EXPRESS SCRIPTS AND MEDCO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Exhibit 99.2
EXPRESS SCRIPTS AND MEDCO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
FINANCIAL INFORMATION
On July 20, 2011, Express Scripts, Inc. (“Express Scripts”) entered into an Agreement and Plan
of Merger, as amended (the “Merger Agreement”) with Medco Health Solutions, Inc. (“Medco”), Aristotle Holding,
Inc. (“New Express Scripts”), ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ Sub, Inc., a Delaware corporation and a wholly owned
subsidiary of New Express Scripts (“Express Scripts Merger Sub”), and Plato Merger Sub, Inc., a
Delaware corporation and a wholly owned subsidiary of New Express Scripts (“Medco Merger Sub” and,
together with Express Scripts Merger Sub, the “Merger
Subs”), as amended by Amendment No. 1 thereto, dated November 7,
2011. Pursuant to the Merger Agreement,
Express Scripts Merger Sub will be merged with and into Express Scripts (the “Express Scripts
Merger”), and Medco Merger Sub will be merged with and into Medco (the “Medco Merger” and, together
with the Express Scripts Merger, the “Mergers”). As a result, Express Scripts and Medco will each
become a wholly owned subsidiary of New Express Scripts. The “Related Financing Transactions”
refers to (i)
the borrowing by us of $4.0 billion under the Term Loan Facility (as defined below) and each of the
other borrowings, issuances or other transactions effected to procure the balance of the funds
needed to pay the cash consideration in accordance with the Merger Agreement, to repay any existing
indebtedness that will be repaid in connection with the Mergers and to pay related fees and
expenses and (ii) the payment of existing indebtedness that will be repaid in connection with the
Mergers.
The unaudited pro forma condensed combined financial information presented below is derived
from the historical financial statements of Express Scripts and Medco, adjusted to give effect to
the Mergers and the Related Financing Transactions.
The unaudited pro forma condensed combined statements of operations for the nine months ended
September 30, 2011 and for the year ended December 31, 2010 give effect to the Mergers and the
Related Financing Transactions as if they had occurred on the first day of the earliest period
presented. The unaudited pro forma condensed combined balance sheet gives effect to the Mergers
and the Related Financing Transactions as if they had occurred on September 30, 2011.
The pro forma adjustments are preliminary and have been made solely for informational
purposes. The actual results reported by the combined company in periods following the Mergers may
differ significantly from that reflected in these unaudited pro forma condensed combined financial
statements for a number of reasons, including but not limited to cost savings from operating
efficiencies, synergies and the impact of the incremental costs incurred in integrating the two
companies. As a result, the pro forma condensed combined information is not intended to represent and does not
purport to be what the combined company’s financial condition or results of operations
would have been had the Mergers and the Related Financing Transactions been completed on the
applicable dates of this pro forma condensed combined financial information. In addition, the pro forma condensed combined financial
information does not purport to project the future financial condition and results of operations of
the combined company.
The unaudited pro forma condensed combined financial information is based upon the historical
financial statements of Express Scripts and Medco. The pro forma condensed combined financial statements are based on
various assumptions, including assumptions relating to the consideration paid and the allocation
thereof to the assets acquired and liabilities assumed from Medco based on preliminary estimates of
fair value. The pro forma assumptions and adjustments are described in the accompanying notes
presented on the following pages. Pro forma adjustments are those that are directly attributable
to the transaction, are factually supportable and, with respect to the unaudited pro forma
statement of operations, are expected to have a continuing impact on the consolidated results. The
final purchase price and the allocation thereof will differ from that reflected in the pro forma
condensed combined financial statements after final valuation procedures are performed and amounts are finalized
following the completion of the Mergers.
The unaudited pro forma condensed combined financial information does not reflect any cost
savings from operating efficiencies, synergies or other restructurings that could result from the
Mergers.
1
Unaudited Pro Forma Condensed Combined Balance Sheet
September 30, 2011
September 30, 2011
| Pro Forma | ||||||||||||||||||||||||
| Express | Medco | Reclassifications | Combined | |||||||||||||||||||||
| Scripts | September | for Consistent | Pro Forma | September | ||||||||||||||||||||
| (in millions) | September 30, 2011 | 24, 2011 | Presentation(1) | Adjustments | 30, 2011 | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 1,062.6 | $ | 161.5 | $ | — | $ | (1,000.0 | ) | (A | ) | $ | 224.1 | |||||||||||
Restricted cash and investments |
19.9 | 5.3 | — | — | 25.2 | |||||||||||||||||||
Receivables, net |
1,770.7 | — | 4,270.5 | — | 6,041.2 | |||||||||||||||||||
Manufacturer accounts receivable, net |
— | 1,859.8 | (1,859.8 | ) | — | — | ||||||||||||||||||
Client accounts receivable, net |
— | 2,410.7 | (2,410.7 | ) | — | — | ||||||||||||||||||
