SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003. |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ |
Commission File Number: 0-20199
EXPRESS SCRIPTS, INC.
(Exact name of
registrant as specified in its charter)
| Delaware | 43-1420563 |
| (State of Incorporation) | (I.R.S. employer identification no.) |
13900 Riverport Dr., Maryland Heights, Missouri |
63043 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (314) 770-1666
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
___
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X
No
___
Common stock outstanding as of April 30, 2003: 78,074,507 Shares
EXPRESS SCRIPTS, INC.
INDEX
| Part I | Financial Information |
| Item 1. |
Financial Statements (unaudited) |
| a) |
Unaudited Consolidated Balance Sheet |
| b) |
Unaudited Consolidated Statement of Operations |
| c) |
Unaudited Consolidated Statement of Changes in Stockholders' Equity |
| d) |
Unaudited Consolidated Statement of Cash Flows |
| e) |
Notes to Unaudited Consolidated Financial Statements |
| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
| Item 4. |
Controls and Procedures |
| Part II | Other Information |
| Item 1. |
Legal Proceedings |
| Item 2. |
Changes in Securities and Use of Proceeds - (Not Applicable) |
| Item 3. |
Defaults Upon Senior Securities - (Not Applicable) |
| Item 4. |
Submission of Matters to a Vote of Security Holders - (Not Applicable) |
| Item 5. |
Other Information - (Not Applicable) |
| Item 6. |
Exhibits and Reports on Form 8-K |
| Signatures | |
| Index to Exhibits |
PART I. FINANCIAL INFORMATION
| March 31, | December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands, except share data) | 2003 | 2002 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 256,541 | $ | 190,654 | ||||
| Receivables, net | 1,020,219 | 988,544 | ||||||
| Inventories | 197,251 | 160,483 | ||||||
| Deferred taxes | 25,693 | 25,686 | ||||||
| Prepaid expenses and other current assets | 41,369 | 28,454 | ||||||
| Total current assets | 1,541,073 | 1,393,821 | ||||||
| Property and equipment, net | 170,011 | 168,973 | ||||||
| Goodwill, net | 1,379,489 | 1,378,436 | ||||||
| Other intangible assets, net | 247,506 | 251,111 | ||||||
| Other assets | 16,208 | 14,651 | ||||||
| Total assets | $ | 3,354,287 | $ | 3,206,992 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Claims and rebates payable | $ | 1,231,241 | $ | 1,084,906 | ||||
| Accounts payable | 206,336 | 255,245 | ||||||
| Accrued expenses | 203,443 | 200,356 | ||||||
| Current maturities of long-term debt | - | 3,250 | ||||||
| Total current liabilities | 1,641,020 | 1,543,757 | ||||||
| Long-term debt | 540,729 | 562,556 | ||||||
| Other liabilities | 104,259 | 97,824 | ||||||
| Total liabilities | 2,286,008 | 2,204,137 | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.01 par value per share, 5,000,000 shares | ||||||||
| authorized, and no shares issued and outstanding | - | - | ||||||
| Common Stock, $0.01 par value per share, 181,000,000 shares | ||||||||
| authorized, and 79,784,000 and 79,834,000 shares issued and | ||||||||
| outstanding, respectively | 797 | 798 | ||||||
| Additional paid-in capital | 498,315 | 503,746 | ||||||
| Unearned compensation under employee compensation plans | (7,157 | ) | (8,179 | ) | ||||
| Accumulated other comprehensive income | (2,131 | ) | (4,422 | ) | ||||
| Retained earnings | 673,571 | 614,950 | ||||||
| 1,163,395 | 1,106,893 | |||||||
| Common Stock in treasury at cost, 1,794,000 and 1,963,000 | ||||||||
| shares, respectively | (95,116 | ) | (104,038 | ) | ||||
| Total stockholders’ equity | 1,068,279 | 1,002,855 | ||||||
| Total liabilities and stockholders’ equity | $ | 3,354,287 | $ | 3,206,992 | ||||
See accompanying Notes to Unaudited Consolidated Financial Statements
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | 2003 | 2002 | ||||||
| Revenues | $ | 3,223,981 | $ | 2,551,022 | ||||
| Cost of revenues | 3,014,368 | 2,376,365 | ||||||
| Gross profit | 209,613 | 174,657 | ||||||
| Selling, general and administrative | 101,786 | 96,387 | ||||||
| Operating income | 107,827 | 78,270 | ||||||
| Other (expense) income: | ||||||||
| Undistributed loss from joint venture | (1,539 | ) | (1,037 | ) | ||||
| Interest income | 868 | 1,060 | ||||||
| Interest expense | (10,702 | ) | (8,128 | ) | ||||
| (11,373 | ) | (8,105 | ) | |||||
