UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010.

o		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 or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)
One Express Way, St. Louis, MO		63121
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (314) 996-0900

          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 þ No o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Common stock outstanding as of September 30, 2010:		526,211,000 Shares

 

 

EXPRESS SCRIPTS, INC.

INDEX

Part I		Financial Information
		Item 1.		Financial Statements (unaudited)			3
				a) Unaudited Consolidated Balance Sheet			3
				b) Unaudited Consolidated Statement of Operations			4
				c) Unaudited Consolidated Statement of Changes in Stockholders’ Equity			5
				d) Unaudited Consolidated Statement of Cash Flows			6
				e) Notes to Unaudited Consolidated Financial Statements			7
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			31
		Item 4.		Controls and Procedures			31
Part II		Other Information
		Item 1.		Legal Proceedings			32
		Item 1A.		Risk Factors — (Not Applicable)			—
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			33
		Item 3.		Defaults Upon Senior Securities — (Not Applicable)			—
		Item 4.		Removed and Reserved			—
		Item 5.		Other Information — (Not Applicable)			—
		Item 6.		Exhibits			33
Signatures							34
Index to Exhibits							35
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EXPRESS SCRIPTS, INC.

		September 30,				December 31,
(in millions, except share data)		2010				2009
Assets
Current assets:
Cash and cash equivalents		$	267.5			$	1,070.4
Restricted cash and investments			10.9				9.1
Receivables, net			1,795.5				2,516.4
Inventories			315.8				313.0
Deferred taxes			119.2				135.0
Prepaid expenses and other current assets			45.1				94.2
Current assets of discontinued operations			—				5.4
Total current assets			2,554.0				4,143.5
Property and equipment, net			353.7				347.1
Goodwill			5,490.7				5,497.1
Other intangible assets, net			1,764.5				1,880.8
Other assets			31.8				31.7
Noncurrent assets of discontinued operations			—				31.0
Total assets		$	10,194.7			$	11,931.2
Liabilities and Stockholders’ Equity
Current liabilities:
Claims and rebates payable		$	2,597.5			$	2,850.7
Accounts payable			686.1				706.4
Accrued expenses			682.9				549.2
Current maturities of long-term debt			0.1				1,340.1
Current liabilities of discontinued operations			—				10.4
Total current liabilities			3,966.6				5,456.8
Long-term debt			2,493.4				2,492.5
Other liabilities			514.7				430.1
Total liabilities			6,974.7				8,379.4
Stockholders’ Equity:
Preferred stock, 5,000,000 shares authorized, $0.01 par value per share; and no shares issued and outstanding			—				—
Common stock, 1,000,000,000 shares authorized, $0.01 par value per share; shares issued: 690,243,000 and 345,279,000, respectively; shares outstanding: 526,211,000 and 275,007,000, respectively			6.9				3.5
Additional paid-in capital			2,314.3				2,260.0
Accumulated other comprehensive income			17.4				14.1
Retained earnings			5,040.2				4,188.6
			7,378.8				6,466.2
Common stock in treasury at cost, 164,032,000 and 70,272,000 shares, respectively			(4,158.8	)			(2,914.4	)
Total stockholders’ equity			3,220.0				3,551.8
Total liabilities and stockholders’ equity		$	10,194.7			$	11,931.2

See accompanying Notes to Unaudited Consolidated Financial Statements

EXPRESS SCRIPTS, INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in millions, except per share data)		2010				2009				2010				2009
Revenues 1		$	11,251.8			$	5,613.0			$	33,679.0			$	16,525.3
Cost of revenues 1			10,487.7				5,001.9				31,494.2				14,789.0
Gross profit			764.1				611.1				2,184.8				1,736.3
Selling, general and administrative			236.1				252.7				671.8				642.4
Operating income			528.0				358.4				1,513.0				1,093.9
Other (expense) income:
Interest income			2.2				2.0				4.4				4.1
Interest expense			(42.2	)			(48.0	)			(127.0	)			(142.7	)
			(40.0	)			(46.0	)			(122.6	)			(138.6	)
Income before income taxes			488.0				312.4				1,390.4				955.3
Provision for income taxes			180.9				115.6				515.4				351.8
Net income from continuing operations			307.1				196.8				875.0				603.5
Net (loss) income from discontinued operations, net of tax			(5.6	)			0.8				(23.4	)			0.8
Net income		$	301.5			$	197.6			$	851.6			$	604.3
Weighted average number of common shares outstanding during the period:
Basic			531.7				549.0				541.9				519.4
Diluted			537.0				554.4				547.5				524.2
Basic earnings per share:
Continuing operations		$	0.58			$	0.36			$	1.61			$	1.16
Discontinued operations			(0.01	)			—				(0.04	)			—
Net earnings			0.57				0.36				1.57				1.16
Diluted earnings per share:
Continuing operations		$	0.57			$	0.35			$	1.60			$	1.15
Discontinued operations			(0.01	)			—				(0.04	)			—
Net earnings			0.56				0.36				1.56				1.15

See accompanying Notes to Unaudited Consolidated Financial Statements

EXPRESS SCRIPTS, INC.