Inventories |
340.2 | 788.1 | — | — | 1,128.3 | |||||||||||||||||||
Deferred taxes |
45.0 | 266.9 | — | — | 311.9 | |||||||||||||||||||
Prepaid expenses and other current assets |
68.0 | 69.7 | — | (3.7 | ) | (B | ) | 134.0 | ||||||||||||||||
Total current assets |
3,306.4 | 5,562.0 | — | (1,003.7 | ) | 7,864.7 | ||||||||||||||||||
Property and equipment, net |
388.8 | 1,027.1 | — | — | (C | ) | 1,415.9 | |||||||||||||||||
Goodwill |
5,485.4 | 6,957.7 | — | 17,318.6 | (D | ) | 29,761.7 | |||||||||||||||||
Other intangible assets, net |
1,665.8 | 2,214.4 | — | 9,618.3 | (D | ) | 13,498.5 | |||||||||||||||||
Other assets |
25.3 | 102.4 | — | (11.4 | ) | (B | ) | 116.3 | ||||||||||||||||
Total assets |
$ | 10,871.7 | $ | 15,863.6 | $ | — | $ | 25,921.8 | $ | 52,657.1 | ||||||||||||||
Liabilities and stockholders’ equity |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Claims and rebates payable |
$ | 2,710.9 | $ | — | $ | 4,156.0 | $ | — | $ | 6,866.9 | ||||||||||||||
Accounts payable |
744.3 | — | 1,006.3 | — | 1,750.6 | |||||||||||||||||||
Claims and other accounts payable |
— | 2,960.5 | (2,960.5 | ) | — | — | ||||||||||||||||||
Client rebates and guarantees payable |
— | 2,201.8 | (2,201.8 | ) | — | — | ||||||||||||||||||
Accrued expenses |
688.6 | 940.0 | — | — | 1,628.6 | |||||||||||||||||||
Short-term debt |
— | 36.4 | — | — | 36.4 | |||||||||||||||||||
Current maturities of long-term debt |
999.9 | 2,000.0 | — | (2,000.0 | ) | (B | ) | 999.9 | ||||||||||||||||
Total current liabilities |
5,143.7 | 8,138.7 | — | (2,000.0 | ) | 11,282.4 | ||||||||||||||||||
Long-term debt |
2,989.3 | 3,002.2 | — | 12,768.1 | (B | ) | 18,759.6 | |||||||||||||||||
Deferred tax liabilities |
— | 972.2 | (972.2 | ) | — | — | ||||||||||||||||||
Other liabilities |
574.0 | 200.1 | 972.2 | 3,313.3 | (E | ) | 5,059.6 | |||||||||||||||||
Total liabilities |
8,707.0 | 12,313.2 | — | 14,081.4 | 35,101.6 | |||||||||||||||||||
Stockholders’ equity: |
||||||||||||||||||||||||
Preferred stock |
— | — | — | — | — | |||||||||||||||||||
Common stock |
6.9 | 6.7 | — | (3.1 | ) | (F | ) | 10.5 | ||||||||||||||||
Additional paid-in capital |
2,422.5 | 8,760.0 | — | 6,778.9 | (F | ) | 17,961.4 | |||||||||||||||||
Accumulated other comprehensive income
(loss) |
15.6 | (31.6 | ) | — | 31.6 | (F | ) | 15.6 | ||||||||||||||||
Retained earnings |
6,355.2 | 7,668.2 | — | (7,819.9 | ) | (F | ) | 6,203.5 | ||||||||||||||||
| 8,800.2 | 16,403.3 | — | (1,012.5 | ) | 24,191.0 | |||||||||||||||||||
Common stock in treasury at cost |
(6,635.5 | ) | (12,852.9 | ) | — | 12,852.9 | (F | ) | (6,635.5 | ) | ||||||||||||||
Total stockholders’ equity |
2,164.7 | 3,550.4 | — | 11,840.4 | 17,555.5 | |||||||||||||||||||
Total liabilities and stockholders’ equity |
$ | 10,871.7 | $ | 15,863.6 | $ | — | $ | 25,921.8 | $ | 52,657.1 | ||||||||||||||
| (1) | See Note 1 — Basis of Presentation for explanation of reclassifications. |
See accompanying notes to the unaudited pro forma condensed combined financial statements
2
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Nine Months Ended September 30, 2011
For the Nine Months Ended September 30, 2011
| Express | Pro Forma | |||||||||||||||||||||||
| Scripts | Medco | Reclassifications | Combined | |||||||||||||||||||||
| September 30, | September | for Consistent | Pro Forma | September | ||||||||||||||||||||
| (in millions, except per share data) | 2011 | 24, 2011 | Presentation(1) | Adjustments | 30, 2011 | |||||||||||||||||||
Revenues |
$ | 34,026.9 | $ | 51,075.1 | $ | — | $ | (248.7 | ) | (G | ) | $ | 84,853.3 | |||||||||||
Cost of revenues |
31,661.5 | 47,732.4 | (76.9 | ) | (248.7 | ) | (G | ) | 79,068.3 | |||||||||||||||
Gross profit |
2,365.4 | 3,342.7 | 76.9 | — | 5,785.0 | |||||||||||||||||||
▇▇▇▇▇▇▇, general and administrative |
628.6 | 1,263.0 | 296.5 | 894.4 | (H | ) | 3,082.5 | |||||||||||||||||
Amortization of intangibles |
— | 219.6 | (219.6 | ) | — | — | ||||||||||||||||||
Operating income |
1,736.8 | 1,860.1 | — | (894.4 | ) | 2,702.5 | ||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Interest income and other income
(expense) |
7.8 | (1.7 | ) | — | — | 6.1 | ||||||||||||||||||
Interest expense |
(184.3 | ) | (156.4 | ) | — | (280.9 | ) | (I | ) | (621.6 | ) | |||||||||||||
| (176.5 | ) | (158.1 | ) | — | (280.9 | ) | (615.5 | ) | ||||||||||||||||
Income before income taxes |
1,560.3 | 1,702.0 | — | (1,175.3 | ) | 2,087.0 | ||||||||||||||||||
Provision for income taxes |
574.9 | 670.7 | — | (448.7 | ) | (J | ) | 796.9 | ||||||||||||||||
Net income from continuing operations |
$ | 985.4 | $ | 1,031.3 | $ | — | $ | (726.6 | ) | $ | 1,290.1 | |||||||||||||
Weighted average number of common
shares
outstanding during the period: |
||||||||||||||||||||||||
Basic: |
506.1 | 397.0 | — | (75.4 | ) | (K | ) | 827.7 | ||||||||||||||||
Diluted: |
510.3 | 404.7 | — | (76.9 | ) | (K | ) | 838.1 | ||||||||||||||||
Basic earnings per share from
continuing operations |
$ | 1.95 | $ | 2.60 | $ | 1.56 | ||||||||||||||||||
Diluted earnings per share from
continuing operations |
$ | 1.93 | $ | 2.55 | $ | 1.54 | ||||||||||||||||||
| (1) | See Note 1 — Basis of Presentation for explanation of reclassifications. |
See accompanying notes to the unaudited pro forma condensed combined financial statements
3
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Fiscal Year Ended December 31, 2010
For the Fiscal Year Ended December 31, 2010
| Express | Pro Forma | |||||||||||||||||||||||
| Scripts | Medco | Reclassifications | Combined | |||||||||||||||||||||
| December 31, | December 25, | for Consistent | Pro Forma | December 31, | ||||||||||||||||||||
