See accompanying notes to the unaudited condensed consolidated financial statements.
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" or the "Company") is a publicly-held, for-profit Delaware corporation owned by public stockholders and by hospitals, health systems and other healthcare organizations (such owners of Premier are referred to herein as "member owners") located in the United States and by public stockholders.States. The Company is a holding company with no material business operations of its own. The Company's primary asset is its equity interest in its wholly-owned subsidiary Premier Services, LLC, a Delaware limited liability company ("Premier GP"). Premier GP is the sole general partner of Premier Healthcare Alliance, L.P. ("Premier LP"), a California limited partnership. The Company conducts substantially all of its business operations through Premier LP and its other consolidated subsidiaries. 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's business model and solutions are designed to provide its members access to scale efficiencies, spread the cost of their development, provide actionable intelligence derived from anonymized data in the Company's data warehouse, mitigate the risk of innovation and disseminate best practices to help the Company's member organizations 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 17 - Segments for further information related to the Company's reportable business segments. The Supply Chain Services segment includes one of the largest healthcare group purchasing organization ("GPO") programs in the United States and integrated pharmacy and direct sourcing activities. The Performance Services segment, through its development, integration and delivery of technology with wrap-around service offerings, includes one of the largest informatics and consulting services businesses in the United States focused on healthcare providers. More specifically, theThe Company's software as a service ("SaaS") informatics products utilize the Company's comprehensive data set to provide actionable intelligence to its members, enabling them to benchmark, analyze and identify areas of improvement across the three3 main categories of cost management, quality and safety, and value-based care. While leveraging these tools, the Company also combines its consulting services and technology-enabled performance improvement collaboratives to provide a more comprehensive and holistic customer value proposition and overall experience. The Performance Services segment also includes the Company's government services and insurance management services.
Acquisitions and Divestitures
Acquisition of Acurity and Nexera Assets
On February 28, 2020, the Company, through two newly formed consolidated subsidiaries, Prince A Purchaser, LLC ("PAP") and Prince N Purchaser, LLC ("PNP"), acquired substantially all of the assets and certain liabilities of Acurity, Inc. and Nexera, Inc., both indirect wholly-owned subsidiaries of Greater New York Hospital Association ("GNYHA"), for an aggregate amount of $291.5 million, of which $166.1 million was paid at closing with borrowings under the Company's Credit Facility (as defined in Note 9 - Debt). Pursuant to the terms of the asset purchase agreement (as amended, the "Purchase Agreement"), an additional $120.0 million will be paid to the sellers in 4 equal annual installments of $30.0 million on or about June 30, 2021, 2022, 2023 and 2024. An additional $5.4 million is expected to be paid during the Company’s second fiscal quarter of 2021. In addition to the aggregate amount of $291.5 million, the Purchase Agreement provides a graduated earn-out opportunity to Acurity, Inc. of up to $30.0 million based upon the Company’s achievement of a range of member renewals on terms to be agreed to by the Company and GNYHA based on prevailing market conditions in December 2023.
After the closing of the transaction, PAP and PNP changed their names to Acurity, LLC ("Acurity") and Nexera, LLC ("Nexera"), respectively. Acurity is a regional group purchasing organization and has been a customer and strategic partner of the Company for more than 24 years. Nexera is a hospital financial improvement consulting firm which partners with healthcare organizations to improve hospital and health system performance, with a significant focus on supply chain enhancement and transformation. The Company reports the operations of Acurity and Nexera as part of its Supply Chain Services segment. See Note 3 - Business Acquisitions for further information.
Acquisition of Medpricer
On October 28, 2019, the Company, through its consolidated subsidiary, Premier Supply Chain Improvement, Inc. ("PSCI"), acquired all of the outstanding capital stock in Medpricer.com, Inc. ("Medpricer") for an adjusted purchase price of $38.5 million
with borrowings under the Credit Facility. Medpricer is a SaaS-based provider of technology solutions that enable hospitals and other organizations to analyze, benchmark and source purchased services contracts independent of any existing GPO affiliation. Medpricer is reported as part of the Supply Chain Services segment. See Note 3 - Business Acquisitions for further information.
Acquisition of Stanson
On November 9, 2018, the Company, through its consolidated subsidiary Premier Healthcare Solutions, Inc. ("PHSI"), acquired all of the outstanding capital stock in Stanson Health, Inc. ("Stanson") through a reverse subsidiary merger transaction for an adjusted purchase price of $55.4 million in cash. Stanson is a SaaS-based provider of clinical decision support tools that are integrated directly into the electronic health record workflow to help provide real-time, patient-specific best practices at the point of care. Stanson is reported as part of the Performance Services segment. See Note 3 - Business Acquisitions for further information.
Divestiture of Specialty Pharmacy Business - Discontinued Operations
On June 7, 2019, the Company and its consolidated subsidiaries, NS3 Health, LLC, Commcare Pharmacy - FTL, LLC, and Acro Pharmaceutical Services LLC completed the sale of prescription files and records and certain other assets used in the Company's specialty pharmacy business to ProCare Pharmacy, L.L.C., an affiliate of CVS Health Corporation, for $22.3 million. The Company also received $7.6 million related to the sale of a portion of its pharmaceutical inventory on June 10, 2019, and an additional $3.6 million on July 24, 2019 primarily in connection with the sale of its remaining pharmaceutical inventory. In addition, during the nine months ended March 31, 2020, the Company substantially completed its wind down and exit from the specialty pharmacy business. See Note 4 - Discontinued Operations and Exit Activities for further information.
The Company met the criteria for classifying certain assets and liabilities of the specialty pharmacy business as a discontinued operation as of June 30, 2019. Accordingly, unless otherwise indicated, information in the notes to the condensed consolidated financial statements has been retrospectively adjusted to reflect continuing operations for all periods presented.
Company Structure
The Company, through Premier GP, held an approximate 49%58% and 40%49% sole general partner interest in Premier LP at March 31, 20192020 and June 30, 2018,2019, respectively. In addition to their equity ownership interest in the Company, ourthe member owners held an aggregate of approximatelyapproximate 42% and 51% and 60% limited partner interest in Premier LP at March 31, 20192020 and June 30, 2018,2019, respectively. As a result of exchanges under an exchange agreement entered into by the member owners in connection with the completion of the Company's initial public offering on October 1, 2013 (the "Exchange Agreement"), as of July 31, 2019, the Class A common stock and Class B common stock represented approximately 50.2% and 49.8% respectively, of the Company's combined Class A and Class B common stock and accordingly, the Class B common stock held by member owners no longer represented the majority of the Company's outstanding common stock. On July 31, 2019, as a result of the Class B common unit exchange process, the Company no longer qualified for the "controlled company" exemption under NASDAQ rules and must comply with all general NASDAQ rules regarding board and committee composition by July 31, 2020. The Company expects to comply with all NASDAQ rules in a timely manner, including having a majority of independent directors on the Board of Directors by July 31, 2020.
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 March 31, 20192020 and June 30, 2018,2019, the member owners owned an aggregate of approximately42% and 51% and 60%, respectively, of the Company's combined Class A and Class B common stock through their ownership of Class B common stock. During the nine months ended March 31, 2019,2020, the member owners exchanged 14.313.1 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.Exchange Agreement. The Exchange Agreement provides each member owner the cumulative right to exchange up to one-seventh of its initial allocation 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 duringDuring the nine months ended March 31, 2019, approximately 14.32020, 13.1 million Class B common units were contributed to Premier LP, converted to Class A common units and remain outstanding. Correspondingly, approximately 14.313.1 million Class B common shares were retired during the same period. For further information, see Note 10 - Redeemable Limited Partners' Capital and Note 12 - Earnings (Loss) Per Share.
Refer to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (the "2018 Annual Report") filed with the Securities and Exchange Commission ("SEC") on August 23, 2018 for further discussion of the Exchange Agreement.
At both March 31, 20192020 and June 30, 2018,2019, 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 an aggregate of approximately58% and 49% and 40%, respectively, of the Company's outstanding common stock through their ownership of Class A common stock.
The Company has corrected prior period information within the current period financial statements related to a specific component used in calculating the tax effect on Premier, Inc. net income for purposes of diluted earnings (loss) per share. Diluted earnings (loss) per share for the nine months ended March 31, 2018 was previously stated at ($0.84) per share and has been corrected to $0.79 per share. The Company believes the correction is immaterial and the amount had no impact on the Company's overall financial condition, results of operations or cash flows.
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") for interim financial information and include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the 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, including normal recurring adjustments. 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 20182019 Annual Report.
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 power 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 March 31, 20192020 and June 30, 20182019, including assets and liabilities of discontinued operations, consisted of the following (in thousands):
|
| | | | | | |
| March 31, 2020 | June 30, 2019 |
Assets | | |
Current | $ | 742,525 |
| $ | 603,390 |
|
Noncurrent | 1,874,662 |
| 1,536,685 |
|
Total assets of Premier LP | $ | 2,617,187 |
| $ | 2,140,075 |
|
| | |
Liabilities | | |
Current | $ | 753,763 |
| $ | 517,616 |
|
Noncurrent | 290,163 |
| 118,032 |
|
Total liabilities of Premier LP | $ | 1,043,926 |
| $ | 635,648 |
|
|
| | | | | | |
| March 31, 2019 | June 30, 2018 |
| New revenue standard (a) | Previous revenue standard |
Assets | | |
Current | $ | 621,146 |
| $ | 393,863 |
|
Noncurrent | 1,635,703 |
| 1,577,974 |
|
Total assets of Premier LP | $ | 2,256,849 |
| $ | 1,971,837 |
|
| | |
Liabilities | | |
Current | $ | 633,346 |
| $ | 457,172 |
|
Noncurrent | 128,555 |
| 128,793 |
|
Total liabilities of Premier LP | $ | 761,901 |
| $ | 585,965 |
|
| |
(a) | The Company adopted Topic 606 effective July 1, 2018, while comparative results are presented under Topic 605. Refer to Note 2 - Significant Accounting Policies for more information. |
Net income attributable to Premier LP, including income and expense that has been classified as discontinued operations, during the three and nine months ended March 31, 20192020 and 20182019 was as follows (in thousands):
|
| | | | | | | | | | | | |
| Three Months Ended March 31, | Nine Months Ended March 31, |
| 2019 | 2018 | 2019 | 2018 |
| New revenue standard (a) | Previous revenue standard | New revenue standard (a) | Previous revenue standard |
Premier LP net income | $ | 84,883 |
| $ | 87,920 |
| $ | 295,928 |
| $ | 255,050 |
|
|
| | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
| March 31, | March 31, |
| 2020 | 2019 | 2020 | 2019 |
Premier LP net income | $ | 84,185 |
| $ | 84,883 |
| $ | 290,430 |
| $ | 295,928 |
|
| |
(a) | The Company adopted Topic 606 effective July 1, 2018, while comparative results are presented under Topic 605. Refer to Note 2 - Significant Accounting Policies for more information. |
Premier LP's cash flows, including cash flows attributable to discontinued operations, for the nine months ended March 31, 20192020 and 20182019 consisted of the following (in thousands):
|
| | | | | | |
| Nine Months Ended March 31, |
| 2020 | 2019 |
Net cash provided by (used in): | | |
Operating activities | $ | 252,566 |
| $ | 391,508 |
|
Investing activities | (171,954 | ) | (132,385 | ) |
Financing activities | 24,790 |
| (251,440 | ) |
Net increase in cash and cash equivalents | 105,402 |
| 7,683 |
|
Cash and cash equivalents at beginning of year | 131,210 |
| 117,741 |
|
Cash and cash equivalents at end of period | $ | 236,612 |
| $ | 125,424 |
|
|
| | | | | | |
| Nine Months Ended March 31, |
| 2019 | 2018 |
| New revenue standard (a) | Previous revenue standard |
Net cash provided by (used in): | | |
Operating activities | $ | 391,508 |
| $ | 388,340 |
|
Investing activities | (132,385 | ) | (65,260 | ) |
Financing activities | (251,440 | ) | (344,463 | ) |
Net increase (decrease) in cash and cash equivalents | 7,683 |
| (21,383 | ) |
Cash and cash equivalents at beginning of year | 117,741 |
| 133,450 |
|
Cash and cash equivalents at end of period | $ | 125,424 |
| $ | 112,067 |
|
| |
(a) | The Company adopted Topic 606 effective July 1, 2018, while comparative results are presented under Topic 605. Refer to Note 2 - Significant Accounting Policies for more information. |
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company'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, useful lives of property and equipment, stock-based compensation, payables under tax receivable agreements ("TRAs"TRA"), deferred tax balances including valuation allowances on deferred tax assets, uncertain tax positions, values of investments not publicly traded, projected future cash flows used in the evaluation of asset impairment,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%. Concurrent with the enactmentimpact of the TCJA,coronavirus ("COVID-19") pandemic on our business, results of operations, financial condition and cash flows is dependent on future developments, including the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effectsduration of the TCJA.
