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

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

EXPRESS SCRIPTS, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		43-1420563 (I.R.S. Employer Identification No.)
One Express Way, St. Louis, MO (Address of principal executive offices)		63121 (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 March 31, 2011: 529,454,000 Shares

 

 

EXPRESS SCRIPTS, INC.

INDEX

Part I Financial Information		3
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		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		24
Item 4. Controls and Procedures		25
Part II Other Information		26
Item 1. Legal Proceedings		26
Item 1A. Risk Factors		27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 3. Defaults Upon Senior Securities — (Not Applicable)
Item 4. Removed and Reserved
Item 5. Other Information — (Not Applicable)
Item 6. Exhibits		27
Signatures		28
Index to Exhibits		28
EX-12.1
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.

		March 31,				December 31,
(in millions, except share data)		2011				2010
Assets
Current assets:
Cash and cash equivalents		$	766.1			$	523.7
Restricted cash and investments			15.9				16.3
Receivables, net			1,907.0				1,720.9
Inventories			325.5				382.4
Deferred taxes			49.5				86.0
Prepaid expenses			48.5				177.6
Other current assets			35.7				34.4
Total current assets			3,148.2				2,941.3
Property and equipment, net			359.1				372.7
Goodwill			5,486.9				5,486.2
Other intangible assets, net			1,685.3				1,725.0
Other assets			28.6				32.6
Total assets		$	10,708.1			$	10,557.8
Liabilities and Stockholders’ Equity
Current liabilities:
Claims and rebates payable		$	2,500.0			$	2,666.5
Accounts payable			673.8				656.7
Accrued expenses			537.0				593.9
Current maturities of long-term debt			0.1				0.1
Total current liabilities			3,710.9				3,917.2
Long-term debt			2,494.0				2,493.7
Other liabilities			540.0				540.3
Total liabilities			6,744.9				6,951.2
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;			6.9				6.9
shares issued: 690,606,000 and 690,231,000, respectively;
shares outstanding: 529,454,000 and 528,069,000, respectively
Additional paid-in capital			2,371.0				2,354.4
Accumulated other comprehensive income			21.1				19.8
Retained earnings			5,696.3				5,369.8
			8,095.3				7,750.9
Common stock in treasury at cost, 161,152,000 and 162,162,000 shares, respectively			(4,132.1	)			(4,144.3	)
Total stockholders’ equity			3,963.2				3,606.6
Total liabilities and stockholders’ equity		$	10,708.1			$	10,557.8

See accompanying Notes to Unaudited Consolidated Financial Statements

EXPRESS SCRIPTS, INC.

		Three Months Ended
		March 31,
(in millions, except per share data)		2011				2010
Revenues 1		$	11,094.5			$	11,138.4
Cost of revenues 1			10,349.0				10,475.2
Gross profit			745.5				663.2
Selling, general and administrative			193.1				208.5
Operating income			552.4				454.7
Other (expense) income:
Interest income			0.4				1.7
Interest expense			(39.7	)			(42.8	)
			(39.3	)			(41.1	)
Income before income taxes			513.1				413.6
Provision for income taxes			186.6				153.0
Net income from continuing operations			326.5				260.6
Net loss from discontinued operations, net of tax			—				(0.4	)
Net income		$	326.5			$	260.2
Weighted average number of common shares outstanding during the period:
Basic			529.0				549.8
Diluted			533.9				555.8
Basic earnings per share:
Continuing operations		$	0.62			$	0.47
Discontinued operations			—				—
Net earnings			0.62				0.47
Diluted earnings per share:
Continuing operations		$	0.61			$	0.47
Discontinued operations			—				—
Net earnings			0.61				0.47

¹         Includes retail pharmacy co-payments of $1,526.5 million and $1,662.6 million for the three months ended March 31, 2011 and 2010, respectively.

See accompanying Notes to Unaudited Consolidated Financial Statements

EXPRESS SCRIPTS, INC.

		Number of Shares				Amount
										Additional				Accumulated Other
										Paid-in				Comprehensive								Treasury
(in millions)		Common Stock				Common Stock				Capital				Income				Retained Earnings				Stock				Total
Balance at December 31, 2010			690.2			$	6.9			$	2,354.4			$	19.8			$	5,369.8			$	(4,144.3	)		$	3,606.6
Comprehensive income:
Net income			—				—				—				—				326.5				—				326.5
Other comprehensive income:
Foreign currency translation adjustment			—				—				—				1.3				—				—				1.3
Comprehensive income			—				—				—				1.3				326.5				—				327.8
Changes in stockholders’ equity related to employee stock plans			0.4				—				16.6				—				—				12.2				28.8
Balance at March 31, 2011			690.6			$	6.9			$	2,371.0			$	21.1			$	5,696.3			$	(4,132.1	)		$	3,963.2

See accompanying Notes to Unaudited Consolidated Financial Statements

EXPRESS SCRIPTS, INC.

