10-Q 1 esrx-09302016x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 2016.
 
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  ☒  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  ☒  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
 
 
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  ☐  No ☒
 
Common stock outstanding as of September 30, 2016:
 
616,621,000

 
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)
September 30, 2016
 
December 31, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,304.7

 
$
3,186.3

Receivables, net
6,967.0

 
6,721.3

Inventories
1,677.4

 
2,023.1

Prepaid expenses and other current assets
173.9

 
128.8

Total current assets
11,123.0

 
12,059.5

Property and equipment, net
1,255.5

 
1,291.3

Goodwill
29,278.3

 
29,277.3

Other intangible assets, net
9,099.1

 
10,469.7

Other assets
153.4

 
145.5

Total assets
$
50,909.3

 
$
53,243.3

 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Claims and rebates payable
$
8,717.1

 
$
9,397.7

Accounts payable
3,791.1

 
3,451.8

Accrued expenses
2,286.3

 
2,659.4

Current maturities of long-term debt
1,184.0

 
1,646.4

Total current liabilities
15,978.5

 
17,155.3

Long-term debt
14,924.5

 
13,946.3

Deferred taxes
3,734.8

 
4,069.8

Other liabilities
662.5

 
691.4

Total liabilities
35,300.3

 
35,862.8

Commitments and contingencies (Note 8)


 


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

 

Common stock, 2,985.0 shares authorized, $0.01 par value; shares issued: 856.8 and 854.5, respectively; shares outstanding: 616.6 and 676.9, respectively
8.6

 
8.5

Additional paid-in capital
23,175.7

 
22,204.7

Accumulated other comprehensive loss
(9.6
)
 
(14.0
)
Retained earnings
10,366.5

 
8,396.8

 
33,541.2

 
30,596.0

Common stock in treasury at cost, 240.2 and 177.6 shares, respectively
(17,940.9
)
 
(13,223.2
)
Total Express Scripts stockholders’ equity
15,600.3

 
17,372.8

Non-controlling interest
8.7

 
7.7

Total stockholders’ equity
15,609.0

 
17,380.5

Total liabilities and stockholders’ equity
$
50,909.3

 
$
53,243.3

See accompanying Notes to Unaudited Consolidated Financial Statements

3


EXPRESS SCRIPTS HOLDING COMPANY
Unaudited Consolidated Statement of Operations
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in millions, except per share data)
2016
 
2015
 
2016
 
2015
Revenues(1)
$
25,410.1

 
$
25,222.6

 
$
75,424.2

 
$
75,576.4

Cost of revenues(1)
23,136.0

 
23,049.1

 
69,141.9

 
69,437.7

Gross profit
2,274.1

 
2,173.5

 
6,282.3

 
6,138.7

Selling, general and administrative
858.1

 
1,007.3

 
2,669.2

 
3,013.2

Operating income
1,416.0

 
1,166.2

 
3,613.1

 
3,125.5

Other (expense) income:
 
 
 
 
 
 
 
Interest income and other
8.3

 
7.8

 
27.4

 
19.1

Interest expense and other
(273.4
)
 
(128.4
)
 
(548.8
)
 
(377.1
)
 
(265.1
)
 
(120.6
)
 
(521.4
)
 
(358.0
)
Income before income taxes
1,150.9

 
1,045.6

 
3,091.7

 
2,767.5

Provision for income taxes
422.4

 
378.2

 
1,103.9

 
1,046.9

Net income
728.5

 
667.4

 
1,987.8

 
1,720.6

Less: Net income attributable to non-controlling interest
5.6

 
5.7

 
18.1

 
17.7

Net income attributable to Express Scripts
$
722.9

 
$
661.7

 
$
1,969.7

 
$
1,702.9

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding during the period:
 
 
 
 
 
 
 
Basic
622.6

 
676.3

 
632.9

 
693.1

Diluted
627.1

 
682.2

 
637.4

 
699.5

Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.16

 
$
0.98

 
$
3.11

 
$
2.46

Diluted
$
1.15

 
$
0.97

 
$
3.09

 
$
2.43


1
Includes retail pharmacy co-payments of $2,008.5 million and $2,161.5 million for the three months ended September 30, 2016 and 2015, respectively, and $6,685.9 million and $7,118.2 million for the nine months ended September 30, 2016 and 2015, respectively.
See accompanying Notes to Unaudited Consolidated Financial Statements


4


EXPRESS SCRIPTS HOLDING COMPANY
Unaudited Consolidated Statement of Comprehensive Income
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in millions)
2016
 
2015
 
2016
 
2015
Net income
$
728.5

 
$
667.4

 
$
1,987.8

 
$
1,720.6

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(1.7
)
 
(7.3
)
 
4.4

 
(12.8
)
Comprehensive income
726.8

 
660.1

 
1,992.2

 
1,707.8

Less: Comprehensive income attributable to non-controlling interest
5.6

 
5.7

 
18.1

 
17.7

Comprehensive income attributable to Express Scripts
$
721.2

 
$
654.4

 
$
1,974.1

 
$
1,690.1

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 Loss
 
Retained Earnings
 
Treasury Stock
 
Non-controlling Interest
 
Total
Balance at December 31, 2015
854.5

 
$
8.5

 
$
22,204.7

 
$
(14.0
)
 
$
8,396.8

 
$
(13,223.2
)
 
$
7.7

 
$
17,380.5

Net income

 

 

 

 
1,969.7

 

 
18.1

 
1,987.8

Other comprehensive income

 

 

 
4.4

 

 

 

 
4.4

Treasury stock acquired

 

 
825.0

 

 

 
(4,717.7
)
 

 
(3,892.7
)
Changes in stockholders’ equity related to employee stock plans
2.3

 
0.1

 
146.0

 

 

 

 

 
146.1

Distributions to non-controlling interest

 

 

 

 

 

 
(17.1
)
 
(17.1
)
Balance at September 30, 2016
856.8

 
$
8.6

 
$
23,175.7

 
$
(9.6
)
 
$
10,366.5

 
$
(17,940.9
)
 
$
8.7

 
$
15,609.0

See accompanying Notes to Unaudited Consolidated Financial Statements

6


EXPRESS SCRIPTS HOLDING COMPANY
Unaudited Consolidated Statement of Cash Flows
 
Nine Months Ended September 30,
(in millions)
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
1,987.8

 
$
1,720.6

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,611.2

 
1,727.7

Deferred income taxes
(334.0
)
 
(270.5
)
Employee stock-based compensation expense
81.9

 
86.8

Other, net
(19.1
)
 
(45.3
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(270.7
)
 
(1,468.7
)
Inventories
345.7

 
382.7

Other current and noncurrent assets
(43.5
)
 
(139.7
)
Claims and rebates payable
(680.7
)
 
250.4

Accounts payable
348.0

 
172.2

Accrued expenses
(327.4
)
 
(425.0
)
Other current and noncurrent liabilities
(28.7
)
 
(16.9
)
Net cash flows provided by operating activities
2,670.5

 
1,974.3

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(237.6
)
 
(177.1
)
Other, net
(7.6
)
 
19.2

Net cash used in investing activities
(245.2
)
 
(157.9
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt, net of discounts
5,986.8

 
5,500.0

Repayment of long-term debt
(5,395.0
)
 
(3,353.3
)
Treasury stock acquired
(3,892.7
)
 
