UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________________________
FORM 10-Q
__________________________________________________________________________________________
(Mark One)
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x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 20172021
OR
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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 001-36092
__________________________________________________________________________________________
Premier, Inc.
(Exact name of registrant as specified in its charter)
___________________________________________________________________________________________
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Delaware | | 35-2477140 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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13034 Ballantyne Corporate Place Charlotte, North Carolina
| | 28277 |
Charlotte, | North Carolina | | 28277 |
(Address of principal executive offices) | | (Zip Code) |
(704) 357-0022
(Registrant'sRegistrant’s telephone number, including area code)
__________________________________________________________________________________________
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, $0.01 Par Value | PINC | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No 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 x ☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company,"” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | x☒ | | Accelerated filer | o☐ | | Non-accelerated filer | o☐ |
Smaller reporting company | o☐ | | Emerging growth company | o☐ | | (Do not check if a smaller reporting company) |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o ☐ No x☒
As of February 2, 2018,January 27, 2022, there were 54,713,852119,082,893 shares of the registrant'sregistrant’s Class A common stock, par value $0.01 per share and 80,978,267 shares of the registrant's Class B common stock, par value $0.000001 per share, outstanding.
TABLE OF CONTENTS
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| Condensed Consolidated Statement of Stockholders' Deficit for the six months ended December 31, 2017 (Unaudited) | |
| Condensed Consolidated Statements of Cash Flow for the six months ended December 31, 2017 and 2016 Flows(Unaudited) | |
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| Exhibits | | |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this Quarterly Reportquarterly report for the six months ended December 31, 2021 for Premier, Inc. (this “Quarterly Report”) that are not statements of historical or current facts, such as those under the heading "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations,"” are "forward-looking statements"“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from historical results or from any future results or projections expressed or implied by such forward-looking statements. In addition to statements that explicitly describe such risks and uncertainties, readers are urged to consider statements in conditional or future tenses or that include terms such as "believes," "belief," "expects," "estimates," "intends," "anticipates"“believes,” “belief,” “expects,” “estimates,” “intends,” “anticipates” or "plans"“plans” to be uncertain and forward-looking. Forward-looking statements may include comments as to our beliefs and expectations regarding future events and trends affecting our business and are necessarily subject to uncertainties, many of which are outside our control. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:
•the impact of the continuing financial and operational uncertainty due to the coronavirus pandemic or other pandemics and associated supply chain disruptions and inflation;
•competition which could limit our ability to maintain or expand market share within our industry;
•consolidation in the healthcare industry;
•potential delays recognizing or increasing revenue if the sales cycle or implementation period takes longer than expected;
•the terminabilityimpact on us if members of member participation in our group purchasing organization ("GPO"(“GPO”) programs with limitedreduce activity levels or no notice,terminate or the failure of a significant number of memberselect not to renew their GPO participation agreements;contracts on substantially similar terms or at all;
•the rate at which the markets for our non-GPOsoftware as a service (“SaaS”) or licensed-based clinical analytics products and services and products develop;
•the dependency of our members on payments from third-party payers;
•our reliance on administrative fees that we receive from GPO suppliers;
•our ability to maintain third-party provider and strategic alliances or enter into new alliances;
•our ability to timely offer new and innovative products and services;
•the portion of revenues we receive from our largest members;
•risks and expenses related to future acquisition opportunities and integration of acquisitions;
•financial and operational risks associated with non-controlling investments in other businesses or partnerships orother joint ventures with, other businesses, particularly those that we do not control;control, particularly early-stage companies;
•potential litigation;
•our reliance on Internet infrastructure, bandwidth providers, data center providers and other third parties and our own systems for providing services to our users;
•data loss or corruption due to failures or errors in our systems and service disruptions at our data centers, or breaches or failures of our security measures;
•the financial, operational and reputational consequences of cyber-attacks or other data security breaches that disrupt our operations or result in the dissemination of proprietary or confidential information about us or our members or other third parties;
•our ability to use, disclose, de-identify or license data and to integrate third-party technologies;
•our use of "open source"“open source” software;
changes in industry pricing benchmarks;
our inability to grow our integrated pharmacy business or maintain current patients due to increases in the safety risk profiles of prescription drugs or the withdrawal of prescription drugs from the market, or our inability to maintain and expand our existing base of drugs in our integrated pharmacies;
•our dependency on contract manufacturing facilities located in various parts of the world;
•inventory risk we face in the event of a potential material price decline for the personal protective equipment or other products we may have purchased at elevated market prices or fixed prices;
•our ability to attract, hire, integrate and retain key personnel;
•adequate protection of our intellectual property and potential claims against our use of the intellectual property of third parties;
•potential sales and use tax liability in certain jurisdictions;
•changes in tax laws that materially impact our tax rate, income tax expense, anticipated tax benefits, deferred tax assets, cash flows or tax receivable agreement ("TRA") liabilities;and profitability;
•our indebtedness and our ability to obtain additional financing on favorable terms;terms, including our ability to renew or replace our existing long-term credit facility at maturity;
•fluctuation of our quarterly cash flows, revenues and results of operations;
•changes and uncertainty in the political, economic or regulatory environment affecting healthcare organizations, including with respect to the status of the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act of 2010 collectively referred to as the "ACA";and pandemic-related public health and reimbursement measures;
•our compliance with complex international, federal and state laws governing financial relationships among healthcare providers and the submission of false or fraudulent healthcare claims;
•interpretation and enforcement of current or future antitrust laws and regulations;
•compliance with complex federal, state and stateinternational privacy, security and breach notification laws;
•compliance with current or future laws, rules or regulations relating to information blocking provisions of the 21st Century Cures Act issued by the Office of the National Coordinator for Health Information Technology (the “ONC Rules”) that may cause our certified Health Information Technology products to be regulated by the ONC Rules;
•compliance with current or future laws, rules or regulations adopted by the Food & Drug Administration ("FDA") applicable to our software applications that may be considered medical devices;
compliance with, and potential changes•the impact of payments required under notes payable to extensive federal, state and local laws, regulations and procedures governing our integrated pharmacy operations;
risks inherent informer limited partners related to the filling, packaging and distribution of pharmaceuticals, including the counseling required to be provided by our pharmacists for dispensing of products;
our holding company structure and dependence on distributions from Premier Healthcare Alliance, L.P. ("Premier LP");
different interests among our member owners or between us and our member owners;
the ability of our member owners to exercise significant control over us, including through the election of all of our directors;
exemption from certain corporate governance requirements due to our status as a "controlled company" within the meaningearly termination of the NASDAQ rules;
the terms of agreements between usUnit Exchange and Tax Receivable Acceleration Agreements (the “Unit Exchange Agreements”) issued in connection with our member owners;
payments made under the TRAs to Premier LP's limited partnersAugust 2020 Restructuring on our overall cash flow and our ability to fully realize the expected tax benefits related to the acquisition of Class B common units from Premier LP's limited partners;match such fixed payment obligations under those notes payable;
changes to Premier LP's allocation methods or examinations or changes in interpretation of applicable tax laws and regulations by various taxing authorities that may increase a tax-exempt limited partner's risk that some allocated income is unrelated business taxable income;
•provisions in our certificate of incorporation and bylaws and the Amended and Restated Limited Partnership Agreement of Premier LP (as amended, the "LP Agreement") and provisions of Delaware law that discourage or prevent strategic transactions, including a takeover of us;
•failure to maintain an effective system of internal controls;controls over financial reporting or an inability to remediate any weaknesses identified and the related costs of remediation;
•the impact on the price of our Class A common stock if we cease paying dividends or reduce dividend payments from current levels;
•the number of shares of Class A common stock that will be eligible for sale or exchange in the near future and the dilutive effect of such issuances;
our intention notrepurchased by us pursuant to pay cash dividends on our Class A common stock;
whether we complete our recently announcedany then existing Class A common stock repurchase program and the timing of any such repurchases;
•the number and per share price of shares of Class A common stock ultimately purchased undereligible for sale after the program;
possible future issuancesissuance of Class A common stock preferred stock, limited partnership units or debt securitiesin our August 2020 Restructuring and the dilutive effectpotential impact of such issuances;sales; and
•the risk factors discussed under the heading "Risk Factors" in Item 1A of Part II herein and“Risk Factors” under Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 20172021 (the "2017“2021 Annual Report"Report”), filed with the Securities and Exchange Commission ("SEC"(“SEC”).
More information on potential factors that could affect our financial results is included from time to time in the "Cautionary“Cautionary Note Regarding Forward-Looking Statements," "Risk Factors"” “Risk Factors” and "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” or similarly captioned sections of this Quarterly Report and our other periodic and current filings made from time to time with the SEC, which are available on our website at http://investors.premierinc.com.investors.premierinc.com/ (the contents of which are not part of this Quarterly Report). You should not place undue reliance on any of our forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events or otherwise. Furthermore, we cannot guarantee future results, events, levels of activity, performance or achievements.
Certain Definitions
For periods prior to August 11, 2020, references to “member owners” are references to participants in our GPO programs that were also limited partners of Premier Healthcare Alliance L.P. (“Premier LP”), sometimes referred to as “LPs,” that held Class B common units of Premier LP and shares of our Class B common stock.
For periods on or after August 11, 2020, references to “members” are references to health systems and other customers that participate in our GPO programs, or utilize any of our programs or services, some of which were formerly referred to as member owners.
References to the “August 2020 Restructuring” are references to our corporate restructuring on August 11, 2020 in which we (i) eliminated our dual-class ownership structure, through an exchange under which member owners converted their Class B common units in Premier LP and corresponding Class B common shares of Premier, Inc. into our Class A common stock, on a one-for-one basis, and (ii) exercised our right to terminate the Tax Receivable Agreement (the “TRA”) by providing all former limited partners a notice of termination and the amount of the expected payment to be made to each limited partner pursuant to the early termination provisions of the TRA with a determination date of August 10, 2020. For additional information and details regarding the August 2020 Restructuring, see our 2021 Annual Report.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PREMIER, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
| | | | | | | | | | | |
| December 31, 2021 | | June 30, 2021 |
Assets | | | |
Cash and cash equivalents | $ | 86,161 | | | $ | 129,141 | |
Accounts receivable (net of $1,312 and $1,174 allowance for credit losses, respectively) | 137,902 | | | 142,557 | |
Contract assets (net of $1,248 and $1,110 allowance for credit losses, respectively) | 289,136 | | | 266,173 | |
Inventory | 148,415 | | | 176,376 | |
Prepaid expenses and other current assets | 66,499 | | | 68,049 | |
Total current assets | 728,113 | | | 782,296 | |
Property and equipment (net of $559,269 and $518,332 accumulated depreciation, respectively) | 225,470 | | | 224,271 | |
Intangible assets (net of $311,650 and $289,912 accumulated amortization, respectively) | 374,904 | | | 396,642 | |
Goodwill | 999,913 | | | 999,913 | |
Deferred income tax assets | 761,934 | | | 781,824 | |
Deferred compensation plan assets | 57,172 | | | 59,581 | |
Investments in unconsolidated affiliates | 192,398 | | | 153,224 | |
Operating lease right-of-use assets | 44,122 | | | 48,199 | |
Other assets | 67,436 | | | 76,948 | |
Total assets | $ | 3,451,462 | | | $ | 3,522,898 | |
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Liabilities and stockholders' equity | | | |
Accounts payable | $ | 70,510 | | | $ | 85,413 | |
Accrued expenses | 53,728 | | | 48,144 | |
Revenue share obligations | 230,109 | | | 226,883 | |
Accrued compensation and benefits | 62,815 | | | 100,713 | |
Deferred revenue | 33,367 | | | 34,058 | |
Current portion of notes payable to former limited partners | 96,877 | | | 95,948 | |
Line of credit and current portion of long-term debt | 128,005 | | | 78,295 | |
Other current liabilities | 47,599 | | | 47,330 | |
Total current liabilities | 723,010 | | | 716,784 | |
Long-term debt, less current portion | 2,745 | | | 5,333 | |
Notes payable to former limited partners, less current portion | 250,324 | | | 298,995 | |
Deferred compensation plan obligations | 57,172 | | | 59,581 | |
| | | |
Deferred consideration, less current portion | 57,444 | | | 56,809 | |
Operating lease liabilities, less current portion | 38,350 | | | 43,102 | |
Other liabilities | 43,615 | | | 112,401 | |
Total liabilities | 1,172,660 | | | 1,293,005 | |
Commitments and contingencies (Note 14) | 0 | | 0 |
|
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| December 31, 2017 | June 30, 2017 |
Assets | | |
Cash and cash equivalents | $ | 163,014 |
| $ | 156,735 |
|
Accounts receivable (net of $2,384 and $1,812 allowance for doubtful accounts, respectively) | 171,354 |
| 159,745 |
|
Inventory | 62,067 |
| 50,426 |
|
Prepaid expenses and other current assets | 24,021 |
| 35,164 |
|
Due from related parties | 381 |
| 6,742 |
|
Total current assets | 420,837 |
| 408,812 |
|
Property and equipment (net of $264,173 and $236,460 accumulated depreciation, respectively) | 190,815 |
| 187,365 |
|
Intangible assets (net of $125,903 and $99,198 accumulated amortization, respectively) | 349,847 |
| 377,962 |
|
Goodwill | 906,545 |
| 906,545 |
|
Deferred income tax assets | 305,549 |
| 482,484 |
|
Deferred compensation plan assets | 42,779 |
| 41,518 |
|
Investments in unconsolidated affiliates | 98,388 |
| 92,879 |
|
Other assets | 5,403 |
| 10,271 |
|
Total assets | $ | 2,320,163 |
| $ | 2,507,836 |
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Liabilities, redeemable limited partners' capital and stockholders' deficit | | |
Accounts payable | $ | 49,626 |
| $ | 42,815 |
|
Accrued expenses | 46,090 |
| 55,857 |
|
Revenue share obligations | 74,651 |
| 72,078 |
|
Limited partners' distribution payable | 20,396 |
| 24,951 |
|
Accrued compensation and benefits | 41,725 |
| 53,506 |
|
Deferred revenue | 45,699 |
| 44,443 |
|
Current portion of tax receivable agreements | 17,925 |
| 17,925 |
|
Current portion of long-term debt | 201,139 |
| 227,993 |
|
Other liabilities | 9,106 |
| 32,019 |
|
Total current liabilities | 506,357 |
| 571,587 |
|
Long-term debt, less current portion | 6,544 |
| 6,279 |
|
Tax receivable agreements, less current portion | 229,291 |
| 321,796 |
|
Deferred compensation plan obligations | 42,779 |
| 41,518 |
|
Deferred tax liabilities | 30,942 |
| 48,227 |
|
Other liabilities | 55,183 |
| 42,099 |
|
Total liabilities | 871,096 |
| 1,031,506 |
|
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| December 31, 2017 | June 30, 2017 |
Redeemable limited partners' capital | 2,398,640 |
| 3,138,583 |
|
Stockholders' deficit: | | |
Class A common stock, $0.01 par value, 500,000,000 shares authorized; 57,263,627 shares issued and 54,685,668 shares outstanding at December 31, 2017 and 51,943,281 shares issued and outstanding at June 30, 2017 | 573 |
| 519 |
|
Class B common stock, $0.000001 par value, 600,000,000 shares authorized; 82,282,748 and 87,298,888 shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively | — |
| — |
|
Treasury stock, at cost; 2,577,959 shares | (74,698 | ) | — |
|
Additional paid-in-capital | — |
| — |
|
Accumulated deficit | (875,448 | ) | (1,662,772 | ) |
Accumulated other comprehensive loss | — |
| — |
|
Total stockholders' deficit | (949,573 | ) | (1,662,253 | ) |
Total liabilities, redeemable limited partners' capital and stockholders' deficit | $ | 2,320,163 |
| $ | 2,507,836 |
|
| | | | | | | | | | | |
| December 31, 2021 | | June 30, 2021 |
Stockholders' equity: | | | |
Class A common stock, $0.01 par value, 500,000,000 shares authorized; 124,403,702 shares issued and 119,935,420 shares outstanding at December 31, 2021 and 122,533,051 shares issued and outstanding at June 30, 2021 | 1,244 | | | 1,225 | |
Treasury stock, at cost; 4,468,282 and 0 shares at December 31, 2021 and June 30, 2021, respectively | (176,024) | | | — | |
Additional paid-in capital | 2,135,687 | | | 2,059,194 | |
Retained earnings | 317,896 | | | 169,474 | |
Accumulated other comprehensive loss | (1) | | | — | |
Total stockholders' equity | 2,278,802 | | | 2,229,893 | |
Total liabilities and stockholders' equity | $ | 3,451,462 | | | $ | 3,522,898 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(In thousands, except per share data)
| | | | | | | | | | | | Three Months Ended | | Six Months Ended |
| Three Months Ended December 31, | Six Months Ended December 31, | | December 31, | | December 31, |
| 2017 | 2016 | 2017 | 2016 | | 2021 | | 2020 | | 2021 | | 2020 |
Net revenue: | | Net revenue: | | | | | | | |
Net administrative fees | $ | 159,343 |
| $ | 129,071 |
| $ | 310,334 |
| $ | 255,047 |
| Net administrative fees | $ | 150,403 | | | $ | 145,339 | | | $ | 299,865 | | | $ | 277,984 | |
Other services and support | 89,953 |
| 87,051 |
| 176,864 |
| 168,218 |
| Other services and support | 117,046 | | | 97,818 | | | 214,301 | | | 196,645 | |
Services | 249,296 |
| 216,122 |
| 487,198 |
| 423,265 |
| Services | 267,449 | | | 243,157 | | | 514,166 | | | 474,629 | |
Products | 162,102 |
| 142,378 |
| 314,764 |
| 248,507 |
| Products | 111,766 | | | 179,670 | | | 230,196 | | | 295,085 | |
Net revenue | 411,398 |
| 358,500 |
| 801,962 |
| 671,772 |
| Net revenue | 379,215 | | | 422,827 | | | 744,362 | | | 769,714 | |
Cost of revenue: | | Cost of revenue: | |
Services | 47,255 |
| 44,856 |
| 94,191 |
| 87,546 |
| Services | 45,782 | | | 40,122 | | | 89,591 | | | 78,872 | |
Products | 153,272 |
| 131,158 |
| 297,712 |
| 226,971 |
| Products | 96,933 | | | 171,722 | | | 206,295 | | | 285,150 | |
Cost of revenue | 200,527 |
| 176,014 |
| 391,903 |
| 314,517 |
| Cost of revenue | 142,715 | | | 211,844 | | | 295,886 | | | 364,022 | |
Gross profit | 210,871 |
| 182,486 |
| 410,059 |
| 357,255 |
| Gross profit | 236,500 | | | 210,983 | | | 448,476 | | | 405,692 | |
Other operating income: | | |
Remeasurement of tax receivable agreement liabilities | 177,174 |
| — |
| 177,174 |
| 5,722 |
| |
Other operating income | 177,174 |
| — |
| 177,174 |
| 5,722 |
| |
Operating expenses: | | Operating expenses: | |
Selling, general and administrative | 108,620 |
| 95,927 |
| 222,941 |
| 193,887 |
| Selling, general and administrative | 146,840 | | | 129,997 | | | 274,654 | | | 253,951 | |
Research and development | 324 |
| 767 |
| 813 |
| 1,573 |
| Research and development | 846 | | | 722 | | | 1,840 | | | 1,298 | |
Amortization of purchased intangible assets | 13,817 |
| 11,151 |
| 27,715 |
| 20,360 |
| Amortization of purchased intangible assets | 10,850 | | | 10,260 | | | 21,739 | | | 23,464 | |
Operating expenses | 122,761 |
| 107,845 |
| 251,469 |
| 215,820 |
| Operating expenses | 158,536 | | | 140,979 | | | 298,233 | | | 278,713 | |
Operating income | 265,284 |
| 74,641 |
| 335,764 |
| 147,157 |
| Operating income | 77,964 | | | 70,004 | | | 150,243 | | | 126,979 | |
Remeasurement gain attributable to acquisition of Innovatix, LLC | — |
| 204,833 |
| — |
| 204,833 |
| |
Equity in net income of unconsolidated affiliates | 1,257 |
| 5,127 |
| 5,509 |
| 14,706 |
| Equity in net income of unconsolidated affiliates | 6,116 | | | 4,572 | | | 13,174 | | | 10,499 | |
Interest and investment loss, net | (1,508 | ) | (857 | ) | (3,003 | ) | (1,009 | ) | |
Loss on disposal of long-lived assets | (400 | ) | — |
| (1,720 | ) | (1,518 | ) | |
Other income (expense) | (13,356 | ) | (131 | ) | (11,893 | ) | 875 |
| |
Interest expense, net | | Interest expense, net | (2,873) | | | (3,398) | | | (5,661) | | | (5,517) | |
(Loss) gain on FFF Put and Call Rights | | (Loss) gain on FFF Put and Call Rights | — | | | (14,507) | | | 64,110 | | | (16,426) | |
Other income, net | | Other income, net | 2,392 | | | 4,890 | | | 2,072 | | | 8,573 | |
Other income (expense), net | (14,007 | ) | 208,972 |
| (11,107 | ) | 217,887 |
| Other income (expense), net | 5,635 | | | (8,443) | | | 73,695 | | | (2,871) | |
Income before income taxes | 251,277 |
| 283,613 |
| 324,657 |
| 365,044 |
| Income before income taxes | 83,599 | | | 61,561 | | | 223,938 | | | 124,108 | |
Income tax expense | 231,508 |
| 37,429 |
| 244,272 |
| 60,765 |
| |
Income tax expense (benefit) | | Income tax expense (benefit) | 6,367 | | | 16,657 | | | 25,400 | | | (78,324) | |
Net income | 19,769 |
| 246,184 |
| 80,385 |
| 304,279 |
| Net income | 77,232 | | | 44,904 | | | 198,538 | | | 202,432 | |
Net income attributable to non-controlling interest in Premier LP | (56,485 | ) | (181,173 | ) | (101,095 | ) | (230,774 | ) | |
Net income attributable to non-controlling interest | | Net income attributable to non-controlling interest | (1,687) | | | (935) | | | (989) | | | (12,780) | |
Adjustment of redeemable limited partners' capital to redemption amount | 317,916 |
| 335,264 |
| 638,340 |
| 397,072 |
| Adjustment of redeemable limited partners' capital to redemption amount | — | | | — | | | — | | | (26,685) | |
Net income attributable to stockholders | $ | 281,200 |
| $ | 400,275 |
| $ | 617,630 |
| $ | 470,577 |
| Net income attributable to stockholders | $ | 75,545 | | | $ | 43,969 | | | $ | 197,549 | | | $ | 162,967 | |
| Comprehensive income: | | Comprehensive income: | |
Net income | | Net income | $ | 77,232 | | | $ | 44,904 | | | $ | 198,538 | | | $ | 202,432 | |
Comprehensive income attributable to non-controlling interest | | Comprehensive income attributable to non-controlling interest | (1,687) | | | (935) | | | (989) | | | (12,780) | |
Foreign currency translation loss | | Foreign currency translation loss | (1) | | | — | | | (1) | | | — | |
Comprehensive income attributable to stockholders | | Comprehensive income attributable to stockholders | $ | 75,544 | | | $ | 43,969 | | | $ | 197,548 | | | $ | 189,652 | |
| | | | | | | | | |
Weighted average shares outstanding: | | Weighted average shares outstanding: | |
Basic | 55,209 |
| 49,445 |
| 54,059 |
| 48,330 |
| Basic | 121,181 | | | 122,127 | | | 122,063 | | | 110,851 | |
Diluted | 139,237 |
| 141,308 |
| 139,641 |
| 142,133 |
| Diluted | 122,473 | | | 122,919 | | | 123,523 | | | 111,573 | |
| | |
Earnings (loss) per share attributable to stockholders: | | |
Earnings per share attributable to stockholders: | | Earnings per share attributable to stockholders: | |
Basic | $ | 5.09 |
| $ | 8.10 |
| $ | 11.43 |
| $ | 9.74 |
| Basic | $ | 0.62 | | | $ | 0.36 | | | $ | 1.62 | | | $ | 1.47 | |
Diluted | $ | (1.66 | ) | $ | 1.50 |
| $ | (1.30 | ) | $ | 1.75 |
| Diluted | $ | 0.62 | | | $ | 0.36 | | | $ | 1.61 | | | $ | 1.46 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
Condensed Consolidated Statements of Comprehensive IncomeStockholders' Equity
Six Months Ended December 31, 2021 and 2020
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total Stockholders' Equity |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
Balance at June 30, 2021 | 122,533 | | | $ | 1,225 | | | — | | | $ | — | | | — | | | $ | — | | | $ | 2,059,194 | | | $ | — | | | $ | 169,474 | | | $ | 2,229,893 | |
Issuance of Class A common stock under equity incentive plan | 1,239 | | | 13 | | | — | | | — | | | — | | | — | | | 22,851 | | | — | | | — | | | 22,864 | |
Treasury stock | (1,091) | | | — | | | — | | | — | | | 1,091 | | | (42,628) | | | — | | | — | | | — | | | (42,628) | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 7,554 | | | — | | | — | | | 7,554 | |
Repurchase of vested restricted units for employee tax-withholding | — | | | — | | | — | | | — | | | — | | | — | | | (9,171) | | | — | | | — | | | (9,171) | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 121,306 | | | 121,306 | |
Net loss attributable to non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | (698) | | | — | | | 698 | | | — | |
Dividends ($0.20 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (24,877) | | | (24,877) | |
Non-controlling interest related to acquisition | — | | | — | | | — | | | — | | | — | | | — | | | 23,145 | | | — | | | — | | | 23,145 | |
Balance at September 30, 2021 | 122,681 | | | 1,238 | | | — | | | — | | | 1,091 | | | (42,628) | | | 2,102,875 | | | — | | | 266,601 | | | 2,328,086 | |
Issuance of Class A common stock under equity incentive plan | 579 | | | 5 | | | — | | | — | | | — | | | — | | | 14,398 | | | — | | | — | | | 14,403 | |
Issuance of Class A common stock under employee stock purchase plan | 52 | | | 1 | | | — | | | — | | | — | | | — | | | 1,976 | | | — | | | — | | | 1,977 | |
Treasury stock | (3,377) | | | — | | | — | | | — | | | 3,377 | | | (133,396) | | | — | | | — | | | — | | | (133,396) | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 16,234 | | | — | | | — | | | 16,234 | |
Repurchase of vested restricted units for employee tax-withholding | — | | | — | | | — | | | — | | | — | | | — | | | (1,495) | | | — | | | — | | | (1,495) | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 77,232 | | | 77,232 | |
Net income attributable to non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | 1,687 | | | — | | | (1,687) | | | — | |
Change in ownership of consolidated entity | — | | | — | | | — | | | — | | | — | | | — | | | 12 | | | — | | | — | | | 12 | |
Dividends ($0.20 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | (24,250) | | | (24,250) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Foreign currency translation loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
Balance at December 31, 2021 | 119,935 | | | $ | 1,244 | | | — | | | $ | — | | | 4,468 | | | $ | (176,024) | | | $ | 2,135,687 | | | $ | (1) | | | $ | 317,896 | | | $ | 2,278,802 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| Three Months Ended December 31, | Six Months Ended December 31, |
| 2017 | 2016 | 2017 | 2016 |
Net income | $ | 19,769 |
| $ | 246,184 |
| $ | 80,385 |
| $ | 304,279 |
|
Net unrealized gain on marketable securities | — |
| — |
| — |
| 128 |
|
Total comprehensive income | 19,769 |
| 246,184 |
| 80,385 |
| 304,407 |
|
Less: comprehensive income attributable to non-controlling interest | (56,485 | ) | (181,173 | ) | (101,095 | ) | (230,859 | ) |
Comprehensive income attributable to stockholders | $ | (36,716 | ) | $ | 65,011 |
| $ | (20,710 | ) | $ | 73,548 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Retained Earnings / (Accumulated Deficit) | | Total Stockholders' Equity |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | |
Balance at June 30, 2020 | 71,627 | | | $ | 716 | | | 50,213 | | | $ | — | | | — | | | $ | — | | | $ | 138,547 | | | $ | — | | | $ | 139,263 | |
Balance at July 1, 2020 | 71,627 | | | 716 | | | 50,213 | | | — | | | — | | | — | | | 138,547 | | | — | | | 139,263 | |
Impact of change in accounting principle | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,228) | | | (1,228) | |
Adjusted balance at July 1, 2020 | 71,627 | | | 716 | | | 50,213 | | | — | | | — | | | — | | | 138,547 | | | (1,228) | | | 138,035 | |
Exchange of Class B common units for Class A common stock by member owners | 70 | | | 1 | | | (70) | | | — | | | — | | | — | | | 2,436 | | | — | | | 2,437 | |
Increase in additional paid-in capital related to quarterly exchange by member owners, including associated TRA revaluation | — | | | — | | | — | | | — | | | — | | | — | | | 37,319 | | | — | | | 37,319 | |
Increase in additional paid-in capital related to final exchange by member owners, including TRA termination | — | | | — | | | — | | | — | | | — | | | — | | | 517,526 | | | — | | | 517,526 | |
Issuance of Class A common stock under equity incentive plan | 241 | | | 2 | | | — | | | — | | | — | | | — | | | 642 | | | — | | | 644 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 7,229 | | | — | | | 7,229 | |
Repurchase of vested restricted units for employee tax-withholding | — | | | — | | | — | | | — | | | — | | | — | | | (3,023) | | | — | | | (3,023) | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 157,528 | | | 157,528 | |
Net income attributable to non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (11,845) | | | (11,845) | |
Adjustment of redeemable limited partners' capital to redemption amount | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (26,685) | | | (26,685) | |
Reclassification of redeemable limited partners' capital to permanent equity | — | | | — | | | — | | | — | | | — | | | — | | | 1,750,840 | | | 3,767 | | | 1,754,607 | |
Final exchange of Class B common units for Class A common stock by member owners | 50,143 | | | 502 | | | (50,143) | | | — | | | — | | | — | | | (502) | | | — | | | — | |
Early termination payments to members | — | | | — | | | — | | | — | | | — | | | — | | | (438,967) | | | — | | | (438,967) | |
Dividends ($0.19 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (23,381) | | | (23,381) | |
Balance at September 30, 2020 | 122,081 | | | 1,221 | | | — | | | — | | | — | | | — | | | 2,012,047 | | | 98,156 | | | 2,111,424 | |
Issuance of Class A common stock under equity incentive plan | 102 | | | 1 | | | — | | | — | | | — | | | — | | | 1,770 | | | — | | | 1,771 | |
Issuance of Class A common stock under employee stock purchase plan | 45 | | | — | | | — | | | — | | | — | | | — | | | 1,597 | | | — | | | 1,597 | |
Stock-based compensation expense | — | | | — | | | — | | | — | | | — | | | — | | | 7,316 | | | — | | | 7,316 | |
Repurchase of vested restricted units for employee tax-withholding | — | | | — | | | — | | | — | | | — | | | — | | | (28) | | | — | | | (28) | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 44,904 | | | 44,904 | |
Net income attributable to non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | 935 | | | (935) | | | — | |
Dividends ($0.19 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (23,374) | | | (23,374) | |
Adjustment in additional paid-in capital related to consolidated investment | — | | | — | | | — | | | — | | | — | | | — | | | 318 | | | (318) | | | — | |
Capital contributions | — | | | — | | | — | | | — | | | — | | | — | | | 1,959 | | | — | | | 1,959 | |
Non-controlling interest in consolidated investments | — | | | — | | | — | | | — | | | — | | | — | | | 3,690 | | | — | | | 3,690 | |
Balance at December 31, 2020 | 122,228 | | | $ | 1,222 | | | — | | | $ | — | | | — | | | $ | — | | | $ | 2,029,604 | | | $ | 118,433 | | | $ | 2,149,259 | |
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| | | | | | | | | | | | | | | | | |
See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
Condensed Consolidated Statement of Stockholders' Deficit
Six Months Ended December 31, 2017
(Unaudited)
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | Class B Common Stock | Treasury Stock | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders' Deficit |
| Shares | Amount | Shares | Amount | Shares | Amount |
Balance at June 30, 2017 | 51,943 |
| $ | 519 |
| 87,299 |
| $ | — |
| — |
| $ | — |
| $ | — |
| $ | (1,662,772 | ) | $ | (1,662,253 | ) |
Exchange of Class B units for Class A common stock by member owners | 4,883 |
| 50 |
| (4,883 | ) | — |
| — |
| — |
| 162,215 |
| — |
| 162,265 |
|
Redemption of limited partners | — |
| — |
| (133 | ) | — |
| — |
| — |
| — |
| — |
| — |
|
Decrease in additional paid-in capital related to quarterly exchange by member owners, including associated TRA revaluation | — |
| — |
| — |
| — |
| — |
| — |
| (8,669 | ) | — |
| (8,669 | ) |
Issuance of Class A common stock under equity incentive plan | 390 |
| 4 |
| — |
| — |
| — |
| — |
| 2,804 |
| — |
| 2,808 |
|
Issuance of Class A common stock under employee stock purchase plan | 48 |
| — |
| — |
| — |
| — |
| — |
| 1,388 |
| — |
| 1,388 |
|
Treasury stock | (2,578 | ) | — |
| — |
| — |
| 2,578 |
| (74,698 | ) | — |
| — |
| (74,698 | ) |
Stock-based compensation expense | — |
| — |
| — |
| — |
| — |
| — |
| 17,699 |
| — |
| 17,699 |
|
Repurchase of vested restricted units for employee tax-withholding | — |
| — |
| — |
| — |
| — |
| — |
| (5,743 | ) | — |
| (5,743 | ) |
Net income | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 80,385 |
| 80,385 |
|
Net income attributable to non-controlling interest in Premier LP | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (101,095 | ) | (101,095 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| — |
| — |
| — |
| — |
| — |
| (169,694 | ) | 808,034 |
| 638,340 |
|
Balance at December 31, 2017 | 54,686 |
| $ | 573 |
| 82,283 |
| $ | — |
| 2,578 |
| $ | (74,698 | ) | $ | — |
| $ | (875,448 | ) | $ | (949,573 | ) |
See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
| | | | | | |
| Six Months Ended December 31, |
| 2017 | 2016 |
Operating activities | | |
Net income | $ | 80,385 |
| $ | 304,279 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation and amortization | 61,532 |
| 48,576 |
|
Equity in net income of unconsolidated affiliates | (5,509 | ) | (14,706 | ) |
Deferred income taxes | 235,648 |
| 48,705 |
|
Stock-based compensation | 17,699 |
| 12,066 |
|
Remeasurement of tax receivable agreement liabilities | (177,174 | ) | (5,722 | ) |
Remeasurement gain attributable to acquisition of Innovatix, LLC | — |
| (204,833 | ) |
Loss on disposal of long-lived assets | 1,720 |
| 1,518 |
|
Changes in operating assets and liabilities: | | |
Accounts receivable, prepaid expenses and other current assets | (467 | ) | (11,888 | ) |
Other assets | 1,060 |
| 274 |
|
Inventories | (11,641 | ) | (31,832 | ) |
Accounts payable, accrued expenses and other current liabilities | (20,238 | ) | (4,136 | ) |
Long-term liabilities | 1,287 |
| (4,100 | ) |
Loss on FFF put and call rights | 15,607 |
| 174 |
|
Other operating activities | 6,606 |
| (11 | ) |
Net cash provided by operating activities | 206,515 |
| 138,364 |
|
Investing activities | | |
Purchases of property and equipment | (38,622 | ) | (34,325 | ) |
Proceeds from sale of marketable securities | — |
| 48,013 |
|
Acquisition of Innovatix, LLC and Essensa Ventures, LLC, net of cash acquired | — |
| (222,217 | ) |
Acquisition of Acro Pharmaceuticals, net of cash acquired | — |
| (68,745 | ) |
Investments in unconsolidated affiliates | — |
| (65,660 | ) |
Distributions received on equity investments in unconsolidated affiliates | — |
| 6,550 |
|
Other investing activities | — |
| 26 |
|
Net cash used in investing activities | (38,622 | ) | (336,358 | ) |
Financing activities | | |
Payments made on notes payable | (6,858 | ) | (1,338 | ) |
Proceeds from credit facility | 30,000 |
| 327,500 |
|
Payments on credit facility | (50,000 | ) | — |
|
Proceeds from exercise of stock options under equity incentive plan | 2,808 |
| 2,909 |
|
Proceeds from issuance of Class A common stock under stock purchase plan | 1,388 |
| 1,256 |
|
Repurchase of vested restricted units for employee tax-withholding | (5,743 | ) | (17,629 | ) |
Settlement of exchange of Class B units by member owners | — |
| (99,999 | ) |
Distributions to limited partners of Premier LP | (45,703 | ) | (44,630 | ) |
Repurchase of Class A common stock (held as treasury stock) | (70,844 | ) | — |
|
Earn-out liability payment to GNYHA Holdings | (16,662 | ) | — |
|
Net cash provided by (used in) financing activities | (161,614 | ) | 168,069 |
|
Net increase (decrease) in cash and cash equivalents | 6,279 |
| (29,925 | ) |
Cash and cash equivalents at beginning of year | 156,735 |
| 248,817 |
|
Cash and cash equivalents at end of period | $ | 163,014 |
| $ | 218,892 |
|
|
| | | | | | |
| Six Months Ended December 31, |
| 2017 | 2016 |
| | |
Supplemental schedule of non-cash investing and financing activities: | | |
Decrease in redeemable limited partners' capital for adjustment to fair value, with offsetting increases in additional paid-in-capital and accumulated deficit | $ | 638,340 |
| $ | 397,072 |
|
Reduction in redeemable limited partners' capital, with offsetting increases in common stock and additional paid-in capital related to quarterly exchanges by member owners | $ | 162,265 |
| $ | 107,213 |
|
Reduction in redeemable limited partners' capital for limited partners' distribution payable | $ | 41,148 |
| $ | 44,870 |
|
Distributions utilized to reduce subscriptions, notes, interest and accounts receivable from member owners | $ | 984 |
| $ | 1,074 |
|
Net increase in deferred tax assets related to quarterly exchanges by member owners and other adjustments | $ | 75,998 |
| $ | 77,638 |
|
Net increase in tax receivable agreement liabilities related to quarterly exchanges by member owners and other adjustments | $ | 84,667 |
| $ | 49,352 |
|
Net increase (decrease) in additional paid-in capital related to quarterly exchanges by member owners and other adjustments | $ | (8,669 | ) | $ | 28,286 |
|
Increase in treasury stock related to a forward purchase commitment as a result of applying trade date accounting when recording the repurchase of Class A common stock | $ | 3,854 |
| $ | — |
|
| | | | | | | | | | | |
| Six Months Ended December 31, |
| 2021 | | 2020 |
Operating activities | | | |
Net income | $ | 198,538 | | | $ | 202,432 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 63,205 | | | 60,031 | |
Equity in net income of unconsolidated affiliates | (13,174) | | | (10,499) | |
Deferred income taxes | 19,890 | | | (104,378) | |
Stock-based compensation | 23,788 | | | 14,545 | |
(Gain) loss on FFF call/put rights | (64,110) | | | 16,426 | |
Other | 930 | | | 323 | |
Changes in operating assets and liabilities, net of the effects of acquisitions: | | | |
Accounts receivable, inventories, prepaid expenses and other assets | 50,164 | | | (127,764) | |
Contract assets | (22,963) | | | (23,541) | |
Accounts payable, accrued expenses, deferred revenue, revenue share obligations and other liabilities | (58,741) | | | 88,602 | |
Net cash provided by operating activities | 197,527 | | | 116,177 | |
Investing activities | | | |
Purchases of property and equipment | (42,660) | | | (44,864) | |
Acquisition of businesses and equity method investments, net of cash acquired | (26,000) | | | (791) | |
Other | — | | | (1,228) | |
Net cash used in investing activities | (68,660) | | | (46,883) | |
Financing activities | | | |
Payments made on notes payable | (50,621) | | | (3,684) | |
Proceeds from credit facility | 175,000 | | | 125,000 | |
Payments on credit facility | (125,000) | | | (100,000) | |
Distributions to limited partners of Premier LP | — | | | (9,949) | |
Payments to limited partners of Premier LP related to tax receivable agreements | — | | | (24,218) | |
Cash dividends paid | (49,044) | | | (46,396) | |
Repurchase of Class A common stock (held as treasury stock) | (173,916) | | | — | |
| | | |
Proceeds from exercise of stock options | 37,267 | | | 2,416 | |
Other | 14,468 | | | (2,754) | |
Net cash used in financing activities | (171,846) | | | (59,585) | |
Effect of exchange rate changes on cash flows | (1) | | | — | |
Net increase in cash and cash equivalents | (42,980) | | | 9,709 | |
Cash and cash equivalents at beginning of period | 129,141 | | | 99,304 | |
Cash and cash equivalents at end of period | $ | 86,161 | | | $ | 109,013 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Organization
Premier, Inc. ("Premier"(“Premier” or the "Company"“Company”) is a publicly-held,publicly held, for-profit Delaware corporation owned by hospitals, health systems and other healthcare organizations (such owners of Premier are referred to herein as "member owners") located in the United StatesStates. The Company is a holding company with no material business operations of its own. Following an internal legal entity reorganization of the Company’s corporate subsidiaries in December 2021 to simplify the Company’s subsidiary reporting structure (the “Subsidiary Reorganization”), the Company’s primary asset is its equity interest in its wholly owned subsidiary Premier Healthcare Solutions, Inc., a Delaware corporation (“PHSI”). The Company conducts substantially all of its business operations through PHSI and by public stockholders.its other consolidated subsidiaries, including Premier LP. The Company, together with its subsidiaries and affiliates, is a leading healthcare performance improvement company that unites hospitals, health systems, physicians and other healthcare providers to improve and innovate in the clinical, financial and operational areas of their businesses to meet the demands of a rapidly evolving healthcare industry. The Company also provides services to other businesses including food service, schools and universities.