		Three Months Ended
		March 31,
(in millions)		2011				2010
Cash flows from operating activities:
Net income		$	326.5			$	260.2
Net loss from discontinued operations, net of tax			—				0.4
Net income from continuing operations			326.5				260.6
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			62.9				58.7
Non-cash adjustments to net income			55.6				40.8
Changes in operating assets and liabilities:
Accounts receivable			(189.3	)			394.8
Claims and rebates payable			(166.5	)			(203.7	)
Other net changes in operating assets and liabilities			155.2				208.8
Net cash provided by operating activities—continuing operations			244.4				760.0
Net cash provided by operating activities—discontinued operations			—				0.8
Net cash flows provided by operating activities			244.4				760.8
Cash flows from investing activities:
Purchases of property and equipment			(19.5	)			(33.7	)
Other			1.7				5.2
Net cash used in investing activities — continuing operations			(17.8	)			(28.5	)
Net cash used in investing activities — discontinued operations			—				(0.5	)
Net cash used in investing activities			(17.8	)			(29.0	)
Cash flows from financing activities:
Tax benefit relating to employee stock compensation			13.0				26.7
Net proceeds from employee stock plans			2.6				10.7
Treasury stock acquired			—				(218.2	)
Repayment of long-term debt			—				(180.0	)
Net cash provided by (used in) financing activities			15.6				(360.8	)
Effect of foreign currency translation adjustment			0.2				1.7
Net increase in cash and cash equivalents			242.4				372.7
Cash and cash equivalents at beginning of period			523.7				1,070.4
Cash and cash equivalents at end of period		$	766.1			$	1,443.1

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, 2010. 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, 2010.

     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 March 31, 2011, the unaudited consolidated statement of operations for the three months ended March 31, 2011 and 2010, the unaudited consolidated statement of changes in stockholders’ equity for the three months ended March 31, 2011, and the unaudited consolidated statement of cash flows for the three months ended March 31, 2011 and 2010. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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 $656.6 million and $426.3 million, restricted cash and investments of $15.9 million and $16.3 million, and trading securities (included in other assets) of $14.0 million and $13.5 million at March 31, 2011 and December 31, 2010, respectively. These assets are carried at fair value based on quoted prices in active markets 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:

		March 31, 2011								December 31, 2010
		Carrying				Fair				Carrying				Fair
(in millions)		Amount				Value				Amount				Value
5.25% senior notes due 2012, net of unamortized discount		$	999.7			$	1,046.0			$	999.6			$	1,056.0
6.25% senior notes due 2014, net of unamortized discount			997.1				1,111.0				996.9				1,116.0
7.25% senior notes due 2019, net of unamortized discount			497.1				590.0				497.1				586.3
Total		$	2,493.9			$	2,747.0			$	2,493.6			$	2,758.3

     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 — Discontinued Operations

     In the third quarter of 2010, we completed the sale of our Phoenix Marketing Group (“PMG”) line of business. 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. Prior to being classified as a discontinued operation, PMG was included in our Emerging Markets (“EM”) segment. PMG was headquartered in Lincoln Park, New Jersey and provided 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, cash flows of our discontinued operations are segregated in our accompanying unaudited consolidated statements of cash flows.

     Certain information with respect to the discontinued operations for the three months ended March 31, 2011 and 2010 is summarized below.

		Three Months Ended,
		March 31,
(in millions)		2011				2010
Revenues		$	—			$	5.5
Net loss from discontinued operations, net of tax			—				(0.4	)
Income tax benefit from discontinued operations		$	—			$	(0.2	)

Note 4 — Goodwill and other intangible assets

     The following is a summary of our goodwill and other intangible assets for our two reportable segments Pharmacy Benefit Management (“PBM”) and EM:

						March 31, 2011												December 31, 2010
		Gross Carrying				Accumulated				Net Carrying				Gross Carrying				Accumulated				Net Carrying
(in millions)		Amount				Amortization				Amount				Amount				Amortization				Amount
Goodwill
PBM		$	5,462.2			$	(107.6	)		$	5,354.6			$	5,461.3			$	(107.4	)		$	5,353.9
EM			132.3				—				132.3				132.3				—				132.3
		$	5,594.5			$	(107.6	)		$	5,486.9			$	5,593.6			$	(107.4	)		$	5,486.2
Other intangible assets
PBM
Customer contracts		$	2,018.9			$	(383.7	)		$	1,635.2			$	2,018.7			$	(346.4	)		$	1,672.3
Other			20.8				(6.0	)			14.8				20.8				(5.0	)			15.8
			2,039.7				(389.7	)			1,650.0				2,039.5				(351.4	)			1,688.1
EM
Customer relationships			68.4				(33.8	)			34.6				68.4				(32.2	)			36.2
Other			0.7				—				0.7				0.7				—				0.7
			69.1				(33.8	)			35.3				69.1				(32.2	)			36.9
Total other intangible assets		$	2,108.8			$	(423.5	)		$	1,685.3			$	2,108.6			$	(383.6	)		$	1,725.0

     The aggregate amount of amortization expense of other intangible assets for our continuing operations was $39.7 million and $40.1 million for the three months ended March 31, 2011 and 2010, respectively. In accordance with applicable accounting guidance, amortization for customer contracts related to our agreement to provide PBM services to members of the affiliated health plans of WellPoint has been included as an offset to revenues in the amount of $28.5 million for the three months ended both March 31, 2011 and 2010. The future aggregate amount of amortization expense of other intangible assets for our continuing operations is expected to be approximately $158.8 million for 2011, $158.1 million for 2012, $156.9 million for 2013, $151.3 million for 2014 and $133.1 million for 2015. 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.

     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				Total
Balance at December 31, 2010		$	5,353.9			$	132.3			$	5,486.2
Foreign currency translation			0.7				—				0.7
Balance at March 31, 2011		$	5,354.6			$	132.3			$	5,486.9

Note 5 — 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. All shares are calculated under the “treasury stock” method. 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
		March 31,
(in millions)		2011(1)				2010
Weighted average number of common shares outstanding during the period — Basic EPS			529.0				549.8
Dilutive common stock equivalents:
Outstanding stock options, “stock-settled” stock appreciation rights (“SSRs”), restricted stock units, and executive deferred compensation units			4.9				6.0
Weighted average number of common shares outstanding during the period — Diluted EPS(2)			533.9				555.8

Note 6 — Financing

     Long-term debt consists of:

		March 31,				December 31,
(in millions)		2011				2010
5.25% senior notes due 2012, net of unamortized discount		$	999.7			$	999.6
6.25% senior notes due 2014, net of unamortized discount			997.1				996.9
7.25% senior notes due 2019, net of unamortized discount			497.1				497.1
Revolving credit facility due August 13, 2013			—				—
Other			0.2				0.2
Total debt			2,494.1				2,493.8
Less current maturities			0.1				0.1
Long-term debt		$	2,494.0			$	2,493.7

     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 (none of which was outstanding as of March 31, 2011) available for general corporate purposes. Our credit agreement requires us to pay interest periodically on the London Interbank Offered Rates (“LIBOR”) or base rate options, plus a margin ranging 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.

     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 March 31, 2011, we believe we were in compliance in all material respects with all covenants associated with our credit agreement.

Note 7 — 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 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 three months of 2011, we granted 2,230,000 stock options with a weighted average fair market value of $17.72. The SSRs and stock options have three-year graded vesting.

     During the first three months of 2011, we granted to certain officers and employees approximately 247,000 restricted stock units and performance shares with a weighted average fair market value of $56.50. 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 amount of performance share grants is subject to a multiplier of 2.5 based on certain performance metrics. During the first quarter of 2011, approximately 215,000 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 855,000 at March 31, 2011 and 950,000 at December 31, 2010.

     We recognized stock-based compensation expense of $11.9 million in the three months ended both March 31, 2011 and 2010. Unamortized stock-based compensation as of March 31, 2011 was $49.7 million for stock options and SSRs and $23.9 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
		March 31,
		2011				2010
Expected life of option		3-5 years				3-5 years
Risk-free interest rate			1.2%-2.1	%			1.3%-2.3	%
Expected volatility of stock			36%-39	%			37%-40	%
Expected dividend yield		None				None

Note 8 — Contingencies

     We record self-insurance accruals based upon estimates of the aggregate liability of claim costs in excess of our insurance coverage. Accruals 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 accounting guidance, if the range of possible loss is broad, the liability accrued should be based on the lower end of the range.

     In the ordinary course of business there have arisen various legal proceedings, investigations or claims now pending against us or our subsidiaries. In accordance with applicable accounting guidance, we record accruals for certain of our outstanding legal proceedings, investigations or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. We evaluate, on a quarterly basis, developments in legal proceedings, investigations or claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable. We disclose the amount of the accrual if the financial statements would be otherwise misleading, which was not the case for the three months ending March 31, 2011 and 2010.