(5,500.0
)
Net proceeds from employee stock plans
56.0

 
155.0

Excess tax benefit relating to employee stock-based compensation
11.1

 
53.0

Other, net
(75.7
)
 
(58.8
)
Net cash used in financing activities
(3,309.5
)
 
(3,204.1
)
Effect of foreign currency translation adjustment
2.6

 
(6.7
)
Net decrease in cash and cash equivalents
(881.6
)
 
(1,394.4
)
Cash and cash equivalents at beginning of period
3,186.3

 
1,832.6

Cash and cash equivalents at end of period
$
2,304.7

 
$
438.2

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
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”). We believe 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 our 2015 Annual Financial Statements for the year ended December 31, 2015, included in Item 8 - Consolidated Financial Statements and Supplementary Data for the year ended December 31, 2015, included on Form 10-K filed with the SEC on February 16, 2016. For a description of our accounting policies, refer to the Notes to the Consolidated Financial Statements included therein.
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 as of September 30, 2016, the consolidated balance sheet as of December 31, 2015, the unaudited consolidated statement of operations and unaudited consolidated statement of comprehensive income for the three and nine months ended September 30, 2016 and 2015, the unaudited consolidated statement of changes in stockholders’ equity for the nine months ended September 30, 2016, and the unaudited consolidated statement of cash flows for the nine months ended September 30, 2016 and 2015. Certain amounts in the prior year have been reclassified to conform to the current year presentation. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
New accounting guidance. In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The guidance addresses the classification of cash flow related to (1) debt prepayment or extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance, including bank-owned life insurance, (6) distributions received from equity method investees and (7) beneficial interests in securitization transactions. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will generally be applied retrospectively and is effective for financial statements issued for annual reporting periods beginning after December 15, 2017. Early application is permitted. We are currently evaluating the impact of this standard on our consolidated statement of cash flows.
In March 2016, FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation. The new standard simplifies the accounting for stock-based compensation, including amendments on how both taxes related to stock-based compensation and cash payments made to taxing authorities are recorded. These amendments are expected to impact net income, earnings per share (“EPS”) and the consolidated statement of cash flows. The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2016, and early application is permitted, with any adjustments reflected as of the beginning of the fiscal year of adoption. We are currently evaluating the impact of this standard on our consolidated financial statements.
In February 2016, FASB issued ASU 2016-02, Leases (ASC Topic 842), which supersedes ASC Topic 840, Leases. This ASU is intended to increase transparency and comparability of organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2018, and early application is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606), which supersedes ASC Topic 605, Revenue Recognition. The new standard requires companies to recognize revenues upon transfer of goods or services to customers in amounts that reflect the consideration which the company expects to receive in exchange for those goods or services. In July 2015, the FASB delayed the effective date of the standard by one year. The new guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2017, and early application is not permitted before the original effective date of annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of this standard on our consolidated financial statements.

8


Note 2 - Fair value measurements
Authoritative 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.
The fair values of cash and cash equivalents and investments (Level 1), accounts receivable, claims and rebates payable and accounts payable approximate carrying values due to the short-term maturities of these instruments. Financial assets accounted for at fair value on a recurring basis include cash equivalents of $1,644.6 million and $1,795.5 million and trading securities (included in other assets and consisting primarily of mutual funds) of $29.5 million and $26.8 million as of September 30, 2016 and December 31, 2015, respectively. These assets are carried at fair value based on quoted prices in active markets for identical securities (Level 1). Cash equivalents include investments in AAA-rated money market mutual funds with original maturities of less than 90 days.
The fair values, which approximate the carrying values, of our 2015 two-year term loan and 2015 five-year term loan (Level 2) (as defined in Note 5 - Financing) were estimated using the current market rates for debt with similar maturities. The fair values of our senior notes are $13,695.0 million and $11,078.0 million as of September 30, 2016 and December 31, 2015, respectively. See Note 5 - Financing for further discussion of the carrying values of our debt. The fair values of our senior notes were estimated based on observable market information (Level 2). In determining the fair values of liabilities, we took into consideration the risk of nonperformance. Nonperformance risk refers to the risk 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 values of our liabilities.    

9


Note 3 - Goodwill and other intangible assets
Following is a summary of our goodwill and other intangible assets for our two reportable segments, Pharmacy Benefit Management (“PBM”) and Other Business Operations.
 
September 30, 2016
 
December 31, 2015
(in millions)
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Goodwill
 
 
 
 
 
 
 
 
 
 
 
PBM
$
29,287.8

 
$
(106.9
)
 
$
29,180.9

 
$
29,286.7

 
$
(106.8
)
 
$
29,179.9

Other Business Operations
97.4

 

 
97.4

 
97.4

 

 
97.4

 
$
29,385.2

 
$
(106.9
)
 
$
29,278.3

 
$
29,384.1

 
$
(106.8
)
 
$
29,277.3

Other intangible assets
 
 
 
 
 
 
 
 
 
 
 
PBM
 
 
 
 
 
 
 
 
 
 
 
Customer contracts
$
17,570.7

 
$
(8,629.9
)
 
$
8,940.8

 
$
17,570.3

 
$
(7,290.0
)
 
$
10,280.3

Trade names
226.6

 
(100.3
)
 
126.3

 
226.6

 
(83.6
)
 
143.0

Miscellaneous
8.7

 
(7.8
)
 
0.9

 
8.7

 
(6.5
)
 
2.2

 
17,806.0

 
(8,738.0
)
 
9,068.0

 
17,805.6

 
(7,380.1
)
 
10,425.5

Other Business Operations
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
107.5

 
(95.9
)
 
11.6

 
120.1

 
(98.1
)
 
22.0

Trade names
35.7

 
(16.2
)
 
19.5

 
35.7

 
(13.5
)
 
22.2

 
143.2

 
(112.1
)
 
31.1

 
155.8

 
(111.6
)
 
44.2

Total other intangible assets
$
17,949.2

 
$
(8,850.1
)
 
$
9,099.1

 
$
17,961.4

 
$
(7,491.7
)
 
$
10,469.7

Following is a summary of the change in the net carrying value of goodwill by reportable segment: 
(in millions)
PBM
 
Other Business Operations
 
Total
Balance at December 31, 2015
$
29,179.9

 
$
97.4

 
$
29,277.3

Foreign currency translation
1.0

 

 
1.0

Balance at September 30, 2016
$
29,180.9

 
$
97.4

 
$
29,278.3

The aggregate amount of amortization expense of other intangible assets was $463.7 million and $432.9 million for the three months ended September 30, 2016 and 2015, respectively, and $1,370.7 million and $1,298.3 million for the nine months ended September 30, 2016 and 2015, respectively.
Included in total amortization expense is $55.4 million and $23.8 million for the three months ended September 30, 2016 and 2015, respectively, and $145.1 million and $71.4 million for the nine months ended September 30, 2016 and 2015, respectively, related to our 10-year contract with Anthem, Inc. (“Anthem”) to provide PBM services to members of the affiliated health plans of Anthem, which amounts are included as an offset to revenues. When we executed our agreement with Anthem in 2009, we considered the overall structure of the agreement and the nature of our relationship with Anthem, including the complexity of the service level required, and attributed a reasonable likelihood of renewal at the end of its term in 2019. Accordingly, we amortized the agreement using a modified pattern of benefit over an estimated useful life of 15 years. However, due to the sequence of events regarding our discussions with Anthem, culminating in the filing of a lawsuit by Anthem on March 21, 2016, we felt it prudent to consider the increased likelihood of either non-renewal or renewal on substantially different terms such that, beginning in March 2016, we began amortizing our agreement with Anthem over the remaining term of the contract (i.e., using a life of 10 years from the time the agreement was executed in 2009). Previously, we amortized the agreement over 15 years. Therefore, the intangible asset amortization associated with the Anthem agreement will run through the remaining term of the contract at the end of 2019, reducing the previous amortization period by 5 years. This change increased intangible asset amortization by $10.5 million for the first quarter of 2016 and by approximately $32.0 million per quarter beginning in the second quarter of 2016.
The weighted-average amortization period of intangible assets subject to amortization is 15 years, and by major intangible asset class is 8 to 20 years for customer-related intangible assets, 10 years for trade names (excluding legacy Express Scripts, Inc. (“ESI”) trade names which have an indefinite life) and 5 years for other intangible assets.

