,148
    
    
    
    290,960Cost of revenue:PBM
    
    
    389,166
    
    
    
    238,972HCIT
    
    
    12,753
    
    
    
    12,804Total cost of revenue
    
    
    401,919
    
    
    
    251,776Gross profit
    
    
    50,229
    
    
    
    39,184Expenses:Product development costs
    
    
    3,073
    
    
    
    3,163Selling, general and administrative
    
    
    21,308
    
    
    
    20,797Depreciation of property and equipment
    
    
    1,481
    
    
    
    1,482Amortization of intangible assets
    
    
    1,995
    
    
    
    2,82527,857
    
    
    
    28,267Operating income
    
    
    22,372
    
    
    
    10,917Interest income
    
    
    (149
    )
    
    
    (246
    )Interest expense
    
    
    394
    
    
    
    956Net interest expense
    
    
    245
    
    
    
    710Other expense (income), net
    
    
    198
    
    
    
    (325
    )Income before income taxes
    
    
    21,929
    
    
    
    10,532Income tax expense:Current
    
    
    5,529
    
    
    
    2,201Deferred
    
    
    1,608
    
    
    
    6497,137
    
    
    
    2,850Net income
    
    $
    14,792
    
    
    $
    7,682Earnings per share:Basic
    
    $
    0.49
    
    
    $
    0.32Diluted
    
    $
    0.48
    
    
    $
    0.31Weighted average number of shares used
in computing earnings per share:Basic
    
    
    30,093,501
    
    
    
    24,324,911Diluted
    
    
    31,079,884
    
    
    
    24,923,208
 See accompanying notes to the unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Comprehensive Income
 (in thousands)
 Three months ended March 31,2010
    
    
    2009(unaudited)Net income
    
    $
    14,792
    
    
    $
    7,682Other comprehensive income, net of taxUnrealized gain on cash flow hedges and other (net of income tax expense of $1 and
$9, for the three months ended March 31, 2010 and 2009, respectively)
    
    
    1
    
    
    
    29Comprehensive income
    
    $
    14,793
    
    
    $
    7,711
 See accompanying notes to the unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements of Cash Flows
 (in thousands)
 Three months endedMarch 31,2010
    
    
    2009(unaudited)Cash flows from operating activities:Net income
    
    $
    14,792
    
    
    $
    7,682Items not involving cash:Stock-based compensation
    
    
    1,264
    
    
    
    613Depreciation of property and equipment
    
    
    2,089
    
    
    
    1,976Amortization of intangible assets
    
    
    1,995
    
    
    
    2,825Deferred lease inducements and rent
    
    
    (121
    )
    
    
    (45
    )Deferred income taxes
    
    
    1,608
    
    
    
    649Tax benefit on option exercises
    
    
    (4,082
    )
    
    
    (1,562
    )Changes in operating assets and liabilities, net of effects from acquisitions:Accounts receivable
    
    
    (11,288
    )
    
    
    (3,863
    )Rebates receivable
    
    
    (14,500
    )
    
    
    5,699Restricted cash
    
    
    (136
    )
    
    
    (1,130
    )Prepaid expenses and other assets
    
    
    (159
    )
    
    
    (421
    )Inventory
    
    
    (1,133
    )
    
    
    657Income tax recoverable
    
    
    3,643
    
    
    
    88Accounts payable
    
    
    (2,383
    )
    
    
    (1,198
    )Accrued liabilities
    
    
    (10,734
    )
    
    
    (8,617
    )Pharmacy benefit claim payments payable
    
    
    2,337
    
    
    
    485Pharmacy benefit management rebates payable
    
    
    11,997
    
    
    
    2,541Deferred revenue
    
    
    1,388
    
    
    
    3,247Customer deposits
    
    
    651
    
    
    
    2,174Other
    
    
    105
    
    
    
    42Net cash (used) provided by operating activities
    
    
    (2,667
    )
    
    
    11,842Cash flows from investing activities:Purchases of property and equipment
    
    
    (970
    )
    
    
    (3,289
    )Sales of short term investments
    
    
    6,828
    
    
    
    Purchases of short term investments
    
    
    (2,208
    )
    
    
    Acquisitions, net of cash acquired
    
    
    
    
    