     When a loss contingency is not both probable and estimable, we do not establish an accrued liability. However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then we disclose an estimate of the possible loss or range of loss, if such estimate can be made, or disclose that an estimate cannot be made.

     The assessments of whether a loss is probable or a reasonable possibility, and whether the loss or a range of loss is estimable, often involve a series of complex judgments about future events. We are often unable to estimate a range of reasonably possible loss, particularly where (i) the damages sought are substantial or indeterminate, (ii) the proceedings are in the early stages, or (iii) the matters involve novel or unsettled legal theories or a large number of parties. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss, fine, penalty or business impact, if any. Accordingly, for many proceedings, we are currently unable to estimate the loss or a range of possible loss. For a limited number of proceedings, we may be able to reasonably estimate the possible range of loss in excess of any accruals. However, we believe that such matters, individually and in the aggregate, when finally resolved, are not reasonably likely to have a material adverse effect on our consolidated cash flow or financial condition. We also believe that any amount that could be reasonably estimated in excess of accruals, if any, for such proceedings is not material. However, an adverse resolution of one or more of such matters could have a material adverse effect on our results of operations in a particular quarter or fiscal year.

Note 9 — 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 3, our PMG line of business was classified as a discontinued operation in the second quarter of 2010. The results of operations for PMG, previously included in our EM segment, are reported as discontinued operations for all periods presented in the accompanying unaudited consolidated statements of operations in accordance with applicable accounting guidance.

     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 ended March 31, 2011 and 2010.

(in millions)		PBM				EM				Total
For the three months ended March 31, 2011
Product revenues:
Network revenues(1)		$	7,258.1			$	—			$	7,258.1
Home delivery and specialty revenues(2)			3,407.1				—				3,407.1
Other revenues			—				350.5				350.5
Service revenues			73.5				5.3				78.8
Total revenues			10,738.7				355.8				11,094.5
Depreciation and amortization expense			60.8				2.1				62.9
Operating income			544.1				8.3				552.4
Interest income											0.4
Interest expense											(39.7	)
Income before income taxes											513.1
Capital expenditures			19.1				0.4				19.5
For the three months ended March 31, 2010
Product revenues:
Network revenues(1)		$	7,514.9			$	—			$	7,514.9
Home delivery and specialty revenues(2)			3,230.6				—				3,230.6
Other revenues			—				324.0				324.0
Service revenues			65.9				3.0				68.9
Total revenues			10,811.4				327.0				11,138.4
Depreciation and amortization expense			56.7				2.0				58.7
Operating income			450.6				4.1				454.7
Interest income											1.7
Interest expense											(42.8	)
Income before income taxes											413.6
Capital expenditures			33.5				0.2				33.7

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

(in millions)		PBM				EM				Total
Total Assets
As of March 31, 2011		$	10,203.3			$	504.8			$	10,708.1
As of December 31, 2010		$	10,078.4			$	479.4			$	10,557.8

     PBM product revenues consist of revenues from the sale of prescription drugs by retail pharmacies in our retail pharmacy networks, revenues from the dispensing of prescription drugs from our home delivery pharmacies and distribution of certain specialty drugs. EM product revenues consist of distribution of certain fertility drugs and revenues from specialty distribution activities. PBM service revenues include administrative fees associated with the administration of retail pharmacy networks contracted by certain clients, informed decision counseling services, and specialty distribution services. EM service revenues include revenues from healthcare card administration.

     For the three months ended March 31, 2011 and 2010, our top five clients collectively represented 57.1% and 53.2% of revenues, respectively. For the three months ended March 31, 2011, our two largest clients, WellPoint and the Department of Defense (“DoD”), represented 29.2% and 21.7% of revenues, respectively, as compared to 28.1% and 18.7%, respectively, for the same period of 2010. None of our other clients accounted for 10% or more of our consolidated revenues during the three months ended March 31, 2011 or 2010.

     Revenues earned by our Canadian PBM totaled $15.4 million and $12.2 million for the three months ended March 31, 2011 and 2010, respectively. All other revenues were earned in the United States. Long-lived assets of our Canadian PBM (consisting primarily of fixed assets) totaled $16.5 million and $16.7 million as of March 31, 2011 and December 31, 2010, respectively. All other long-lived assets are domiciled in the United States.