10


Following is a summary of the annual expected aggregate amortization of other intangible assets (in millions):
Year Ended December 31,
 
Future Amortization
2016
 
$
1,833.0

2017
 
1,446.0

2018
 
1,436.0

2019
 
1,411.0

2020
 
762.0

Note 4 - Earnings per share
Basic 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. Following is the reconciliation between the number of weighted-average shares used in the basic and diluted EPS calculations:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in millions)
2016
 
2015
 
2016
 
2015
Weighted-average number of common shares outstanding during the period—basic
622.6

 
676.3

 
632.9

 
693.1

Dilutive common stock equivalents:(1)
 
 
 
 
 
 
 
Outstanding stock options, restricted stock units and executive deferred compensation units
4.5

 
5.9

 
4.5

 
6.4

Weighted-average number of common shares outstanding during the period—diluted
627.1

 
682.2

 
637.4

 
699.5

(1)
Excludes equity awards of 8.6 million and 2.8 million for the three months ended September 30, 2016 and 2015, respectively, and 7.8 million and 2.2 million for the nine months ended September 30, 2016 and 2015, respectively. These were excluded because the effect is anti-dilutive.

11


Note 5 - Financing
Our debt, issued by us, ESI and Medco Health Solutions, Inc. (“Medco”), net of unamortized discounts, premiums and financing costs, consists of: 
 
 
 
 
 
 
September 30, 
 2016
 
December 31, 
 2015
Long-term Debt
 
Issuer
 
Basis Points(1)
 
Carrying Amount (in millions)
Senior notes(2)
 
 
 
 
 
 
 
 
$1,500.0 million, 3.125% senior notes due May 2016(3)
 
ESI
 
20

 
$

 
$
1,498.7

$1,500.0 million, 2.650% senior notes due February 2017(3)
 
Express Scripts
 
35

 

 
1,494.4

$500.0 million, 1.250% senior notes due June 2017(3)
 
Express Scripts
 
10

 
499.3

 
498.6

$1,200.0 million, 7.125% senior notes due March 2018(3)
 
Medco
 
50

 
876.3

 
1,296.9

$1,000.0 million, 2.250% senior notes due June 2019(3)
 
Express Scripts
 
15

 
994.6

 
993.1

$500.0 million, 7.250% senior notes due June 2019(3)
 
ESI
 
50

 
336.1

 
497.4

$500.0 million, 4.125% senior notes due September 2020(3)
 
Medco
 
25

 
504.2

 
504.9

$500.0 million, 3.300% senior notes due February 2021(3)
 
Express Scripts
 
35

 
495.6

 

$1,250.0 million, 4.750% senior notes due November 2021(3)
 
Express Scripts
 
45

 
1,239.1

 
1,237.5

$1,000.0 million, 3.900% senior notes due February 2022(3)
 
Express Scripts
 
40

 
983.4

 
981.3

$1,000.0 million, 3.000% senior notes due July 2023(3)
 
Express Scripts
 
25

 
992.1

 

$1,000.0 million, 3.500% senior notes due June 2024(3)
 
Express Scripts
 
20

 
987.9

 
986.8

$1,500.0 million, 4.500% senior notes due February 2026(3)
 
Express Scripts
 
45

 
1,480.7

 

$1,500.0 million, 3.400% senior notes due March 2027(4)
 
Express Scripts
 
30

 
1,488.5

 

$700.0 million, 6.125% senior notes due November 2041(3)
 
Express Scripts
 
50

 
444.0

 
692.5

$1,500.0 million, 4.800% senior notes due July 2046(3)
 
Express Scripts
 
40

 
1,482.9

 

Total senior notes
 
 
 
 
 
12,804.7

 
10,682.1

Term loans
 
 
 
 
 
 
 
 
$2,500.0 million, term loan due April 2017(5)
 
Express Scripts
 
N/A

 
499.5

 
1,995.5

$3,000.0 million, term loan due April 2020(5)
 
Express Scripts
 
N/A

 
2,804.3

 
2,915.1

Total term loans
 
 
 
 
 
3,303.8

 
4,910.6

Total debt
 
 
 
 
 
16,108.5

 
15,592.7

Current maturities of debt
 
 
 
 
 
 
 
 
$1,500.0 million, 3.125% senior notes due May 2016(2)(3)
 
ESI
 
20

 

 
1,498.7

$500.0 million, 1.250% senior notes due June 2017(2)(3)
 
Express Scripts
 
10

 
499.3

 

$2,500.0 million, term loan due April 2017(5)
 
Express Scripts
 
N/A

 
499.5

 

$3,000.0 million, term loan due April 2020(5)
 
Express Scripts
 
N/A

 
185.2

 
147.7

Total current maturities of long-term debt
 
 
 
 
 
1,184.0

 
1,646.4

Total long-term debt
 
 
 
 
 
$
14,924.5

 
$
13,946.3

(1)
All senior notes are redeemable prior to maturity at a price equal to the greater of (1) 100% of the aggregate principal amount of any notes being redeemed; or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes being redeemed discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the treasury rate plus the basis points as indicated, plus in each case, unpaid interest on the notes being redeemed accrued to the redemption date.
(2)
All senior notes 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 on a senior unsecured basis by Express Scripts (if issued by either Medco or ESI) and by most of our current and future 100% owned domestic subsidiaries.
(3)
Senior notes require interest to be paid semi-annually, commencing six months subsequent to issuance.
(4)
Senior notes require interest to be paid semi-annually, commencing with September 2016.
(5)
The 2015 two-year term loan and 2015 five-year term loan (each as defined below) had average interest rates of 1.62% and 1.74%, respectively, as of September 30, 2016 and 1.33% and 1.45%, respectively, as of December 31, 2015.