    
    (180
    )Net cash provided (used) by investing activities
    
    
    3,650
    
    
    
    (3,469
    )Cash flows from financing activities:Proceeds from exercise of options
    
    
    3,767
    
    
    
    2,346Tax benefit on option exercises
    
    
    4,082
    
    
    
    1,562Repayment of long-term debt
    
    
    
    
    
    
    (120
    )Net cash provided by financing activities
    
    
    7,849
    
    
    
    3,788Effect of foreign exchange on cash balances
    
    
    39
    
    
    
    94Increase in cash and cash equivalents
    
    
    8,871
    
    
    
    12,255Cash and cash equivalents, beginning of period
    
    
    304,370
    
    
    
    67,715Cash and cash equivalents, end of period
    
    $
    313,241
    
    
    $
    79,970
 See accompanying notes to unaudited consolidated financial statements.
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SXC HEALTH SOLUTIONS CORP.
 
 Consolidated Statements 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
    
    
    30,057,281
    
    
    $
    361,530
    
    
    $
    15,153
    
    
    $
    81,812
    
    
    $
    (1
    )
    
    $
    458,494Activity during the period (unaudited):Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,792
    
    
    
    
    
    
    
    14,792Exercise of stock options
    
    
    261,337
    
    
    
    5,378
    
    
    
    (1,611
    )
    
    
    
    
    
    
    
    
    
    
    3,767Tax benefit on options exercised
    
    
    
    
    
    
    
    
    
    
    4,082
    
    
    
    
    
    
    
    
    
    
    
    4,082Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,264
    
    
    
    
    
    
    
    
    
    
    
    1,264Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Balance at March 31, 2010 (unaudited)
    
    
    30,318,618
    
    
    
    366,908
    
    
    
    18,888
    
    
    
    96,604
    
    
    
    
    
    
    
    482,400Balance at December 31, 2008
    
    
    24,103,032
    
    
    $
    146,988
    
    
    $
    11,854
    
    
    $
    35,751
    
    
    $
    (430
    )
    
    $
    194,163Activity during the period (unaudited):
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,682
    
    
    
    
    
    
    
    7,682Issuance of shares for acquisition
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vesting of restricted stock units
    
    
    991
    
    
    
    18
    
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    372,500
    
    
    
    3,489
    
    
    
    (1,143
    )
    
    
    
    
    
    
    
    
    
    
    2,346Tax benefit on options exercised
    
    
    
    
    
    
    
    
    
    
    1,562
    
    
    
    
    
    
    
    
    
    
    
    1,562Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    613
    
    
    
    
    
    
    
    
    
    
    
    613Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    29Balance at March 31, 2009 (unaudited)
    
    
    24,476,544
    
    
    $
    150,495
    
    
    $
    12,868
    
    
    $
    43,433
    
    
    $
    (401
    )
    
    $
    206,395
 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
 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 Companys 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 Commissions (SEC) rules and regulations for
reporting on Form 10-Q, and following accounting policies consistent with the Companys
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 are expressed in U.S. dollars, except where indicated, which is also the Companys
functional currency. 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-month period ended March 31, 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 Companys 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 Boards (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 Companys 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 Companys financial results.
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4.
    
    Cash and Cash Equivalents
 The components of cash and cash equivalents are as follows (in thousands):
 March 31, 2010
    
    
    December 31, 2009Cash on deposit
    
    $
    384,939
    
    
    $
    86,384Payments in transit
    
    
    (71,731
    )
    
    
    (87,500
    )U.S. money market funds
    
    
    
    
    
    
    305,453Canadian dollar deposits (March 31,
2010  Cdn. $35 at 1.0516; December
31, 2009  Cdn. $35 at 1.0517)
    
    
    33
    
    
    
    33$
    313,241
    
    
    $
    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 and 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 months ended March 31, 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):
 March 31, 2010
    
    
    December 31, 2009Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    53,760
    
    
    $
    19,960
    
    
    $
    33,800
    
    
    $
    53,760
    
    
    $
    18,116
    
    
    $
    35,644Acquired software
    
    
    3,765
    
    
    
    3,047
    
    
    
    718
    
    
    
    3,765
    
    
    
    2,932
    
    
    
    833Trademarks/Trade names
    
    
    1,370
    
    
    
    1,205
    
    
    
    165
    
    
    