Note 10 — 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 September 17, 2010, PMG was sold. The assets, liabilities, and operations from PMG are included as discontinued operations in those of the non-guarantors for all periods presented. 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 March 31, 2011
Cash and cash equivalents		$	687.7			$	9.1			$	69.3			$	—			$	766.1
Restricted cash and investments			—				11.2				4.7				—				15.9
Receivables, net			1,333.9				564.1				9.0				—				1,907.0
Other current assets			87.5				337.1				34.6				—				459.2
Total current assets			2,109.1				921.5				117.6				—				3,148.2
Property and equipment, net			224.0				120.8				14.3				—				359.1
Investments in subsidiaries			6,460.2				—				—				(6,460.2	)			—
Intercompany			—				3,442.2				—				(3,442.2	)			—
Goodwill			2,921.4				2,538.8				26.7				—				5,486.9
Other intangible assets, net			1,396.1				285.2				4.0				—				1,685.3
Other assets			23.1				3.4				2.1				—				28.6
Total assets		$	13,133.9			$	7,311.9			$	164.7			$	(9,902.4	)		$	10,708.1
Claims and rebates payable		$	2,499.5			$	0.5			$	—			$	—			$	2,500.0
Accounts payable			654.0				17.4				2.4				—				673.8
Accrued expenses			160.9				368.3				7.8				—				537.0
Current maturities of long-term debt			—				0.1				—				—				0.1
Total current liabilities			3,314.4				386.3				10.2				—				3,710.9
Long-term debt			2,494.0				—				—				—				2,494.0
Intercompany			3,301.9				—				140.3				(3,442.2	)			—
Other liabilities			60.4				477.2				2.4				—				540.0
Stockholders’ equity			3,963.2				6,448.4				11.8				(6,460.2	)			3,963.2
Total liabilities and stockholders’ equity		$	13,133.9			$	7,311.9			$	164.7			$	(9,902.4	)		$	10,708.1
As of December 31, 2010
Cash and cash equivalents		$	456.7			$	9.0			$	58.0			$	—			$	523.7
Restricted cash and investments			—				11.7				4.6				—				16.3
Receivables, net			1,175.6				536.2				9.1				—				1,720.9
Other current assets			249.0				396.0				35.4				—				680.4
Total current assets			1,881.3				952.9				107.1				—				2,941.3
Property and equipment, net			231.5				127.2				14.0				—				372.7
Investments in subsidiaries			6,382.2				—				—				(6,382.2	)			—
Intercompany			—				3,214.0				—				(3,214.0	)			—
Goodwill			2,921.4				2,538.8				26.0				—				5,486.2
Other intangible assets, net			1,426.2				294.8				4.0				—				1,725.0
Other assets			20.6				10.1				1.9				—				32.6
Total assets		$	12,863.2			$	7,137.8			$	153.0			$	(9,596.2	)		$	10,557.8
Claims and rebates payable		$	2,664.9			$	1.6			$	—			$	—			$	2,666.5
Accounts payable			634.4				17.7				4.6				—				656.7
Accrued expenses			288.7				294.5				10.7				—				593.9
Current maturities of long-term debt			—				0.1				—				—				0.1
Total current liabilities			3,588.0				313.9				15.3				—				3,917.2
Long-term debt			2,493.7				—				—				—				2,493.7
Intercompany			3,094.8				—				119.2				(3,214.0	)			—
Other liabilities			80.1				455.5				4.7				—				540.3
Stockholders’ equity			3,606.6				6,368.4				13.8				(6,382.2	)			3,606.6
Total liabilities and stockholders’ equity		$	12,863.2			$	7,137.8			$	153.0			$	(9,596.2	)		$	10,557.8

Condensed Consolidating Statement of Operations

		Express								Non-
(in millions)		Scripts, Inc.				Guarantors				Guarantors				Eliminations				Consolidated
For the three months ended March 31, 2011
Revenues		$	7,173.1			$	3,897.2			$	24.2			$	—			$	11,094.5
Operating expenses			6,725.6				3,788.8				27.7				—				10,542.1
Operating income (loss)			447.5				108.4				(3.5	)			—				552.4
Interest expense, net			(37.9	)			(1.7	)			0.3				—				(39.3	)
Income (loss) before income taxes			409.6				106.7				(3.2	)			—				513.1
Provision for income taxes			147.1				38.0				1.5				—				186.6
Net income (loss) from continuing operations			262.5				68.7				(4.7	)			—				326.5
Equity in earnings of subsidiaries			64.0				—				—				(64.0	)			—
Net income (loss)		$	326.5			$	68.7			$	(4.7	)		$	(64.0	)		$	326.5
For the three months ended March 31, 2010
Revenues		$	7,394.5			$	3,722.7			$	21.2			$	—			$	11,138.4
Operating expenses			7,051.6				3,607.9				24.2				—				10,683.7
Operating income (loss)			342.9				114.8				(3.0	)			—				454.7
Interest expense, net			(39.6	)			(1.5	)			—				—				(41.1	)
Income (loss) before income taxes			303.3				113.3				(3.0	)			—				413.6
Provision for income taxes			110.3				42.7				—				—				153.0
Net income (loss) from continuing operations			193.0				70.6				(3.0	)			—				260.6
Net loss from discontinued operations, net of tax			—				—				(0.4	)			—				(0.4	)
Equity in earnings of subsidiaries			67.2				—				—				(67.2	)			—
Net income (loss)		$	260.2			$	70.6			$	(3.4	)		$	(67.2	)		$	260.2

