Express Scripts Reports Fourth Quarter and Full Year Results

EXPRESS SCRIPTS HOLDING COMPANY

Unaudited Consolidated Statement of Operations

Three Months Ended

December 31,

Year Ended

December 31,

(in millions, except per share data)

2012

2011

2012

2011

Revenues^(*)

$ 27,410.7

$ 12,101.4

$ 93,858.1

$ 46,128.3

Cost of revenues^(*)

25,107.8

11,256.9

86,527.9

42,918.4

   Gross profit

2,302.9

844.5

7,330.2

3,209.9

Selling, general and administrative

1,398.4

268.0

4,545.7

895.5

Operating income

904.5

576.5

2,784.5

2,314.4

Other (expense) income:

   Equity income from joint venture

5.5

-

14.9

-

   Interest income

4.6

4.6

10.6

12.4

   Interest expense and other

(157.4)

(115.4)

(619.0)

(299.7)

(147.3)

(110.8)

(593.5)

(287.3)

Income before income taxes

757.2

465.7

2,191.0

2,027.1

Provision for income taxes

234.4

173.7

833.3

748.6

Net income from continuing operations

522.8

292.0

1,357.7

1,278.5

Net loss from discontinued operations, net of tax

(11.8)

-

(27.6)

-

Net income

511.0

292.0

1,330.1

1,278.5

Less: Net income attributable to non-controlling interest

6.9

1.6

17.2

2.7

Net income attributable to Express Scripts

$ 504.1

$ 290.4

$ 1,312.9

$ 1,275.8

Weighted average number of common shares outstanding during the period:

   Basic

817.3

485.3

731.3

500.9

   Diluted

832.4

489.0

747.3

505.0

Basic earnings (loss) per share

   Continuing operations attributable to Express Scripts

$ 0.63

$ 0.60

$ 1.83

$ 2.55

   Discontinued operations attributable to Express Scripts

(0.01)

-

(0.04)

-

   Net earnings attributable to Express Scripts

0.62

0.60

1.80

2.55

Diluted earnings (loss) per share

   Continuing operations attributable to Express Scripts

$ 0.62

$ 0.59

$ 1.79

$ 2.53

   Discontinued operations attributable to Express Scripts

(0.01)

-

(0.04)

-

   Net earnings attributable to Express Scripts

0.61

0.59

1.76

2.53

Amounts attributable to Express Scripts shareholders:

   Income from continuing operations, net of tax

$ 515.9

$ 290.4

$ 1,340.5

$ 1,275.8

   Discontinued operations, net of tax

(11.8)

-

(27.6)

-

   Net income attributable to Express Scripts shareholders

$ 504.1

$ 290.4

$ 1,312.9

$ 1,275.8

^(*) Includes retail pharmacy co-payments of $3,304.0 million and $1,412.6 million for the three months ended December 31, 2012 and 2011, respectively and $11,668.6 million and $5,786.6 million for the year ended December 31, 2012 and 2011, respectively.

EXPRESS SCRIPTS HOLDING COMPANY

Unaudited Consolidated Balance Sheet

December 31,

December 31,

(in millions)

2012

2011

Assets

Current assets:

Cash and cash equivalents

$ 2,793.9

$ 5,620.1

Restricted cash and investments

19.6

17.8

Receivables, net

5,480.6

1,915.7

Inventories

1,661.9

374.4

Deferred taxes

408.5

45.8

Prepaid expenses and other current assets

194.4

84.2

Current assets of discontinued operations

198.0

-

Total current assets

10,756.9

8,058.0

Property and equipment, net

1,634.3

416.2

Goodwill

29,359.8

5,485.7

Other intangible assets, net

16,037.9

1,620.9

Other assets

56.6

26.2

Noncurrent assets of discontinued operations

265.7

-

Total assets

$ 58,111.2

$ 15,607.0

Liabilities and stockholders' equity

Current liabilities:

Claims and rebates payable

$ 7,440.0

$ 2,874.1

Accounts payable

2,909.1

928.1

Accrued expenses

1,630.0

656.0

Current maturities of long-term debt

934.9

999.9

Current liabilities of discontinued operations

143.4

-

Total current liabilities

13,057.4

5,458.1

Long-term debt

14,980.1

7,076.4

Deferred taxes

5,948.8

546.5

Other liabilities

692.9

50.7

Noncurrent liabilities of discontinued operations

36.3

-

Total liabilities

34,715.5

13,131.7

Stockholders' equity:

Preferred stock, 15.0 shares authorized, $0.01 par value per share;

and no shares issued and outstanding

-

-

Common stock, 2,985.0 shares authorized, $0.01 par value per share;

shares issued: 818.1 and 690.7, respectively;

shares outstanding: 818.1 and 484.6, respectively

8.2

6.9

Additional paid-in capital

21,289.7

2,438.2

Accumulated other comprehensive income

18.9

17.0

Retained earnings

2,068.2

6,645.6

23,385.0

9,107.7

Common stock in treasury at cost, zero and 206.1 shares, respectively

-

(6,634.0)

Total Express Scripts stockholders' equity

23,385.0

2,473.7

Non-controlling interest

10.7

1.6

Total stockholders' equity

23,395.7

2,475.3

Total liabilities and stockholders' equity

$ 58,111.2

$ 15,607.0

EXPRESS SCRIPTS HOLDING COMPANY

Unaudited Consolidated Statement of Cash Flows

Year Ended

December 31,

(in millions)

2012

2011

Cash flows from operating activities:

Net income

$ 1,330.1

$ 1,278.5

Net loss from discontinued operations, net of tax

27.6

-

  Net income from continuing operations

1,357.7

1,278.5

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

1,872.6

253.4

Deferred income taxes

(390.4)

137.8

Employee stock-based compensation expense

410.0

48.8

Bad debt expense

158.8

11.6

Deferred financing fees

43.6

81.0

Other, net

(118.5)

4.5

Changes in operating assets and liabilities, net of effects of acquisition:

Receivables

325.2

(206.1)

Inventories

(515.8)

8.0

Other current and noncurrent assets

303.2

119.2

Claims and rebates payable

82.8

207.5

Accounts payable

982.2

271.4

Other current and noncurrent liabilities

240.8

(22.5)

Net cash provided by operating activities - continuing operations

4,752.2

2,193.1

Net cash provided by operating activities - discontinued operations

29.4

-

Net cash flows provided by operating activities

4,781.6

2,193.1

Cash flows from investing activities:

Acquisitions, net of cash acquired

(10,326.4)

-

Purchases of property and equipment

(160.2)

(144.4)

Purchase of short-term investments

(2.8)

(25.0)

Proceeds from sale of short-term investments

4.6

45.0

Proceeds from sale of business

61.5

-

Other

(5.8)

0.5

Net cash used in investing activities - continuing operations

(10,429.1)

(123.9)

Acquisitions, cash acquired - discontinued operations

42.8

-

Net cash used in investing activities - discontinued operations

(5.4)

-

Net cash used in investing activities

(10,391.7)

(123.9)

Cash flows from financing activities:

Proceeds from long-term debt, net of discounts

7,458.9

5,580.3

Repayment of long-term debt

(3,868.5)

(0.1)

Repayment of revolving credit line, net

(1,000.0)

-

Proceeds from accounts receivable financing facility

600.0

-

Repayment of accounts receivable financing facility

(600.0)

-

Excess tax benefit relating to employee stock-based compensation

45.3

28.3

Net proceeds from employee stock plans

326.0

32.2

Deferred financing fees

(103.2)

(91.6)

Treasury stock acquired

-

(2,515.7)

Distributions paid to non-controlling interest

(8.1)

(1.1)

Other

-

(2.9)