| (in millions, except per share data) | 2010 | 2010 | Presentation(1) | Adjustments | 2010 | |||||||||||||||||||
Revenues |
$ | 44,973.2 | $ | 65,968.3 | $ | — | $ | (266.2 | ) | (G | ) | $ | 110,675.3 | |||||||||||
Cost of revenues |
42,015.0 | 61,633.2 | (101.5 | ) | (266.2 | ) | (G | ) | 103,280.5 | |||||||||||||||
Gross profit |
2,958.2 | 4,335.1 | 101.5 | — | 7,394.8 | |||||||||||||||||||
Selling, general and administrative |
887.3 | 1,550.4 | 388.9 | 1,352.5 | (H | ) | 4,179.1 | |||||||||||||||||
Amortization of intangibles |
— | 287.4 | (287.4 | ) | — | — | ||||||||||||||||||
Operating income |
2,070.9 | 2,497.3 | — | (1,352.5 | ) | 3,215.7 | ||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Interest income and other income |
4.9 | 9.4 | — | — | 14.3 | |||||||||||||||||||
Interest expense |
(167.1 | ) | (172.5 | ) | — | (465.5 | ) | (I | ) | (805.1 | ) | |||||||||||||
| (162.2 | ) | (163.1 | ) | — | (465.5 | ) | (790.8 | ) | ||||||||||||||||
Income before income taxes |
1,908.7 | 2,334.2 | — | (1,818.0 | ) | 2,424.9 | ||||||||||||||||||
Provision for income taxes |
704.1 | 906.9 | — | (690.3 | ) | (J | ) | 920.7 | ||||||||||||||||
Net income from continuing operations |
$ | 1,204.6 | $ | 1,427.3 | $ | — | $ | (1,127.7 | ) | $ | 1,504.2 | |||||||||||||
Weighted average number of common
shares outstanding during the period: |
||||||||||||||||||||||||
Basic: |
538.5 | 443.0 | — | (84.2 | ) | (K | ) | 897.3 | ||||||||||||||||
Diluted: |
544.0 | 451.8 | — | (85.8 | ) | (K | ) | 910.0 | ||||||||||||||||
Basic earnings per share from
continuing operations |
$ | 2.24 | $ | 3.22 | $ | 1.68 | ||||||||||||||||||
Diluted earnings per share from
continuing operations |
$ | 2.21 | $ | 3.16 | $ | 1.65 | ||||||||||||||||||
| (1) | See Note 1 — Basis of Presentation for explanation of reclassifications. |
See accompanying notes to the unaudited pro forma condensed combined financial statements
4
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Note 1 — Basis of Presentation
The unaudited pro forma condensed combined financial information was prepared using the
acquisition method of accounting and was based on the historical audited financial statements of
Express Scripts and Medco for the years ended December 31, 2010 and December 25, 2010,
respectively, and unaudited financial statements of Express Scripts and Medco as of and for the
nine months ended September 30, 2011 and September 24, 2011, respectively. Certain
reclassifications have been made to the historical financial statements of Medco to conform to
Express Scripts’ presentation, including the presentation of claims and rebates payable as a
separate line item from accounts payable and condensing Medco’s receivable balances into one line
item. Additionally, Medco’s product revenues and service revenues have been combined into a single
line item and amortization of intangibles has been included in selling, general and administrative
expenses to conform to Express Scripts’ presentation. Finally, the following adjustments have been
made to cost of revenues and selling, general and administrative expense:
| Nine months ended | Twelve months ended | |||||||
| (in millions) | September 30, 2011 | December 31, 2010 | ||||||
Reclassify bad debt expense(1) |
$ | (100.4 | ) | $ | (130.5 | ) | ||
Reclassify labor and benefits expense (2) |
(8.7 | ) | (11.6 | ) | ||||
Allocation of IT related expenses(3) |
32.2 | 40.6 | ||||||
Net adjustment to cost of revenues |
$ | (76.9 | ) | $ | (101.5 | ) | ||
Reclassify bad debt expense(1) |
$ | 100.4 | $ | 130.5 | ||||
Reclassify labor and benefits expense (2) |
8.7 | 11.6 | ||||||
Allocation of IT related expenses(3) |
(32.2 | ) | (40.6 | ) | ||||
Medco historical amortization of intangibles(4) |
219.6 | 287.4 | ||||||
Net adjustment to selling, general and administrative |
$ | 296.5 | $ | 388.9 | ||||
| (1) | Bad debt expense recorded by ▇▇▇▇▇ has been reclassified from cost of revenues to selling, general and administrative expenses for consistent presentation in the unaudited pro forma condensed combined statements of operations. | |
| (2) | Medco allocates a portion of the labor and benefits expenses for certain employees who manage its relationships with retail pharmacies and pharmaceutical manufacturers to cost of revenues. The allocated amount of these labor and benefits expenses has been reclassified to selling, general and administrative expense for consistent presentation in the unaudited pro forma condensed combined statements of operations. | |
| (3) | Adjustments have been made to allocate a portion of Medco’s pharmacy technology expenses from selling, general and administrative expense to cost of revenues for consistent presentation in the unaudited pro forma condensed combined statements of operations. | |
| (4) | Amortization of intangibles, presented as a separate line item in Medco’s historical financial statements, has been condensed into selling, general and administrative expense for consistent presentation in the unaudited pro forma condensed combined statements of operations. |
The unaudited pro forma condensed combined statements of operations for the year ended
December 31, 2010 and for the nine months ended September 30, 2011 give effect to the proposed
Mergers and the Related Financing Transactions as if they had occurred on the first day of the
earliest period presented. The unaudited condensed combined balance sheet as of September 30, 2011
gives effect to the Mergers and the Related Financing Transactions as if they had occurred on
September 30, 2011.