    1,370
    
    
    
    1,188
    
    
    
    182Non-compete agreements
    
    
    1,510
    
    
    
    1,486
    
    
    
    24
    
    
    
    1,510
    
    
    
    1,484
    
    
    
    26Licenses
    
    
    1,000
    
    
    
    128
    
    
    
    872
    
    
    
    1,000
    
    
    
    111
    
    
    
    889Total
    
    $
    61,405
    
    
    $
    25,826
    
    
    $
    35,579
    
    
    $
    61,405
    
    
    $
    23,831
    
    
    $
    37,574
 Amortization associated with intangible assets at March 31, 2010 is estimated to be $5.9
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 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 Companys shareholders and
recipients of awards under the LTIP by increasing the proprietary interest of such
recipients in the Companys 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 1,326,467 stock options outstanding as of March 31, 2010 issued under the LTIP
or the Companys 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 Companys 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.
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During the first quarter of 2009, the ESPP was amended so that the common shares available
for purchase under the ESPP are drawn from reacquired common shares purchased on behalf of
the Company in the open market. During the three months ended March 31, 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 Companys stock-based compensation expense.
 (c)
    
    Outstanding shares and stock options:
 At March 31, 2010, the Company had outstanding common shares of 30,318,618 and stock
options outstanding of 1,326,467. At December 31, 2009, the Company had outstanding common shares of 30,057,281 and stock options outstanding of 1,532,664. As of March 31, 2010,
stock options outstanding consisted of 286,573 options at a weighted-average exercise price
of Canadian $11.14 and 1,039,894 options at a weighted-average exercise price of U.S.
$21.80.
 (d)
    
    Restricted stock units:
 During the three months ended March 31, 2010, the Company granted 55,860 time-based RSUs
and 44,440 performance based RSUs to its employees and non-employee directors with a grant
date fair value of $60.50 per share. At March 31, 2010, there were 205,477 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 three-month periods ended March 31, 2010 and 2009, the Company recorded stock-based
compensation expense of $1.3 million and $0.6 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:
 Three months ended March 31,2010
    
    2009Total stock options granted
    
    65,340
    
    500Volatility
    
    48.50%
    
    55.50%Risk-free interest rate
    
    2.36%-2.39%
    
    1.96%Expected life
    
    4.5 years
    
    4.5 yearsDividend yield
    
    
    
    Weighted-average grant date fair value:
    
    $25.77
    
    $8.09
 8.
    
    Segment information
 The Company operates in two geographic areas as follows (in thousands):
 Three months ended March 31,Revenue
    
    2010
    
    
    2009United States
    
    $
    451,077
    
    
    $
    290,467Canada
    
    
    1,071
    
    
    
    493Total
    
    $
    452,148
    
    
    $
    290,960
 Net assets
    
    March 31, 2010
    
    
    December 31, 2009United States
    
    $
    310,101
    
    
    $
    286,003Canada
    
    
    172,299
    
    
    
    172,491Total
    
    $
    482,400
    
    
    $
    458,494
  10




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##### Table of Contents



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 March 31,2010
    
    
    2009PBM:Revenues
    
    $
    427,502
    
    
    $
    267,780Cost of revenue
    
    $
    389,166
    
    
    $
    238,972Gross profit
    
    $
    38,336
    
    
    $
    28,808Total assets at March 31
    
    $
    437,994
    
    
    $
    298,875HCIT:Revenues
    
    $
    24,646
    
    
    $
    23,180Cost of revenue
    
    $
    12,753
    
    
    $
    12,804Gross profit
    
    $
    11,893
    
    
    $
    10,376Total assets at March 31
    
    $
    251,489
    
    
    $
    136,823Consolidated:Revenues
    
    $
    452,148
    
    
    $
    290,960Cost of revenue
    
    $
    401,919
    
    
    $
    251,776Gross profit
    
    $
    50,229
    
    
    $
    39,184Total assets at March 31
    
    $
    689,483
    
    
    $
    435,698
 For the three-month period ended March 31, 2010, no one customer accounted for 10% or more of
total revenues. For the three-month period ended March 31, 2009, one customer accounted for
15.0% of total revenues.
 At March 31, 2010 and December 31, 2009, no one customer accounted for 10% or more of the
outstanding accounts receivable balance.
 9.
    