SAB 118 provided a measurement period that should not extend beyond one year frompandemic and 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 effectsrelated length 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 740impact on the basis of the provision of the tax laws that were in effect immediately prior to the enactment of the TCJA. WithUnited States and global economies, which are uncertain and cannot be predicted at this in mind, the Company prescribed provisional relief under SAB 118 through the one year measurement period to calculate components of
its deferred tax balances. During the second quarter of fiscal year 2019, the Company completed its accounting for all of the enactment date income tax effects of the TCJA.time.
(2) SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company's significant accounting policies included withinas described in the 20182019 Annual Report, except as described below.
Recently Adopted Accounting Standards
In JanuaryFebruary 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial LiabilitiesNo. 2016-02, Leases (Topic 842), ("ASU 2016-12"), which is intended to provide usersincreases transparency and comparability by requiring the recognition of financial statements with more useful informationlease assets and lease liabilities on the recognition, measurement, presentation, andbalance sheet, as well as requiring the disclosure of financial instruments.key information about leasing arrangements. The Company adopted this standard effectiveASU 2016-02 on July 1, 2018. The implementation of this ASU did not have2019 on a material effect on the Company's condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes 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 allowed for either full retrospective or modified retrospective adoption.
In August 2015,basis under the FASB issued an amendmentoptional transition method; therefore, comparative periods are presented in ASU 2015-14, Revenue from Contractsaccordance with Customers (Topic 606): DeferralAccounting Standards Codification ("ASC") Topic 840. Additionally, the Company elected the package of practical expedients permitted under the Effective Date, to defer the effective date oftransition guidance within the new standard, which allowed us to carry forward (1) historical lease classification and assessments for all entities by one year.expired and existing leases, and (2) historical accounting for initial direct costs for existing leases. The new standard, as amended, is 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 is permitted.
In March 2016, the FASB issued another amendment in ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, 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 principalCompany elected not to recognize revenueany operating lease right-of-use assets or operating lease liabilities for any lease whose term is 12 months or less and does not include a purchase option that the gross amount and the agentCompany is reasonably certain 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.exercise. The new standard is 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 is 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 electCompany also elected to account for the cost of shipping and handling performed after control of a good has been transferred to the customernon-lease components within its leases 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 is 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 anypart of the new or previously existing optional exemptionssingle lease component to expand their qualitative disclosures. The new standard also makes twelve other technical corrections and modifications to ASU 2014-09. The new standard is effective with ASU 2014-09.
The Company adopted this standard effective July 1, 2018 using the modified retrospective approach.which they are related. Refer to the "Effects"Adoption of ASC Topic 606" below842" for moreadditional information related toon the impact of this standard on the Company's significant accounting policies and condensed consolidated financial statements.adoption of ASC Topic 842.
Recently Issued Accounting Standards Not Yet Adopted
In August 2018, the FASB issued ASU 2018-15, Intangibles- Goodwill and Other- Internal Use Software (Topic 350): Customer AccountCustomer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract,("ASU 2018-15"), which requires customers in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. More specifically, capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The new standardexpense. ASU 2018-15 will be effective for the Company for the fiscal year beginning July 1, 2020. Early adoption is permitted including adoption in any
interim periods. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement, ("ASU 2018-13"), which improves the effectiveness of fair value measurement disclosures by eliminating, adding and modifying certain disclosure requirements for fair value measurements as part of its disclosure framework project. More specifically, entitiesEntities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The new standardASU 2018-13 will be effective for the Company for the fiscal year beginning July 1, 2020. 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 2017,June 2016, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other2016-13, Financial Instruments-Credit Losses (Topic 350)326): Simplifying the Test for Goodwill ImpairmentMeasurement of Credit Losses on Financial Instruments, (“ASU 2016-13”), which eliminates Step 2 frommodifies the goodwill impairment test. The guidance requires an entity to perform its annual, or interim, goodwill impairment test by comparingmeasurement of expected credit losses on certain financial instruments and the fair valuetiming of a reporting unit 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 standardwhen such losses are recorded. ASU 2016-13, will be effective for the Company for the fiscal year beginning July 1, 2020. Early adoption is permitted for interim and annual goodwill impairment tests performed after January 1, 2017. The Company is currently evaluatinghas performed an initial analysis on the impact of the adoption of the new standard, and does not expect the adoption to have a material impact on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intendeddisclosures; however, we will continue 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 12 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 beginningevaluate through July 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact2020.
Adoption of the adoption of the new standard on its consolidated financial statements and related disclosures.
Effects ofASC Topic 606842
As a result of adopting ASC Topic 606,842, the Company's accounting policies and condensed consolidated financial statements were updated as follows:
Contract Assets
Supply Chain Services contract assets represent estimated customer purchases on supplierThe Company enters into lease contracts for which administrative fees have been earned, but not collected. Performance Services contract assets represent revenue earned for services provided butin which the Company is not contractually ablethe lessee, substantially all of which are related to bill asoffice space leased in various buildings used for general corporate purposes. The terms of the end of the respective reporting period.
ContractCosts
Contract costs represent amountsthese non-cancelable operating leases typically require the Company has capitalizedto pay rent and reflecta share of operating expenses and real estate taxes, generally with an inflation-based rent increase included. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease right-of-use assets and operating lease liabilities are recognized based on the incremental costspresent value of obtaining and fulfilling a contract, which include sales commissions and costs related to implementing SaaS informatics tools. For commissions on new contracts, these costs are amortizedfuture minimum lease payments over the life oflease term beginning at the expected relationship with the customercommencement date. Operating lease right-of-use assets are adjusted for the respective performance obligation. For renewals, commissions are amortized over the contract life with the customer. Implementationlease incentives, deferred rent and initial direct costs, are amortized straight-line, once the tool is implemented, over the life of the expected relationship with the customer for the respective performance obligation, which is consistent with the transfer of services to the customer to which the implementation relates.if incurred. The Company's contract costs are included in other assets on the Condensed Consolidated Balance Sheets, while the associated amortization related to sales commissions is included in selling, general and administrative expenses and the associated amortization related to implementation costs is included in cost of revenue in the Condensed Consolidated Statements of Income.
Deferred Revenue
Deferred revenue consists of unrecognized revenue related to advanced customer invoicing or member payments received prior to fulfillment of the Company's revenue recognition criteria. Substantially all deferred revenue consists of deferred subscription fees and deferred consulting fees. Subscription fees for Company-hosted SaaS applications are deferred until the customer's unique data records have been incorporated into the underlying software database, or until customer site-specific software has been implemented and the customer has access to the software. Deferred consulting fees arise upon invoicing to customers prior to services being performed.
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 isleases generally do not separately identifiable from other promises and,include an implicit rate; therefore, not distinct; while other contracts may have multiple performance obligations, most commonly due to the contract covering multiple deliverable arrangements (licensing fees, implementation fees, subscription fees, professional fees for consulting services, etc.).
Revenue Recognition
The Company accounts for a contract with a customer when the contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection.
Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services. Ifdetermined the consideration promised in a contract includes a variable amount, the Company estimates the amount to which it expects to be entitledpresent value of future minimum lease payments using either the expected value or most likely amount method. The Company's contracts may include terms that could cause variability in the transaction price, including, for example, revenue share, rebates, discounts, and variable fees based on performance.
The Company only includes estimated amounts of consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. These estimates require management to make complex, difficult or subjective judgments, and to make estimates about the effect of matters inherently uncertain. As such, the Company may not be able to reliably estimate variable fees based on performance in certain long-term arrangements due to uncertainties that are not expected to be resolved for a long period of time or when the Company's experience with similar types of contracts is limited. Estimates of variable consideration and the determination of whether to include estimated amounts of consideration in the transaction price arean incremental borrowing rate based on information (historical, current and forecasted) thatavailable as of July 1, 2019, the transition date. The related lease expense is reasonably available to the Company, taking into consideration the type of customer, the type of transaction and the specific facts and circumstances of each arrangement. Additionally, management performs periodic analyses to verify the accuracy of estimates for variable consideration.
Although the Company believes that its approach in developing estimates and reliance on certain judgments and underlying inputs is reasonable, actual results could differ which may result in exposure of increases or decreases in revenue that could be material.
Net Administrative Fees Revenue
Net administrative fees revenue is a single performance obligation earned through a series of distinct daily services and includes maintaining a network of members to participate in the group purchasing program and providing suppliers efficiency in contracting and access to the Company's members. Revenue is generated through administrative fees received from suppliers, which are
estimated based on the total dollar volume of goods and services purchased by the Company's members in connection with its GPO programs and is included in service revenue in the accompanying Condensed Consolidated Statements of Income.
The Company, through its GPO programs, aggregates member purchasing power to negotiate pricing discounts and improve contract terms with suppliers. Contracted suppliers pay the Company administrative fees which generally represent 1% to 3% of the gross purchase price of goods and services sold to members under the contracts the Company has negotiated. Administrative fees are variable consideration and are recognized as earned based upon estimated purchases by the Company's members utilizing the Company's GPO supplier contracts. The Company estimates revenue using an estimated value approach using predictive analytics based on historical member spend and updates for current trends and expectations. Member and supplier contracts substantiate persuasive evidence of an arrangement. The Company does not take title to the underlying equipment or products purchased by members through its GPO supplier contracts. Administrative fee revenue receivable is included in contract assets in the accompanying Condensed Consolidated Balance Sheet.