The acquisition method of accounting is based on authoritative guidance for business
combinations and uses the fair value concepts defined in authoritative guidance. We prepared the
unaudited pro forma condensed combined financial information using the acquisition method of accounting under these existing
U.S. GAAP standards.
5
The authoritative guidance for business combinations requires, among other things, that assets
acquired and liabilities assumed be recognized at their fair values as of the acquisition date if
fair value can reasonably be estimated. If the fair value of an asset or liability that arises from
a contingency cannot be determined, the asset or liability is recognized if it is probable that an
asset existed or a liability has been incurred at the acquisition date and the amount of such asset
or liability can be reasonably determined. In addition, the guidance establishes that the
consideration transferred be measured at the closing date of the acquisition at the then-current
market price. As the purchase price includes shares to be issued for consideration in the Mergers,
this will likely result in an equity component that is different from the amount assumed in these
unaudited pro forma condensed combined financial statements.
The authoritative guidance for fair value defines the term ‘fair value,’ sets forth the
valuation requirements for any asset or liability measured at fair value, expands related
disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of
inputs used to develop the fair value measures. Fair value is defined in the guidance as “the
price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.” This is an exit price concept for
the valuation of the asset or liability. In addition, market participants are assumed to be buyers
and sellers in the principal (or the most advantageous) market for the asset or liability. Fair
value measurements for an asset assume the highest and best use by these market participants. As a
result of these standards, we may be required to record assets that we do not intend to use or sell
(defensive assets) and/or to value assets at fair value measurements that do not reflect our
intended use of those assets. Many of these fair value measurements can be highly subjective and
it is also possible that other professionals, applying reasonable judgment to the same facts and
circumstances, could develop and support a range of alternative estimated amounts.
The pro forma adjustments described below have been developed based on assumptions and
estimates, including assumptions relating to the consideration to be paid and the allocation
thereof to the assets acquired and liabilities assumed from Medco based on preliminary estimates of
fair value. The final purchase price and the allocation thereof will differ from that reflected in
the pro forma condensed combined financial statements after final valuation procedures are
performed and amounts are finalized following the completion of the Mergers.
The unaudited pro forma condensed combined financial statements are provided for illustrative
purposes only and do not purport to represent what the actual consolidated results of operations or
the consolidated financial position of New Express Scripts would have been had the Mergers and the
Related Financing Transactions occurred on the dates assumed, nor are they necessarily indicative
of future consolidated results of operations or financial position.
The unaudited pro forma condensed combined financial statements do not reflect any cost
savings from operating efficiencies, synergies or other restructurings that could result from the
Mergers. Additionally, no adjustments were made to reflect termination costs to be incurred in
connection with the Mergers, as such costs are not currently factually supportable.
Express Scripts has been determined to be the acquirer under the acquisition method of
accounting based on various considerations. Upon closing of the Mergers, Express Scripts
stockholders are expected to own approximately 59% of the combined company and Medco stockholders
are expected to own approximately 41%. Additionally, New Express Scripts will transfer cash and
issue common stock as the merger consideration to Medco stockholders. Further, the Board of
Directors and senior management of the combined company will be comprised primarily of current
Express Scripts board members and senior management, respectively.
Express Scripts performed a preliminary review of Medco’s accounting policies, based primarily
on publicly available information, to determine whether any adjustments were necessary to ensure
comparability in the pro forma condensed combined financial statements. At this time, Express Scripts is not
aware of any differences that would have a material impact on the pro forma condensed combined financial
statements. The unaudited pro forma condensed combined financial statements do not reflect any
differences in accounting policies. Upon completion of the Mergers, or as more information becomes
available, Express Scripts will perform a more detailed review of Medco’s accounting
6
policies. As a result of that review, differences may be identified between the accounting
policies of the two companies that, when conformed, could have a material impact on the combined
financial statements.
