Express Scripts 2012 Annual Report Download - page 88

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Express Scripts 2012 Annual Report86
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:
2012
2011
2010
Expected life of option
2-5 years
2-5 years
3-5 years
Risk-free interest rate
0.3%-0.9%
0.3%-2.2%
0.5%-2.4%
Expected volatility of stock
29%-38%
30%-39%
36%-41%
Expected dividend yield
None
None
None
Weighted-average volatility of stock
35.5%
36.6%
38.4%
The fair value of Medco converted grants was estimated on the date of the Merger using a Black-Scholes
multiple option-pricing model with the following weighted-average assumptions:
At April 2, 2012
Medco Converted
Grants
Expected life of option
2 years
Risk-free interest rate
0.4%
Expected volatility of stock
32.9%
Expected dividend yield
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.
Cash proceeds, intrinsic value related to total stock options exercised, and weighted-average fair value of
stock options granted during the years ended December 31, 2012, 2011 and 2010 are provided in the following
table:
(in millions, except per share data)
2012
2011
2010
Proceeds from stock options exercised
$ 401.1
$ 35.9
$ 38.2
Intrinsic value of stock options exercised
359.6
82.8
123.7
Weighted-average fair value per share of options granted during the year
$ 15.13
$ 14.74
$ 15.97
11. Pension and other postretirement benefits
Net pension and postretirement benefit cost. In connection with the Merger, Express Scripts assumed
sponsorship of Medco’s pension and other post-retirement benefit obligations, which were re-measured and
recorded at fair value on the date of the Merger.
For the pension plans, Express Scripts has elected to determine the projected benefit obligation as the value
of the benefits to which employees would be entitled if they separated from service immediately. Under this
approach, the liability is equal to the employee’s account value as of the measurement date. After re-measurement
upon the Merger consummation, the fair value of the projected benefit obligation was $291.3 million and the plan
assets at fair value totaled $217.0 million, representing an underfunded status and resulting in a balance sheet
liability of $74.3 million.
In January 2011, Medco amended its defined benefit pension plans, freezing the benefit for all participants
effective in the first quarter of 2011. After the plan freeze, participants no longer accrue any benefits under the
plans, and the plans have been closed to new entrants since February 28, 2011. However, account balances continue
to be credited with interest until paid.
Medco’s unfunded postretirement healthcare benefit plan was discontinued for all active non-retirement
eligible employees in January 2011.