10-Q 1 esrx-06302013x10q.htm 10-Q ESRX - 06.30.2013 - 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 2013.
 
¨
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: 1-35490
 
 
EXPRESS SCRIPTS HOLDING COMPANY
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
45-2884094
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One Express Way, St. Louis, MO
 
63121
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (314) 996-0900
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    Noý
 
Common stock outstanding as of June 30, 2013:
 
814,198,000

 
Shares



EXPRESS SCRIPTS HOLDING COMPANY
INDEX
 
 
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 

 

 

 
 

 
Item 1A.
Risk Factors – (Not Applicable)

 

 
Item 3.
Defaults Upon Senior Securities – (Not Applicable)

 
Item 4.
Mine Safety Disclosures – (Not Applicable)

 
Item 5.
Other Information – (Not Applicable)

 

 
 
 

 
 
 



2


PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
EXPRESS SCRIPTS HOLDING COMPANY
Unaudited Consolidated Balance Sheet
(in millions)
June 30,
2013
 
December 31,
2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,342.2

 
$
2,793.9

Restricted cash and investments
12.4

 
19.6

Receivables, net
4,552.8

 
5,480.6

Inventories
1,672.9

 
1,661.9

Deferred taxes
387.3

 
408.5

Prepaid expenses and other current assets
197.4

 
194.4

Current assets of discontinued operations
137.8

 
198.0

Total current assets
8,302.8

 
10,756.9

Property and equipment, net
1,663.6

 
1,634.3

Goodwill
29,345.2

 
29,359.8

Other intangible assets, net
15,021.3

 
16,037.9

Other assets
60.2

 
56.6

Noncurrent assets of discontinued operations
188.4

 
265.7

Total assets
$
54,581.5

 
$
58,111.2

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Claims and rebates payable
$
5,823.4

 
$
7,440.0

Accounts payable
2,639.3

 
2,909.1

Accrued expenses
1,403.1

 
1,630.0

Current maturities of long-term debt
631.6

 
934.9

Current liabilities of discontinued operations
120.9

 
143.4

Total current liabilities
10,618.3

 
13,057.4

Long-term debt
13,648.5

 
14,980.1

Deferred taxes
5,662.0

 
5,948.8

Other liabilities
734.2

 
692.9

Noncurrent liabilities of discontinued operations
41.8

 
36.3

Total liabilities
30,704.8

 
34,715.5

Commitments and contingencies (Note 10)


 


Stockholders’ Equity:
 
 
 
Preferred stock, 15.0 shares authorized, $0.01 par value per share; and no shares issued and outstanding

 

Common stock, 2,985.0 shares authorized, $0.01 par value; shares issued: 827.5 and 818.1, respectively; shares outstanding: 814.2 and 818.1, respectively
8.2

 
8.2

Additional paid-in capital
21,662.2

 
21,289.7

Accumulated other comprehensive income
12.9

 
18.9

Retained earnings
2,984.2

 
2,068.2

 
24,667.5

 
23,385.0

Common stock in treasury at cost, 13.3 and zero shares, respectively
(801.0
)
 

Total Express Scripts stockholders’ equity
23,866.5

 
23,385.0

Non-controlling interest
10.2

 
10.7

Total stockholders’ equity
23,876.7

 
23,395.7

Total liabilities and stockholders’ equity
$
54,581.5

 
$
58,111.2

See accompanying Notes to Unaudited Consolidated Financial Statements

3


EXPRESS SCRIPTS HOLDING COMPANY
Unaudited Consolidated Statement of Operations

  
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions, except per share data)
2013
 
2012
 
2013
 
2012
Revenues (1)
$
26,425.0

 
$
27,504.6

 
$
52,488.0

 
$
39,637.2

Cost of revenues (1)
24,307.4

 
25,417.5

 
48,403.8

 
36,718.1

Gross profit
2,117.6

 
2,087.1

 
4,084.2

 
2,919.1

Selling, general and administrative
1,127.3

 
1,587.7

 
2,252.0

 
1,852.8

Operating income
990.3

 
499.4

 
1,832.2

 
1,066.3

Other (expense) income:
 
 
 
 
 
 
 
Equity income from joint venture
7.0

 
4.3

 
16.8

 
4.3

Interest income
1.1

 
2.3

 
2.7

 
4.6

Interest expense and other
(127.6
)
 
(174.4
)
 
(343.0
)
 
(306.4
)
 
(119.5
)
 
(167.8
)
 
(323.5
)
 
(297.5
)
Income before income taxes
870.8

 
331.6

 
1,508.7

 
768.8

Provision for income taxes
305.0

 
178.2

 
563.6

 
345.2

Net income from continuing operations
565.8

 
153.4

 
945.1

 
423.6

Net loss from discontinued operations, net of tax
(15.3
)
 
(0.4
)
 
(16.5
)
 
(0.4
)
Net income
550.5

 
153.0

 
928.6

 
423.2

Less: Net income attributable to non-controlling interest
7.5

 
3.4

 
12.6

 
5.8

Net income attributable to Express Scripts
$
543.0

 
$
149.6

 
$
916.0

 
$
417.4

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding during the period:
 
 
 
 
 
 
 
Basic
815.2

 
807.8

 
816.9

 
646.6

Diluted
828.4

 
823.9

 
830.5

 
663.2

Basic earnings per share:
 
 
 
 
 
 
 
Continuing operations attributable to Express Scripts
$
0.68

 
$
0.19

 
$
1.14

 
$
0.65

Discontinued operations attributable to Express Scripts
(0.02
)
 

 
(0.02
)
 

Net earnings attributable to Express Scripts
$
0.67

 
$
0.19

 
$
1.12

 
$
0.65

Diluted earnings per share:
 
 
 
 
 
 
 
Continuing operations attributable to Express Scripts
$
0.67

 
$
0.18

 
$
1.12

 
$
0.63

Discontinued operations attributable to Express Scripts
(0.02
)
 

 
(0.02
)
 

Net earnings attributable to Express Scripts
$
0.66

 
$
0.18

 
$
1.10

 
$
0.63

Amounts attributable to Express Scripts shareholders:
 
 
 
 
 
 
 
Income from continuing operations, net of tax
$
558.3

 
$
150.0

 
$
932.5

 
$
417.8

Discontinued operations, net of tax
(15.3
)
 
(0.4
)
 
(16.5
)
 
(0.4
)
Net income attributable to Express Scripts shareholders
$
543.0

 
$
149.6

 
$
916.0

 
$
417.4


1
Includes retail pharmacy co-payments of $3,204.3 and $3,519.1 for the three months ended June 30, 2013 and 2012, respectively, and $6,878.7 and $5,015.7 for the six months ended June 30, 2013 and 2012, respectively.

See accompanying Notes to Unaudited Consolidated Financial Statements


4


EXPRESS SCRIPTS HOLDING COMPANY
Unaudited Consolidated Statement of Comprehensive Income

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2013
 
2012
 
2013
 
2012
Net income
$
550.5

 
$
153.0

 
$
928.6

 
$
423.2

Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(3.9
)
 
(10.5
)
 
(6.0
)
 
(8.9
)
Comprehensive income
546.6

 
142.5

 
922.6

 
414.3

Less: Comprehensive income attributable to non-controlling interests
7.5

 
3.4

 
12.6

 
5.8

Comprehensive income attributable to Express Scripts
$
539.1

 
$
139.1

 
$
910.0

 
$
408.5


See accompanying Notes to Unaudited Consolidated Financial Statements


5


EXPRESS SCRIPTS HOLDING COMPANY
Unaudited Consolidated Statement of Changes in Stockholders’ Equity

 
Number
of Shares
 
Amount
(in millions)
Common
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Treasury
Stock
 
Non-
controlling
Interest
 
Total
Balance at December 31, 2012
818.1

 
$
8.2

 
$
21,289.7

 
$
18.9

 
$
2,068.2

 
$

 
$
10.7

 
$
23,395.7

Net income

 

 

 

 
916.0

 

 
12.6

 
928.6

Other comprehensive loss

 

 

 
(6.0
)
 

 

 

 
(6.0
)
Treasury stock acquired

 