| Income before income taxes | 96,454 | 70,165 | ||||||
| Provision for income taxes | 36,805 | 26,196 | ||||||
| Income before cumulative effect of accounting change | 59,649 | 43,969 | ||||||
| Cumulative effect of accounting change, net of tax | (1,028 | ) | - | |||||
| Net income | $ | 58,621 | $ | 43,969 | ||||
| Basic earnings per share: | ||||||||
| Before cumulative effect of accounting change | $ | 0.77 | $ | 0.57 | ||||
| Cumulative effect of accounting change | (0.01 | ) | - | |||||
| Net income | $ | 0.76 | $ | 0.57 | ||||
| Weighted average number of common shares | ||||||||
| Outstanding during the period - Basic EPS | 77,547 | 77,686 | ||||||
| Diluted earnings per share: | ||||||||
| Before cumulative effect of accounting change | $ | 0.75 | $ | 0.55 | ||||
| Cumulative effect of accounting change | (0.01 | ) | - | |||||
| Net income | $ | 0.74 | $ | 0.55 | ||||
| Weighted average number of common shares | ||||||||
| Outstanding during the period - Diluted EPS | 79,075 | 79,575 | ||||||
See accompanying Notes to Unaudited Consolidated Financial Statements
| Number of Shares |
Amount | |||||||||||||||||||||||||
| (in thousands) |
Common Stock |
Common Stock |
Additional Paid-in Capital |
Unearned Compensation Under Employee Compensation Plans |
Accumulated Other Comprehensive Income |
Retained Earnings |
Treasury Stock |
Total | ||||||||||||||||||
| Balance at December 31, 2002 | 79,834 | $ | 798 | $ | 503,746 | $ | (8,179 | ) | $ | (4,422 | ) | $ | 614,950 | $ | (104,038 | ) | $ | 1,002,855 | ||||||||
| Comprehensive income: | ||||||||||||||||||||||||||
| Net income | - | - | - | - | - | 58,621 | - | 58,621 | ||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||
| Foreign currency | ||||||||||||||||||||||||||
| translation adjustment | - | - | - | - | 1,913 | - | - | 1,913 | ||||||||||||||||||
| Realized and unrealized gains | ||||||||||||||||||||||||||
| on derivative financial | ||||||||||||||||||||||||||
| instruments, net of taxes | - | - | - | - | 378 | - | - | 378 | ||||||||||||||||||
| Comprehensive income | - | - | - | - | 2,291 | 58,621 | - | 60,912 | ||||||||||||||||||
| Changes in stockholders's equity | ||||||||||||||||||||||||||
| realted to employee stock plans | (50) | (1) | (5,431) | 1,022 | - | - | 8,922 | 4,512 | ||||||||||||||||||
| Balance at March 31, 2003 | 79,784 | $ | 797 | $ | 498,315 | $ | (7,157 | ) | $ | (2,131 | ) | $ | 673,571 | $ | (95,116 | ) | $ | 1,068,279 | ||||||||
See accompanying Notes to Unaudited Consolidated Financial Statements
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2003 | 2002 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 58,621 | $ | 43,969 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Depreciation and amortization | 13,163 | 28,153 | ||||||
| Non-cash adjustments to net income | 11,629 | 16,330 | ||||||
| Net changes in operating assets and liabilities | 11,023 | (63,653 | ) | |||||
| Net cash provided by operating activities | 94,436 | 24,799 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (9,195 | ) | (9,262 | ) | ||||
| Acquisitions, net of cash acquired, and investment in joint venture | 2,804 | (32,934 | ) | |||||
| Other | 7 | 5 | ||||||
| Net cash used in investing activities | (6,384 | ) | (42,191 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayment of long-term debt | (25,000 | ) | - | |||||
| Treasury stock acquired | - | (13,598 | ) | |||||
| Net proceeds from employee stock plans | 1,939 | 12,176 | ||||||
| Other | - | (316 | ) | |||||
| Net cash used in financing activities | (23,061 | ) | (1,738 | ) | ||||
| Effect of foreign currency translation adjustment | 896 | 99 | ||||||
| Net increase (decrease) in cash and cash equivalents | 65,887 | (19,031 | ) | |||||
| Cash and cash equivalents at beginning of period | 190,654 | 177,715 | ||||||
| Cash and cash equivalents at end of period | $ | 256,541 | $ | 158,684 | ||||
See accompanying Notes to Unaudited Consolidated Financial Statements
Certain of our significant accounting policies are described below. Other financial statement note disclosures, normally included in financial statements prepared in conformity with generally accepted accounting principles, have been omitted from this Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. However, we believe the disclosures contained in this Form 10-Q are adequate to make the information presented not misleading when read in conjunction with the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on April 1, 2003. For a full description of our accounting policies, please refer to the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2002.