		Number
		of Shares				Amount
														Accumulated
										Additional				Other
		Common				Common				Paid-in				Comprehensive				Retained				Treasury
(in millions)		Stock				Stock				Capital				Income				Earnings				Stock				Total
Balance at December 31, 2009			345.3			$	3.5			$	2,260.0			$	14.1			$	4,188.6			$	(2,914.4	)		$	3,551.8
Comprehensive income:
Net income			—				—				—				—				851.6				—				851.6
Other comprehensive income:
Foreign currency translation adjustment			—				—				—				3.3				—				—				3.3
Comprehensive income			—				—				—				3.3				851.6				—				854.9
Stock split in form of dividend			345.1				3.4				(3.4	)			—				—				—				—
Treasury stock acquired			—				—				—				—				—				(1,276.2	)			(1,276.2	)
Changes in stockholders’ equity related to employee stock plans			(0.2	)			—				57.7				—				—				31.8				89.5
Balance at September 30, 2010			690.2			$	6.9			$	2,314.3			$	17.4			$	5,040.2			$	(4,158.8	)		$	3,220.0

See accompanying Notes to Unaudited Consolidated Financial Statements

EXPRESS SCRIPTS, INC.

		Nine Months Ended
		September 30,
(in millions)		2010				2009
Cash flows from operating activities:
Net income		$	851.6			$	604.3
Net loss (income) from discontinued operations, net of tax			23.4				(0.8	)
Net income from continuing operations			875.0				603.5
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			180.9				70.9
Non-cash adjustments to net income			140.7				77.1
Deferred financing fees			4.1				59.0
Changes in operating assets and liabilities:
Accounts receivable			706.6				(108.3	)
Claims and rebates payable			(253.2	)			20.2
Other net changes in operating assets and liabilities			175.6				186.2
Net cash provided by operating activities—continuing operations			1,829.7				908.6
Net cash provided by operating activities—discontinued operations			12.3				17.9
Net cash flows provided by operating activities			1,842.0				926.5
Cash flows from investing activities:
Purchases of property and equipment			(84.6	)			(89.5	)
Purchase of short-term investments			(10.0	)			(1,198.9	)
Other			15.8				5.4
Net cash used in investing activities — continuing operations			(78.8	)			(1,283.0	)
Net cash used in investing activities — discontinued operations			(0.8	)			(1.0	)
Net cash used in investing activities			(79.6	)			(1,284.0	)
Cash flows from financing activities:
Repayment of long-term debt			(1,340.1	)			(240.1	)
Treasury stock acquired			(1,276.2	)			—
Tax benefit relating to employee stock compensation			32.9				7.7
Net proceeds from employee stock plans			19.3				7.1
Deferred financing fees			(3.9	)			(69.5	)
Proceeds on long-term debt, net of discounts			—				2,491.6
Net proceeds from stock issuance			—				1,569.1
Net cash (used in) provided by financing activities			(2,568.0	)			3,765.9
Effect of foreign currency translation adjustment			2.7				3.3
Net (decrease) increase in cash and cash equivalents			(802.9	)			3,411.7
Cash and cash equivalents at beginning of period			1,070.4				530.7
Cash and cash equivalents at end of period		$	267.5			$	3,942.4

See accompanying Notes to Unaudited Consolidated Financial Statements

EXPRESS SCRIPTS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of significant accounting policies

          Our significant accounting policies, 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 (“SEC”). However, we believe the disclosures contained in this Form 10-Q are adequate to fairly state the information 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, 2009. For a full description of our accounting policies, refer to the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.

          We believe the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the Unaudited Consolidated Balance Sheet at September 30, 2010, the Unaudited Consolidated Statement of Operations for the three months and nine months ended September 30, 2010 and 2009, the Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2010, and the Unaudited Consolidated Statement of Cash Flows for the nine months ended September 30, 2010 and 2009. Operating results for the three months and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

Note 2 — Fair value measurements

          Financial Accounting Standards Board (“FASB”) guidance regarding fair value measurement establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices for similar assets and liabilities in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

          Financial assets accounted for at fair value on a recurring basis include cash equivalents of $174.6 million and $909.8 million, restricted cash and investments of $10.9 million and $9.1 million, and trading securities (included in other assets) of $12.5 million and $11.4 million at September 30, 2010 and December 31, 2009, respectively. These assets are carried at fair value based on quoted market prices for identical securities (Level 1 inputs). Cash equivalents include investments in AAA-rated money market mutual funds with maturities of less than 90 days.

          The carrying value of cash and cash equivalents, accounts receivable, claims and rebates payable, and accounts payable approximated fair values due to the short-term maturities of these instruments. The fair value, which approximates the carrying value, of our bank credit facility was estimated using either quoted market prices or the current rates offered to us for debt with similar maturity. The carrying values and the fair values of our senior notes are shown in the following table:

		September 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
(in millions)		Amount				Value				Amount				Value
5.25% senior notes due 2012, net of unamortized discount		$	999.6			$	1,067.5			$	999.4			$	1,068.6
6.25% senior notes due 2014, net of unamortized discount			996.7				1,148.4				996.1				1,095.7
7.25% senior notes due 2019, net of unamortized discount			497.0				628.9				496.8				591.6
Total		$	2,493.3			$	2,844.8			$	2,492.3			$	2,755.9

          The fair values of our senior notes were estimated based on quoted prices in active markets for identical securities (Level 1 inputs). In determining the fair value of liabilities, we took into consideration the risk of nonperformance. Nonperformance risk refers to the risk that the obligation will not be fulfilled and affects the value at which the liability would be transferred to a market participant. This risk did not have a material impact on the fair value of our liabilities.