The Company pays revenue share equal to a percentage of gross administrative fees, which is estimated according to the members' contractual agreements with the Company using a portfolio approach based on historical revenue fee share percentages and adjusted for current or anticipated trends. Revenue share is recognized as a reduction to gross administrative fees revenue to arrive at a net administrative fees revenue, and the corresponding revenue share liability is included in revenue share obligations in the accompanying Condensed Consolidated Balance Sheets.
Product Revenue
Specialty pharmacy revenue is generated through a single performance obligation through dispensing prescription medication to customers. Revenue is recognized at a point in time as the prescription medication is dispensed to the customers and is recorded net of the estimated contractual adjustments under agreements with Medicare, Medicaid and other managed care plans. Consideration from specialty pharmacy is variable as payments for the products provided under such agreements vary from period to period and are based on defined allowable reimbursements rather than standard billing rates. The difference between the standard billing rate and allowable reimbursement rate results in contractual adjustments which are recorded as deductions from the transaction price.
Direct sourcing generates revenue through products sold to distributors, hospitals and other customers. Revenue is recognized once control of products has been transferred to the customer and is recorded net of discounts and rebates offered to customers. Discounts and rebates are estimated based on contractual terms and historical trends.
Other Services and Support Revenue
Within Performance Services, which provides technology with wrap-around service offerings, revenue consists of SaaS informatics products subscriptions, certain perpetual and term licenses, performance improvement collaborative and other service subscriptions, professional fees for consulting services, and insurance services management fees and commissions from group-sponsored insurance programs.
SaaS informatics subscriptions include the right to use the Company's proprietary hosted technology on a SaaS basis, training and member support to deliver improvements in cost management, quality and safety, value-based care and provider analytics. SaaS arrangements create a single performance obligation for each subscription within the contract in which the nature of the obligation is a stand-ready obligation, and each day of service meets the criteria for over time recognition. Pricing varies by application and size of healthcare system. Informatics subscriptions are generally three to five-year agreements with automatic renewal clauses and annual price escalators that typically do not allow for early termination. These agreements do not allow for physical possession of the software. Subscription fees are typically billed on a monthly basis and revenue is recognized as a single deliverable on a straight-line basis over the remaining contractual period following implementation. Implementation involves the completion of data preparation services that are unique to each member's data set and, in certain cases, the installation of member site-specific software, in order to access and transfer member data into the Company's hosted SaaS informatics products. Implementation is generally 60 to 240 days following contract execution before the SaaS informatics products can be fully utilized by the member.lease term.
The Company sells certain perpetual and term licenses that include professional services and post-contract customer support in the form of maintenance and support services. The license, professional services and maintenance services each represent a distinct promise and are identified as separate performance obligations. Pricing varies by application and size of healthcare system. Fees under these contracts include the license fees, professional services fees and the maintenance and support services fees. The Company recognizes the license fees upon delivery of the licenses, the professional services fees over the implementation period, and the maintenance and support services fees straight-line over the remaining contract term following implementation. Generally, implementation is approximately 240 days following contract execution before the products can be fully utilized by the member.
Revenue from performance improvement collaboratives and other service subscriptions that support the Company's offerings in cost management, quality and safety and value-based care is recognized over the service period as the services are provided, which is generally one year. Performance improvement collaboratives and other service subscriptions revenue is considered one performance obligation and is generated by providing customers access to online communities whereby data is housed and available for analytics and benchmarking.
Professional fees for consulting services are sold under contracts, the terms of which vary based on the nature of the engagement. These services typically include general consulting, report-based consulting and cost savings initiatives. Promised services under such consulting engagements are typically not considered distinct and are regularly combined and accounted for as one performance obligation. Fees are billed as stipulated in the contract, and revenue is recognized on a proportional performance method as services are performed or when deliverables are provided. In situations where the contracts have significant contract performance guarantees, the performance guarantees are estimated and accounted for as a form of variable consideration when determining the transaction price. In the event that guaranteed savings levels are not achieved, the Company may have to perform additional services at no additional charge in order to achieve the guaranteed savings or pay the difference between the savings that were guaranteed and the actual achieved savings. Occasionally, our entitlement to consideration is predicated on the occurrence of an event such as the delivery of a report for which client acceptance is required. However, except for event-driven point-in-time transactions, the majority of services provided within this service line are delivered over time due to the continuous benefit provided to our customers.
Consulting arrangements can require significant estimates for the transaction price and estimated number of hours within an engagement. These estimates are based on the expected value which is derived from outcomes from historical contracts that are similar in nature and forecasted amounts based on anticipated savings for the new agreements. The transaction price is generally constrained until the target transaction price becomes more certain.
Insurance services management fees are recognized in the period in which such services are provided. Commissions from group sponsored insurance programs is earned by acting as an intermediary in the placement of effective insurance policies. Under this arrangement, revenue is recognized at a point in time on the effective date of the associated policies when control of the policy transfers to the customer and is constrained for estimated early terminations.
Certain administrative and/or patient management integrated pharmacy services are provided in situations where prescriptions are sent back to member health systems for dispensing. Additionally, the Company derives revenue from pharmaceutical manufacturers for providing patient education and utilization data. Revenue is recognized as these services are provided.
Multiple Deliverable Arrangements
The Company enters into agreements where the individual deliverables discussed above, such as SaaS subscriptions and consulting services, are bundled into a single service arrangement. These agreements are generally provided over a time period ranging from approximately three months to five years after the applicable contract execution date. Revenue, including both fixed and variable consideration, is allocated to the individual performance obligations within the arrangement based on the standalone selling price when it is sold separately in a stand-alone arrangement.
Condensed Consolidated Financial Statements
The Company applied Topic 606 ("New Revenue Standard") using the modified retrospective method, which resulted in recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity at July 1, 2018 for contracts that were not complete at that date. Therefore, the comparative information has not been adjusted and continues to be reported under Topic 605 ("Previous Revenue Standard"). The following tables summarize the impacts of adopting ASC Topic 606842 on the Company's condensed consolidated financial statements for the three and nine months ended March 31, 2019Condensed Consolidated Balance Sheets (in thousands, except per share data)thousands). See Note 616 - Contract BalancesCommitments and Note 17 - SegmentsContingencies for morefurther information.
Cumulative Effect - Adoption of New Revenue Standard
The cumulative effect adjustment related to the adoption of the New Revenue Standard has been revised from the amounts previously disclosed in our interim financial statements filed on the Form 10-Q for the quarterly periods ended September 30, 2018 and December 31, 2018 to correct certain immaterial misstatements. The result of correcting these misstatements was a $5.3 million decrease to opening accumulated deficit, a $0.7 million decrease to contract assets and a $4.6 million increase to deferred revenue, recorded during the three months ended March 31, 2019.
|
| | | | | | | | | |
| Impact of change in accounting principle |
| June 30, 2018 As presented | Impact of new revenue standard | July 1, 2018 New revenue standard |
Assets | | | |
Accounts receivable (net of $1,841 allowance for doubtful accounts) | $ | 185,874 |
| $ | (5,421 | ) | $ | 180,453 |
|
Contract assets | $ | — |
| $ | 168,960 |
| $ | 168,960 |
|
Total current assets | $ | 428,618 |
| $ | 163,539 |
| $ | 592,157 |
|
Deferred income tax assets | $ | 305,624 |
| $ | (7,106 | ) | $ | 298,518 |
|
Other assets | $ | 3,991 |
| $ | 15,390 |
| $ | 19,381 |
|
Total assets | $ | 2,312,216 |
| $ | 171,823 |
| $ | 2,484,039 |
|
| | | |
Liabilities, redeemable limited partners' capital and stockholders' deficit | | | |
Revenue share obligations | $ | 78,999 |
| $ | 43,880 |
| $ | 122,879 |
|
Deferred revenue | $ | 39,785 |
| $ | 2,401 |
| $ | 42,186 |
|
Total current liabilities | $ | 448,882 |
| $ | 46,281 |
| $ | 495,163 |
|
Deferred tax liabilities | $ | 17,569 |
| $ | 3,597 |
| $ | 21,166 |
|
Total liabilities | $ | 818,870 |
| $ | 49,878 |
| $ | 868,748 |
|
| | | |
Accumulated deficit | $ | (1,277,581 | ) | $ | 121,945 |
| $ | (1,155,636 | ) |
Total stockholders' deficit | $ | (1,427,064 | ) | $ | 121,945 |
| $ | (1,305,119 | ) |
Total liabilities, redeemable limited partners' capital and stockholders' deficit | $ | 2,312,216 |
| $ | 171,823 |
| $ | 2,484,039 |
|
|
| | | | | | | | | |
| June 30, 2019 As presented | Impact of ASC Topic 842 | July 1, 2019 Adjusted |
Intangible assets, net (a) | $ | 270,722 |
| $ | (8,474 | ) | $ | 262,248 |
|
Deferred income tax assets | 422,014 |
| 302 |
| 422,316 |
|
Operating lease right-of-use assets | — |
| 62,642 |
| 62,642 |
|
Total assets | $ | 2,569,567 |
| $ | 54,470 |
| $ | 2,624,037 |
|
| | |
|
Other current liabilities | $ | 7,113 |
| $ | 7,661 |
| $ | 14,774 |
|
Current liabilities of discontinued operations | 11,797 |
| 1,200 |
| 12,997 |
|
Operating lease liabilities | — |
| 58,596 |
| 58,596 |
|
Other long-term liabilities | 67,683 |
| (12,088 | ) | 55,595 |
|
Total liabilities | $ | 908,547 |
| $ | 55,369 |
| $ | 963,916 |
|
| | |
|
Accumulated deficit (b) | $ | (775,674 | ) | $ | (899 | ) | $ | (776,573 | ) |
Total liabilities and equity | $ | 2,569,567 |
| $ | 54,470 |
| $ | 2,624,037 |
|
| |
(a) | The Company reclassified a favorable lease commitment, which was recorded within intangible assets, net in the Consolidated Balance Sheets as of June 30, 2019, to operating lease right-of-use assets as part of the adoption of ASC Topic 842. |
| |
(b) | The Company recognized a non-cash impairment charge of $1.2 million ($0.9 million net of deferred tax impact), which was recorded as an adjustment to the opening balance of equity at July 1, 2019. The impairment charge was related to operating lease right-of-use assets of the specialty pharmacy business, which is classified as a discontinued operation. |
(3) BUSINESS ACQUISITIONS
Acquisition of Acurity and Nexera Assets
On February 28, 2020, the Company completed the Acurity and Nexera asset acquisition (the "Acurity and Nexera asset acquisition"). Pursuant to the terms of the Purchase Agreement, the Company agreed to pay an aggregate amount of $291.5 million, of which $166.1 million was paid at closing with borrowings under the Credit Facility. An additional $120.0 million will be paid in 4 equal annual installments of $30.0 million on or about June 30, 2021, 2022, 2023 and 2024. An additional $5.4 million is expected to be paid to an affiliate of GNYHA during the Company’s second fiscal quarter of 2021.
The Purchase Agreement provides an earn-out opportunity for Acurity, Inc. of up to $30.0 million based upon the Company’s achievement of a range of member renewals on terms to be agreed to by the Company and GNYHA based on prevailing market conditions in December 2023. As of March 31, 2020, the fair value of the earn-out liability was $22.7 million (see Note 6 - Fair Value Measurements).
