.Analysis of Goodwill and Intangible Assets
Difficulty: Advanced
Goodwill and Intangible Assets Accounting Policy
Goodwill
Goodwill is evaluated for impairment annually during the fourth quarter or when events or circumstances occur indicating goodwill might be impaired. Goodwill impairment testing guidance provides an option to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount. Express Scripts determines reporting units for the purpose of evaluating goodwill valuation based on component parts of the business one level below the segment level. Express Scripts' reporting units represent businesses for which discrete financial information is available and reviewed regularly by segment management. When performing a qualitative assessment, Express Scripts considers various events and circumstances in evaluating whether it is more likely than not the fair value of a reporting unit is less than its carrying amount and whether a quantitative impairment test is necessary. In 2017, Express Scripts performed a qualitative assessment for approximately 99% of the goodwill as of December 31, 2017.
When performing the quantitative impairment test, the measurement of possible impairment is based on a comparison of the fair value of each reporting unit to the carrying value of each reporting unit's net assets, including goodwill. Express Scripts records an impairment charge to the extent the carrying value of goodwill exceeds the implied fair value of goodwill resulting from this calculation. This valuation process involves assumptions based on management's best estimates and judgments, which approximate the market conditions experienced for Express Scripts' reporting units at the time the impairment assessment is made. Actual results may differ from these estimates due to the inherent uncertainty involved in such estimates.
No impairment existed for any of Express Scripts' reporting units during the years ended December 31, 2017, 2016 or 2015.
Other intangible assets
Other intangible assets include customer contracts, customer relationships and trade names. Customer contracts and relationships and trade names are valued at fair market value when acquired using the income approach. Intangible assets, excluding legacy Express Scripts, Inc. ("ESI") trade names which have an indefinite life, are being amortized using a modified pattern of benefit method over an estimated useful life of 10 to 20 years for customer contracts and relationships and 6 to 10 years for trade names. The weighted-average amortization period of intangible assets subject to amortization is 16 years.
Express Scripts evaluates the recoverability of intangible assets with finite lives whenever events or changes in circumstances indicate the carrying value of an intangible may not be recoverable. In the event this occurs, an impairment loss is recognized to the extent the carrying value exceeds fair value based on undiscounted cash flows.
Express Scripts has a 10-year contract with Anthem Inc. ("Anthem") under which Express Scripts provides pharmacy benefit management services to Anthem and its designated affiliates (the "PBM agreement"). When Express Scripts executed the agreement with Anthem in 2009, Express Scripts considered the overall structure of the agreement and the nature of the relationship with Anthem, including the complexity of the service level required, and attributed a reasonable likelihood of renewal at the end of its term in 2019. Accordingly, Express Scripts amortized the agreement using a modified pattern of benefit over an estimated useful life of 15 years. However, the sequence of events regarding the relationship with Anthem, culminating in the filing of a lawsuit by Anthem on March 21, 2016, increased the likelihood of either non-renewal or renewal on substantially different terms such that, beginning in March 2016, Express Scripts began amortizing the agreement with Anthem over the remaining term of the contract (i.e., using a life of 10 years from the time the agreement was executed in 2009). Therefore, the intangible asset amortization associated with the Anthem agreement will run through the remaining term of the contract at the end of 2019, reducing the previous amortization period by 5 years. This change increased intangible asset amortization by $126.7 million and $105.6 million for 2017 and 2016, respectively, relative to the previous amortization schedule.
Source: Express Scripts Holding Co., Annual Report
Goodwill and Intangible Assets Disclosure
Express Scripts Holding Co., Statement of Financial Position, Goodwill and Intangible Assets
USD $ in thousands
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| | Customer contracts | |||||
| | Trade names | |||||
| | Miscellaneous | |||||
| | Pharmacy Benefit Management (PBM) | |||||
| | Customer relationships | |||||
| | Trade names | |||||
| | Other Business Operations | |||||
| | Other intangible assets, gross carrying amount | |||||
| | Accumulated amortization | |||||
| | Other intangible assets, net carrying amount | |||||
| | Goodwill | |||||
| | Goodwill and other intangibles |
Source: Based on data from Express Scripts Holding Co. Annual Reports
| Item | Description | The company |
|---|---|---|
| Other intangible assets, net carrying amount | Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. | Express Scripts Holding Co.'s other intangible assets, net carrying amount declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level. |
| Goodwill | Carrying amount as of the balance sheet date, which is the cumulative amount paid and (if applicable) the fair value of any noncontrolling interest in the acquiree, adjusted for any amortization recognized prior to the adoption of any changes in generally accepted accounting principles (as applicable) and for any impairment charges, in excess of the fair value of net assets acquired in one or more business combination transactions. | Express Scripts Holding Co.'s goodwill increased from 2015 to 2016 and from 2016 to 2017. |