Note 3 — Acquisition (reflecting the two-for-one stock split effective June 8, 2010)

          On December 1, 2009, we completed the purchase of 100% of the shares and equity interests of certain subsidiaries of WellPoint, Inc. (“WellPoint”) that provide pharmacy benefit management services (“NextRx” or the “NextRx PBM Business”), in exchange for total consideration of $4.675 billion paid in cash. The working capital adjustment was finalized during the second quarter of 2010 and reduced the purchase price by $8.3 million, resulting in a final purchase price of $4.667 billion. The NextRx PBM Business is a national provider of PBM services, and we believe the acquisition will enhance our ability to achieve cost savings, innovations, and operational efficiencies which will benefit our customers and stockholders. The purchase price was primarily funded through a $2.5 billion underwritten public offering of senior notes completed on June 9, 2009, resulting in net proceeds of $2,478.3 million, and a public offering of 52.9 million shares of common stock completed June 10, 2009, resulting in net proceeds of $1,569.1 million. This acquisition is reported as part of our pharmacy benefit management (“PBM”) segment.

          The parties have agreed to make an election under Section 338(h)(10) of the Internal Revenue Code with respect to the transaction which results in the goodwill and other intangibles generated being tax deductible over 15 years. We estimate the value of such election to us to be between $800 million and $1.2 billion dependent upon the discount factor and tax rate assumed. This benefit will be realized over the 15 year period as the goodwill and other intangibles are amortized and deducted for tax purposes. There was no separate asset related to this tax benefit recorded in our consolidated financial statements upon close of the acquisition as the tax basis of these assets was equal to their book basis. Additionally, at the closing of the acquisition, we entered into a 10-year contract with WellPoint (the “PBM agreement”) under which we will provide pharmacy benefits management services to WellPoint and its designated affiliates which were previously provided by NextRx. The services provided under the PBM agreement include retail network pharmacy management, home delivery and specialty pharmacy services, drug formulary management, claims adjudication and other services consistent with those provided to other PBM clients. These services are provided to HMOs, health insurers, third-party administrators, employers, union-sponsored benefit plans, workers’ compensation plans and government health programs, which is consistent with our current customer base.

          The following unaudited pro forma information presents a summary of our combined results of operations and those of the NextRx PBM Business for the three and nine months ended September 30, 2009 as if the acquisition and financing transactions had occurred at January 1, 2009, along with certain pro forma adjustments to give effect to amortization of other intangible assets, interest expense on acquisition debt and other adjustments. This information is presented with actual results from the three and nine months ended September 30, 2010 for comparative purposes. The following pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including but not limited to, differences between the assumptions used to prepare the pro forma information, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the NextRx PBM Business:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in millions, except per share data)		2010				2009				2010				2009
Total revenues		$	11,251.8			$	9,457.1			$	33,679.0			$	28,264.6
Net income from continuing operations			307.1				256.5				875.0				745.3
Basic earnings per share from continuing operations			0.58				0.47				1.61				1.36
Diluted earnings per share from continuing operations		$	0.57			$	0.47			$	1.60			$	1.35

          The purchase price has been preliminarily allocated based upon the estimated fair value of net assets acquired and liabilities assumed at the date of the acquisition. Because information may become available within the measurement period (one year from the date of acquisition) that indicates a potential change to these valuations, the purchase price allocation is subject to change. The Company expects to finalize the allocation of the purchase price during the fourth quarter of 2010. The components of the preliminary purchase price allocation for NextRx are as follows:

Allocation of Purchase Price (in millions):
Current assets		$	937.0
Property and equipment			42.7
Acquired intangible assets			1,585.0
Goodwill			2,679.9
Liabilities assumed			(577.9	)
Total		$	4,666.7

          The values of the tangible net assets in the above table are representative of the fair values of those assets and liabilities. The current assets of $937.0 million are primarily comprised of pharmaceutical manufacturer rebate receivables, which have historically experienced better collection rates than other customer trade receivables. As a result, the allowance for doubtful accounts related to these receivables is lower than our book of business average. The liabilities assumed of $577.9 million are primarily comprised of rebates payable to clients.

          A portion of the excess of purchase price over tangible net assets acquired has been preliminarily allocated to intangible assets consisting of customer contracts in the amount of $1,585.0 million. These assets are included in other intangible assets, net on the unaudited consolidated balance sheet. The excess of purchase price over tangible net assets and identified intangible assets acquired has been preliminarily allocated to goodwill in the amount of $2,679.9 million. The goodwill is the residual value after identified assets are separately valued and represents the result of expected buyer-specific synergies derived from our ability to drive growth in generic and mail order utilization, supply chain savings from both drug manufacturers and the retail network, and the tax benefits derived from the Section 338(h)(10) election under the Internal Revenue Code.

          During the second quarter of 2010, we recorded a pre-tax benefit of $30.0 million related to the amendment of a client contract which relieved us of certain contractual guarantees. This amount was originally accrued in the NextRx opening balance sheet. In accordance with business combination accounting guidance, the reversal of the accrual was recorded in revenue, since it relates to client guarantees, upon amendment of the contract during the second quarter of 2010.

