Express Scripts Reformulation

1. Express Scripts Reformulation Ian Johnston

2. Beginning Issue • Express Scripts merged with Medco Health Solutions in 2012 • ESRX 10-K dated December 31, 2012 did not include assumed merger in 2011 or 2010 financial data • ESRX and Medco financial data needed to be combined for 2011 and 2010 • Need 3 years of balance sheet and income data

3. First Step • Combine financial data for ESRX and Medco • Issues • Different line item titles and classifications • Categorization of certain assets, liabilities, revenues, and expenses • Solution • Group items under general headings • Example: combine “Sales Revenue” and “Product Revenue” under “Revenue” line item

4. Key Aspects of Original Statements • Balance Sheet • Fixed assets and equipment combined under two line items (Land & Buildings; Furniture, Equipment, and Machinery) • Large increase in Goodwill from 2011 to 2012 (acquisition of Medco) • Large increase in intangible assets from 2011 to 2012 • Large increase in stockholder’s equity (no stock in treasury in 2012)

5. Key Aspects of Original Statements • Income Statement • Equity income from joint venture in 2012 • Decrease in revenue of 24% from 2011 to 2012 • Net income fell 50% from 2011 to 2012 • Need to look more in detail concerning discontinued operations, sold business lines • No easily accessible data concerning other comprehensive income

8. Reformulated Balance Sheet • Assumptions • Cash needed for enterprise operations = 2% of revenue • Items to be included in enterprise assets • Prepaid expenses & other current assets • Assumed to represent prepayments relating to operations • Current/noncurrent assets of discontinued operations • Assumed are being sold from activities that at one time were operating • Other intangible assets • Assumed to be integral to the business and therefore part of operations • Other assets • Assumed to have a purpose in the operations of the company • Remaining cash belongs in financial assets

9. Reformulated Balance Sheet • Assumptions • Items to be included in enterprise Liabilities • Accrued Expenses • Assumed to arise from operating activities • Current/noncurrent liabilities of discontinued operations • Assumed to have arisen from activities that were once operating • Other liabilities • Assumed to arise from operating activities • All debt belongs in financial liabilities

12. Reformulated Income Statement • Assumptions for EPAT • Equity income from joint venture belongs • A joint venture involves operating activities to generate revenue for the business • Net loss from discontinued operations belongs • Constitutes a loss from an operating activity • Loss attributable to non-controlling interest • Must be subtracted to correctly value income from a subsidiary owned less than 100%

15. Unanswered Questions • What is the nature of the line items assumed to be part of NEA and EPAT? • Equity income from joint venture • Other assets/liabilities • Activities around discontinued operations • Prepaid and accrued expenses • How much cash is appropriate for ESRX to hold? • Where can information relating to other comprehensive income be found?