The Company'sCompany’s business model and solutions are designed to provide its members and other customers access to scale efficiencies, spread the cost of their development, provide actionable intelligence derived from anonymized data in the Company'sCompany’s enterprise data warehouse, mitigate the risk of innovation and disseminate best practices that willto help the Company's member organizationsCompany’s members and other customers succeed in their transformation to higher quality and more cost-effective healthcare.
The Company, together with its subsidiaries and affiliates, delivers its integrated platform of solutions through two2 business segments: Supply Chain Services and Performance Services. See Note 1615 - Segments for further information related to the Company'sCompany’s reportable business segments. The Supply Chain Services segment includes one of the largest healthcare group purchasing organization ("GPO"(“GPO”) programs in the United States, and integrated pharmacysupply chain co-management and direct sourcing activities. The Performance Services segment includes oneconsists of 3 sub-brands: PINC AITM, the Company’s technology and services platform with offerings that help optimize performance in three main areas – clinical intelligence, margin improvement and value-based care – using advanced analytics to identify improvement opportunities, consulting services for clinical and operational design, and workflow solutions to hardwire sustainable change in the provider, life sciences and payer markets; Contigo Health®, the Company’s direct-to-employer business which provides third party administrator services and management of health benefit programs; and RemitraTM, the Company’s digital invoicing and payables business.
December 2021 Subsidiary Reorganization
On December 1, 2021, the Company completed the Subsidiary Reorganization, an internal legal entity reorganization of the largest informatics and advisory services businesses inCompany’s corporate subsidiaries for the United States focused on healthcare providers. The Company's software as a service ("SaaS") informatics products utilizepurpose of simplifying the Company's comprehensive data setCompany’s subsidiary reporting structure. Pursuant to provide actionable intelligence to its members, enabling them to benchmark, analyze and identify areas of improvement across the three main categories of cost management, quality and safety, and population health management. The Performance Services segment also includes the Company's technology-enabled performance improvement collaboratives, advisory services, government services and insurance management services.
The Company, through its wholly-owned subsidiary,Subsidiary Reorganization, (i) Premier Services, LLC ("(“Prior Premier GP"GP”), held an approximate 40% merged with and 37% general partnerinto Premier, with Premier being the surviving entity; (ii) Premier LP distributed 99% of the equity interest in our main operating company,of PHSI to Premier Healthcare Alliance, L.P. ("on a tax-free basis; (iii) Premier LP"LP distributed 1% of the equity interest of PHSI to Premier Services II, LLC (“Premier Services”), at December 31, 2017; (iv) Premier Services distributed the 1% of the equity interest of PHSI to Premier; and June 30, 2017, respectively. In addition to their ownership(v) Premier contributed (a) its membership interest in Premier our member owners held an approximate 60%Services and 63% limited partner(b) its partnership interest in Premier LP at December 31, 2017 and June 30, 2017, respectively.
Basis of Presentation and Consolidation
Basis of Presentation
The member owners' interest in Premier LP is reflected as redeemable limited partners' capital in the Company's accompanying Condensed Consolidated Balance Sheets, and the limited partners' proportionate share of income in Premier LP is reflected within net income attributable to non-controlling interest in Premier LP in the Company's accompanying Condensed Consolidated Statements of Income and within comprehensive income attributable to non-controlling interest in Premier LP in the Company's accompanying Condensed Consolidated Statements of Comprehensive Income.
At December 31, 2017 and June 30, 2017, the member owners owned approximately 60% and 63%, respectively,PHSI. As a result of the Company's combined Class A and Class B common stock through their ownership of Class B common stock. DuringSubsidiary Reorganization, (i) the six months ended December 31, 2017, the member owners exchanged 4.9 million Class B common units and associated Class B common shares for an equal number of Class A common shares pursuant to an exchange agreement (the "Exchange Agreement") entered into by the member owners in connection with the completion of our initial public offering on October 1, 2013. The Exchange Agreement provides each member owner the cumulative right to exchange up to one-seventhCompany conducts substantially all of its initial allocationbusiness operations through PHSI and PHSI’s direct and indirect subsidiaries and (ii) PHSI became the sole general partner of Class B common units, as well as any additional Class B common units purchased by such member owner pursuant to certain rights of first refusal, for shares of Class A common stock (on a one-for-one basis subject to customary adjustments for subdivisions or combinations by split, reverse split, distribution, reclassification, recapitalization or otherwise), cash or a combination of both, the form of consideration to be at the discretion of the Company's independent Audit and Compliance Committee of the Board of Directors (the "Audit and Compliance Committee"). In connection with Class B common units exchanged for Class A common shares during the six months ended December 31, 2017, approximately 4.9 million Class B common units were contributed to Premier LP and converted to Class A common units, which remain outstanding.
Refer to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2017 (the "2017 Annual Report") filed with the Securities and Exchange Commission ("SEC") on August 23, 2017 for further discussion of the Exchange Agreement. At December 31, 2017 and June 30, 2017, the public investors, which may include member owners that have received shares of
Class A common stock in connection with previous exchanges of their Class B common units and associated Class B common shares for an equal number of Class A common shares, owned approximately 40% and 37%, respectively, of the Company's outstanding common stock through their ownership of Class A common stock.LP.
Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC and in accordance with U.S. generally accepted accounting principles ("GAAP"(“GAAP”) for interim financial information and pursuant toinclude the rulesassets, liabilities, revenues and regulationsexpenses of all majority-owned subsidiaries over which the SEC.Company exercised control and when applicable, entities for which the Company had a controlling financial interest or was the primary beneficiary. All intercompany transactions have been eliminated upon consolidation. Accordingly, certain information and disclosures normally included in annual financial statements have been condensed or omitted. The accompanying condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, includingconsisting of normal recurring adjustments.adjustments unless otherwise disclosed. The Company believes that the disclosures are adequate to make the information presented not misleading and should be read in conjunction with the audited consolidated financial statements and related footnotes contained in the 20172021 Annual Report.
We have reclassified $5.7 million from selling, general and administrative expenses to the remeasurement of tax receivable agreement liabilities
Supplementary Cash Flows Information
The following table presents supplementary cash flows information for the six months ended December 31, 2016 within the Condensed Consolidated Statements of Income in order to conform with the current period presentation.
Variable Interest Entities
Premier LP is a variable interest entity ("VIE") as the limited partners do not have the ability to exercise a substantive removal right with respect to the general partner. The Company does not hold a majority interest but, through Premier GP, has the exclusive power2021 and authority to manage the business and affairs of Premier LP, to make all decisions with respect to driving the economic performance of Premier LP, and has both an obligation to absorb losses and a right to receive benefits. As such, the Company is the primary beneficiary of the VIE and consolidates the operations of Premier LP under the Variable Interest Model.
The assets and liabilities of Premier LP at December 31, 2017 and June 30, 2017 consisted of the following2020 (in thousands):
|
| | | | | | |
| December 31, 2017 | June 30, 2017 |
Assets | | |
Current | $ | 378,412 |
| $ | 385,477 |
|
Noncurrent | 1,593,777 |
| 1,616,539 |
|
Total assets of Premier LP | $ | 1,972,189 |
| $ | 2,002,016 |
|
| | |
Liabilities | | |
Current | $ | 493,462 |
| $ | 560,582 |
|
Noncurrent | 131,154 |
| 134,635 |
|
Total liabilities of Premier LP | $ | 624,616 |
| $ | 695,217 |
|
Net income attributable to Premier LP during the three and six months ended December 31, 2017 and 2016 was as follows (in thousands):
|
| | | | | | | | | | | | |
| Three Months Ended December 31, | Six Months Ended December 31, |
| 2017 | 2016 | 2017 | 2016 |
Premier LP net income | $ | 94,838 |
| $ | 281,629 |
| $ | 167,129 |
| $ | 355,974 |
|
Premier LP's cash flows for the six months ended December 31, 2017 and 2016 consisted of the following (in thousands):
|
| | | | | | |
| Six Months Ended December 31, |
| 2017 | 2016 |
Net cash provided by (used in): | | |
Operating activities | $ | 207,514 |
| $ | 121,731 |
|
Investing activities | (38,622 | ) | (336,358 | ) |
Financing activities | (180,600 | ) | 159,533 |
|
Net decrease in cash and cash equivalents | (11,708 | ) | (55,094 | ) |
Cash and cash equivalents at beginning of year | 133,451 |
| 210,048 |
|
Cash and cash equivalents at end of period | $ | 121,743 |
| $ | 154,954 |
|
| | | | | | | | | | | |
| Six Months Ended December 31, |
| 2021 | | 2020 |
Supplementary non-cash investing and financing activities: | | | |
Increase in treasury stock related to a payable as a result of applying trade date accounting when recording the repurchase of Class A common stock | $ | 2,108 | | | $ | — | |
Non-cash additions to property and equipment | 8 | | | — | |
Accrued dividend equivalents | 244 | | | 363 | |
Increase in redeemable limited partners' capital for adjustment to fair value, with offsetting decrease in stockholders' equity | — | | | 26,685 | |
Decrease in redeemable limited partners' capital, with offsetting increase in stockholders' equity related to quarterly exchanges by member owners | — | | | (2,437) | |
Net increase in deferred tax assets related to departures and quarterly exchanges by member owners and other adjustments | — | | | 331 | |
Net increase in deferred tax assets related to final exchange by member owners | — | | | 284,852 | |
Reclassification of redeemable limited partners' capital to additional paid in capital | — | | | 1,754,607 | |
Decrease in additional paid-in capital related to notes payable to former limited partners, net of discounts | — | | | 438,967 | |
Net increase in additional paid-in capital related to departures and quarterly exchanges by member owners and other adjustments | — | | | 37,319 | |
Increase in additional paid-in capital related to final exchange by member owners | — | | | 517,526 | |
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company'sCompany’s condensed consolidated financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Significant estimates are evaluated on an ongoing basis, including estimates for net administrative fees revenue, other services and support revenue, contract assets, deferred revenue, contract costs, allowances for doubtful accounts,credit losses, useful lives of property and equipment, stock-based compensation, payables under tax receivable agreements ("TRAs"), deferred tax balances including valuation allowances on deferred tax assets, uncertain tax positions, values of investments not publicly traded, deferred revenue,projected future cash flows associated withused in the evaluation of asset impairments, values of put and call rights, values of earn-out liabilities and the allocation of purchase prices. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Given the Company's use of estimates referenced above, it is important to highlight that on December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("TCJA"). The TCJA includes significant changes to the U.S. corporate income tax system, specifically reducing the U.S. federal corporate income tax rate from 35% to 21%. As changes under the TCJA are broad and complex, the Company continues to interpret the breadth of its immediate and long-term impacts. The Company notes that concurrent with the enactment of the TCJA, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the TCJA.
SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting required under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional amount on its financial statements. If a company cannot determine a provisional estimate to be included on its financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately prior to the enactment of the TCJA. With this in mind, the Company has prescribed such provisional relief via SAB 118 by incorporating various estimates regarding timing and determination of temporary difference recognition when calculating components of its deferred tax balances. While the Company is able to provide reasonable estimates of the impacts related to the TCJA, the final impact may differ from these estimates, due to, among other things, changes in interpretations, assumptions, additional guidance that may be released by the I.R.S. and other actions that we may take that are yet to be determined.
(2) SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company'sCompany’s significant accounting policies as described in the 20172021 Annual Report.
Recently Adopted Accounting Standards
In July 2015, the FASB issued Accounting Standards Update ("ASU") 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires entities to measure most inventory "at the lower of cost and net realizable value," thereby simplifying the guidance under which an entity must measure inventory at the lower of cost or market. This guidance does not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. The Company adopted this standard effective July 1, 2017 using the prospective approach. The implementation of this ASU did not have a material effect on the Company's condensed consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, whichclarifies when changes to the terms or conditions of a share-based payment award must be accounted forReport, except as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. The Company adopted this standard effective October 1, 2017 using the prospective approach. The implementation of this ASU did not have a material effect on the Company's condensed consolidated financial statements.described below.
Recently Issued Accounting Standards Not Yet Adopted
In January 2017,October 2021, the FASB issued ASU 2017-04, Intangibles - GoodwillNo. 2021-08 Business Combinations (Topic 805): Accounting for Contract Assets and Other (Topic 350): Simplifying the Test for Goodwill ImpairmentContract Liabilities from Contracts with Customers, (“ASU 2021-08”), which eliminates Step 2requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from the goodwill impairment test. The guidance requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unitContracts with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. In addition, the guidance eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The new standardCustomers. ASU 2021-08 will be effective for the Company for the fiscal year beginning July 1, 2020.2023. Early adoption is permitted forincluding adoption in interim and annual goodwill impairment tests performed after January 1, 2017.periods. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which removes the prohibition in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The guidance is intended to reduce the complexity of GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The ASU amendments add or clarify guidance on eight cash flow issues. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations of accounting for leasing arrangements. This guidance establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Entities will be required to recognize and measure leases as of the earliest period presented using a modified retrospective approach. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which is intended to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted for certain amendments. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance. The new standard requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new standard allows for either full retrospective or modified retrospective adoption.
The FASB subsequently issued an amendment in ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, in August 2015 to defer the effective date of the new standard for all entities by one year. The new standard, as amended, will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption as of the original effective date for public entities will be permitted.
The FASB issued another amendment in ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, in March 2016 related to a third party providing goods or services to a customer. When another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself or to arrange for the good or service to be provided by a third party. If the entity provides the specific good or service itself, the entity acts as a principal. If an entity arranges for the good or service to be provided by a third party, the entity acts as an agent. The standard requires the principal to recognize revenue for the gross amount and the agent to recognize revenue for the amount of any fee or commission for which it expects to be entitled in exchange for arranging for the specified good or service to be provided. The new standard will be effective with ASU 2014-09.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which amends specific aspects of ASU 2014-09, including how to identify performance obligations and guidance related to licensing implementation. This amendment provides guidance on determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property or a right to access the entity's intellectual property. The amendment will be effective with ASU 2014-09.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies specific aspects of ASU 2014-09, clarifying how to identify performance obligations and guidance related to its promise in granting a license of intellectual property. This new standard provides guidance to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised good or service is separately identifiable and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost. The new standard also clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property to help determine whether it recognizes revenue over time or at a point in time and addresses how entities should consider license renewals and restrictions. The new standard will be effective with ASU 2014-09.
In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606: Revenue from Contracts with Customers, which clarifies specific aspects of ASU 2014-09, including allowing entities not to make quantitative disclosures about remaining performance obligations in certain cases and requiring entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. The new standard also makes twelve other technical corrections and modifications to ASU 2014-09. The new standard will be effective with ASU 2014-09.
The new revenue recognition standards related to Topic 606 discussed above, as amended, will be effective for the Company for the fiscal year beginning July 1, 2018, at which time we plan to adopt the standard using the modified retrospective approach. To-date, the Company has identified the following preliminary impact of adopting the new standards on various revenue streams across its operating segments.
Within the Supply Chain Services segment, the Company is continuing to assess the impact of adopting the new standards on its various revenue streams. Under the new standard, the Company expects to recognize administrative fee revenue upon the occurrence of a sale by suppliers to the Company’s members. This differs from the current treatment in which the Company recognizes revenue in the period that the respective supplier reports member purchasing data, which is usually a month or a quarter in arrears of the actual member purchase activity. This change is expected to result in the Company recognizing revenue sooner in the revenue cycle than under the Company's current revenue recognition policy and the creation of a contract asset associated with this shift in revenue recognition timing. The Company is continuing to assess the impact of these changes on the financial statements and disclosures.
Within the Performance Services segment, the Company is continuing to assess the impact of adopting the new standards on its various revenue streams. Under the new standard, the Company will be required to capitalize the incremental costs of obtaining a contract, which the Company has preliminarily identified as sales commissions and costs associated with implementing our SaaS informatics tools, and to amortize these costs in a manner that reflects the transfer of services to the customer. These costs are expensed as incurred under the Company's current revenue recognition policy. The Company is continuing to assess the impact of these changes on the financial statements and disclosures.
Additionally, the Company is evaluating the potential impact of adopting the new standards on its business processes, systems and controls necessary to support revenue recognition and disclosure requirements under the new standard.
(3) BUSINESS ACQUISITIONS
Acquisition of Innovatix and EssensaInvoice Delivery Services, LP Assets
Innovatix, LLC ("Innovatix") and Essensa Ventures, LLC ("Essensa") are GPOs focused on serving alternate site healthcare providers and other organizations throughout the United States. Prior to December 2, 2016,On March 1, 2021, the Company acquired, through its consolidatedindirect, wholly-owned subsidiary Premier Supply Chain Improvement ("PSCI"), held 50%IDS, LLC, substantially all the assets and assumed certain liabilities of the membership interests in Innovatix (see Note 4 - Investments). On December 2, 2016, the Company, through PSCI, acquired from GNYHA Holdings, LLC ("GNYHA Holdings"Invoice Delivery Services, LP (“IDS”) (see Note 14 - Related Party Transactions) the remaining 50% ownership interestfor an adjusted purchase price of Innovatix and 100% of the ownership interest in Essensa for $325.0$80.7 million, subject to certain adjustments, of which $227.5$80.0 million in cash was paid at closing and $97.5 millionwith borrowings under the Company’s Credit Facility (as defined in cash was paid on January 10, 2017. As a result of certain purchase price adjustments provided for in the purchase agreement, the adjusted purchase price was $336.0 million.
In connection with the acquisition, the Company utilized its credit facility dated June 24, 2014, as amended on June 4, 2015 (the "Credit Facility") to fund the $325.0 million purchase price (see Note 8 - Debt), the outstanding portion of which is reflected within current portion of long-term debt in the Condensed Consolidated Balance Sheets at December 31, 2017. The Company incurred transaction costs related to this acquisition of $1.6 millionDebt and $4.4 million during the three months ended December 31, 2017 and 2016, respectively, and $3.4 million and $4.7 million during the six months ended December 31, 2017 and 2016, respectively. These transaction costs were included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.
Notes Payable).
The Company has accounted for the Innovatix and Essensa acquisition as a business combination whereby the purchase price was allocated to tangible and intangible assets acquired (see Note 6 - Intangible Assets, Net) and liabilities assumed based on their fair values. The acquisition resulted in the recognition of approximately $334.7 million of goodwill (see Note 7 - Goodwill) attributable to the anticipated profitability of Innovatix and Essensa. The acquisition was considered an asset acquisition for tax purposes, and accordingly, the Company expects the goodwill to be deductible for tax purposes.
The fair values assigned to the net assets acquired and the liabilities assumed as of the acquisition date were as follows (in thousands):
|
| | | |
| Acquisition Date Fair Value |
Cash paid at closing | $ | 227,500 |
|
Cash paid on January 10, 2017 | 97,500 |
|
Purchase price | 325,000 |
|
Additional cash paid at closing | 10,984 |
|
Adjusted purchase price | 335,984 |
|
Earn-out liability | 16,662 |
|
Receivable from GNYHA Holdings, LLC | (3,000 | ) |
Total consideration paid | 349,646 |
|
Cash acquired | (16,267 | ) |
Net consideration | 333,379 |
|
50% ownership interest in Innovatix | 218,356 |
|
Payable to Innovatix and Essensa | (5,765 | ) |
Enterprise value | 545,970 |
|
| |
Accounts receivable | 21,242 |
|
Prepaid expenses and other current assets | 686 |
|
Fixed assets, net | 3,476 |
|
Intangible assets | 241,494 |
|
Total assets acquired | 266,898 |
|
Accrued expenses | 5,264 |
|
Revenue share obligations | 7,011 |
|
Other current liabilities | 694 |
|
Total liabilities assumed | 12,969 |
|
Deferred tax liability | 42,636 |
|
Goodwill | $ | 334,677 |
|
The acquisition provides the seller an earn-out opportunity of up to $43.0 million based on Innovatix's and Essensa's Adjusted EBITDA (as defined in the purchase agreement) for the fiscal year ending June 30, 2017, which is still in the process of being finalized. The Company paid the seller $18.5 million of the earn-out opportunity during the current period. As of December 31, 2017, the fair value of the earn-out liability was $2.6 million (see Note 5 - Fair Value Measurements).
Certain executive officers of Innovatix and Essensa executed employment agreements that became effective upon the closing of the acquisition. The purchase agreement provides that in the event that Innovatix's and Essensa's Adjusted EBITDA exceeds agreed upon amounts, certain of those executive officers are entitled to receive a retention bonus payment of up to $3.0 million in the aggregate, for which the Company will be reimbursed by GNYHA Holdings, LLC, of which $1.5 million was paid and reimbursed during the current period.
The Company's 50% ownership interest in Innovatix prior to the acquisition was accounted for under the equity method and had a carrying value of $13.3 million (see Note 4 - Investments). In connection with the acquisition, the Company's investment was remeasured under business combination accounting rules to a fair value of $218.4 million, resulting in a one-time gain of $205.1 million which was recorded as other income.
Pro forma results of operations for the acquisition have not been presented because the effects on revenue and net income were not material to our historic consolidated financial statements. The Company reports Innovatix and Essensa as part of its Supply Chain Services segment.
Acquisition of Acro Pharmaceuticals
Acro Pharmaceutical Services LLC ("Acro") and Community Pharmacy Services, LLC (collectively with Acro, "Acro Pharmaceuticals") are specialty pharmacy businesses that provide customized healthcare management solutions to members. On August 23, 2016, the Company, through its consolidated subsidiary, NS3 Health, LLC, acquired 100% of the membership interests of Acro Pharmaceuticals for $75.0 million in cash. As a result of certain purchase price adjustments provided for in the purchase agreement, the adjusted purchase price was $62.9 million. The acquisition was funded with available cash on hand.
The Company has accounted for the Acro PharmaceuticalsIDS acquisition as a business combination whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their fair values. The Acro Pharmaceuticalstotal fair value assigned to intangible assets acquired was $22.4 million, consisting primarily of developed technology.
The IDS acquisition resulted in the recognition of approximately $33.9$57.7 million of goodwill (see Note 7 - Goodwill) attributablebased on the purchase price paid in the acquisition compared to the anticipated profitabilityfair value of Acro Pharmaceuticals.the tangible assets acquired. The Acro PharmaceuticalsIDS acquisition was considered an asset acquisition for income tax purposes and accordingly,purposes. Accordingly, the Company expects thetax goodwill to be deductible for tax purposes. The initial purchase price allocation for the IDS acquisition is preliminary and subject to changes in the valuation of the assets acquired and liabilities assumed. IDS is being integrated within Premier under the brand name RemitraTM and is reported as part of the Performance Services segment.
Pro forma results of operations for the acquisition have not been presented because the effects on revenue and net income were not material to ourthe Company’s historic consolidated financial statements. The Company reports Acro Pharmaceuticals as part of its Supply Chain Services segment.
(4) INVESTMENTS
Investments in Unconsolidated Affiliates
The Company'sCompany’s investments in unconsolidated affiliates consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying Value | | Equity in Net Income |
| | | | | Three Months Ended | | Six Months Ended |
| | | | | December 31, | | December 31, |
| December 31, 2021 | | June 30, 2021 | | 2021 | | 2020 | | 2021 | | 2020 |
FFF | $ | 129,947 | | | $ | 120,548 | | | $ | 3,454 | | | $ | 3,007 | | | $ | 9,399 | | | $ | 7,581 | |
Exela | 27,003 | | | — | | | 1,003 | | | — | | | 1,003 | | | — | |
Prestige | 16,815 | | | 14,478 | | | 1,579 | | | 1,594 | | | 2,337 | | | 2,646 | |
Other investments | 18,633 | | | 18,198 | | | 80 | | | (29) | | | 435 | | | 272 | |
Total investments | $ | 192,398 | | | $ | 153,224 | | | $ | 6,116 | | | $ | 4,572 | | | $ | 13,174 | | | $ | 10,499 | |
|
| | | | | | | | | | | | | | | | | | | |
| Carrying Value | | Equity in Net Income (Loss) |
| | | | Three Months Ended December 31, | Six Months Ended December 31, |
| December 31, 2017 | June 30, 2017 | | 2017 | 2016 | 2017 | 2016 |
FFF | $ | 91,125 |
| $ | 85,520 |
| | $ | 1,268 |
| $ | 1,119 |
| $ | 5,605 |
| $ | 4,177 |
|
Bloodbuy | 2,001 |
| 2,066 |
| | (31 | ) | (34 | ) | (65 | ) | (52 | ) |
PharmaPoint | 4,074 |
| 4,232 |
| | (107 | ) | (85 | ) | (158 | ) | (162 | ) |
Innovatix | — |
| — |
| | — |
| 4,127 |
| — |
| 10,743 |
|
Other investments | 1,188 |
| 1,061 |
| | 127 |
| — |
| 127 |
| — |
|
Total investments | $ | 98,388 |
| $ | 92,879 |
| | $ | 1,257 |
| $ | 5,127 |
| $ | 5,509 |
| $ | 14,706 |
|
On July 26, 2016, theThe Company, through Premier Supply Chain Improvement, Inc. (“PSCI”), held a 49% interest in FFF Enterprises, Inc. (“FFF”) through its consolidated subsidiary, PSCI, acquired 49%ownership of the issued and outstanding stock of FFF Enterprises, Inc. ("FFF") for $65.7 million in cash plus considerationat December 31, 2021 and June 30, 2021. On July 29, 2021, the FFF shareholders’ agreement was amended resulting in the formtermination of the FFF put and call rights. Theright, which had previously provided the majority shareholder of FFF a right to require the Company recorded the initial investmentto purchase such shareholder’s interest in FFF, on an all or nothing basis, on or after April 15, 2023 (“FFF Put Right”). The termination of the FFF Put Right resulted in the derecognition of the FFF Put Right liability and the recognition of a corresponding non-cash gain of $64.1 million in the accompanying Condensed Consolidated Balance Sheets at $81.1 million,Statements of which $65.7 million was in cashIncome and $15.4 million was consideration in the form of the initial net fair value of the FFF put and call rightsComprehensive Income (see Note 5 - Fair Value Measurements for additional information related to the fair valuesinformation).
The Company, through its consolidated subsidiary, ExPre Holdings, LLC (“ExPre”), held an approximate 6% interest in Exela Holdings, Inc. (“Exela”), through its ownership of Exela Class A common stock at December 31, 2021. The Company owns approximately 15% of the FFF put and call rights). membership interest of ExPre, with the remainder of the membership interests held by 11 member health systems or their affiliates.
The Company, through its consolidated subsidiary, PRAM Holdings, LLC (“PRAM”), held an approximate 20% interest in Prestige Ameritech Ltd. (“Prestige”) through its ownership of Prestige limited partnership units at December 31, 2021. The Company owns approximately 26% of the membership interest of PRAM, with the remainder of the membership interests held by 16 member health systems or their affiliates.
The Company accounts for its investmentinvestments in FFF, Exela and Prestige using the equity method of accounting and includes theeach investment as part of the Supply Chain Services segment.Segment.
The Company, through its consolidated subsidiary, PSCI, held a 15% ownership interest in BloodSolutions, LLC ("Bloodbuy") through its 5.3 million units of Class B Membership Interests at December 31, 2017 and June 30, 2017. The Company accounts for its investment in Bloodbuy using the equity method of accounting as the Company has rights to appoint a Board member, and includes the investment as part of the Supply Chain Services segment.The Company, through its consolidated subsidiary, PSCI, held a 28% ownership interest in PharmaPoint, LLC ("PharmaPoint") through its 5.0 million units of Class B Membership Interests at December 31, 2017 and June 30, 2017. The Company accounts for its investment in PharmaPoint using the equity method of accounting and includes the investment as part of the Supply Chain Services segment.
The Company, through its consolidated subsidiary, PSCI, held 50% of the membership interests in Innovatix until December 2, 2016, at which time it acquired the remaining 50% membership interests (see Note 3 - Business Acquisitions and Note 14 - Related Party Transactions). Prior to the acquisition, the Company accounted for its investment in Innovatix using the equity method of accounting and included the investment as part of the Supply Chain Services segment.
Marketable Securities
The Company has historically invested its excess cash in commercial paper, U.S. government debt securities, corporate debt securities and other securities with maturities generally ranging from three months to five years from the date of purchase. The Company uses the specific-identification method to determine the cost of securities sold. At December 31, 2017 and June 30, 2017, the Company had no marketable securities other than those included in deferred compensation plan assets (see Note 5 - Fair Value Measurements).
(5) FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The following table provides a summary ofrepresents the Company'sCompany’s financial assets and liabilities, which are measured at fair value on a recurring basis (in thousands):
|
| | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
December 31, 2017 | | | | |
Cash equivalents | $ | 28,390 |
| $ | 28,390 |
| $ | — |
| $ | — |
|
FFF call right | 2,108 |
| — |
| — |
| 2,108 |
|
Deferred compensation plan assets | 46,670 |
| 46,670 |
| — |
| — |
|
Total assets | $ | 77,168 |
| $ | 75,060 |
| $ | — |
| $ | 2,108 |
|
Earn-out liabilities | $ | 2,792 |
| $ | — |
| $ | — |
| $ | 2,792 |
|
FFF put right | 37,110 |
| — |
| — |
| 37,110 |
|
Total liabilities | $ | 39,902 |
| $ | — |
| $ | — |
| $ | 39,902 |
|
| | | | |
June 30, 2017 | | | | |
Cash equivalents | $ | 22,218 |
| $ | 22,218 |
| $ | — |
| $ | — |
|
FFF call right | 4,655 |
| — |
| — |
| 4,655 |
|
Deferred compensation plan assets | 47,202 |
| 47,202 |
| — |
| — |
|
Total assets | $ | 74,075 |
| $ | 69,420 |
| $ | — |
| $ | 4,655 |
|
Earn-out liabilities | $ | 21,310 |
| $ | — |
| $ | — |
| $ | 21,310 |
|
FFF put right | 24,050 |
| — |
| — |
| 24,050 |
|
Total liabilities | $ | 45,360 |
| $ | — |
| $ | — |
| $ | 45,360 |
|
Cash equivalents were included in cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets (see Note 4 - Investments). | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value of Financial Assets and Liabilities | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
December 31, 2021 | | | | | | | |
Cash equivalents | $ | 75 | | | $ | 75 | | | $ | — | | | $ | — | |
Deferred compensation plan assets | 63,395 | | | 63,395 | | | — | | | — | |
Total assets | 63,470 | | | 63,470 | | | — | | | — | |
| | | | | | | |
Earn-out liabilities | 24,139 | | | — | | | — | | | 24,139 | |
| | | | | | | |
Total liabilities | $ | 24,139 | | | $ | — | | | $ | — | | | $ | 24,139 | |
| | | | | | | |
June 30, 2021 | | | | | | | |
Cash equivalents | $ | 75 | | | $ | 75 | | | $ | — | | | $ | — | |
Deferred compensation plan assets | 65,051 | | | 65,051 | | | — | | | — | |
Total assets | 65,126 | | | 65,126 | | | — | | | — | |
| | | | | | | |
Earn-out liabilities | 24,249 | | | — | | | — | | | 24,249 | |
FFF put right | 64,110 | | | — | | | — | | | 64,110 | |
Total liabilities | $ | 88,359 | | | $ | — | | | $ | — | | | $ | 88,359 | |
Deferred compensation plan assets consisted of highly liquid mutual fund investments, which were classified as Level 1. The current portion of deferred compensation plan assets ($6.2 million and $5.5 million at December 31, 2021 and June 30, 2021, respectively) was included in prepaid expenses and other current assets ($3.9 million and $5.7 million at December 31, 2017 and June 30, 2017, respectively) in the accompanying Condensed Consolidated Balance Sheets.
