Express Scripts 2011 Annual Report Download - page 82

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Express Scripts 2011 Annual Report
80
The SSRs and stock options have three-year graded vesting. Of the awards granted in 2011, 1.0 million
were granted during the fourth quarter of 2011. These stock options cliff vest two years from the closing date of the
proposed merger with Medco (the ―merger options‖). In addition to the two year service requirement, vesting of the
merger options is contingent upon completion of the proposed merger. As this vesting condition does not meet
probability thresholds indicated by authoritative accounting guidance, no expense has been recorded for the merger
options during the year ended December 31, 2011.
Due to the nature of the awards, we use the same valuation methods and accounting treatments for SSRs
and stock options. As of December 31, 2011 and 2010, unearned compensation related to SSRs and stock options
was $32.1 million and $23.9 million, respectively. We recorded pre-tax compensation expense related to SSRs and
stock options of $34.6 million, $32.1 million and $28.6 million in 2011, 2010, and 2009, respectively. The weighted
average remaining recognition period for stock options and SSRs shares is 1.5 years.
For the year ended December 31, 2011, the windfall tax benefit related to stock options exercised during
the year was $28.3 million, and is classified as a financing cash inflow on the consolidated statement of cash flows.
The tax benefit related to employee stock compensation recognized during the years ended December 31, 2011,
2010, and 2009 was $17.7 million, $18.1 million, and $16.6 million, respectively.
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 assumptions:
2011
2010
2009
Expected life of option
2-5 years
3-5 years
3-5 years
Risk-free interest rate
0.3%-2.2%
0.5%-2.4%
1.3%-2.4%
Expected volatility of stock
30%-39%
36%-41%
35%-39%
Expected dividend yield
None
None
None
Weighted average volatility of stock
36.6%
38.4%
37.5%
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.
At December 31, 2011, the weighted-average remaining contractual lives of stock options and SSRs
outstanding and stock options and SSRs exercisable were 4.1 years and 3.0 years, respectively, and the aggregate
intrinsic value (the amount by which the market value of the underlying stock exceeds the exercise price of the
option) of shares outstanding and shares exercisable was $176.1 million and $148.7 million, respectively. Cash
proceeds, fair value of vested shares, intrinsic value related to total stock options exercised, and weighted average
fair value of stock options granted during the years ended December 31, 2011, 2010 and 2009 are provided in the
following table:
(in millions, except per share data)
2011
2010
2009
Proceeds from stock options exercised
$ 35.9
$ 38.2
$ 9.4
Intrinsic value of stock options exercised
82.8
123.7
48.8
Weighted average fair value of options granted during the year
$ 14.74
$ 15.97
$ 7.27