Express Scripts 2013 Annual Report Download - page 90

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Express Scripts 2013 Annual Report 90
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. Express Scripts’ and 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 prior to the Merger generally cliff 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, 2013 and 2012, unearned compensation related to restricted stock units and
performance shares was $52.5 million and $99.4 million, respectively. We recorded pre-tax compensation expense related to
restricted stock units and performance share grants of $87.4 million, $190.0 million and $13.9 million in 2013, 2012 and 2011,
respectively. The fair value of restricted stock units vested during the years ended December 31, 2013, 2012 and 2011 was
$136.7 million, $213.8 million and $20.9 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 1.1 years.
A summary of the status of restricted stock units and performance shares as of December 31, 2013, and changes
during the year ended December 31, 2013, is presented below.
Shares (in millions)
Weighted-Average
Grant Date Fair Value
Per Share
Outstanding at beginning of year 4.7 $ 54.57
Granted 1.1 58.31
Other(1) 0.1 49.72
Released (2.5) 53.70
Forfeited/cancelled (0.3) 54.04
Outstanding at December 31, 2013 3.1 56.58
Vested and deferred at December 31, 2013 0.1 56.49
Non-vested at December 31, 2013 3.0 $ 56.58
(1) Represents additional performance shares issued above the original value for exceeding certain performance metrics.
Stock options and SSRs. Express Scripts grants stock options and SSRs to certain officers, directors and
employees to purchase shares of Express Scripts Holding Company common stock at fair market value on the date of grant.
Express Scripts’ and ESI’s SSRs and stock options generally have three-year graded vesting, with the exception of 1.0 million
awards granted during the fourth quarter of 2011 which cliff vest two years from the closing date of the Merger. Medco’s
options granted under the 2002 Stock Incentive Plan generally vest on a graded basis over three years.
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, 2013 and 2012, unearned compensation related to SSRs and stock options was $43.8 million and
$74.4 million, respectively. We recorded pre-tax compensation expense related to SSRs and stock options of $77.3 million,
$220.0 million and $34.6 million in 2013, 2012 and 2011, respectively. The increase for the year ended December 31, 2012
resulted from stock-based compensation expense acceleration associated with the termination of certain Medco employees. The
weighted-average remaining recognition period for stock options and SSRs is 1.3 years.