Financial Instruments Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
Earn-out liabilitiesFFF Put and Call Rights
Earn-out liabilities were incurred in connection with acquisitions of Healthcare Insights, LLC (acquired onOn July 31, 2015), Inflow Health, LLC (acquired on October 1, 2015) and Innovatix and Essensa (acquired on December 2, 2016) (see Note 3 - Business Acquisitions). At December 31, 2017 and June 30, 2017,29, 2021, the earn-out liabilities were classified within Level 3 of the fair value
hierarchy. The fair values of the earn-out liabilities were determined based on estimated future earnings and the probability of achieving them. The current portion of the earn-out liabilities was $2.6 million and $21.1 million at December 31, 2017 and June 30, 2017, respectively, and was included in other liabilities, current in the accompanying Condensed Consolidated Balance Sheets. The decrease in the current portion of the earn-out liabilities is attributable to an $18.5 million earn-out payment to GNYHA Holdings that occurred during the current period. The long-term portion of the earn-out liabilities was $0.2 million at December 31, 2017 and June 30, 2017, and was included in other liabilities, non-current in the accompanying Condensed Consolidated Balance Sheets. Changes in the fair values of the earn-out liabilities were recorded within selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.
FFF put and call rights
Pursuant to a shareholders' agreement entered into in connection with the Company's equity investment in FFF (see Note 4 - Investments), which shareholders'shareholders’ agreement was amended resulting in the termination of the FFF Put Right and restated November 22, 2017,the derecognition of the FFF Put Right liability.
In the event of a Key Man Event (generally defined in the FFF shareholders’ agreement as the resignation, termination for cause, death or disability of the majority shareholder), the Company has a call right that requires the majority shareholder of FFF holds a put right that provides such shareholder (i) the right to require the Company to purchase up to 50% of its interest in FFF, which is exercisable beginning on the fourth anniversary of the investment closing date, July 26, 2020, and (ii) requires the Company to purchase all or a portion ofsell its remaining interest in FFF on orto the Company, and is exercisable at any time within 180 calendar days after the date of a Key Man Event (the “Call Right”, together with the FFF Put Right, the “Put and Call Rights”). As of December 31, 2020. Any such required purchases are to2021 and June 30, 2021, the Call Right had zero value. In the event that the Call Right is exercised, the purchase price for the additional interest in FFF will be made at a per share price equal to FFF'sFFF’s earnings before interest, taxes, depreciation and amortization ("EBITDA"(“FFF EBITDA”) over the twelve calendar months prior to the purchase date multiplied by a market adjusted multiple, adjusted for any outstanding debt and cash and cash equivalents, ("divided by the number of shares of FFF common stock then outstanding (“Equity Value per Share"Share”). In addition,
At June 30, 2021, the amended and restated shareholders' agreement provides the Company with a call right requiring the majority shareholder to sell its remaining interest in FFF to the Company, which is exercisable at any time within the later of 180 calendar days after the date of a Key Man Event (generally defined in the shareholders' agreement as the resignation, termination for cause, death or disabilityfair values of the majority shareholder) or 30 calendar days after December 31, 2020. In the event that the FFF put or call rights are exercised, the purchase price for the additional interestPut and Call Rights were determined using a Monte Carlo simulation in FFF will be at a per share price equal to the Equity Value per Share.
The fair value of the FFF put and call rights were determinedrisk-neutral framework based on the Equity Value per Share calculation using unobservable inputs, which included the estimated FFF putPut and call rights'Call Rights expiration dates, the forecast of FFF'sFFF’s EBITDA and enterprise value over the option period, forecasted movements in the overall market and the likelihood of a Key Man Event. Significant changes toFFF’s enterprise value over the Equity Value per Shareoption period was valued utilizing expected annual FFF EBITDA and revenue growth rates, among other assumptions. The resulting from changesFFF enterprise value was an assumption utilized in the unobservable inputs could have a significant impact on the fair valuesvaluation of the FFF putPut and call rights.Call Rights.
The Company utilized the following assumptions to estimate the fair value of the Put and Call Rights at June 30, 2021:
| | | | | |
| June 30, 2021 |
Annual FFF EBITDA growth rate | 2.5-10.8% |
Annual revenue growth rate | 2.5-6.3% |
Correlation | 80.0 | % |
Weighted average cost of capital | 14.0 | % |
Asset volatility | 30.0 | % |
Credit spread | 0.8 | % |
The significant assumptions using the Monte Carlo simulation approach for valuation of the Put and Call Rights are:
(i)Annual EBITDA Growth Rate: The forecasted EBITDA growth range over six years;
(ii)Annual Revenue Growth Rate: The forecasted Revenue growth range over six years;
(iii)Correlation: The estimated correlation between future Business Enterprise Value and EBITDA of FFF;
(iv)Weighted Average Cost of Capital: The expected rate paid to security holders to finance debt and equity;
(v)Asset volatility: Based on the asset volatility of guideline public companies in the healthcare industry; and
(vi)Credit Spread: Based on term-matched BBB yield curve.
At June 30, 2021, the Company recorded the FFF putPut and call rightsCall Rights within long-term other liabilities and long-term other assets, respectively, within the accompanying Condensed Consolidated Balance Sheets. Net changes in the fair valuevalues of the Put and Call Rights, including the gain recorded as a result of the termination of the FFF put and call rightsPut Right, were recorded within other income (expense), net in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income.
Earn-out liabilities
An earn-out liability was established in connection with the acquisition of substantially all of the assets and certain liabilities of Acurity, Inc. and Nexera, Inc. (the “Acurity and Nexera asset acquisition”) in February 2020. The earn-out liability was classified as Level 3 of the fair value hierarchy.
The earn-out liability arising from expected earn-out payments related to the Acurity and Nexera asset acquisition was measured on the acquisition date using a probability-weighted expected payment model and are remeasured periodically due to changes in management’s estimates of the number of transferred member renewals and market conditions. In determining the fair value of the contingent liabilities, management reviews the current results of the acquired business, along with projected results for the remaining earn-out period, to calculate the expected earn-out payment to be made based on the contractual terms set out in the acquisition agreement. The Acurity and Nexera earn-out liability utilized a credit spread of 0.9% at both December 31, 2021 and June 30, 2021. As of December 31, 2021 and June 30, 2021, the undiscounted range of outcomes is between $0 and $30.0 million. A significant decrease in the probability could result in a significant decrease in the value of the earn-out liability. The fair value of the Acurity and Nexera earn-out liability at December 31, 2021 and June 30, 2021 was $24.1 million and $24.2 million, respectively.
Acurity and Nexera Earn-out (a)
| | | | | | | | | | | |
Input assumptions | As of December 31, 2021 | | As of June 30, 2021 |
Probability of transferred member renewal percentage < 50% | 5.0 | % | | 5.0 | % |
Probability of transferred member renewal percentage between 50% and 65% | 10.0 | % | | 10.0 | % |
Probability of transferred member renewal percentage between 65% and 80% | 25.0 | % | | 25.0 | % |
Probability of transferred member renewal percentage > 80% | 60.0 | % | | 60.0 | % |
Credit spread | 0.9 | % | | 0.9 | % |
(a)The Acurity and Nexera earn-out liability was initially valued as of February 28, 2020.
A reconciliation of the Company'sCompany’s Put Right and earn-out liabilities and FFF put and call rights is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Beginning Balance | | Purchases (Settlements) (a)(b) | | (Gain)/Loss (c) | | Ending Balance |
Three Months Ended December 31, 2021 | | | | | | | |
Earn-out liabilities | $ | 24,368 | | | $ | — | | | $ | (229) | | | $ | 24,139 | |
| | | | | | | |
Total Level 3 liabilities | $ | 24,368 | | | $ | — | | | $ | (229) | | | $ | 24,139 | |
| | | | | | | |
Three Months Ended December 31, 2020 | | | | | | | |
Earn-out liabilities | $ | 23,017 | | | $ | (4,660) | | | $ | 4,343 | | | $ | 22,700 | |
FFF put right | 38,677 | | | — | | | 14,507 | | | 53,184 | |
Total Level 3 liabilities | $ | 61,694 | | | $ | (4,660) | | | $ | 18,850 | | | $ | 75,884 | |
| | | | | | | |
Six Months Ended December 31, 2021 | | | | | | | |
Earn-out liabilities | $ | 24,249 | | | $ | — | | | $ | (110) | | | $ | 24,139 | |
FFF put right | 64,110 | | | (64,110) | | | — | | | — | |
Total Level 3 liabilities | $ | 88,359 | | | $ | (64,110) | | | $ | (110) | | | $ | 24,139 | |
| | | | | | | |
Six Months Ended December 31, 2020 | | | | | | | |
Earn-out liabilities | $ | 33,151 | | | $ | (13,733) | | | $ | 3,282 | | | $ | 22,700 | |
FFF put right | 36,758 | | | — | | | 16,426 | | | 53,184 | |
Total Level 3 liabilities | $ | 69,909 | | | $ | (13,733) | | | $ | 19,708 | | | $ | 75,884 | |
(a)Purchases (Settlements) for the six months ended December 31, 2021 includes non-cash gain recognized as a result the termination of the FFF Put Right and the derecognition of the FFF Put Right liability. |
| | | | | | | | | | | | |
| Beginning Balance | Purchases (Settlements) | Gain (Loss) | Ending Balance |
Three Months Ended December 31, 2017 | | | | |
FFF call right | $ | 4,593 |
| $ | — |
| $ | (2,485 | ) | $ | 2,108 |
|
Total Level 3 assets | $ | 4,593 |
| $ | — |
| $ | (2,485 | ) | $ | 2,108 |
|
Earn-out liabilities | $ | 21,675 |
| $ | (18,500 | ) | $ | 383 |
| $ | 2,792 |
|
FFF put right | 24,008 |
| — |
| (13,102 | ) | 37,110 |
|
Total Level 3 liabilities | $ | 45,683 |
| $ | (18,500 | ) | $ | (12,719 | ) | $ | 39,902 |
|
| | | | |
Three Months Ended December 31, 2016 | | | | |
FFF call right | $ | 10,316 |
| $ | — |
| $ | 434 |
| $ | 10,750 |
|
Total Level 3 assets | $ | 10,316 |
| $ | — |
| $ | 434 |
| $ | 10,750 |
|
Earn-out liabilities | $ | 2,359 |
| $ | 16,662 |
| $ | 2,308 |
| $ | 16,713 |
|
FFF put right | 25,811 |
| — |
| (573 | ) | 26,384 |
|
Total Level 3 liabilities | $ | 28,170 |
| $ | 16,662 |
| $ | 1,735 |
| $ | 43,097 |
|
| | | | |
Six Months Ended December 31, 2017 | | | | |
FFF call right | $ | 4,655 |
| $ | — |
| $ | (2,547 | ) | $ | 2,108 |
|
Total Level 3 assets | $ | 4,655 |
| $ | — |
| $ | (2,547 | ) | $ | 2,108 |
|
Earn-out liabilities | $ | 21,310 |
| $ | (18,500 | ) | $ | 18 |
| $ | 2,792 |
|
FFF put right | 24,050 |
| — |
| (13,060 | ) | 37,110 |
|
Total Level 3 liabilities | $ | 45,360 |
| $ | (18,500 | ) | $ | (13,042 | ) | $ | 39,902 |
|
| | | | |
Six Months Ended December 31, 2016 | | | | |
FFF call right | $ | — |
| $ | 10,361 |
| $ | 389 |
| $ | 10,750 |
|
Total Level 3 assets | $ | — |
| $ | 10,361 |
| $ | 389 |
| $ | 10,750 |
|
Earn-out liabilities | $ | 4,128 |
| $ | 16,662 |
| $ | 4,077 |
| $ | 16,713 |
|
FFF put right | — |
| 25,821 |
| (563 | ) | 26,384 |
|
Total Level 3 liabilities | $ | 4,128 |
| $ | 42,483 |
| $ | 3,514 |
| $ | 43,097 |
|
(b)Purchases (Settlements) for the three months ended December 31, 2020 includes the Medpricer earnout, which had been earned but not yet paid as of December 31, 2020. Purchases (Settlements) for the six months ended December 31, 2020 includes the Medpricer earnout and the Stanson earnout, which was paid in full as of December 31, 2020.(c)A gain on level 3 liability balances will decrease the liability ending balance whereas a loss on level 3 liability balance will increase the liability ending balance.
Non-Recurring Fair Value Measurements
During the six months ended December 31, 2017,2021, the Company recorded notes payable to former limited partners as a result of the August 2020 Restructuring. Although these notes are non-interest bearing, they include a Level 2 input associated with the implied interest rate of 1.8% and are calculated as of August 11, 2020. (see Note 8 - Debt and Notes Payable).
During the six months ended December 31, 2021, no non-recurring fair value measurements were required relatedrelating to the measurement of goodwill and intangible assets for impairment.
Financial Instruments forFor Which Fair Value Only is Disclosed
The fair values of non-interest bearing notes payable, classified as Level 2, were less than their carrying valuesvalue by approximately $0.5 million and $0.6$0.1 million at both December 31, 20172021 and June 30, 2017, respectively,2021 based on assumed market interest rates of 2.9% and 2.6%1.6% for December 31, 2017 and June 30, 2017, respectively.both periods.
Other Financial Instruments
The fair values of cash, accounts receivable, accounts payable, accrued liabilities, and the Company's Credit Facility (as defined in Note 8 - Debt and Notes Payable) approximated carrying value due to the short-term nature of these financial instruments.
(6) CONTRACT BALANCES
(6)Deferred Revenue
Revenue recognized during the six months ended December 31, 2021 that was included in the opening balance of deferred revenue at June 30, 2021 was $13.0 million, which is a result of satisfying performance obligations.
Performance Obligations
A performance obligation is a promise to transfer a distinct good or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Contracts may have a single performance obligation as the promise to transfer individual goods or services is not separately identifiable from other promises and, therefore, not distinct, while other contracts may have multiple performance obligations, most commonly due to the contract covering multiple phases or deliverable arrangements (licensing fees, implementation fees, maintenance and support fees, professional fees for consulting services), including certain performance guarantees.
Net revenue of $8.1 million and $3.7 million was recognized during the three and six months ended December 31, 2021, respectively, from performance obligations that were satisfied or partially satisfied in prior periods. The net revenue recognized was driven by an increase of $7.3 million and $3.1 million, respectively, in net administrative fees revenue related to under-forecasted cash receipts received in the current period. There was also an increase of $0.8 million and $0.6 million, respectively, associated with revised forecasts from underlying contracts that include variable consideration components as well as additional fluctuations due to input method contracts which occur in the normal course of business.
Net revenue of $3.1 million was recognized during the three months ended December 31, 2020 from performance obligations that were satisfied or partially satisfied in prior periods. The net revenue recognized was driven by a $4.9 million increase in net administrative fees revenue related to under-forecasted cash receipts received in the current period partially offset by a reduction of $1.8 million associated with revised forecasts from underlying contracts that include variable consideration components as well as additional fluctuations due to input method contracts which occur in the normal course of business.
A decrease to net revenue of $3.2 million was recognized during the six months ended December 31, 2020 from performance obligations that were partially satisfied in prior periods. The decrease in net revenue recognized was driven by a $2.5 million decrease in net administrative fees revenue related to over-forecasted cash receipts received in the current period and a reduction of $0.7 million associated with revised forecasts from underlying contracts that include variable consideration components as well as additional fluctuations due to input method contracts which occur in the normal course of business.
Remaining performance obligations represent the portion of the transaction price that has not yet been satisfied or achieved. As of December 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $654.1 million. The Company expects to recognize approximately 44% of the remaining performance obligations over the next 12 months and an additional 26% over the following 12 months, with the remainder recognized thereafter.
(7) GOODWILL AND INTANGIBLE ASSETS NET
Goodwill
At December 31, 2021 and June 30, 2021, we had goodwill balances recorded at Supply Chain Services and Performance Services of $388.5 million and $611.4 million, respectively.
Intangible Assets, Net
Intangible assets, net consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Useful Life | | December 31, 2021 | | June 30, 2021 |
Member relationships | 14.7 years | | $ | 386,100 | | | $ | 386,100 | |
Technology | 6.1 years | | 186,017 | | | 186,017 | |
Customer relationships | 9.6 years | | 70,830 | | | 70,830 | |
Trade names | 7.4 years | | 24,610 | | | 24,610 | |
Non-compete agreements | 5.3 years | | 11,315 | | | 11,315 | |
Other (a) | 10.2 years | | 7,682 | | | 7,682 | |
Total intangible assets | | | 686,554 | | | 686,554 | |
Accumulated amortization | | | (311,650) | | | (289,912) | |
Total intangible assets, net | | | $ | 374,904 | | | $ | 396,642 | |
|
| | | | | | | |
| Useful Life | December 31, 2017 | June 30, 2017 |
Member relationships | 14.7 years | $ | 220,100 |
| $ | 220,100 |
|
Technology | 5.0 years | 142,317 |
| 143,727 |
|
Customer relationships | 8.3 years | 48,120 |
| 48,120 |
|
Trade names | 8.3 years | 22,710 |
| 22,710 |
|
Distribution network | 10.0 years | 22,400 |
| 22,400 |
|
Favorable lease commitments | 10.1 years | 11,393 |
| 11,393 |
|
Non-compete agreements | 5.9 years | 8,710 |
| 8,710 |
|
Total intangible assets | | 475,750 |
| 477,160 |
|
Accumulated amortization | | (125,903 | ) | (99,198 | ) |
Intangible assets, net | | $ | 349,847 |
| $ | 377,962 |
|
(a) Includes a $1.0 million indefinite-lived asset.Intangible asset amortization totaled $13.8was $21.7 million and $11.2 million for the three months ended December 31, 2017 and 2016, respectively, and $27.7 million and $20.4$23.5 million for the six months ended December 31, 20172021 and 2016,2020, respectively.
(7) GOODWILL
Goodwill(8) DEBT AND NOTES PAYABLE
Long-term debt and notes payable consisted of the following (in thousands):
|
| | | | | | |
| December 31, 2017 | June 30, 2017 |
Supply Chain Services | $ | 400,348 |
| $ | 400,348 |
|
Performance Services | 506,197 |
| 506,197 |
|
Total goodwill | $ | 906,545 |
| $ | 906,545 |
|
(8) DEBT
Long-term debt consisted of the following (in thousands):
|
| | | | | | | | | | |
| Commitment Amount | Due Date | December 31, 2017 | June 30, 2017 |
Credit Facility | $ | 750,000 |
| June 24, 2019 | $ | 200,000 |
| $ | 220,000 |
|
Notes payable | — |
| Various | 7,683 |
| 14,272 |
|
Total debt | | | 207,683 |
| 234,272 |
|
Less: Current portion | | | (201,139 | ) | (227,993 | ) |
Total long-term debt | | | $ | 6,544 |
| $ | 6,279 |
|
| | | | | | | | | | | |
| December 31, 2021 | | June 30, 2021 |
Credit facility | $ | 125,000 | | | $ | 75,000 | |
Notes payable to members, net of discount | 347,201 | | | 394,943 | |
Other notes payable | 5,750 | | | 8,628 | |
Total debt and notes payable | 477,951 | | | 478,571 | |
Less: current portion | (224,882) | | | (174,243) | |
Total long-term debt and notes payable | $ | 253,069 | | | $ | 304,328 | |
Credit Facility
Premier LP,PHSI, along with its consolidated subsidiaries, PSCIPremier LP and PHSI,PSCI, as Co-Borrowers, Prior Premier GP and certain domestic subsidiaries of Premier GP,the Co-Borrowers, as guarantors, entered into an unsecured Credit Facility, dated as of June 24, 2014 and amended on June 4, 2015. The Credit Facility has a maturity date of June 24, 2019. The Credit Facility provides for borrowings of up to $750.0 millionNovember 9, 2018 (the “Credit Facility”). On December 1, 2021, in connection with (i) a $25.0 million sub-facility for standby letters of credit and (ii) a $75.0 million sub-facility for swingline loans. The Credit Facility may be increased from time to time at the Company's request up to an aggregate additional amount of $250.0 million, subject to lender approval. The Credit Facility includes an unconditional and irrevocable guaranty of all obligations underSubsidiary Reorganization, the Credit Facility bywas amended to remove Prior Premier GP certain domestic subsidiaries of Premier GP and future guarantors, if any.as a guarantor. Premier, Inc. is not a guarantor under the Credit Facility.
AtOutstanding borrowings under the Company's option, committed loans may be in the form of Eurodollar rate loans ("Eurodollar Loans") or base rate loans ("Base Rate Loans"). Eurodollar LoansCredit Facility bear interest on a variable rate structure with borrowings bearing interest at the Eurodollar rate (defined as theeither London Interbank Offered Rate or LIBOR,(“LIBOR”) plus the Applicable Rate (defined as aan applicable margin based on the Consolidated Total Leverage Ratio (as defined in the Credit Facility))). Base Rate Loans bear interest at the Base Rate (defined as the highest ofranging from 1.000% to 1.500% or the prime rate announced by the administrative agent, the federal funds effectivelending rate plus 0.50% or the one-month LIBOR plus 1.0%) plus the Applicable Rate. The Applicable Rate rangesan applicable margin ranging from 1.125%0.000% to 1.750% for Eurodollar Loans and 0.125% to 0.750% for Base Rate Loans.0.500%. At December 31, 2017,2021, the weighted average interest rate for three-month Eurodollar Loanson outstanding borrowings under the Credit Facility was 2.815%1.110% and the interest rate for Base Rate Loans was 4.625%. The Co-Borrowers are required to pay aannual commitment fee, ranging from 0.125% to 0.250% per annumbased on the actual daily unused amount of commitments under the Credit Facility. At December 31, 2017, the commitment feeFacility, was 0.125%0.100%.
The Credit Facility contains customary representations and warranties as well as customary affirmative and negative covenants, including, among others, limitations on liens, indebtedness, fundamental changes, dispositions, restricted payments and investments, of which certain covenant calculations use EBITDA, a Non-GAAP financial measure. Under the terms of the Credit Facility, Premier GP is not permitted to allow its consolidated total leverage ratio (as defined in the Credit Facility) to exceed 3.00 to 1.00 for any period of four consecutive quarters. In addition, Premier GP must maintain a minimum consolidated interest coverage ratio (as defined in the Credit Facility) of 3.00 to 1.00 at the end of every fiscal quarter. Premier GPinvestments. The Company was in compliance with all such covenants at December 31, 2017.
2021. The Credit Facility also contains customary events of default, including among others, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaultsa cross-default of any indebtedness or guarantees in excess of $30.0 million, bankruptcy and other insolvency events, judgment defaults in excess of $30.0 million, and the occurrence of a change of control (as defined in the Credit Facility).$75.0 million. If any event of default occurs and is continuing, the administrative agent under the Credit Facility may, with the consent, or shall, at the request of a majority of the required lenders under the Credit Facility, terminate the commitments and declare all of the amounts owed under the Credit Facility to be immediately due and payable.
The Company may prepay amountshad $125.0 million in outstanding under the Credit Facility without premium or penalty provided that Co-Borrowers compensate the lenders for losses and expenses incurred as a result of the prepayment of any Eurodollar Loan, as defined in the Credit Facility.
Proceeds from borrowings under the Credit Facility may generally be used to finance ongoing working capital requirements, including permitted acquisitions, discretionary cash settlementsat December 31, 2021 with $874.9 million of Class B unit exchanges under the Exchange Agreement, repurchasesavailable borrowing capacity after reductions for outstanding borrowings and outstanding letters of Class A common stock pursuant to a stock repurchase program, and other general corporate activities. Duringcredit. For the six months ended December 31, 2017,2021, the Company borrowed $175.0 million and repaid $50.0$125.0 million of borrowings and borrowed an additional $30.0 million under the Credit Facility. The Company had outstanding borrowings under the Credit Facility of $200.0 million at December 31, 2017. Borrowings due within one year of the balance sheet date are classified as current liabilities in the Condensed Consolidated Balance Sheets. They may be renewed or extended at the option of the Company through the maturity date of the Credit Facility.
Notes Payable
Notes Payable to Former Limited Partners
At December 31, 20172021, the Company had $347.2 million of notes payable to former LPs, net of discounts on notes payable of $12.2 million, of which $96.9 million was recorded to current portion of notes payable to former limited partners in the accompanying Condensed Consolidated Balance Sheets. At June 30, 2021, the Company had $394.9 million of notes payable to former LPs, net of discounts on notes payable of $15.8 million, of which $95.9 million was recorded to current portion of notes payable to former limited partners in the accompanying Condensed Consolidated Balance Sheets. The notes payable to former LPs were issued in connection with the early termination of the TRA as part of the August 2020 Restructuring. Although the notes payable to former LPs are non-interest bearing, pursuant to GAAP requirements, they were recorded net of imputed interest at a fixed annual rate of 1.8%.
Other
At December 31, 2021 and June 30, 2017,2021, the Company had $7.7$5.8 million and $14.3$8.6 million respectively, in other notes payable, consisting primarily of non-interest bearing notes payable outstanding to departed member owners,respectively, of which $1.2$3.0 million and $8.0$3.3 million, respectively, were included in current portion of long-term debt and $6.5 million and $6.3 million, respectively, were included in long-term debt, less current portion, in the accompanying Condensed Consolidated Balance Sheets. NotesOther notes payable do not bear interest and generally have stated maturities ofthree to five years from their date of issuance.
(9) REDEEMABLE LIMITED PARTNERS' CAPITAL
RedeemableThe fair value of redeemable limited partners'partners’ capital representswas reclassified from temporary equity in the member owners' 60% ownership of Premier LP through their ownership of Class B common units at December 31, 2017. The member owners hold the majoritymezzanine section of the votesCondensed Consolidated Balance Sheets to additional paid in capital as a component of the Board of Directors and any redemption or transfer or choice of consideration cannot be assumedpermanent equity at July 31, 2020. As a result, there were no adjustments to be within the control of the Company. Therefore, redeemable limited partners' capital is recorded at the greater of the book value or redemption amount per the Amended and Restated Limited Partnership Agreement of Premier LP (as amended, the "LP Agreement"), and is calculated as the fair value of all Class B common units as if immediately exchangeable into Class A common shares. redeemable limited partners’ capital for the six months ended December 31, 2021.
For the six months ended December 31, 2017 and 2016,2020, the Company recorded decreasesan adjustment of $(26.7) million to the fair value of redeemable limited partners'partners’ capital as an adjustment of redeemable limited partners'partners’ capital to redemption amount in the accompanying Condensed Consolidated Statements of Income inand Comprehensive Income. Subsequent to July 31, 2020, there were no adjustments to the fair value of redeemable limited partners’ capital as an adjustment of redeemable limited partners’ capital to redemption amount of $638.3 million and $397.1 million, respectively.
Redeemable limited partners' capital is classified as temporary equitywere recorded in the mezzanine section of the accompanying Condensed Consolidated Balance Sheets as, pursuant to the LP Agreement, withdrawal is at the optionStatements of each member ownerIncome and the conditions of the repurchase are not solely within the Company's control.
Comprehensive Income.
The tabletables below providesprovide a summary of the changes in the redeemable limited partners'partners’ capital from June 30, 20172020 to September 30, 2020 (in thousands). There were no changes in redeemable limited partner’s capital from September 30, 2020 to December 31, 2017 (in thousands):2020.
| | | | | | | | | | | | | | | | | |
| Receivables From Limited Partners | | Redeemable Limited Partners' Capital | | Total Redeemable Limited Partners' Capital |
June 30, 2020 | $ | (995) | | | $ | 1,721,304 | | | $ | 1,720,309 | |
Distributions applied to receivables from limited partners | 141 | | | — | | | 141 | |
Net income attributable to non-controlling interest in Premier LP | — | | | 11,845 | | | 11,845 | |
Distributions to limited partners | — | | | (1,936) | | | (1,936) | |
Exchange of Class B common units for Class A common stock by member owners | — | | | (2,437) | | | (2,437) | |
Adjustment of redeemable limited partners' capital to redemption amount | — | | | 26,685 | | | 26,685 | |
Reclassification to permanent equity | 854 | | | (1,755,461) | | | (1,754,607) | |
September 30, 2020 | $ | — | | | $ | — | | | $ | — | |
|
| | | | | | | | | |
| Receivables From Limited Partners | Redeemable Limited Partners' Capital | Total Redeemable Limited Partners' Capital |
June 30, 2017 | $ | (4,177 | ) | $ | 3,142,760 |
| $ | 3,138,583 |
|
Distributions applied to receivables from limited partners | 984 |
| — |
| 984 |
|
Redemption of limited partners | — |
| (269 | ) | (269 | ) |
Net income attributable to non-controlling interest in Premier LP | — |
| 101,095 |
| 101,095 |
|
Distributions to limited partners | — |
| (41,148 | ) | (41,148 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (162,265 | ) | (162,265 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| (638,340 | ) | (638,340 | ) |
December 31, 2017 | $ | (3,193 | ) | $ | 2,401,833 |
| $ | 2,398,640 |
|
Receivables from limited partners represent amounts due from limited partners for their required capital in Premier LP. These receivables are either interest bearing notes that were issued to new limited partners or non-interest bearing loans (contribution loans) provided to existing limited partners. These receivables are reflected as a reduction to redeemable limited partners' capital so that amounts due from limited partners for capital are not reflected as redeemable limited partnership capital until paid. No interest bearing notes receivable were executed by limited partners of Premier LP during the six months ended December 31, 2017.
During the six months ended December 31, 2017, two limited partners withdrew from Premier LP. The limited partnership agreement provides for the redemption of former limited partners' Class B common units that are not eligible for exchange in the form of a five-year, unsecured, non-interest bearing term promissory note, a cash payment equal to the present value of the redemption amount, or other mutually agreed upon terms. Partnership interest obligations to former limited partners are reflected in notes payable in the accompanying Condensed Consolidated Balance Sheets. Under the Exchange Agreement, Class B common units that are eligible for exchange by withdrawing limited partners must be exchanged in the subsequent exchange process.
Premier LP's distribution policy requires cash distributions as long as taxable income is generated and cash is available to distribute, on a quarterly basis prior to the 60th day after the end of each calendar quarter. The Company makes quarterly distributions to its limited partners in the form of a legal partnership income distribution governed by the terms of the LP Agreement. These partner distributions are based on the limited partner's ownership in Premier LP and relative participation across Premier service offerings. While these distributions are based on relative participation across Premier service offerings, they are not based directly on revenue generated from an individual partner's participation as the distributions are based on the net income (loss) of the partnership which encompasses the operating expenses of the partnership as well as participation by non-owner members in Premier's service offerings. To the extent Premier LP incurred a net loss, the limited partners would not receive a quarterly distribution. As provided in the LP Agreement, the amount of actual cash distributed may be reduced by the amount of such distributions used by limited partners to offset contribution loans or other amounts payable to the Company.
Quarterly distributions made to limited partners during the current fiscal year are as follows (in thousands):
|
| | | |
Date | Distribution (a) |
August 24, 2017 | $ | 24,951 |
|
November 22, 2017 | $ | 20,752 |
|
| |
(a) | Distributions are equal to Premier LP’s total taxable income from the preceding fiscal quarter-to-date period for each respective distribution date multiplied by the Company's standalone effective combined federal, state and local income tax rate for each respective distribution date. Premier LP expects to make a $20.4 million quarterly distribution on or before February 22, 2018. The distribution is reflected in limited partners' distribution payable in the accompanying Condensed Consolidated Balance Sheets at December 31, 2017. |
Pursuant to the Exchange Agreement (see Note 1 - Organization and Basis of Presentation for more information), each limited partner has the cumulative right to exchange up to one-seventh of its initial allocation of Class B common units for shares of Class A common stock, cash or a combination of both, the form of consideration to be at the discretion of the Company's independent Audit and Compliance Committee. During the six months ended December 31, 2017, the Company recorded total reductions of $162.3 million to redeemable limited partners' capital to reflect the exchange of approximately 4.9 million Class B common units and surrender of associated shares of Class B common stock by member owners for a like number of shares of the Company's
Class A common stock (see Note 11 - Earnings Per Share for more information). Quarterly exchanges during the current fiscal year were as follows (in thousands, except Class B common units).
|
| | | | | |
Date of Quarterly Exchange | Number of Class B Common Units Exchanged | Reduction in Redeemable Limited Partners' Capital |
July 31, 2017 | 1,231,410 |
| $ | 42,976 |
|
October 31, 2017 | 3,651,294 |
| 119,289 |
|
Total | 4,882,704 |
| $ | 162,265 |
|
(10) STOCKHOLDERS' DEFICITEQUITY
As of December 31, 2017,2021, there were 54,685,668119,935,420 shares of the Company's Class A common stock, par value $0.01 per share, and 82,282,748 shares of the Company's Class B common stock, par value $0.000001 per share, outstanding.
On October 31, 2017,August 5, 2021, the Company'sCompany’s Board of Directors authorized the repurchase of up to $200$250.0 million of our outstanding Class A common stock as part of a balanced capital deployment strategy, such repurchases to be made from time to time in private orduring fiscal year 2022 through open market transactions at the Company's discretion in accordance with applicable federal securities laws.purchases or privately negotiated transactions. As of December 31, 2017,2021, the Company had purchased approximately 2.64.5 million shares of Class A common stock at an average price of $28.96$39.37 per share for a total purchase price of approximately $74.7 million,$176.0 million. There can be no assurances regarding the timing or number of which $3.9 million relates to a forward purchase commitment included within accounts payable on our Condensed Consolidated Balance Sheets as a result of applying trade date accounting when recording the repurchase of such shares. As of December 31, 2017, the Company had approximately $125.3 million available under its share repurchase authorization, which expires June 30, 2018. Subsequent to December 31, 2017 and as of February 2, 2018, the Company had purchased approximately 1.0 million additional shares of Class A common stock at an average price of $31.67 per share for a total incremental purchase price of approximately $32.9 million, the amounts of which are not reflected in the Company's condensed consolidated financial statements for the quarter ended December 31, 2017.purchased under this authorization. The repurchase authorization may be suspended, delayed or discontinued at any time at the discretion of the Company'sCompany’s Board of Directors.
HoldersDuring the six months ended December 31, 2021, the Company paid cash dividends of Class A common stock are entitled to (i) one vote for each$0.20 per share held of record on all matters submitted to a vote of stockholders, (ii) receive dividends, when and if declared by the Board of Directors out of funds legally available, subject to any statutory or contractual restrictions on the payment of dividends and subject to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock or any class of series of stock having a preference over or the right to participate with the Class A common stock with respect to the payment of dividends or other distributions and (iii) receive pro rata, based on the number of shares of Class A common stock held, the remaining assets available for distribution upon the dissolution or liquidationto stockholders on each of Premier, after payment in full of all amounts required to be paid to creditorsSeptember 15, 2021 and to the holders of preferred stock having liquidation preferences, if any.
Holders of Class B common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders, but are not entitled to receive dividends, other than dividends payable in shares of Premier's common stock, or to receive a distribution upon the dissolution or a liquidation of Premier. Pursuant to the Voting Trust Agreement, the trustee will vote all of the Class B common stock as a block in the manner determined by the plurality of the votes received by the trustee from the member owners for the election of directors to serve onDecember 15, 2021. On January 20, 2022, the Board of Directors and bydeclared a majoritycash dividend of the votes received by the trustee from the member owners for all other matters. Class B common stock will not be listed$0.20 per share, payable on any stock exchange and, except in connection with any permitted sale or transferMarch 15, 2022 to stockholders of Class B common units, cannot be sold or transferred.record on March 1, 2022.
(11) EARNINGS PER SHARE
Basic earnings per share of Premier is computed by dividing net income attributable to stockholders by the weighted average number of shares of common stock outstanding for the period. Net income attributable to stockholders includes the adjustment recorded in the period to reflect redeemable limited partners'partners’ capital at the redemption amount, as a result ofwhich was due to the exchange benefit obtained by limited partners through the ownership of Class B common units.units, which were canceled in conjunction with the August 2020 Restructuring. Except when the effect would be anti-dilutive, the diluted earnings per share calculation, which is calculated using the treasury stock method, includes the impact of all potentially issuable dilutive shares that could be issued under the outstanding stock options, non-vested restricted stock units and awards, shares of non-vested performance share awards and the effect of the assumed redemption of Class B common units through the issuance of Class A common shares.stock.