 

 

 

 
(801.0
)
 

 
(801.0
)
Changes in stockholders’ equity related to employee stock plans
9.4

 

 
372.5

 

 

 

 

 
372.5

Distributions to non-controlling interest

 

 

 

 

 

 
(13.1
)
 
(13.1
)
Balance at June 30, 2013
827.5

 
$
8.2

 
$
21,662.2

 
$
12.9

 
$
2,984.2

 
$
(801.0
)
 
$
10.2

 
$
23,876.7


See accompanying Notes to Unaudited Consolidated Financial Statements


6


EXPRESS SCRIPTS HOLDING COMPANY
Unaudited Consolidated Statement of Cash Flows
 
Six Months Ended June 30,
(in millions)
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
928.6

 
$
423.2

Net loss from discontinued operations, net of tax
16.5

 
0.4

Net income from continuing operations
945.1

 
423.6

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,210.2

 
659.6

Non-cash adjustments to net income
(221.3
)
 
94.9

Deferred financing fees
10.7

 
26.9

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
868.4

 
180.5

Claims and rebates payable
(1,616.6
)
 
(453.1
)
Other net changes in operating assets and liabilities
(389.0
)
 
324.8

Net cash provided by operating activities - continuing operations
807.5

 
1,257.2

Net cash (used in) provided by operating activities - discontinued operations
(25.0
)
 
2.4

Net cash flows provided by operating activities
782.5

 
1,259.6

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(195.0
)
 
(63.9
)
Acquisitions, net of cash acquired

 
(10,326.4
)
Proceeds from sale of business
77.9

 

Other
1.3

 
(11.2
)
Net cash used in investing activities - continuing operations
(115.8
)
 
(10,401.5
)
Acquisitions, cash acquired - discontinued operations

 
42.8

Net cash used in investing activities - discontinued operations
(2.0
)
 
(2.7
)
Net cash used in investing activities
(117.8
)
 
(10,361.4
)
Cash flows from financing activities:
 
 
 
Repayment of long-term debt
(1,615.8
)
 
(2,500.1
)
Treasury stock acquired
(801.0
)
 

Net proceeds from employee stock plans
271.0

 
141.1

Excess tax benefit relating to employee stock compensation
14.8

 
15.6

Distributions paid to non-controlling interest
(13.4
)
 
(3.4
)
Proceeds from long-term debt, net of discounts

 
7,353.6

Repayment of revolving credit line, net

 
(600.0
)
Proceeds from accounts receivable financing facility

 
600.0

Other
6.3

 
(103.2
)
Net cash (used in) provided by financing activities - continuing operations
(2,138.1
)
 
4,903.6

Net cash used in financing activities - discontinued operations

 
(1.7
)
Net cash (used in) provided by financing activities
(2,138.1
)
 
4,901.9

Effect of foreign currency translation adjustment
(5.2
)
 
(0.2
)
Less: cash decrease (increase) attributable to discontinued operations
26.9

 
(40.9
)
Net decrease in cash and cash equivalents
(1,451.7
)
 
(4,241.0
)
Cash and cash equivalents at beginning of period
2,793.9

 
5,620.1

Cash and cash equivalents at end of period
$
1,342.2

 
$
1,379.1

See accompanying Notes to Unaudited Consolidated Financial Statements

7


EXPRESS SCRIPTS HOLDING COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of significant accounting policies
On July 20, 2011, Express Scripts, Inc. (“ESI”) entered into a definitive merger agreement (the “Merger Agreement”) with Medco Health Solutions, Inc. (“Medco”), which was amended by Amendment No. 1 thereto on November 7, 2011, providing for the combination of ESI and Medco under a new holding company named Aristotle Holding, Inc. The transactions contemplated by the Merger Agreement (the “Merger”) were consummated on April 2, 2012. Aristotle Holding, Inc. was renamed Express Scripts Holding Company (the “Company” or “Express Scripts”) concurrently with the consummation of the Merger. “We,” “our” or “us” refers to Express Scripts Holding Company and its subsidiaries. For financial reporting and accounting purposes, ESI was the acquirer of Medco. The consolidated financial statements reflect the results of operations and financial position of ESI for the period beginning January 1, 2012 through April 1, 2012. However, references to amounts for periods after the closing of the Merger on April 2, 2012 relate to Express Scripts.
Our significant accounting policies, normally included in financial statements prepared in conformity with generally accepted accounting principles, have been omitted from this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Express Scripts believes the disclosures contained in this Form 10-Q are adequate to fairly state the information when read in conjunction with the Notes to the Consolidated Financial Statements included in Express Scripts’ Annual Report on Form 10-K for the year ended December 31, 2012. For a full description of our accounting policies, refer to the Notes to the Consolidated Financial Statements included in Express Scripts’ Annual Report on Form 10-K for the year ended December 31, 2012.
We believe the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the unaudited consolidated balance sheet at June 30, 2013, the unaudited consolidated statement of operations and unaudited consolidated statement of comprehensive income for the three and six months ended June 30, 2013 and 2012, the unaudited consolidated statement of changes in stockholders’ equity for the six months ended June 30, 2013, and the unaudited consolidated statement of cash flows for the six months ended June 30, 2013 and 2012. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.
Discontinued Operations. During 2012, we determined various businesses acquired in the Merger were no longer core to our future operations and committed to a plan to dispose of these businesses. In accordance with applicable accounting guidance, the results of operations for these entities are reported as discontinued operations for all periods presented in the accompanying consolidated statement of operations. Additionally, for all periods presented, assets and liabilities of the discontinued operations are segregated in the accompanying consolidated balance sheet and cash flows of our discontinued operations are segregated in our accompanying consolidated statement of cash flows (see Note 4 - Dispositions).
Presentation of Non-Controlling Interest. The accompanying financial statements have been revised to reflect net income attributable to members of our consolidated affiliates. This revision results in a $3.4 million and $5.8 million adjustment from the “Selling, general and administrative” (“SG&A”) line item to the “Net income attributable to non-controlling interest” line item within the consolidated statement of operations for the three and six months ended June 30, 2012, respectively. This adjustment does not change amounts previously disclosed for the three and six months ended June 30, 2012 as “Net income attributable to Express Scripts.” This adjustment also affects net income included in cash flows from operating activities in the consolidated statement of cash flows for the six months ended June 30, 2012. Additionally, within the consolidated statement of cash flows for the six months ended June 30, 2012, the “Other net changes in operating assets and liabilities” line item decreased $2.4 million, and a $3.4 million cash outflow is now reflected within the “Distributions paid to non-controlling interest” line item.
Transaction Expense Adjustment. In September 2012, the Company identified $36.4 million of transaction expenses related to the Merger which occurred subsequent to consummation of the Merger and were inadvertently excluded in the filed Form 10-Q for the three and six months ended June 30, 2012. These costs should have been accrued as of June 30, 2012. In accordance with Staff Accounting Bulletin No. 99, the Company assessed the materiality of the error and concluded that the error was not material to our financial statements for the three and six months ended June 30, 2012, but that the June 30, 2012 financial statements would be revised. The Company has revised these financial statements to include the transaction expenses, which are reported within the SG&A line item of the accompanying financial statements for the three and six months ended June 30, 2012. The result of this adjustment revises SG&A, Operating income, Net income, and basic and diluted earnings per share for the three and six months ended June 30, 2012.

8


New Accounting Guidance. In February 2013, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance containing changes to the presentation of amounts reclassified out of accumulated other comprehensive income. This statement is effective for financial statements issued for annual periods beginning after December 15, 2012. Adoption of the standard impacts the presentation of certain information within the financial statements, but will not impact our financial position, results of operations or cash flows. The Company has not reclassified amounts out of accumulated other comprehensive income; as such, no additional information is presented for the three and six months ended June 30, 2013 or 2012.

