Express Scripts Holding Co. (NASDAQ:ESRX)

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: 10-K (filing date: 2018-02-27).

Express Scripts Holding Co., balance sheet: goodwill and intangible assets

US$ in thousands

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-14), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-23), 10-K (filing date: 2014-02-20).

Express Scripts Holding Co., adjustments to financial statements

US$ in thousands

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-14), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-23), 10-K (filing date: 2014-02-20).

Express Scripts Holding Co., Financial Data: Reported vs. Adjusted

Express Scripts Holding Co., adjusted financial ratios

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-14), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-23), 10-K (filing date: 2014-02-20).

Express Scripts Holding Co., Financial Ratios: Reported vs. Adjusted

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-14), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-23), 10-K (filing date: 2014-02-20).

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-14), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-23), 10-K (filing date: 2014-02-20).

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-14), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-23), 10-K (filing date: 2014-02-20).

Based on: 10-K (filing date: 2018-02-27), 10-K (filing date: 2017-02-14), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-23), 10-K (filing date: 2014-02-20).