The following table provides a reconciliation of the numerator and denominator used for basic and diluted earnings per share (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Numerator for basic earnings per share: | | | | | | | |
Net income attributable to stockholders (a) | $ | 75,545 | | | $ | 43,969 | | | $ | 197,549 | | | $ | 162,967 | |
| | | | | | | |
Numerator for diluted earnings per share: | | | | | | | |
Net income attributable to stockholders (a) | $ | 75,545 | | | $ | 43,969 | | | $ | 197,549 | | | $ | 162,967 | |
| | | | | | | |
Net income attributable to non-controlling interest | — | | | — | | | 989 | | | — | |
Net income for diluted earnings per share | $ | 75,545 | | | $ | 43,969 | | | $ | 198,538 | | | $ | 162,967 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Denominator for earnings per share: | | | | | | | |
Basic weighted average shares outstanding (b) | 121,181 | | | 122,127 | | | 122,063 | | | 110,851 | |
Effect of dilutive securities: (c) | | | | | | | |
Stock options | 267 | | | 321 | | | 288 | | | 287 | |
Restricted stock | 540 | | | 333 | | | 516 | | | 318 | |
Performance share awards | 485 | | | 138 | | | 656 | | | 117 | |
Diluted weighted average shares and assumed conversions | 122,473 | | | 122,919 | | | 123,523 | | | 111,573 | |
| | | | | | | |
Earnings per share attributable to stockholders: | | | | | | | |
Basic | $ | 0.62 | | | $ | 0.36 | | | $ | 1.62 | | | $ | 1.47 | |
Diluted | $ | 0.62 | | | $ | 0.36 | | | $ | 1.61 | | | $ | 1.46 | |
(a)Net income attributable to stockholders was calculated as follows (in thousands): |
| | | | | | | | | | | | |
| Three Months Ended December 31, | Six Months Ended December 31, |
| 2017 | 2016 | 2017 | 2016 |
Numerator for basic earnings per share: | | | | |
Net income attributable to stockholders | $ | 281,200 |
| $ | 400,275 |
| $ | 617,630 |
| $ | 470,577 |
|
| | | | |
Numerator for diluted earnings (loss) per share: | | | | |
Net income attributable to stockholders | $ | 281,200 |
| $ | 400,275 |
| $ | 617,630 |
| $ | 470,577 |
|
Adjustment of redeemable limited partners' capital to redemption amount | (317,916 | ) | (335,264 | ) | (638,340 | ) | (397,072 | ) |
Net income attributable to non-controlling interest in Premier LP | 56,485 |
| 181,173 |
| 101,095 |
| 230,774 |
|
Net income | 19,769 |
| 246,184 |
| 80,385 |
| 304,279 |
|
Tax effect on Premier, Inc. net income (a) | (251,085 | ) | (34,496 | ) | (261,636 | ) | (55,448 | ) |
Adjusted net income (loss) | $ | (231,316 | ) | $ | 211,688 |
| $ | (181,251 | ) | $ | 248,831 |
|
| | | | |
Denominator for basic earnings per share: | | | | |
Weighted average shares (b) | 55,209 |
| 49,445 |
| 54,059 |
| 48,330 |
|
| | | | |
Denominator for diluted earnings (loss) per share: | | | | |
Weighted average shares (b) | 55,209 |
| 49,445 |
| 54,059 |
| 48,330 |
|
Effect of dilutive securities: (c) | | | | |
Stock options | 189 |
| 220 |
| 270 |
| 261 |
|
Restricted stock | 261 |
| 181 |
| 283 |
| 176 |
|
Performance share awards | — |
| — |
| — |
| — |
|
Class B shares outstanding | 83,578 |
| 91,462 |
| 85,029 |
| 93,366 |
|
Weighted average shares and assumed conversions | 139,237 |
| 141,308 |
| 139,641 |
| 142,133 |
|
| | | | |
Basic earnings per share | $ | 5.09 |
| $ | 8.10 |
| $ | 11.43 |
| $ | 9.74 |
|
Diluted earnings (loss) per share | $ | (1.66 | ) | $ | 1.50 |
| $ | (1.30 | ) | $ | 1.75 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income | $ | 77,232 | | | $ | 44,904 | | | $ | 198,538 | | | $ | 202,432 | |
Net income attributable to non-controlling interest | (1,687) | | | (935) | | | (989) | | | (12,780) | |
Adjustment of redeemable limited partners’ capital to redemption amount | — | | | — | | | — | | | (26,685) | |
Net income attributable to stockholders | $ | 75,545 | | | $ | 43,969 | | | $ | 197,549 | | | $ | 162,967 | |
| |
(a) | Represents income tax expense related to Premier, Inc. retaining the portion of net income attributable to income from non-controlling interest in Premier, LP for the purpose of diluted earnings per share. |
| |
(b) | Weighted average number of common shares used for basic earnings per share excludes weighted average shares of non-vested stock options, non-vested restricted stock, non-vested performance share awards and Class B shares outstanding for the three and six months ended December 31, 2017 and 2016. |
| |
(c) | For the three and six months ended December 31, 2017, the effect of 2.2 million stock options was excluded from diluted weighted average shares outstanding as they had an anti-dilutive effect, and the effect of 0.5 million performance share awards was excluded from diluted weighted average shares outstanding as they had not satisfied the applicable performance criteria at the end of the period. |
(b)Weighted average number of common shares used for basic earnings per share excludes the impact of all potentially issuable dilutive shares of Class A common stock for the six months ended December 31, 2021 and 2020.
(c)For the six months ended December 31, 2021, the effect of 0.3 million restricted stock units was excluded from diluted weighted average shares outstanding as it had an anti-dilutive effect. Additionally, the effect of 0.2 million and 0.4 million performance share awards was excluded from diluted weighted average shares outstanding as the awards had not satisfied the applicable performance criteria at the end of the period.
For the three and six months ended December 31, 2016,2020, the effect of 1.90.4 million and 1.1 million stock options and restricted stock units, and performance share awards wererespectively, was excluded from diluted weighted average shares outstanding as theyit had an anti-dilutive effect. Additionally, the effect of 0.6 million performance share awards was excluded from diluted weighted average shares outstanding as the awards had not satisfied the applicable performance criteria at the end of the period.
For the six months ended December 31, 2020, the effect of 11.2 million Class B common units was excluded from the diluted weighted average shares outstanding as it had an anti-dilutive effect.
Pursuant to the terms of the Exchange Agreement, on a quarterly basis, the Company has the option, as determined by the independent Audit and Compliance Committee, to settle the exchange of Class B common units of Premier LP by member owners for cash, an equal number of Class A common shares of Premier, Inc. or a combination of cash and shares of Class A common stock. In connection with the exchange of Class B common units by member owners, regardless of the consideration used to settle the exchange, an equal number of shares of Premier's Class B common stock are surrendered by member owners and retired (see Note 9 - Redeemable Limited Partners' Capital). The following table presents certain information regarding the exchange of Class B common units and associated Class B common stock for Premier's Class A common stock and/or cash in connection with the quarterly exchanges pursuant to the terms of the Exchange Agreement, including activity related to the Class A and Class B common units and Class A and Class B common stock through the date of the applicable quarterly exchange:
|
| | | | | | | |
Quarterly Exchange by Member Owners | Class B Common Shares Retired Upon Exchange (a) | Class B Common Shares Outstanding After Exchange (a) | Class A Common Shares Outstanding After Exchange (b) | Percentage of Combined Voting Power Class B/Class A Common Stock |
July 31, 2017 | 1,231,410 |
| 86,067,478 |
| 53,212,057 |
| 62%/38% |
October 31, 2017 | 3,651,294 |
| 82,416,184 |
| 57,215,143 |
| 59%/41% |
January 31, 2018 (c) | 1,006,435 |
| 81,169,319 |
| 54,829,086 |
| 60%/40% |
| |
(a) | The number of Class B common shares retired or outstanding is equivalent to the number of Class B common units retired upon exchange or outstanding after the exchange, as applicable. |
| |
(b) | The number of Class A common shares outstanding after exchange also includes activity related to the Company's share repurchase program (see Note 10 - Stockholders' Deficit), equity incentive plan (see Note 12 - Stock-Based Compensation) and departed member owners (see Note 9 - Redeemable Limited Partners' Capital).
|
| |
(c) | As the quarterly exchange occurred on January 31, 2018, the impact of the exchange is not reflected in the condensed consolidated financial statements for the quarter ended December 31, 2017. |
(12) STOCK-BASED COMPENSATION
Stock-based compensation expense is recognized over the requisite service period, which generally equals the stated vesting period. Pre-tax stock-based compensation expense was $8.9 million and $6.3 million for the three months ended December 31, 2017 and 2016, respectively, with a resulting deferred tax benefit of $2.2 million and $2.4 million, respectively. Pre-tax stock-based compensation expense was $17.7 million and $12.1 million for the six months ended December 31, 2017 and 2016, respectively, with a resulting deferred tax benefit of $4.4 million and $4.6 million, respectively. The associated deferred tax benefit was calculated at a rate of 25%26% for the three and six months ended December 31, 20172021 and 38% for the three and six months ended December 31, 2016,2020, which represents the expected effective income tax rate at the time of the compensation expense deduction primarily at PHSI, and differs from the Company'sCompany’s current effective income tax rate which includesrate. See Note 13 - Income Taxes for further information.
Stock-based compensation expense and the impact of partnership income not subject to federalresulting deferred tax benefits were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Pre-tax stock-based compensation expense | $ | 16,234 | | | $ | 7,316 | | | $ | 23,788 | | | $ | 14,545 | |
Deferred tax benefit (a) | 3,650 | | | 1,011 | | | 4,725 | | | 2,120 | |
Total stock-based compensation expense, net of tax | $ | 12,584 | | | $ | 6,305 | | | $ | 19,063 | | | $ | 12,425 | |
(a)For the three and state income taxes. The decrease insix months ended December 31, 2021, the deferred tax benefit ratewas reduced by $0.8 million and $1.5 million, respectively, attributable to stock-based compensation expense that is a result ofnondeductible for tax purposes pursuant to Section 162(m) as amended by the Tax Cuts and Jobs Act which was enacted on December 22, 2017 (see Note 13 - Income Taxes).of 2017.
Premier 2013 Equity Incentive Plan
The Premier 2013 Equity Incentive Plan, as amended and restated (and including any further amendments thereto, the "2013“2013 Equity Incentive Plan"Plan”) provides for grants of up to 11.314.8 million shares of Class A common stock, all of which are eligible to be issued as non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units or performance share awards. As of December 31, 2017,2021, there were 3.54.6 million shares available for grant under the 2013 Equity Incentive Plan.
The following table includes information related to restricted stock, performance share awards and stock options for the six months ended December 31, 2017:2021:
| | | | | | | | | | | | | | | Restricted Stock | | Performance Share Awards | | Stock Options |
| Restricted Stock | | Performance Share Awards | | Stock Options | | Number of Awards | | Weighted Average Fair Value at Grant Date | | Number of Awards | | Weighted Average Fair Value at Grant Date | | Number of Options | | Weighted Average Exercise Price |
| Number of Awards | Weighted Average Fair Value at Grant Date | | Number of Awards | Weighted Average Fair Value at Grant Date | | Number of Options | Weighted Average Exercise Price | |
Outstanding at June 30, 2017 | 576,988 |
| $ | 32.92 |
| | 1,085,872 |
| $ | 32.79 |
| | 3,372,499 |
| $ | 30.31 |
| |
Outstanding at June 30, 2021 | | Outstanding at June 30, 2021 | 990,301 | | | $ | 35.27 | | | 1,731,002 | | | $ | 35.56 | | | 2,163,006 | | | $ | 30.32 | |
Granted | 206,929 |
| $ | 32.81 |
| | 690,470 |
| $ | 32.62 |
| | 550,563 |
| $ | 32.80 |
| Granted | 617,505 | | | $ | 37.79 | | | 651,392 | | | $ | 37.18 | | | — | | | $ | — | |
Vested/exercised | (109,174 | ) | $ | 31.67 |
| | (352,867 | ) | $ | 31.73 |
| | (103,061 | ) | $ | 28.26 |
| Vested/exercised | (281,142) | | | $ | 40.41 | | | (588,142) | | | $ | 43.74 | | | (1,236,015) | | | $ | 30.17 | |
Forfeited | (20,276 | ) | $ | 32.50 |
| | (46,502 | ) | $ | 32.43 |
| | (92,179 | ) | $ | 34.28 |
| Forfeited | (117,122) | | | $ | 33.57 | | | (168,127) | | | $ | 31.87 | | | (12,025) | | | $ | 36.54 | |
Outstanding at December 31, 2017 | 654,467 |
| $ | 33.11 |
| | 1,376,973 |
| $ | 32.99 |
| | 3,727,822 |
| $ | 30.64 |
| |
Outstanding at December 31, 2021 | | Outstanding at December 31, 2021 | 1,209,542 | | | $ | 35.53 | | | 1,626,125 | | | $ | 33.63 | | | 914,966 | | | $ | 30.45 | |
| | | | | | | | | |
Stock options outstanding and exercisable at December 31, 2017 | | | | | | | 2,620,480 |
| $ | 29.64 |
| |
Stock options outstanding and exercisable at December 31, 2021 | | Stock options outstanding and exercisable at December 31, 2021 | | 914,966 | | | $ | 30.45 | |
Restricted stock units and restricted stock awards issued and outstanding generally vest over a three-year period for employees and a one-year period for directors. Performance share awards issued and outstanding generally vest over a three-year period if performance targets are met. Stock options have a term of ten years from the date of grant. Vested stock options will generally expire either after twelve months ofafter an employee'semployee’s termination with Premierthe Company or immediately upon90 days after an employee'semployee’s termination with Premier,the Company, depending on the termination circumstances. Stock options generally vest in equal annual installments over three years.
Unrecognized stock-based compensation expense at December 31, 20172021 was as follows (in thousands):. At December 31, 2021, there was no unrecognized stock-based compensation expense for outstanding stock options.
| | | | | | | | | | | |
| Unrecognized Stock-Based Compensation Expense | | Weighted Average Amortization Period |
Restricted stock | $ | 28,795 | | | 2.2 years |
Performance share awards | 29,291 | | | 1.9 years |
Total unrecognized stock-based compensation expense | $ | 58,086 | | | 2.1 years |
|
| | | | |
| Unrecognized Stock-Based Compensation Expense | Weighted Average Amortization Period |
Restricted stock | $ | 11,111 |
| 2.06 years |
Performance share awards | 27,385 |
| 2.00 years |
Stock options | 10,282 |
| 2.03 years |
Total unrecognized stock-based compensation expense | $ | 48,778 |
| 2.02 years |
The aggregate intrinsic value of stock options at December 31, 20172021 was as follows (in thousands):
|
| | | |
| Intrinsic Value of Stock Options |
Outstanding and exercisable | $ | 3,336 |
|
Expected to vest | 8 |
|
Total outstanding | $ | 3,344 |
|
| |
Exercised during the six months ended December 31, 2017 | $ | 588 |
|
The Company estimated the fair value of each stock option on the date of grant using a Black-Scholes option-pricing model, applying the following assumptions, and amortized expense over each option's vesting period using the straight-line attribution approach:
|
| | |
| Six Months Ended December 31, |
| 2017 | 2016 |
Expected life (a) | 6 years | 6 years |
Expected dividend (b) | — | — |
Expected volatility (c) | 29.92% - 32.26% | 32.0% - 33.0% |
Risk-free interest rate (d) | 1.89% - 2.14% | 1.31% - 2.00% |
Weighted average option grant date fair value | $9.48 - $11.42 | $10.48 - $10.80 |
| | | | | |
| Intrinsic Value of Stock Options |
Outstanding and exercisable | $ | 9,810 | |
| |
(a) | The six-year expected life (estimated period of time outstanding) of stock options granted was estimated using the "Simplified Method" which utilizes the midpoint between the vesting date and the end of the contractual term. This method was utilized for the stock options due to the lack of historical exercise behavior of Premier's employees. |
| |
(b)Exercised during the year ended December 31, 2021 | No dividends are expected to be paid over the contractual term of the stock options granted, resulting in the use of a zero expected dividend rate.$ |
9,697 | |
(c) | The expected volatility rate is based on the observed historical volatilities of comparable companies. |
| |
(d) | The risk-free interest rate was interpolated from the five-year and seven-year Constant Maturity Treasury rate published by the United States Treasury as of the date of the grant. |
(13) INCOME TAXES
The Company's income tax expense is attributable to the activities of the Company, PHSI and PSCI, all of which are subchapter C corporations and are subject to U.S. federal and state income taxes. In contrast, under the provisions of federal and state laws, Premier LP is not subject to federal and state income taxes as the income realized by Premier LP is taxable to its partners.
As a result of the TCJA that was enacted on December 22, 2017, the U.S. federal corporate income tax rate was reduced from 35% to 21%. In accordance with U.S. GAAP, the impact of changes in tax rates and tax laws is recognized as a component of income tax expense from continuing operations in the period of enactment. For fiscal year-end companies, determination of temporary differences contemplates the use of a combined U.S. federal income tax rate (which blends the income tax rates that were in effect prior to and after enactment) depending on expected timing of recognition for such temporary differences. The Company has remeasured its deferred tax balances as of the enactment date, accordingly. Given the nature and relative timing of the TCJA enactment, the Company is continuing to interpret the breadth of impact and has ultimately prescribed provisional relief pursuant to SAB 118 to certain components of its deferred tax balances. More specifically, the Company has incorporated various estimates regarding timing and determination of temporary difference recognition when calculating its net deferred tax expense.
Income tax expense for the three months ended December 31, 20172021, and 20162020 was $231.5$6.4 million and $37.4$16.7 million, respectively, which reflects effective tax rates of 92%8% and 13%27%, respectively. The change in the effective tax rate for the three months ended December 31, 2021 is primarily attributable to the Subsidiary Reorganization which was completed on December 1, 2021.
Income tax expense for the six months ended December 31, 2017 and 20162021 was $244.3$25.4 million, and $60.8 million, respectively, which reflects an effective tax ratesrate of 75% and 17%, respectively. The increase in effective tax rates is primarily attributable11% compared to the remeasurement of deferred tax balances, of which $221.2 million related to the aforementioned decrease in the U.S. federal corporatean income tax rate. The Company's effective tax rates differ from income taxes recorded using a combined (or blended) rate largely due to Premier LP income, which is not subject to federal, state or local income taxes as well as valuation allowances associated with deferred tax assets at PHSI.
Deferred tax assets decreased $159.7 million to $274.6 million at December 31, 2017 from $434.3 million at June 30, 2017. The current period balance was comprisedbenefit of $305.5 million in deferred tax assets at Premier, Inc. offset by $30.9 million in deferred tax liabilities at PHSI and PSCI. The decrease in deferred tax assets from the prior period was largely driven by $221.2 million in net reductions to deferred tax assets and liabilities in connection with the underlying revaluation associated with the previously mentioned decrease in the U.S. federal corporate income tax rate. This decrease was partially offset by a $65.3 million increase in deferred tax assets in connection with the quarterly member owner exchanges that occurred during the six months ended December 31, 2017.
The Company's tax receivable agreement ("TRA") liabilities represent 85% of the tax savings the Company expects to receive, if any, in U.S. federal, foreign, state and local income and franchise tax that may be realized (or deemed to realize, in the case of payments required to be made upon certain occurrences under such TRAs), payable to limited partners in connection with the Section 754 election by Premier LP. Tax savings are generated as a result of the increase in tax basis resulting from the initial sale of Class B common units, subsequent exchanges (pursuant to the Exchange Agreement) and payments under the TRA. The election results in adjustments to the tax basis of the assets of Premier LP upon member owner exchanges of Class B common units of
Premier LP for Class A common stock of Premier, Inc. or cash. TRA liabilities decreased $92.5 million to $247.2 million at December 31, 2017 from $339.7 million at June 30, 2017. The change in TRA liabilities was driven primarily by the $177.2 million decrease in valuation as a result of the TCJA's decrease in the U.S. federal corporate income tax rates, partially offset by $62.2 million in increases in TRA liabilities in connection with the quarterly member owner exchanges that occurred during the six months ended December 31, 2017 and $20.9 million associated with the revaluation and remeasurement of the TRA liabilities due to the change in the allocation and realization of future anticipated payments.
(14) RELATED PARTY TRANSACTIONS
GNYHA
GNYHA Purchasing Alliance, LLC and its member organizations ("GNYHA PA") owned approximately 8% of the outstanding partnership interests in Premier LP as of December 31, 2017. Although we no longer consider GNYHA PA a related party under U.S. GAAP, prior period information is included below.
Net administrative fees revenue based on purchases by GNYHA Services, Inc. ("GNYHA") (an affiliate of GNYHA PA) and its member organizations was $17.2 million and $34.9 million for the three and six months ended December 31, 2016, respectively. The Company has a contractual requirement under the GPO participation agreement to pay each member owner revenue share from Premier LP equal to 30% of all gross administrative fees collected by Premier LP based upon purchasing by such member owner's facilities through Premier LP's GPO supplier contracts. As GNYHA also remits to Premier LP all gross administrative fees collected by GNYHA based on purchases by its member organizations through GNYHA's own GPO supplier contracts, it also receives revenue share from Premier LP equal to 30% of such gross administrative fees remitted to the Company. Approximately $7.8 million of revenue share obligations in the accompanying Condensed Consolidated Balance Sheets related to revenue share obligations to GNYHA and its member organizations at June 30, 2017.
In addition, of the $25.0 million limited partners' distribution payable in the accompanying Condensed Consolidated Balance Sheets at June 30, 2017, $2.7 million were payable to GNYHA and its member organizations. Services and support revenue earned from GNYHA and its member organizations was $3.5 million and $7.1 million during the three and six months ended December 31, 2016, respectively. Product revenue earned from, or attributable to services provided to, GNYHA and its member organizations was $4.3 million and $8.0 million during the three and six months ended December 31, 2016, respectively. Receivables from GNYHA and its member organizations, included in due from related parties in the accompanying Condensed Consolidated Balance Sheets, were $5.4 million at June 30, 2017.
Innovatix and Essensa
The Company held 50% of the membership interests in Innovatix until December 2, 2016, at which time it acquired the remaining 50% of the membership interests from GNYHA Holdings (see Note 3 - Business Acquisitions). The Company's share of Innovatix's net income included in equity in net income of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income prior to the acquisition was $4.1 million and $10.7 million during the three and six months ended December 31, 2016, respectively. The Company maintained a group purchasing agreement with Innovatix under which Innovatix members were permitted to utilize Premier LP's GPO supplier contracts. Gross administrative fees revenue and a corresponding revenue share recorded under the arrangement prior to the acquisition were $8.5 million and $19.9 million for the three and six months ended December 31, 2016, respectively.
The Company historically maintained a group purchasing agreement with Essensa, under which Essensa utilized the Company's GPO supplier contracts. On December 2, 2016, the Company acquired 100% of the membership interests in Essensa from GNYHA Holdings (see Note 3 - Business Acquisitions). Net administrative fees revenue recorded from Essensa prior to the acquisition was $0.5 million and $1.2 million for the three and six months ended December 31, 2016, respectively.
FFF
The Company's 49% ownership share of net income of FFF, which was acquired on July 26, 2016, included in equity in net income of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income was $1.3 million and $1.1 million for the three months ended December 31, 2017 and 2016, respectively, and $5.6 million and $4.2$78.3 million for the six months ended December 31, 2017 and 2016, respectively.2020 which reflects an effective tax rate of (63)%. The Company maintains group purchasing agreements with FFF and receives administrative feeschange in the effective tax rate for purchases madethe six months ended December 31, 2021 is primarily driven by the Company's members pursuantprior year deferred tax remeasurement due to those agreements. Net administrative fees revenue recordedthe change in the state statutory rate and valuation allowance release resulting from purchases under those agreements was $2.3the Company and its subsidiaries forming one consolidated filing group for tax purposes at the consummation of the August 2020 Restructuring. Excluding the one-time deferred tax benefit, the effective tax rate would have been 24% for the six months ended December 31, 2020.
During the first quarter of fiscal year 2022, the Company assessed the future realization of its deferred tax assets as a result of its plan to complete the Subsidiary Reorganization by the end of the second quarter of fiscal year 2022. On December 1, 2021, the Company completed the Subsidiary Reorganization and reassessed the valuation allowance release. In fiscal year 2022, the Company expects to release $32.3 million of deferred tax asset valuation allowance primarily related to finite-lived net operating losses and $1.6research and development credit carryforwards. As a result of the Subsidiary Reorganization, the Company has included $6.4 million of tax benefit in its annualized effective tax rate calculation based on the amount that is expected to offset ordinary income during fiscal year 2022. The remaining $25.9 million of valuation allowance expected to be released relates to carryforwards expected to be utilized in future years and is being recognized as a discrete item in the six months ended December 31, 2021.
(14) COMMITMENTS AND CONTINGENCIES
Operating Leases
Operating lease expense for the three months ended December 31, 20172021 and 2016, respectively, and $4.02020 was $2.5 million and $1.7$2.7 million, duringrespectively. Operating lease expense for the six months ended December 31, 20172021 and 2016, respectively.
AEIX
The Company conducts all operational activities for American Excess Insurance Exchange Risk Retention Group ("AEIX"), a reciprocal risk retention group that provides excess and umbrella healthcare professional and general liability insurance to certain hospital and healthcare system members. The Company is reimbursed by AEIX for actual costs, plus an annual incentive management fee not to exceed $0.5 million per calendar year. The Company received cost reimbursement of $1.42020 was $5.1 million and $1.1$5.6 million, during the three months ended December 31, 2017 and 2016, respectively, and $2.9 million and $2.2 million during the six months ended December 31, 2017 and 2016, respectively. As of December 31, 20172021, the weighted average remaining lease term was 4.3 years and the weighted average discount rate was 4%.
Future minimum lease payments under noncancellable operating leases with initial lease terms in excess of one year were as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | June 30, 2021 |
2022 (a) | $ | 6,003 | | | $ | 11,738 | |
2023 | 12,131 | | | 12,012 | |
2024 | 12,267 | | | 12,145 | |
2025 | 12,301 | | | 12,177 | |
2026 | 9,005 | | | 8,878 | |
Thereafter | 1,324 | | | 1,293 | |
Total future minimum lease payments | 53,031 | | | 58,243 | |
Less: imputed interest | 4,351 | | | 5,289 | |
Total operating lease liabilities (b) | $ | 48,680 | | | $ | 52,954 | |
(a)As of December 31, 2021, future minimum lease payments are for the period from January 1, 2022 to June 30, 2017, $0.62022.
(b)As of December 31, 2021, total operating lease liabilities included $10.3 million in amounts receivable from AEIX are included in due from related partieswithin other current liabilities in the accompanying Condensed Consolidated Balance Sheets.
(15) COMMITMENTS AND CONTINGENCIESOther Matters
The Company is not currently involved in any litigation it believes to be significant.material. The Company is periodically involved in litigation, arising in the ordinary course of business or otherwise, which from time to time may include claims relating to commercial, product liability, tort and personal injury, employment, antitrust, intellectual property, or other regulatory matters. Furthermore, as a public company, the Company may become subject to stockholder derivative or other similar litigation. If current or future government regulations, specifically,including but not limited to those with respect to antitrust or healthcare laws, are interpreted or enforced in a manner adverse to the Company or its business, the Company may be subject to regulatory inquiries or investigations, enforcement actions, penalties and other material limitations which could have a material adverse effect on the Company'sCompany’s business, financial condition and results of operations.
(16)(15) SEGMENTS
The Company delivers its solutions and manages its business through two2 reportable business segments, the Supply Chain Services segment and the Performance Services segment. The Supply Chain Services segment includes the Company'sCompany’s GPO, integrated pharmacy offeringssupply chain co-management and direct sourcing activities. The Performance Services segment includesconsists of 3 sub-brands: PINC AITM, the Company's informatics, collaborative, advisoryCompany’s technology and services government servicesplatform; Contigo Health®, the Company’s direct-to-employer business; and insurance services businesses.RemitraTM, the Company’s digital invoicing and payables business.
The following table presents disaggregated revenue by business segment and underlying source (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net revenue: | | | | | | | |
Segment net revenue | | | | | | | |
Supply Chain Services | | | | | | | |
Net administrative fees | $ | 150,403 | | | $ | 145,339 | | | $ | 299,865 | | | $ | 277,984 | |
Other services and support | 9,326 | | | 4,086 | | | 18,251 | | | 9,677 | |
Services | 159,729 | | | 149,425 | | | 318,116 | | | 287,661 | |
Products | 111,766 | | | 179,670 | | | 230,196 | | | 295,085 | |
Total Supply Chain Services (a) | 271,495 | | | 329,095 | | | 548,312 | | | 582,746 | |
Performance Services (a) | 107,729 | | | 93,732 | | | 196,059 | | | 186,968 | |
Total segment net revenue | 379,224 | | | 422,827 | | | 744,371 | | | 769,714 | |
Eliminations (a) | (9) | | | — | | | (9) | | | — | |
Net revenue | $ | 379,215 | | | $ | 422,827 | | | $ | 744,362 | | | $ | 769,714 | |
(a)Includes intersegment revenue that is eliminated in consolidation. Intersegment revenue is not separately identified in Segments as the amounts are not material.
Additional segment information related to depreciation and amortization expense, capital expenditures and total assets was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Depreciation and amortization expense (a): | | | | | | | |
Supply Chain Services | $ | 13,452 | | | $ | 9,417 | | | $ | 26,596 | | | $ | 18,219 | |
Performance Services | 16,076 | | | 17,810 | | | 32,186 | | | 37,567 | |
Corporate | 2,192 | | | 2,126 | | | 4,423 | | | 4,245 | |
Total depreciation and amortization expense | $ | 31,720 | | | $ | 29,353 | | | $ | 63,205 | | | $ | 60,031 | |
| | | | | | | |
Capital expenditures: | | | | | | | |
Supply Chain Services | $ | 7,315 | | | $ | 2,699 | | | $ | 15,472 | | | $ | 5,575 | |
Performance Services | 12,363 | | | 16,912 | | | 23,386 | | | 35,283 | |
Corporate | 1,932 | | | 271 | | | 3,802 | | | 4,006 | |
Total capital expenditures | $ | 21,610 | | | $ | 19,882 | | | $ | 42,660 | | | $ | 44,864 | |
| | | Three Months Ended December 31, | Six Months Ended December 31, | |
| 2017 | 2016 | 2017 | 2016 | |
Net revenue: | | |
Supply Chain Services | | |
Net administrative fees | $ | 159,343 |
| $ | 129,071 |
| $ | 310,334 |
| $ | 255,047 |
| |
Other services and support | 3,421 |
| 1,201 |
| 5,570 |
| 2,846 |
| |
Services | 162,764 |
| 130,272 |
| 315,904 |
| 257,893 |
| |
Products | 162,101 |
| 142,378 |
| 314,764 |
| 248,507 |
| |
Total Supply Chain Services | 324,865 |
| 272,650 |
| 630,668 |
| 506,400 |
| |
Performance Services | 86,533 |
| 85,850 |
| 171,294 |
| 165,372 |
| |
Net revenue | $ | 411,398 |
| $ | 358,500 |
| $ | 801,962 |
| $ | 671,772 |
| |
| | |
Depreciation and amortization expense (a): | | |
Supply Chain Services | $ | 5,171 |
| $ | 2,453 |
| $ | 10,666 |
| $ | 2,920 |
| |
Performance Services | 23,634 |
| 20,984 |
| 46,551 |
| 41,859 |
| |
Corporate | 2,322 |
| 1,912 |
| 4,315 |
| 3,797 |
| |
Total depreciation and amortization expense | $ | 31,127 |
| $ | 25,349 |
| $ | 61,532 |
| $ | 48,576 |
| |
| | |
Capital expenditures: | | |
Supply Chain Services | $ | 541 |
| $ | 2,149 |
| $ | 848 |
| $ | 2,149 |
| |
Performance Services | 19,742 |
| 13,920 |
| 33,291 |
| 30,771 |
| |
Corporate | 1,692 |
| 1,290 |
| 4,483 |
| 1,405 |
| |
Total capital expenditures | $ | 21,975 |
| $ | 17,359 |
| $ | 38,622 |
| $ | 34,325 |
| |
| | | December 31, 2021 | | June 30, 2021 |
Total assets: | | December 31, 2017 | June 30, 2017 | Total assets: | | | |
Supply Chain Services | | $ | 1,001,803 |
| $ | 1,017,023 |
| Supply Chain Services | $ | 1,475,941 | | | $ | 1,550,300 | |
Performance Services | | 874,269 |
| 888,862 |
| Performance Services | 1,034,427 | | | 1,043,608 | |
Corporate | | 444,091 |
| 601,951 |
| Corporate | 941,097 | | | 928,939 | |
Total assets | | | $ | 2,320,163 |
| $ | 2,507,836 |
| Total assets | 3,451,465 | | | 3,522,847 | |
Eliminations (b) | | Eliminations (b) | (3) | | | 51 | |
Total assets, net | | Total assets, net | $ | 3,451,462 | | | $ | 3,522,898 | |
| |
(a) | Includes amortization of purchased intangible assets. |
(a)Includes amortization of purchased intangible assets.
(b)Includes eliminations of intersegment transactions which occur during the ordinary course of business.
The Company uses Segment Adjusted EBITDA (a financial measure not determined in accordance with generally accepted accounting principles ("Non-GAAP"(“Non-GAAP”)) as its primary measure of profit or loss to assess segment performance and to determine the allocation of resources. The Company also uses Segment Adjusted EBITDA to facilitate the comparison of the segment operating performance on a consistent basis from period to period. The Company defines Segment Adjusted EBITDA as the segment'ssegment’s net revenue and equity in net incomeless cost of unconsolidated affiliates lessrevenue and operating expenses directly attributable to the segment excluding depreciation and amortization, amortization of purchased intangible assets, merger and acquisition related expenses, and non-recurring or non-cash items.items, and including equity in net income of unconsolidated affiliates. Operating expenses directly attributable to the segment include expenses associated with sales and marketing, general and administrative, and product development activities specific to the operation of each segment. Non-recurring items are income or expenses and other items that have not been earned or incurred within the prior two years and are not expected to recur within the next two years. General and administrative corporate expenses that are not specific to a particular segment are not included in the calculation of Segment Adjusted EBITDA. Segment Adjusted EBITDA also excludes any income and expense that has been classified as discontinued operations.