Net cash provided by financing activities - continuing operations

2,850.4

3,029.4

Net cash used in financing activities - discontinued operations

(26.8)

-

Net cash provided by financing activities

2,823.6

3,029.4

Effect of foreign currency translation adjustment

2.0

(2.2)

Less: cash attributable to discontinued operations

(41.7)

-

Net (decrease) increase in cash and cash equivalents

(2,826.2)

5,096.4

Cash and cash equivalents at beginning of year

5,620.1

523.7

Cash and cash equivalents at end of year

$ 2,793.9

$ 5,620.1

Table 1

Express Scripts Holding Company Unaudited Consolidated Selected Information

(in millions)

Three Months Ended

December 31,

Year Ended

December 31,

2012

2011

2012

2011

Claims Volume

Continuing operations:

Network

299.2

156.4

1,020.7

600.4

Home delivery and specialty⁽¹⁾

38.3

13.6

129.1

53.4

   Total claims

337.5

170.0

1,149.8

653.8

Total adjusted claims - continuing operations⁽²⁾

410.8

194.9

1,395.7

751.5

Discontinued operations:

Home delivery and specialty⁽¹⁾

1.2

-

4.9

-

Total adjusted claims - discontinued operations⁽²⁾

3.6

-

14.7

-

Depreciation and Amortization (D&A):

Revenue amortization⁽³⁾

$ 28.5

$ 28.5

$ 114.0

$ 114.0

Cost of revenues depreciation

32.0

12.3

105.3

43.5

Selling, general and administrative depreciation

58.4

14.9

178.9

55.2

Selling, general and administrative amortization

483.1

10.2

1,474.4

40.7

   Total D&A - continuing operations

$ 602.0

$ 65.9

$ 1,872.6

$ 253.4

Generic Fill Rate

Network

80.6%

75.8%

79.4%

75.3%

Home delivery

73.7%

64.7%

71.5%

63.0%

Overall

79.8%

74.8%

78.5%

74.2%

Note: See Appendix for Footnotes and Additional Notes.

Table 2

Calculation of Express Scripts Holding Company Adjusted Gross Profit and SG&A - Continuing Operations

(in millions)

Three Months Ended

December 31,

Year Ended

December 31,

2012

2011

2012

2011

Gross profit, as reported

$ 2,302.9

$ 844.5

$ 7,330.2

$ 3,209.9

Amortization of legacy Express Scripts intangible assets ⁽³⁾

28.5

28.5

114.0

114.0

Non-recurring transaction and integration costs ⁽⁴⁾

16.0

-

49.7

-

Accrual related to client contractual dispute ⁽⁵⁾

-

30.0

-

30.0

Adjusted gross profit

$ 2,347.4

$ 903.0

$ 7,493.9

$ 3,353.9

Selling, general and administrative, as reported

$ 1,398.4

$ 268.0

$ 4,545.7

$ 895.5

Amortization of legacy Express Scripts intangible assets ⁽³⁾

10.2

10.2

40.7

40.7

Amortization of Medco-related intangible assets ⁽⁶⁾

472.9

-

1,433.7

-

Non-recurring transaction and integration costs ⁽⁴⁾

130.8

42.2

705.4

62.5

Adjusted selling, general and administrative

$ 784.5

$ 215.6

$ 2,365.9

$ 792.3

Note: See Appendix for Footnotes and Additional Notes.

The Company is providing adjusted gross profit and adjusted selling, general and administrative expenses, in each case, excluding the impact of non-recurring charges and amortization of intangible assets (both of which are non-GAAP financial measures) in order to compare the underlying financial performance to prior periods.

Table 3

Express Scripts Holding Company EBITDA Reconciliation

(in millions, except per claim data)

The following is a reconciliation of net income from continuing operations attributable to Express Scripts to EBITDA from continuing operations attributable to Express Scripts. The Company believes net income is the most directly comparable measure calculated under U.S. GAAP.