Note 2 - Fair value measurements
Accounting guidance regarding fair value measurement establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices for similar assets and liabilities in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Financial assets accounted for at fair value on a recurring basis include cash equivalents of $493.3 million and $1,572.3 million, restricted cash and investments of $12.4 million and $19.6 million, and trading securities (included in other assets) of $8.5 million and $15.8 million, in each case, at June 30, 2013 and December 31, 2012, respectively. These assets are carried at fair value based on quoted prices in active markets for identical securities (Level 1 inputs). Cash equivalents include investments in AAA-rated money market mutual funds with maturities of less than 90 days.
The carrying value of cash and cash equivalents (Level 1), restricted cash and investments (Level 1), accounts receivable, claims and rebates payable, and accounts payable approximated fair values due to the short-term maturities of these instruments. The fair value, which approximates the carrying value, of our bank credit facility (Level 2) was estimated using the current rates offered to us for debt with similar maturities. The carrying values and the fair values of our senior notes are shown, net of unamortized discounts and premiums, in the following table:
 

9


 
June 30, 2013
 
December 31, 2012
(in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
March 2008 Senior Notes (acquired)
 
 
 
 
 
 
 
7.125% senior notes due 2018
$
1,398.1

 
$
1,452.0

 
$
1,417.2

 
$
1,497.3

6.125% senior notes due 2013

 

 
303.3

 
303.0

 
1,398.1

 
1,452.0

 
1,720.5

 
1,800.3

June 2009 Senior Notes
 
 
 
 
 
 
 
6.250% senior notes due 2014

 

 
998.7

 
1,076.4

7.250% senior notes due 2019
497.7

 
616.5

 
497.6

 
645.1

 
497.7

 
616.5

 
1,496.3

 
1,721.5

September 2010 Senior Notes (acquired)
 
 
 
 
 
 
 
2.750% senior notes due 2015
508.9

 
514.5

 
510.9

 
522.4

4.125% senior notes due 2020
507.2

 
514.5

 
507.6

 
546.1

 
1,016.1

 
1,029.0

 
1,018.5

 
1,068.5

May 2011 Senior Notes
 
 
 
 
 
 
 
3.125% senior notes due 2016
1,496.4

 
1,563.0

 
1,495.8

 
1,590.2

 
 
 
 
 
 
 
 
November 2011 Senior Notes
 
 
 
 
 
 
 
3.500% senior notes due 2016
1,249.8

 
1,320.0

 
1,249.7

 
1,347.8

4.750% senior notes due 2021
1,240.8

 
1,335.0

 
1,240.3

 
1,425.7

2.750% senior notes due 2014
899.4

 
920.8

 
899.4

 
930.8

6.125% senior notes due 2041
698.4

 
809.9

 
698.4

 
894.6

 
4,088.4

 
4,385.7

 
4,087.8

 
4,598.9

February 2012 Senior Notes
 
 
 
 
 
 
 
2.650% senior notes due 2017
1,489.3

 
1,526.3

 
1,487.9

 
1,559.6

2.100% senior notes due 2015
997.3

 
1,016.4

 
996.5

 
1,023.7

3.900% senior notes due 2022
980.9

 
1,008.0

 
980.0

 
1,073.3

 
3,467.5

 
3,550.7

 
3,464.4

 
3,656.6

Total
$
11,964.2

 
$
12,596.9

 
$
13,283.3

 
$
14,436.0

The fair values of our senior notes were estimated based on observable market information (Level 2 inputs). In determining the fair value of liabilities, we took into consideration the risk of nonperformance. Nonperformance risk refers to the risk that the obligation will not be fulfilled and affects the value at which the liability would be transferred to a market participant. This risk did not have a material impact on the fair value of our liabilities.

Note 3 - Changes in business
As a result of the Merger on April 2, 2012, Medco and ESI each became 100% owned subsidiaries of Express Scripts and former Medco and ESI stockholders became owners of stock in Express Scripts, which is listed on the Nasdaq. Upon closing of the Merger, former ESI stockholders owned approximately 59% of Express Scripts and former Medco stockholders owned approximately 41% of Express Scripts. Per the terms of the Merger Agreement, upon consummation of the Merger on April 2, 2012, each share of Medco common stock was converted into (i) the right to receive $28.80 in cash, without interest and (ii) 0.81 shares of Express Scripts stock. Holders of Medco stock options, restricted stock units and deferred stock units received replacement awards at an exchange ratio of 1.3474 Express Scripts stock awards for each Medco award owned, which is equal to the sum of (i) 0.81 and (ii) the quotient obtained by dividing (1) $28.80 (the cash component of the Merger consideration) by (2) an amount equal to the average of the closing prices of ESI common stock on the Nasdaq for each of the 15 consecutive trading days ending with the fourth complete trading day prior to the completion of the Merger.

10


Based on the opening price of Express Scripts’ stock on April 2, 2012, the purchase price was comprised of the following: 
(in millions)
 
Cash paid to Medco stockholders(1)
$
11,309.6

Value of shares of common stock issued to Medco stockholders(2)
17,963.8

Value of stock options issued to holders of Medco stock options(3) (4)
706.1

Value of restricted stock units issued to holders of Medco restricted stock units(3)
174.9

Total consideration
$
30,154.4

(1)
Equals Medco outstanding shares multiplied by $28.80 per share.
(2)
Equals Medco outstanding shares immediately prior to the Merger multiplied by the exchange ratio of 0.81, multiplied by the Express Scripts opening share price on April 2, 2012 of $56.49.
(3)
In accordance with applicable accounting guidance, the fair value of replacement awards attributable to pre-combination service is recorded as part of the consideration transferred in the Merger, while the fair value of replacement awards attributable to post-combination service is recorded separately from the business combination and recognized as compensation cost in the post-acquisition period over the remaining service period.
(4)
The fair value of the Company’s equivalent stock options was estimated using the Black-Scholes valuation model utilizing various assumptions. The expected volatility of the Company’s common stock price is a blended rate based on the average historical volatility over the expected term based on daily closing stock prices of ESI and Medco common stock. The expected term of the option is based on Medco historical employee stock option exercise behavior as well as the remaining contractual exercise term.
The following unaudited pro forma information presents a summary of Express Scripts’ combined results of continuing operations for the six months ended June 30, 2012 as if the Merger and related financing transactions had occurred at January 1, 2012. The following pro forma financial information is not necessarily indicative of the results of operations as it would have been had the transactions been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies and the impact of incremental costs incurred in integrating the businesses: 
(in millions, except per share data)
Six months ended June 30, 2012
Total revenues
$
55,418.3

Net income attributable to Express Scripts
277.0

Basic earnings per share from continuing operations
0.43

Diluted earnings per share from continuing operations
0.42

Pro forma net income for the six months ended June 30, 2012 includes total non-recurring amounts of $721.6 million related to estimated severance payments, accelerated stock-based compensation and transaction and integration costs incurred in connection with the Merger.
The Merger has been accounted for under the acquisition method of accounting with ESI treated as the acquirer for accounting purposes. The purchase price has been allocated based on the estimated fair value of net assets acquired and liabilities assumed at the date of the acquisition.
During the first quarter ended March 31, 2013, the Company made refinements to its preliminary allocation of purchase price related to accrued liabilities due to the finalization of assumptions utilized to value the liabilities acquired. These adjustments had the effect of increasing current assets and other noncurrent liabilities and decreasing goodwill, deferred tax liabilities and current liabilities.

11


Express Scripts finalized the purchase price allocation and push down accounting as of March 31, 2013. The following table summarizes Express Scripts’ estimates of the fair values of the assets acquired and liabilities assumed in the Merger:
 
(in millions)
Amounts Recognized
as of 
Acquisition Date
Current assets
$
6,934.9

Property and equipment
1,390.6

Goodwill
23,965.6

Acquired intangible assets
16,216.7

Other noncurrent assets
48.3

Current liabilities
(8,966.4
)
Long-term debt
(3,008.3
)
Deferred income taxes
(5,875.2
)
Other noncurrent liabilities
(551.8
)
Total
$
30,154.4

A portion of the excess of purchase price over tangible net assets acquired has been allocated to intangible assets consisting of customer contracts in the amount of $15,935.0 million with an estimated weighted average amortization period of 16 years. Additional intangible assets consist of trade names in the amount of $273.0 million with an estimated weighted average amortization period of 10 years and miscellaneous intangible assets of $8.7 million with an estimated weighted average amortization period of 5 years. The acquired intangible assets have been valued using an income approach and are being amortized on a basis that approximates the pattern of benefit.
The excess of purchase price over tangible net assets and identified intangible assets acquired has been allocated to goodwill in the amount of $23,965.6 million. The majority of the goodwill recognized as part of the Merger is reported under our Pharmacy Benefit Management (“PBM”) segment and reflects our expected synergies from combining operations, such as improved economies of scale and cost savings. Goodwill recognized is not expected to be deductible for income tax purposes and is not amortized.