For more information on Segment Adjusted EBITDA and the use of Non-GAAP financial measures, see "Our“Our Use of Non-GAAP Financial Measures"Measures” within Item 2 - Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
A reconciliation of income before income taxes to unaudited Segment Adjusted EBITDA, a Non-GAAP financial measure, is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Income before income taxes | $ | 83,599 | | | $ | 61,561 | | | $ | 223,938 | | | $ | 124,108 | |
Equity in net income of unconsolidated affiliates (a) | (6,116) | | | (4,572) | | | (13,174) | | | (10,499) | |
Interest and investment loss, net | 2,873 | | | 3,398 | | | 5,661 | | | 5,517 | |
Loss (gain) on FFF Put and Call Rights (b) | — | | | 14,507 | | | (64,110) | | | 16,426 | |
Other (income) expense | (2,392) | | | (4,890) | | | (2,072) | | | (8,573) | |
Operating income | 77,964 | | | 70,004 | | | 150,243 | | | 126,979 | |
Depreciation and amortization | 20,870 | | | 19,093 | | | 41,466 | | | 36,567 | |
Amortization of purchased intangible assets | 10,850 | | | 10,260 | | | 21,739 | | | 23,464 | |
Stock-based compensation (c) | 16,330 | | | 7,415 | | | 24,081 | | | 14,790 | |
Acquisition and disposition related expenses | 3,746 | | | 7,918 | | | 7,167 | | | 10,763 | |
Equity in net income of unconsolidated affiliates (a) | 6,116 | | | 4,572 | | | 13,174 | | | 10,499 | |
Deferred compensation plan income (d) | 2,389 | | | 4,803 | | | 2,071 | | | 7,710 | |
Other expense, net | 3,751 | | | 753 | | | 3,778 | | | 4,789 | |
Non-GAAP Adjusted EBITDA | $ | 142,016 | | | $ | 124,818 | | | $ | 263,719 | | | $ | 235,561 | |
| | | | | | | |
Segment Non-GAAP Adjusted EBITDA: | | | | | | | |
Supply Chain Services (e) | $ | 134,280 | | | $ | 118,939 | | | $ | 263,549 | | | $ | 221,590 | |
Performance Services (e) | 39,010 | | | 36,609 | | | 62,725 | | | 73,724 | |
Corporate | (31,274) | | | (30,730) | | | (62,555) | | | (59,753) | |
Non-GAAP Adjusted EBITDA | $ | 142,016 | | | $ | 124,818 | | | $ | 263,719 | | | $ | 235,561 | |
(a)Refer to Note 4 - Investments for more information. |
| | | | | | | | | | | | |
| Three Months Ended December 31, | Six Months Ended December 31, |
| 2017 | 2016 | 2017 | 2016 |
Income before income taxes | $ | 251,277 |
| $ | 283,613 |
| $ | 324,657 |
| $ | 365,044 |
|
Remeasurement gain attributable to acquisition of Innovatix, LLC | — |
| (204,833 | ) | — |
| (204,833 | ) |
Equity in net income of unconsolidated affiliates (a) | (1,257 | ) | (5,127 | ) | (5,509 | ) | (14,706 | ) |
Interest and investment loss, net (b) | 1,508 |
| 857 |
| 3,003 |
| 1,009 |
|
Loss on disposal of long-lived assets | 400 |
| — |
| 1,720 |
| 1,518 |
|
Other income | 13,356 |
| 131 |
| 11,893 |
| (875 | ) |
Operating income | 265,284 |
| 74,641 |
| 335,764 |
| 147,157 |
|
Depreciation and amortization | 17,310 |
| 14,198 |
| 33,817 |
| 28,216 |
|
Amortization of purchased intangible assets | 13,817 |
| 11,151 |
| 27,715 |
| 20,360 |
|
Stock-based compensation (c) | 8,951 |
| 6,423 |
| 17,908 |
| 12,319 |
|
Acquisition related expenses | 1,674 |
| 4,216 |
| 4,773 |
| 7,153 |
|
Remeasurement of tax receivable agreement liabilities (d) | (177,174 | ) | — |
| (177,174 | ) | (5,722 | ) |
ERP implementation expenses (e) | 156 |
| 432 |
| 491 |
| 1,526 |
|
Acquisition related adjustment - revenue (f) | 87 |
| 5,813 |
| 192 |
| 5,964 |
|
Equity in net income of unconsolidated affiliates (a) | 1,257 |
| 5,127 |
| 5,509 |
| 14,706 |
|
Deferred compensation plan income (g) | 1,577 |
| 8 |
| 3,116 |
| 1,103 |
|
Other expense | 603 |
| — |
| 602 |
| — |
|
Adjusted EBITDA | $ | 133,542 |
| $ | 122,009 |
| $ | 252,713 |
| $ | 232,782 |
|
| | | | |
Segment Adjusted EBITDA: | | | | |
Supply Chain Services | $ | 132,045 |
| $ | 119,022 |
| $ | 257,665 |
| $ | 236,326 |
|
Performance Services | 27,929 |
| 28,603 |
| 49,150 |
| 50,914 |
|
Corporate | (26,432 | ) | (25,616 | ) | (54,102 | ) | (54,458 | ) |
Adjusted EBITDA | $ | 133,542 |
| $ | 122,009 |
| $ | 252,713 |
| $ | 232,782 |
|
(b)Refer to Note 5 - Fair Value Measurements for more information. | |
(a) | Refer to Note 4 - Investments for further information regarding equity in net income of unconsolidated affiliates. |
| |
(b) | Represents interest expense, net and realized gains and losses on our marketable securities. |
| |
(c) | Represents(c)Includes non-cash employee stock-based compensation expense and stock purchase plan expense of $0.1 million for both the three months ended December 31, 2021 and 2020and $0.3 million and $0.2 million during the three months ended December 31, 2017 and 2016, respectively, and $0.2 million and $0.3 million during the six months ended December 31, 2017 and 2016, respectively. |
| |
(d) | Represents adjustments to TRA liabilities for a 14% decrease in the U.S. federal corporate income tax rate that occurred during the six months ended December 31, 2017, which is a result of the TCJA that was enacted on December 22, 2017, and a 1% decrease in the North Carolina state income tax rate that occurred during the six months ended December 31, 2016. |
| |
(e) | Represents implementation and other costs associated with the implementation of our enterprise resource planning ("ERP") system. |
| |
(f) | Upon acquiring Innovatix and Essensa, we recorded a net $5.6 million purchase accounting adjustment to Adjusted EBITDA during the three months ended December 31, 2016 that reflects the fair value of administrative fees related to member purchases that occurred prior to December 2, 2016, but were reported to us subsequent to that date through December 31, 2016. Under our revenue recognition accounting policy, which is an accordance with GAAP, these administrative fees would be ordinarily recorded as revenue when reported to us; however, the acquisition method of accounting requires us to estimate the amount of purchases prior to the acquisition date and to record the fair value of the administrative fees to be received from those purchases as an account receivable (as opposed to recognizing revenue when these transactions are reported to us) and record any corresponding revenue share obligation as a liability. The purchase accounting adjustment amounted to an estimated $23.3 million of accounts receivable relating to these administrative fees and an estimated $4.1 million for the related revenue share obligation through December 31, 2016.
|
This item also includes non-cash adjustments to deferred revenue of acquired entities of $0.2 million and $0.3 million for the three and six months ended December 31, 2016,2021 and 2020, respectively. Business combination accounting rules require the Company to record a deferred revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which was based on upfront software license update fees and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one year in duration, our GAAP revenues for the one year period subsequent to the acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwise been recorded by the acquired entity. The Non-GAAP adjustment to software license update fees and product support revenues is intended to include, and thus reflect, the full amount of such revenues.
(g) (d)Represents realized and unrealized gains and losses and dividend income on deferred compensation plan assets.
(e)Includes intersegment revenue which is eliminated in consolidation.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report. This discussion is designed to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. In addition, the following discussion includes certain forward-looking statements. For a discussion of important factors, including the continuing development of our business and other factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see the discussions under "Risk Factors"“Risk Factors” and "Cautionary“Cautionary Note Regarding Forward-Looking Statements"Statements” herein and in the Company'sour Form 10-K for the fiscal year ended June 30, 20172021 (the "2017“2021 Annual Report"Report”), filed with the Securities and Exchange Commission ("SEC"(“SEC”).
Business Overview
Our Business
Premier, Inc. ("Premier"(“Premier”, the "Company"“Company”, "we"“we”, or "our"“our”) is a leading healthcare performance improvement company, uniting an alliance of approximately 3,900 U.S. hospitals, and health systems and approximately 150,000 other providers and organizations to transform healthcare. We partner with hospitals, health systems, physicians and other healthcare providers and organizations with the common goal of improving and innovating in the clinical, financial and operational areas of their businesses to meet the demands of a rapidly evolving healthcare industry. We deliver value through a comprehensive technology-enabled platform that offers critical supply chain services, clinical, financial,
operational and population healthvalue-based care software-as-a-service ("SaaS"(“SaaS”) informaticsas well as licensed-based clinical analytics products, advisoryenterprise analytics licenses, consulting services, and performance improvement collaborative programs.
As of December 31, 2017, we were controlled by 165 U.S. hospitals, health systemsprograms, third-party administrator services and digital invoicing and payment processes for healthcare providers and vendors. We also provide services to other healthcare organizations, which represented 1,425 owned, leasedbusinesses including food service, schools and managed acute care facilities and other non-acute care organizations, through their ownership of Class B common stock. As of December 31, 2017, the Class A common stock and Class B common stock represented approximately 40% and 60%, respectively, of our combined Class A and Class B common stock. All of our Class B common stock was held beneficially by our member owners and all of our Class A common stock was held by public investors, which may include member owners that have received shares of our Class A common stock in connection with previous quarterly exchanges pursuant to an exchange agreement (the "Exchange Agreement") entered into by the member owners in connection with the completion of our initial public offering on October 1, 2013 (see Note 1 - Organization and Basis of Presentation to the accompanying condensed consolidated financial statements for more information).universities.
We generated net revenue, net income and Adjusted EBITDA (a financial measure not determined in accordance with generally accepted accounting principles ("Non-GAAP"(“Non-GAAP”)) for the periods presented as follows (in thousands):
| | | Three Months Ended December 31, | Six Months Ended December 31, | | Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | 2016 | 2017 | 2016 | | 2021 | | 2020 | | 2021 | | 2020 |
Net revenue | $ | 411,398 |
| $ | 358,500 |
| $ | 801,962 |
| $ | 671,772 |
| Net revenue | $ | 379,215 | | | $ | 422,827 | | | $ | 744,362 | | | $ | 769,714 | |
Net income | $ | 19,769 |
| $ | 246,184 |
| $ | 80,385 |
| $ | 304,279 |
| Net income | 77,232 | | | 44,904 | | | 198,538 | | | 202,432 | |
Non-GAAP Adjusted EBITDA | $ | 133,542 |
| $ | 122,009 |
| $ | 252,713 |
| $ | 232,782 |
| Non-GAAP Adjusted EBITDA | 142,016 | | | 124,818 | | | 263,719 | | | 235,561 | |
See “Our Use of Non-GAAP Financial Measures” and “Results of Operations” below for a discussion of our use of Non-GAAP Adjusted EBITDA and a reconciliation of net income to Non-GAAP Adjusted EBITDA.
Our Business Segments
Our business model and solutions are designed to provide our members and other customers access to scale efficiencies spread thewhile focusing on optimization of information resources and cost of their development,containment, provide actionable intelligence derived from anonymized data in our data warehouse provided by our members, mitigate the risk of innovation, and disseminate best practices that will help our member organizations and other customers succeed in their transformation to higher quality and more cost-effective healthcare. We deliver our integrated platform of solutions that address the areas of total cost management, quality and safety improvement and population health management through two business segments: Supply Chain Services and Performance Services.
Segment net revenue for the three months ended December 31, 2021 and 2020 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Change | | % of Net Revenue |
Net revenue: | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Supply Chain Services | $ | 271,495 | | | $ | 329,095 | | | $ | (57,600) | | | (18) | % | | 72 | % | | 78 | % |
Performance Services | 107,729 | | | 93,732 | | | 13,997 | | | 15 | % | | 28 | % | | 22 | % |
Net revenue | $ | 379,224 | | | $ | 422,827 | | | $ | (43,603) | | | (10) | % | | 100 | % | | 100 | % |
Segment net revenue for the six months ended December 31, 2021 and 2020 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended December 31, | | Change | | % of Net Revenue |
Net revenue: | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Supply Chain Services | $ | 548,312 | | | $ | 582,746 | | | $ | (34,434) | | | (6) | % | | 74�� | % | | 76 | % |
Performance Services | 196,059 | | | 186,968 | | | 9,091 | | | 5 | % | | 26 | % | | 24 | % |
Net revenue | $ | 744,371 | | | $ | 769,714 | | | $ | (25,343) | | | (3) | % | | 100 | % | | 100 | % |
Our Supply Chain Services segment includes one of the largest healthcare group purchasing organization ("GPO"(“GPO”) programs in the United States, serving acute, non-acute non-healthcare and alternatenon-healthcare sites and includes integrated pharmacyproviding supply chain co-management and our direct sourcing activities. Supply Chain Services net revenue grew from $272.7 million for the three months ended December 31, 2016 to $324.9
million for the three months ended December 31, 2017, representing net revenue growth of 19%, and accounted for 79% of our overall net revenue for the three months ended December 31, 2017. Supply Chain Services net revenue grew from $506.4 million for the six months ended December 31, 2016 to $630.7 million for the six months ended December 31, 2017, representing net revenue growth of 25%, and accounted for 79% of our overall net revenue for the six months ended December 31, 2017. We generate revenue in our Supply Chain Services segment from administrative fees received from suppliers based on the total dollar volume of supplies purchased by our members and other customers, fees from supply chain co-management and through product sales in connection with our integrated pharmacy and direct sourcing activities.
Our Performance Services segment includes oneconsists of the largest informaticsthree sub-brands: PINC AITM, our technology and advisory services businessesplatform with offerings that help optimize performance in three main areas – clinical intelligence, margin improvement and value-based care – using advanced analytics to identify improvement opportunities, consulting services for clinical and operational design, and workflow solutions to hardwire sustainable change in the United States focused on healthcare providers. provider, life sciences and payer markets; Contigo Health®, our direct-to-employer business which provides third party administrator services and management of health benefit programs; and RemitraTM, our digital invoicing and payables business. Each sub-brand serves different markets but are all united in our vision to optimize provider performance and accelerate industry innovation for better, smarter healthcare. For additional information, please see “Performance Services net revenue increased from $85.9 millionRealignment for the three months ended December 31, 2016 to $86.5 million for the three months ended December 31, 2017, representing a 1% increase, and accounted for 21% ofFiscal 2022” under “Item 1. Business” in our overall net revenue for the three months ended December 31, 2017. Performance Services net revenue increased from $165.4 million for the six months ended December 31, 2016 to $171.3 million for the six months ended December 31, 2017, representing a 4% increase, and accounted for 21% of our overall net revenue for the six months ended December 31, 2017. Our SaaS informatics products utilize our comprehensive data set to provide actionable intelligence to our members, enabling them to benchmark, analyze and identify areas of improvement across three main categories: cost management, quality and safety and population health management. The Performance Services segment also includes our technology-enabled performance improvement collaboratives, advisory services, government services and insurance management services.2021 Annual Report.
Acquisitions
Acquisition of Innovatix and EssensaInvoice Delivery Services, LP Assets
Prior to December 2, 2016, the Company,On March 1, 2021, we acquired, through its consolidatedour indirect, wholly-owned subsidiary, Premier Supply Chain Improvement ("PSCI"), held 50%IDS, LLC, substantially all the assets and assumed certain liabilities of the membership interests in Innovatix, LLC ("Innovatix"). On December 2, 2016, the Company, through PSCI, acquired the remaining 50% ownership interests of Innovatix and 100% of the ownership interest in Essensa Ventures, LLC ("Essensa"Invoice Delivery Services, LP (“IDS”) Thefor an adjusted purchase price afterof $80.7 million, subject to certain adjustments, pursuant to the purchase agreement,of which $80.0 million was $336.0 million. The acquisition was fundedpaid at closing with borrowings under our Credit Facility (as defined in Note 8 - Debt and Notes Payable to the Company's credit facility dated June 24, 2014, as amended on June 4, 2015 (the "Credit Facility")accompanying condensed consolidated financial statements). Innovatix IDS is being integrated within Premier under the brand name RemitraTM and Essensa are GPOs focused on serving alternate site healthcare providers and other non-healthcare organizations throughout the United States. The Company reports Innovatix and Essensais reported as part of its Supply Chainthe Performance Services segment. See Note 3 - Business Acquisitions for more information.
Acquisition of Acro Pharmaceuticals
On August 23, 2016, the Company, through its consolidated subsidiary, NS3 Health, LLC, acquired 100% of the membership interests of Acro Pharmaceutical Services LLC ("Acro") and Community Pharmacy Services, LLC (collectively with Acro, "Acro Pharmaceuticals"). The aggregate purchase price, after adjustments pursuant to the purchase agreement, was $62.9 million. The acquisition was funded with available cash on hand. Acro Pharmaceuticals is a specialty pharmacy business that provides customized healthcare management solutions to members. The Company reports Acro Pharmaceuticals as part of its Supply Chain Services segment. See Note 3 - Business Acquisitionsaccompanying condensed consolidated financial statements for morefurther information.
Market and Industry Trends and Outlook
We expect that certain trends and economic or industry-wideindustrywide factors will continue to affect our business, in both in the short-termshort- and long-term. We have based our expectations described below on assumptions made by us and on information currently available to us. To the extent our underlying assumptions about, or interpretation of, available information prove to be incorrect, our actual results may vary materially from our expected results. See “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in the 2021 Annual Report.
Trends in the U.S. healthcare market affect our revenues and costs in the Supply Chain Services and Performance Services segments. The trends we see affecting our current healthcare business include the impact of the implementation of current or future healthcare legislation, particularly the uncertainty regardingpotential for the statusAffordable Care Act (“ACA”) to be materially altered by Congress, through regulatory action by government agencies, or in the event of a change of party control in Congress. Actions related to the ACA its repeal, replacement, or other modification, the enactment of new regulatorycould be disruptive for Premier and our customers, impacting revenue, reporting requirements, expansion and contraction of insurance coverage and associated costs that may impact subscriber elections, intense cost pressure, payment reform, provider consolidation,reforms, shift in care to the alternate site market and increased data availability and transparency. To meet the demands of this environment, there will be increased focus on scale and cost containment and healthcare providers will need to measure and report on and bear financial risk for outcomes. WeOver the long-term, we believe these trends will result in increased demand for our Supply Chain Services and Performance Services solutions in the areas of cost management, quality and safety, and population health management,value-based care, however, there are uncertainties and risks that may affect the actual impact of these anticipated trends, expected demand for our services or related assumptions on our business. See "Cautionary“Cautionary Note Regarding Forward-Looking Statements"Statements” for more information.
COVID-19 Pandemic, Variants Thereof, Recurrences or Similar Pandemics
In addition to the trends in the U.S. healthcare market discussed above, we face known and unknown uncertainties arising from the outbreak of the novel coronavirus (“COVID-19”) and the resulting global pandemic and financial and operational uncertainty, including its impact on the overall economy, our sales, operations and supply chains, our members and other customers, workforce and suppliers, and countries. As a result of the COVID-19 pandemic, variants thereof, and potential future pandemic outbreaks, we face significant risks including, but not limited to:
•Changes in the demand for our products and services. We experienced and may continue to experience demand uncertainty from both material increases and decreases in demand as a result of the COVID-19 pandemic. There was a material increase in demand for personal protective equipment (“PPE”), drugs and other supplies directly related to treating and preventing the spread of COVID-19 and variants thereof during fiscal 2020 and 2021. Patients, hospitals and other medical facilities have deferred and continue to defer some elective procedures and routine medical visits during the crisis due to ongoing and continuing volatility or as the result of government orders or advisories. This created a material decline in the demand for supplies and services not related to COVID-19 during 2020, 2021 and the first half of 2022, and such lower demand may continue through fiscal 2022 and beyond if COVID-19 vaccine protection wanes due to COVID-19 variants. In addition, as a result of our members’ focus on managing the effects of COVID-19 on patients and their businesses, we have experienced a decrease in demand for our consulting and other performance service engagements. Furthermore, as a result of the COVID-19 pandemic, many of our members’ non-acute or non-healthcare facilities, such as education and hospitality businesses, closed or operated on a limited or reduced basis. These facilities have re-opened at a slower pace and, as a result, we may see a material reduction in product sales to those facilities. The extent to which these impacts on demand may continue, and the effect they may have on our business and operating results, will depend upon future developments that are highly uncertain and cannot be accurately predicted.
•Limited access to our members’ facilities that impacts our ability to fulfill our contractual requirements. Our member hospitals and non-acute care sites have experienced, and continue to experience, reduced or limited access for non-patients, including our field teams, consultants and other professionals, and travel restrictions have impacted our employees’ ability to travel to our members’ facilities and our performance under our existing contracts. The long-
term continuation, or any future recurrence of these circumstances may negatively impact the ability of our employees to effectively deliver existing or sell new products and services to our members and could affect our performance of our existing contracts.
•Materials and personnel shortages and disruptions in supply chain, including manufacturing and shipping. The global supply chain has been materially disrupted due to personnel shortages associated with ongoing COVID-19 rates of infection, stay-at-home orders, border closings, rapidly escalating shipping costs and material logistical delays due to port congestion. Border closings and restrictions in response to COVID-19, particularly regarding China, have impacted our access to products for our members. Staffing or personnel shortages due to shelter-in-place orders and quarantines, or other public health measures, have led to material logistical delays and an increase in shipping costs which have impacted and may continue to impact us and our members, other customers or suppliers. In addition, due to unprecedented demand during the COVID-19 pandemic, there have been widespread shortages in certain product categories. During the COVID-19 pandemic, we lost revenue when member healthcare systems chose to source products directly themselves rather than through our GPO when incumbent suppliers could not deliver products in a timely manner or at all, and we were not able to locate reputable alternative suppliers. In the food service line, COVID-19 related illnesses impacted food processing suppliers and led to plant closures. If the supply chain for materials used in the products purchased by our members through our GPO or products contract manufactured through our direct sourcing business continue to be adversely impacted by the COVID-19 pandemic, our supply chain may continue to be disrupted. Failure of our suppliers, contract manufacturers, distributors, contractors and other business partners to meet their obligations to our members, other customers or to us, or material disruptions in their ability to do so due to their own financial or operational difficulties, may adversely impact our operations.
•Requests for contract modifications, payment deferrals or exercises of force majeure clauses. We have and may continue to receive requests for contract modifications, payment waivers and deferrals, payment reductions or amended payment terms from our contract counterparties. We have and may continue to receive requests to delay service or payment on performance service contracts. In addition, we have and may continue to receive requests from our suppliers for increases to their contracted prices, and such requests may be implemented in the future. Inflation in such contract prices may impact member utilization of items and services available through our GPO contracts, which could adversely impact our net administrative fees revenue and direct sourcing revenue. In addition, several pharmacy suppliers have exercised force majeure clauses related to failure to supply clauses in their contracts with us because they are unable to obtain raw materials for manufacturing from India and China. The standard failure to supply language in our contracts contains financial penalties to suppliers if they are unable to supply products, which such suppliers may not be able to pay. In addition, we may not be able to source products from alternative suppliers on commercially reasonable terms, or at all.
•Overall economic and capital markets decline. The impact of the COVID-19 pandemic and variants thereof and associated supply chain disruptions and inflation could result in a prolonged recession or depression in the United States or globally that could harm the banking system, limit demand for all products and services and cause other foreseen and unforeseen events and circumstances, all of which could negatively impact us. The continued spread of COVID-19 has led to and could continue to lead to severe disruption and volatility in the United States and global capital markets, which could increase our cost of capital and adversely affect our ability to access the capital markets in the future. In addition, trading prices on the public stock market, as well as that of our Class A common stock, have been highly volatile as a result of the COVID-19 pandemic.
•Managing the evolving regulatory environment. In response to the COVID-19 pandemic and variants thereof, federal, state and local governments are issuing new rules, regulations, changing reimbursement eligibility rules, orders and advisories on a regular basis. These government actions can impact us and our members, other customers and suppliers.
The ultimate impact of COVID-19, variants thereof, recurrences, or similar pandemics on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of any pandemic and the related length of its impact on the United States and global economies, which are uncertain and cannot be predicted at this time. The impact of the COVID-19 pandemic, variants thereof, recurrences, or future similar pandemics may also exacerbate many of the other risks described in Item 1A. “Risk Factors” section of the 2021 Annual Report. Despite our efforts to manage these impacts, their ultimate impact depends on factors beyond our knowledge or control, including the duration and severity of any outbreak and actions taken to contain its spread and mitigate its public health effects. The foregoing and other continued disruptions in our business as a result of the COVID-19 pandemic, variants thereof, recurrences or similar pandemics could result in a material adverse effect on our business, results of operations, financial condition, cash flows, prospects and the trading prices of our securities in the near-term and through fiscal 2022 and beyond.
Critical Accounting Policies and Estimates
Management's DiscussionRefer to Note 1 - Organization and Analysis of Financial Condition and Results of Operations is primarily based upon ourNote 2 - Significant Accounting Policies to the accompanying condensed consolidated financial statements which have been prepared in accordance with GAAP. The preparation offor more information related to our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Significant estimates, including estimates for allowances for doubtful accounts, useful lives of property and equipment, stock-based compensation, payables under tax receivable agreements ("TRA"), deferred tax balances including valuation allowances on deferred tax assets, uncertain tax positions, values of investments not publicly traded, deferred revenue, future cash flows associated with asset impairments, values of put and call rights and the allocation of purchase prices are evaluated on an ongoing basis. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Given the Company's use of estimates referenced above, it is important to highlight that on December 22, 2017,in the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("TCJA"). The TCJA includes significant changes to the U.S. corporate income tax system, specifically reducing the U.S. federal corporate income tax rate from 35% to 21%. As changes under the TCJA are broad and complex, the Company continues to interpret the breadthpreparation of its immediate and long-term impacts. The Company notes that concurrent with the enactment of the TCJA, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the TCJA.
SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting required under the Financial Accounting Standards Board Accounting Standards Codification ("ASC") 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional amount on its financial statements. If a company cannot determine a provisional estimate to be included on its financial statements it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately prior to the enactment of the TCJA. With this in mind, the Company has prescribed such provisional relief via SAB 118 by incorporating various estimates regarding timing and determination of temporary difference recognition when calculating components of its deferred tax balances. While the Company is able to provide reasonable estimates of the impactsas well as information related to the TCJA, the final impact may differ from these estimates, due to, among other things,material changes in interpretations, assumptions, additional guidance that may be released by the I.R.S. and other actions that we may take that are yet to be determined.
There have been no material changes to the Company'sour significant accounting policies as describedthat were included in the Company's 2017our 2021 Annual Report.
New Accounting Standards
New accounting standards that we have recently adopted as well as those that have been recently issued but not yet adopted by the Companyus are included in Note 2 - Significant Accounting Policies to the accompanying condensed consolidated financial statements, which is incorporated herein by reference.
Key Components of Our Results of Operations
Net Revenue
Net revenue consists of service revenue, which includes net administrative fees revenue and other services and support revenue, and productproducts revenue. Net administrative fees revenue consists of GPO administrative fees in our Supply Chain Services segment. Other services and support revenue consists primarily of fees generated by our Performance Services segment in connection withand supply chain co-management revenue generated by our SaaS informatics products subscriptions, license fees, advisory services and performance improvement collaborative subscriptions. ProductSupply Chain Services segment. Products revenue consists of integrated pharmacy and direct sourcing product sales, which are included in theour Supply Chain Services segment.
Supply Chain Services
Supply Chain Services revenue consists of GPO net administrative fees (gross administrative fees received from suppliers, reduced by the amount of any revenue share paid to members), specialty pharmacy revenue,supply chain co-management and direct sourcing revenue and managed service revenue.
The success of our Supply Chain Services revenue streams are influenced by our ability to negotiate favorable contracts with suppliers and members, the number of members that utilize our GPO supplier contracts and the volume of their purchases, the number of members that utilize our integrated pharmacy, as well as the impact of changes in the defined allowable reimbursement amounts determined by Medicare, Medicaid and other managed care plans and the number of members and other customers that purchase products through our direct sourcing activities and the impact of competitive pricing. Our managed services line of business is a fee for service model created to perform supply chain related services for members, including pharmacy benefit management ("PBM") services in partnership with a national PBM company.
Performance Services
Performance Services revenue consists of SaaS informaticsof:
•Health care information technology license and SaaS-based clinical, margin improvement and value-based care products subscriptions, license fees, performance improvement collaborative and other service subscriptions and professional fees for advisoryconsulting services under our PINC AI technology and services platform;
•insurance services management fees and commissions from endorsed commercial insurance programs.programs;
•third party administrator fees for our Contigo Health direct to employer business; and
•customer fees for our Remitra digital invoicing and payables business.
Our Performance Services growth will depend upon the expansion of our SaaS informatics products, performance improvement collaborativesPINC AI technology and advisory services platform to new and existing members impactand other customers, expansion of applied research initiatives,our Contigo Health and Remitra businesses to new and existing members, renewal of existing subscriptions to our SaaS informaticsand licensed software products, our ability to generate additional applied sciences engagements, our ability to sell enterprise analytics licenses to new and existing customers at rates sufficient to offset the loss of recurring SaaS-based revenue due to the conversion to an enterprise analytics license and expansion into new markets with potential future acquisitions.markets.
Cost of Revenue
Cost of revenue consists of cost of service revenue and cost of products revenue.
Cost of service revenue includes expenses related to employees (including compensation and benefits) and outside consultants who directly provide services related to revenue-generating activities, including advisoryconsulting services to members and other customers, third-party administrator services and implementation services related to our SaaS and licensed software products along with associated amortization of certain capitalized contract costs. Amortization of contract costs represent amounts that have been capitalized and reflect the incremental costs of obtaining and fulfilling a contract. Amortization of contract costs included within cost of service revenue include costs related to implementing SaaS informatics products.tools. Cost of service revenue also includes expenses related to hosting services, related data center capacity costs, third-party product license expenses and amortization of the cost of internal use software.internally developed software applications.
Cost of productproducts revenue consists of purchase and shipment costs for specialty pharmaceuticals and direct sourced medical and commodity products. Our cost of productproducts revenue is influenced by the cost and availability of specialty pharmaceuticals and the manufacturing and transportation costs associated with direct sourced medical and commodity products.
Other Operating Income
Other operating income includes the adjustment to TRA liabilities. Changes in estimated TRA liabilities that are the result of a change in tax accounting method, including the impacts of the TCJA, are recorded as a component of other operating income in the Condensed Consolidated Statements of Income. Changes in estimated TRA liabilities that are related to new basis changes as a result of the exchange of Class B common units for a like number of shares of Class A common stock or as a result of departed member owners are recorded as an increase to additional paid-in capital in the Condensed Consolidated Statements of Stockholders' Deficit. See "Income Tax Expense" below for additional information.
Operating Expenses
Operating expenses includes selling, general and administrative expenses, research and development expenses and amortization of purchased intangible assets.
Selling, general and administrative expenses are directly associated with selling and administrative functions and support of revenue-generating activities including expenses to support and maintain our software-related products and services. Selling, general and administrative expenses primarily consist of compensation and benefits related costs, travel-related expenses, business development expenses, including costs for business acquisition opportunities, indirect costs such as insurance, professional fees and other general overhead expenses, and adjustments to TRA liabilities.amortization of certain contract costs. Amortization of contract costs represent amounts, including sales commissions, that have been capitalized and reflect the incremental costs of obtaining and fulfilling a contract.
Research and development expenses consist of employee-related compensation and benefit expenses and third-party consulting fees of technology professionals, net of capitalized labor, incurred to develop our software-related products and services.services prior to reaching technological feasibility.
Amortization of purchased intangible assets includes the amortization of all identified intangible assets resulting from acquisitions.assets.
Other Income (Expense), Net
Other income (expense) income, net, includes equity in net income of unconsolidated affiliates that is generated from our equity method investments. Our equity method investments primarily consist of our 49% ownershipinterests in FFF Enterprises, Inc. ("FFF"(“FFF”), Exela Holdings, Inc. (“Exela”), and priorPrestige Ameritech Ltd. (“Prestige”) (see Note 4 - Investments). Other income (expense), net, also includes the change in the fair value of the FFF Call Right and the gain recognized due to the acquisitiontermination of Innovatixthe FFF Put Right and Essensa on December 2, 2016, included our 50% ownership interest in Innovatix. In connection withderecognition of the acquisition of Innovatix and Essensa, the Company recorded a one-time gain of $205.1 million related to the remeasurement of our historical 50% equity method investment in Innovatix to fair value. Other income, net, also includesassociated liability (see Note 5 - Fair Value Measurements), interest income and expense, realized and unrealized gains or losses on deferred compensation plan assets, and gains or losses on the disposal of assets.
assets, and any impairment on our held-to-maturity investments.
Income Tax Expense (Benefit)
The Company's income tax expense is attributable to the activities of the Company, PHSI and PSCI, all of which are subchapter C corporations and are subject to U.S. federal and state income taxes. In contrast, under the provisions of federal and state laws, Premier LP is not subject to federal and state income taxes as the income realized by Premier LP is taxable to its partners. The Company’s overall effective tax rate differs from the U.S. statutory tax rate primarily due to the aforementioned ownership structure as well as other items noted in Note 13 - Income Taxes.
Given the Company’s ownership and capital structure, various effective tax rates are calculated for specific tax items. For example, the deferred tax benefit related to stock-based compensation expense (see Note 12 - Stock-Based Compensation) is calculated based on the effective tax rate of PHSI, the legal entity where the majority of stock-based compensation expense is recorded. The Company’s effective tax rate, as discussed in Note 13 - Income Taxes, represents the effective tax rate computed in accordance with generally accepted accounting principles ("GAAP") based on total income tax expense (reflected in income tax expense in the Condensed Consolidated Statements of Income) of the Company, PHSI and PSCI, divided by consolidated pre-tax income.
Non-GAAP Adjusted Fully Distributed Net Income, a Non-GAAP financial measure as defined below in “Our Use of Non-GAAP Financial Measures”, is calculated net of taxes based on the Company’s fully distributedour estimated annual effective tax rate for federal and state income tax, adjusted for the Companyunusual or infrequent items, as we are a whole as if it were one taxable entityconsolidated filing group for federal income tax purposes with all of its subsidiaries'our subsidiaries’ activities included. Prior to the enactment of the Act, theThe tax rate used to compute the Non-GAAP Adjusted Fully Distributed Net Income was 39%.25% and 24% for the six months ended December 31, 2021 and 2020, respectively. The change in the tax rate used to compute Adjusted Net Income is due to our internal legal entity reorganization of our corporate subsidiaries for the purpose of simplifying our subsidiary reporting structure on December 1, 2021 (the “Subsidiary Reorganization”) resulting in the release of $32.3 million of valuation allowance of our deferred tax asset in the fiscal year ending June 30, 2022. As a result of the TCJA,Subsidiary Reorganization, one of our consolidated subsidiaries is expected to have sufficient income to utilize its net operating loss and research and development credit carryforwards.
During the first quarter of fiscal 2022, we made substantial progress on the Subsidiary Reorganization and as we expected to complete it prior to December 31, 2021, we released the valuation allowance. On December 1, 2021, we completed the Subsidiary Reorganization and reassessed the portion of the valuation allowance benefited through fiscal 2022 ordinary income and the portion included as a discrete item. Of the $32.3 million valuation allowance expected to be released, $6.4 million is included in the estimated annual effective tax rate will be reduced for the fiscal year. However, for the purpose of computing Non-GAAP Adjusted Fully Distributed Net Income for the current quarter, the Company continues to use the 39% rate duecalculation to the rate change becoming effectiveextent such carryforwards are projected to offset fiscal 2022 ordinary income. The remaining $25.9 million of valuation allowance expected to be released has been included as of January 1, 2018. Going forward,a discrete item in the Company will adjust its fully distributed tax rate to 25% to determine its Non-GAAP Adjusted Fully Distributed Net Income for the remainder of fiscal year 2018.six months ended December 31, 2021.
Net Income Attributable to Non-Controlling Interest
As of December 31, 2017, we owned an approximate 40% controlling general partner interest in Premier LP through our wholly-owned subsidiary, Premier Services, LLC ("Premier GP"). NetWe recognize net income attributable to non-controlling interest representsfor non-Premier ownership in our consolidated subsidiaries which hold interest in our equity method investments. At December 31, 2021, we owned approximately 26%, 21% and 15% of the portionmembership interest of PRAM Holdings, LLC (“PRAM”), DePre Holdings, LLC (“DePre”) and ExPre Holdings, LLC (“ExPre”), respectively. We recognized net income attributable to non-controlling interest for the limited partners74%, 79% and 85% interest held in PRAM, DePre and ExPre, respectively, by member health systems or their affiliates. PRAM, DePre and ExPre are investments we made as part of Premier LP, which was reduced from approximately 63% as of June 30, 2017our long-term supply chain resiliency program to approximately 60% aspromote domestic and geographically diverse manufacturing and to help ensure a robust and resilient supply chain for essential medical products.
As of December 31, 2017, as2021, we own 92% of the equity interest in Contigo Health and recognized net income attributable to non-controlling interest for the 4% of equity held by an affiliate of a resultmember health system in addition to 4% held by certain customers of completed quarterly exchanges pursuant to the Exchange Agreement (see Note 9 - Redeemable Limited Partners' Capital).Contigo Health.
Our Use of Non-GAAP Financial Measures
The other key business metrics we consider are EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow, which are all Non-GAAP financial measures.
We define EBITDA as net income before income or loss from discontinued operations, net of tax, interest and investment income or expense, net, income tax expense, depreciation and amortization and amortization of purchased intangible assets. We define Adjusted EBITDA as EBITDA before merger and acquisition related expenses and non-recurring, non-cash or non-operating items and including equity in net income of unconsolidated affiliates. For all Non-GAAP financial measures, we consider non-recurring items to be income or expenses and other items that have not been earned or incurred within the prior two years and are not expected to recur within the next two years. Such items include certain strategic and financial restructuring expenses. Non-operating items include gaingains or losslosses on the disposal of assets and interest and investment income or expense.
We define Segment Adjusted EBITDA as the segment'ssegment’s net revenue less cost of revenue and operating expenses directly attributable to the segment excluding depreciation and amortization, amortization of purchased intangible assets, merger and acquisition related expenses and non-recurring or non-cash items and including equity in net income of unconsolidated affiliates. Operating expenses directly attributable to the segment include expenses associated with sales and marketing, general and administrative, and product development activities specific to the operation of each segment. General and administrative corporate expenses that are not specific to a particular segment are not included in the calculation of Segment Adjusted EBITDA. Segment Adjusted EBITDA also excludes any income and expense that has been classified as discontinued operations.