Prior to entering into the Purchase Agreement, Acurity, Inc. agreed to provide one-time rebates to certain of its then members based on their pre-closing purchasing volume. The Company has concluded that these one-time rebates of $93.8 million will be excluded from the purchase price and capitalized as prepaid contract administrative fee share at closing. The prepaid contract administrative fee share will be treated as a reduction in the determination of net administrative fee revenue over the remaining life of the acquired contracts on the Company’s financial statements. As a result, the total fair value of consideration paid as part of the acquisition totaled $202.6 million. The current and noncurrent components of the prepaid contract administrative fee share were recorded to the "Prepaid expenses and other current assets" and "Other assets" line items, respectively, on the Condensed Consolidated Balance SheetSheets.
At the closing of the transaction, GNYHA Purchasing Alliance, LLC unilaterally terminated its participation in the TRA, and will cease to be a limited partner of Premier LP on November 2, 2020.
The Company has accounted for the Acurity and Nexera asset acquisition as a business combination whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on fair values. Total fair value assigned to the intangible assets was $187.7 million, consisting primarily of acquired member relationships of $166.0 million. The initial purchase price allocation for the Acurity and Nexera asset acquisition is preliminary and subject to changes in the valuation of the assets acquired and liabilities assumed. The acquisition resulted in the recognition of $22.7 million of goodwill (see Note 8 - Selected Financial DataGoodwill and Intangible Assets) attributable to the anticipated profitability of the acquired assets of Acurity, Inc. and Nexera, Inc. The acquisition was considered an asset acquisition for tax purposes, and accordingly, the Company expects the goodwill to be deductible for tax purposes. The initial purchase price allocation for the Acurity and Nexera asset acquisition is preliminary and subject to changes in fair value valuation of the assets acquired and the liabilities assumed.
Pro forma results of operations for the acquisition have not been presented because the effects on revenue and net income were not material to the Company's historic consolidated financial statements. After closing of the transaction, PAP and PNP changed their names to Acurity and Nexera, respectively, and the Company reports their operations as part of its Supply Chain Services segment. |
| | | | | | | | | |
| Impact of change in accounting principle |
March 31, 2019 | As presented | Impact of new revenue standard | Previous revenue standard |
Assets | | | |
Accounts receivable (net of $3,716 allowance for doubtful accounts) | $ | 206,595 |
| $ | (7,407 | ) | $ | 214,002 |
|
Contract assets | $ | 197,016 |
| $ | 197,016 |
| $ | — |
|
Prepaid expenses and other current assets | $ | 28,593 |
| $ | (4,873 | ) | $ | 33,466 |
|
Total current assets | $ | 634,957 |
| $ | 184,736 |
| $ | 450,221 |
|
Deferred income tax assets | $ | 413,511 |
| $ | (6,152 | ) | $ | 419,663 |
|
Other assets | $ | 33,125 |
| $ | 15,173 |
| $ | 17,952 |
|
Total assets | $ | 2,684,173 |
| $ | 193,757 |
| $ | 2,490,416 |
|
| | | |
Liabilities, redeemable limited partners' capital and stockholders' deficit | | | |
Revenue share obligations | $ | 132,602 |
| $ | 50,342 |
| $ | 82,260 |
|
Limited partners' distribution payable | $ | 13,145 |
| $ | 5,013 |
| $ | 8,132 |
|
Deferred revenue | $ | 34,154 |
| $ | (11,279 | ) | $ | 45,433 |
|
Total current liabilities | $ | 587,982 |
| $ | 44,076 |
| $ | 543,906 |
|
Deferred tax liabilities | $ | 20,479 |
| $ | 2,357 |
| $ | 18,122 |
|
Total liabilities | $ | 1,045,889 |
| $ | 46,433 |
| $ | 999,456 |
|
| | | |
Accumulated deficit | $ | (499,446 | ) | $ | 147,324 |
| $ | (646,770 | ) |
Total stockholders' deficit | $ | (601,714 | ) | $ | 147,324 |
| $ | (749,038 | ) |
Total liabilities, redeemable limited partners' capital and stockholders' deficit | $ | 2,684,173 |
| $ | 193,757 |
| $ | 2,490,416 |
|
Acquisition of MedpricerOn October 28, 2019, the Company, through its consolidated subsidiary PSCI, acquired all of the outstanding capital stock in Medpricer for an adjusted purchase price of $38.5 million. The acquisition was funded with borrowings under the Credit Facility.
The acquisition provides the sellers an earn-out opportunity of up to $5.0 million based on Medpricer's achievement of a revenue target for the calendar year ended December 31, 2020. As of March 31, 2020, the fair value of the earn-out liability was $1.9 million (see Note 6 - Fair Value Measurements).
The Company has accounted for the Medpricer 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. Total fair value assigned to intangible assets acquired was $12.1 million, primarily comprised of developed software technology.
The Medpricer acquisition resulted in the recognition of $26.2 million of goodwill attributable to the anticipated profitability of Medpricer. The Medpricer acquisition was considered a stock purchase for tax purposes and accordingly, the goodwill is not deductible for tax purposes.
Condensed Consolidated Statements
Pro forma results of Income - Selected Financial Data
|
| | | | | | | | | | | | | | | | | | | |
| Impact of change in accounting principle |
| Three Months Ended March 31, 2019 | | Nine Months Ended March 31, 2019 |
| As presented | Impact of new revenue standard | Previous revenue standard | | As presented | Impact of new revenue standard | Previous revenue standard |
Net revenue: | | | | | | | |
Net administrative fees | $ | 164,534 |
| $ | (891 | ) | $ | 165,425 |
| | $ | 492,229 |
| $ | 10,232 |
| $ | 481,997 |
|
Other services and support | 95,937 |
| 2,250 |
| 93,687 |
| | 282,656 |
| 15,907 |
| 266,749 |
|
Services | 260,471 |
| 1,359 |
| 259,112 |
| | 774,885 |
| 26,139 |
| 748,746 |
|
Products | 162,404 |
| (11,186 | ) | 173,590 |
| | 471,393 |
| (35,062 | ) | 506,455 |
|
Net revenue | $ | 422,875 |
| $ | (9,827 | ) | $ | 432,702 |
| | $ | 1,246,278 |
| $ | (8,923 | ) | $ | 1,255,201 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Impact of change in accounting principle |
| Three Months Ended March 31, 2019 | | Nine Months Ended March 31, 2019 |
| As presented | Impact of new revenue standard | Previous revenue standard | | As presented | Impact of new revenue standard | Previous revenue standard |
Cost of revenue: | | | | | | | |
Services | $ | 46,545 |
| $ | (1,296 | ) | $ | 47,841 |
| | $ | 133,106 |
| $ | (5,842 | ) | $ | 138,948 |
|
Products | 157,438 |
| (10,440 | ) | 167,878 |
| | 458,593 |
| (32,738 | ) | 491,331 |
|
Cost of revenue | $ | 203,983 |
| $ | (11,736 | ) | $ | 215,719 |
| | $ | 591,699 |
| $ | (38,580 | ) | $ | 630,279 |
|
Gross profit | $ | 218,892 |
| $ | 1,909 |
| $ | 216,983 |
| | $ | 654,579 |
| $ | 29,657 |
| $ | 624,922 |
|
Operating expenses: | | | | | | | |
Selling, general and administrative | $ | 118,503 |
| $ | (1,032 | ) | $ | 119,535 |
| | $ | 334,485 |
| $ | (3,413 | ) | $ | 337,898 |
|
Operating expenses | $ | 133,032 |
| $ | (1,032 | ) | $ | 134,064 |
| | $ | 377,183 |
| $ | (3,413 | ) | $ | 380,596 |
|
Operating income | $ | 85,860 |
| $ | 2,941 |
| $ | 82,919 |
| | $ | 277,396 |
| $ | 33,070 |
| $ | 244,326 |
|
Income before income taxes | $ | 84,894 |
| $ | 2,941 |
| $ | 81,953 |
| | $ | 284,275 |
| $ | 33,070 |
| $ | 251,205 |
|
Income tax expense | $ | 11,092 |
| $ | (1,239 | ) | $ | 12,331 |
| | $ | 23,689 |
| $ | 2,678 |
| $ | 21,011 |
|
Net income | $ | 73,802 |
| $ | 4,180 |
| $ | 69,622 |
| | $ | 260,586 |
| $ | 30,392 |
| $ | 230,194 |
|
Net income attributable to non-controlling interest in Premier LP | $ | (43,388 | ) | $ | (2,728 | ) | $ | (40,660 | ) | | $ | (161,132 | ) | $ | (19,314 | ) | $ | (141,818 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | $ | 235,394 |
| $ | 1,681 |
| $ | 233,713 |
| | $ | 178,910 |
| $ | 14,301 |
| $ | 164,609 |
|
Net income attributable to stockholders | $ | 265,808 |
| $ | 3,133 |
| $ | 262,675 |
| | $ | 278,364 |
| $ | 25,379 |
| $ | 252,985 |
|
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | 62,020 |
| 62,020 |
| 62,020 |
| | 58,346 |
| 58,346 |
| 58,346 |
|
Diluted | 129,072 |
| 129,072 |
| 129,072 |
| | 132,249 |
| 132,249 |
| 132,249 |
|
| | | | | | | |
| Impact of change in accounting principle |
| Three Months Ended March 31, 2019 | | Nine Months Ended March 31, 2019 |
| As presented | Impact of new revenue standard | Previous revenue standard | | As presented | Impact of new revenue standard | Previous revenue standard |
Earnings per share attributable to stockholders: | | | | | | | |
Basic | $ | 4.29 |
| $ | 0.05 |
| $ | 4.24 |
| | $ | 4.77 |
| $ | 0.43 |
| $ | 4.34 |
|
Diluted | $ | 0.48 |
| $ | 0.04 |
| $ | 0.44 |
| | $ | 1.68 |
| $ | 0.21 |
| $ | 1.47 |
|
Condensed Consolidated Statementoperations for the acquisition have not been presented because the effects on revenue and net income were not material to the Company's historic consolidated financial statements. The Company reports Medpricer as part of Comprehensive Income
|
| | | | | | | | | | | | | | | | | | | |
| Impact of change in accounting principle |
| Three Months Ended March 31, 2019 | | Nine Months Ended March 31, 2019 |
| As presented | Impact of new revenue standard | Previous revenue standard | | As presented | Impact of new revenue standard | Previous revenue standard |
Net income | $ | 73,802 |
| $ | 4,180 |
| $ | 69,622 |
| | $ | 260,586 |
| $ | 30,392 |
| $ | 230,194 |
|
Less: Comprehensive income attributable to non-controlling interest | (43,388 | ) | (2,728 | ) | (40,660 | ) | | (161,132 | ) | (19,314 | ) | (141,818 | ) |
Comprehensive income attributable to Premier, Inc. | $ | 30,414 |
| $ | 1,452 |
| $ | 28,962 |
| | $ | 99,454 |
| $ | 11,078 |
| $ | 88,376 |
|
Condensed Consolidated Statement of Cash Flows - Selected Financial Data
|
| | | | | | | | | |
| Impact of change in accounting principle |
Nine Months Ended March 31, 2019 | As presented | Impact of new revenue standard | Previous revenue standard |
Operating activities | | | |
Net income | $ | 260,586 |
| $ | 30,392 |
| $ | 230,194 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Deferred income taxes | $ | 7,747 |
| $ | (2,196 | ) | $ | 9,943 |
|
Changes in operating assets and liabilities: | |
| |
Accounts receivable, contract assets, prepaid expenses and other current assets | $ | (56,886 | ) | $ | (21,196 | ) | $ | (35,690 | ) |
Other assets | $ | (1,646 | ) | $ | 218 |
| $ | (1,864 | ) |
Accounts payable, accrued expenses, deferred revenue and other current liabilities | $ | 37,873 |
| $ | (7,218 | ) | $ | 45,091 |
|
Net decrease in cash and cash equivalents | $ | (14,874 | ) | $ | — |
| $ | (14,874 | ) |
(3) BUSINESS ACQUISITIONSits Supply Chain Services segment.