Note 4 - Dispositions

Sale of CYC. In the third quarter of 2012, we completed the sale of our ConnectYourCare (“CYC”) line of business, which was included within our Other Business Operations segment. During the first quarter of 2013, certain working capital balances were settled, resulting in a $3.5 million gain. The gain is included in the SG&A line item in the accompanying unaudited consolidated statement of operations for the six months ended June 30, 2013.
Sale of Liberty. In the fourth quarter of 2012, we completed the sale of our PolyMedica Corporation (“Liberty”) line of business, which was included within our Other Business Operations segment. Liberty sells diabetes testing supplies and is located in Port St. Lucie, Florida. Immediately following the time Liberty became independently owned and operated, Express Scripts and Liberty entered into an arms-length agreement whereby Express Scripts will work as a back-end pharmacy supplier for portions of the Liberty business for a minimum of two years. As such, the Company expects continued revenue (and resulting cash flows) associated with Liberty, which precludes classification of this business as a discontinued operation.
Sale of EAV. In the fourth quarter of 2012, we completed the sale of our Europa Apotheek Venlo B.V. (“EAV”) line of business, which primarily provided home delivery pharmacy services in Germany. Prior to being classified as a discontinued operation, EAV was included within our Other Business Operations segment.
Discontinued Operations of Europe and portions of UBC. During the fourth quarter of 2012, we determined that certain portions of the business within United BioSource Corporation (“UBC”), which is located in Chevy Chase, Maryland, and our operations in Europe (“European Operations”), which were included within our Other Business Operations segment, were not core to our future operations and committed to a plan to dispose of these businesses. As a result, these businesses were classified as discontinued operations as of December 31, 2012. UBC is a global medical and scientific affairs organization that partners with life science companies to develop and commercialize their products. The portions of UBC held for sale include specialty services for pre-market trials; health economics, outcomes research, data analytics and market access services; and technology solutions and publications for biopharmaceutical companies. Our European Operations primarily consist of retail network pharmacy management services. It is expected that our European Operations will be disposed of in 2013.

12


On June 7, 2013, we completed the sale of the portion of our UBC business which primarily provided technology solutions and publications for biopharmaceutical companies. During the second quarter of 2013, we recognized a gain on the sale of this business which totaled $18.3 million. The gain on this portion of UBC is included in the “Net loss from discontinued operations, net of tax” line item in the accompanying consolidated statement of operations for the three and six months ended June 30, 2013. See Note 13 - Subsequent events for discussion of the sale of the remaining portions of our UBC business included within discontinued operations subsequent to quarter end.
The results of selected operations of UBC, as defined above, and our European Operations are reported as discontinued operations for all periods presented in the accompanying unaudited consolidated statements of operations in accordance with applicable accounting guidance. As such, results of operations for the three and six months ended June 30, 2012 have been adjusted to reflect these operations as discontinued. As the discontinued operations were acquired through the Merger, results of operations for the three months ended March 31, 2012 do not include these operations in our accompanying unaudited consolidated statement of operations. Additionally, for all periods presented, cash flows of our discontinued operations are segregated in our accompanying unaudited consolidated statements of cash flows. Finally, assets and liabilities of these businesses held as of June 30, 2013 and December 31, 2012 were segregated in our accompanying unaudited consolidated balance sheet as of June 30, 2013 and consolidated balance sheet as of December 31, 2012. The major components of assets and liabilities of these discontinued operations are as follows:
(in millions)
June 30,
2013
 
December 31,
2012
Current assets
$
137.8

 
$
198.0

Goodwill
66.4

 
88.5

Other intangible assets, net
105.2

 
157.4

Other assets
16.8

 
19.8

Total assets
$
326.2

 
$
463.7

 
 
 
 
Current liabilities
$
120.9

 
$
143.4

Deferred Taxes
38.7

 
32.6

Other liabilities
3.1

 
3.7

Total liabilities
$
162.7

 
$
179.7


Certain information with respect to the discontinued operations, as defined above, for the three and six months ended June 30, 2013 and 2012 is summarized as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2013
 
2012
 
2013
 
2012
Revenues
$
129.4

 
$
187.9

 
$
251.7

 
$
187.9

Operating income (loss)
1.8

 
(0.3
)
 
1.1

 
(0.3
)
Income tax expense (benefit) from discontinued operations
17.1

 
(0.7
)
 
17.6

 
(0.7
)
Net loss from discontinued operations, net of tax
(15.3
)
 
(0.4
)
 
(16.5
)
 
(0.4
)


13


Note 5 - Goodwill and other intangible assets
The following is a summary of our goodwill and other intangible assets for our two reportable segments: PBM and Other Business Operations.
 
June 30, 2013
 
December 31, 2012
(in millions)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Goodwill
 
 
 
 
 
 
 
 
 
 
 
PBM(1)
$
29,355.2

 
$
(107.4
)
 
$
29,247.8

 
$
29,369.8

 
$
(107.4
)
 
$
29,262.4

Other Business Operations
97.4

 

 
97.4

 
97.4

 

 
97.4

 
$
29,452.6

 
$
(107.4
)
 
$
29,345.2

 
$
29,467.2

 
$
(107.4
)
 
$
29,359.8

Other intangible assets
 
 
 
 
 
 
 
 
 
 
 
PBM
 
 
 
 
 
 
 
 
 
 
 
Customer contracts
$
17,672.3

 
$
(3,021.4
)
 
$
14,650.9

 
$
17,672.7

 
$
(2,038.3
)
 
$
15,634.4

Trade names
226.6

 
(27.9
)
 
198.7

 
226.6

 
(16.7
)
 
209.9

Miscellaneous(2)
111.6

 
(37.6
)
 
74.0

 
121.6

 
(34.9
)
 
86.7

 
18,010.5

 
(3,086.9
)
 
14,923.6

 
18,020.9

 
(2,089.9
)
 
15,931.0

Other Business Operations
 
 
 
 
 
 
 
 
 
 
 
Customer relationships(3)
127.3

 
(60.8
)
 
66.5

 
138.5

 
(63.2
)
 
75.3

Trade names
35.7

 
(4.5
)
 
31.2

 
34.7

 
(3.1
)
 
31.6

 
163.0

 
(65.3
)
 
97.7

 
173.2

 
(66.3
)
 
106.9

Total other intangible assets
$
18,173.5

 
$
(3,152.2
)
 
$
15,021.3

 
$
18,194.1

 
$
(2,156.2
)
 
$
16,037.9

(1)
Goodwill associated with the Merger has been adjusted due to refinement of purchase price valuation assumptions. Goodwill has been reduced by $12.7 million due to finalization of the purchase price allocation during the first quarter of 2013.
(2)
Balances as of June 30, 2013 include a decrease of $10.0 million to both gross miscellaneous assets and related accumulated amortization following the write-off of deferred financing fees related to the early repayment and the redemption of senior notes. See Note 7 - Financing for additional information.
(3)
As of June 30, 2013, gross customer relationships and related accumulated amortization reflect a decrease of $11.2 million. These balances reflect amounts previously written off and have no net impact on the net other intangible assets balance.
The aggregate amount of amortization expense of other intangible assets for our continuing operations was $509.9 million and $521.0 million for the three months ended June 30, 2013 and 2012, respectively, and $1,017.5 million and $577.8 million for the six months ended June 30, 2013 and 2012, respectively. In accordance with applicable accounting guidance, amortization for customer contracts related to our agreement to provide PBM services to members of the affiliated health plans of WellPoint has been included as an offset to revenues in the amount of $28.5 million for the three months ended June 30, 2013 and 2012 and $57.0 million for the six months ended June 30, 2013 and 2012. The aggregate amount of amortization expense of other intangible assets for our continuing operations is expected to be approximately $2,039.8 million for 2013, $1,766.4 million for 2014, $1,746.0 million for 2015, $1,738.2 million for 2016 and $1,320.7 million for 2017. The weighted average amortization period of intangible assets subject to amortization is 16 years in total, and by major intangible class is 5 to 20 years for customer-related intangibles and 2 to 30 years for other intangible assets.
A summary of the change in the net carrying value of goodwill by business segment is shown in the following table: 
(in millions)
PBM
 
Other
Business
Operations
 
Total
Balance at December 31, 2012
$
29,262.4

 
$
97.4

 
$
29,359.8

Purchase price allocation adjustment(1)
(12.7
)
 

 
(12.7
)
Foreign currency translation and other
(1.9
)
 

 
(1.9
)
Balance at June 30, 2013
$
29,247.8

 
$
97.4

 
$
29,345.2

(1)
Goodwill associated with the Merger has been adjusted due to refinement of purchase price valuation assumptions.