Note 2 — Preliminary Purchase Price
The total consideration for the transaction is $26.7 billion, composed of $66.89 per share in
cash and New Express Scripts’ stock (valued based on the closing price of Express Scripts stock on
November 10, 2011), including $28.80 in cash and 0.81 shares for each Medco share outstanding. The
purchase price for the business combination is estimated as follows:
Estimated Purchase Price Including Debt Assumed (in millions): |
||||
Cash to be paid to Medco stockholders(1) |
$ | 11,141.9 | ||
Value of shares of New Express Scripts common stock to be issued
to Medco stockholders(2) |
14,734.5 | |||
Value of New Express Scripts restricted stock units to be issued
to holders of Medco restricted stock units(3) |
215.0 | |||
Value of New Express Scripts stock options to be issued to
holders of Medco stock options(3)(4) |
593.0 | |||
Consideration to be transferred |
26,684.4 | |||
Debt assumed |
5,380.4 | |||
Total purchase price |
$ | 32,064.8 | ||
| (1) | Equals Medco outstanding shares as of September 24, 2011 multiplied by $28.80 per share. | |
| (2) | Equals Medco outstanding shares as of September 24, 2011 multiplied by the exchange ratio of 0.81, multiplied by the Express Scripts closing share price at November 10, 2011 of $47.02. | |
| (3) | In accordance with applicable accounting guidance, the fair value of replacement awards attributable to precombination service is recorded as part of the consideration transferred in the Mergers, while the fair value of replacement awards attributable to postcombination service is recorded separately from the business combination and recognized as compensation cost in the post-acquisition period over the remaining service period. The portion of Medco stock options attributable to precombination and postcombination service is estimated based on the ratio of vested to unvested stock options and the average vesting period. These postcombination compensation costs have been recorded as adjustments to the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2010 and the nine months ended September 30, 2011. See Note 4 — Unaudited Pro Forma Adjustments (H) for adjustment amounts. Various estimates were used in this calculation, including average remaining vesting period. These estimates could differ significantly from actual amounts calculated at the date of the Mergers, and such differences could have a material impact on the total purchase price. | |
| (4) | The fair value of the New Express Scripts equivalent stock options was estimated as of November 10, 2011 using the Black-Scholes valuation model utilizing various assumptions. The expected volatility of the New Express Scripts common stock price is based on the average historical volatility over the expected term based on daily closing stock prices of Express Scripts common stock. The expected term of the option is based on Medco historical employee stock option exercise behavior as well as the remaining contractual exercise term. The stock price volatility and expected term are based on Express Scripts’ best estimates at this time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the total consideration that will be recorded at the effective time of the Mergers. These estimates are subject to change with market conditions and other circumstances, and these changes may have a material impact on the fair value of stock options used to calculate the total purchase price. |
Since the Express Scripts stock price at the November 10, 2011 measurement date used for
purposes of these unaudited pro forma condensed combined financial statements exceeds the average
stock price for the 15 days prior to and including such measurement date, which is used to
calculate the exchange ratio, excess fair value of $109.9 million is recorded for the replacement
stock options. For the purposes of the unaudited pro forma condensed combined statements of
operations, this excess fair value has been amortized over the remaining vesting period of the stock options resulting in additional compensation expense of $67.2 million and $22.9 million
for the year ended December 31, 2010 and the nine months ended September 30, 2011, respectively.
Express Scripts will recalculate the fair values of the Medco stock options and the converted
options as of the closing date to determine the excess fair value amounts, if any, to be recorded
as compensation expense by New Express Scripts.
7
Medco’s stock incentive plan includes a provision for the acceleration of vesting of awards
granted under the Medco stock incentive plan in certain circumstances involving termination in
connection with a change in control. No adjustments have been made to the unaudited pro forma
condensed combined financial statements as a result of this provision, as Express Scripts cannot
currently predict the nature and extent of terminations to be made in connection with the Mergers.
The portion of the purchase price to be paid in shares of New Express Scripts common stock is
valued based on the number of Medco shares outstanding immediately prior to the Mergers and the
Express Scripts share price on that date. A 10% difference in Express Scripts’ stock price would
change the purchase price by approximately $1.6 billion with a corresponding change to goodwill.
Additionally, a 10% change in the number of Medco shares outstanding would change the purchase
price by approximately $2.6 billion, with a corresponding change to goodwill. The actual purchase
price will fluctuate with the price of Express Scripts’ common stock until the effective date of
the acquisition and the final valuation could differ significantly from the current estimate.
Note 3 — Preliminary Purchase Price Allocation
The combined company will allocate the purchase price paid by Express Scripts to the fair
value of the Medco assets acquired and liabilities assumed. The pro forma purchase price allocation
below has been developed based on preliminary estimates of fair value using the historical
financial statements of Medco as of September 24, 2011. In addition, the allocation of the purchase
price to acquired intangible assets is based on preliminary fair value estimates and is subject to
final management analysis, with the assistance of third party valuation advisors, at the completion
of the Mergers. Once Express Scripts and its third party valuation advisors have full access to the
specifics of Medco’s intangible assets, additional insight will be gained that could impact: (i)
the estimated total value assigned to intangible assets, (ii) the estimated allocation of value
between finite-lived and indefinite-lived intangible assets and/or (iii) the estimated
weighted-average useful life of each category of intangible assets. The estimated intangible asset
values and their useful lives could be impacted by a variety of factors that may become known to us
only upon access to additional information and/or by changes in such factors that may occur prior
to the effective time of the Mergers.