Note 4 — Discontinued Operations

          In the third quarter of 2010, we completed the sale of our Phoenix Marketing Group (“PMG”) line of business. The loss on the sale as well as other charges related to discontinued operations during the third quarter of 2010 totaled $8.3 million. These charges are included in the “Net (loss) income from discontinued operations, net of tax” line item in the accompanying unaudited consolidated statement of operations for the three and nine months

ended September 30, 2010. The purchase price is subject to a working capital adjustment, which is expected to be finalized in the fourth quarter of 2010 and is not expected to be material.

          During the second quarter of 2010, we concluded that PMG was no longer core to our future operations and committed to a plan to dispose of the business. As a result, PMG was classified as a discontinued operation beginning in the second quarter of 2010, and an impairment charge of $28.2 million was recorded to reflect goodwill and intangible asset impairment and the subsequent write-down of PMG assets to fair market value. The impairment charge is included in the “Net (loss) income from discontinued operations, net of tax” line item in the accompanying unaudited consolidated statement of operations for the nine months ended September 30, 2010.

          Prior to being classified as a discontinued operation, PMG was included in our Emerging Markets (“EM”) segment. PMG is headquartered in Lincoln Park, New Jersey and provides outsourced distribution and verification services to pharmaceutical manufacturers. The results of operations for PMG are reported as discontinued operations for all periods presented in the accompanying unaudited consolidated statements of operations in accordance with applicable accounting guidance. Additionally, for all periods presented, assets and liabilities of the discontinued operations are segregated in the accompanying unaudited consolidated balance sheets, and cash flows of our discontinued operations are segregated in our accompanying unaudited consolidated statement of cash flows.

          Certain information with respect to the discontinued operations for the three and nine months ended September 30, 2010 and 2009 is summarized below. Certain activity related to the winding down of working capital balances of our infusion pharmacy line of business (“IP”), which was sold in 2008, is included in the information for the three months and nine months ended September 30, 2009.

		Three Months Ended,								Nine Months Ended,
		September 30,								September 30,
(in millions)		2010				2009				2010				2009
Revenues		$	5.2			$	6.4			$	16.5			$	20.2
Net (loss) income from discontinued operations, net of tax			(5.6	)			0.8				(23.4	)			0.8
Income tax (benefit) expense from discontinued operations		$	(2.5	)		$	0.4			$	(12.9	)		$	0.4

Note 5 — Goodwill and other intangible assets

          The following is a summary of our goodwill and other intangible assets for our two reportable segments PBM and EM (excludes discontinued operations of PMG):

		September 30, 2010												December 31, 2009
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
(in millions)		Amount				Amortization				Amount				Amount				Amortization				Amount
Goodwill
PBM		$	5,465.8			$	(107.4	)		$	5,358.4			$	5,472.1			$	(107.3	)		$	5,364.8
EM			132.3				—				132.3				132.3				—				132.3
		$	5,598.1			$	(107.4	)		$	5,490.7			$	5,604.4			$	(107.3	)		$	5,497.1
Other intangible assets
PBM
Customer contracts		$	2,018.4			$	(309.2	)		$	1,709.2			$	2,018.3			$	(197.8	)		$	1,820.5
Other			20.8				(3.9	)			16.9				27.9				(10.9	)			17.0
			2,039.2				(313.1	)			1,726.1				2,046.2				(208.7	)			1,837.5
EM
Customer relationships			68.4				(30.7	)			37.7				68.4				(25.8	)			42.6
Other			0.7				—				0.7				0.7				—				0.7
			69.1				(30.7	)			38.4				69.1				(25.8	)			43.3
Total other intangible assets		$	2,108.3			$	(343.8	)		$	1,764.5			$	2,115.3			$	(234.5	)		$	1,880.8

          The aggregate amount of amortization expense of other intangible assets for our continuing operations was $40.1 million and $10.2 million for the three months ended September 30, 2010 and 2009, respectively and $120.1 million and $28.5 million for the nine months ended September 30, 2010 and 2009, respectively. In accordance with applicable accounting guidance, amortization for customer contracts related to the PBM agreement has been included as an offset to revenues in the amount of $28.5 million and $85.5 million for the three and nine months ended September 30, 2010, respectively. The future aggregate amount of amortization expense of other intangible assets for our continuing operations is expected to be approximately $159.9 million for 2010, $158.8 million for 2011, $158.1 million for 2012, $156.9 million for 2013, and $151.3 million for 2014. The weighted average amortization period of intangible assets subject to amortization is 15 years in total, and by major intangible class is 5 to 20 years for customer-related intangibles and 3 to 10 years for other intangible assets.

          The change in the gross carrying amount and accumulated amortization for PBM other intangible assets is the result of the write-off of $11.0 million of deferred financing fees related to the credit facility terminated during the quarter and the capitalization of $3.9 million of deferred financing fees related to the new credit facility (see Note 7).

          A summary of the change in the net carrying value of goodwill by business segment is shown in the following table:

(in millions)		PBM				EM(1)				Total
Balance at December 31, 2009		$	5,364.8			$	132.3			$	5,497.1
Adjustment to purchase price allocation(2)			(6.8	)			—				(6.8	)
Foreign currency translation and other			0.4				—				0.4
Balance at September 30, 2010		$	5,358.4			$	132.3			$	5,490.7

          See Note 3 for further information on goodwill related to recent acquisitions.

