Express Scripts 2012 Annual Report Download - page 86

Express Scripts 2012 Annual Report84
Subsequent to the effective date of the 2011 LTIP, no additional awards will be granted under the 2000
Long-Term Incentive Plan (the “2000 LTIP”), which provided for the grant of various equity awards with various
terms to ESI’s officers, Board of Directors and key employees selected by the Compensation Committee of the
Board of Directors. However, this plan is still in existence as there are outstanding grants under this plan. Under the
2000 LTIP, ESI issued stock options, SSRs, restricted stock units, restricted stock awards and performance share
awards, which awards were converted into awards relating to Express Scripts common stock upon closing of the
Merger. Prior to the Merger, awards were typically settled using treasury shares. Upon close of the Merger, treasury
shares of ESI were cancelled and subsequent awards were settled by issuance of new shares. The maximum term of
stock options, SSRs, restricted stock units, restricted stock awards and performance shares granted under the 2000
LTIP is 10 years.
The provisions of both the 2000 LTIP and 2011 LTIP 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.
The tax benefit related to employee stock compensation recognized during the years ended December 31,
2012, 2011 and 2010 was $153.9 million, $17.7 million and $18.1 million, respectively.
Effective upon the closing of the Merger, the Company assumed the sponsorship of the Medco Health
Solutions, Inc. 2002 Stock Incentive Plan (the “2002 Stock Incentive Plan”), originally adopted by Medco, allowing
Express Scripts to issue awards under this plan. As of December 31, 2012, 14.7 million shares are available under
this plan. Under the Medco Health Solutions, Inc. 2002 Stock Incentive Plan, Medco granted, and Express Scripts
may grant, stock options, restricted stock units and other types of awards to employees and directors. Medco’s
awards granted under the 2002 Stock Incentive Plan are subject to accelerated vesting upon change in control and
termination.
As part of the consideration transferred in the Merger, Express Scripts issued 41.5 million replacement
stock options to holders of Medco stock options, valued at $706.1 million, and 7.2 million replacement restricted
stock units to holders of Medco restricted stock units, valued at $174.9 million. See Note 3 – Changes in business,
for further discussion of valuation.
Restricted stock units and performance shares. Express Scripts grants restricted stock units to certain
officers, directors and employees and performance shares to certain officers and employees. ESI’s restricted stock
units have three-year graded vesting and performance shares cliff vest at the end of three years. In 2011, 0.5 million
restricted units were awarded which cliff vest two years from the closing date of the Merger (the “merger restricted
shares”). In addition to the two year service requirement, vesting of the merger restricted shares was contingent upon
completion of the Merger. As this vesting condition did not meet probability thresholds indicated by authoritative
accounting guidance, no expense was recorded for the merger restricted shares until consummation of the Merger.
Prior to vesting, shares are subject to forfeiture to us without consideration upon termination of employment under
certain circumstances. The number of performance shares that ultimately vest is dependent upon achieving specific
performance targets. The original value of the performance share grants is subject to a multiplier of up to 2.5 based
on certain performance metrics. Medco’s restricted stock units and performance shares granted under the 2002 Stock
Incentive Plan generally vest over three years.
Unearned compensation relating to these awards is amortized to non-cash compensation expense over the
estimated vesting periods. As of December 31, 2012 and 2011, unearned compensation related to restricted stock
units and performance shares was $99.4 million and $37.2 million, respectively. We recorded pre-tax compensation
expense related to restricted stock units and performance share grants of $190.0 million, $13.9 million and $17.5
million in 2012, 2011 and 2010, respectively. The fair value of restricted stock units vested during the years ended
December 31, 2012, 2011 and 2010 was $213.8 million, $20.9 million and $10.5 million, respectively. The increase
in pre-tax compensation expense and fair value of restricted shares vested for the year ended December 31, 2012
resulted from acceleration of stock-based compensation expense and award vesting associated with the termination
of certain Medco employees following the Merger. The weighted-average remaining recognition period for
restricted stock units and performance shares is 1.6 years.
A summary of the status of restricted stock units and performance shares as of December 31, 2012, and
changes during the year ended December 31, 2012, is presented below.