The estimated intangible assets are comprised of customer contracts with an estimated useful
life of 10 years and trade names with an estimated useful life of 5 years, which is consistent with
the estimated benefit period. Since Express Scripts has limited information at this time to value
all of the intangible assets, the estimated fair values were based primarily on current estimates
of Medco’s expected future cash flows for all customer contracts and trade names. Express Scripts
expects that the estimated value assigned to Medco’s customer contracts is likely to change as
access is gained by Express Scripts to the specifics of Medco’s customer contracts and as life and renewal assumptions
are refined. Additional intangible asset classes may be identified as the valuation process
continues, however such items are currently not expected to be material to the overall purchase
price allocation. A 10% change in the amount allocated to identifiable intangible assets would
increase or decrease annual amortization expense by $140.0 million. The residual amount of the
purchase price after preliminary allocation to identifiable intangibles has been allocated to
goodwill. The actual amounts recorded when the Mergers are complete may differ materially from the
pro forma amounts presented below (in millions):
8
Tangible assets acquired: |
||||
Current assets |
$ | 5,558.3 | ||
Property and equipment, net |
1,027.1 | |||
Other non-current assets |
91.0 | |||
Total tangible assets acquired |
6,676.4 | |||
Value assigned to intangible assets acquired |
11,700.0 | |||
Liabilities assumed, excluding debt |
(7,274.6 | ) | ||
Deferred tax liability related to acquired intangible assets
and replacement stock awards included in the purchase price |
(3,313.3 | ) | ||
Total assets acquired in excess of liabilities assumed |
7,788.5 | |||
Goodwill |
24,276.3 | |||
Total purchase price |
32,064.8 | |||
Less debt assumed |
(5,380.4 | ) | ||
Total payments to Medco stockholders |
$ | 26,684.4 | ||
Note 4 — Unaudited Pro Forma Adjustments
Unaudited Pro Forma Condensed Combined Balance Sheet
(A) Sources and Uses
| (in millions) | ||||
Sources of funds: |
||||
Express Scripts cash on hand at September 30, 2011 |
$ | 1,000.0 | ||
Term Loan Facility |
4,000.0 | |||
Additional debt financing |
8,426.3 | |||
Total sources of funds |
$ | 13,426.3 | ||
Use of funds: |
||||
Cash payments to Medco stockholders |
$ | 11,141.9 | ||
Payment of Medco 2012 term loan and revolving credit facility |
2,000.0 | |||
Express Scripts transaction costs(1) |
151.7 | |||
New debt issuance costs(2) |
132.7 | |||
Total use of funds |
$ | 13,426.3 | ||
| (1) | In accordance with applicable accounting guidance, the transactions costs are expensed as they are incurred. | |
| (2) | See Note (D) below |
In connection with the Mergers, on August 5, 2011, Express Scripts entered into a $14.0
billion unsecured bridge facility (the “Bridge Facility”). On the effective date of the Bridge
Facility and prior to the consummation of the Express Scripts Merger, Express Scripts will be the
borrower under the Bridge Facility. New Express Scripts will assume the role, rights and
obligations of Express Scripts and become the borrower under the Bridge Facility upon consummation
of the Express Scripts Merger. The Bridge Facility will be available for Express Scripts or New
Express Scripts to pay a portion of the cash consideration in accordance with the Merger Agreement,
to repay any existing indebtedness that will become due or otherwise default upon consummation of
the Mergers, and to pay related fees and expenses.
9
In connection with the Mergers, on August 29, 2011, Express Scripts entered into a $5.5
billion permanent facility consisting of a five-year $4.0 billion unsecured term loan facility (the
“Term Loan Facility”) and a five-year $1.5 billion unsecured revolving loan facility (“the
Revolving Loan Facility”). On the effective date of the Term Loan Facility and the Revolving Loan Facility and prior to the
consummation of the Express Scripts Merger, Express Scripts will be the borrower under the Term Loan Facility and the Revolving Loan Facility. New Express Scripts will assume the role, rights and
obligations of Express Scripts and become the borrower under the credit agreement in respect of the Term Loan Facility and the Revolving Loan Facility upon consummation of the Express Scripts Merger. The Term Loan Facility will be available for
Express Scripts to pay a portion of the cash consideration in accordance with the Merger Agreement,
to repay any existing indebtedness that will become due or otherwise default upon consummation of
the Mergers and to pay related fees and expenses. The Revolving Loan Facility will be available
for working capital needs and general corporate purposes. Upon entry into the Term Loan Facility,
the commitments under the Bridge Facility were automatically reduced by $4.0 billion. Upon funding
of the Term Loan Facility, we anticipate that the $1.5 billion Revolving Loan Facility will replace Express Scripts’
current $750 million revolving credit facility.
In the period leading up to the closing of the Mergers, Express Scripts may pursue other
financing opportunities to replace all or portions of the Bridge Facility, or, in the event that we
draw upon the Bridge Facility, we may refinance all or a portion of the Bridge Facility at a later
date. The proceeds from these borrowings may be used to pay a portion of the cash consideration to
be paid in the Mergers and to pay related fees and expenses.
We intend to borrow $4.0 billion under the Term Loan Facility in connection with the Mergers.
The balance of the financing in connection with the Mergers could take any of several forms or any
combination of them, including but not limited to the following: (i) we may draw up to $10.0
billion under the Bridge Facility, reduced on a dollar-for-dollar
basis by the amount of proceeds we receive from any issuance of
senior notes; (ii) we may
issue senior notes in the public and/or private capital markets; and (iii) we may use
cash on hand. When any senior notes are issued, the commitments under the Bridge Facility will automatically reduce in an amount equal to
the aggregate principal amount of such senior notes. Amounts borrowed for funding the Mergers may
differ significantly from the amounts assumed in the sources of funds table above.
(B) Debt
Upon close of the Mergers, Express Scripts intends to settle Medco’s $2.0 billion of current
debt outstanding under its unsecured credit agreements.
The adjustment to long-term debt is comprised of the following items (in millions):
Financing incurred in connection with the Mergers |
$ | 12,426.3 | ||
Adjust Medco pre-Merger fixed rate debt to fair value |
341.8 | |||
Total adjustment to long-term debt |
$ | 12,768.1 | ||
The fair values of Medco’s senior notes were estimated based on observable relevant market
information.
Additionally, deferred financing fees of $3.7 million and $11.4 million relating to pre-Merger
Medco debt have been eliminated from Prepaid expenses and other current assets and Other assets,
respectively, in connection with the adjustment of Medco’s debt to fair value.