Condensed Consolidating Statement of Cash Flows

		Express								Non-
		Scripts, Inc.				Guarantors				Guarantors				Eliminations				Consolidated
For the three months ended March 31, 2011
Net cash flows provided by (used in) operating activities		$	99.8			$	218.0			$	(9.4	)		$	(64.0	)		$	244.4
Cash flows from investing activities:
Purchase of property and equipment			(15.2	)			(2.4	)			(1.9	)			—				(19.5	)
Other			—				1.4				0.3				—				1.7
Net cash used in investing activities			(15.2	)			(1.0	)			(1.6	)			—				(17.8	)
Cash flows from financing activities:
Tax benefit relating to employee stock compensation			13.0				—				—				—				13.0
Net proceeds from employee stock plans			2.6				—				—				—				2.6
Net transactions with parent			130.8				(216.9	)			22.1				64.0				—
Net cash provided by (used in) financing activities			146.4				(216.9	)			22.1				64.0				15.6
Effect of foreign currency translation adjustment			—				—				0.2				—				0.2
Net increase in cash and cash equivalents			231.0				0.1				11.3				—				242.4
Cash and cash equivalents at beginning of period			456.7				9.0				58.0				—				523.7
Cash and cash equivalents at end of period		$	687.7			$	9.1			$	69.3			$	—			$	766.1

Condensed Consolidating Statement of Cash Flows

		Express								Non-
		Scripts, Inc.				Guarantors				Guarantors				Eliminations				Consolidated
For the three months ended March 31, 2010
Net cash flows provided by (used in) operating activities		$	291.3			$	536.7			$	—			$	(67.2	)		$	760.8
Cash flows from investing activities:
Purchase of property and equipment			(17.7	)			(15.9	)			(0.1	)			—				(33.7	)
Other			3.3				(1.1	)			3.0				—				5.2
Net cash (used in) provided by investing activities – continuing operations			(14.4	)			(17.0	)			2.9				—				(28.5	)
Net cash used in investing activities – discontinued operations			—				—				(0.5	)							(0.5	)
Net cash (used in) provided by investing activities			(14.4	)			(17.0	)			2.4				—				(29.0	)
Cash flows from financing activities:
Treasury stock acquired			(218.2	)			—				—				—				(218.2	)
Repayment of long-term debt			(180.0	)			—				—				—				(180.0	)
Tax benefit relating to employee stock compensation			26.7				—				—				—				26.7
Net proceeds from employee stock plans			10.7				—				—				—				10.7
Net transactions with parent			412.2				(489.0	)			9.6				67.2				—
Net cash provided by (used in) financing activities			51.4				(489.0	)			9.6				67.2				(360.8	)
Effect of foreign currency translation adjustment			—				—				1.7				—				1.7
Net increase in cash and cash equivalents			328.3				30.7				13.7				—				372.7
Cash and cash equivalents at beginning of period			1,005.0				10.0				55.4				—				1,070.4
Cash and cash equivalents at end of period		$	1,333.3			$	40.7			$	69.1			$	—			$	1,443.1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

          Information we have included or incorporated by reference in this Quarterly Report on Form 10-Q, and information which may be contained in our other filings with the Securities and Exchange Commission (the “SEC”) and our press releases or other public statements, contain or may contain forward-looking statements. These forward-looking statements include, among others, statements of our plans, objectives, expectations (financial or otherwise) or intentions.