Acquisition of Stanson
Stanson Health, Inc. ("Stanson") is a SaaS-based provider of clinical decision support and prior authorization tools that are integrated directly into the electronic health record workflow, providing real-time, patient-specific best practices at the point of care. On November 9, 2018, the Company, through its consolidated subsidiary Premier Healthcare Solutions, Inc. ("PHSI"),PHSI, acquired 100%all of the outstanding capital stock in Stanson through a reverse subsidiary merger transaction for $51.5 million in cash. As a result of certain purchase price adjustments provided for in the purchase agreement, thean adjusted purchase price wasof $55.4 million. The acquisition was funded with available cash on hand.
The acquisition provides the sellers and certain employees an earn-out opportunity of up to $15.0 million based on Stanson's successful commercial delivery of a SaaS tool on or prior to March 31, 2020, achievement of certain development milestones on or prior to December 31, 20192020 and achievement of certaina revenue milestonestarget for the calendar year ended December 31, 2020. As of March 31, 2019,2020, the fair value of the earn-out liability was $6.2$10.3 million (see Note 56 - Fair Value Measurements).
The Company has accounted for the Stanson 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. Total fair value assigned to the intangible assets acquired was $23.6 million, primarily comprised of developed software technology. The purchase price allocation for the Stanson acquisition is preliminary and subject to changes in the valuation of the assets acquired and the liabilities assumed.
The Stanson acquisition resulted in the recognition of $37.4$37.5 million of goodwill (see Note 8 - Goodwill)Goodwill and Intangible Assets) attributable to the anticipated profitability of Stanson. The Stanson acquisition was considered a stock purchase for tax purposes and accordingly, the Company expects the goodwill tois not be deductible for tax purposes.
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 Stanson as part of its Performance Services segment.
(4) DISCONTINUED OPERATIONS AND EXIT ACTIVITIES
In connection with the sale of certain assets and wind down and exit from the specialty pharmacy business (see Note 1 - Organization and Basis of Presentation), the Company met the criteria for classifying certain assets and liabilities of its specialty pharmacy business as a discontinued operation as of June 30, 2019. Prior to its classification as a discontinued operation, the specialty pharmacy business was included as part of the Supply Chain Services segment.
The Company incurred $0.9 million of severance and retention expenses directly associated with the specialty pharmacy business within discontinued operations during the nine months ended March 31, 2020.
The following table summarizes the major classes of assets and liabilities classified as discontinued operations at March 31, 2020 and June 30, 2019 (in thousands):
|
| | | | | | |
| March 31, 2020 | June 30, 2019 |
Assets | | |
Accounts receivable | $ | — |
| $ | 21,183 |
|
Inventory | — |
| 3,385 |
|
Assets of discontinued operations | $ | — |
| $ | 24,568 |
|
| | |
Liabilities | | |
Accounts payable | $ | — |
| $ | 2,255 |
|
Accrued expenses | — |
| 6,630 |
|
Accrued compensation and benefits | — |
| 2,373 |
|
Other current liabilities | — |
| 539 |
|
Liabilities of discontinued operations | $ | — |
| $ | 11,797 |
|
The following table summarizes the major components of net income (loss) from discontinued operations (in thousands):
|
| | | | | | | | | | | | |
| Three Months Ended March 31, | Nine Months Ended March 31, |
| 2020 | 2019 | 2020 | 2019 |
Net revenue | $ | — |
| $ | 121,662 |
| $ | — |
| $ | 344,873 |
|
Cost of revenue | — |
| 117,942 |
| — |
| 334,567 |
|
Gross profit | — |
| 3,720 |
| — |
| 10,306 |
|
Selling, general and administrative expense | — |
| 5,167 |
| — |
| 14,286 |
|
Amortization of purchased intangible assets | — |
| 661 |
| — |
| 1,984 |
|
Operating expenses | — |
| 5,828 |
| — |
| 16,270 |
|
Operating loss from discontinued operations | — |
| (2,108 | ) | — |
| (5,964 | ) |
Net gain on disposal of assets | 24 |
| — |
| 1,399 |
| — |
|
Income (loss) from discontinued operations before income taxes | 24 |
| (2,108 | ) | 1,399 |
| (5,964 | ) |
Income tax expense (benefit) | 19 |
| (645 | ) | 390 |
| (2,102 | ) |
Income (loss) from discontinued operations, net of tax | 5 |
| (1,463 | ) | 1,009 |
| (3,862 | ) |
Net (income) loss from discontinued operations attributable to non-controlling interest in Premier LP | (3 | ) | 747 |
| (480 | ) | 2,098 |
|
Net income (loss) from discontinued operations attributable to stockholders | $ | 2 |
| $ | (716 | ) | $ | 529 |
| $ | (1,764 | ) |
(5) INVESTMENTS
Investments in Unconsolidated Affiliates
The Company's investments in unconsolidated affiliates consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Carrying Value | | Equity in Net Income |
| | | | Three Months Ended | Nine Months Ended |
| | | | March 31, | March 31, |
| March 31, 2020 | June 30, 2019 | | 2020 | 2019 | 2020 | 2019 |
FFF | $ | 107,735 |
| $ | 96,905 |
| | $ | 4,340 |
| $ | 444 |
| $ | 10,830 |
| $ | 4,430 |
|
Other investments | 12,907 |
| 2,731 |
| | 102 |
| 109 |
| 208 |
| 257 |
|
Total investments | $ | 120,642 |
| $ | 99,636 |
| | $ | 4,442 |
| $ | 553 |
| $ | 11,038 |
| $ | 4,687 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Carrying Value | | Equity in Net Income (Loss) |
| | | | Three Months Ended March 31, | Nine Months Ended March 31, |
| March 31, 2019 | June 30, 2018 | | 2019 | 2018 | 2019 | 2018 |
FFF | $ | 96,234 |
| $ | 91,804 |
| | $ | 444 |
| $ | 64 |
| $ | 4,430 |
| $ | 5,668 |
|
PharmaPoint | — |
| — |
| | — |
| (4,073 | ) | — |
| (4,232 | ) |
Other investments | 2,408 |
| 2,249 |
| | 109 |
| (930 | ) | 257 |
| (866 | ) |
Total investments | $ | 98,642 |
| $ | 94,053 |
| | $ | 553 |
| $ | (4,939 | ) | $ | 4,687 |
| $ | 570 |
|
The Company, through its consolidated subsidiary, Premier Supply Chain Improvement, Inc. ("PSCI"),PSCI, held a 49% interest in FFF Enterprises, Inc. ("FFF") through its ownership of stock of FFF at March 31, 20192020 and June 30, 2018.2019. The Company records the fair value of the FFF put and call rights in the accompanying Condensed Consolidated Balance Sheets (see Note 56 - Fair Value Measurements for additional information). The Company accounts for its investment in FFF 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 a 28% ownership interest in PharmaPoint, LLC ("PharmaPoint") through its ownership of Class B Membership Interests in PharmaPoint at March 31, 2019 and June 30, 2018. During the three months ended March 31, 2018, the Company determined that it was unlikely to recover its investment in PharmaPoint, and as a result recognized an other-than-temporary impairment of $4.0 million, which is included in equity in net income (loss) of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income. 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.
(5)
(6) FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The following table provides a summary of the Company's financial assets and liabilities which are measured at fair value on a recurring basis at March 31, 2020 (in thousands):
|
| | | | | | | | | | | | |
| 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) |
Cash equivalents | $ | 188,101 |
| $ | 188,101 |
| $ | — |
| $ | — |
|
Deferred compensation plan assets | 45,697 |
| 45,697 |
| — |
| — |
|
Total assets | $ | 233,798 |
| $ | 233,798 |
| $ | — |
| $ | — |
|
Earn-out liabilities | $ | 34,887 |
| $ | — |
| $ | — |
| $ | 34,887 |
|
FFF put right | 32,971 |
| — |
| — |
| 32,971 |
|
Total liabilities | $ | 67,858 |
| $ | — |
| $ | — |
| $ | 67,858 |
|
|
| | | | | | | | | | | | |
| 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) |
March 31, 2019 | | | | |
Cash equivalents | $ | 42,377 |
| $ | 42,377 |
| $ | — |
| $ | — |
|
FFF call right | 328 |
| — |
| — |
| 328 |
|
Deferred compensation plan assets | 48,367 |
| 48,367 |
| — |
| — |
|
Total assets | $ | 91,072 |
| $ | 90,744 |
| $ | — |
| $ | 328 |
|
Earn-out liabilities | $ | 6,243 |
| — |
| — |
| $ | 6,243 |
|
FFF put right | 38,299 |
| — |
| — |
| 38,299 |
|
Total liabilities | $ | 44,542 |
| $ | — |
| $ | — |
| $ | 44,542 |
|
| | | | |
June 30, 2018 | | | | |
Cash equivalents | $ | 62,684 |
| $ | 62,684 |
| $ | — |
| $ | — |
|
FFF call right | 610 |
| — |
| — |
| 610 |
|
Deferred compensation plan assets | 48,215 |
| 48,215 |
| — |
| — |
|
Total assets | $ | 111,509 |
| $ | 110,899 |
| $ | — |
| $ | 610 |
|
FFF put right | $ | 42,041 |
| $ | — |
| $ | — |
| $ | 42,041 |
|
Total liabilities | $ | 42,041 |
| $ | — |
| $ | — |
| $ | 42,041 |
|
The following table provides a summary of the Company's financial assets and liabilities measured at fair value on a recurring basis at June 30, 2019 (in thousands): |
| | | | | | | | | | | | |
| 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) |
Cash equivalents | $ | 57,607 |
| $ | 57,607 |
| $ | — |
| $ | — |
|
FFF call right | 204 |
| — |
| — |
| 204 |
|
Deferred compensation plan assets | 50,229 |
| 50,229 |
| — |
| — |
|
Total assets | $ | 108,040 |
| $ | 107,836 |
| $ | — |
| $ | 204 |
|
Earn-out liability | $ | 6,816 |
| $ | — |
| $ | — |
| $ | 6,816 |
|
FFF put right | 41,652 |
| — |
| — |
| 41,652 |
|
Total liabilities | $ | 48,468 |
| $ | — |
| $ | — |
| $ | 48,468 |
|
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 ($2.9 million and $4.8 million at March 31, 2020 and June 30, 2019, respectively) was included in prepaidthe "Prepaid expenses and other current assets ($4.7 million and $3.6 million at March 31, 2019 and June 30, 2018, respectively)assets" line item in the accompanying Condensed Consolidated Balance Sheets.