14


Note 6 - Earnings per share
Basic earnings per share (“EPS”) is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed in the same manner as basic EPS but adds the number of additional common shares that would have been outstanding for the period if the dilutive potential common shares had been issued. All shares are calculated under the “treasury stock” method. The following is the reconciliation between the number of weighted average shares used in the basic and diluted EPS calculations for all periods:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2013(1)

 
2012
 
2013(1)

 
2012
Weighted average number of common shares outstanding during the period—Basic
815.2

 
807.8

 
816.9

 
646.6

Dilutive common stock equivalents:
 
 
 
 
 
 
 
Outstanding stock options, “stock-settled” stock appreciation rights, restricted stock units and executive deferred compensation units
13.2

 
16.1

 
13.6

 
16.6

Weighted average number of common shares outstanding during the period—Diluted(2)
828.4

 
823.9

 
830.5

 
663.2

(1)
The increase in the weighted average number of common shares outstanding for the three and six months ended June 30, 2013 used for both Basic and Diluted EPS resulted primarily from the issuance of 318.0 million shares in connection with the Merger, partially offset by the repurchase of 8.2 million and 13.3 million treasury shares during the three and six months ended June 30, 2013, respectively.
(2)
Excludes awards of 3.3 million and 14.2 million for the three months ended June 30, 2013 and 2012, respectively, and 4.2 million and 14.6 million for the six months ended June 30, 2013 and 2012, respectively. These were excluded because their effect was anti-dilutive.


15


Note 7 - Financing
The Company’s debt, net of unamortized discounts and premiums, consists of: 

(in millions)
June 30,
2013
 
December 31,
2012
Long-term debt:
 
 
 
March 2008 Senior Notes (acquired)
 
 
 
7.125% senior notes due 2018
$
1,398.1

 
$
1,417.2

6.125% senior notes due 2013

 
303.3

 
1,398.1

 
1,720.5

June 2009 Senior Notes
 
 
 
6.250% senior notes due 2014

 
998.7

7.250% senior notes due 2019
497.7

 
497.6

 
497.7

 
1,496.3

September 2010 Senior Notes (acquired)
 
 
 
2.750% senior notes due 2015
508.9

 
510.9

4.125% senior notes due 2020
507.2

 
507.6

 
1,016.1

 
1,018.5

May 2011 Senior Notes
 
 
 
3.125% senior notes due 2016
1,496.4

 
1,495.8

 
 
 
 
November 2011 Senior Notes
 
 
 
3.500% senior notes due 2016
1,249.8

 
1,249.7

4.750% senior notes due 2021
1,240.8

 
1,240.3

2.750% senior notes due 2014
899.4

 
899.4

6.125% senior notes due 2041
698.4

 
698.4

 
4,088.4

 
4,087.8

February 2012 Senior Notes
 
 
 
2.650% senior notes due 2017
1,489.3

 
1,487.9

2.100% senior notes due 2015
997.3

 
996.5

3.900% senior notes due 2022
980.9

 
980.0

 
3,467.5

 
3,464.4

Term facility due August 29, 2016 with an average interest rate of 1.95% at June 30, 2013 and 1.96% at December 31, 2012
2,315.8

 
2,631.6

Other
0.1

 
0.1

Total debt
14,280.1

 
15,915.0

Less: Current maturities of long-term debt
631.6

 
934.9

Total long-term debt
$
13,648.5

 
$
14,980.1

BANK CREDIT FACILITIES
On August 29, 2011, ESI entered into a credit agreement (the “credit agreement”) with a commercial bank syndicate providing for a five-year $4.0 billion term loan facility (the “term facility”) and a $1.5 billion revolving loan facility (the “revolving facility”). The term facility was used to pay a portion of the cash consideration paid in connection with the Merger (as discussed in Note 3 - Changes in business), to repay existing indebtedness and to pay related fees and expenses. Upon consummation of the Merger, Express Scripts assumed the obligations of ESI and became the borrower under the credit agreement and revolving facility. Subsequent to consummation of the Merger on April 2, 2012, the revolving facility is available for general corporate purposes. The term facility and the revolving facility both mature on August 29, 2016. As of June 30, 2013, no balance was outstanding under the revolving facility. The Company makes quarterly principal payments on the term facility. As of June 30, 2013, $631.6 million of this facility is considered current maturities of long-term debt.

16


The credit agreement requires interest to be paid at the LIBOR or adjusted base rate options, plus a margin. The margin over LIBOR ranges from 1.25% to 1.75% for the term facility and 1.10% to 1.55% for the revolving facility, and the margin over the base rate options ranges from 0.25% to 0.75% for the term facility and 0.10% to 0.55% for the revolving facility, depending on our consolidated leverage ratio. Under the credit agreement, we are required to pay commitment fees on the unused portion of the $1.5 billion revolving facility. The commitment fee ranges from 0.15% to 0.20% depending on Express Scripts’ consolidated leverage ratio.

SENIOR NOTES
On March 29, 2013, the Company redeemed ESI’s $1.0 billion aggregate principal amount of 6.250% senior notes due 2014. These notes were redeemable at a redemption price equal to the greater of (i) 100% of the aggregate principal amount of the notes being redeemed, plus accrued and unpaid interest; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the notes being redeemed, not including unpaid interest accrued to the redemption date, discounted to the redemption date on a semiannual basis at the treasury rate plus 50 basis points with respect to the notes being redeemed, plus unpaid interest of the notes being redeemed accrued to the redemption date. Total cash payments related to the redemption of these notes were $1.1 billion, which included $68.5 million of redemption costs and write-off of deferred financing fees which are reflected within the “Interest expense and other” line item of the unaudited consolidated statement of operations for the six months ended June 30, 2013.
On March 18, 2013, $300.0 million aggregate principal amount of 6.125% senior notes due 2013, issued by Medco, matured and were redeemed.
COVENANTS
Our bank financing arrangements contain covenants that restrict our ability to incur additional indebtedness, create or permit liens on assets and engage in mergers or consolidations. The covenants also include minimum interest coverage ratios and maximum leverage ratios. The 7.125% senior notes due 2018 issued by Medco are also subject to an interest rate adjustment in the event of a downgrade in the ratings to below investment grade. At June 30, 2013, we believe we were in compliance in all material respects with all covenants associated with our debt instruments (including credit agreements and terms of our senior notes).

Note 8 - Common stock
On March 6, 2013, the Board of Directors of Express Scripts approved a new share repurchase program (the “2013 Share Repurchase Program”), authorizing the repurchase of up to 75.0 million shares (as adjusted for any subsequent stock split, stock dividend or similar transaction) of the Company’s common stock. There is no limit on the duration of the 2013 Share Repurchase Program.
During the three and six months ended June 30, 2013, we repurchased 8.2 million and 13.3 million shares for $501.0 million and $801.0 million, respectively. Repurchases during the second quarter included 1.2 million shares of common stock for an aggregate purchase price of $68.4 million that were held on behalf of participants who acquired such shares upon the consummation of the Merger as a result of conversion of Medco shares previously held in Medco’s 401(k) plan. As previously announced, the Express Scripts 401(k) Plan no longer offers an investment fund option consisting solely of shares of Express Scripts common stock, and previously held shares were to be sold on or about the first anniversary of the Merger. This repurchase is not considered part of the 2013 Share Repurchase Program. The remaining shares repurchased throughout 2013 were purchased as part of the 2013 Share Repurchase Program. As of June 30, 2013, there were 62.9 million shares remaining under the 2013 Share Repurchase Program. Additional share repurchases, if any, will be made in such amounts and at such times as the Company deems appropriate based upon prevailing market and business conditions and other factors. Current year repurchases were funded through internally generated cash.

