Express Scripts 2012 Annual Report Download - page 70

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Express Scripts 2012 Annual Report68
each of the 15 consecutive trading days ending with the fourth complete trading day prior to the completion of the
Merger.
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
options is based on Medco’s historical employee stock option exercise behavior as well as the remaining contractual exercise term.
The consolidated statement of operations for Express Scripts for the year ended December 31, 2012
following consummation of the Merger on April 2, 2012 includes Medco’s total revenues for continuing operations
of $45,763.5 million and net income of $290.7 million, which includes integration expense and amortization.
The following unaudited pro forma information presents a summary of Express Scripts’ combined results
of operations for the years ended December 31, 2012 and 2011 as if the Merger and related financing transactions
had occurred at January 1, 2011. 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:
Year Ended
December 31,
(in millions, except per share data)
2012
2011
Total revenues
$
109,639.2
$
115,463.4
Net income attributable to Express Scripts
1,345.5
719.8
Basic earnings per share from continuing operations
1.69
0.88
Diluted earnings per share from continuing operations
$
1.66
$
0.87
Pro forma net income for the year ended December 31, 2011 includes total non-recurring amounts of
$1,192.2 million related to estimated severance payments, accelerated stock-based compensation and transaction and
integration costs incurred in connection with the Merger.
The Merger is 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 2012, the Company recorded fair value adjustments of approximately $104.0 million to its
preliminary allocation of purchase price related to intangible assets, which had the effect of increasing intangible
assets and reducing goodwill. In connection with the adjustment to fair value, the Company recorded a cumulative
adjustment to amortization expense of $4.8 million.