| Goodwill and other intangibles | Sum of the carrying amounts of all intangible assets, including goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. | Express Scripts Holding Co.'s goodwill and other intangibles declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level. |
Analyst Adjustments: Removal of Goodwill
Express Scripts Holding Co., adjustments to financial data
USD $ in thousands
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Adjustment to Total Assets | ||||||
| | Total assets (as reported) | |||||
| | Less: Goodwill | |||||
| | Total assets (adjusted) | |||||
| Adjustment to Total Express Scripts Stockholders' Equity | ||||||
| | Total Express Scripts stockholders' equity (as reported) | |||||
| | Less: Goodwill | |||||
| | Total Express Scripts stockholders' equity (adjusted) | |||||
Adjusted Ratios: Removal of Goodwill (Summary)
Express Scripts Holding Co., adjusted ratios
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| Total Asset Turnover | ||||||
| | Reported total asset turnover | |||||
| | Adjusted total asset turnover | |||||
| Financial Leverage | ||||||
| | Reported financial leverage | |||||
| | Adjusted financial leverage | |||||
| Return on Equity (ROE) | ||||||
| | Reported ROE | % | % | % | % | % |
| | Adjusted ROE | % | % | % | % | % |
| Return on Assets (ROA) | ||||||
| | Reported ROA | % | % | % | % | % |
| | Adjusted ROA | % | % | % | % | % |
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Express Scripts Holding Co.'s adjusted total asset turnover improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level. |
| Adjusted financial leverage | A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income. |
|
| Adjusted ROE | A profitability ratio calculated as net income divided by adjusted shareholders' equity. | |
| Adjusted ROA | A profitability ratio calculated as net income divided by adjusted total assets. | Express Scripts Holding Co.'s adjusted ROA improved from 2015 to 2016 and from 2016 to 2017. |
Adjusted Total Asset Turnover
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| | Revenues (USD $ in thousands) | |||||
| | Total assets (USD $ in thousands) | |||||
| | Total asset turnover1 | |||||
| Adjusted for Goodwill | ||||||
| | Revenues (USD $ in thousands) | |||||
| | Adjusted total assets (USD $ in thousands) | |||||
| | Adjusted total asset turnover2 | |||||
2017 Calculations
1 Total asset turnover = Revenues ÷ Total assets
= ÷ =
2 Adjusted total asset turnover = Revenues ÷ Adjusted total assets
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted total asset turnover | An activity ratio calculated as total revenue divided by adjusted total assets. | Express Scripts Holding Co.'s adjusted total asset turnover improved from 2015 to 2016 but then slightly deteriorated from 2016 to 2017 not reaching 2015 level. |
Adjusted Financial Leverage
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| | Total assets (USD $ in thousands) | |||||
| | Total Express Scripts stockholders' equity (USD $ in thousands) | |||||
| | Financial leverage1 | |||||
| Adjusted for Goodwill | ||||||
| | Adjusted total assets (USD $ in thousands) | |||||
| | Adjusted total Express Scripts stockholders' equity (USD $ in thousands) | |||||
| | Adjusted financial leverage2 | |||||
2017 Calculations
1 Financial leverage = Total assets ÷ Total Express Scripts stockholders' equity
= ÷ =
2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted total Express Scripts stockholders' equity
= ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted financial leverage | A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity. Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income. |
Adjusted Return on Equity (ROE)
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| | Net income attributable to Express Scripts (USD $ in thousands) | |||||
| | Total Express Scripts stockholders' equity (USD $ in thousands) | |||||
| | ROE1 | % | % | % | % | % |
| Adjusted for Goodwill | ||||||
| | Net income attributable to Express Scripts (USD $ in thousands) | |||||
| | Adjusted total Express Scripts stockholders' equity (USD $ in thousands) | |||||
| | Adjusted ROE2 | % | % | % | % | % |
2017 Calculations
1 ROE = 100 × Net income attributable to Express Scripts ÷ Total Express Scripts stockholders' equity
= 100 × ÷ = %
2 Adjusted ROE = 100 × Net income attributable to Express Scripts ÷ Adjusted total Express Scripts stockholders' equity
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROE | A profitability ratio calculated as net income divided by adjusted shareholders' equity. |
Adjusted Return on Assets (ROA)
| Dec 31, 2017 | Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | ||
|---|---|---|---|---|---|---|
| As Reported | ||||||
| | Net income attributable to Express Scripts (USD $ in thousands) | |||||
| | Total assets (USD $ in thousands) | |||||
| | ROA1 | % | % | % | % | % |
| Adjusted for Goodwill | ||||||
| | Net income attributable to Express Scripts (USD $ in thousands) | |||||
| | Adjusted total assets (USD $ in thousands) | |||||
| | Adjusted ROA2 | % | % | % | % | % |
2017 Calculations
1 ROA = 100 × Net income attributable to Express Scripts ÷ Total assets
= 100 × ÷ = %
2 Adjusted ROA = 100 × Net income attributable to Express Scripts ÷ Adjusted total assets
= 100 × ÷ = %
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROA | A profitability ratio calculated as net income divided by adjusted total assets. | Express Scripts Holding Co.'s adjusted ROA improved from 2015 to 2016 and from 2016 to 2017. |