          As discussed in Note 4, our PMG line of business was classified as a discontinued operation during the second quarter of 2010 and we completed the sale of the business during the third quarter of 2010. In connection with the classification of PMG as a discontinued operation, we revised our impairment model based on the intent to dispose of the business. The revised change in model indicated impairment in the total amount of $28.2 million during the second quarter of 2010, the majority of which reflects the PMG goodwill and intangible asset impairment and the subsequent write-down of PMG assets to fair market value. The impairment charge is included in the “Net (loss) income from discontinued operations, net of tax” line item in the accompanying unaudited consolidated statement of operations.

Note 6 — Earnings per share (reflecting the two-for-one stock split effective June 8, 2010)

          Basic earnings per share (“EPS”) is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed in the same manner as basic earnings per share but adds the number of additional common shares that would have been outstanding for the period if the dilutive potential common shares had been issued. The following is the reconciliation between the number of weighted average shares used in the basic and diluted EPS calculations for all periods:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in millions)		2010(1)				2009				2010(2)				2009
Weighted average number of common shares outstanding during the period — Basic EPS(3)			531.7				549.0				541.9				519.4
Dilutive common stock equivalents:
Outstanding stock options, “stock-settled” stock appreciation rights (“SSRs”), restricted stock units, and executive deferred compensation units(3)			5.3				5.4				5.6				4.8
Weighted average number of common shares outstanding during the period — Diluted EPS(3)			537.0				554.4				547.5				524.2

          The above shares are all calculated under the “treasury stock” method.

Note 7 — Financing

          Long-term debt consists of:

		September 30,				December 31,
(in millions)		2010				2009
5.25% senior notes due 2012, net of unamortized discount		$	999.6			$	999.4
6.25% senior notes due 2014, net of unamortized discount			996.7				996.1
7.25% senior notes due 2019, net of unamortized discount			497.0				496.8
Term A loans due October 14, 2010			—				540.0
Term-1 loans due October 14, 2010			—				800.0
Revolving credit facility due August 13, 2013			—				—
Other			0.2				0.3
Total debt			2,493.5				3,832.6
Less current maturities			0.1				1,340.1
Long-term debt		$	2,493.4			$	2,492.5

          On August 13, 2010, we entered into a credit agreement with a commercial bank syndicate providing for a three-year revolving credit facility of $750.0 million. In connection with entering into the credit agreement, we terminated in full the revolving facility under our prior credit agreement, entered into October 14, 2005 and due October 14, 2010. There was no outstanding balance in our prior revolving credit facility upon termination.

          During the third quarter of 2010, we repaid the Term A and Term-1 loans in full. We made total Term loan payments of $1,340.0 million during the nine months ended September 30, 2010. At September 30, 2010, our credit agreement consists of a $750.0 million revolving credit facility (none of which was outstanding as of September 30, 2010) available for general corporate purposes.

          The new credit agreement requires us to pay interest periodically on the London Interbank Offered Rates (“LIBOR”) or base rate options, plus a margin. The margin over LIBOR will range from 1.55% to 1.95%, depending on our consolidated leverage ratio. Under the credit agreement we are required to pay commitment fees on the unused portion of the $750.0 million revolving credit facility. The commitment fee will range from 0.20% to 0.30% depending on our consolidated leverage ratio. Financing costs of $3.9 million related to the new credit facility are being amortized over three years and are reflected in other intangible assets, net in the accompanying unaudited consolidated balance sheet.

          The credit agreement contains covenants which limit our ability to incur additional indebtedness, create or permit liens on assets, and engage in mergers, consolidations, or disposals. The covenants also include a minimum interest coverage ratio and a maximum leverage ratio. At September 30, 2010, we believe we were in compliance in all material respects with all covenants associated with our new credit agreement.

Note 8 — Common stock (reflecting the two-for-one stock split effective June 8, 2010)

          On May 5, 2010, we announced a two-for-one stock split for stockholders of record on May 21, 2010 effective June 8, 2010. The split was effected in the form of a dividend by issuance of one additional share of common stock for each share of common stock outstanding. The earnings per share and the weighted average number of shares outstanding for basic and diluted earnings per share for each period have been adjusted for the stock split.

          On June 10, 2009, we completed a public offering of 52.9 million shares of common stock, which includes 6.9 million shares sold as a result of the underwriters’ exercise of their overallotment option in full at closing, at a price of $30.50 per share. The sale resulted in net proceeds of $1,569.1 million after giving effect to the underwriting discount and issuance costs of $44.4 million. We used the net proceeds for the acquisition of WellPoint’s NextRx PBM Business (see Note 3).

Note 9 — Stock-based compensation plans (reflecting the two-for-one stock split effective June 8, 2010)

          Under our stock-based compensation plans, we have issued stock options, SSRs, restricted stock awards, restricted stock units, and performance share awards. Awards are typically settled using treasury shares. The maximum contractual term of stock options and SSRs granted under the 2000 Long Term Incentive Plan (“LTIP”) is 10 years. Due to the nature of the awards, we use the same valuation methods and accounting treatments for SSRs and stock options. During the first nine months of 2010, we granted 2,480,000 stock options with a weighted average fair market value of $15.96. The SSRs and stock options have three-year graded vesting.