    Income Taxes
 The Companys effective tax rate for the three months ended March 31, 2010 and 2009 was
32.5% and 27.1%, respectively. The effective tax rate increased during the three months ended
March 31, 2010 compared to the same period in 2009, primarily due to the difference in the
proportion of overall income among jurisdictions.
 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
Companys 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 or 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 Companys 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 managements 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
Companys products infringe on a third partys 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 and may require renewals for the length of the contract period.
  11




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##### Table of Contents



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.
 To protect itself against the interest rate exposures, and pursuant to the terms of the
Companys $48 million credit agreement, 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 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 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.
 The two derivative instruments mentioned above were entered into to manage fluctuations in
cash flows resulting from interest rate risk attributable to changes in the benchmark interest
rate of LIBOR, and to comply with the terms of the credit agreement.
 As of March 31, 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.
 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 March 31, 2010 and December
31, 2009 (in thousands):
 March 31, 2010Quoted Prices in
    
    
    Significant
    
    
    SignificantActive Markets
    
    
    Observable Inputs
    
    
    Unobservable Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalLiabilities:Interest Rate Contract Derivatives
    
    $
    
    
    
    $
    642
    
    
    $
    
    
    
    $
    642
 December 31, 2009Quoted Prices in
    
    
    Significant
    
    
    SignificantActive Markets
    
    
    Observable Inputs
    
    
    Unobservable Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalAssets:Corporate debt securities
    
    $
    
    
    
    $
    2,490
    
    
    $
    
    
    
    $
    2,490Other short term investments
    
    $
    
    
    
    $
    2,149
    
    
    $
    
    
    
    $
    2,149Liabilities: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.
  12




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##### Table of Contents



The Company has classified derivative liabilities as other noncurrent liabilities on the
consolidated balance sheets. 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 $0.1 million for
the three months ended March 31, 2010, which was recognized as other expense in the
consolidated statement of operations. During the three months ended March 31, 2009, the
Company was still applying hedge accounting to the interest rate contract derivatives, and
accordingly reclassified $0.1 million 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 did not hold any corporate debt securities as
of March 31, 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 did not hold these securities as of March 31,
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.
 
 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, amongst others, 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 risks
and uncertainties section of 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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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:
  15




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Selected financial highlights for the three months ended March 31, 2010 compared to the same
period in 2009
  
    
    Total revenue in the three months ended March 31, 2010 was $452.1 million as
compared to $291.0 million for the same period in 2009. The increase is largely
attributable to an increase in PBM revenue of $159.7 million compared to 2009. PBM
revenues increased primarily due to growth in the customer base throughout 2009 and into
2010. The increased customer base was complemented by additional services sold to existing
customers.
 
    
    Operating income increased $11.5 million or 104.9% in for the first quarter of 2010 to
$22.4 million as compared to $10.9 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 $14.8 million, or $0.48 per share (fully-diluted),
for the three months ended March 31, 2010, compared to $7.7 million, or $0.31 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 Companys long-term debt in December 2009. These increases are partially
offset by increases in cost of revenues and income taxes.
 
    
    On March 4, 2010, the Company announced a new agreement with HealthSpring Inc. pursuant
to which the Companys informedRx subsidiary will provide HealthSpring with its full suite
of PBM services, managing 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 2010, with implementation of the
full PBM services on January 1, 2011. For financial statement reporting purposes with
respect to the agreement, because of the size of this agreement, the Company expects that
margins related to this agreement will be materially lower than historical margins.
 Results of Operations
 Three months ended March 31, 2010 as compared to the three months ended March 31, 2009
 Three months endedMarch 31,In thousands, except per share data
    
    2010
    
    
    2009Revenue
    
    $
    452,148
    
    
    $
    290,960Cost of revenue
    
    
    401,919
    
    
    
    251,776Gross profit
    
    
    50,229
    
    
    
    39,184Product development costs
    
    
    3,073
    
    
    
    3,163SG&A
    
    
    21,308
    
    
    
    20,797Depreciation of property and equipment
    
    
    1,481
    
    
    
    1,482Amortization of intangible assets
    
    
    1,995
    
    
    
    2,825Operating income
    
    
    22,372
    
    
    
    10,917Interest expense, net
    
    
    245
    
    
    