(C) Property and equipment, net
Based on the preliminary fair value assessment, the carrying value of Medco’s property and
equipment at September 24, 2011 approximates fair value. As such, the carrying value of Medco’s
property and equipment was used in the preliminary purchase price allocation, and no adjustments
were made to the unaudited pro forma condensed combined balance sheet. Adjustments may be required
when additional information is obtained and a more detailed review is performed over the fair value
of property and equipment. The actual amounts recorded when the Mergers are completed may differ
materially from the current book value of property and equipment.
10
(D) Goodwill and other intangible assets
The net adjustment to goodwill includes the elimination of Medco pre-Merger goodwill balances
and is calculated as follows (in millions):
Purchase price allocation to goodwill (Note 3) |
$ | 24,276.3 | ||
Elimination of pre-Merger Medco goodwill |
(6,957.7 | ) | ||
Total adjustment to goodwill |
$ | 17,318.6 | ||
The net adjustment to other intangible assets, net, is calculated as follows (in
millions):
New intangibles recorded: |
||||
Value assigned to intangible assets acquired(1) |
$ | 11,700.0 | ||
Debt issuance costs(2) |
132.7 | |||
Elimination of Medco pre-Merger other intangibles |
(2,214.4 | ) | ||
Total adjustment to other intangible assets |
$ | 9,618.3 | ||
| (1) | Based on the preliminary valuation, intangible assets acquired is comprised of $9.4 billion of customer contracts and $2.3 billion of trade names. | |
| (2) | These represent deferred financing fees incurred in connection with the Bridge Facility, the Term Loan Facility, the Revolving Loan Facility, and estimated fees to be incurred in connection with the other Related Financing Transactions. Amounts incurred in connection with the Bridge Facility are being amortized over nine months, and amounts incurred in relation to the Term Loan Facility and the Revolving Loan Facility are being amortized over the five year term of such facilities. Estimated amounts to be incurred in connection with the other Related Financing Transactions are being amortized over an estimated weighted average period of 11.1 years. This amortization period may differ materially from the estimates used for the purposes of these unaudited pro forma condensed combined financial statements. See Note (I) below for a sensitivity analysis of the impact of our assumptions to interest expense. |
See Note 3 for the estimated purchase price allocation. The final valuation could differ
significantly from the current estimate. The pro forma purchase price allocation is preliminary as
the Mergers have not yet been completed. The pro forma presentation assumes that the historical
values of Medco’s tangible assets and liabilities approximate fair value. Additionally, the
allocation of the purchase price to acquired intangible assets is preliminary and subject to the
final outcome of management’s analysis to be conducted, with the assistance of valuation advisors,
upon the completion of the Mergers. The residual amount of the purchase price has been allocated to
goodwill. The actual amounts recorded when the Mergers are completed may differ materially from the
pro forma amounts presented herein.
(E) Deferred taxes
The adjustment reflects an increase of $3,621.8 million in deferred tax liabilities associated
with the recording of new identifiable intangible assets for the combined company. This amount was
calculated using a tax rate of 38.18%, which represents Express Scripts’ and Medco’s estimated
blended rate for the first nine months of 2011, which approximates the relevant statutory rate.
This was offset by an additional adjustment of $308.5 million associated with the portion of
replacement stock options and restricted stock units allocated to the purchase price. The actual
amounts recorded for deferred taxes may differ materially from the pro forma amounts presented
herein.
(F) Equity
The historical stockholders’ equity of Medco will be eliminated upon the completion of
the Mergers. The total stockholders’ equity of the combined company will be increased over the
pre-Merger Express Scripts amounts by the value of the common stock issued in connection with the
purchase price. New Express Scripts will be issuing approximately $15.5 billion of stock as part
of the purchase price consideration. The calculation below estimates the
11
number of shares issued
to be 313.4 million using a share price of $47.02 (Express Scripts’ closing share price on November
10, 2011), and the number of replacement stock options and restricted stock units to be 50.1
million. The number of shares issued is dependent on the number of Medco shares, restricted shares
and options outstanding on the date of the Mergers. See the calculation of the pro forma
adjustments to common stock and additional paid-in capital below (in millions):
| Accumulated | Common | |||||||||||||||||||
| Additional | other | stock in | ||||||||||||||||||
| Common | paid-in | comprehensive | Retained | treasury at | ||||||||||||||||
| stock | capital | loss | earnings | cost | ||||||||||||||||
Elimination of pre-Merger Medco
equity balances |
$ | (6.7 | ) | $ | (8,760.0 | ) | $ | 31.6 | $ | (7,668.2 | ) | $ | 12,852.9 | |||||||
Impact of shares to be issued
to Medco stockholders |
3.6 | 15,538.9 | — | — | — | |||||||||||||||
Estimated transaction fees |
— | — | — | (151.7 | ) | — | ||||||||||||||
Total pro forma adjustment |
$ | (3.1 | ) | $ | 6,778.9 | $ | 31.6 | $ | (7,819.9 | ) | $ | 12,852.9 | ||||||||
Unaudited Pro Forma Condensed Combined Statements of Operations
(G) Revenues and Cost of revenues
Adjustments have been included in the unaudited pro forma condensed combined statements of
operations to eliminate revenues and cost of revenues from transactions between Express Scripts and
Medco. Express Scripts and Medco’s pharmacies may be included in the pharmacy networks of the
other respective company in order to fulfill members’ prescriptions for certain drugs that are
under limited or exclusive distribution contracts with manufacturers.