12


Bank credit facilities. In April 2015, we entered into a credit agreement (the “2015 credit agreement”) providing for a five-year $2,000.0 million revolving credit facility (the “2015 revolving facility”), a two-year $2,500.0 million term loan (the “2015 two-year term loan”) and a five-year $3,000.0 million term loan (the “2015 five-year term loan”). At September 30, 2016, no amounts were outstanding under the 2015 revolving facility. We make quarterly principal payments on the 2015 five-year term loan.
The 2015 credit agreement requires interest to be paid, at our option, at LIBOR or an adjusted base rate, plus applicable margin. Depending on our consolidated leverage ratio, the applicable margin over LIBOR ranges from 0.900% to 1.300% for the 2015 revolving facility, 0.875% to 1.375% for the 2015 two-year term loan and 1.000% to 1.500% for the 2015 five-year term loan. The applicable margin over the adjusted base rate ranges from 0.000% to 0.300% for the 2015 revolving facility, 0.000% to 0.375% for the 2015 two-year term loan and 0.000% to 0.500% for the 2015 five-year term loan. We are required to pay commitment fees on the 2015 revolving facility, which range from 0.100% to 0.200% of the revolving loan commitments, depending on our consolidated leverage ratio.
We have two additional credit agreements, each providing for an uncommitted revolving credit facility: $150.0 million executed August 2015 and amended May 2016 with a termination date of May 2017, and $130.0 million executed December 2014 and amended October 2015 and April 2016 with a termination date of April 2017. At September 30, 2016, no amounts were drawn under either facility.
Senior notes. In February 2016, we issued senior notes (the “February 2016 Senior Notes”) consisting of:
$500.0 million aggregate principal amount of 3.300% senior notes due February 2021
$1,500.0 million aggregate principal amount of 4.500% senior notes due February 2026
We used the net proceeds from the sale of the February 2016 Senior Notes to complete a tender offer and follow-on redemption of our 3.125% senior notes due May 2016 (which were fully redeemed in April 2016), to enter into an accelerated share repurchase program and for other general corporate purposes.
In March 2016, we completed the tender offer for $934.7 million of our $1,500.0 million aggregate principal amount of 3.125% senior notes due May 2016 using the proceeds of the February 2016 Senior Notes, and wrote off the associated amount of discounts and financing costs. In April 2016, we completed the redemption of the remaining $565.3 million aggregate principal. These notes were redeemed at a redemption price equal to 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 20 basis points, plus unpaid interest of the notes being redeemed accrued to the redemption date. Total cash payments, excluding accrued interest, related to these notes were $1,506.7 million, which included $6.7 million of repayment costs.
Financing costs of approximately $16.0 million for the issuance of the February 2016 Senior Notes are being amortized over a weighted-average period of 8.8 years.
In July 2016, we issued senior notes (the “July 2016 Senior Notes”) consisting of:
$1,000.0 million aggregate principal amount of 3.000% senior notes due July 2023
$1,500.0 million aggregate principal amount of 3.400% senior notes due March 2027
$1,500.0 million aggregate principal amount of 4.800% senior notes due July 2046
During the three months ended September 30, 2016, we used a portion of the net proceeds from the sale of the July 2016 Senior Notes for the following:
To repay $1,500.0 million of our $2,500.0 million aggregate principal 2015 two-year term loan (of which approximately $2,000.0 million was outstanding as of June 30, 2016).
To complete a tender offer for $1,104.8 million and redeem the remaining $395.2 million of our $1,500.0 million aggregate principal amount of 2.650% senior notes due February 2017. These notes were redeemed at a redemption price equal to 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 35 basis points, plus unpaid interest of the notes being redeemed accrued to the redemption date.
To complete a tender offer for $368.6 million of our $1,200.0 million aggregate principal amount of 7.125% senior notes due March 2018, $162.6 million of $500.0 million aggregate principal amount of 7.250% senior

13


notes due June 2019 and $251.3 million of $700.0 million aggregate principal amount of 6.125% senior notes due November 2041.
In each of the above instances, we wrote off the associated amount of discounts, premiums and financing costs. Total cash payments related to the above, excluding accrued interest, were $3,919.6 million, which included approximately $136.0 million of repayment costs. We plan to use the remaining proceeds for general corporate purposes, which may include the repayment of our other indebtedness, working capital and repurchases of our common stock.
Financing costs of approximately $33.0 million for the issuance of the July 2016 Senior Notes are being amortized over a weighted-average period of 17.0 years.
Covenants. Our bank financing arrangements and senior notes contain certain customary covenants that restrict our ability to incur additional indebtedness, create or permit liens on assets and engage in mergers or consolidations. The covenants related to bank financing arrangements also include, among other things, a maximum leverage ratio. The 7.125% senior notes due March 2018 issued by Medco are also subject to an interest rate adjustment in the event of a downgrade in our credit ratings to below investment grade. At September 30, 2016, we were in compliance with all covenants associated with our debt instruments.
Schedule of maturities. Following is a schedule of maturities, excluding unamortized discounts, premiums and financing costs, for our long-term debt as of September 30, 2016 (in millions):
Year Ended December 31,
Maturities of Long-term Debt
2016(1)
$
37.5

2017
1,225.0

2018
1,206.4

2019
2,537.4

2020
1,475.0

Thereafter
9,698.7

Total
$
16,180.0

(1)
Represents expected aggregate principal payments for the three months ending December 31, 2016.
Note 6 - Common stock
Accelerated share repurchases. In January 2016, we settled the $5,500.0 million accelerated share repurchase agreement executed in April 2015 (the “2015 ASR Agreement”) and received 9.1 million additional shares, resulting in a total of 64.2 million shares received under the 2015 ASR Agreement. The $825.0 million that had previously been recorded in additional paid-in capital in respect of the 2015 ASR Agreement was reclassified to treasury stock upon settlement of the 2015 ASR Agreement.
In February 2016, we entered into an accelerated share repurchase agreement (the “2016 ASR Agreement”) to repurchase shares of our common stock for an initial payment (the “prepayment amount”) of $2,800.0 million. Under the terms of the 2016 ASR Agreement, upon payment of the prepayment amount, we received an initial delivery of 32.1 million shares of our common stock at a price of $69.69 per share, which represented, based on the closing share price of our common stock on Nasdaq on February 25, 2016, approximately 80% of the prepayment amount. The final purchase price per share (the “forward price”) and the final number of shares received were determined using the arithmetic mean of the daily volume-weighted average price per share of our common stock (the “VWAP”) over the term of the 2016 ASR Agreement, less a discount and subject to adjustments pursuant to the terms of the 2016 ASR Agreement (including a cap on the forward price). In August 2016, we settled the 2016 ASR Agreement and received 6.2 million additional shares, resulting in a total of 38.3 million shares received under the 2016 ASR Agreement.
The 2016 ASR Agreement was accounted for as an initial treasury stock transaction and a forward stock purchase contract. We recorded an increase to treasury stock of $2,240.0 million and a decrease to additional paid-in capital of $560.0 million in the unaudited consolidated balance sheet. The $560.0 million recorded in additional paid-in capital was reclassified to treasury stock upon settlement of the 2016 ASR Agreement in August 2016. The forward stock purchase contract was classified as an equity instrument and was deemed to have a fair value of zero at the effective date of the 2016 ASR Agreement. The initial delivery of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net income per share on the effective date of the 2016 ASR Agreement.