Financial Instruments Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
FFF put and call rights
Pursuant to a shareholders' agreement entered into inIn connection with the Company's equity investment in FFF, the Company entered into a shareholders' agreement on July 26, 2016, (see Note 4 - Investments), which shareholders' agreement was amended and restated on November 22, 2017,2017. On July 29, 2019, the parties entered into a second amended and restated shareholders' agreement that provides, among other things, that the majority shareholder of FFF hasholds a put right that requires the Company to purchase (i) up to 50% of the majority shareholder's interest in FFF, which is exercisable beginning on an all or nothing basis, on or after April 15, 2023. Any required purchase by the fourth anniversaryCompany upon exercise of the investment closing date, July 26, 2020, and (ii) all or a portion of theput right by FFF's majority shareholder's remaining interest in FFF 30 calendar days after December 31, 2020. Any such required purchases are toshareholder must be made at a per share price equal to FFF's earnings before interest, taxes, depreciation and amortization ("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 ("Equity Value per Share"). In addition, under the second amended and restated shareholders' agreement, the Company has a call right that requires the majority shareholder to sell its remaining interest in FFF to the Company, and is exercisable at any time within the later of 180 calendar days after the date of a Key Man Event (generally defined in the second amended and restated shareholders' agreement as the resignation, termination for cause, death or disability of the majority shareholder) or after January 30, 2021. As of March 31, 2020, the call right had 0 value. In the event that either of these rights are exercised, the purchase price for the additional interest in FFF will be at a per share price equal to the Equity Value per Share.
The fair values of the FFF put and call rights were determined based on the Equity Value per Share calculation using unobservable inputs, which included the estimated FFF put and call rights' expiration dates, the forecast of FFF's EBITDA over the option period,
forecasted movements in the overall market and the likelihood of a Key Man Event. Significant changes to the Equity Value per Share resulting from changes in the unobservable inputs could have a significant impact on the fair values of the FFF put and call rights.
The Company recorded the FFF put and call rights within long-term other liabilities and long-term other assets, respectively, within the accompanying Condensed Consolidated Balance Sheets.Sheets. Net changes in the fair values of the FFF put and call rights were recorded within other expense in the accompanying Condensed Consolidated Statements of Income.Income.
Earn-out liabilities
Earn-out liabilities were established in connection with acquisitions of Healthcare Insights, LLC on July 31, 2015, Inflow Health, LLC on October 1, 2015, Innovatix, LLCthe Acurity and Essensa Ventures, LLC, each on December 2, 2016Nexera asset acquisition as well as the Medpricer and Stanson on November 9, 2018.acquisitions. The earn-out liabilities were classified as Level 3 of the fair value hierarchyhierarchy. The earn-out liability value for the Acurity and theirNexera asset acquisition is based upon the Company’s estimated achievement of a range of member renewals on terms to be agreed to by the Company and GNYHA based on prevailing market conditions in December 2023. The earn-out liability values for the Medpricer and Stanson acquisitions were determined based on estimated future earnings and the probability of achieving them. 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.Income.
A reconciliation of the Company's FFF put and call rights and earn-out liabilities is as follows (in thousands):
|
| | | | | | | | | | | | |
| Beginning Balance | Purchases (Settlements) | Gain (Loss) | Ending Balance |
Three Months Ended March 31, 2020 | | | | |
FFF call right | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Total Level 3 assets | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Earn-out liability | $ | 13,420 |
| $ | 22,700 |
| $ | 1,233 |
| $ | 34,887 |
|
FFF put right | 19,065 |
| — |
| (13,906 | ) | 32,971 |
|
Total Level 3 liabilities | $ | 32,485 |
| $ | 22,700 |
| $ | (12,673 | ) | $ | 67,858 |
|
| | | | |
Three Months Ended March 31, 2019 | | | | |
FFF call right | $ | 431 |
| $ | — |
| $ | (103 | ) | $ | 328 |
|
Total Level 3 assets | $ | 431 |
| $ | — |
| $ | (103 | ) | $ | 328 |
|
Earn-out liabilities | $ | 4,548 |
| $ | — |
| $ | (1,695 | ) | $ | 6,243 |
|
FFF put right | 34,295 |
| — |
| (4,004 | ) | 38,299 |
|
Total Level 3 liabilities | $ | 38,843 |
| $ | — |
| $ | (5,699 | ) | $ | 44,542 |
|
| | | | |
Nine Months Ended March 31, 2020 | | | | |
FFF call right | $ | 204 |
| $ | — |
| $ | (204 | ) | $ | — |
|
Total Level 3 assets | $ | 204 |
| $ | — |
| $ | (204 | ) | $ | — |
|
Earn-out liabilities | $ | 6,816 |
| $ | 26,481 |
| $ | (1,590 | ) | $ | 34,887 |
|
FFF put right | 41,652 |
| — |
| 8,681 |
| 32,971 |
|
Total Level 3 liabilities | $ | 48,468 |
| $ | 26,481 |
| $ | 7,091 |
| $ | 67,858 |
|
| | | | |
Nine Months Ended March 31, 2019 | | | | |
FFF call right | $ | 610 |
| $ | — |
| $ | (282 | ) | $ | 328 |
|
Total Level 3 assets | $ | 610 |
| $ | — |
| $ | (282 | ) | $ | 328 |
|
Earn-out liabilities | $ | — |
| $ | 4,548 |
| $ | (1,695 | ) | $ | 6,243 |
|
FFF put right | 42,041 |
| — |
| 3,742 |
| 38,299 |
|
Total Level 3 liabilities | $ | 42,041 |
| $ | 4,548 |
| $ | 2,047 |
| $ | 44,542 |
|
|
| | | | | | | | | | | | |
| Beginning Balance | Purchases (Settlements) | Gain (Loss) | Ending Balance |
Three Months Ended March 31, 2019 | | | | |
FFF call right | $ | 431 |
| $ | — |
| $ | (103 | ) | $ | 328 |
|
Total Level 3 assets | $ | 431 |
| $ | — |
| $ | (103 | ) | $ | 328 |
|
Earn-out liabilities | $ | 4,548 |
| $ | — |
| $ | (1,695 | ) | $ | 6,243 |
|
FFF put right | 34,295 |
| — |
| (4,004 | ) | 38,299 |
|
Total Level 3 liabilities | $ | 38,843 |
| $ | — |
| $ | (5,699 | ) | $ | 44,542 |
|
| | | | |
Three Months Ended March 31, 2018 | | | | |
FFF call right | $ | 2,108 |
| $ | — |
| $ | (1,356 | ) | $ | 752 |
|
Total Level 3 assets | $ | 2,108 |
| $ | — |
| $ | (1,356 | ) | $ | 752 |
|
Earn-out liabilities | $ | 2,792 |
| $ | (2,625 | ) | $ | 106 |
| $ | 61 |
|
FFF put right | 37,110 |
| — |
| (1,711 | ) | 38,821 |
|
Total Level 3 liabilities | $ | 39,902 |
| $ | (2,625 | ) | $ | (1,605 | ) | $ | 38,882 |
|
| | | | |
Nine Months Ended March 31, 2019 | | | | |
FFF call right | $ | 610 |
| $ | — |
| $ | (282 | ) | $ | 328 |
|
Total Level 3 assets | $ | 610 |
| $ | — |
| $ | (282 | ) | $ | 328 |
|
Earn-out liabilities | $ | — |
| $ | 4,548 |
| $ | (1,695 | ) | $ | 6,243 |
|
FFF put right | 42,041 |
| — |
| 3,742 |
| 38,299 |
|
Total Level 3 liabilities | $ | 42,041 |
| $ | 4,548 |
| $ | 2,047 |
| $ | 44,542 |
|
| | | | |
Nine Months Ended March 31, 2018 | | | | |
FFF call right | $ | 4,655 |
| $ | — |
| $ | (3,903 | ) | $ | 752 |
|
Total Level 3 assets | $ | 4,655 |
| $ | — |
| $ | (3,903 | ) | $ | 752 |
|
Earn-out liabilities | $ | 21,310 |
| $ | (21,125 | ) | $ | 124 |
| $ | 61 |
|
FFF put right | 24,050 |
| — |
| (14,771 | ) | 38,821 |
|
Total Level 3 liabilities | $ | 45,360 |
| $ | (21,125 | ) | $ | (14,647 | ) | $ | 38,882 |
|
Non-Recurring Fair Value Measurements
During the nine months ended March 31, 2019,2020, no non-recurring fair value measurements were required relating to the measurement of goodwill and intangible assets for impairment. However, purchase price allocations required significant non-recurring Level 3 inputs. The preliminary fair values of the acquired intangible assets resulting from the Acurity and Nexera asset acquisition as well as the acquisition of StansonMedpricer were determined using the income approach (see Note 3 - Business Acquisitions).
Financial Instruments For 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 $0.6$0.3 million and $0.5 million at both March 31, 20192020 and June 30, 20182019, respectively, based on assumed market interest rates of 3.8%2.1% and 3.6%3.4%, respectively.
Other Financial Instruments
The fair values of cash, accounts receivable, accounts payable, accrued liabilities, and the Company's Credit Facility (as defined in Note 9 - Debt) approximated carrying value due to the short-term nature of these financial instruments.
(6)(7) CONTRACT BALANCES
Contract Assets, Deferred Revenue and Revenue Share Obligations
The timing of revenue recognition, billings and cash collections results in accounts receivables, contract assets (unbilled receivables) and deferred revenue on the Condensed Consolidated Balance Sheets. The $197.0 million increase in contract assets from June 30, 2018 to March 31, 2019 was largely attributable to the establishment of $169.0 million in contract assets upon adoption of the New Revenue Standard of which $141.5 million was for Supply Chain Services and $27.5 million was for Performance Services. Subsequent to adoption of the New Revenue Standard, Supply Chain Services contract assets increased an additional $18.8 million, which represents changes in the Company's estimated revenue for which cash has not yet been collected associated with net administrative fees for the current period. Performance Services contract assets increased $9.2 million primarily due to the acceleration of revenue recognition from licensing and certain consulting services contracts which represents performance obligations that have been satisfied prior to customer invoicing. Performance Services contract assets also increased due to the timing of payments related to certain cost management consulting services and performance-based engagements where revenue is recognized as work is performed.
The $53.6 million increase in revenue share obligation from June 30, 2018 to March 31, 2019 is largely a function of the aforementioned increases in contract assets and the underlying revenue share arrangements associated with the Company's GPO participation agreements.
Revenue recognized during the nine months ended March 31, 20192020 that was included in the opening balance of deferred revenue at June 30, 20182019 was approximately $26.8$27.9 million, which is a result of satisfying performance obligations within the Performance Services segment.
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.