          During the first nine months of 2010, we granted to certain officers and employees approximately 276,000 restricted stock units and performance shares with a weighted average fair market value of $49.59. The restricted stock units have three-year graded vesting and the performance shares cliff vest at the end of the three years. The number of performance shares that ultimately vest is dependent upon achieving specific performance targets. Prior to vesting, these shares are subject to forfeiture to us without consideration upon termination of employment under certain circumstances. The original value of the performance share grants is subject to a multiplier of 2.5 based on certain performance metrics. During the first nine months of 2010, approximately 213,000 additional performance shares were granted to certain officers for exceeding certain performance metrics. The total number of non-vested restricted stock and performance share awards was 995,000 at September 30, 2010 and 1,200,000 at December 31, 2009.

          We recognized stock-based compensation expense of $13.1 million and $11.2 million in the three months ended September 30, 2010 and 2009, respectively and $37.2 million and $33.5 million in the nine months ended September 30, 2010 and 2009, respectively. Unamortized stock-based compensation as of September 30, 2010 was $31.9 million for stock options and SSRs and $20.7 million for restricted stock and performance shares.

          The fair value of options and SSRs granted is estimated on the date of grant using a Black-Scholes multiple option-pricing model with the following weighted average assumptions:

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2010		2009(1)		2010		2009
Expected life of option		3-5 years		—		3-5 years		3-5 years
Risk-free interest rate		0.8%-1.4%		—		0.8%-2.4%		1.3%-2.4%
Expected volatility of stock		37%-41%		—		36%-41%		35%-39%
Expected dividend yield		None		—		None		None

Note 10 — Contingencies

          We accrue self-insurance reserves based upon estimates of the aggregate liability of claim costs in excess of our insurance coverage. Reserves are estimated using certain actuarial assumptions followed in the insurance industry and our historical experience. The majority of these claims are legal claims and our liability estimate is primarily related to the cost to defend these claims. We do not accrue for settlements, judgments, monetary fines or penalties until such amounts are probable and estimable. Under authoritative FASB guidance, if the range of possible loss is broad, the liability accrued should be based on the lower end of the range. We received a $15 million insurance recovery in the second quarter of 2009, included in selling, general and administrative expense (“SG&A”), for previously incurred litigation costs. We accrued $35.0 million in the third quarter of 2009 related to the settlement of a lawsuit brought against us and one of our subsidiaries by Aetna, Inc., which settlement resulted in the dismissal of the case by the court on October 22, 2009.

          In the ordinary course of business there have arisen various legal proceedings, investigations or claims now pending against us or our subsidiaries. The effect of these actions on future financial results is not subject to reasonable estimation because considerable uncertainty exists about the outcomes.

          While we believe our services and business practices are in compliance with applicable laws, rules and regulations in all material respects, we cannot predict the outcome of any such legal proceedings, investigations or claims at this time. An unfavorable outcome in one or more of these matters could result in the imposition of judgments, monetary fines or penalties, or injunctive or administrative remedies. We can give no assurance that such judgments, fines and remedies, and future costs associated with any such matters, would not have a material adverse effect on our financial condition, our consolidated results of operations or our consolidated cash flows.

Note 11 — Segment information

          We report segments on the basis of services offered and have determined we have two reportable segments: PBM and EM. Our domestic and Canadian PBM operating segments have similar characteristics and as such have been aggregated into a single PBM reporting segment. As described in Note 4, our PMG line of business was classified as a discontinued operation in the second quarter of 2010. The results of operations for PMG are reported as discontinued operations for all periods presented in the accompanying unaudited consolidated statements of operations in accordance with applicable accounting guidance. PMG was previously included in our EM segment.

          Operating income is the measure used by our chief operating decision maker to assess the performance of each of our operating segments. The following table presents information about our reportable segments for the three months and nine months ended September 30, 2010 and 2009.

(in millions)		PBM				EM				Total
For the three months ended September 30, 2010
Product revenue:
Network revenues(1)		$	7,490.9			$	—			$	7,490.9
Home delivery and specialty revenues(2)			3,316.1				—				3,316.1
Other revenues			—				379.2				379.2
Service revenues			62.6				3.0				65.6
Total revenues			10,869.6				382.2				11,251.8
Depreciation and amortization expense			59.7				2.0				61.7
Operating income			523.8				4.2				528.0
Interest income											2.2
Interest expense											(42.2	)
Income before income taxes											488.0
Capital expenditures			32.5				1.0				33.5
For the three months ended September 30, 2009
Product revenue:
Network revenues(1)		$	3,288.8			$	—			$	3,288.8
Home delivery and specialty revenues(2)			1,915.1				—				1,915.1
Other revenues			—				339.3				339.3
Service revenues			67.1				2.7				69.8
Total revenues			5,271.0				342.0				5,613.0
Depreciation and amortization expense			20.9				2.2				23.1
Operating income			354.8				3.6				358.4
Interest income											2.0
Interest expense											(48.0	)
Income before income taxes											312.4
Capital expenditures			57.3				0.6				57.9
For the nine months ended September 30, 2010
Product revenue:
Network revenues(1)		$	22,596.4			$	—			$	22,596.4
Home delivery and specialty revenues(2)			9,841.9				—				9,841.9
Other revenues			—				1,037.4				1,037.4
Service revenues			194.3				9.0				203.3
Total revenues			32,632.6				1,046.4				33,679.0
Depreciation and amortization expense			174.9				6.0				180.9
Operating income			1,499.8				13.2				1,513.0
Interest income											4.4
Interest expense											(127.0	)
Income before income taxes											1,390.4
Capital expenditures			82.3				2.3				84.6