17


Note 9 - Stock-based compensation plans
In March 2011, ESI’s Board of Directors adopted the ESI 2011 Long-Term Incentive Plan (the “2011 LTIP”), which provides for the grant of various equity awards with various terms to our officers, directors and key employees selected by the Compensation Committee of the Board of Directors. The 2011 LTIP was approved by ESI’s stockholders in May 2011 and became effective June 1, 2011. Upon consummation of the Merger, the Company assumed sponsorship of the 2011 LTIP. Under the 2011 LTIP, we may issue stock options, stock-settled stock appreciation rights (“SSRs”), restricted stock units, restricted stock awards, performance share awards and other types of awards. Subsequent to the effective date of the 2011 LTIP, no additional awards have been or will be granted under the 2000 Long-Term Incentive Plan (“2000 LTIP”), which provided for the grant of various equity awards with various terms to our officers, directors and key employees selected by the Compensation Committee.
Effective upon the closing of the Merger, the Company assumed sponsorship of the Medco Health Solutions, Inc. 2002 Stock Incentive Plan (the “2002 Stock Incentive Plan”), allowing Express Scripts to issue awards under this plan. Under the 2002 Stock Incentive Plan, Medco granted, and, following the Merger, Express Scripts has granted and may continue to grant, stock options, restricted stock units and other types of awards to officers, employees and directors.
Awards granted under the 2000 LTIP, the 2011 LTIP and the 2002 Stock Incentive Plan are subject to accelerated vesting under certain specified circumstances resulting from a change in control and termination. The maximum term of stock options, SSRs, restricted stock and performance shares granted under the 2000 LTIP, the 2011 LTIP and the 2002 Stock Incentive Plan is 10 years.
Under our stock-based compensation plans, we have issued stock options, SSRs, restricted stock awards, restricted stock units and performance share awards. Subsequent to the Merger, all awards are settled by issuance of new shares. During the six months ended June 30, 2013, we granted 3.3 million stock options with a weighted average fair market value of $17.16. The SSRs and stock options granted under the 2000 LTIP, 2011 LTIP and 2002 Stock Incentive Plan have three-year graded vesting. Due to the nature of the awards, we use the same valuation methods and accounting treatments for SSRs and stock options.
The fair value of options and SSRs granted is estimated on the date of grant using a Black-Scholes multiple option-pricing model with the following weighted average assumptions:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Expected life of option
4-5 years
 
3-5 years
 
4-5 years
 
2-5 years
Risk-free interest rate
0.6%-1.1%
 
0.4%-0.8%
 
0.6%-1.1%
 
0.3%-0.9%
Expected volatility of stock
28%-36%
 
29%-38%
 
28%-37%
 
29%-38%
Expected dividend yield
None
 
None
 
None
 
None
The Black-Scholes model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term and forfeiture rate of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior as well as expected behavior on outstanding options. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of our stock price. These factors could change in the future, which would affect the stock-based compensation expense in future periods.
During the six months ended June 30, 2013, we granted to certain officers and employees approximately 1.1 million restricted stock units and performance shares with a weighted average fair market value of $58.24. Restricted stock units and performance shares granted under the 2000 LTIP, 2011 LTIP and 2002 Stock Incentive Plan vest over three years. Restricted stock units granted under the 2011 LTIP and the 2002 Stock Incentive Plan subsequent to the Merger vest on a graded schedule. Performance shares, as well as Medco’s restricted stock units granted under the 2002 Stock Incentive Plan prior to the Merger, cliff vest at the end of the vesting period. The number of performance shares that ultimately vest is dependent upon achieving specific performance targets. Prior to vesting, performance shares are subject to forfeiture to us without consideration upon termination of employment under certain circumstances. The original amount of performance share grants is subject to a multiplier of up to 2.5 based on the achievement of certain performance metrics. During the six months ended June 30, 2013, approximately 0.1 million additional performance shares were granted to certain officers for achieving certain performance metrics.

18


We recognized stock-based compensation expense of $39.8 million and $230.0 million in the three months ended June 30, 2013 and 2012, respectively, and $87.0 million and $246.2 million in the six months ended June 30, 2013 and 2012, respectively. The decrease in pre-tax compensation expense for the 2013 periods resulted from awards converted in connection with the Merger in the second quarter of 2012. Unamortized stock-based compensation as of June 30, 2013 was $85.2 million for stock options and SSRs and $99.5 million for restricted stock units and performance shares.

Note 10 - Commitments and contingencies
In the ordinary course of business there have arisen various legal proceedings, investigations, recoupment demands or claims now pending against us or our subsidiaries. In accordance with applicable accounting guidance, we record accruals for certain of our outstanding legal proceedings, investigations or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. We evaluate, on a quarterly basis, developments in legal proceedings, investigations or claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable. We disclose the amount of the accrual if the financial statements would be otherwise misleading, which was not the case for any such accruals for the six months ended June 30, 2013 or 2012.
We record self-insurance accruals based upon estimates of the aggregate liability of claim costs in excess of our insurance coverage. Accruals are estimated using certain actuarial assumptions followed in the insurance industry and our historical experience. The majority of these claims are legal claims and our liability estimate is primarily related to the cost to defend these claims. We do not accrue for settlements, judgments, monetary fines or penalties until such amounts are probable and estimable. Under authoritative accounting guidance, if the range of probable loss is broad, the liability accrued should be based on the lower end of the range.
When a loss contingency is not both probable and estimable, we do not establish an accrued liability. However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then we disclose an estimate of the possible loss or range of loss, if such estimate can be made, or disclose that an estimate cannot be made.
The assessments of whether a loss is probable or a reasonable possibility, and whether the loss or a range of loss is estimable, often involve a series of complex judgments about future events. We are often unable to estimate a range of reasonably possible losses, particularly where (i) the damages sought are substantial or indeterminate, (ii) the proceedings are in the early stages, or (iii) the matters involve novel or unsettled legal theories or a large number of parties. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss, fine, penalty or business impact, if any. Accordingly, for many proceedings, we are currently unable to estimate the loss or a range of possible loss. For a limited number of proceedings, we may be able to reasonably estimate the possible range of loss in excess of any accruals. However, we believe that such matters, individually and in the aggregate, when finally resolved, are not reasonably likely to have a material adverse effect on our consolidated cash flow or financial condition. We also believe that any amount that could be reasonably estimated in excess of accruals, if any, for such proceedings is not material. However, an adverse resolution of one or more of such matters could have a material adverse effect on our results of operations in a particular quarter or fiscal year.
While we believe our services and business practices are in compliance with applicable laws, rules and regulations in all material respects, we cannot predict the outcome of these claims at this time. An unfavorable outcome in one or more of these matters could result in the imposition of judgments, monetary fines or penalties, or injunctive or administrative remedies. We can give no assurance that such judgments, fines and remedies, and future costs associated with any such matters, would not have a material adverse effect on our financial condition, our consolidated results of operations or our consolidated cash flows.
Note 11 - Segment information
We report segments on the basis of services offered and have determined we have two reportable segments: PBM and Other Business Operations.
Operating income is the measure used by our chief operating decision maker to assess the performance of each of our operating segments. The following table presents information about our reportable segments, including a reconciliation of operating income from continuing operations to income before income taxes from continuing operations, for the three and six months ended June 30, 2013 and 2012.

