Express Scripts 2013 Annual Report Download - page 42

Express Scripts 2013 Annual Report 42
For our 2013 impairment test, we did not perform a qualitative assessment for any of our reporting units, and
instead began with Step 1 of the goodwill impairment analysis, as allowed under authoritative Financial Accounting Standards
Board (“FASB”) guidance. No impairment charges were recorded as a result of our annual impairment test. However, an
impairment charge of $32.9 million was recorded in 2013 based on the contracted sales price of the business (Level 2)
associated with our acute infusion therapies line of business due to entering into an agreement for the sale of the business. Our
acute infusion therapies line of business was subsequently sold on November 1, 2013. An impairment charge of $2.0 million
was recorded in 2012 associated with our subsidiary Europa Apotheek Venlo B.V. (“EAV”), based on a change in business
environment related to an adverse court ruling by the German high court in August 2012 and the expected disposal of EAV as a
result of the ruling (Level 2). EAV was subsequently sold on December 4, 2012. No other goodwill impairment charges existed
for any of our other reporting units at December 31, 2013 or December 31, 2012.
Other intangible assets include, but are not limited to, customer contracts and relationships, deferred financing fees
and trade names. Deferred financing fees are recorded at cost. Customer contracts and relationships are valued at fair market
value when acquired using the income method. Customer contracts and relationships related to our 10-year contract with
WellPoint, Inc. (“WellPoint”) under which we provide pharmacy benefit management services to WellPoint and its designated
affiliates (“the PBM agreement”) are being amortized using a modified pattern of benefit method over an estimated useful life
of 15 years. Customer contracts and relationships intangible assets related to our acquisition of Medco are being amortized
using a modified pattern of benefit method over an estimated useful life of 2 to 16 years. The customer contract related to our
asset acquisition of the SmartD Medicare Prescription Drug Plan is being amortized over an estimated useful life of 10 years.
All other intangible assets, excluding legacy ESI trade names which have an indefinite life, are amortized on a straight-line
basis, which approximates the pattern of benefit, over periods from 5 to 20 years for customer-related intangibles, 10 years for
trade names and 2 to 30 years for other intangible assets.
In 2012, upon reassessment of the carrying values of assets and liabilities of EAV based on the events described
above, we recorded impairment charges associated with this line of business totaling $9.5 million of intangibles assets. The
write-off of intangible assets was comprised of customer relationships with a carrying value of $3.6 million (gross value of $5.0
million less accumulated amortization of $1.4 million) and trade names with a carrying value of $5.9 million (gross value of
$7.0 million less accumulated amortization of $1.1 million). EAV was subsequently sold on December 4, 2012.
In 2012, as a result of our plan to dispose of our PolyMedica Corporation (“Liberty”) line of business, an
impairment charge totaling $23.0 million was recorded against intangible assets to reflect fair value based on the contracted
sales price of the business (Level 2). The write-down was comprised of customer relationships with a carrying value of $24.2
million (gross value of $35.0 million less accumulated amortization of $10.8 million) and trade names with a carrying value of
$6.6 million ($7.0 million less accumulated amortization of $0.4 million). This charge was allocated to these assets on a pro
rata basis using the carrying values as of September 30, 2012. Liberty was subsequently sold on December 3, 2012. See Note 4
- Dispositions and Note 6 - Goodwill and other intangibles for further discussion of these lines of business.
FACTORS AFFECTING ESTIMATE
The fair values of reporting units, asset groups or acquired businesses are measured based on market prices, when
available. When market prices are not available, we estimate fair value using the income approach and/or the market approach.
The income approach uses cash flow projections which require inputs and assumptions that reflect current market conditions as
well as management judgment. We base our fair values on projected financial information which we believe to be reasonable.
However, actual results may differ from those projections and those differences may be material.
The key assumptions included in our income approach include, but are not limited to, earnings growth rates,
discount rates and inflation rates. Assessment of these factors could be impacted by internal factors and/or external economic
conditions. We performed various sensitivity analyses on the key assumptions which did not indicate any potential impairment.
CONTRACTUAL GUARANTEES
ACCOUNTING POLICY
Many of our contracts contain terms whereby we make certain financial and performance guarantees, including the
minimum level of discounts or rebates a client may receive, generic utilization rates and various service guarantees. These
clients may be entitled to performance penalties if we fail to meet a financial or service guarantee. Actual performance is
compared to the guarantee for each measure throughout the period, and accruals are recorded if we determine that our
performance against the guarantee indicates a potential liability. These estimates are adjusted to actual when the guarantee
period ends and we have either met the guaranteed rate or paid amounts to clients.