(in millions)		PBM				EM				Total
For the nine months ended September 30, 2009
Product revenue:
Network revenues(1)		$	9,772.3			$	—			$	9,772.3
Home delivery and specialty revenues(2)			5,599.8				—				5,599.8
Other revenues			—				942.9				942.9
Service revenues			200.8				9.5				210.3
Total revenues			15,572.9				952.4				16,525.3
Depreciation and amortization expense			64.3				6.6				70.9
Operating income			1,083.5				10.4				1,093.9
Interest income											4.1
Interest expense											(142.7	)
Income before income taxes											955.3
Capital expenditures			88.3				1.2				89.5

          The following table presents balance sheet information about our reportable segments:

(in millions)		PBM				EM				DISC OP				Total
As of September 30, 2010
Total assets		$	9,659.7			$	535.0			$	—			$	10,194.7
Investment in equity method investees			4.3				—				—				4.3
As of December 31, 2009
Total assets		$	11,560.3			$	334.5			$	36.4			$	11,931.2
Investment in equity method investees			4.1				—				—				4.1

          PBM product revenue consists of revenues from the sale of prescription drugs by retail pharmacies in our retail pharmacy networks and revenues from the dispensing of prescription drugs from our home delivery and specialty pharmacies. EM product revenues consist of distribution of certain fertility drugs and revenues from drug distribution services.

          PBM service revenue includes administrative fees associated with the administration of retail pharmacy networks contracted by certain clients, market research programs, informed decision counseling services, and specialty distribution services. EM service revenue includes revenues from accountability services and healthcare account administration.

          For the three and nine months ended September 30, 2010, our top five clients collectively represented 55.5% and 54.3% of revenues, respectively. For the three months ended September 30, 2010, our two largest clients, WellPoint and the Department of Defense (“DoD”), represented 29.4% and 19.8% of revenues, respectively. Additionally, for the nine months ended September 30, 2010, WellPoint and the DoD represented 28.7% and 19.2% of revenues, respectively. None of our other clients accounted for 10% or more of our consolidated revenues during the three and nine months ended September 30, 2010. No clients accounted for 10% or more of our consolidated revenues over the same periods of 2009.

          Revenues earned by our Canadian PBM totaled $12.9 million and $11.6 million for the three months ended September 30, 2010 and 2009, respectively, and $37.9 million and $34.7 million for the nine months ended September 30, 2010 and 2009, respectively. All other revenues were earned in the United States. Long-lived assets of our Canadian PBM (consisting primarily of fixed assets) totaled $15.8 million and $15.2 million as of September 30, 2010 and December 31, 2009, respectively. All other long-lived assets are domiciled in the United States.

Note 12 — Condensed consolidating financial information

          Our senior notes are jointly and severally and fully and unconditionally guaranteed by our 100% owned domestic subsidiaries, other than certain regulated subsidiaries including Express Scripts Insurance Company. The following condensed consolidating financial information has been prepared in accordance with the requirements for presentation of such information. Effective June 30, 2008, IP was sold, and effective September 17, 2010, PMG was sold. The assets, liabilities, and operations from IP and PMG are included as discontinued operations in those of the non-guarantors. Subsequent to the acquisition of NextRx on December 1, 2009, the assets, liabilities and operations of the 100% owned domestic subsidiaries have been included in those of the guarantors. Certain amounts from prior periods have been reclassified to conform to current period presentation. The following presents the condensed consolidating financial information separately for:

	(i)		Express Scripts, Inc. (the Parent Company), the issuer of the guaranteed obligations;
	(ii)		Guarantor subsidiaries, on a combined basis, as specified in the indentures related to Express Scripts’ obligations under the notes;
	(iii)		Non-guarantor subsidiaries, on a combined basis;
	(iv)		Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among the Parent Company, the guarantor subsidiaries and the non-guarantor subsidiaries, (b) eliminate the investments in our subsidiaries and (c) record consolidating entries; and
	(v)		Express Scripts, Inc. and subsidiaries on a consolidated basis.

Condensed Consolidating Balance Sheet

		Express								Non-
(in millions)		Scripts, Inc.				Guarantors				Guarantors				Eliminations				Consolidated
As of September 30, 2010
Cash and cash equivalents		$	194.2			$	8.1			$	65.2			$	—			$	267.5
Restricted cash and investments			—				9.3				1.6				—				10.9
Receivables, net			1,252.6				534.3				8.6				—				1,795.5
Other current assets			66.1				400.7				13.3				—				480.1
Total current assets			1,512.9				952.4				88.7				—				2,554.0
Property and equipment, net			247.4				94.8				11.5				—				353.7
Investments in subsidiaries			6,191.1				—				—				(6,191.1	)			—
Intercompany			—				3,185.2				—				(3,185.2	)			—
Goodwill			2,932.4				2,533.1				25.2				—				5,490.7
Other intangible assets, net			1,456.4				304.1				4.0				—				1,764.5
Other assets			24.6				5.3				1.9				—				31.8
Total assets		$	12,364.8			$	7,074.9			$	131.3			$	(9,376.3	)		$	10,194.7
Claims and rebates payable		$	2,582.5			$	15.0			$	—			$	—			$	2,597.5
Accounts payable			659.6				23.1				3.4				—				686.1
Accrued expenses			239.0				433.4				10.5				—				682.9
Current maturities of long-term debt			0.1				—				—				—				0.1
Total current liabilities			3,481.2				471.5				13.9				—				3,966.6
Long-term debt			2,493.4				—				—				—				2,493.4
Intercompany			3,081.5				—				103.7				(3,185.2	)			—
Other liabilities			88.7				421.4				4.6				—				514.7
Stockholders’ equity			3,220.0				6,182.0				9.1				(6,191.1	)			3,220.0
Total liabilities and stockholders’ equity		$	12,364.8			$	7,074.9			$	131.3			$	(9,376.3	)		$	10,194.7