19


(in millions)
PBM
 
Other
Business
Operations
 
Total
For the three months ended June 30, 2013
 
 
 
 
 
Product revenues:
 
 
 
 
 
Network revenues(1)
$
16,273.7

 
$

 
$
16,273.7

Home delivery and specialty revenues(2)
9,318.4

 

 
9,318.4

Other revenues

 
503.5

 
503.5

Service revenues
277.1

 
52.3

 
329.4

Total revenues
25,869.2

 
555.8

 
26,425.0

Depreciation and amortization expense
602.8

 
6.8

 
609.6

Operating income
981.3

 
9.0

 
990.3

Equity income from joint venture
 
 
 
 
7.0

Interest income
 
 
 
 
1.1

Interest expense and other
 
 
 
 
(127.6
)
Income before income taxes
 
 
 
 
870.8

Capital expenditures
85.9

 
0.2

 
86.1

For the three months ended June 30, 2012
 
 
 
 
 
Product revenues:
 
 
 
 
 
Network revenues(1)
$
16,834.8

 
$

 
$
16,834.8

Home delivery and specialty revenues(2)
9,791.6

 

 
9,791.6

Other revenues

 
585.8

 
585.8

Service revenues
239.8

 
52.6

 
292.4

Total revenues
26,866.2

 
638.4

 
27,504.6

Depreciation and amortization expense
582.1

 
12.5

 
594.6

Operating income (loss)
505.2

 
(5.8
)
 
499.4

Equity income from joint venture
 
 
 
 
4.3

Interest income
 
 
 
 
2.3

Interest expense and other
 
 
 
 
(174.4
)
Income before income taxes
 
 
 
 
331.6

Capital expenditures
42.1

 
3.1

 
45.2

For the six months ended June 30, 2013
 
 
 
 
 
Product revenues:
 
 
 
 
 
Network revenues(1)
$
32,371.5

 
$

 
$
32,371.5

Home delivery and specialty revenues(2)
18,544.6

 

 
18,544.6

Other revenues

 
955.3

 
955.3

Service revenues
512.8

 
103.8

 
616.6

Total revenues
51,428.9

 
1,059.1

 
52,488.0

Depreciation and amortization expense
1,196.6

 
13.6

 
1,210.2

Operating income
1,807.8

 
24.4

 
1,832.2

Equity income from joint venture
 
 
 
 
16.8

Interest income
 
 
 
 
2.7

Interest expense and other
 
 
 
 
(343.0
)
Income before income taxes
 
 
 
 
1,508.7

Capital expenditures
192.6

 
2.4

 
195.0


20


(in millions)
PBM
 
Other
Business
Operations
 
Total
For the six months ended June 30, 2012
 
 
 
 
 
Product revenues:
 
 
 
 
 
Network revenues(1)
$
24,518.6

 
$

 
$
24,518.6

Home delivery and specialty revenues(2)
13,772.3

 

 
13,772.3

Other revenues

 
957.4

 
957.4

Service revenues
329.9

 
59.0

 
388.9

Total revenues
38,620.8

 
1,016.4

 
39,637.2

Depreciation and amortization expense
645.2

 
14.4

 
659.6

Operating income (loss)
1,068.8

 
(2.5
)
 
1,066.3

Equity income from joint venture
 
 
 
 
4.3

Interest income
 
 
 
 
4.6

Interest expense and other
 
 
 
 
(306.4
)
Income before income taxes
 
 
 
 
768.8

Capital expenditures
59.4

 
4.5

 
63.9

(1)
Includes retail pharmacy co-payments of $3,204.3 million and $3,519.1 million for the three months ended June 30, 2013 and 2012, respectively, and $6,878.7 million and $5,015.7 million for the six months ended June 30, 2013 and 2012, respectively.
(2)
Includes home delivery, specialty and other including: (a) drugs distributed through patient assistance programs and (b) drugs we distribute to other PBMs’ clients under limited distribution contracts with pharmaceutical manufacturers, and (c) FreedomFP claims.
The following table presents balance sheet information about our reportable segments, including the discontinued operations of our businesses within UBC held for sale and our European Operations: 
(in millions)
PBM
 
Other
Business
Operations
 
Discontinued
Operations
 
Total
As of June 30, 2013
 
 
 
 
 
 
 
Total assets
$
53,333.6

 
$
921.7

 
$
326.2

 
$
54,581.5

Investment in equity method investees
$
23.1

 
$

 
$

 
$
23.1

 
 
 
 
 
 
 
 
As of December 31, 2012
 
 
 
 
 
 
 
Total assets
$
54,626.3

 
$
3,021.2

 
$
463.7

 
$
58,111.2

Investment in equity method investees
$
11.9

 
$

 
$

 
$
11.9

PBM product revenues consist of revenues from the sale of prescription drugs by retail pharmacies in our retail pharmacy networks, revenues from the dispensing of prescription drugs from our home delivery pharmacies and distribution of certain fertility and specialty drugs. Other Business Operations product revenues consist of specialty distribution activities and development of scientific evidence to guide the safe, effective and affordable use of medicines. PBM service revenues include administrative fees associated with the administration of retail pharmacy networks contracted by certain clients, informed decision counseling services and specialty distribution services. Other Business Operations service revenues include revenues related to data analytics and research associated with our UBC business as well as from healthcare card administration from the period January 1, 2012 through September 14, 2012, the date of disposal of CYC.
The top five clients in the aggregate represent 32.5% and 36.1% of our consolidated revenue for the three and six months ended June 30, 2013, respectively. None of these clients on an individual basis exceed 10.0% of consolidated revenues for the three and six months ended June 30, 2013.

21


Revenues earned by our continuing operations international businesses totaled $17.2 million and $23.6 million for the three months ended June 30, 2013 and 2012, respectively, and $35.6 million and $39.8 million for the six months ended June 30, 2013 and 2012, respectively. All other continuing operations revenues were earned in the United States. Long-lived assets of our continuing operations international businesses (consisting primarily of fixed assets) totaled $48.1 million and $32.6 million as of June 30, 2013 and December 31, 2012, respectively. All other continuing operations long-lived assets are domiciled in the United States.

Note 12 - Condensed consolidating financial information
The senior notes issued by the Company, ESI and Medco are jointly and severally and fully and unconditionally (subject to certain customary release provisions, including sale, exchange, transfer or liquidation of the guarantor subsidiary) guaranteed by our 100% owned domestic subsidiaries, other than certain regulated subsidiaries, and, with respect to notes issued by ESI and Medco, by us. The following condensed consolidating financial information has been prepared in accordance with the requirements for presentation of such information. The condensed consolidating financial information presented below is not indicative of what the financial position, results of operations, or cash flows would have been had each of the entities operated as an independent company during the period for various reasons, including, but not limited to, intercompany transactions and integration of systems.
In December 2012 we sold both our Liberty and EAV subsidiaries. In addition, during the fourth quarter of 2012, we determined that our European Operations and portions of UBC would meet the criteria of discontinued operations. In June 2013 we sold the portion of our UBC business which primarily provided technology solutions and publications to biopharmaceutical companies. Consequently, the operations of EAV, our European Operations, the international operations of UBC classified as discontinued and the portion of our UBC business sold in June 2013 are included as discontinued operations of the non-guarantors as of and for the three and six months ended June 30, 2013 and 2012 (through their respective dates of sale, as applicable), and as of December 31, 2012. The domestic operations of UBC classified as discontinued operations are included as discontinued operations of the guarantors as of and for the three and six months ended June 30, 2013 and 2012, and as of December 31, 2012. Results for the three and six months ended June 30, 2012 include the operations of Liberty, EAV, our European Operations, and UBC subsequent to the date of the Merger, April 2, 2012 (revised to reflect the operations as discontinued operations as applicable). The following presentation reflects the structure that exists as of the most recent balance sheet date and also includes certain retrospective revisions to conform prior periods to current period presentation (discussed and presented in further detail below). The condensed consolidating financial information is presented separately for:
 