14


Treasury share repurchases. Including the shares received under the 2016 ASR Agreement, we repurchased 14.1 million shares under our share repurchase program for $1,132.5 million during the three months ended September 30, 2016. There were no repurchases of the Company’s common stock during the third quarter of 2015. Including the shares received under the 2016 ASR Agreement and upon settlement of the 2015 ASR Agreement, we repurchased 62.6 million shares and 55.1 million shares under our share repurchase program for $4,717.7 million and $4,675.0 million during the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, there were 26.0 million shares remaining under our share repurchase program. Additional share repurchases, if any, will be made in such amounts and at such times as we deem appropriate based upon prevailing market and business conditions and other factors.
Note 7 - Stock-based compensation plans
In March 2016, our Board of Directors adopted the Express Scripts Holding Company 2016 Long-Term Incentive Plan (the “2016 LTIP”), which was approved by our stockholders in May 2016 and authorizes the grant of various equity awards with various terms to our officers, members of our Board of Directors and other key employees. The 2016 LTIP was approved by our stockholders and became effective on May 4, 2016. Under the 2016 LTIP, we may issue stock options, stock appreciation rights (“SARs”), restricted stock awards, restricted stock units, performance share awards and other types of awards. The maximum number of shares available for awards under the 2016 LTIP is 33.0 million. The maximum term of stock options, SARs, restricted stock awards, restricted stock units and performance shares granted under the 2016 LTIP is 10 years.
Effective May 4, 2016, no additional awards will be granted under the 2011 Long-Term Incentive Plan (the “2011 LTIP”), the Accredo Health, Incorporated 2002 Long-Term Incentive Plan (the “Accredo Plan”), the ESI 2000 Long-Term Incentive Plan (the “2000 LTIP”) or the Medco 2002 Stock Incentive Plan (the “2002 SIP”), which authorized the grant of various equity awards with various terms to our officers, members of our Board of Directors and other key employees. However, the terms of these plans will continue to govern awards outstanding under these plans.
The provisions of the 2016 LTIP, the 2011 LTIP, the Accredo Plan, the 2000 LTIP and the 2002 SIP (collectively, the “stock incentive plans”) allow employees to use shares to cover tax withholding on stock awards. Upon vesting of restricted stock and performance shares, employees have taxable income subject to statutory withholding requirements. The number of shares issued to employees may be reduced by the number of shares having a market value equal to our minimum statutory withholding for federal, state and local tax purposes.
Under the stock incentive plans, we have issued stock options, restricted stock units and performance shares. All such awards are settled by issuance of new shares.
Awards granted under the stock incentive plans are subject to accelerated vesting under certain specified circumstances, including upon a change in control and termination, and are also subject to forfeiture without consideration upon termination of employment under certain circumstances. The maximum term of stock options is generally 10 years.
We recognized stock-based compensation expense of $27.2 million and $32.4 million in the three months ended September 30, 2016 and 2015, respectively, and $81.9 million and $86.8 million in the nine months ended September 30, 2016 and 2015, respectively. Unamortized stock-based compensation as of September 30, 2016 was $45.4 million for stock options and $58.0 million for restricted stock units and performance shares.
Stock options. During the nine months ended September 30, 2016, we granted 4.2 million stock options with a weighted-average fair market value of $13.75 per share. Stock options granted generally have three-year graded vesting.
The fair value of stock options granted was estimated on the date of grant using a Black-Scholes multiple option-pricing model with the following weighted-average assumptions:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Expected life of option
3-5 years
 
3-5 years
 
3-5 years
 
3-5 years
Risk-free interest rate
0.9%-1.2%
 
1.0%-1.6%
 
0.9%-1.4%
 
1.0%-1.7%
Expected volatility of stock
20%-25%
 
20%-25%
 
20%-25%
 
20%-26%
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 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

15


options. The risk-free rate is based on the United States 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 recognized in future periods.
Restricted stock units and performance shares. During the nine months ended September 30, 2016, we granted 1.0 million restricted stock units and performance shares with a weighted-average fair market value of $69.81 per share. Restricted stock units generally have three-year graded vesting. Performance shares generally have three-year cliff vesting. The number of performance shares that ultimately vest is dependent upon the achievement of specific performance metrics. The original grant of performance shares is subject to a multiplier of up to 2.5 based on the achievement of the performance metrics. Due to the achievement of certain performance metrics, during the nine months ended September 30, 2016, 0.1 million of common stock shares were issued in settlement of performance shares granted in March 2013.
Note 8 - Commitments and contingencies
We are subject to various legal proceedings, investigations, government inquiries and claims pending against us or our subsidiaries, including, but not limited to, those relating to regulatory, commercial, employment and employee benefits. We record accruals for certain of our outstanding legal proceedings, investigations and claims when we believe it is probable a liability will be incurred and the amount of loss can be reasonably estimated. On a quarterly basis, we evaluate developments in legal proceedings, investigations and claims that could affect the amount of any accrual, as well as any developments that would make a loss both probable and reasonably estimable.
We record self-insurance accruals based on estimates of the aggregate liability of claim costs (including defense costs) in excess of our insurance coverage. 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. If the range of possible loss is broad, and no amount within the range is more likely than any other, the liability accrual is based on the low end of the range.
When a loss contingency is not believed to be 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 believed to be 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 an estimate cannot be made.
The legal proceedings, investigations, government inquires and claims pending against us or our subsidiaries include multi-district litigation, class action lawsuits, antitrust allegations, qui tam lawsuits (“whistleblower” actions) and various governmental inquiries and informational subpoenas.
The assessment of whether a loss is probable and reasonably estimable involves a series of complex judgments about future events. We are often unable to estimate a range of loss due to significant uncertainties, particularly where (i) the damages sought are unspecified or indeterminate; (ii) the proceedings are in the early stages; (iii) the matters involve novel or unsettled legal theories or a large number of parties; (iv) class action status may be sought and certified; (v) it is questionable whether asserted claims or allegations will survive dispositive motion practice; (vi) the impact of discovery on the legal process is unknown; (vii) the settlement posture of the parties has not been determined; or (viii) in the case of certain government agency investigations, whether a sealed qui tam lawsuit has been filed and whether the government agency makes a decision to intervene in the lawsuit following investigation. 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 such matters, individually and in the aggregate, when finally resolved, are not reasonably likely to have a material adverse effect on our cash flow or financial condition. We also believe any amount that could be reasonably estimated in excess of accruals, if any, for such proceedings is not material. However, an unexpected 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.
Subsequent to the acquisition of Medco, we have experienced an increase in the number of inquiries, subpoenas and qui tam lawsuits and in the volume of information requested related thereto. Certain data requests have included several years of information from legacy acquired systems that in some cases may not be readily available. The process of locating the data requested is time consuming and labor intensive, but is required to be responsive and cooperative with the various inquiries.
We cannot predict the timing or outcome of the matters described below:
Jerry Beeman, et al. v. Caremark, et al. Plaintiffs allege that ESI and the other defendants failed to comply with statutory obligations to provide California clients with the results of a bi-annual survey of retail drug prices and have