NetReduction in net revenue recognized during the three and nine months ended March 31, 20192020 from performance obligations that were satisfied or partially satisfied on or before December 31, 2018in prior periods was $3.6 million.$0.1 million and $1.4 million, respectively. The reduction was driven by $3.8 million and $6.9 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. This was driven primarilyoffset by $3.7 million and $5.5 million, respectively, of net administrative fees revenue related to under-forecasted cash receipts received in the current period.
Net revenue recognized during the three and nine months ended March 31, 2019 from performance obligations that were satisfied or partially satisfied on or before June 30, 2018in prior periods was $3.6 million and $9.6 million. Thismillion, respectively. The net revenue recognized during the three and nine months ended March 31, 2019 was driven primarily by $3.8 million and $5.4 million, respectively, of net administrative fees revenue related to under-forecasted cash receipts received in the current period as well as a reduction of $0.2 million and an increase of $4.2 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.
Remaining performance obligations represent the portion of the transaction price that has not yet been satisfied or achieved. As of March 31, 2019,2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $491.2$572.7 million. The Company expects to recognize approximately 50%41% of the remaining performance obligations over the next 12 months and an additional 25%28% over the following 12 months, with the remainder recognized thereafter.
Contract Costs
The Company is required to capitalize the incremental costs of obtaining and fulfilling a contract, which include sales commissions and costs associated with implementing SaaS informatics tools. At March 31, 2019, the Company had $15.2 million in capitalized
contract costs, including $9.0 million related to implementation costs and $6.2 million related to sales commissions. The Company had $1.4 million and $4.8 million of related amortization expense for the three and nine months ended March 31, 2019, respectively.
(7)
(8) GOODWILL AND INTANGIBLE ASSETS NET
Intangible assets, net consisted of the following (in thousands):
|
| | | | | | | |
| Useful Life | March 31, 2019 | June 30, 2018 |
Member relationships | 14.7 years | $ | 220,100 |
| $ | 220,100 |
|
Technology | 5.7 years | 164,217 |
| 142,317 |
|
Customer relationships | 8.2 years | 49,320 |
| 48,120 |
|
Trade names | 8.3 years | 22,910 |
| 22,710 |
|
Distribution network | 10.0 years | 22,400 |
| 22,400 |
|
Favorable lease commitments | 10.1 years | 11,393 |
| 11,393 |
|
Non-compete agreements | 5.8 years | 9,030 |
| 8,710 |
|
Total intangible assets | | 499,370 |
| 475,750 |
|
Accumulated amortization | | (195,404 | ) | (153,635 | ) |
Intangible assets, net | | $ | 303,966 |
| $ | 322,115 |
|
The increase in total intangible assets was due to the acquisition of Stanson in November 2018 (see Note 3 - Business Acquisitions). Intangible asset amortization totaled $14.2 million and $13.9 million for the three months ended March 31, 2019 and 2018, respectively, and $41.8 million and $41.6 million for the nine months ended March 31, 2019 and 2018, respectively.
(8) GOODWILLGoodwill
Goodwill consisted of the following (in thousands):
|
| | | | | | | | | |
| Supply Chain Services | Performance Services | Total |
June 30, 2019 | $ | 336,973 |
| $ | 543,736 |
| $ | 880,709 |
|
Acquisition of businesses and assets | 48,906 |
| — |
| 48,906 |
|
March 31, 2020 | $ | 385,879 |
| $ | 543,736 |
| $ | 929,615 |
|
|
| | | | | | | | | |
| Supply Chain Services | Performance Services | Total |
June 30, 2018 | $ | 400,348 |
| $ | 506,197 |
| $ | 906,545 |
|
Stanson | — |
| 37,425 |
| 37,425 |
|
March 31, 2019 | $ | 400,348 |
| $ | 543,622 |
| $ | 943,970 |
|
The initial purchase price allocations for the Company's Acurity and Nexera asset acquisition and the acquisition of Stanson isMedpricer are preliminary and subject to changes in fair value of working capital and valuation of the assets acquired and the liabilities assumed. The Company recorded Stanson acquisition adjustments during the three months ended March 31, 2019 which were related to working capital adjustments subsequent to the acquisition date. See Note 3 - Business Acquisitions for more information.
Intangible Assets, Net
Intangible assets, net consisted of the following (in thousands):
|
| | | | | | | |
| Weighted Average Useful Life as of March 31, 2020 | March 31, 2020 | June 30, 2019 |
Member relationships | 14.8 years | $ | 386,100 |
| $ | 220,100 |
|
Technology | 5.6 years | 169,217 |
| 164,217 |
|
Customer relationships | 9.0 years | 63,230 |
| 48,010 |
|
Trade names | 7.6 years | 23,870 |
| 16,060 |
|
Non-compete agreements | 5.3 years | 11,315 |
| 8,800 |
|
Favorable lease commitments | n/a | — |
| 11,393 |
|
Other | 6.0 years | 260 |
| — |
|
Total intangible assets | | 653,992 |
| 468,580 |
|
Accumulated amortization | | (233,888 | ) | (197,858 | ) |
Total intangible assets, net | | $ | 420,104 |
| $ | 270,722 |
|
Total intangible assets increased due to the Acurity and Nexera asset acquisition and the acquisition of Medpricer (see Note 3 - Business Acquisitions). Intangible asset amortization was $14.0 million and $13.6 million for the three months ended March 31, 2020 and 2019, respectively, and $38.9 million and $39.8 million for the nine months ended March 31, 2020 and 2019, respectively.
(9) DEBT
Long-term debt consisted of the following (in thousands):
|
| | | | | | |
| March 31, 2020 | June 30, 2019 |
Credit Facility | $ | 250,000 |
| $ | 25,000 |
|
Notes payable | 9,573 |
| 8,611 |
|
Total debt | 259,573 |
| 33,611 |
|
Less: current portion | (254,745 | ) | (27,608 | ) |
Total long-term debt | $ | 4,828 |
| $ | 6,003 |
|
|
| | | | | | | | | | |
| Commitment Amount | Due Date | March 31, 2019 | June 30, 2018 |
Credit Facility | $ | 1,000,000 |
| November 9, 2023 | $ | 150,000 |
| $ | 100,000 |
|
Notes payable | — |
| Various | 8,234 |
| 7,212 |
|
Total debt | | | 158,234 |
| 107,212 |
|
Less: current portion | | | (152,046 | ) | (100,250 | ) |
Total long-term debt | | | $ | 6,188 |
| $ | 6,962 |
|
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 into an unsecured Credit Facility, dated as of November 9, 2018.2018 (the "Credit Facility"). The Credit Facility has a maturity date of November 9, 2023, subject to up to two2 one-year extensions at the request of the Co-Borrowers
and approval of a majority of the lenders under the Credit Facility. The Credit Facility provides for borrowings of up to $1.0 billion with (i) a $50.0 million sub-facility for standby letters of credit and (ii) a $100.0 million sub-facility for swingline loans. The Credit Facility also provides that Co-Borrowers may from time to time (i) incur incremental term loans and (ii) request an increase in the revolving commitments under the Credit Facility, together up to an aggregate of $350.0 million, subject to the approval of the lenders providing such term loans or revolving commitment increases. The Credit Facility includes an unconditional and irrevocable guaranty of all obligations 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.
The Credit Facility replaced our then existing Credit Facility dated June 24, 2014 and amended as of June 4, 2015 (the "Prior Loan Agreement"). The Prior Loan Agreement included a $750.0 million unsecured revolving credit facility and was scheduled to mature on June 24, 2019. At the time of its termination, outstanding borrowings, accrued interest and fees and expenses under the Prior Loan Agreement totaled approximately $100.7 million, which was repaid with cash on hand andOutstanding borrowings under the new 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 LoansFacility bear interest on a variable rate structure with borrowings bearing interest at the Eurodollar rate (defined as theeither London Interbank Offered Rate or LIBOR, plus the Applicable Rate (defined as a margin based on the Consolidated Total Net 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%, the one-month LIBOR plus 1.0% and 0.0%("LIBOR") plus the Applicable Rate. The Applicable Rate rangesan applicable margin ranging from 1.000% to 1.500% for Eurodollar Loans andor the prime lending rate plus an applicable margin ranging from 0.000% to 0.500% for Base Rate Loans.. At March 31, 2019,2020, the interest rate for one-month Eurodollar Loans was 3.495% and the interest rate for Base Rate Loans was 5.500%. The Co-Borrowers are required to pay a commitment fee ranging from 0.100% to 0.200% per annum on the actual daily unused amount of commitmentsoutstanding borrowings under the Credit Facility. At March 31, 2019, the commitment feeFacility was 0.100%1.96%.
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. Under the terms of the Credit Facility, Premier GP is not permitted to allow its consolidated total net leverage ratio (as defined in the Credit Facility) to exceed 3.75 to 1.00 for any period of four consecutive quarters, provided that, in connection with any acquisition for which the aggregate consideration exceeds $250.0 million, the maximum consolidated total net leverage ratio may be increased to 4.25 to 1.00 for the four consecutive fiscal quarters beginning with the quarter in which such acquisition is completed. In addition, Premier GP must maintain a minimum consolidated interest coverage ratio (as defined in the Credit Facility) of 2.50 to 1.00 at the end of every fiscal quarter.covenants. Premier GP was in compliance with all such covenants at March 31, 2019.
2020. 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 $75.0 million, bankruptcy and other insolvency events, ERISA-related liabilities and judgment defaults in excess of $50.0 million, and the occurrence of a change of control (as defined in the Credit Facility).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 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 Class A common stock pursuant to stock repurchase programs, and other general corporate activities. During the nine months ended March 31, 2019,2020, the Company borrowed $50.0$375.0 million and repaid $150.0 million of borrowings under the Credit Facility. The Company had $250.0 million in outstanding borrowings under the Credit Facility of $150.0 million at March 31, 2019.
In2020 with $750.0 million of available borrowing capacity after reductions for outstanding borrowings and outstanding letters of credit. On April 2019,27, 2020, the Company repaid $50.0$150.0 million of outstanding borrowings under the Credit Facility.
Notes Payable
At March 31, 20192020 and June 30, 2018,2019, the Company had $8.2$9.6 million and $7.2$8.6 million in notes payable, respectively, consisting primarily of non-interest bearing notes payable outstanding to departed member owners, of which $2.0$4.8 million and $0.2$2.6 million, respectively, were included in current portion of long-term debt and $6.2 million and $7.0 million, respectively, were included in
long-term debt, less current portion, in the accompanying Condensed Consolidated Balance Sheets.Sheets. Notes payable do not bear interest and generally have stated maturities of five years from their date of issuance.
(10) REDEEMABLE LIMITED PARTNERS' CAPITAL
Redeemable limited partners' capital represents the member owners' 51%42% ownership of Premier LP through their ownership of Class B common units at March 31, 2019.2020. The member owners hold the majority of the votes of the Board of Directors and any redemption or transfer or choice of consideration cannot be assumed 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. For the nine months ended March 31, 20192020 and 2018,2019, the Company recorded decreasesadjustments to the fair value of redeemable limited partners' capital as an adjustment of redeemable limited partners' capital to redemption amount in the accompanying Condensed Consolidated Statements of Income in the amounts of $178.9$516.7 million and $511.3$178.9 million, respectively.