Condensed Consolidating Balance Sheet

		Express								Non-
(in millions)		Scripts, Inc.				Guarantors				Guarantors				Eliminations				Consolidated
As of December 31, 2009
Cash and cash equivalents		$	1,005.0			$	10.0			$	55.4			$	—			$	1,070.4
Restricted cash and investments			—				7.5				1.6				—				9.1
Receivables, net			1,179.8				1,326.7				9.9				—				2,516.4
Other current assets			196.0				340.6				5.6				—				542.2
Current assets of discontinued operations			—				—				5.4				—				5.4
Total current assets			2,380.8				1,684.8				77.9				—				4,143.5
Property and equipment, net			239.6				96.5				11.0				—				347.1
Investments in subsidiaries			5,970.2				—				—				(5,970.2	)			—
Intercompany			—				2,500.2				—				(2,500.2	)			—
Goodwill			2,939.2				2,533.1				24.8				—				5,497.1
Other intangible assets, net			1,543.9				332.6				4.3				—				1,880.8
Other assets			21.3				8.5				1.9				—				31.7
Non-current assets of discontinued operations			—				—				31.0				—				31.0
Total assets		$	13,095.0			$	7,155.7			$	150.9			$	(8,470.4	)		$	11,931.2
Claims and rebates payable		$	2,264.3			$	586.4			$	—			$	—			$	2,850.7
Accounts payable			674.4				29.0				3.0				—				706.4
Accrued expenses			312.7				225.2				11.3				—				549.2
Current maturities of long-term debt			1,340.0				0.1				—				—				1,340.1
Current liabilities of discontinued operations			—				—				10.4				—				10.4
Total current liabilities			4,591.4				840.7				24.7				—				5,456.8
Long-term debt			2,492.5				—				—				—				2,492.5
Intercompany			2,387.2				—				113.0				(2,500.2	)			—
Other liabilities			72.1				356.3				1.7				—				430.1
Stockholders’ equity			3,551.8				5,958.7				11.5				(5,970.2	)			3,551.8
Total liabilities and stockholders’ equity		$	13,095.0			$	7,155.7			$	150.9			$	(8,470.4	)		$	11,931.2

Condensed Consolidating Statement of Operations

		Express								Non-
(in millions)		Scripts, Inc.				Guarantors				Guarantors				Eliminations				Consolidated
For the three months ended September 30, 2010
Revenues		$	7,387.7			$	3,840.8			$	23.3			$	—			$	11,251.8
Operating expenses			7,027.3				3,675.3				21.2				—				10,723.8
Operating income			360.4				165.5				2.1				—				528.0
Interest expense, net			(38.2	)			(1.8	)			—				—				(40.0	)
Income before income taxes			322.2				163.7				2.1				—				488.0
Provision for income taxes			117.5				62.0				1.4				—				180.9
Net income from continuing operations			204.7				101.7				0.7				—				307.1
Net loss from discontinued operations, net of tax			—				—				(5.6	)			—				(5.6	)
Equity in earnings of subsidiaries			96.8				—				—				(96.8	)			—
Net income (loss)		$	301.5			$	101.7			$	(4.9	)		$	(96.8	)		$	301.5
For the three months ended September 30, 2009
Revenues		$	3,197.1			$	2,397.6			$	18.3			$	—			$	5,613.0
Operating expenses			2,931.1				2,308.4				15.1				—				5,254.6
Operating income			266.0				89.2				3.2				—				358.4
Interest expense, net			(43.4	)			(1.8	)			(0.8	)			—				(46.0	)
Income before income taxes			222.6				87.4				2.4				—				312.4
Provision for income taxes			82.8				31.6				1.2				—				115.6
Net income from continuing operations			139.8				55.8				1.2				—				196.8
Net income from discontinued operations, net of tax			—				—				0.8				—				0.8
Equity in earnings of subsidiaries			57.8				—				—				(57.8	)			—
Net income (loss)		$	197.6			$	55.8			$	2.0			$	(57.8	)		$	197.6
For the nine months ended September 30, 2010
Revenues		$	22,249.4			$	11,363.6			$	66.0			$	—			$	33,679.0
Operating expenses			21,129.9				10,968.5				67.6				—				32,166.0
Operating income (loss)			1,119.5				395.1				(1.6	)			—				1,513.0
Interest (expense) income, net			(117.9	)			(4.8	)			0.1				—				(122.6	)
Income (loss) before income taxes			1,001.6				390.3				(1.5	)			—				1,390.4
Provision for income taxes			369.2				145.1				1.1				—				515.4
Net income (loss) from continuing operations			632.4				245.2				(2.6	)			—				875.0
Net loss from discontinued operations, net of tax			—				—				(23.4	)			—				(23.4	)
Equity in earnings of subsidiaries			219.2				—				—				(219.2	)			—
Net income (loss)		$	851.6			$	245.2			$	(26.0	)		$	(219.2	)		$	851.6