We believe the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Unaudited Consolidated Balance Sheet at March 31, 2003, the Unaudited Consolidated Statement of Operations for the three months ended March 31, 2003 and 2002, the Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2003, and the Unaudited Consolidated Statement of Cash Flows for the three months ended March 31, 2003 and 2002. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003.
REVENUE RECOGNITION
Revenues from our pharmacy benefit management (“PBM”) segment are earned by dispensing prescriptions from our mail pharmacies, processing claims for prescriptions filled by retail pharmacies in our nationwide network, and by providing services to drug manufacturers, including administration of rebate and discount programs.
Revenues from dispensing prescriptions from our mail pharmacies, which include the co-payment received from our members, are recorded when the prescription is shipped. At the time of shipment our earnings process is complete; the obligation of our customer to pay for the drugs is fixed, and due to the nature of the product, the member may not return the drugs nor receive a refund.
Revenues related to the sale of prescription drugs by retail pharmacies in our nationwide network consist of the amount (less the co-payment) the client has contracted to pay us for the dispensing of such drugs together with any associated administrative fees. These revenues are recognized when the claim is processed. When we independently have a contractual obligation to pay our network pharmacy providers for benefits provided to our clients’ members, we act as a principal in the arrangement and we include the total payments we have contracted to receive from these clients as revenue, and payments to the network pharmacy providers as cost of revenue in compliance with Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Gross Revenue as a Principal vs. Net as an Agent.” When a prescription is presented by a member to a retail pharmacy within our network, we are solely responsible for confirming member eligibility, performing drug utilization review, reviewing for drug-to-drug interactions, performing clinical intervention, which may involve a call to the member’s physician, communicating plan provisions to the pharmacy, directing payment to the pharmacy and billing the client for the amount they are contractually obligated to pay us for the prescription dispensed, as specified within our client contracts. We also provide benefit design and formulary consultation services to clients. We have separately negotiated contractual relationships with our clients and with network pharmacies, and under our contracts with pharmacies we assume the credit risk of our clients’ ability to pay for drugs dispensed by these pharmacies to clients’ members. Our clients are not obligated to pay the pharmacies as we are primarily obligated to pay retail pharmacies in our network the contractually agreed upon amount for the prescription dispensed as specified within our provider contracts. In addition, under many of our client contracts, we may realize a positive or negative margin represented by the difference between the separately negotiated ingredient costs we will receive from our clients and negotiated ingredient costs we will pay to our network pharmacies. These factors indicate we are a principal as defined by EITF 99-19 and as such we record ingredient cost charged to clients in revenue and the corresponding ingredient cost paid to network pharmacies in cost of reveneus. In retail pharmacy transactions, amounts paid to pharmacies and amounts charged to clients are always exclusive of the applicable member co-payment. Under our pharmacy agreements, the pharmacy is solely obligated to collect the co-payment from the member. Under our client contracts, we do not assume liability for the member co-payment in retail pharmacy transactions. As such, we do not include member co-payments to retail pharmacies in revenue or cost of revenue.