Three Months Ended

December 31,

Year Ended

December 31,

2012

2011

2012

2011

Net income from continuing operations, attributable to Express Scripts, as reported

$ 515.9

$ 290.4

$ 1,340.5

$ 1,275.8

  Provision for income taxes

234.4

173.7

833.3

748.6

  Depreciation and amortization

602.0

65.9

1,872.6

253.4

  Interest expense, net

152.8

110.8

608.4

287.3

  Equity income from joint venture

(5.5)

-

(14.9)

-

EBITDA from continuing operations, attributable to Express Scripts, as reported

1,499.6

640.8

4,639.9

2,565.1

Non-recurring transaction and integration costs ⁽⁴⁾

146.8

42.2

755.1

62.5

Accrual related to client contractual dispute ⁽⁵⁾

-

30.0

-

30.0

Adjusted EBITDA from continuing operations, attributable to Express Scripts

$ 1,646.4

$ 713.0

$ 5,395.0

$ 2,657.6

Total adjusted claims - continuing operations

410.8

194.9

1,395.7

751.5

Adjusted EBITDA per adjusted claim

$ 4.01

$ 3.66

$ 3.87

$ 3.54

Note: See Appendix for Footnotes and Additional Notes.

The Company is providing adjusted EBITDA excluding the impact of non-recurring charges in order to compare the underlying financial performance to prior periods.

EBITDA is earnings before other income (expense), interest, taxes, depreciation and amortization, or alternatively calculated as operating income plus depreciation and amortization. EBITDA is presented because it is a widely accepted indicator of a company's ability to service indebtedness and is frequently used to evaluate a company's performance. EBITDA, however, should not be considered as an alternative to net income, as a measure of operating performance, as an alternative to cash flow, as a measure of liquidity or as a substitute for any other measure computed in accordance with accounting principles generally accepted in the United States. In addition, our definition and calculation of EBITDA may not be comparable to that used by other companies.

Adjusted EBITDA per adjusted claim is a supplemental measurement used by analysts and investors to help evaluate overall operating performance. We have calculated adjusted EBITDA excluding certain charges recorded each year, as these charges are not considered an indicator of ongoing company performance. Adjusted EBITDA per adjusted claim is calculated by dividing adjusted EBITDA by the adjusted claim volume for the period. This measure is used as an indicator of EBITDA performance on a per-unit basis. Adjusted EBITDA, and as a result, adjusted EBITDA per adjusted claim, are affected by the changes in claim volumes between retail and mail-order, the relative representation of brand-name, generic and specialty pharmacy drugs, as well as the level of efficiency in the business.

Table 4

Calculation of Express Scripts Holding Company Adjusted EPS

Three Months Ended

December 31,

Year Ended

December 31,

2012

2011

2012

2011

(per diluted share)

EPS from continuing operations attributable to Express Scripts, as reported

$ 0.62

$ 0.59

$ 1.79

$ 2.53

Non-recurring/transaction-related items:

Transaction and integration costs ⁽⁴⁾

0.11

0.06

0.61

0.08

Medco acquisition pre-close financing costs ⁽⁷⁾

-

0.08

0.07

0.13

Discrete tax items ⁽⁸⁾

(0.06)

-

(0.01)

-

Accrual related to client contractual dispute ⁽⁵⁾

-

0.04

-

0.04

Amortization of:

Legacy Express Scripts intangible assets⁽³⁾

0.03

0.05

0.12

0.19

Medco-related intangible assets⁽⁶⁾

0.35

-

1.16

-

EPS from continuing operations, adjusted

$ 1.05

$ 0.82

$ 3.74

$ 2.97

EPS from discontinued operations attributable to Express Scripts, as reported

$ (0.01)

$ -

$ (0.04)

$ -

Non-recurring/transaction-related items:

Transaction and integration costs ⁽⁹⁾

-

-

0.01

-

Amortization of:

Medco-related intangible assets⁽⁹⁾

-

-

0.02

-

EPS from discontinued operations, adjusted

$ (0.01)

$ -

$ (0.01)

$ -

Total EPS attributable to Express Scripts, adjusted

$ 1.04

$ 0.82

$ 3.73

$ 2.97

Note: See Appendix for Footnotes and Additional Notes.