(i)
Express Scripts (the Parent Company), the issuer of certain guaranteed obligations;
(ii)
ESI, guarantor, the issuer of additional guaranteed obligations;
(iii)
Medco, guarantor, the issuer of additional guaranteed obligations;
(iv)
Guarantor subsidiaries, on a combined basis (but excluding ESI and Medco), as specified in the indentures related to Express Scripts’, ESI’s and Medco’s obligations under the notes;
(v)
Non-guarantor subsidiaries, on a combined basis;
(vi)
Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among Express Scripts, ESI, Medco, the guarantor subsidiaries and the non-guarantor subsidiaries, (b) eliminate the investments in our subsidiaries and (c) record consolidating entries; and
(vii)
Express Scripts and its subsidiaries on a consolidated basis.
Certain amounts from prior periods have been reclassified to conform to current period presentation:
(i)
With respect to the condensed consolidating statement of operations for the three and six months ended June 30, 2012, amounts related to net income attributable to non-controlling interest have been reclassified from the “Operating expenses” line item to the “Net income attributable to non-controlling interest” line item as follows:
 
Three months ended
Six months ended
 
June 30, 2012
June 30, 2012
(in millions)
Non-Guarantors
 
Consolidated
Non-Guarantors
 
Consolidated
Operating Expenses
$
(3.4
)
 
$
(3.4
)
$
(5.8
)
 
$
(5.8
)
Net income attributable to non-controlling interest
$
3.4

 
$
3.4

$
5.8

 
$
5.8


22



(ii)
With respect to the condensed consolidating statement of cash flows for the six months ended June 30, 2012, amounts related to distributions paid to non-controlling interest have been reclassified from the “Net cash flows provided by (used in) operating activities” line item to the “Distributions paid to non-controlling interest” line item within the cash flows from financing activities section, as follows:
(in millions)
Non-Guarantors
 
Consolidated
Net cash flows provided by (used in) operating activities
$
3.4

 
$
3.4

Distributions paid to non-controlling interest
$
(3.4
)
 
$
(3.4
)

(iii)
As noted in our quarterly report on Form 10-Q for the period ending September 30, 2012, and as subsequently modified in Exhibit 99.6 to the S-4 filed November 19, 2012, with respect to the condensed consolidating statement of operations for the three and six months ended June 30, 2012, amounts related to certain intercompany revenues and operating expenses were not recorded on a gross basis within the respective columns and certain operating expenses were not appropriately allocated to the respective column. The impact of the revision is to increase revenue in the amount of $20.5 million in the Medco column and $799.3 million in the Guarantors column, offset by a decrease of $819.8 million in the Eliminations column. Additionally, operating expense is increased by $192.5 million in the Medco column, $606.8 million in the Guarantors column and $20.5 million in the Non-Guarantors column offset by decreases of $819.8 million in the Eliminations column. The impact of the revision also resulted in an increase of $97.1 million to equity in earnings of subsidiaries in the Medco column, offset in the Eliminations column.

(iv)
As noted in our quarterly report on Form 10-Q for the period ending September 30, 2012, the condensed consolidating statements of operations for the three and six months ended June 30, 2012 reflect the revision to increase operating expenses in the amount of $36.4 million, decrease the provision for taxes by $15.1 million and decrease net income by $21.3 million.

(v)
As noted in our quarterly report on Form 10-Q for the period ending September 30, 2012, with respect to condensed consolidating statement of cash flows for the six month period ended June 30, 2012, amounts related to the tax benefit of employee stock based compensation within cash flows from financing activities were not recorded in the correct column. The impact of the revision is to adjust the tax benefit of employee stock based compensation in the amount of $15.6 million, from the Express Scripts Holding Company column with an increase of $20.1 million in the Express Scripts, Inc. column and decrease of $4.5 million in the Guarantors column.

(vi)
As noted in our quarterly report on Form 10-Q for the period ending September 30, 2012, with respect to the condensed consolidating statement of cash flows for the six month period ended June 30, 2012, amounts related to net income within the cash flows from operating activities were not recorded in the correct column. The impact of the revision is to adjust cash flows from operating activities to increase the Medco column by $148.6 million and decrease the Guarantors by the same amount, with offsetting amounts to cash flows from financing activities.

(vii)
With respect to the condensed consolidating balance sheet as of December 31, 2012, amounts related to the goodwill allocated to Medco Health Solutions, Inc. and certain of its guarantor and non-guarantor subsidiaries have changed as we finalized the purchase price allocation in the first quarter of 2013. The impact of the measurement period adjustment is to reallocate goodwill and intercompany amounts as follows:
(in millions)
Medco Health Solutions, Inc.
 
Guarantors
 
Non-guarantors
 
Eliminations
Intercompany assets
$
(2,040.0
)
 
$
2,000.5

 
$

 
$
39.5

Goodwill
$
2,040.0

 
$
(2,000.5
)
 
$
39.5

 
$

Intercompany liabilities
$

 
$

 
$
(39.5
)
 
$
39.5



23


Condensed Consolidating Balance Sheet
(in millions)
Express
Scripts
Holding
Company
 
Express
Scripts, Inc.
 
Medco Health
Solutions, Inc.
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
As of June 30, 2013
Cash and cash equivalents
$

 
$
853.8

 
$
1.2

 
$
172.5

 
$
314.7

 
$

 
$
1,342.2

Restricted cash and investments

 

 
1.0

 

 
11.4

 

 
12.4

Receivables, net

 
1,135.2

 
1,690.3

 
1,413.1

 
314.2

 

 
4,552.8

Other current assets

 
117.6

 
271.5

 
1,834.4

 
34.1

 

 
2,257.6

Current assets of discontinued operations

 

 

 
59.2

 
78.6

 

 
137.8

Total current assets

 
2,106.6

 
1,964.0

 
3,479.2

 
753.0

 

 
8,302.8

Property and equipment, net

 
437.8

 

 
1,207.1

 
18.7

 

 
1,663.6

Investments in subsidiaries
32,401.9

 
8,663.1

 
5,208.1

 

 

 
(46,273.1
)
 

Intercompany
1,339.3

 

 
122.2

 
7,074.3

 

 
(8,535.8
)
 

Goodwill

 
2,921.4

 
22,608.2

 
3,789.7

 
25.9

 

 
29,345.2

Other intangible assets, net
59.4

 
1,131.2

 
11,780.1

 
2,044.9

 
5.7

 

 
15,021.3

Other assets

 
73.2

 
12.3

 
3.9

 
6.4

 
(35.6
)
 
60.2

Noncurrent assets of discontinued operations

 

 

 
146.0

 
42.4

 

 
188.4

Total assets
$
33,800.6

 
$
15,333.3

 
$
41,694.9

 
$
17,745.1

 
$
852.1

 
$
(54,844.5
)
 
$
54,581.5

Claims and rebates payable
$

 
$
2,327.6

 
$
3,495.8

 
$

 
$

 
$

 
$
5,823.4

Accounts payable

 
648.7

 
66.7

 
1,844.9

 
79.0

 

 
2,639.3

Accrued expenses
62.3

 
200.3

 
289.4

 
742.5

 
108.6

 

 
1,403.1

Current maturities of long-term debt
631.6

 

 

 

 

 

 
631.6

Current liabilities of discontinued operations

 

 

 
54.8

 
66.1

 

 
120.9

Total current liabilities
693.9

 
3,176.6

 
3,851.9

 
2,642.2

 
253.7

 

 
10,618.3

Long-term debt
9,240.2

 
1,994.1

 
2,414.2

 

 

 

 
13,648.5

Intercompany

 
8,294.8

 

 

 
241.0

 
(8,535.8
)
 

Deferred taxes

 

 
4,249.7

 
1,404.5

 
7.8

 

 
5,662.0

Other liabilities

 
176.7

 
468.3

 
103.3

 
21.5

 
(35.6
)
 
734.2

Noncurrent liabilities of discontinued operations

 

 

 
34.6

 
7.2

 

 
41.8

Non-controlling interest

 

 

 

 
10.2

 

 
10.2

Express Scripts stockholders’ equity
23,866.5

 
1,691.1

 
30,710.8

 
13,560.5

 
310.7

 
(46,273.1
)
 
23,866.5

Total liabilities and stockholders’ equity
$
33,800.6

 
$
15,333.3

 
$
41,694.9

 
$
17,745.1

 
$
852.1

 
$
(54,844.5
)
 
$
54,581.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 

24


Condensed C