We define Adjusted Fully Distributed Net Income as net income attributable to Premier (i) excluding income or loss from discontinued operations, net, (ii) excluding income tax expense, (ii)(iii) excluding the impact of adjustment of redeemable limited partners'partners’ capital to redemption amount, (iii)(iv) excluding the effect of non-recurring andor non-cash items, (iv)including certain strategic and financial restructuring expenses, (v) assuming the exchange of all the Class B common units for shares of Class A common stock, which results in the elimination of non-controlling interest in Premier LP and (v)(vi) reflecting an adjustment for income tax expense on Non-GAAP fully distributed net income before income taxes at our estimated annual effective income tax rate.rate, adjusted for unusual or infrequent items. We define Adjusted Fully Distributed Earnings per Share as Adjusted Fully Distributed Net Income divided by diluted weighted average shares (see Note 11 - Earnings Per Share).
We define Free Cash Flow as net cash provided by operating activities from continuing operations less distributions and TRATax Receivable Agreement (“TRA”) payments to limited partners, early termination payments to certain former limited partners that elected to execute a Unit Exchange and Tax Receivable Acceleration Agreement (“Unit Exchange Agreement”) in connection with our August 2020 Restructuring and purchases of property and equipment. Free Cash Flow does not represent discretionary cash available for spending as it excludes certain contractual obligations such as debt repayments.
Adjusted EBITDA and Free Cash Flow are supplemental financial measures used by us and by external users of our financial statements and are considered to be indicators of the operational strength and performance of our business. Adjusted EBITDA and Free Cash Flow measures allow us to assess our performance without regard to financing methods and capital structure and without the impact of other matters that we do not consider indicative of the operating performance of our business. More specifically, Segment Adjusted EBITDA is the primary earnings measure we use to evaluate the performance of our business segments.
We use Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results prepared in accordance with GAAP, provides a more complete understanding of factors and trends affecting our business. We believe Adjusted EBITDA and Segment Adjusted EBITDA assist our Board of Directors, management and investors in comparing our operating performance on a consistent basis from period to period because they remove the impact of earnings elements attributable to our asset base (primarily depreciation and amortization) and, certain items outside the control of our management team, e.g. taxes, as well as other non-cash items (such as impairment of intangible assets, purchase accounting adjustments and stock-based compensation) and, non-recurring items (such as strategic and financial restructuring expenses) and income and expense that has been classified as discontinued operations from our operating results. We believe Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share assist our Board of Directors, management and investors in comparing our net income and earnings per share on a consistent basis from period to period because these measures remove non-cash (such as impairment of intangible assets, purchase accounting adjustments and stock-based compensation) and non-recurring items (such
as strategic and financial restructuring expenses), and eliminate the variability of non-controlling interest that results from member owner exchanges of Class B common units for shares of Class A common stock. We believe Free Cash Flow is an important measure because it represents the cash that we generate after payment of tax distributions to limited partners, payments to certain former limited partners that elected to execute a Unit Exchange Agreement and capital investment to maintain existing products and services and ongoing business operations, as well as development of new and upgraded products and services to support future growth. Our Free Cash Flow allows us to enhance stockholder value through acquisitions, partnerships, joint ventures, investments in related businesses and debt reduction.
Despite the importance of these Non-GAAP financial measures in analyzing our business, determining compliance with certain financial covenants in our Credit Facility, measuring and determining incentive compensation and evaluating our operating performance relative to our competitors, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow are not measurements of financial performance under GAAP, may have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, net income, net cash provided by operating activities, or any other measure of our performance derived in accordance with GAAP.
Some of the limitations of the EBITDA, Adjusted EBITDA and Segment Adjusted EBITDA measures include that they do not reflect: our capital expenditures or our future requirements for capital expenditures or contractual commitments; changes in, or cash requirements for, our working capital needs; the interest expense or the cash requirements to service interest or principal payments under our Credit Facility; income tax payments we are required to make; and any cash requirements for replacements of assets being depreciated or amortized. In addition, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA and Free Cash Flow are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flows from operating activities.
Some of the limitations of the Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share measures are that they do not reflect income tax expense or income tax payments we are required to make. In addition, Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share are not measures of profitability under GAAP.
We also urge you to review the reconciliation of these Non-GAAP financial measures included elsewhere in this Quarterly Report. To properly and prudently evaluate our business, we encourage you to review the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report and to not rely on any single financial measure to evaluate our business. In addition, because the EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow measures are susceptible to varying calculations, such Non-GAAP financial measures may differ from, and may therefore not be comparable to, similarly titled measures used by other companies.
Non-recurring and non-cash items excluded in our calculation of Adjusted EBITDA, Segment Adjusted EBITDA and Adjusted Fully Distributed Net Income consist of stock-based compensation, strategicacquisition and financial restructuringdisposition related expenses, adjustments toremeasurement of TRA liabilities, enterprise resource planning ("ERP") implementation expensesgain on or loss on the FFF Put and acquisition related adjustment - revenue.Call Rights, income and expense that has been classified as discontinued operations and other expense. More information about certain of the more significant items follows below.
Stock-based compensation
In addition to non-cash employee stock-based compensation expense, this item includes non-cash stock purchase plan expense of $0.1 million and $0.2 million for both the three months ended December 31, 20172021 and 2016, respectively,2020 and $0.2$0.3 million and $0.3$0.2 million for the six months ended December 31, 20172021 and 2016.
Remeasurement of TRA liabilities
The Company records TRA liabilities based on 85% of the estimated amount of tax savings the Company expects to receive, generally over a 15-year period, which are attributable2020, respectively (see Note 12 - Stock-Based Compensation to the initial purchase of Class B common units from the member owners made concurrently with the IPOaccompanying condensed consolidated financial statements).
Acquisition and subsequent exchanges by member owners of Class B common units into Class A common stock or cash. Tax payments made under the TRA will be made to the member owners as the Company realizes tax benefits. Determining the estimated amount of tax savings the Company expects to receive requires judgment as deductibility of goodwill amortization expense is not assured and the estimate of tax savings is dependent upon the actual realization of the tax benefit and the tax rates in effect at that time.
Changes in estimated TRA liabilities that are the result of a change in tax accounting method, including the impacts of the TCJA, are recorded as a component of other operating income in the Condensed Consolidated Statements of Income. Changes in estimated TRA liabilities that aredisposition related to new basis changes as a result of the exchange of Class B common units for a like number of shares of Class A common stock or as a result of departed member owners are recorded as an increase to additional paid-in capital in the Condensed Consolidated Statements of Stockholders' Deficit.
The adjustments to TRA liabilities for the three and six months ended December 31, 2017 are primarily attributable to the 14% decrease in the U.S. federal corporate income tax rate, which occurred as a result of the TCJA that was enacted on December 22, 2017 (see Note 13 - Income Taxes). The adjustment to TRA liabilities for six months ended December 31, 2016 is primarily attributable to the 1% decrease in the North Carolina state income tax rate that occurred during the six months ended December 31, 2016.
ERP implementation expenses
This item includes costs related to the implementation of a new ERP system.
Acquisition related adjustment - revenue
During the three months ended December 31, 2016, we recorded a net $5.6 million purchaseexpenses include legal, accounting, adjustment to Adjusted EBITDAand other expenses related to our acquisition of Innovatixactivities and Essensagains and losses on December 2, 2016. These adjustments reflect the change in fair value of administrativeearn-out liabilities. Disposition related expenses include severance and retention benefits and financial advisor fees and legal fees related to member purchases that occurred prior to December 2, 2016, but were reported to us subsequent to that date through December 31, 2016. Under our revenue recognition accounting policy, which is an accordance with GAAP, these administrative fees would be ordinarily recorded as revenue when reported to us; however, the acquisition method of accounting requires us to estimate the amount of purchases priordisposition activities.
Gain or loss on FFF Put and Call Rights
See Note 5 - Fair Value Measurements to the acquisition date and to record the fair value of the administrative fees to be received from those purchases as an account receivable (as opposed to recognizing revenue when these transactions are reported to us) and record any corresponding revenue share obligation as a liability. The purchase accounting adjustment amounted to an estimated $23.3 million of accounts receivable relating to these administrative fees and an estimated $4.1 million for the related revenue share obligation through December 31, 2016.accompanying condensed consolidated financial statements.
This item also includes non-cash adjustments to deferred revenue of acquired entities of $0.2 million and $0.3 million for the three and six months ended December 31, 2016, respectively. Business combination accounting rules require the Company to record a deferred revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction to the purchased deferred revenue balance, which is based on upfront software license update fees and product support contracts assumed in connection with acquisitions. Because these support contracts are typically one year in duration, our GAAP revenues for the one year period subsequent to the acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwise been recorded by the acquired entity. The Non-GAAP adjustment to software license update fees and product support revenues is intended to include, and thus reflect, the full amount of such revenues.
Results of Operations
The following table summarizespresents our results of operations for the periods presented (in thousands, except per share data):
| | | Three Months Ended December 31, | | Six Months Ended December 31, | | Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | 2016 | | 2017 | 2016 | | 2021 | | 2020 | | 2021 | | 2020 |
| Amount | % of Net Revenue | Amount | % of Net Revenue | | Amount | % of Net Revenue | Amount | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue |
Net revenue: | | | | | | | | | | Net revenue: | | | | | | | | | | | | | | | |
Net administrative fees | $ | 159,343 |
| 39% | $ | 129,071 |
| 36% | | $ | 310,334 |
| 39% | $ | 255,047 |
| 38% | Net administrative fees | $ | 150,403 | | | 40% | | $ | 145,339 | | | 34% | | $ | 299,865 | | | 40% | | $ | 277,984 | | | 36% |
Other services and support | 89,953 |
| 22% | 87,051 |
| 24% | | 176,864 |
| 22% | 168,218 |
| 25% | Other services and support | 117,046 | | | 31% | | 97,818 | | | 23% | | 214,301 | | | 29% | | 196,645 | | | 26% |
Services | 249,296 |
| 61% | 216,122 |
| 60% | | 487,198 |
| 61% | 423,265 |
| 63% | Services | 267,449 | | | 71% | | 243,157 | | | 58% | | 514,166 | | | 69% | | 474,629 | | | 62% |
Products | 162,102 |
| 39% | 142,378 |
| 40% | | 314,764 |
| 39% | 248,507 |
| 37% | Products | 111,766 | | | 29% | | 179,670 | | | 42% | | 230,196 | | | 31% | | 295,085 | | | 38% |
Net revenue | 411,398 |
| 100% | 358,500 |
| 100% | | 801,962 |
| 100% | 671,772 |
| 100% | Net revenue | 379,215 | | | 100% | | 422,827 | | | 100% | | 744,362 | | | 100% | | 769,714 | | | 100% |
Cost of revenue: | | | | | | | | | Cost of revenue: | |
Services | 47,255 |
| 12% | 44,856 |
| 13% | | 94,191 |
| 13% | 87,546 |
| 13% | Services | 45,782 | | | 12% | | 40,122 | | | 9% | | 89,591 | | | 12% | | 78,872 | | | 10% |
Products | 153,272 |
| 37% | 131,158 |
| 37% | | 297,712 |
| 37% | 226,971 |
| 34% | Products | 96,933 | | | 26% | | 171,722 | | | 41% | | 206,295 | | | 28% | | 285,150 | | | 37% |
Cost of revenue | 200,527 |
| 49% | 176,014 |
| 49% | | 391,903 |
| 49% | 314,517 |
| 47% | Cost of revenue | 142,715 | | | 38% | | 211,844 | | | 50% | | 295,886 | | | 40% | | 364,022 | | | 47% |
Gross profit | 210,871 |
| 51% | 182,486 |
| 51% | | 410,059 |
| 51% | 357,255 |
| 53% | Gross profit | 236,500 | | | 62% | | 210,983 | | | 50% | | 448,476 | | | 60% | | 405,692 | | | 53% |
Other operating income: | | | | | | | | | |
Remeasurement of tax receivable agreement liabilities | 177,174 |
| 43% | — |
| —% | | 177,174 |
| 22% | 5,722 |
| 1% | |
Other operating income | 177,174 |
| 43% | — |
| —% | | 177,174 |
| 22% | 5,722 |
| 1% | |
Operating expenses: | | | | | | | | | |
Selling, general and administrative | 108,620 |
| 26% | 95,927 |
| 27% | | 222,941 |
| 28% | 193,887 |
| 29% | |
Research and development | 324 |
| —% | 767 |
| —% | | 813 |
| —% | 1,573 |
| —% | |
Amortization of purchased intangible assets | 13,817 |
| 3% | 11,151 |
| 3% | | 27,715 |
| 3% | 20,360 |
| 3% | |
Operating expenses | 122,761 |
| 30% | 107,845 |
| 30% | | 251,469 |
| 31% | 215,820 |
| 32% | Operating expenses | 158,536 | | | 42% | | 140,979 | | | 33% | | 298,233 | | | 40% | | 278,713 | | | 36% |
Operating income | 265,284 |
| 64% | 74,641 |
| 22% | | 335,764 |
| 42% | 147,157 |
| 23% | Operating income | 77,964 | | | 21% | | 70,004 | | | 17% | | 150,243 | | | 20% | | 126,979 | | | 16% |
Other income, net | (14,007 | ) | (3)% | 208,972 |
| 58% | | (11,107 | ) | (1)% | 217,887 |
| 32% | |
Other income (expense), net | | Other income (expense), net | 5,635 | | | 1% | | (8,443) | | | (2)% | | 73,695 | | | 10% | | (2,871) | | | —% |
Income before income taxes | 251,277 |
| 61% | 283,613 |
| 80% | | 324,657 |
| 40% | 365,044 |
| 55% | Income before income taxes | 83,599 | | | 22% | | 61,561 | | | 15% | | 223,938 | | | 30% | | 124,108 | | | 16% |
Income tax expense | 231,508 |
| 56% | 37,429 |
| 10% | | 244,272 |
| 30% | 60,765 |
| 9% | |
Income tax expense (benefit) | | Income tax expense (benefit) | 6,367 | | | 2% | | 16,657 | | | 4% | | 25,400 | | | 3% | | (78,324) | | | (10)% |
Net income | 19,769 |
| 5% | 246,184 |
| 69% | | 80,385 |
| 10% | 304,279 |
| 46% | Net income | 77,232 | | | 20% | | 44,904 | | | 11% | | 198,538 | | | 27% | | 202,432 | | | 26% |
Net income attributable to non-controlling interest in Premier LP | (56,485 | ) | (14)% | (181,173 | ) | (51)% | | (101,095 | ) | (13)% | (230,774 | ) | (34)% | |
Adjustment of redeemable limited partners' capital to redemption amount | 317,916 |
| nm | 335,264 |
| nm | | 638,340 |
| nm | 397,072 |
| nm | |
Net income attributable to non-controlling interest | | Net income attributable to non-controlling interest | (1,687) | | | —% | | (935) | | | —% | | (989) | | | —% | | (12,780) | | | (2)% |
Adjustment of redeemable limited partners’ capital to redemption amount | | Adjustment of redeemable limited partners’ capital to redemption amount | — | | | —% | | — | | | —% | | — | | | —% | | (26,685) | | | (3)% |
Net income attributable to stockholders | $ | 281,200 |
| nm | $ | 400,275 |
| nm | | $ | 617,630 |
| nm | $ | 470,577 |
| nm | Net income attributable to stockholders | $ | 75,545 | | | nm | | $ | 43,969 | | | nm | | $ | 197,549 | | | nm | | $ | 162,967 | | | nm |
| | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | |
Basic | 55,209 |
| | 49,445 |
| | 54,059 |
| | 48,330 |
| | |
Diluted | 139,237 |
| | 141,308 |
| | 139,641 |
| | 142,133 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per share attributable to stockholders: | Earnings per share attributable to stockholders: | | | | | | | | Earnings per share attributable to stockholders: | |
Basic | $ | 5.09 |
| | $ | 8.10 |
| | $ | 11.43 |
| | $ | 9.74 |
| | Basic | $ | 0.62 | | | $ | 0.36 | | | $ | 1.62 | | | $ | 1.47 | | |
Diluted | $ | (1.66 | ) | | $ | 1.50 |
| | $ | (1.30 | ) | | $ | 1.75 |
| | Diluted | $ | 0.62 | | | $ | 0.36 | | | $ | 1.61 | | | $ | 1.46 | | |
nm = Not meaningful
The following table provides certain Non-GAAP financial measures for the periods presented (in thousands, except per share data). Refer to "Our“Our Use of Non-GAAP Financial Measures"Measures” for further information regarding items excluded in our calculation of Adjusted EBITDA and Segment Adjusted EBITDA.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Certain Non-GAAP Financial Data: | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | Amount | | % of Net Revenue |
Adjusted EBITDA | $ | 142,016 | | | 37% | | 124,818 | | | 30% | | $ | 263,719 | | | 35% | | $ | 235,561 | | | 31% |
Non-GAAP Adjusted Net Income | 90,011 | | | 24% | | 79,394 | | | 19% | | 165,145 | | | 22% | | 149,553 | | | 19% |
Non-GAAP Adjusted Earnings Per Share | 0.73 | | | nm | | 0.65 | | | nm | | 1.34 | | | nm | | 1.22 | | | nm |
nm = Not meaningful
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | 2016 | | 2017 | 2016 |
| Amount | % of Net Revenue | Amount | % of Net Revenue | | Amount | % of Net Revenue | Amount | % of Net Revenue |
Certain Non-GAAP Financial Data: | | | | | | | | | |
Adjusted EBITDA | $ | 133,542 |
| 32% | $ | 122,009 |
| 34% | | $ | 252,713 |
| 32% | $ | 232,782 |
| 35% |
Non-GAAP Adjusted Fully Distributed Net Income | $ | 69,982 |
| 17% | $ | 65,242 |
| 18% | | $ | 131,695 |
| 16% | $ | 124,170 |
| 18% |
Non-GAAP Adjusted Fully Distributed Earnings Per Share | $ | 0.50 |
| | $ | 0.46 |
| | | $ | 0.94 |
| | $ | 0.87 |
| |
The following table providestables provide the reconciliation of net income to Adjusted EBITDA and the reconciliation of income before income taxes to Segment Adjusted EBITDA (in thousands). Refer to "Our“Our Use of Non-GAAP Financial Measures"Measures” for further information regarding items excluded in our calculation of Adjusted EBITDA and Segment Adjusted EBITDA.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income | $ | 77,232 | | | $ | 44,904 | | | $ | 198,538 | | | $ | 202,432 | |
Interest expense, net | 2,873 | | | 3,398 | | | 5,661 | | | 5,517 | |
Income tax expense (benefit) | 6,367 | | | 16,657 | | | 25,400 | | | (78,324) | |
Depreciation and amortization | 20,870 | | | 19,093 | | | 41,466 | | | 36,567 | |
Amortization of purchased intangible assets | 10,850 | | | 10,260 | | | 21,739 | | | 23,464 | |
EBITDA | 118,192 | | | 94,312 | | | 292,804 | | | 189,656 | |
Stock-based compensation | 16,330 | | | 7,415 | | | 24,081 | | | 14,790 | |
Acquisition and disposition related expenses | 3,746 | | | 7,918 | | | 7,167 | | | 10,763 | |
Loss (gain) on FFF Put and Call Rights | — | | | 14,507 | | | (64,110) | | | 16,426 | |
Other expense, net | 3,748 | | | 666 | | | 3,777 | | | 3,926 | |
Adjusted EBITDA | $ | 142,016 | | | $ | 124,818 | | | $ | 263,719 | | | $ | 235,561 | |
| | | | | | | |
Income before income taxes | $ | 83,599 | | | $ | 61,561 | | | $ | 223,938 | | | $ | 124,108 | |
Equity in net income of unconsolidated affiliates | (6,116) | | | (4,572) | | | (13,174) | | | (10,499) | |
Interest expense, net | 2,873 | | | 3,398 | | | 5,661 | | | 5,517 | |
Loss (gain) on FFF Put and Call Rights | — | | | 14,507 | | | (64,110) | | | 16,426 | |
Other expense, net | (2,392) | | | (4,890) | | | (2,072) | | | (8,573) | |
Operating income | 77,964 | | | 70,004 | | | 150,243 | | | 126,979 | |
Depreciation and amortization | 20,870 | | | 19,093 | | | 41,466 | | | 36,567 | |
Amortization of purchased intangible assets | 10,850 | | | 10,260 | | | 21,739 | | | 23,464 | |
Stock-based compensation | 16,330 | | | 7,415 | | | 24,081 | | | 14,790 | |
Acquisition and disposition related expenses | 3,746 | | | 7,918 | | | 7,167 | | | 10,763 | |
Equity in net income of unconsolidated affiliates | 6,116 | | | 4,572 | | | 13,174 | | | 10,499 | |
Deferred compensation plan income | 2,389 | | | 4,803 | | | 2,071 | | | 7,710 | |
Other expense, net | 3,751 | | | 753 | | | 3,778 | | | 4,789 | |
Adjusted EBITDA | $ | 142,016 | | | $ | 124,818 | | | $ | 263,719 | | | $ | 235,561 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Segment Adjusted EBITDA: | | | | | | | |
Supply Chain Services | $ | 134,280 | | | $ | 118,939 | | | $ | 263,549 | | | $ | 221,590 | |
Performance Services | 39,010 | | | 36,609 | | | 62,725 | | | 73,724 | |
Corporate | (31,274) | | | (30,730) | | | (62,555) | | | (59,753) | |
Adjusted EBITDA | $ | 142,016 | | | $ | 124,818 | | | $ | 263,719 | | | $ | 235,561 | |
|
| | | | | | | | | | | | |
| Three Months Ended December 31, | Six Months Ended December 31, |
| 2017 | 2016 | 2017 | 2016 |
Net income | $ | 19,769 |
| $ | 246,184 |
| $ | 80,385 |
| $ | 304,279 |
|
Interest and investment loss, net | 1,508 |
| 857 |
| 3,003 |
| 1,009 |
|
Income tax expense | 231,508 |
| 37,429 |
| 244,272 |
| 60,765 |
|
Depreciation and amortization | 17,310 |
| 14,198 |
| 33,817 |
| 28,216 |
|
Amortization of purchased intangible assets | 13,817 |
| 11,151 |
| 27,715 |
| 20,360 |
|
EBITDA | 283,912 |
| 309,819 |
| 389,192 |
| 414,629 |
|
Stock-based compensation | 8,951 |
| 6,423 |
| 17,908 |
| 12,319 |
|
Acquisition related expenses | 1,674 |
| 4,216 |
| 4,773 |
| 7,153 |
|
Remeasurement of tax receivable agreement liabilities | (177,174 | ) | — |
| (177,174 | ) | (5,722 | ) |
ERP implementation expenses | 156 |
| 432 |
| 491 |
| 1,526 |
|
Acquisition related adjustment - revenue | 87 |
| 5,813 |
| 192 |
| 5,964 |
|
Remeasurement gain attributable to acquisition of Innovatix, LLC | — |
| (204,833 | ) | — |
| (204,833 | ) |
Loss on disposal of long-lived assets | 400 |
| — |
| 1,720 |
| 1,518 |
|
Loss on FFF put and call rights | 15,587 |
| — |
| 15,607 |
| — |
|
Other expense | (51 | ) | 139 |
| 4 |
| 228 |
|
Adjusted EBITDA | $ | 133,542 |
| $ | 122,009 |
| $ | 252,713 |
| $ | 232,782 |
|
| | | | |
Income before income taxes | $ | 251,277 |
| $ | 283,613 |
| $ | 324,657 |
| $ | 365,044 |
|
Remeasurement gain attributable to acquisition of Innovatix, LLC | — |
| (204,833 | ) | — |
| (204,833 | ) |
Equity in net income of unconsolidated affiliates | (1,257 | ) | (5,127 | ) | (5,509 | ) | (14,706 | ) |
Interest and investment loss, net | 1,508 |
| 857 |
| 3,003 |
| 1,009 |
|
Loss on disposal of long-lived assets | 400 |
| — |
| 1,720 |
| 1,518 |
|
Other income | 13,356 |
| 131 |
| 11,893 |
| (875 | ) |
Operating income | 265,284 |
| 74,641 |
| 335,764 |
| 147,157 |
|
Depreciation and amortization | 17,310 |
| 14,198 |
| 33,817 |
| 28,216 |
|
Amortization of purchased intangible assets | 13,817 |
| 11,151 |
| 27,715 |
| 20,360 |
|
Stock-based compensation | 8,951 |
| 6,423 |
| 17,908 |
| 12,319 |
|
Acquisition related expenses | 1,674 |
| 4,216 |
| 4,773 |
| 7,153 |
|
Remeasurement of tax receivable agreement liabilities | (177,174 | ) | — |
| (177,174 | ) | (5,722 | ) |
ERP implementation expenses | 156 |
| 432 |
| 491 |
| 1,526 |
|
Acquisition related adjustment - revenue | 87 |
| 5,813 |
| 192 |
| 5,964 |
|
Equity in net income of unconsolidated affiliates | 1,257 |
| 5,127 |
| 5,509 |
| 14,706 |
|
Deferred compensation plan income | 1,577 |
| 8 |
| 3,116 |
| 1,103 |
|
Other expense | 603 |
| — |
| 602 |
| — |
|
Adjusted EBITDA | $ | 133,542 |
| $ | 122,009 |
| $ | 252,713 |
| $ | 232,782 |
|
| | | | |
Segment Adjusted EBITDA: | | | | |
Supply Chain Services | $ | 132,045 |
| $ | 119,022 |
| $ | 257,665 |
| $ | 236,326 |
|
Performance Services | 27,929 |
| 28,603 |
| 49,150 |
| 50,914 |
|
Corporate | (26,432 | ) | (25,616 | ) | (54,102 | ) | (54,458 | ) |
Adjusted EBITDA | $ | 133,542 |
| $ | 122,009 |
| $ | 252,713 |
| $ | 232,782 |
|
The following table provides the reconciliation of net income attributable to stockholders to Non-GAAP Adjusted Fully Distributed Net Income and the reconciliation of the numerator and denominator for earnings per share attributable to stockholders to Non-GAAP Adjusted Fully Distributed Earnings per Share for the periods presented (in thousands). Refer to "Our“Our Use of Non-GAAP Financial Measures"Measures” for further information regarding items excluded in our calculation of Non-GAAP Adjusted Fully Distributed Net Income and Non-GAAP Adjusted Fully Distributed Earnings per Share.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income attributable to stockholders | $ | 75,545 | | | $ | 43,969 | | | $ | 197,549 | | | $ | 162,967 | |
Adjustment of redeemable limited partners’ capital to redemption amount | — | | | — | | | — | | | 26,685 | |
Net income attributable to non-controlling interest | 1,687 | | | 935 | | | 989 | | | 12,780 | |
Income tax expense (benefit) | 6,367 | | | 16,657 | | | 25,400 | | | (78,324) | |
Amortization of purchased intangible assets | 10,850 | | | 10,260 | | | 21,739 | | | 23,464 | |
Stock-based compensation | 16,330 | | | 7,415 | | | 24,081 | | | 14,790 | |
Acquisition and disposition related expenses | 3,746 | | | 7,918 | | | 7,167 | | | 10,763 | |
Loss (gain) on FFF Put and Call Rights | — | | | 14,507 | | | (64,110) | | | 16,426 | |
Other expense, net | 5,490 | | | 2,805 | | | 7,378 | | | 7,229 | |
Non-GAAP adjusted income before income taxes | 120,015 | | | 104,466 | | | 220,193 | | | 196,780 | |
Income tax expense on adjusted income before income taxes (a) | 30,004 | | | 25,072 | | | 55,048 | | | 47,227 | |
Non-GAAP Adjusted Net Income | $ | 90,011 | | | $ | 79,394 | | | $ | 165,145 | | | $ | 149,553 | |
| | | | | | | |
Reconciliation of denominator for earnings per share attributable to stockholders to Non-GAAP Adjusted Earnings per Share | | | | |
Weighted Average: | | | | | | | |
Basic weighted average shares outstanding | 121,181 | | | 122,127 | | | 122,063 | | | 110,851 | |
Dilutive securities | 1,292 | | | 792 | | | 1,460 | | | 722 | |
| | | | | | | |
Weighted average shares outstanding - diluted | 122,473 | | | 122,919 | | | 123,523 | | | 111,573 | |
| | | | | | | |
Class B shares outstanding (b) | — | | | — | | | — | | | 11,185 | |
Non-GAAP weighted average shares outstanding - diluted | 122,473 | | | 122,919 | | | 123,523 | | | 122,758 | |
(a)Reflects income tax expense at an estimated effective income tax rate of 25% of non-GAAP adjusted net income before income taxes for the three and six months ended December 31, 2021 and 24% of non-GAAP adjusted net income before income taxes for the three and six months ended December 31, 2020.
(b)For the six months ended December 31, 2020, the effect of 11.2 million Class B common shares was excluded from the GAAP diluted weighted average shares outstanding as they had an anti-dilutive effect and on a non-GAAP basis, the effect of 11.2 million Class B common shares was included in the non-GAAP diluted weighted average shares outstanding.
|
| | | | | | | | | | | | |
| Three Months Ended December 31, | Six Months Ended December 31, |
| 2017 | 2016 | 2017 | 2016 |
Net income attributable to stockholders | $ | 281,200 |
| $ | 400,275 |
| $ | 617,630 |
| $ | 470,577 |
|
Adjustment of redeemable limited partners' capital to redemption amount | (317,916 | ) | (335,264 | ) | (638,340 | ) | (397,072 | ) |
Net income attributable to non-controlling interest in Premier LP | 56,485 |
| 181,173 |
| 101,095 |
| 230,774 |
|
Income tax expense | 231,508 |
| 37,429 |
| 244,272 |
| 60,765 |
|
Amortization of purchased intangible assets | 13,817 |
| 11,151 |
| 27,715 |
| 20,360 |
|
Stock-based compensation | 8,951 |
| 6,423 |
| 17,908 |
| 12,319 |
|
Acquisition related expenses | 1,674 |
| 4,216 |
| 4,773 |
| 7,153 |
|
Remeasurement of tax receivable agreement liabilities
| (177,174 | ) | — |
| (177,174 | ) | (5,722 | ) |
ERP implementation expenses | 156 |
| 432 |
| 491 |
| 1,526 |
|
Acquisition related adjustment - revenue | 87 |
| 5,813 |
| 192 |
| 5,964 |
|
Remeasurement gain attributable to acquisition of Innovatix, LLC | — |
| (204,833 | ) | — |
| (204,833 | ) |
Loss on disposal of long-lived assets | 400 |
| — |
| 1,720 |
| 1,518 |
|
Loss on FFF put and call rights | 15,587 |
| — |
| 15,607 |
| — |
|
Other expense | (51 | ) | 139 |
| 4 |
| 228 |
|
Non-GAAP adjusted fully distributed income before income taxes | 114,724 |
| 106,954 |
| 215,893 |
| 203,557 |
|
Income tax expense on fully distributed income before income taxes(a) | 44,742 |
| 41,712 |
| 84,198 |
| 79,387 |
|
Non-GAAP Adjusted Fully Distributed Net Income | $ | 69,982 |
| $ | 65,242 |
| $ | 131,695 |
| $ | 124,170 |
|
| | | | |
Reconciliation of denominator for earnings per share attributable to stockholders to Non-GAAP Adjusted Fully Distributed Earnings per Share |
Weighted Average: | | | | |
Common shares used for basic and diluted earnings (loss) per share | 55,209 |
| 49,445 |
| 54,059 |
| 48,330 |
|
Potentially dilutive shares | 450 |
| 401 |
| 553 |
| 437 |
|
Conversion of Class B common units | 83,578 |
| 91,462 |
| 85,029 |
| 93,366 |
|
Weighted average fully distributed shares outstanding - diluted | 139,237 |
| 141,308 |
| 139,641 |
| 142,133 |
|
| |
(a) | Reflects income tax expense at an estimated effective income tax rate of 39% of Non-GAAP adjusted fully distributed income before income taxes for the three and six months ended December 31, 2017 and 2016. |
The following table provides the reconciliation of earnings per share attributable to stockholders to Non-GAAP Adjusted Fully Distributed Earnings per Share for the periods presented. Refer to "Our“Our Use of Non-GAAP Financial Measures"Measures” for further information regarding items excluded in our calculation of Non-GAAP Adjusted Fully Distributed Earnings per Share.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Earnings per share attributable to stockholders | $ | 0.62 | | | $ | 0.36 | | | $ | 1.62 | | | $ | 1.47 | |
Adjustment of redeemable limited partners’ capital to redemption amount | — | | | — | | | — | | | 0.24 | |
Net income attributable to non-controlling interest | 0.01 | | | 0.01 | | | 0.01 | | | 0.12 | |
Income tax expense (benefit) | 0.05 | | | 0.14 | | | 0.21 | | | (0.71) | |
Amortization of purchased intangible assets | 0.09 | | | 0.08 | | | 0.18 | | | 0.21 | |
Stock-based compensation | 0.13 | | | 0.06 | | | 0.20 | | | 0.13 | |
Acquisition and disposition related expenses | 0.03 | | | 0.06 | | | 0.06 | | | 0.10 | |
Loss (gain) on FFF Put and Call Rights | — | | | 0.12 | | | (0.53) | | | 0.15 | |
Other expense, net | 0.06 | | | 0.02 | | | 0.06 | | | 0.07 | |
Impact of corporation taxes (a) | (0.25) | | | (0.20) | | | (0.45) | | | (0.43) | |
Impact of dilutive shares (b) | (0.01) | | | — | | | (0.02) | | | (0.13) | |
Non-GAAP Adjusted Earnings Per Share | $ | 0.73 | | | $ | 0.65 | | | $ | 1.34 | | | $ | 1.22 | |
|
| | | | | | | | | | | | |
| Three Months Ended December 31, | Six Months Ended December 31, |
| 2017 | 2016 | 2017 | 2016 |
Earnings per share attributable to stockholders | $ | 5.09 |
| $ | 8.10 |
| $ | 11.43 |
| $ | 9.74 |
|
Adjustment of redeemable limited partners' capital to redemption amount | (5.76 | ) | (6.79 | ) | (11.81 | ) | (8.22 | ) |
Net income attributable to non-controlling interest in Premier LP | 1.02 |
| 3.66 |
| 1.87 |
| 4.77 |
|
Income tax expense | 4.19 |
| 0.76 |
| 4.52 |
| 1.26 |
|
Amortization of purchased intangible assets | 0.25 |
| 0.23 |
| 0.51 |
| 0.42 |
|
Stock-based compensation | 0.16 |
| 0.13 |
| 0.33 |
| 0.25 |
|
Acquisition related expenses | 0.03 |
| 0.09 |
| 0.09 |
| 0.15 |
|
Remeasurement of tax receivable agreement liabilities | (3.21 | ) | — |
| (3.28 | ) | (0.12 | ) |
ERP implementation expenses | — |
| 0.01 |
| 0.01 |
| 0.03 |
|
Acquisition related adjustment - revenue | — |
| 0.12 |
| — |
| 0.12 |
|
Remeasurement gain attributable to acquisition of Innovatix, LLC | — |
| (4.14 | ) | — |
| (4.24 | ) |
Loss on disposal of long-lived assets | 0.01 |
| — |
| 0.03 |
| 0.03 |
|
Loss on FFF put and call rights | 0.28 |
| — |
| 0.29 |
| — |
|
Impact of corporation taxes (a) | (0.80 | ) | (0.84 | ) | (1.56 | ) | (1.63 | ) |
Impact of dilutive shares (b) | (0.76 | ) | (0.87 | ) | (1.49 | ) | (1.69 | ) |
Non-GAAP Adjusted Fully Distributed Earnings Per Share | $ | 0.50 |
| $ | 0.46 |
| $ | 0.94 |
| $ | 0.87 |
|
| |
(a) | Reflects income tax expense at an estimated effective income tax rate of 39% of Non-GAAP adjusted fully distributed(a)Reflects income tax expense at an estimated effective income tax rate of 25% of non-GAAP adjusted net income before income taxes for the three and six months ended December 31, 2017 and 2016. |
| |
(b) | Reflects impact of dilutive shares, primarily attributable to the assumed conversion of all Class B common units for Class A common stock. |
Consolidated Results - Comparison of the Three and Six Months ended December 31, 2017 to 2016
Net Revenue
Net revenue increased $52.9 million, or 15%, to $411.4 million for the three months ended December 31, 2017 from $358.5 million2021 and 24% of non-GAAP adjusted net income before income taxes for the three and six months ended December 31, 2016. Net revenue increased $130.2 million, or 19%,2020.
(b)Reflects impact of dilutive shares on a non-GAAP basis, primarily attributable to $802.0 millionthe assumed conversion of the weighted average outstanding Class B common units for the six months ended December 31, 2017 from $671.8 million2020 for Class A common stock.
Consolidated Results - Comparison of the six months endedThree Months Ended December 31, 2016.2021 to 2020
The variances in the material factors contributing to the changes in the consolidated results are discussed further in “Segment Results” below.