          Our forward-looking statements involve risks and uncertainties. Our actual results may differ significantly from those projected or suggested in any forward-looking statements. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Any number of factors could cause our actual results to differ materially from those contemplated by any forward looking statements, including, but not limited to the factors listed below:

	•		our ability to remain profitable in a very competitive marketplace is dependent upon our ability to attract and retain clients while maintaining our margins, to differentiate our products and services from others in the marketplace, and to develop and cross sell new products and services to our existing clients.
	•		our failure to anticipate and appropriately adapt to changes in the rapidly changing health care industry.
	•		changes in applicable laws or regulations, or their interpretation or enforcement, or the enactment of new laws or regulations, which apply to our business practices (past, present or future) or require us to spend significant resources in order to comply.
	•		changes to the health care industry designed to manage health care costs or alter health care financing practices.
	•		changes relating to our participation in Medicare Part D, the loss of Medicare Part D eligible members, or our failure to otherwise execute on our strategies related to Medicare Part D.
	•		a failure in the security or stability of our technology infrastructure, or the infrastructure of one or more of our key vendors, or a significant failure or disruption in service within our operations or the operations of such vendors.
	•		our failure to effectively execute on strategic transactions, or to integrate or achieve anticipated benefits from any acquired businesses.
	•		the termination, or an unfavorable modification, of our relationship with one or more key pharmacy providers, or significant changes within the pharmacy provider marketplace.
	•		the termination, or an unfavorable modification, of our relationship with one or more key pharmaceutical manufacturers, or the significant reduction in payments made or discounts provided by pharmaceutical manufacturers.
	•		changes in industry pricing benchmarks.
	•		results in pending and future litigation or other proceedings which would subject us to significant monetary damages or penalties and/or require us to change our business practices, or the costs incurred in connection with such proceedings.
	•		our failure to execute on, or other issues arising under, certain key client contracts.
	•		the impact of our debt service obligations on the availability of funds for other business purposes, and the terms and our required compliance with covenants relating to our indebtedness.
	•		our failure to attract and retain talented employees, or to manage succession and retention for our Chief Executive Officer or other key executives.
	•		other risks described from time to time in our filings with the SEC.

          See the more comprehensive description of risk factors under the captions “Forward Looking Statements and Associated Risks” contained in Item 1 — “Business” and Item 1A — “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 16, 2011.

OVERVIEW

          As one of the largest full-service pharmacy benefit management (“PBM”) companies in North America, we provide healthcare management and administration services on behalf of our clients, which include health maintenance organizations, health insurers, third-party administrators, employers, union-sponsored benefit plans, workers’ compensation plans, and government health programs. Our integrated PBM services include network claims processing, home delivery services, patient care and direct specialty home delivery to patients, benefit plan design consultation, drug utilization review, formulary management, drug data analysis services, distribution of injectable drugs to patient homes and physicians’ offices, bio-pharma services, and fulfillment of prescriptions to low-income patients through manufacturer-sponsored patient assistance programs.

          Through our Emerging Markets (“EM”) segment, we provide services including distribution of pharmaceuticals and medical supplies to providers and clinics, fertility services to providers and patients, and healthcare account administration and implementation of consumer-directed healthcare solutions.

          Revenue generated by our segments can be classified as either tangible product revenue or service revenue. We earn tangible product revenue from the sale of prescription drugs by retail pharmacies in our retail pharmacy networks and from dispensing prescription drugs from our home delivery and specialty pharmacies. Service revenue includes administrative fees associated with the administration of retail pharmacy networks contracted by certain clients, medication counseling services and certain specialty distribution services. Tangible product revenue generated by our PBM and EM segments represented 99.3% of revenues for the three months ended March 31, 2011, and 99.4% for the same period of 2010.

EXECUTIVE SUMMARY AND TREND FACTORS AFFECTING THE BUSINESS

          Our results in the first quarter of 2011 reflect the successful execution of our business model, which emphasizes the alignment of our financial interests with those of our clients through greater use of generics and low-cost brands, home delivery and specialty pharmacy. While we saw lower claims volume during the first quarter of 2011, we expect utilization of the pharmacy benefit to improve as the U.S. economy recovers. In the first three months of 2011, we benefited from better management of ingredient costs through renegotiation of supplier contracts, increased competition among generic manufacturers, higher generic fill rate (73.8% compared to 70.2% in the same period of 2010) and other actions which helped to reduce ingredient costs. In addition, through the research performed by us and guided by our Consumerology^® Advisory Board, we are providing our clients with additional tools designed to generate higher generic fill rates, further increase the use of our home delivery and specialty pharmacy services and drive greater adherence.

          The positive trends we saw in 2010, including lower drug purchasing costs and increased generic usage, are expected to continue to offset the negative impact of various marketplace forces affecting pricing and plan structure, among other factors, and thus continue to generate improvements in our results of operations in the future. Additionally, as the regulatory environment evolves, we will continue to make significant investments designed to keep us ahead of the competition. These projects include preparation for changes to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), Medicare regulations and the Health Reform Laws.