16


filed a motion for class certification. In March 2014, after rejecting defendants’ objections regarding plaintiffs’ lack of standing and certain constitutionality issues, the Ninth Circuit Court of Appeals remanded the case to the district court for further proceedings. On August 26, 2016, defendants filed a motion to deny class certification. Plaintiffs filed a memorandum in opposition to the motion on September 16, 2016 and defendants filed a reply in support of the motion on October 3, 2016. A hearing on the motion to deny class certification was held on October 17, 2016 and we await the court’s ruling.
Brady Enterprises, Inc., et al. v. Medco Health Solutions, Inc., and North Jackson Pharmacy, Inc., et al. v. Express Scripts, Inc., et al. Plaintiffs assert claims for violation of the Sherman Antitrust Act. Currently, ESI’s motion to decertify the class in the Brady Enterprises case is pending. Oral arguments were held in January 2012.
Anthem, Inc. v. Express Scripts, Inc. Anthem filed this lawsuit alleging various breach of contract claims against ESI relating to the parties’ rights and obligations under the periodic pricing review section of the pharmacy benefit management agreement between the parties, including allegations that ESI failed to negotiate new pricing concessions in good faith, as well as various alleged service issues. Anthem requests the court enter declaratory judgment that ESI is required to provide Anthem competitive benchmark pricing, that Anthem can terminate the agreement, and that ESI is required to provide Anthem with post-termination services at competitive benchmark pricing for one year following any termination by Anthem. Anthem claims it is entitled to $13,000.0 million in additional pricing concessions over the remaining term of the agreement as well as $1,800.0 million for one year following any contract termination by Anthem, and $150.0 million in damages for service issues. On April 19, 2016, in response to Anthem’s complaint, ESI filed its answer denying Anthem’s allegations in their entirety and asserting affirmative defenses and counterclaims against Anthem. Anthem filed a motion to dismiss two counts of ESI’s amended counterclaims on July 8, 2016, and the Company filed a brief in opposition on August 5, 2016, which has been fully briefed.
Melbourne Municipal Firefighters’ Pension Trust Fund v. Express Scripts Holding Company, et al. Plaintiff filed this putative securities class action complaint on behalf of all persons or entities that purchased or otherwise acquired the Company’s publicly traded common stock between February 24, 2015 and March 21, 2016 and alleges the Company and named individuals violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 by carrying out a scheme to defraud the investing public. Plaintiff seeks compensatory damages in favor of Plaintiff and other class members, attorneys’ fees and costs, and equitable relief (for purposes of this Note 8, “Securities Action”). On July 27, 2016, the court appointed a lead plaintiff (for purposes of this Note 8, “Lead Plaintiff”). On August 15, 2016, the Company filed a motion to transfer venue to the Circuit Court of St. Louis County, Missouri, which was fully briefed as of September 8, 2016. On October 14, 2016, Lead Plaintiff filed an amended class action complaint.
In re Express Scripts/Anthem ERISA Litigation (consolidated the following cases on August 1, 2016: John Doe One and John Doe Two v. Express Scripts, Inc., filed May 6, 2016, and Karen Burnett, Brendan Farrell, and Robert Shullich v. Express Scripts, Inc. and Anthem, Inc., filed June 24, 2016). Plaintiffs filed a First Amended Consolidated Class Action Complaint on behalf of health plan beneficiaries who are enrolled in health care plans that are insured or administered by Anthem. Plaintiffs allege that the Company and Anthem breached fiduciary duties and otherwise violated their legal obligations under ERISA, that ESI engaged in mail fraud, wire fraud and other racketeering activity through its invoicing system with Anthem, that ESI breached its contract with Anthem, that plaintiffs are entitled to equitable relief under theories including unjust enrichment, that ESI violated unfair and deceptive trade practices statutes, that Anthem breached the covenant of good faith and fair dealing implied in health plans, and that ESI violated the anti-discrimination provisions of the Affordable Care Act. Plaintiffs seek compensatory damages, declaratory relief, equitable relief and attorneys’ fees and costs.
Abraham Neufeld, derivatively on behalf of nominal defendant Express Scripts Holding Company v. George Paz, et al. Plaintiff filed this stockholder derivative lawsuit alleging certain current and former officers and directors of the Company breached certain fiduciary duties and were unjustly enriched. Plaintiff seeks damages on behalf of the Company from the named defendants, disgorgement of individual defendants’ proceeds derived from sales of the Company’s common stock, equitable relief, and attorneys’ fees and costs. On July 28, 2016, a stipulation and order was entered staying the case until 45 days after Lead Plaintiff in the Securities Action files an amended class action complaint. Lead Plaintiff filed an amended consolidated complaint in the Securities Action on October 14, 2016.
Robert Jessup, derivatively on behalf of Express Scripts Holding Company v. Timothy Wentworth, et al. Plaintiff filed this stockholder derivative lawsuit alleging certain current and former officers and directors of the Company breached certain fiduciary duties and were unjustly enriched. Plaintiff seeks damages on behalf of the Company from the named defendants, a stockholder vote for resolutions regarding amendments to the Company’s by-laws or articles of incorporation with respect to corporate governance policies, equitable relief including a constructive trust restricting

17


the individual defendants’ stock trading activities, restitution and disgorgement of all profits or benefits obtained by the individual defendant’s, and attorneys’ fees and costs.
Richard Weisglas, derivatively on behalf of Express Scripts Holding Company v. Express Scripts Holding Company, et al. Plaintiff filed this stockholder derivative lawsuit alleging certain current and former officers and directors of the Company breached fiduciary duties and were unjustly enriched. Plaintiff seeks damages on behalf of the Company from Individual Defendants, equitable injunctive relief, and attorneys’ fees and costs.
M. Scott Brewer, et al., in their capacities as Trustees for the Carpenters Pension Fund of West Virginia, derivatively on behalf of Express Scripts Holding Company v. Maura C. Breen, et al. Plaintiffs filed this stockholder derivative lawsuit alleging certain current and former officers and directors of the Company breached fiduciary duties and were unjustly enriched and also asserting a claim for corporate waste. Plaintiff seeks damages on behalf of the Company from the individual defendants, an accounting by the individual defendants for all damages, profits, special benefits and unjust enrichment and imposition of a constructive trust, judgment directing the Company to take all necessary actions to reform and improve its corporate governance and internal control procedures, punitive damages, and an award of attorneys’ fees and costs.
We are the subject of various qui tam matters:
United States ex. rel. Steve Greenfield, et al. v. Medco Health Solutions, Inc., Accredo Health Group, Inc., and Hemophilia Health Services, Inc. The complaint alleges defendants violated the federal False Claims Act, the Anti-Kickback Statute, the Civil Monetary Penalty Statute and various state and local false claims statutes. Greenfield filed an amended complaint in October 2014, and the Company filed an answer and affirmative defenses in November 2014. On May 6, 2016, the parties cross-filed motions for summary judgment, cross memoranda in opposition were filed on June 6, 2016, and cross replies were filed on June 27, 2016.
United States of America ex. rel. Shane Lager v. CSL Behring, LLC, CSL Limited, Accredo Health, Inc., and Coram LLC. The complaint, received on June 23, 2015, alleges Accredo violated the federal False Claims Act. On August 21, 2015, the Company filed a motion to dismiss the complaint under the public disclosure bar, for failure to state a claim, and for failure to plead fraud with particularity. Relator filed a response to the motion on October 21, 2015 and the Company filed a reply on November 12, 2015. On January 20, 2016, the Court granted the Company’s motion, as well as motions filed by the other defendants, and the case was dismissed with prejudice. Lager appealed the Court’s ruling and filed his opening Appellant’s Brief on April 18, 2016 and Accredo filed its Defendant’s Brief on June 17, 2016.
We have received and intend to cooperate with various subpoenas from government agencies requesting information.
Investigations under the federal False Claims Act and most state false claims acts may be initiated by the applicable government investigative body or by a qui tam relator’s filing of a complaint under court seal. If a qui tam relator’s complaint remained under seal, applicable law would restrict our ability to disclose such a fact.    
While we believe our services and business practices are in substantial compliance with applicable laws, rules and regulations in all material respects, we cannot predict the outcome of these actions 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.