    710Other expense (income), net
    
    
    198
    
    
    
    (325
    )Income before income taxes
    
    
    21,929
    
    
    
    10,532Income tax expense
    
    
    7,137
    
    
    
    2,850Net income
    
    $
    14,792
    
    
    $
    7,682Diluted earnings per share
    
    $
    0.48
    
    
    $
    0.31
 Revenue
  Cost of Revenue
  Gross Profit
   16




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##### Table of Contents



Product Development Costs
  SG&A Costs
  Depreciation
  Amortization
  Interest Income and Expense
  Income Taxes
  Net Income
  Segment Analysis
  PBM
    
    
    HCIT
    
    
    Consolidated2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    $
    427,502
    
    
    $
    267,780
    
    
    $
    24,646
    
    
    $
    23,180
    
    
    $
    452,148
    
    
    $
    290,960Cost of revenue
    
    
    389,166
    
    
    
    238,972
    
    
    
    12,753
    
    
    
    12,804
    
    
    
    401,919
    
    
    
    251,776Gross profit
    
    $
    38,336
    
    
    $
    28,808
    
    
    $
    11,893
    
    
    $
    10,376
    
    
    $
    50,229
    
    
    $
    39,184Gross profit %
    
    
    9.0
    %
    
    
    10.8
    %
    
    
    48.3
    %
    
    
    44.8
    %
    
    
    11.1
    %
    
    
    13.5
    %
 PBM
   17




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##### Table of Contents



HCIT
    Cost of Revenue:
 Gross Profit:
 Liquidity and Capital Resources
     18




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##### Table of Contents



Consolidated Balance Sheets
  
    
    Cash and cash-equivalents totaled $313.2 million, up $8.8 million from $304.4
million at December 31, 2009. The Companys cash is primarily held in deposit accounts
with major financial institutions with high credit ratings.
 
    
    Restricted cash totaling $14.3 million relates to cash balances required to be
maintained in accordance with various state statutes, contractual terms with customers
and other customer restrictions related to the PBM business. The Company continues to
monitor changes in balance requirements that may release restrictions and allow the
funds to be used for general corporate purposes.
 
    
    Rebates receivable of $32.1 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 $14.5 million from $17.6 million at
December 31, 2009, due primarily to increased rebates 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 $8.2 million consists predominately 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 sales.
 
    
    Customer deposits payable of $15.5 million relate to deposits required by the
Company from certain customers in order to satisfy liabilities incurred on the
customers behalf for the adjudication of pharmacy claims, and is related to the
restricted cash balances outlined above.
 
    
    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 $12.0
million to $58.6 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 our customers will also increase.
 
    
    Pharmacy benefit claim payments payable of $64.0 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.
 
    
    Accrued liabilities decreased $6.1 million to $24.7 million at March 31, 2010 from
$30.8 million at December 31, 2009 due primarily to payments made to customers in
relation to contract performance guarantees and payments made related to assumed
liabilities from to the NMHC acquisition.
 
    
    Salaries and wages payable decreased $4.6 million to $7.7 million at March 31, 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 timing
of period end relative to the Companys pay cycles. Pay cycles that fall closer to the
end of a period will cause the salaries and wages payable account to decrease; whereas,
when the pay cycle falls further from the period end, the balance will be higher.
 Cash flows from operating activities:
      19




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##### Table of Contents



Cash flows from investing activities
    Cash flows from financing activities
    Future Capital Requirements
    Contingencies
     20




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##### Table of Contents



Contractual Obligations
  Outstanding Securities
  Critical Accounting Estimates
  Recent Accounting Standards
  
 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
   21




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##### Table of Contents



ITEM 3.
    
    Defaults Upon Senior Securities
  
 ITEM 4.
    
    Reserved
  
 ITEM 5.
    
    Other Information
  
 ITEM 6.
    
    Exhibits
 ExhibitNumber
    
    Description of Document
    
    Reference31.1
    
    
    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
  22




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##### Table of Contents



SIGNATURE
  SXC Health Solutions Corp.May  7, 2010
    By:
    /s/ Jeffrey ParkJeffrey ParkChief Financial Officer
(on behalf of the registrant and
as Chief Accounting Officer)  23




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document
    
    Reference31.1
    
    
    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
  24