(H) Selling, general and administrative
| Nine months ended | Twelve months ended | |||||||
| (in millions) | September 30, 2011 | December 31, 2010 | ||||||
Intangible asset amortization(1) |
$ | 830.4 | $ | 1,112.6 | ||||
Post combination stock compensation expense (Note 2) |
85.7 | 241.3 | ||||||
Elimination of non-recurring charges directly
attributable to the transaction |
(20.3 | ) | — | |||||
Elimination of amortization of prior service costs and
actuarial gain/loss related to pension and other
post-retirement benefit plans(2) |
(1.4 | ) | (1.4 | ) | ||||
Net adjustment to selling, general and administrative |
$ | 894.4 | $ | 1,352.5 | ||||
| (1) | As of the effective time of the Mergers, identifiable intangible assets are required to be measured at fair value and these acquired assets could include assets that are not intended to be used or sold or that are intended to be used in a manner other than their highest and best use. For purposes of these unaudited pro forma condensed combined financial statements, it is assumed that all assets will be used and that all assets will be used in a manner that represents the highest and best use of those assets. Adjustments have been included in the unaudited pro forma condensed combined statements of operations to record the estimated net increase in amortization expense for other intangible assets. The incremental additional expense was calculated on a straight-line basis using a preliminary estimated useful life of 10 years for customer contracts and 5 years for trade names to amortize the preliminary estimated value of $11.7 billion assigned to identifiable intangible assets. Express Scripts is still considering a modified pattern of benefit method of amortization over 10 years for customer contracts. A modified pattern of benefit method of amortization would result in a greater portion of the expense recorded in the first 5 years to better reflect the expected cash flows under the Mergers, resulting in greater amortization expense during the early years. Further assessments will also be performed regarding the appropriate amortization method for trade names and any other definite-lived intangible assets identified. A determination will be made as Express Scripts is able to perform a more detailed review of Medco’s records. |
12
| (2) | In January 2011, Medco amended its postretirement healthcare benefit plan, discontinuing the benefit for all active non-retirement eligible employees. Medco had previously reduced and capped the benefit through a 2003 plan amendment, the effect of which resulted in a prior service credit reflected as a component of accumulated other comprehensive loss in stockholders’ equity. As this amount is being eliminated on the unaudited pro forma condensed combined balance sheet in connection with the elimination of Medco’s pre-Merger equity, adjustments have been made to eliminate the corresponding amortization of pension and postretirement prior service costs and actuarial gains and losses from selling, general and administrative expenses. |
(I) Interest Expense
For the purposes of the unaudited pro forma condensed combined financial statements, Express
Scripts is assumed to partially fund the Mergers through drawing $4.0 billion under the Term Loan
Facility and up to $10.0 billion under the Bridge Facility, reduced in proportion to the gross
proceeds from any issuance of senior notes. The adjustment included in the unaudited pro forma condensed combined
statements of operations reflects the additional interest expense using an estimated weighted
average interest rate of 4.17% for the nine months ended September 30, 2011 and 3.93% for the
twelve months ended December 31, 2010. For purposes of estimating the weighted average interest
rate, we have made certain assumptions regarding the Related
Financing Transactions. The actual weighted average interest rate may differ from the estimated rate due to changes
in market conditions or differences between the actual terms of any
debt financing and our
assumptions. The estimated interest rates for the Bridge Facility and the Term Loan Facility were
calculated using the prime rate plus a margin of 0.50%, based on our consolidated leverage ratio as
of September 30, 2011. The interest rate for the Bridge Facility also assumes that the margin will
increase by 0.25% on the 90th day after the funding date and by an additional
0.25% every 90 days thereafter, per the terms of the credit agreement in respect of the Bridge Facility. Adjustments
have also been made for the historical interest expense related to Medco’s $2.0 billion of debt
outstanding under its unsecured credit agreements that we anticipate will be repaid at the closing of the
Mergers.
The adjustment to interest expense reflects the following (in millions):
| Nine months ended | Twelve months ended | |||||||
| September 30, 2011 | December 31, 2010 | |||||||
Interest expense on financing incurred in connection
with the Mergers assuming a weighted average interest
rate of 4.17% for the nine months ended September 30,
2011 and 3.93% for the year ended December 31, 2010 |
$ | 388.2 | $ | 487.7 | ||||
Amortization associated with increase in pre-Merger Medco
debt to fair value, amortized over the remaining life of
each obligation |
(56.5 | ) | (79.4 | ) | ||||
Eliminate write-off of Bridge Facility deferred financing
fees upon entry into Term Loan Facility |
(26.0 | ) | — | |||||
Eliminate amortization of Bridge Facility deferred
financing costs recorded in the nine months ended
September 30, 2011(1) |
(15.0 | ) | — | |||||
Amortization of deferred financing costs and premiums
recorded in connection with financing assumed in
connection with the Mergers (See (B) above) |
6.7 | 73.9 | ||||||
Historical interest cost—debt to be repaid |
(16.5 | ) | (16.7 | ) | ||||
Total adjustment to interest expense |
$ | 280.9 | $ | 465.5 | ||||
Impact of 1/8% increase in weighted average interest rates |
$ | 11.6 | $ | 15.5 | ||||
| (1) | This amount is being eliminated since the deferred financing fees incurred in connection with the Bridge Facility are being amortized over nine months. As such, the entire amount of amortization is assumed to occur in the twelve months ended December 31, 2010. |
13
(J) Income taxes
The pro forma condensed combined income tax provision has been adjusted for the tax effect of
adjustments to income before income taxes at the estimated blended effective rate for the periods
presented as the effective rate approximates the statutory rate for the periods presented. The
effective tax rate of the combined company could be significantly different depending on
post-acquisition activities.
(K) Basic and diluted shares
The unaudited pro forma condensed combined basic and diluted earnings per share
calculations are based on the combined basic and diluted weighted-average shares. The historical
basic and diluted weighted average shares of Medco are assumed to be replaced by the shares
expected to be issued by New Express Scripts at an exchange ratio of 0.81 per Medco share.
14