The Company is providing EPS and EPS excluding the impact of non-recurring / transaction-related items and amortization of intangible assets (which is a non-GAAP financial measure) in order to compare the underlying financial performance to prior periods.

Table 5

Calculation of Express Scripts Holding Company Adjusted Effective Income Tax Rate

(in millions)

Year Ended

December 31, 2012

Pre-Tax

Provision for Income Taxes

Adjusted Effective Income Tax Rate

Income from continuing operations, as reported

2,191.0

833.3

Income from discontinued operations, as reported

(15.4)

12.2

2,175.6

845.5

Non-controlling interest

(17.2)

-

Total operations attributable to Express Scripts

2,158.4

845.5

Discrete tax items⁽⁸⁾

-

8.2

Total operations attributable to Express Scripts

2,158.4

853.7

39.6%

Note: See Appendix for Footnotes and Additional Notes.

The Company is providing adjusted effective income tax rate excluding the impact of discrete tax items (which is a non-GAAP financial measure) in order to compare the underlying financial performance to prior periods.

Table 6

2013 Guidance Information

Estimated

Year Ended

December 31, 2013

(per diluted share)

Adjusted EPS from continuing operations guidance

$ 4.20

to

$ 4.30

GAAP items not included in guidance:

Amortization of legacy Express Scripts intangible assets

$0.11

Amortization of Medco-related intangible assets ⁽¹⁰⁾

$1.38

Transaction, integration and other non-recurring costs⁽¹¹⁾

To be determined

Note: See Appendix for Footnotes and Additional Notes.

The full-year impact of Medco-related transaction and integration costs have yet to be determined. Accordingly, the Company is unable to include these charges in the list of GAAP items not included in guidance for 2013 revised adjusted EPS from continuing operations or to provide a reconciliation to the corresponding GAAP measure.

Appendix

Footnotes

⁽¹⁾ Includes home delivery, specialty and other including: (a) drugs distributed through patient assistance programs (b) drugs we distribute to other PBMs' clients under limited distribution contracts with pharmaceutical manufacturers and (c) FreedomFP claims.

⁽²⁾ Total adjusted claims reflect home delivery claims multiplied by 3, as home delivery claims typically cover a time period 3 times longer than retail claims.

⁽³⁾ Amortization of legacy Express Scripts intangible assets include amounts in both revenues and selling, general and administrative expense. Revenue amortization is related to the customer contract with WellPoint which consummated upon closing of the NextRx acquisition in 2009. Under U.S. GAAP standards, amortization of intangibles that arise in connection with consideration given to a customer by a vendor is characterized as a reduction of revenues. Intangible amortization of $28.5 million ($17.1 million and $17.9 million net of tax in 2012 and 2011, respectively) is included as a reduction to revenue for the three months ended December 31, 2012 and 2011. Intangible amortization of $114.0 million ($68.8 million and $71.9 million net of tax in 2012 and 2011, respectively) is included as a reduction to revenue for the year ended December 31, 2012 and 2011.

In addition, intangible amortization of $10.2 million ($6.1 million and $6.4 million net of tax in 2012 and 2011, respectively) is included in selling, general and administrative expense in the three months ended December 31, 2012 and 2011. Intangible amortization of $40.7 million ($24.5 million and $25.7 million net of tax in 2012 and 2011, respectively) is included in selling, general and administrative expense in the year ended December 31, 2012 and 2011.

⁽⁴⁾ Non-recurring transaction and integration costs include those directly related to the acquisition of Medco Health Solutions, Inc. ("Medco").

Costs of $16.0 million ($10.4 million net of tax) and $49.7 million ($30.0 million net of tax) for the three months and year ended December 31, 2012, respectively, primarily composed of integration-related activities, are included in cost of revenues.