Net administrative feesRevenue
Net revenue increased $30.2decreased by $43.6 million or 23%, fromduring the three months ended December 31, 20162021 compared to 2017 and $55.3 million, or 22%, from the six months ended December 31, 2016 to 2017, primarily driven by aggregate contributions from Innovatix and Essensa, which were acquired in full on December 2, 2016. To a lesser extent, net administrative fees growth also benefited from a supplier revenue recovery settlement and contract penetration of existing members. Growth in net administrative fees revenue was partially impacted by soft patient utilization trends and timing of cash receipts.
Other services and support revenue increased $2.9 million, or 3%, from the three months ended December 31, 2016 to 20172020, primarily due to increasesa decrease of $67.9 million in SaaS informatics products subscriptionsrevenue partially offset by an increase of $5.1 million in net administrative fees revenue and ambulatory quality solutions services. Other services and support revenue increased $8.7an increase of $19.2 million or 5% from the six months ended December 31, 2016 to 2017, primarily due to growth in cost management advisory services related to performance-based engagements. We also experienced increases in SaaS informatics products subscriptions, applied science services and government services related revenue. We expect to experience quarterly variability within other services and support revenue due to the timing of revenue recognition from certain advisory services and performance-based engagements in which our revenue is based on a percentage of identified member savings and recognition occurs upon approval and documentation of the savings. We expect our other services and support revenue to grow over the long-term to the extent we are able to expand our sales to existing members and additional members begin to utilize our products and services.
Product revenue increased $19.7 million, or 14%, from the three months ended December 31, 2016 to 2017 and $66.3 million, or 27%, from the six months ended December 31, 2016 to 2017, primarily driven by an increase in integrated pharmacy revenues driven by contributions from expansion and growth in therapy offerings largely associated with the Company's acquisition of Acro
Pharmaceuticals, which occurred on August 23, 2016, as well as an increase in sales of certain limited distribution drugs dispensed to treat Idiopathic Pulmonary Fibrosis, Multiple Sclerosis and Oncology, partially offset by a slight decrease in the sales of Hepatitis-C pharmaceuticals. We also experienced increased sales of direct sourcing products. We expect our integrated pharmacy and direct sourcing product revenues to continue to grow to the extent we are able to increase our product offerings, expand our product sales to existing members and additional members begin to utilize our programs.revenue.
Cost of Revenue
Cost of revenue increased $24.5decreased by $69.1 million or 14%, to $200.5 million forduring the three months ended December 31, 2017 from $176.0 million for2021 compared to the three months ended December 31, 2016. Cost2020, primarily due to a decrease of $74.8 million in cost of products revenue increased $77.4partially offset by an increase of $5.7 million or 25%, to $391.9 million for the six months ended December 31, 2017 from $314.5 million for the six months ended December 31, 2016.
Costin cost of services revenuerevenue.
Operating Expenses
Operating expenses increased $2.4by $17.5 million or 5%, fromduring the three months ended December 31, 20162021 compared to 2017 and $6.7 million, or 8% from the six months ended December 31, 2016 to 2017, primarily driven by an increase in salaries and benefits expense resulting from increased staffing to support growth along with higher consulting costs for certain performance-based engagements. We expect cost of service revenue to increase to the extent we expand our performance improvement collaboratives and advisory services to members, continue to develop new and existing internally-developed software applications and expand into new product offerings.
Cost of product revenue increased $22.1 million, or 17%, from the three months ended December 31, 2016 to 2017 and $70.7 million, or 31% from the six months ended December 31, 2016 to 2017,2020, primarily driven by higher product costs associated with the business operations of Acro Pharmaceuticals and due to higher costs driven by growthan increase of $16.8 million in direct sourcing salesselling, general and the impactadministrative expenses and an increase of increases$0.6 million in raw materials pricing. We expect our costamortization of product revenue to increase to the extent we are able to sell additional integrated pharmacy and direct-sourced medical products to new and existing members and enroll additional members into our integrated pharmacy program. The increased cost of product revenues is expected to reduce our gross profit as a percentage of our net revenues.purchased intangible assets.
Other Operating Income, Net
Other operating income, net increased $177.2by $14.0 million fromduring the three months ended December 31, 20162021 compared to 2017 and $171.5 million from the six months ended December 31, 2016 to 2017 as a result of the remeasurement of TRA liabilities, which was primarily attributable to the 14% decrease in the U.S. federal corporate income tax rate associated with the TCJA.
Operating Expenses
Operating expenses decreased $15.0 million, or 14%, to $122.8 million for the three months ended December 31, 2017 from $107.8 million for the three months ended December 31, 2016. Operating expenses decreased $35.7 million, or 17%, to $251.5 million for the six months ended December 31, 2017 from $215.8 million for the six months ended December 31, 2016.
Selling, General and Administrative
Selling, general and administrative expenses increased $12.7 million, or 13%, from the three months ended December 31, 2016 to 2017 and $29.0 million, or 15%, from the six months ended December 31, 2016 to 2017,2020, primarily driven by an increase in salaries and benefits expenses resulting from increased staffing mostly associated with acquisitions and to support growth, along with an increase in stock-based compensation expense largely driven by growth in overall equity award grant size year over year in addition to anticipated achievement of certain performance targets.
Research and Development
Research and development expenses decreased by $0.5 million from the three months ended December 31, 2016 to 2017 and increased by $0.8 million from the six months ended December 31, 2016 to 2017. Research and development expenses consist of employee-related compensation and benefit expenses and third-party consulting fees for technology professionals, net of capitalized labor, incurred to develop our software-related products and services. We experience fluctuations in our research and development expenditures across reportable periods due to the timing of our software development lifecycles, new product features and functionality, new technologies and upgrades to our service offerings.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets increased $2.6 million,loss on the FFF Put Right in the prior year period. There was no gain or 23%, fromloss on the three months ended December 31, 2016 to 2017 and $7.3 million, or 36%, fromFFF Put Right recognized in the six months ended December 31, 2016 to 2017, primarilycurrent period as a result of additional amortizationthe termination and corresponding derecognition of purchased intangible assets related to our acquisitions. As we executethe FFF Put Right liability on our growth strategy and further deploy capital, we expect further increases in amortization of intangible assets in connection with future potential acquisitions.
Other Income (Expense), Net
Other income (expense), net decreased $223.0 million, or 107%, to $(14.0) million for the three months ended December 31, 2017 from $209.0 million for the three months ended December 31, 2016 and decreased $229.0 million, or 105%, to $(11.1) million for the six months ended December 31, 2017 from $217.9 million for the six months ended December 31, 2016, primarily dueJuly 29, 2021 (see Note 5 - Fair Value Measurements to the one-time $205.1 million gain recognized from the remeasurement of the 50% equity method investment in Innovatix to fair value upon acquisition of Innovatix on December 2, 2016 (see Note 3 - Business Acquisitions) along with a reduction in equity in net income of unconsolidated affiliates. As a result of acquiring the remaining 50% of Innovatix, we no longer accountaccompanying condensed consolidated financial statements for our ownership using the equity method. Other income (expense), net was also impacted by the loss on FFF put and call rights in the current period and partially offset by a moderate increase in equity in net income of FFF, which experienced improved performance in the six months ended December 31, 2017.further information).
Income Tax Expense
For the three months ended December 31, 2017 and 2016, the Company2021, we recorded tax expense of $231.5$6.4 million compared to tax expense of $16.7 million recorded during the three months ended December 31, 2020. The tax expense recorded during the three months ended December 31, 2021 and $37.4 million, respectively, which equates to2020 resulted in effective tax rates of 92%7.6% and 13%27.1%, respectively. The change in the effective tax
rate is attributable to the Subsidiary Reorganization. (See Note 1 - Organization and Note 13 - Income Taxes to the accompanying condensed consolidated financial statements for more information.)
Net Income Attributable to Non-Controlling Interest
Net income attributable to non-controlling interest increased by $0.8 million during the three months ended December 31, 2021 compared to the three months ended December 31, 2020, primarily due to an increase in the portion of net income attributable to the non-controlling interest in PRAM, DePre and ExPre.
Adjusted EBITDA
Adjusted EBITDA, a Non-GAAP financial measure as defined in “Our Use of Non-GAAP Financial Measures”, increased by $17.2 million during the three months ended December 31, 2021, compared to the three months ended December 31, 2020. The increase was driven by increases of $15.4 million and $2.4 million in Supply Chain Services and Performance Services Adjusted EBITDA, respectively, partially offset by a decrease of $0.6 million in Corporate Adjusted EBITDA.
Consolidated Results - Comparison of the Six Months Ended December 31, 2021 to 2020
The variances in the material factors contributing to the changes in the consolidated results are discussed further in “Segment Results” below.
Net Revenue
Net revenue decreased by $25.3 million during the six months ended December 31, 2021 compared to the six months ended December 31, 2020, primarily due to decrease of $64.9 million in products revenue partially offset by an increase of $21.9 million in net administrative fees revenue and an increase of $17.7 million in other services and support revenue.
Cost of Revenue
Cost of revenue decreased by $68.1 million during the six months ended December 31, 2021 compared to the six months ended December 31, 2020, primarily due to a decrease of $78.9 million in cost of products revenue partially offset by an increase of $10.7 million in cost of services revenue.
Operating Expenses
Operating expenses increased by $19.5 million during the six months ended December 31, 2021 compared to the six months ended December 31, 2020, primarily due to an increase of $20.7 million in selling, general and administrative expenses partially offset by a decrease of $1.8 million in amortization of purchased intangible assets.
Other Income, Net
Other income, net increased by $76.6 million during the six months ended December 31, 2021 compared to the six months ended December 31, 2020, primarily due to the current period gain on the FFF Put Right as a result of the termination and corresponding derecognition of the FFF Put Right liability on July 29, 2021 compared to a loss on the FFF Put Right recognized in the prior year period (see Note 5 - Fair Value Measurements to the accompanying condensed consolidated financial statements for further information) as well as an increase in equity in net income of unconsolidated affiliates (see Note 4 - Investments to the accompanying condensed consolidated financial statements for further information). The increases were partially offset by a decrease in deferred compensation plan income.
Income Tax Expense (Benefit)
For the six months ended December 31, 2017 and 2016, the Company2021, we recorded tax expense of $244.3$25.4 million compared to a tax benefit of $78.3 million recorded during the six months ended December 31, 2020. The tax expense and $60.8 million, respectively, which equates tobenefit recorded during the six months ended December 31, 2021 and 2020 resulted in effective tax rates of 75%11.3% and 17%(63.1)%, respectively. The increasechange in the effective tax ratesrate is primarily attributable to the prior year one-time deferred tax benefit associated with the remeasurement of the deferred tax balances related to the decrease in the U.S. federal corporate income tax rate from 35% to 21%, pursuant to the TCJA enacted on December 22, 2017. The Company's effective tax rate differs from income taxes recorded at the combined (or blended) statutory income tax rate primarily due to partnership income not subject to federal, state and local income taxesasset and valuation allowances against deferred tax assets at PHSI. Seeallowance release as a result of the August 2020 Restructuring. (See Note 13 - Income Taxes to the accompanying condensed consolidated financial statements for more information.)
Net Income Attributable to Non-Controlling Interest
Net income attributable to non-controlling interest decreased $124.7by $11.8 million or 69%during the six months ended December 31, 2021 compared to the six months ended December 31, 2020, primarily due to the August 2020 Restructuring, whereby net income attributable to non-controlling interest in Premier LP was not recorded after August 11, 2020.
Adjusted EBITDA
Adjusted EBITDA, a Non-GAAP financial measure as defined in “Our Use of Non-GAAP Financial Measures”, to $56.5increased by $28.2 million forduring the three months ended December 31, 2017 from $181.2 million for the three months ended December 31, 2016, primarily attributable2021, compared to a decrease in non-controlling ownership percentage in Premier LP to 60% from 64%, respectively. Net income attributable to non-controlling interest decreased $129.7 million, or 56%, to $101.1 million for the six months ended December 31, 2017 from $230.8 million for the six months ended December 31, 2016, primarily attributable to a decrease in non-controlling ownership percentage in Premier LP to 60% from 64%, respectively.
Non-GAAP Adjusted EBITDA
Non-GAAP Adjusted EBITDA increased $11.5 million, or 9%, to $133.5 million for the three months ended December 31, 2017 from $122.0 million for the three months ended December 31, 2016, primarily as a result of growth in net administrative fees revenue including contributions related to the Innovatix and Essensa acquisition, net of a $4.1 million reduction in equity in net income of unconsolidated affiliates due to acquiring the remaining 50% of Innovatix as it was historically accounted for as an unconsolidated affiliate through the date of acquisition, along with2020 driven by an increase of $42.0 million in product revenue. These results wereSupply Chain Services Adjusted EBITDA partially offset by increased product costsdecreases of $11.0 million and selling, general$2.8 million in Performance Services and administrative expenses resulting from higher salaries and benefits expenses as a result of acquisitions and to support growth. Additionally, SegmentCorporate Adjusted EBITDA, for the prior period included a $5.6 million non-cash adjustment for cash collections not recognized as revenue on a GAAP basis due to a purchase accounting adjustment.respectively.
Non-GAAP Adjusted EBITDA increased $19.9 million, or 9%, to $252.7 million for the six months ended December 31, 2017 from $232.8 million for the six months ended December 31, 2016, primarily as a result of growth in net administrative fees revenue including contributions related to the Innovatix and Essensa acquisition, net of a $10.7 million reduction in equity in net income of unconsolidated affiliates due to acquiring the remaining 50% of Innovatix as it was historically accounted for as an unconsolidated affiliate through the date of acquisition, along with an increase in product revenue and, to a lesser extent, an increase in other services and support revenue driven by growth in cost management advisory services related to performance-based engagements, and an increase in SaaS informatics products subscriptions, applied science services and government services related revenue. These increases were partially offset by increased product costs and selling, general and administrative expenses resulting from higher salaries and benefits expenses as a result of acquisitions and to support growth. Additionally, Segment Adjusted EBITDA for the prior period included a $5.6 million non-cash adjustment for cash collections not recognized as revenue on a GAAP basis due to a purchase accounting adjustment.Results
Supply Chain Services - Comparison of the Three and Six Months ended December 31, 2017 to 2016
The following table summarizespresents our results of operations and Non-GAAP Adjusted EBITDA, a Non-GAAP financial measure, in the Supply Chain Services segment for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
Supply Chain Services | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Net revenue: | | | | | | | | | | | | | | | |
Net administrative fees | $ | 150,403 | | | $ | 145,339 | | | $ | 5,064 | | | 3% | | $ | 299,865 | | | $ | 277,984 | | | $ | 21,881 | | | 8 | % |
Other services and support | 9,326 | | | 4,086 | | | 5,240 | | | 128% | | 18,251 | | | 9,677 | | | 8,574 | | | 89 | % |
Services | 159,729 | | | 149,425 | | | 10,304 | | | 7% | | 318,116 | | | 287,661 | | | 30,455 | | | 11 | % |
Products | 111,766 | | | 179,670 | | | (67,904) | | | (38)% | | 230,196 | | | 295,085 | | | (64,889) | | | (22) | % |
Net revenue | 271,495 | | | 329,095 | | | (57,600) | | | (18)% | | 548,312 | | | 582,746 | | | (34,434) | | | (6) | % |
Cost of revenue: | | | | | | | | | | | | | | | |
Services | 3,267 | | | 774 | | | 2,493 | | | 322% | | 6,638 | | | 1,508 | | | 5,130 | | | 340 | % |
Products | 96,933 | | | 171,722 | | | (74,789) | | | (44)% | | 206,295 | | | 285,150 | | | (78,855) | | | (28) | % |
Cost of revenue | 100,200 | | | 172,496 | | | (72,296) | | | (42)% | | 212,933 | | | 286,658 | | | (73,725) | | | (26) | % |
Gross profit | 171,295 | | | 156,599 | | | 14,696 | | | 9% | | 335,379 | | | 296,088 | | | 39,291 | | | 13 | % |
Operating expenses: | | | | | | | | | | | | | | | |
Selling, general and administrative | 48,454 | | | 50,372 | | | (1,918) | | | (4)% | | 96,498 | | | 94,796 | | | 1,702 | | | 2 | % |
Research and development | 72 | | | 109 | | | (37) | | | (34)% | | 236 | | | 127 | | | 109 | | | 86 | % |
Amortization of purchased intangible assets | 8,116 | | | 8,055 | | | 61 | | | 1% | | 16,252 | | | 16,054 | | | 198 | | | 1 | % |
Operating expenses | 56,642 | | | 58,536 | | | (1,894) | | | (3)% | | 112,986 | | | 110,977 | | | 2,009 | | | 2 | % |
Operating income | 114,653 | | | 98,063 | | | 16,590 | | | 17% | | 222,393 | | | 185,111 | | | 37,282 | | | 20 | % |
Depreciation and amortization | 5,336 | | | 1,363 | | | | | | | 10,344 | | | 2,165 | | | | | |
Amortization of purchased intangible assets | 8,116 | | | 8,054 | | | | | | | 16,252 | | | 16,054 | | | | | |
Acquisition and disposition related expenses | 56 | | | 6,747 | | | | | | | 1,608 | | | 7,632 | | | | | |
Equity in net income of unconsolidated affiliates | 6,116 | | | 4,697 | | | | | | | 12,946 | | | 10,588 | | | | | |
Other expense | 3 | | | 15 | | | | | | | 6 | | | 40 | | | | | |
Segment Adjusted EBITDA | $ | 134,280 | | | $ | 118,939 | | | $ | 15,341 | | | 13% | | $ | 263,549 | | | $ | 221,590 | | | $ | 41,959 | | | 19 | % |
|
| | | | | | | | | | | | |
| Three Months Ended December 31, | Six Months Ended December 31, |
Supply Chain Services | 2017 | 2016 | 2017 | 2016 |
Net revenue: | | | | |
Net administrative fees | $ | 159,343 |
| $ | 129,071 |
| $ | 310,334 |
| $ | 255,047 |
|
Other services and support | 3,421 |
| 1,201 |
| 5,570 |
| 2,846 |
|
Services | 162,764 |
| 130,272 |
| 315,904 |
| 257,893 |
|
Products | 162,101 |
| 142,378 |
| 314,764 |
| 248,507 |
|
Net revenue | 324,865 |
| 272,650 |
| 630,668 |
| 506,400 |
|
Cost of revenue: | | | | |
Services | 1,023 |
| 1,276 |
| 2,086 |
| 2,482 |
|
Products | 153,272 |
| 131,154 |
| 297,712 |
| 226,968 |
|
Cost of revenue | 154,295 |
| 132,430 |
| 299,798 |
| 229,450 |
|
Gross profit | 170,570 |
| 140,220 |
| 330,870 |
| 276,950 |
|
Operating expenses: | | | | |
Selling, general and administrative | 42,185 |
| 38,044 |
| 84,120 |
| 70,547 |
|
Amortization of purchased intangible assets | 4,976 |
| 2,154 |
| 10,017 |
| 2,366 |
|
Operating expenses | 47,161 |
| 40,198 |
| 94,137 |
| 72,913 |
|
Operating income | $ | 123,409 |
| $ | 100,022 |
| $ | 236,733 |
| $ | 204,037 |
|
Depreciation and amortization | 195 |
| 299 |
| 649 |
| 533 |
|
Amortization of purchased intangible assets | 4,976 |
| 2,154 |
| 10,017 |
| 2,366 |
|
Acquisition related expenses | 2,320 |
| 5,788 |
| 4,870 |
| 9,052 |
|
Acquisition related adjustment - revenue | — |
| 5,632 |
| — |
| 5,632 |
|
Equity in net income of unconsolidated affiliates | 1,130 |
| 5,127 |
| 5,381 |
| 14,706 |
|
Other income | 15 |
| — |
| 15 |
| — |
|
Non-GAAP Segment Adjusted EBITDA | $ | 132,045 |
| $ | 119,022 |
| $ | 257,665 |
| $ | 236,326 |
|
Comparison of the Three Months Ended December 31, 2021 to 2020Net Revenue
Supply Chain Services segment net revenue increased $52.2decreased by $57.6 million, or 19%18%, to $324.9 million forduring the three months ended December 31, 2017 from $272.7 million for2021 compared to the three months ended December 31, 2016. Supply Chain Services segment2020. The decrease in net revenue increased $124.3was primarily due to a decrease in products revenue of $67.9 million or 25%, to $630.7 million for the six months ended December 31, 2017 from $506.4 million for the six months ended December 31, 2016.
Net administrative fees revenue increased $30.2 million, or 23%, from the three months ended December 31, 2016 to 2017 and $55.3 million, or 22%, from the six months ended December 31, 2016 to 2017, primarily driven by aggregate contributions from Innovatixlower demand for and Essensa, which were acquired on December 2, 2016. Topricing of personal protective equipment (“PPE”) and other high demand supplies as a lesser extent,result of the state of the COVID-19 pandemic partially offset by growth in commodity products under our PREMIERPRO® brand. As the COVID-19 pandemic subsides or becomes more manageable, we expect further stabilization of the market for some of these products and, accordingly, a decrease in period over period products revenue growth rates.
The decrease in net administrative fees were also favorably impactedrevenue was partially offset by a supplier revenue recovery settlement and contract penetration of existing members. Growthan increase in net administrative fees revenue was partially impacted by soft patient utilization trends and timing of cash receipts.
Product revenue increased $19.7$5.1 million or 14%, from the three months ended December 31, 2016 to 2017 and $66.3 million, or 27%, from the six months ended December 31, 2016 to 2017, primarily driven by an increase in integrated pharmacy revenues mostly attributablethe demand for supplies and services, increased utilization of our contracts by our existing members and the addition of new
categories and suppliers. In addition, the decrease was partially offset by an increase of $5.2 million in other services and support revenue largely due to contributions from expansion and growth in therapy offerings largely associated with the Company's acquisition of Acro Pharmaceuticals, which occurred on August 23, 2016, as well as an increase in sales of certain limited distribution drugs dispensed to treat Idiopathic Pulmonary Fibrosis, Multiple Sclerosis and Oncology, partially offset by a slight decrease in the sales of Hepatitis-C pharmaceuticals. We also experienced increased sales of direct sourcing products. We expect our integrated pharmacy and direct sourcing product revenues to continue to grow to the extent we are able to increase our product offerings, expand our product sales to existing members and additional members begin to utilize our programs.
supply chain co-management fees.
Cost of Revenue
Supply Chain Services segment cost of revenue increased $21.9decreased by $72.3 million or 17%, to $154.3 million forduring the three months ended December 31, 2017 from $132.4 million for2021 compared to the three months ended December 31, 2016. 2020 primarily driven by the aforementioned decrease in products revenue due to the prior year increase in demand as well as fluctuations in product costs. This was partially offset by an increase in cost of services revenue due to the aforementioned increase in other services and support revenue and rapidly escalating shipping costs. As the COVID-19 pandemic subsides or becomes more manageable, we expect further stabilization of the market for some of these products and, accordingly, a decrease in period over period cost of products revenue.
Operating Expenses
Supply Chain Services segment operating expenses decreased by $1.9 million during the three months ended December 31, 2021 compared to the three months ended December 31, 2020. The decrease was primarily due to a decrease of $1.9 million in selling, general and administrative expenses driven by a decrease in acquisition and disposition related expenses partially offset by an increase in personnel costs and depreciation and amortization expense.
Segment Adjusted EBITDA
Supply Chain Services Segment Adjusted EBITDA increased by $15.3 million, or 13%, during the three months ended December 31, 2021 compared to the three months ended December 31, 2020, primarily due to the aforementioned increase in net administrative fees revenue and favorable product mix in our direct sourcing activities business.
Comparison of the Six Months Ended December 31, 2021 to 2020
Net Revenue
Supply Chain Services segment net revenue decreased by $34.4 million, or 6%, during the six months ended December 31, 2021 compared to the six months ended December 31, 2020. The decrease in net revenue was primarily due to a decrease in products revenue of $64.9 million driven by lower demand for and pricing of PPE and other high demand supplies as a result of the state of the COVID-19 pandemic partially offset by growth in commodity products under our PREMIERPRO® brand. As the COVID-19 pandemic subsides or becomes more manageable, we expect further stabilization of the market for some of these products and, accordingly, a decrease in period over period products revenue growth rates.
The decrease was partially offset by an increase in net administrative fees of $21.9 million driven by an increase in the demand for supplies and services, increased utilization of our contracts by our existing members and the addition of new categories and suppliers. In addition, the decrease was partially offset by an increase of $8.6 million in other services and support revenue due to an increase in supply chain co-management fees.
Cost of Revenue
Supply Chain Services segment cost of revenue increased $70.3decreased by $73.7 million or 31%, to $299.8 million forduring the six months ended December 31, 2017 from $229.5 million for2021 compared to the six months ended December 31, 2016.
Cost of product revenue increased $22.1 million, or 17%, from the three months ended December 31, 2016 to 2017 and $70.7 million, or 31%, from the six months ended December 31, 2016 to 2017,2020 primarily driven by higher product costs associated with the business operations of Acro Pharmaceuticals anddecrease in products revenue due to growththe prior year increase in direct sourcing salesdemand partially offset by the aforementioned increase in other services and support revenue. As the impactCOVID-19 pandemic subsides or becomes more manageable, we expect further stabilization of increasesthe market for some of these products and, accordingly, a decrease in raw materials pricing.period over period cost of products revenue.
Operating Expenses
Supply Chain Services segment operating expenses increased $7.0by $2.0 million or 17%, to $47.2 million for the three months ended December 31, 2017 from $40.2 million for the three months ended December 31, 2016. Supply Chain Services segment operating expenses increased $21.2 million, or 29%, to $94.1 million forduring the six months ended December 31, 2017 from $72.9 million for2021 compared to the six months ended December 31, 2016.
Selling,2020 primarily due to an increase in selling, general and administrative expenses of $1.7 million driven by an increase in depreciation and amortization expense. The increases were partially offset by a decrease in acquisition and disposition related expenses.
Segment Adjusted EBITDA
Supply Chain Services Segment Adjusted EBITDA increased $4.1 million, or 11%, from the three months ended December 31, 2016 to 2017 and $13.6by $42.0 million, or 19%, fromduring the six months ended December 31, 20162021 compared to 2017, due to higher salaries and benefits expense primarily associated with the acquisitions of Innovatix and Essensa and to a lesser extent, the acquisition of Acro Pharmaceuticals.
Amortization of purchased intangible assets increased $2.8 million from the three months ended December 31, 2016 to 2017 and $7.7 million from the six months ended December 31, 20162020, primarily due to 2017, primarily as a result of additional amortization of purchased intangible assets related to our acquisitions.
Segment Adjusted EBITDA
Segment Adjusted EBITDA increased $13.0 million, or 11%, to $132.0 million for the three months ended December 31, 2017 from $119.0 million for the three months ended December 31, 2016. Segment Adjusted EBITDA increased $21.3 million, or 9%, to $257.7 million for the six months ended December 31, 2017 from $236.3 million for the six months ended December 31, 2016. Thisaforementioned increase was primarily a result of growth in net administrative fees revenue including contributions related to the Innovatix and Essensa acquisition, net of the reductionfavorable product mix in equity in net income of unconsolidated affiliates due to acquiring the remaining 50% of Innovatix as it was historically accounted for as an unconsolidated affiliate through the date of acquisition, along with an increase in product revenue. These increases were partially offset by increased product costs and selling, general and administrative expenses resulting from higher salaries and benefit expenses as a result of acquisitions and to support growth. Additionally, Segment Adjusted EBITDA for the prior period included a $5.6 million non-cash adjustment for cash collections not recognized as revenue on a GAAP basis due to a purchase accounting adjustment.our direct sourcing activities business.
Performance Services - Comparison of the Three and Six Months ended December 31, 2017 to 2016
The following table summarizespresents our results of operations and Non-GAAP Adjusted EBITDA in the Performance Services segment for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
Performance Services | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Net revenue: | | | | | | | | | | | | | | | |
Other services and support | $ | 107,729 | | | $ | 93,732 | | | $ | 13,997 | | | 15% | | $ | 196,059 | | | $ | 186,968 | | | $ | 9,091 | | | 5% |
Net revenue | 107,729 | | | 93,732 | | | 13,997 | | | 15% | | 196,059 | | | 186,968 | | | 9,091 | | | 5% |
Cost of revenue: | | | | | | | | | | | | | | | |
Services | 42,515 | | | 39,348 | | | 3,167 | | | 8% | | 82,953 | | | 77,364 | | | 5,589 | | | 7% |
Cost of revenue | 42,515 | | | 39,348 | | | 3,167 | | | 8% | | 82,953 | | | 77,364 | | | 5,589 | | | 7% |
Gross profit | 65,214 | | | 54,384 | | | 10,830 | | | 20% | | 113,106 | | | 109,604 | | | 3,502 | | | 3% |
Operating expenses: | | | | | | | | | | | | | | | |
Selling, general and administrative | 42,462 | | | 33,813 | | | 8,649 | | | 26% | | 81,263 | | | 67,972 | | | 13,291 | | | 20% |
Research and development | 774 | | | 613 | | | 161 | | | 26% | | 1,604 | | | 1,171 | | | 433 | | | 37% |
Amortization of purchased intangible assets | 2,734 | | | 2,205 | | | 529 | | | 24% | | 5,487 | | | 7,410 | | | (1,923) | | | (26)% |
Operating expenses | 45,970 | | | 36,631 | | | 9,339 | | | 25% | | 88,354 | | | 76,553 | | | 11,801 | | | 15% |
Operating income | 19,244 | | | 17,753 | | | 1,491 | | | 8% | | 24,752 | | | 33,051 | | | (8,299) | | | (25)% |
Depreciation and amortization | 13,342 | | | 15,604 | | | | | | | 26,699 | | | 30,157 | | | | | |
Amortization of purchased intangible assets | 2,734 | | | 2,206 | | | | | | | 5,487 | | | 7,410 | | | | | |
Acquisition related expenses | 3,690 | | | 1,171 | | | | | | | 5,559 | | | 3,131 | | | | | |
Equity in net income of unconsolidated affiliates | — | | | (125) | | | | | | | 228 | | | (89) | | | | | |
Other expense | — | | | — | | | | | | | — | | | 64 | | | | | |
Segment Adjusted EBITDA | $ | 39,010 | | | $ | 36,609 | | | $ | 2,401 | | | 7% | | $ | 62,725 | | | $ | 73,724 | | | $ | (10,999) | | | (15)% |
|
| | | | | | | | | | | | |
| Three Months Ended December 31, | Six Months Ended December 31, |
Performance Services | 2017 | 2016 | 2017 | 2016 |
Net revenue: | | | | |
Other services and support | $ | 86,533 |
| $ | 85,850 |
| $ | 171,294 |
| $ | 165,372 |
|
Net revenue | 86,533 |
| 85,850 |
| 171,294 |
| 165,372 |
|
Cost of revenue: | | | | |
Services | 46,233 |
| 43,607 |
| 92,105 |
| 85,046 |
|
Cost of revenue | 46,233 |
| 43,607 |
| 92,105 |
| 85,046 |
|
Gross profit | 40,300 |
| 42,243 |
| 79,189 |
| 80,326 |
|
Operating expenses: | | | | |
Selling, general and administrative | 26,397 |
| 23,664 |
| 58,308 |
| 50,572 |
|
Research and development | 335 |
| 573 |
| 807 |
| 1,159 |
|
Amortization of purchased intangible assets | 8,841 |
| 8,996 |
| 17,699 |
| 17,993 |
|
Operating expenses | 35,573 |
| 33,233 |
| 76,814 |
| 69,724 |
|
Operating income | $ | 4,727 |
| $ | 9,010 |
| $ | 2,375 |
| $ | 10,602 |
|
Depreciation and amortization | 14,793 |
| 11,990 |
| 28,853 |
| 23,866 |
|
Amortization of purchased intangible assets | 8,841 |
| 8,996 |
| 17,699 |
| 17,993 |
|
Acquisition related expenses | (646 | ) | (1,573 | ) | (97 | ) | (1,879 | ) |
Acquisition related adjustment - revenue | 87 |
| 180 |
| 193 |
| 332 |
|
Equity in net income of unconsolidated affiliates | 127 |
| — |
| 127 |
| — |
|
Non-GAAP Segment Adjusted EBITDA | $ | 27,929 |
| $ | 28,603 |
| $ | 49,150 |
| $ | 50,914 |
|
Comparison of the Three Months Ended December 31, 2021 to 2020Net Revenue
Other services and supportNet revenue in our Performance Services segment increased $0.7by $14.0 million, or 1%15%, to $86.5 million forduring the three months ended December 31, 2017 from $85.9 million for2021 compared to the three months ended December 31, 20162020. The increase was primarily driven by higher revenue associated with enterprise analytics license agreements executed during the current period as compared to the prior year period, incremental revenue from our Remitra business and growth in our Contigo Health business.
Cost of Revenue
Performance Services segment cost of revenue increased by $3.2 million during the three months ended December 31, 2021 compared to the three months ended December 31, 2020, primarily due to an increase in personnel costs related to growth in our Contigo Health business and incremental expenses associated with our Remitra business.
Operating Expenses
Performance Services segment operating expenses increased by $9.3 million during the three months ended December 31, 2021 compared to the three months ended December 31, 2020. The increase was primarily due to an increase of $8.6 million in selling, general and administrative expenses driven by an increase in professional fees and a decrease in capitalized labor costs as well as an increase of $0.5 million in amortization of purchased intangible assets.
Segment Adjusted EBITDA
Performance Services Segment Adjusted EBITDA increased by $2.4 million, or 7%, during the three months ended December 31, 2021 compared to the three months ended December 31, 2020 primarily due to the aforementioned increase in revenue partially offset by the aforementioned increases in SaaS informatics products subscriptionscost of revenue and ambulatory quality solutions services. Other services and supportoperating expenses.
Comparison of the Six Months Ended December 31, 2021 to 2020
Net Revenue
Net revenue in our Performance Services segment increased $5.9by $9.1 million, or 4%5%, to $171.3 million forduring the six months ended December 31, 2017 from $165.4 million for2021 compared to the six months ended December 31, 20162020. The increase was primarily duedriven by incremental revenue from our Remitra business, higher revenue associated with enterprise analytics license agreements executed during the current period as compared to the prior year period and growth in cost management advisory services related to performance-based engagements. We also experienced increases in SaaS informatics products subscriptions, applied science services and government services related revenue.
We expect to experience quarterly variability in revenue generated from our Performance Services segment due to the timing of revenue recognition from certain advisory services and performance-based engagements in which our revenue is based on a percentage of identified member savings and recognition occurs upon approval and documentation of the savings. We expect our Performance Services revenue to grow over the long-term to the extent we are able to expand our sales to existing members and additional members begin to utilize our products and services.Contigo Health business.
Cost of Revenue
CostPerformance Services segment cost of revenue increased $2.6by $5.6 million or 6%, to $46.2 million for the three months ended December 31, 2017 from $43.6 million for the three months ended December 31, 2016. Cost of revenue increased $7.1 million, or 8%, to $92.1 million forduring the six months ended December 31, 2017 from $85.0 million for2021 compared to the six months ended December 31, 2016. This2020, primarily due to an increase is primarily driven by higher salariesin personnel costs related to growth in our Contigo Health business and benefitsincremental expenses resulting from increased staffing to support growth and performance-based engagements.associated with our Remitra business.
Operating Expenses
OperatingPerformance Services segment operating expenses increased $2.3by $11.8 million or 7%, to $35.6 million for the three months ended December 31, 2017 from $33.2 million for the three months ended December 31, 2016. Operating expenses increased $7.1 million, or 10%, to $76.8 million forduring the six months ended December 31, 2017 from $69.7 million for2021 compared to the six months ended December 31, 2016.
Selling,2020. The increase was primarily due to an increase of $13.3 million in selling, general and administrative expenses increased $2.7driven by an increase in professional fees as well as a decrease in capitalized labor costs. The increase was partially offset by $1.9 million or 12%, from the three months ended December 31, 2016 to 2017 and $7.7of lower amortization of purchased intangible assets.
Segment Adjusted EBITDA
Performance Services Segment Adjusted EBITDA decreased by $11.0 million, or 15%, fromduring the six months ended December 31, 20162021 compared to 2017, primarily driven by depreciation expense resulting from increased capitalization of labor in prior periods.
Amortization of purchased intangible assets decreased $0.2 million, or 2%, from the three months ended December 31, 2016 to 2017 and $0.3 million, or 2%, from the six months ended December 31, 20162020 primarily due to 2017, remaining relatively flat.