If we merely administer a client’s network pharmacy contracts to which we are not a party and under which we do not assume credit risk, we record only our administrative or dispensing fees as revenue. For these clients, we earn an administrative fee for collecting payments from the client and remitting the corresponding amount to the pharmacies in the client’s network. In these transactions we act as a conduit for the client. Because we are not the principal in these transactions, drug ingredient cost is not included in our revenues or in our cost of revenues.
We bill clients based on a predetermined billing schedule. At the end of a period, any unbilled revenues related to the sale of prescription drugs by retail pharmacies are estimated based on the amount we will pay to the pharmacies and historical gross margin. Those amounts due from our clients are recorded as revenue as they are contractually due to us for past transactions. Minor adjustments are made to these estimated revenues to reflect actual billings at the time clients are billed.
We administer two rebate programs through which we receive rebates and administrative fees from pharmaceutical manufacturers. When we earn rebates and administrative fees in conjunction with formulary management services, but do not process the underlying claims, we record rebates received from manufacturers, net of the portion payable to customers, in revenue. When we provide formulary management services to a client in conjunction with claims processing, we record rebates and administrative fees received from manufacturers as a reduction of cost of revenues and the portion of the rebate payable to customers is treated as a reduction of revenue.
We record rebate amounts payable to clients when the prescriptions covered under contractual agreements with the manufacturers are dispensed; these amounts are not dependent upon future pharmaceutical sales. With respect to rebates based on actual market share performance, we estimate the portion of rebates payable to clients on a quarterly basis based on historical sharing percentages and our estimate of rebates receivable from pharmaceutical manufacturers. These estimates are adjusted to actual when amounts are received from manufacturers and the portion payable to clients is paid. With respect to rebates that are not based on market share performance, no estimation is required because the client portion is determinable when the drug is dispensed. We share all or a contractually agreed upon portion of rebates with clients (see further discussion under “— Cost of Revenues”).
Certain implementation and other fees paid to clients upon the initiation of a contractual agreement are considered an integral part of overall contract pricing and are recorded as a reduction of revenue. Where they are refundable upon cancellation, these payments are capitalized and amortized as a reduction of revenue on a straight-line basis over the life of the contract.
Revenues from our non-PBM segment are derived from specialty distribution services, sample fulfillment and sample accountability services and through June 12, 2001, infusion services. Revenues earned by our specialty distribution subsidiary (“SDS”) include administrative fees received from pharmaceutical manufacturers for dispensing or distributing of consigned pharmaceuticals requiring special handling or packaging. We also administer sample card programs for certain manufacturers and include the ingredient costs of those drug samples dispensed from retail pharmacies in our SDS revenues, and the associated costs for these sample card programs in cost of revenues. Because manufacturers are independently obligated to pay us and we have an independent contractual obligation to pay our network pharmacy providers for free samples dispensed to patients under sample card programs, we include the total payments from these manufacturers (including ingredient costs) as revenue, and payments to the network pharmacy provider as cost of revenue. These transactions require us to assume credit r