CRITICAL ACCOUNTING POLICIES

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates and assumptions are based upon a combination of historical information and various other assumptions believed to be reasonable under the particular circumstances. Actual results may differ from our estimates. For a full description of our critical accounting policies, please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 16, 2011.

CLIENTS

          For the three months ended March 31, 2011, our top five clients collectively represented 57.1% of revenues. Our two largest clients, WellPoint and the DoD, represented approximately 29.2% and 21.7% of revenues for the three months ended March 31, 2011, respectively, and 28.1% and 18.7% of revenues for the three months ended March 31, 2010, respectively. None of our other clients accounted for 10% or more of our consolidated revenues during the three months ended March 31, 2011 or 2010.

RESULTS OF OPERATIONS

PBM OPERATING INCOME

		Three Months Ended
		March 31,
(in millions)		2011				2010
Product revenues
Network revenues(1)		$	7,258.1			$	7,514.9
Home delivery and specialty revenues(2)			3,407.1				3,230.6
Service revenues			73.5				65.9
Total PBM revenues			10,738.7				10,811.4
Cost of PBM revenues(1)			10,009.9				10,160.9
PBM gross profit			728.8				650.5
PBM SG&A expenses			184.7				199.9
PBM operating income		$	544.1			$	450.6
Network			148.8				149.0
Home delivery and specialty(2)			13.1				13.3
Total PBM Claims			161.9				162.3
Total adjusted PBM Claims(3)			186.0				186.5

          Product Revenues for the three months ended March 31, 2011: Network pharmacy revenues decreased by $256.8 million, or 3.4%, in the three months ended March 31, 2011 over the same period of 2010. Approximately $138.2 million of this decrease is due to the mix of prescriptions processed at network pharmacies, partially offset by inflation. Our network generic fill rate increased to 75.0% of total network claims in the first quarter of 2011 as compared to 71.3% in the same period of 2010. The remaining decrease, approximately $118.6 million, is due to lower U.S. claims volumes.

          Network claims include U.S. and Canada claims. Network claims remained relatively flat for the first three months of 2011 compared to the same period of 2010. A decrease in U.S. network claim volume was mostly offset by an increase in Canadian claim volume. Revenue related to Canadian claims represents administrative fees received for processing claims and is reflected in service revenues.

          Home delivery and specialty revenues increased $176.5 million, or 5.5%, in the three months ended March 31, 2011 from the same period in 2010 due primarily to inflation partially offset by a decrease in volume and the impact of higher generic penetration. Our home delivery generic fill rate increased to 61.8% of home delivery claims in the three months ended March 31, 2011 as compared to 59.4% in the same period of 2010.

          Cost of PBM revenues decreased $151.0 million, or 1.5%, in the three months ended March 31, 2011 from the same period of 2010 due primarily to better management of ingredient costs, decreased volume, an increase in the generic fill rate, and synergies realized from the rationalization of our operational footprint following the acquisition of WellPoint’s NextRx PBM business. Additionally, included in cost of PBM revenues for the three months ended March 31, 2010 is $25.9 million of integration costs related to the acquisition of NextRx. We do not expect any charges in 2011 and beyond related to the integration of NextRx.

          Our PBM gross profit increased $78.3 million, or 12.0%, for the three months ended March 31, 2011 as compared to the same period of 2010. Better management of ingredient costs and cost savings from the increase in the aggregate generic fill rate were partially offset by the decrease in claims volume described above.

          Selling, general and administrative expense (“SG&A”) for our PBM segment for the three months ended March 31, 2011 decreased by $15.2 million, or 7.6%, as compared to the same period of 2010 primarily as a result of decreases in management compensation as well as integration costs of $6.0 million during the first quarter of 2010 related to the acquisition of NextRx. We do not expect any charges in 2011 and beyond related to the integration of NextRx.

          PBM operating income increased $93.5 million, or 20.8%, for the three months ended March 31, 2011 as compared to the same period of 2010, based on the various factors described above.

EM OPERATING INCOME

		Three Months Ended
		March 31,
(in millions)		2011				2010(1)
Product revenues		$	350.5			$	324.0
Service revenues			5.3				3.0
Total EM revenues			355.8				327.0
Cost of EM revenues			339.1				314.3
EM gross profit			16.7				12.7
EM SG&A expenses			8.4				8.6
EM operating income		$	8.3			$	4.1