Segment Adjusted EBITDA
While revenue increased, Segment Adjusted EBITDA decreased $0.7 million, or 2%, to $27.9 million for the three months ended December 31, 2017 from $28.6 million for the three months ended December 31, 2016. Segment Adjusted EBITDA decreased $1.8 million, or 3%, to $49.15 million for the six months ended December 31, 2017 from $50.9 million for the six months ended December 31, 2016. This decrease is primarily a result of an increaseaforementioned increases in cost of sales related to anrevenue and operating expenses partially offset by the increase in staffing and costs to support growth and performance-based engagements, and was impacted on a comparable basis due to higher revenue recognition from performance-based engagements in the prior year. Specifically, the Company made investments in staff and infrastructure to support growth involving primarily larger and more complex engagements that include significant performance-based advisory services initiatives.revenue.
Corporate - Comparison of the Three and Six Months ended December 31, 2017 to 2016
The following table summarizespresents corporate expenses and Non-GAAP Adjusted EBITDA for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | | | Six Months Ended December 31, | | | | |
Corporate | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Operating expenses: | | | | | | | | | | | | | | | |
Selling, general and administrative | $ | 55,933 | | | $ | 45,812 | | | $ | 10,121 | | | 22% | | $ | 96,902 | | | $ | 91,183 | | | $ | 5,719 | | | 6% |
| | | | | | | | | | | | | | | |
Operating expenses | 55,933 | | | 45,812 | | | 10,121 | | | 22% | | 96,902 | | | 91,183 | | | 5,719 | | | 6% |
Operating loss | (55,933) | | | (45,812) | | | (10,121) | | | 22% | | (96,902) | | | (91,183) | | | (5,719) | | | 6% |
Depreciation and amortization | 2,192 | | | 2,126 | | | | | | | 4,423 | | | 4,245 | | | | | |
Stock-based compensation | 16,330 | | | 7,415 | | | | | | | 24,081 | | | 14,790 | | | | | |
Deferred compensation plan income | 2,389 | | | 4,803 | | | | | | | 2,071 | | | 7,710 | | | | | |
Other expense, net | 3,748 | | | 738 | | | | | | | 3,772 | | | 4,685 | | | | | |
Adjusted EBITDA | $ | (31,274) | | | $ | (30,730) | | | $ | (544) | | | (2)% | | $ | (62,555) | | | $ | (59,753) | | | $ | (2,802) | | | (5)% |
|
| | | | | | | | | | | | |
| Three Months Ended December 31, | Six Months Ended December 31, |
Corporate | 2017 | 2016 | 2017 | 2016 |
Other operating income: | | | | |
Remeasurement of tax receivable agreement liabilities | $ | 177,174 |
| $ | — |
| $ | 177,174 |
| $ | 5,722 |
|
Other operating income | 177,174 |
| — |
| 177,174 |
| 5,722 |
|
Operating expenses: | | | | |
Selling, general and administrative | 40,038 |
| 34,197 |
| 80,513 |
| 72,790 |
|
Research and development | (10 | ) | 194 |
| 6 |
| 414 |
|
Operating expenses | $ | 40,028 |
| $ | 34,391 |
| $ | 80,519 |
| $ | 73,204 |
|
Operating income (loss) | $ | 137,146 |
| $ | (34,391 | ) | $ | 96,655 |
| $ | (67,482 | ) |
Depreciation and amortization | 2,323 |
| 1,912 |
| 4,315 |
| 3,797 |
|
Stock-based compensation | 8,951 |
| 6,423 |
| 17,908 |
| 12,319 |
|
Strategic and financial restructuring expenses | 3 |
| — |
| 3 |
| — |
|
Adjustment to tax receivable agreement liabilities | (177,174 | ) | — |
| (177,174 | ) | (5,722 | ) |
ERP implementation expenses | 156 |
| 433 |
| 491 |
| 1,526 |
|
Deferred compensation plan income | 1,577 |
| 7 |
| 3,115 |
| 1,104 |
|
Other income | 586 |
| �� |
| 585 |
| — |
|
Non-GAAP Corporate Adjusted EBITDA | $ | (26,432 | ) | $ | (25,616 | ) | $ | (54,102 | ) | $ | (54,458 | ) |
Comparison of the Three Months Ended December 31, 2021 to 2020Other Operating IncomeExpenses
OtherCorporate operating incomeexpenses increased $177.2by $10.1 million fromduring the three months ended December 31, 20162021 compared to 2017the three months ended December 31, 2020, primarily due to an increase in stock-based compensation expense due to higher achievement of performance share awards, an increase in professional fees related to strategic and $171.5financial restructuring expenses in support of growth and strategic initiatives, and an increase in employee travel and meeting expenses as travel and meeting limitations due to the COVID-19 pandemic began to subside.
Adjusted EBITDA
Adjusted EBITDA decreased by $0.5 million, fromor 2%, during the three months ended December 31, 2021 compared to the three months ended December 31, 2020, primarily due to an increase in employee-related expenses, including employee travel and meeting expenses.
Comparison of the Six Months Ended December 31, 2021 to 2020
Operating Expenses
Corporate operating expenses increased by $5.7 million during the six months ended December 31, 20162021 compared to 2017 as a result of the remeasurement of TRA liabilities, which was primarily attributable to the 14% decrease in the U.S. federal corporate income tax rate associated with the TCJA. See "Member-Owner TRA" below for additional information related to the Company's TRA liabilities.
Operating Expenses
Operating expenses increased $5.6 million, or 16%, to $40.0 million for the three months ended December 31, 2017 from $34.4 million for the three months ended December 31, 2016. Operating expenses increased $7.3 million, or 10%, to $80.5 million for the six months ended December 31, 2017 from $73.22020, primarily due to increases in stock-based compensation expense due to higher achievement of performance share awards and employee-related expenses, including employee travel and meeting expenses as travel and meeting limitations due to the COVID-19 pandemic began to subside.
Adjusted EBITDA
Adjusted EBITDA decreased by $2.8 million, foror 5%, during the six months ended December 31, 2016.
Selling, general and administrative expenses increased $5.8 million, or 17%, from the three months ended December 31, 20162021 compared to 2017 and $7.7 million, or 11%, from the six months ended December 31, 2016 to 2017,2020, primarily driven by an increase in stock-based compensation expense largely associated with anticipated achievement of certain performance targets, along with increased salaries and benefits expenses due to increased staffing to support continued growth and the acquisitions of Innovatix and Essensa and to a lesser extent Acro Pharmaceuticals.
Non-GAAP Adjusted EBITDA
Non-GAAP Adjusted EBITDA decreased by $0.8 million, or 3%, from the three months ended December 31, 2016 to 2017, driven primarily by an increase in professional services costs associated with a certain isolated strategic consulting engagement and increased $0.4 million, or 1%, from the six months ended December 31, 2016 to 2017, driven primarily by a decrease in audit related fees and severanceemployee-related expenses, partially offset by the previously mentioned increase in professional services costs associated with a certain isolated strategic consulting engagement.including employee travel and meeting expenses.
Off-Balance Sheet Arrangements
As of December 31, 2017,2021, we did not have any off-balance sheet arrangements.
Liquidity and Capital Resources
Our principal source of cash has historicallyprimarily been cash provided by operating activities. From time to time we have used, and expect to use in the future, borrowings under our Credit Facility (as defined below and Note 8 - Debt and Notes Payable to the accompanying condensed consolidated financial statements for more information) as a source of liquidity. Our primary cash requirements involve operating expenses, working capital fluctuations, revenue share obligations, tax payments, capital expenditures, discretionary cash settlement of Class B common unit exchanges under the Exchange Agreement,dividend payments on our Class A common stock, if and when declared, repurchases under our current shareof Class A common stock pursuant to stock repurchase program,programs in place from time to time, acquisitions and related business investments, and other general corporate activities. Our capital expenditures typically consist of internally-developedinternally developed software costs, software purchases and computer hardware purchases.
As of December 31, 20172021 and June 30, 2017,2021, we had cash and cash equivalents totaling $163.0of $86.2 million and $156.7$129.1 million, respectively. As of December 31, 2021 and June 30, 2021, there were $125.0 million and $75.0 million, respectively, and there were $200.0 million and $220.0 million, respectively, inof outstanding borrowings under theour Credit Facility. During the six months ended December 31, 2017 the Company2021, we borrowed $175.0 million and repaid $50.0$125.0 million of borrowings and borrowed an additional $30.0 million under theour Credit Facility.Facility, which was used for other general corporate purposes.
We expect cash generated from operations and borrowings under our Credit Facility to provide us with adequate liquidity to fund our anticipated working capital requirements, revenue share obligations, tax payments, capital expenditures, discretionary cash settlement ofdividend payments on our Class BA common unit exchanges under the Exchange Agreement,stock, if and when declared, and repurchases of Class A common stock pursuant to our stock repurchase program, and growth for the foreseeable future.programs in place from time to time. Our capital requirements depend on numerous factors, including funding requirements for our product and service development and commercialization efforts, our information technology requirements, and the amount of cash generated by our operations. We currently believe that we have adequate capital resources at our disposal to fund currently anticipated capital expenditures, business growth and expansion, and current and projected debt service requirements. However, strategic growth initiatives will likely require the use of one or a combination of various forms of capital resources including available cash on hand, cash generated from operations, borrowings under our Credit Facility and other long-term debt and, potentially, proceeds from the issuance of additional equity or debt securities.
The COVID-19 global pandemic and its variants continue to create challenges throughout the United States and much of the rest of the world. The full extent to which the COVID-19 pandemic may impact our business, operating results, financial condition and liquidity in the future will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and variants thereof, the continued actions to contain it and treat its impact, including the success of the COVID-19 vaccination program, or recurrences of COVID-19, variants thereof or similar pandemics. As discussed in Item 1A. “Risk Factors” in our 2021 Annual Report as well as in this Quarterly Report under “Market and Industry Trends and Outlook” within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation, as a result of the COVID-19 pandemic and potential future pandemic outbreaks, we face significant risks including but not limited to the following:
•We have experienced and may continue to experience demand uncertainty from both material increases and decreases in demand for PPE, drugs and other supplies directly related to the treating and preventing the spread of COVID-19 and any variants thereof and decreases in demand for non-COVID-19-related supplies and services.
•Our member hospitals and non-acute care sites have experienced and continue to experience, reduced or limited access for non-patients, including our field teams, consultants and other professionals, and travel restrictions have impacted our employees’ ability to travel to our members’ facilities.
•The global supply chain has been materially disrupted due to personnel shortages associated with ongoing COVID-19 rates of infection, stay-at-home orders, border closings, rapidly escalating shipping costs and material logistical delays due to port congestion.
•We have and may continue to receive requests for contract modifications, payment waivers and deferrals, payment reductions or amended payment terms from our contract counterparties. Inflation in such contract prices may impact member utilization of items and services available through our GPO contracts, with uncertain impact on our net administrative fees revenue and direct sourcing revenue. In addition, several pharmacy suppliers have exercised force majeure clauses related to failure to supply clauses in their contracts with us.
•The impact of the COVID-19 pandemic and any variants thereof could result in a prolonged recession or depression in the United States or globally that could harm the banking system, limit demand for all products and services and cause other foreseen and unforeseen events and circumstances, all of which could negatively impact us.
•In response to COVID-19 and variants thereof, federal, state and local governments are issuing new rules, regulations, changing reimbursement eligibility rules, orders and advisories on a regular basis. These government actions can impact us, our members, other customers and suppliers.
Discussion of Cash Flows for the Six Months endedEnded December 31, 20172021 and 20162020
A summary of net cash flows follows (in thousands):
| | | Six Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | 2016 | | 2021 | | 2020 |
Net cash provided by (used in): | | Net cash provided by (used in): | | | |
Operating activities | $ | 206,515 |
| $ | 138,364 |
| Operating activities | $ | 197,527 | | | $ | 116,177 | |
Investing activities | (38,622 | ) | (336,358 | ) | Investing activities | (68,660) | | | (46,883) | |
Financing activities | (161,614 | ) | 168,069 |
| Financing activities | (171,846) | | | (59,585) | |
Net increase (decrease) in cash and cash equivalents | $ | 6,279 |
| $ | (29,925 | ) | |
Net increase in cash and cash equivalents | | Net increase in cash and cash equivalents | $ | (42,979) | | | $ | 9,709 | |
Net cash provided by operating activities increased $68.2by $81.4 million from the six months ended December 31, 2016primarily due to 2017 primarily driven by ana decrease of $151.6 million in cash paid for cost of revenue. This increase in net administrative fees as well as decreased outflows related to working capital needs,was partially offset by increased selling, generala decrease of $43.6 million in cash received from net revenues and administrative expensesincrease of $34.4 million in the current period.payments of operating expenses.
Net cash used in investing activities decreased $297.7 million from the six months ended December 31, 2016 to 2017 drivenincreased by our $222.2 million acquisition of Innovatix and Essensa, our $68.8 million acquisition of Acro Pharmaceuticals and our $65.7 million investment in FFF during the prior period, partially offset by $48.0 million in proceeds from the sale of marketable securities during the prior period.
Net cash provided by financing activities was $168.1$21.8 million for the six months ended December 31, 2016 while2021 compared to the six months ended December 31, 2020. The increase in net cash used in investing activities was primarily due to $26.0 million of cash paid by ExPre for an ownership interest in Exela Holdings, Inc., which was partially offset by a $2.2 million reduction in purchases of property and equipment.
Net cash used in financing activities was $161.6increased by $112.3 million for the six months ended December 31, 2017. The change in2021 compared to the six months ended December 31, 2020. Net cash flows provided by and used in financing activities was largely driven by $327.5$173.9 million for repurchases of borrowings under the Credit Facility in the prior period, partially offset by $20.0 million in net repayments under the Credit Facility during the current period, and to a lesser extent, the $100.0 million settlement of exchange of Class B units by member owners in the prior period and the $70.8 million used to repurchase Class A common stock under our sharethe fiscal 2022 stock repurchase program, an increase of $46.9 million in payments made on notes payable and an increase in cash dividend payments of $2.7 million. The net cash used in financing activities was partially offset by an increase of $25.0 million in net borrowings under our Credit Facility, a reduction of $34.2 million in distributions to limited partners of Premier LP and payments to limited partners of Premier LP related to tax receivable agreements as both distributions and payments were eliminated in connection with the current period.August 2020 Restructuring, an increase of $34.8 million in proceeds from the issuance of Class A common stock in connection with the exercise of outstanding stock options and an increase of $17.2 million in other financing activities. Other financing activities is primarily driven by proceeds from member health systems that acquired membership interests in ExPre.
Discussion of Non-GAAP Free Cash Flow for theSix Months endedEnded December 31, 20172021 and 20162020
We define Non-GAAP Free Cash Flow as net cash provided by operating activities from continuing operations less distributions and TRA payments to limited partners, early termination payments to certain former limited partners that elected to execute a Unit Exchange Agreement in connection with our August 2020 Restructuring and purchases of property and equipment. Non-GAAP Free cash flowCash Flow does not represent discretionary cash available for spending as it excludes certain contractual obligations such as debt repayments. repayments under our Credit Facility.
A summary of Non-GAAP Free Cash Flow and reconciliation to net cash provided by operating activities for the periods presented follows (in thousands):
| | | | | | | | | | | |
| Six Months Ended December 31, |
| 2021 | | 2020 |
Net cash provided by operating activities | $ | 197,527 | | | $ | 116,177 | |
Purchases of property and equipment | (42,660) | | | (44,864) | |
Early termination payments to certain former limited partners that elected to execute a Unit Exchange Agreement (a) | (47,741) | | | — | |
Distributions to limited partners of Premier LP | — | | | (9,949) | |
Payments to limited partners of Premier LP related to tax receivable agreements | — | | | (24,218) | |
Non-GAAP Free Cash Flow | $ | 107,126 | | | $ | 37,146 | |
|
| | | | | | |
| Six Months Ended December 31, |
| 2017 | 2016 |
Net cash provided by operating activities | $ | 206,515 |
| $ | 138,364 |
|
Purchases of property and equipment | (38,622 | ) | (34,325 | ) |
Distributions to limited partners of Premier LP | (45,703 | ) | (44,630 | ) |
Non-GAAP Free Cash Flow | $ | 122,190 |
| $ | 59,409 |
|
(a)Early termination payments to certain former limited partners that elected to execute a Unit Exchange Agreement in connection with our August 2020 Restructuring are presented in our Condensed Consolidated Statements of Cash Flows under “Payments made on notes payable.” We paid $51.3 million to members including imputed interest of $3.6 million which is included in net cash provided by operating activities. See Note 8 - Debt and Notes Payable to the accompanying condensed consolidated financial statements for further information.Non-GAAP Free Cash Flow increased $62.8by $70.0 million fromfor the six months ended December 31, 20162021 compared to 2017 primarilythe six months ended December 31, 2020. The increase in Non-GAAP Free Cash Flow was driven by anthe aforementioned $81.4 million increase in net administrative feescash provided by operating activities as well as decreased working capital needs,no distributions to limited partners of Premier LP or payments to limited partners of Premier LP related to tax receivable agreements in the six months ended December 31, 2021 as both were eliminated in connection with the August 2020 Restructuring. These increases were partially offset by increased selling, general and administrative expenses$47.7 million of early termination payments to certain former limited partners in connection with the current period. August 2020 Restructuring.
See “Our Use of Non-GAAP Financial Measures” above for additional information regarding our use of Non-GAAP Free Cash Flow.
The Company anticipatesContractual Obligations
Notes Payable to Former Limited Partners
At December 31, 2021, $359.4 million remains to be paid without interest in 14 equal quarterly installments to former limited partners that its Non-GAAP Free Cash Flow will benefit as a result of the decrease in the U.S. federal corporate income tax rate associatedelected to execute Unit Exchange Agreements ending with the TCJA as distributionsquarter ended June 30, 2025. See Note 8 - Debt and Notes Payable to limited partners of Premier LP and payments to limited partners of Premier LP related to tax receivable agreements are expected to decrease in future periods as a result of the decreased federal corporate income tax rate.accompanying condensed consolidated financial statements for more information.
Contractual Obligations
Other Notes Payable
At December 31, 2017,2021, we had commitments of $7.7$5.8 million for other obligations under notes payable. Other notes payable which represented obligations to departed member owners. Notes payable to departed member owners generally have stated maturities ofbetween three to five years from the date of issuance and are non-interest bearing. See Note 8 - Debt inand Notes Payable to the accompanying condensed consolidated financial statements for more information.
2014 Credit Facility
Premier LP, along with its consolidated subsidiaries, PSCI and PHSI, as Co-Borrowers, Premier GP and certain domestic subsidiaries of Premier GP, as guarantors, entered intoWe maintain an unsecured Credit Facility, dated as of June 24, 2014 and amended on June 4, 2015. The Credit Facility has a maturity date of June 24, 2019. The Credit Facilitycredit facility which provides for borrowings of up to $750.0 million$1.0 billion with (i) a $25.0$50.0 million sub-facility for standby letters of credit and (ii) a $75.0$100.0 million sub-facility for swingline loans. The Credit Facility may be increasedloans as well as the ability to incur incremental term loans from time to time atand request an increase in the Company's requestrevolving commitments up to an aggregate additional amount of $250.0$350.0 million, subject to lender approval.certain conditions (the “Credit Facility”). The Credit Facility includes an unconditional and irrevocable guarantymatures on November 9, 2023, subject to up to two one-year extensions which require the approval of all obligationsa majority of the lenders under the Credit Facility.
Outstanding borrowings under the Credit Facility by Premier GP, certain domestic subsidiaries of Premier GP and future guarantors, if any. Premier, Inc. is not a guarantor under the Credit Facility.
At the Company's option, committed loans may be in the form of Eurodollar rate loans ("Eurodollar Loans") or base rate loans ("Base Rate Loans"). Eurodollar Loans bear interest on a variable rate structure with borrowings bearing interest at the Eurodollar rate (defined aseither the London Interbank Offered Rate or LIBOR,(“LIBOR”) plus the Applicable Rate (defined as aan applicable margin based on the Consolidated Total Leverage Ratio (as defined in the Credit Facility))). Base Rate Loans bear interest at the Base Rate (defined as the highest ofranging from 1.000% to 1.500% or the prime rate announced by the administrative agent, the federal funds effectivelending rate plus 0.50% or the one-month LIBOR plus 1.0%) plus the Applicable Rate. The Applicable Rate rangesan applicable margin ranging from 1.125%0.000% to 1.750% for Eurodollar Loans and 0.125% to 0.750% for Base Rate Loans. At December 31, 2017, the interest rate for three-month Eurodollar Loans was 2.815% and the interest rate for the Base Rate Loans was 4.625%0.500%. The Co-Borrowers are required toWe pay a commitment fee ranging from 0.125%0.100% to 0.250% per annum on the actual daily0.200% for unused amount of commitmentscapacity under the Credit Facility. At December 31, 2017,2021, the interest rate on outstanding borrowings under the Credit Facility was 1.110% and the commitment fee was 0.125%0.100%.
The Credit Facility contains customary representations and warranties as well as customary affirmative and negative covenants, including, among others, limitations on liens, indebtedness, fundamental changes, dispositions, restricted payments and investments, of which certain covenant calculations use EBITDA, a Non-GAAP financial measure. Under the terms of the Credit Facility, Premier GP is not permitted to allow its consolidated total leverage ratio (as defined in the Credit Facility) to exceed 3.00 to 1.00 for any period of four consecutive quarters. In addition, Premier GP must maintain a minimum consolidated interest coverage ratio (as defined in the Credit Facility) of 3.00 to 1.00 at the end of every fiscal quarter. Premier GP wascovenants. We were in compliance with all such covenants at December 31, 2017.
2021. The Credit Facility also contains customary events of default, including among others, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaultsa cross-default of any indebtedness or guarantees in excess of $30.0 million, bankruptcy and other insolvency events, judgment defaults in excess of $30.0 million, and the occurrence of a change of control (as defined in the Credit Facility).$75.0 million. If any event of default occurs and is continuing, the administrative agent under the Credit Facility may, with the consent, or shall, at the request of a majority
of the required lenders under the Credit Facility, terminate the commitments and declare all of the amounts owed under the Credit Facility to be immediately due and payable. The Company may prepay amounts outstanding under the Credit Facility without premium or penalty provided that Co-Borrowers compensate the lenders for losses and expenses incurred as a result of the prepayment of any Eurodollar Loan, as defined in the Credit Facility.
Proceeds from borrowings under the Credit Facility may generally be used to finance ongoing working capital requirements, including permitted acquisitions, discretionary cash settlements of Class B unit exchanges under the Exchange Agreement, repurchases of shares of our Class A common stock pursuant to our stock repurchase program,programs, in place from time to time, dividend payments, if and when declared, and other general corporate activities. During the six months endedAt December 31, 2017, the Company repaid $50.0 million2021, we had outstanding borrowings of borrowings and borrowed an additional $30.0$125.0 million under the Credit Facility. Borrowings due within one yearFacility with $874.9 million of the balance sheet date are classified as current liabilities in the Condensed Consolidated Balance Sheets. The Company hadavailable borrowing capacity after reductions for outstanding borrowings under the Credit Facilityand outstanding letters of $200.0 million at December 31, 2017. They may be renewed or extended at the option of the Company through the maturity date of the Credit Facility. credit.
The above summary does not purport to be complete, and is subject to, and qualified in its entirety by reference to, the complete text of the Credit Facility, as amended, which is filed as an exhibitExhibit 10.1 to the 2017 Annualthis Quarterly Report. See also Note 8 - Debt in ourand Notes Payable to the accompanying condensed consolidated financial statements in Part I of this Quarterly Report.statements.
Cash Dividends
Member-Owner TRA
The Company entered into TRAs withIn each of our member owners. Pursuant to the TRAs,September 2021 and December 2021, we will pay member owners 85%paid a cash dividend of the tax savings, if any, in U.S. federal, foreign, state and local income and franchise tax that we actually realize (or are deemed to realize, in the case$0.20 per share on outstanding shares of payments required to be made upon certain occurrences under such TRAs) in connection with the Section 754 election. The election results in adjustments to the tax basis of the assets of Premier LP upon member owner exchanges of Class B common units of Premier LP for Class A common stockstock. On January 20, 2022, our Board of Premier, Inc.Directors declared a cash dividend of $0.20 per share, payable on March 15, 2022 to stockholders of record on March 1, 2022.
We currently expect quarterly dividends to continue to be paid on or cash. Tax savings are generatedabout December 15, March 15, June 15, and September 15. However, the actual declaration of any future cash dividends, and the setting of record and payment dates as a resultwell as the per share amounts, will be at the discretion of our Board of Directors each quarter after consideration of various factors, including our results of operations, financial condition and capital requirements, earnings, general business conditions, restrictions imposed by our current credit facility and any future financing arrangements, legal restrictions on the increases in tax basis resulting from the initial salepayment of Class B common units, subsequent exchanges (pursuant to the Exchange Agreement)dividends and payments under the TRA.
The Company had TRA liabilitiesother factors our Board of $247.2 million and $339.7 million at December 31, 2017 and June 30, 2017, respectively. The $92.5 million decrease was primarily attributable to the $177.2 million revaluation and remeasurement of TRA liabilities associated with the decrease in the U.S. federal corporate income tax rate as a result of the TCJA, partially offset by $62.2 million in increases in TRA liabilities in connection with the quarterly member owner exchanges that occurred during the period and $20.9 million associated with the revaluation and remeasurement of TRA liabilities due to a change in the allocation and realization of future anticipated payments.Directors deems relevant.
Stock Repurchase PlanProgram
On October 31, 2017, we announced thatAugust 5, 2021, our Board of Directors authorized the repurchase of up to $200$250.0 million of our outstanding Class A common stock as part of a balanced capital deployment strategy, such repurchases to be made from time to time in private orduring fiscal year 2022 through open market transactions at the Company's discretion, in accordance with applicable federal securities laws. As ofpurchases or privately negotiated transactions. At December 31, 2017,2021, we had purchased approximately 2.64.5 million shares of Class A common stock at an average price of $28.96$39.37 per share for a total purchase price of approximately $74.7 million, of which $3.9 million relates to a forward$176.0 million. The purchase commitment included within accounts payable on our Condensed Consolidated Balance Sheets as a result of applying trade date accounting when recording the repurchase of such shares. As of December 31, 2017, we had approximately $125.3 million available under our share repurchase authorization, which expires June 30, 2018. Subsequent to December 31, 2017 and as of February 2, 2018, we had purchased approximately 1.0 million additional shares of Class A common stock at an average price of $31.67 per share for a total incremental purchase price of approximately $32.9 million, the amounts of which are not reflected in our condensed consolidated financial statements for the quarter ended December 31, 2017. The repurchase authorization may be suspended, delayed, or discontinued at any time at the discretion of our Board of Directors. Repurchases are subject to compliance with applicable federal securities laws and our management may, at its discretion, suspend, delay, or discontinue repurchases at any time, based on market conditions, alternate uses of capital, or other factors.
Costs Associated with Exit or Disposal ActivitiesImpact of Inflation
As partThe U.S. economy is experiencing significant inflation. Historically, we have not experienced significant inflation risk in our business arising from fluctuations in market prices across our diverse product portfolio. However, our ability to raise our selling prices depends on market conditions and there may be periods during which we are unable to fully recover increases in our costs. Our GPO business has largely been unaffected by pricing inflation as we use our members’ aggregated purchasing power to negotiate firm prices in many of our ongoing integration synergies and effortscontracts. In our Direct Sourcing business, we have historically been able to realign resources for future growth areas, we are implementing certain personnel adjustments, including a workforce reduction. On February 5, 2018, we communicatedadjust our selling prices to our employees that these personnel adjustments impact approximately 75 positions (approximately 65 of which are related to the workforce reduction),pass through increases in cost or approximately 3% of total employees. We finalized and committed to this course of action on February 2, 2018. The workforceoffset them through various cost reduction is expected to result in pre-tax cash restructuring charges, primarily relating to severance and transition assistance, of approximately $5.2 million. Charges related to the workforce reduction, which is expected to be substantially completed in February 2018, will be expensed in the third quarter ending March 31, 2018. The majority of employees impacted by these personnel adjustments are from our Performance Services segment.initiatives.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk.Risk
Our exposure to market risk relatedrelates primarily to the increase or decrease in the amount of any interest expense we must pay with respect to outstanding variable-rate debt instruments. At December 31, 2017,2021, we had $200.0$125.0 million in outstanding borrowings under theour Credit Facility. Committed loans may beBased on the weighted average interest rate charged on outstanding borrowings under our Credit Facility at December 31, 2021, a one-percent change in the form of Eurodollar Rate Loans or Base Rate Loans (as defined in the Credit Facility) at our option. Eurodollar Rate Loans bear interest at the Eurodollar Rate (defined as the London Interbank Offer Rate, or LIBOR) plus the Applicable Rate (defined as a margin based on the Consolidated Total Leverage Ratio (as defined in the Credit Facility)). Base Rate Loans bear interest at the Base Rate (defined as the highest of the prime rate announced by the administrative agent, the federal funds effective rate plus 0.50% or the one-month LIBOR plus 1.0%) plus the Applicable Rate. The Applicable Rate ranges from 1.125% to 1.750% for Eurodollar Rate Loans and 0.125% to 0.750% for Base Rate Loans. At December 31, 2017, theweighted average interest rate for three-month Eurodollar Rate Loans was 2.815% andcharged on outstanding borrowings would increase or decrease interest expense over the interest rate for Base Rate Loans was 4.625%.next twelve months by $1.3 million.
We invest our excess cash in a portfolio of individual cash equivalents. We do not currently hold and we have never held, any material derivative financial instruments. We do not expect changes in interest rates to have a material impact on our financial condition or results of operations.operations or financial position. We plan to ensure the safetymitigate default, market, and preservationinvestment risks of our invested funds by limiting default, market and investment risks. We plan to mitigate default risk by investing in low-risk securities.
Foreign Currency Risk.Risk
Substantially all of our financial transactions are conducted in U.S. dollars. We do not have significant foreign operations and, accordingly, do not believe we have only minimal market risk associated with foreign currencies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act)Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this Quarterly Report, we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon our evaluation, our chief executive officer and chief financial officer have concluded that due solely to the identification of a material weakness in our internal control over financial reporting as described in Part II, Item 9A of our 2017 Form 10-K that has not yet been fully remediated, our disclosure controls and procedures were not effective as of December 31, 2017.2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 20172021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than as described below under “Remediation Plan”.reporting.
As disclosed in Part II, Item 9A of our 2017 Form 10-K, we identified a material weakness in our internal control over financial reporting related to the income tax accounting for complex, non-routine or infrequent transactions. Since that time, we have begun implementing a remediation plan to address this material weakness. The remediation plan consists of augmenting the Company’s accounting resources, training, and implementing a more formal review and documentation process around the income tax accounting for complex, non-routine or infrequent transactions that may arise from time to time. Management believes that this remediation plan will strengthen our overall internal control over financial reporting and specifically with respect to complex, non-routine or infrequent transactions. Management is continuing to assess the sufficiency and expected effectiveness of our remediation efforts, and we may take additional measures or modify our internal control over financial reporting for these types of transactions.
This material weakness will not be considered fully remediated until newly implemented remediation controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect these remedial actions to be effectively implemented during fiscal year 2018 in order to successfully remediate this material weakness by June 30, 2018. If these remedial measures are insufficient or not implemented effectively, or additional deficiencies arise, material misstatements may occur in the future. Among other things, any unremediated or additional material weaknesses could have the effects described in our 2017 Form 10-K, specifically under “Item 1A. Risk Factors - If we fail to maintain an effective system of integrated internal controls, we may not be able to report our financial results accurately, or we may determine that our prior financial statements are not reliable, which could have a material adverse effect on our business, financial condition and results of operations.”
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We participate inoperate businesses that are subject to substantial litigation. We are,litigation from time to time,time. We are periodically involved in litigation, arising in the ordinary course of business or otherwise, which from time to time may include claims relating to commercial,contractual disputes, product liability, tort andor personal injury, employment, antitrust, intellectual property regulatory, or other commercial or regulatory matters. If current or future government regulations specifically those with respect to antitrust or healthcare laws, are interpreted or enforced in a manner adverse to us or our business, including without limitation those with respect to antitrust or healthcare laws, we may be subject to enforcement actions, penalties, damages and other material limitations on our business. Furthermore, as a public company, we may become subject to stockholder inspection demands under Delaware law and derivative or other similar litigation.
In the past,From time to time we have been named as a defendant in severalclass action or other antitrust lawsuits brought by suppliers or purchasers of medical products. Typically, these lawsuits have alleged the existence of a conspiracy among manufacturers of competing products, anddistributors and/or operators of GPOs, including us, to deny the plaintiff access to a market for its products.certain products, to raise the prices for products and/or limit the plaintiff’s choice of products to buy. We believe that we have at all times conducted our business affairs in an ethical and legally compliant manner and have successfully resolved all such actions. We mayNo assurance can be given that we will not be subjected to similar actions in the future and no assurance can be givenor that any such existing or future matters will be resolved in a manner satisfactory to us or which will not harm our business, financial condition or results of operations.
Additional information relating to certain legal proceedings in which we are involved is included in Note 1514 - Commitments and Contingencies to the accompanying condensed consolidated financial statements, which information is incorporated herein by reference.
Item 1A. Risk Factors
During the quarter ended December 31, 2017,2021, there were no material changes to the risk factors disclosed in "Risk Factors"Item 1A. “Risk Factors” in the 20172021 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities
On October 31, 2017, we announced thatAugust 5, 2021, our boardBoard of directorsDirectors authorized the repurchase of up to $200$250.0 million of our outstanding Class A common stock prior to June 30, 2018, as part of a balanced capital deployment strategy. Subject to compliance with applicable federal securities laws, repurchases are authorized to be made from time to time induring fiscal year 2022 through open market transactions,purchases or privately negotiated transactions, or other transactions, including trades under a plan established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.transactions. All repurchases of our Class A common stock have beenwere recorded as treasury shares. The following table summarizes information relating to repurchases made of our Class A common stock duringfor the quarter ended December 31, 2017.2021.
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Share Purchased | | Average Price Paid per Share ($)(a) | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (in millions)(b) |
October 1 through October 31, 2021 | 1,031,268 | | | $ | 39.16 | | | 1,031,268 | | | $ | 167 | |
November 1 through November 30, 2021 | 1,262,046 | | | 40.44 | | | 1,262,046 | | | 116 | |
December 1 through December 31. 2021 | 1,083,606 | | | 38.67 | | | 1,083,606 | | | 74 | |
Total | 3,376,920 | | | | | 3,376,920 | | | $ | 74 | |
|
| | | | | | | | | | |
Period | Total Number of Shares Purchased | Average Price Paid per Share ($) (1) | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (in millions)(2) |
November 9 through November 30, 2017 | 1,201,100 |
| $ | 28.51 |
| 1,201,100 |
| $ | 166 |
|
December 1 through December 31, 2017 | 1,376,859 |
| 29.35 |
| 1,376,859 |
| 125 |
|
Total | 2,577,959 |
| $ | 28.96 |
| 2,577,959 |
| $ | 125 |
|
(1) (a)Average price paid per share excludes fees and commissions.
(2) As of(b)From the stock repurchase program's inception through December 31, 2017,2021, we had purchased 2.6approximately 4.5 million shares of Class A common stock at an average price of $28.96$39.37 per share for a total of $74.7 million since the program's inception.
$176.0 million.
Item 6. Exhibits
|
| | | | | | | |
Exhibit No. | | Description |
10.1 | | |
10.2 | | Transition Agreement and Release, dated October 9, 2017, by and between Durral R. GilbertPremier Supply Chain Improvement, Inc. and Premier Healthcare Solutions, Inc., as Co-Borrowers, Premier Services, LLC, the other Guarantors party thereto and, Wells Fargo Bank, National Association, as Administrative Agent (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 10, 2017).December 1, 2021) |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
101 | | Sections of the Premier, Inc. Quarterly Report on Form 10-Q for the quarter ended December 31, 2017,2021, formatted in XBRL (eXtensibleiXBRL (Inline eXtensible Business Reporting Language), submitted in the following files: |
101.INS101.SCH | | XBRL Instance Document.* |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document.* |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document.* |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document.* |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* |
104 | | The cover page from the Premier, Inc. Quarterly Report on Form 10-Q for the quarter ended December 31, 2021, formatted in Inline XBRL (included in Exhibit 101).* |
* Filed herewith.
+ Indicates a management contract or compensatory plan or arrangement
‡ Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | | | | |
| | | | | PREMIER, INC. |
| | | | | PREMIER, INC. |
Date: | February 1, 2022 | | By: | |
Date: | February 5, 2018 | | By: | | /s/ Craig S. McKasson |
| | | Name: | | Craig S. McKasson |
| | | Title: | | Chief Administrative and Financial Officer and Senior Vice President |
| | | | | Signing on behalf of the registrant and as principal financial officer and principal accounting officer |