18


Note 9 - Segment information
We report segments on the basis of products and services offered and have determined we have two reportable segments: PBM and Other Business Operations. Within the Other Business Operations segment, we have aggregated two operating segments that do not meet the quantitative and qualitative criteria to be separately reported.
Operating income is the measure used by our chief operating decision maker to assess the performance of each of our operating segments. Following is information about our reportable segments, including a reconciliation of operating income to income before income taxes for the three and nine months ended September 30, 2016 and 2015.
(in millions)
PBM(1)
 
Other Business Operations
 
Total
For the three months ended September 30, 2016
 
 
 
 
 
Product revenues:
 
 
 
 
 
Network revenues(2)
$
13,000.6

 
$

 
$
13,000.6

Home delivery and specialty revenues(3)
11,031.8

 

 
11,031.8

Other revenues(4)

 
922.2

 
922.2

Service revenues
377.0

 
78.5

 
455.5

Total revenues
24,409.4

 
1,000.7

 
25,410.1

Depreciation and amortization expense
529.9

 
7.8

 
537.7

Operating income
1,404.9

 
11.1

 
1,416.0

Interest income and other
 
 
 
 
8.3

Interest expense and other
 
 
 
 
(273.4
)
Income before income taxes
 
 
 
 
1,150.9

Capital expenditures
74.3

 
4.8

 
79.1

For the three months ended September 30, 2015
 
 
 
 
 
Product revenues:
 
 
 
 
 
Network revenues(2)
$
13,747.2

 
$

 
$
13,747.2

Home delivery and specialty revenues(3)
10,331.8

 

 
10,331.8

Other revenues(4)

 
624.3

 
624.3

Service revenues
432.4

 
86.9

 
519.3

Total revenues
24,511.4

 
711.2

 
25,222.6

Depreciation and amortization expense
575.2

 
7.6

 
582.8

Operating income
1,150.8

 
15.4

 
1,166.2

Interest income and other
 
 
 
 
7.8

Interest expense and other
 
 
 
 
(128.4
)
Income before income taxes
 
 
 
 
1,045.6

Capital expenditures
64.8

 
5.2

 
70.0


19


(in millions)
PBM(1)
 
Other Business Operations
 
Total
For the nine months ended September 30, 2016
 
 
 
 
 
Product revenues:
 
 
 
 
 
Network revenues(2)
$
39,085.3

 
$

 
$
39,085.3

Home delivery and specialty revenues(3)
32,464.8

 

 
32,464.8

Other revenues(4)

 
2,578.3

 
2,578.3

Service revenues
1,047.2

 
248.6

 
1,295.8

Total revenues
72,597.3

 
2,826.9

 
75,424.2

Depreciation and amortization expense
1,587.3

 
23.9

 
1,611.2

Operating income
3,573.1

 
40.0

 
3,613.1

Interest income and other
 
 
 
 
27.4

Interest expense and other
 
 
 
 
(548.8
)
Income before income taxes
 
 
 
 
3,091.7

Capital expenditures
224.6

 
13.0

 
237.6

For the nine months ended September 30, 2015
 
 
 
 
 
Product revenues:
 
 
 
 
 
Network revenues(2)
$
42,266.2

 
$

 
$
42,266.2

Home delivery and specialty revenues(3)
30,041.9

 

 
30,041.9

Other revenues(4)

 
1,809.7

 
1,809.7

Service revenues
1,213.9

 
244.7

 
1,458.6

Total revenues
73,522.0

 
2,054.4

 
75,576.4

Depreciation and amortization expense
1,705.2

 
22.5

 
1,727.7

Operating income
3,070.9

 
54.6

 
3,125.5

Interest income and other
 
 
 
 
19.1

Interest expense and other
 
 
 
 
(377.1
)
Income before income taxes
 
 
 
 
2,767.5

Capital expenditures
158.0

 
19.1

 
177.1

(1)
PBM total revenues and operating income for the nine months ended September 30, 2016 and 2015 includes $106.6 million and $141.7 million, respectively, related to a large client. These amounts were realized in the second quarters of each of 2016 and 2015 due to the structure of the contract.
(2)
Includes retail pharmacy co-payments of $2,008.5 million and $2,161.5 million for the three months ended September 30, 2016 and 2015, respectively, and $6,685.9 million and $7,118.2 million for the nine months ended September 30, 2016 and 2015, respectively.
(3)
Includes home delivery and specialty, including drugs we distribute to other PBMs’ clients under limited distribution contracts with pharmaceutical manufacturers and Freedom Fertility claims.
(4)
Includes other revenues related to drugs distributed through patient assistance programs.
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 revenues from the sale of certain fertility and specialty drugs. Other Business Operations product revenues consist of distribution services of specialty pharmaceuticals and consulting services for pharmaceutical, biotechnology and device manufacturers to collect 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 pharmacy services. Other Business Operations service revenues include revenues related to data analytics and research associated with our United BioSource business.

20


Following is the summary of total assets by reportable segment:
(in millions)
September 30, 
 2016
 
December 31, 
 2015
PBM
$
49,569.8

 
$
52,174.9

Other Business Operations
1,339.5

 
1,068.4

Total assets
$
50,909.3

 
$
53,243.3

We have contracts with Anthem and the United States Department of Defense. These two clients represent 10% or greater of our consolidated revenues for the three and nine months ended September 30, 2016 and in the aggregate represent 29.6% and 29.8% of consolidated revenues for the three and nine months ended September 30, 2016, respectively.
Revenues earned by our international businesses totaled $22.2 million and $19.8 million for the three months ended September 30, 2016 and 2015, respectively, and $66.3 million and $61.1 million for the nine months ended September 30, 2016 and 2015, respectively. All other revenues were earned in the United States. Long-lived assets of our international businesses (consisting primarily of fixed assets) totaled $23.9 million and $21.8 million as of September 30, 2016 and December 31, 2015, respectively. All other long-lived assets are domiciled in the United States.
Note 10 - Condensed consolidating financial information
The senior notes issued by us, 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 certain of 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.
The following presentation reflects the structure that exists as of the most recent balance sheet date. The condensed consolidating financial information is presented separately for:
(i)
Express Scripts Holding Company (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 Holding Company’s, 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 Holding Company, 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 Holding Company and its subsidiaries on a consolidated basis.
In 2015 and 2016, as part of an ongoing reorganization, certain subsidiaries have been merged within the structure defined above through non-cash transfers. Reorganizations that qualify as a transfer of ongoing business operations are reflected retrospectively in the condensed consolidating balance sheet, statement of operations and statement of cash flows. Reorganizations that qualify as a transfer of assets are reflected prospectively in the condensed consolidating balance sheet, statement of operations and statement of cash flows. These events had no impact on our consolidated balance sheet, consolidated statement of operations or consolidated statement of cash flows.


21


Condensed Consolidating Balance Sheet
(in millions)
Express Scripts Holding Company
 
Express Scripts, 
Inc.
 