Costs of $131.3 million ($85.0 million net of tax) and $42.2 million ($26.4 million net of tax) primarily composed of severance costs, including stock compensation, are included in selling, general and administrative expense in the three months ended December 31, 2012 and 2011, respectively. Costs of $697.2 million ($420.7 million net of tax) and $62.5 million ($39.4 million net of tax) are included in selling, general and administrative expense in the years ended December 31, 2012 and 2011, respectively.

The Company recorded a net benefit of $0.5 million ($0.4 million net of tax) and net charges of $8.2 million ($4.9 million net of tax) within selling, general and administrative expenses for the three months and year ended December 31, 2012, respectively, in conjunction with the strategic decision to exit various businesses.

⁽⁵⁾ In December 2011, the Company recorded an accrual of $30 million ($18.9 million net of tax) as an offset to revenues for the year ended December 31, 2011 related to a client contractual dispute.

⁽⁶⁾ Amortization of intangible assets related to the acquisition of Medco of $472.9 million ($289.6 million net of tax) and $1,433.7 million ($865.2 million net of tax) for the three months and year ended December 31, 2012, respectively is included in selling, general and administrative expense.

⁽⁷⁾ Financing costs include fees related to the amortization of remaining bridge loan fees, commitment fees related to the new credit agreement and interest and fees on the senior notes secured in conjunction with the acquisition of Medco. Costs of $63.1 million ($39.5 million net of tax) is included in interest expense in the three months ended December 31, 2011. Costs of $85.2 million ($52.3 million net of tax) and $105.0 million ($66.2 million net of tax) is included in interest expense for the years ended December 31, 2012 and 2011, respectively.

⁽⁸⁾ Provision for income taxes includes discrete tax benefits of $51.7 million and $8.2 million for the quarter and year ended December 31, 2012, respectively. These items primarily relate to adjustments to prior year income tax return filings partially offset by a reversal of the deferred tax asset previously established for transaction-related costs that became nondeductible upon the consummation of the Merger.

⁽⁹⁾ Net income from discontinued operations, net of tax includes $8.1 million ($5.0 million net of tax) and $25.1 million ($15.2 million net of tax) of amortization of intangible assets related to the acquisition of Medco for the three months and year ended December 31, 2012, respectively.

In addition, net income from discontinued operations, net of tax for the three months and year ended December 31, 2012, respectively includes a benefit of $3.7 million ($2.3 million net of tax) and charges of $7.8 million ($4.8 million net of charges) in conjunction with the strategic decision to exit various businesses.

⁽¹⁰⁾ Adjusted EPS will exclude amortization of intangible assets. The current estimate of full year amortization based on the preliminary purchase price allocation for the Medco transaction. The preliminary purchase price allocation may be subject to further refinement and may result in significant changes.

⁽¹¹⁾ Adjusted EPS will exclude Medco-related transaction, integration and other non-recurring costs, including premium on early retirement of debt. The full-year impact of these costs have yet to be determined.

Appendix

Additional Notes

The Company now recognizes net income attributable to non-controlling interest which represents the share of net income allocated to members in consolidated affiliates. This share of net income was previously included within selling, general and administrative costs on the consolidated statement of operations. This classification impacted all quarters in 2012 and the third and fourth quarters of 2011 and did not impact net income attributable to Express Scripts shareholders.

During the fourth quarter of 2012, the Company determined that portions of the business within the Other Business Operations segment were not core to future operations and committed to a plan to dispose of these businesses. Consequently, results for the year ended December 31, 2012 have been adjusted for the discontinued operations of these businesses. This adjustment for discontinued operations impacts the second, third and fourth quarters of 2012.

Consult the Investor Information section of the Express Scripts website for the 2012 Express Scripts Recast worksheet, a document that recasts historical information reflecting these changes as www.express-scripts.com/corporate