Medco Health Solutions, 
Inc.
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
As of September 30, 2016
Cash and cash equivalents
$

 
$
1,772.7

 
$

 
$
44.6

 
$
487.4

 
$

 
$
2,304.7

Receivables, net

 
3,291.0

 
807.5

 
2,080.8

 
787.7

 

 
6,967.0

Other current assets

 
89.3

 

 
1,698.8

 
63.2

 

 
1,851.3

Total current assets

 
5,153.0

 
807.5

 
3,824.2

 
1,338.3

 

 
11,123.0

Property and equipment, net

 
763.9

 
3.5

 
466.6

 
21.5

 

 
1,255.5

Investments in subsidiaries
42,889.1

 
11,716.1

 
9,426.5

 

 

 
(64,031.7
)
 

Intercompany

 

 
693.8

 
15,250.2

 
492.1

 
(16,436.1
)
 

Goodwill

 
3,122.4

 
22,609.9

 
3,525.0

 
21.0

 

 
29,278.3

Other intangible assets, net

 
740.3

 
7,259.7

 
1,088.5

 
10.6

 

 
9,099.1

Other assets
7.5

 
238.0

 
25.8

 
9.3

 
8.6

 
(135.8
)
 
153.4

Total assets
$
42,896.6

 
$
21,733.7

 
$
40,826.7

 
$
24,163.8

 
$
1,892.1

 
$
(80,603.6
)
 
$
50,909.3

Claims and rebates payable
$

 
$
6,108.6

 
$
2,608.5

 
$

 
$

 
$

 
$
8,717.1

Accounts payable

 
987.6

 
44.7

 
2,684.8

 
74.0

 

 
3,791.1

Accrued expenses
93.7

 
1,048.1

 
334.1

 
218.7

 
591.7

 

 
2,286.3

Current maturities of long-term debt
1,184.0

 

 

 

 

 

 
1,184.0

Total current liabilities
1,277.7

 
8,144.3

 
2,987.3

 
2,903.5

 
665.7

 

 
15,978.5

Long-term debt
13,207.9

 
336.1

 
1,380.5

 

 

 

 
14,924.5

Intercompany
12,810.7

 
3,625.4

 

 

 

 
(16,436.1
)
 

Deferred taxes

 

 
2,563.0

 
1,296.4

 
11.2

 
(135.8
)
 
3,734.8

Other liabilities

 
371.9

 
262.8

 
9.6

 
18.2

 

 
662.5

Non-controlling interest

 

 

 

 
8.7

 

 
8.7

Express Scripts stockholders’ equity
15,600.3

 
9,256.0

 
33,633.1

 
19,954.3

 
1,188.3

 
(64,031.7
)
 
15,600.3

Total liabilities and stockholders’ equity
$
42,896.6

 
$
21,733.7

 
$
40,826.7

 
$
24,163.8

 
$
1,892.1

 
$
(80,603.6
)
 
$
50,909.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 

22


Condensed Consolidating Balance Sheet
(in millions)
Express Scripts Holding Company
 
Express Scripts, 
Inc.
 
Medco Health Solutions, 
Inc.
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
As of December 31, 2015
Cash and cash equivalents
$

 
$
1,957.3

 
$
2.9

 
$
28.8

 
$
1,197.3

 
$

 
$
3,186.3

Receivables, net

 
3,445.9

 
1,123.5

 
1,768.3

 
383.6

 

 
6,721.3

Other current assets

 
34.2

 
3.2

 
2,080.6

 
33.9

 

 
2,151.9

Total current assets

 
5,437.4

 
1,129.6

 
3,877.7

 
1,614.8

 

 
12,059.5

Property and equipment, net

 
768.1

 
3.7

 
500.3

 
19.2

 

 
1,291.3

Investments in subsidiaries
40,819.1

 
11,191.6

 
9,500.4

 

 

 
(61,511.1
)
 

Intercompany

 

 
1,009.5

 
14,429.4

 
231.7

 
(15,670.6
)
 

Goodwill

 
3,122.4

 
22,609.9

 
3,525.0

 
20.0

 

 
29,277.3

Other intangible assets, net

 
893.7

 
8,265.2

 
1,298.8

 
12.0

 

 
10,469.7

Other assets
6.6

 
314.5

 
22.2

 
7.0

 
7.8

 
(212.6
)
 
145.5

Total assets
$
40,825.7

 
$
21,727.7

 
$
42,540.5

 
$
23,638.2

 
$
1,905.5

 
$
(77,394.3
)
 
$
53,243.3

Claims and rebates payable
$

 
$
5,543.7

 
$
3,854.0

 
$

 
$

 
$

 
$
9,397.7

Accounts payable

 
970.0

 
94.8

 
2,297.2

 
89.8

 

 
3,451.8

Accrued expenses
9.6

 
1,126.2

 
543.9

 
194.3

 
785.4

 

 
2,659.4

Current maturities of long-term debt
147.7

 
1,498.7

 

 

 

 

 
1,646.4

Total current liabilities
157.3

 
9,138.6

 
4,492.7

 
2,491.5

 
875.2

 

 
17,155.3

Long-term debt
11,647.1

 
497.4

 
1,801.8

 

 

 

 
13,946.3

Intercompany
11,648.3

 
4,022.3

 

 

 

 
(15,670.6
)
 

Deferred taxes
0.2

 

 
2,833.2

 
1,442.9

 
6.1

 
(212.6
)
 
4,069.8

Other liabilities

 
374.7

 
288.4

 
15.9

 
12.4

 

 
691.4

Non-controlling interest

 

 

 

 
7.7

 

 
7.7

Express Scripts stockholders’ equity
17,372.8

 
7,694.7

 
33,124.4

 
19,687.9

 
1,004.1

 
(61,511.1
)
 
17,372.8

Total liabilities and stockholders’ equity
$
40,825.7

 
$
21,727.7

 
$
42,540.5

 
$
23,638.2

 
$
1,905.5

 
$
(77,394.3
)
 
$
53,243.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 

23


Condensed Consolidating Statement of Operations and Comprehensive Income
(in millions)
Express Scripts Holding Company
 
Express Scripts, 
Inc.
 
Medco Health Solutions, 
Inc.
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
For the three months ended September 30, 2016
Revenues
$

 
$
9,910.4

 
$
6,044.4

 
$
9,973.0

 
$
472.0

 
$
(989.7
)
 
$
25,410.1

Operating expenses

 
9,148.0

 
5,699.5

 
9,770.7

 
365.6

 
(989.7
)
 
23,994.1

Operating income

 
762.4

 
344.9

 
202.3

 
106.4

 

 
1,416.0

Other (expense) income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense and other, net
(211.8
)
 
(29.9
)
 
(21.3
)
 

 
(2.1
)
 

 
(265.1
)
Intercompany interest income (expense)
132.8

 
(66.4
)
 

 
(66.4
)
 

 

 

Other expense, net
(79.0
)
 
(96.3
)
 
(21.3
)
 
(66.4
)
 
(2.1
)
 

 
(265.1
)
Income (loss) before income taxes
(79.0
)
 
666.1

 
323.6

 
135.9

 
104.3

 

 
1,150.9

Provision (benefit) for income taxes
(27.9
)
 
279.2

 
91.3

 
58.4

 
21.4

 

 
422.4

Income (loss) before equity in earnings of subsidiaries
(51.1
)
 
386.9

 
232.3

 
77.5

 
82.9

 

 
728.5

Equity in earnings (loss) of subsidiaries
774.0

 
178.1

 
(23.3
)
 

 

 
(928.8
)
 

Net income
722.9

 
565.0

 
209.0

 
77.5

 
82.9

 
(928.8
)
 
728.5

Less: Net income attributable to non-controlling interest

 

 

 

 
5.6

 

 
5.6

Net income attributable to Express Scripts
722.9

 
565.0

 
209.0

 
77.5

 
77.3

 
(928.8
)
 
722.9

Other comprehensive loss
(1.7
)
 
(1.7
)
 

 

 
(1.7
)
 
3.4

 
(1.7
)
Comprehensive income attributable to Express Scripts
$
721.2

 
$
563.3

 
$
209.0

 
$
77.5

 
$
75.6

 
$
(925.4
)
 
$
721.2