Redeemable limited partners' capital is classified as temporary equity in the mezzanine section of the accompanying Condensed Consolidated Balance Sheets as, pursuant to the LP Agreement, withdrawal is at the option of each member owner and the conditions of the repurchase are not solely within the Company's control.
The tables below provide a summary of the changes in the redeemable limited partners' capital from June 30, 2019 to March 31, 2020 and June 30, 2018 to March 31, 2019 and June 30, 2017 to March 31, 2018 (in thousands):
|
| | | | | | | | | |
| Receivables From Limited Partners | Redeemable Limited Partners' Capital | Total Redeemable Limited Partners' Capital |
Balance at June 30, 2019 | $ | (1,204 | ) | $ | 2,524,474 |
| $ | 2,523,270 |
|
Distributions applied to receivables from limited partners | 69 |
| — |
| 69 |
|
Redemption of limited partners | — |
| (1,371 | ) | (1,371 | ) |
Net income attributable to non-controlling interest in Premier LP | — |
| 41,907 |
| 41,907 |
|
Distributions to limited partners | — |
| (13,699 | ) | (13,699 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (50,792 | ) | (50,792 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| (694,309 | ) | (694,309 | ) |
Balance at September 30, 2019 | $ | (1,135 | ) | $ | 1,806,210 |
| $ | 1,805,075 |
|
Distributions applied to receivables from limited partners | 70 |
| — |
| 70 |
|
Net income attributable to non-controlling interest in Premier LP | — |
| 55,704 |
| 55,704 |
|
Distributions to limited partners | — |
| (12,689 | ) | (12,689 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (223,946 | ) | (223,946 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| 480,153 |
| 480,153 |
|
Balance at December 31, 2019 | $ | (1,065 | ) | $ | 2,105,432 |
| $ | 2,104,367 |
|
Distributions applied to receivables from limited partners | 71 |
| — |
| 71 |
|
Net income attributable to non-controlling interest in Premier LP | — |
| 35,058 |
| 35,058 |
|
Distributions to limited partners | — |
| (9,314 | ) | (9,314 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (169,194 | ) | (169,194 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| (302,569 | ) | (302,569 | ) |
Balance at March 31, 2020 | $ | (994 | ) | $ | 1,659,413 |
| $ | 1,658,419 |
|
|
| | | | | | | | | |
| Receivables From Limited Partners | Redeemable Limited Partners' Capital | Total Redeemable Limited Partners' Capital |
June 30, 2018 | $ | (2,205 | ) | $ | 2,922,615 |
| $ | 2,920,410 |
|
Distributions applied to receivables from limited partners | 437 |
| — |
| 437 |
|
Net income attributable to non-controlling interest in Premier LP | — |
| 55,113 |
| 55,113 |
|
Distributions to limited partners | — |
| (14,993 | ) | (14,993 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (30,536 | ) | (30,536 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| 708,193 |
| 708,193 |
|
September 30, 2018 | $ | (1,768 | ) | $ | 3,640,392 |
| $ | 3,638,624 |
|
Distributions applied to receivables from limited partners | 416 |
| — |
| 416 |
|
Redemption of limited partners | — |
| (448 | ) | (448 | ) |
Net income attributable to non-controlling interest in Premier LP | — |
| 62,631 |
| 62,631 |
|
Distributions to limited partners | — |
| (14,288 | ) | (14,288 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (441,344 | ) | (441,344 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| (651,709 | ) | (651,709 | ) |
December 31, 2018 | $ | (1,352 | ) | $ | 2,595,234 |
| $ | 2,593,882 |
|
Distributions applied to receivables from limited partners | 80 |
| — |
| 80 |
|
Redemption of limited partners | — |
| (1,372 | ) | (1,372 | ) |
Net income attributable to non-controlling interest in Premier LP | — |
| 43,388 |
| 43,388 |
|
Distributions to limited partners | — |
| (13,145 | ) | (13,145 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (147,441 | ) | (147,441 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| (235,394 | ) | (235,394 | ) |
March 31, 2019 | $ | (1,272 | ) | $ | 2,241,270 |
| $ | 2,239,998 |
|
|
| | | | | | | | | |
| Receivables From Limited Partners | Redeemable Limited Partners' Capital | Total Redeemable Limited Partners' Capital |
Balance at June 30, 2018 | $ | (2,205 | ) | $ | 2,922,615 |
| $ | 2,920,410 |
|
Distributions applied to receivables from limited partners | 437 |
| — |
| 437 |
|
Net income attributable to non-controlling interest in Premier LP | — |
| 55,113 |
| 55,113 |
|
Distributions to limited partners | — |
| (14,993 | ) | (14,993 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (30,536 | ) | (30,536 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| 708,193 |
| 708,193 |
|
Balance at September 30, 2018 | $ | (1,768 | ) | $ | 3,640,392 |
| $ | 3,638,624 |
|
Distributions applied to receivables from limited partners | 416 |
| — |
| 416 |
|
Redemption of limited partners | — |
| (448 | ) | (448 | ) |
Net income attributable to non-controlling interest in Premier LP | — |
| 62,631 |
| 62,631 |
|
Distributions to limited partners | — |
| (14,288 | ) | (14,288 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (441,344 | ) | (441,344 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| (651,709 | ) | (651,709 | ) |
Balance at December 31, 2018 | $ | (1,352 | ) | $ | 2,595,234 |
| $ | 2,593,882 |
|
Distributions applied to receivables from limited partners | 80 |
| — |
| 80 |
|
Redemption of limited partners | — |
| (1,372 | ) | (1,372 | ) |
Net income attributable to non-controlling interest in Premier LP | — |
| 43,388 |
| 43,388 |
|
Distributions to limited partners | — |
| (13,145 | ) | (13,145 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (147,441 | ) | (147,441 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| (235,394 | ) | (235,394 | ) |
Balance at March 31, 2019 | $ | (1,272 | ) | $ | 2,241,270 |
| $ | 2,239,998 |
|
|
| | | | | | | | | |
| 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 | 492 |
| — |
| 492 |
|
Net income attributable to non-controlling interest in Premier LP | — |
| 44,610 |
| 44,610 |
|
Distributions to limited partners | — |
| (20,752 | ) | (20,752 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (42,976 | ) | (42,976 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| (320,424 | ) | (320,424 | ) |
September 30, 2017 | $ | (3,685 | ) | $ | 2,803,218 |
| $ | 2,799,533 |
|
Distributions applied to receivables from limited partners | 492 |
| — |
| 492 |
|
Redemption of limited partners | — |
| (269 | ) | (269 | ) |
Net income attributable to non-controlling interest in Premier LP | — |
| 56,485 |
| 56,485 |
|
Distributions to limited partners | — |
| (20,396 | ) | (20,396 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (119,289 | ) | (119,289 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| (317,916 | ) | (317,916 | ) |
December 31, 2017 | $ | (3,193 | ) | $ | 2,401,833 |
| $ | 2,398,640 |
|
Distributions applied to receivables from limited partners | 494 |
| — |
| 494 |
|
Redemption of limited partners | — |
| (673 | ) | (673 | ) |
Net income attributable to non-controlling interest in Premier LP | — |
| 53,047 |
| 53,047 |
|
Distributions to limited partners | — |
| (13,157 | ) | (13,157 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (32,659 | ) | (32,659 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| 127,039 |
| 127,039 |
|
March 31, 2018 | $ | (2,699 | ) | $ | 2,535,430 |
| $ | 2,532,731 |
|
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 receivablesand 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 nine months ended March 31, 2019.2020.
During the nine months ended March 31, 2019, four2020, 3 limited partners withdrew from Premier LP. The limited partnership agreement provides Premier LP with an option to redeemfor the redemption of former limited partners' Class B common units that are not eligible for exchange, upon payment of a specified redemption amount paid 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 quarter's 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 or 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 23, 2018 | $ | 15,465 |
|
November 21, 2018 | $ | 14,993 |
|
February 21, 2019 | $ | 14,288 |
|
|
| | | |
Date | Distribution (a) |
August 22, 2019 | $ | 13,202 |
|
November 27, 2019 | $ | 13,699 |
|
February 20, 2020 | $ | 12,689 |
|
| |
(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 $13.1$9.3 million quarterly distribution on or before May 29, 2019.2020. The distribution is reflected in limited partners' distribution payable in the accompanying Condensed Consolidated Balance Sheets at March 31, 2019.2020. |
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.Committee of the Board of Directors. During the nine months ended March 31, 2019,2020, the Company recorded total reductions of $619.3$443.9 million to redeemable limited partners' capital to reflect the exchange of approximately 14.313.1 million Class B common units and surrender and retirement of a corresponding number of 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 12 - Earnings (Loss) 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, 2019 | 1,310,771 |
| $ | 50,792 |
|
October 31, 2019 | 6,873,699 |
| 223,946 |
|
January 31, 2020 | 4,866,082 |
| 169,194 |
|
Total | 13,050,552 |
| $ | 443,932 |
|
|
| | | | | |
Date of Quarterly Exchange | Number of Class B Common Units Exchanged | Reduction in Redeemable Limited Partners' Capital |
July 31, 2018 | 816,468 |
| $ | 30,536 |
|
October 31, 2018 | 9,807,651 |
| 441,344 |
|
January 31, 2019 | 3,705,459 |
| 147,440 |
|
Total | 14,329,578 |
| $ | 619,320 |
|
(11) STOCKHOLDERS' DEFICITEQUITY (DEFICIT)
As of March 31, 2019,2020, there were 61,391,41771,070,617 shares of the Company's Class A common stock, par value $0.01 per share, and 64,983,23250,715,564 shares of the Company's Class B common stock, par value $0.000001 per share, outstanding.
On May 7, 2018,2019, the Company'sCompany announced that its Board of Directors approvedauthorized the repurchase of up to $250.0$300.0 million of ourthe Company's Class A common stock during fiscal year 2019 as a continuation of our balanced capital deployment strategy.2020. As of March 31, 2019,2020, the Company completed its stock repurchase program, through which approximately 6.7had purchased 4.6 million shares of Class A common stock were purchased at an average price of $37.38$32.28 per share for a total purchase price of approximately $250.0$150.0 million. The repurchase authorization may be suspended, delayed, or discontinued at any time at the discretion of the Company's Board of Directors. Repurchases are subject to compliance with applicable federal securities laws and the Company's management may, at its discretion, suspend, delay, or discontinue repurchases at any time, based on market conditions, alternate uses of capital, or other factors. The Company does not currently expect to make additional purchases of its Class A common stock under the repurchase program during the remainder of fiscal year 2020.
Holders of Class A common stock are entitled to (i) one1 vote for each 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 liquidation of Premier, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any.
Holders of Class B common stock are entitled to one1 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 terms of a voting trust agreement by and among the Company, Premier LP, the holders of Class B common stock and Wells Fargo Delaware Trust Company, N.A., as the trustee, 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 on the Board of Directors, and by a majority
of the votes received by the trustee from the member owners for all other matters. Class B common stock will not be listed on any stock exchange and, except in connection with any permitted sale or transfer of Class B common units, cannot be sold or transferred.
(12) EARNINGS (LOSS) 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' capital at the redemption amount, as a result ofwhich is due to the exchange benefit obtained by limited partners through the ownership of Class B common units. Except when the effect would be anti-dilutive, the diluted earnings (loss) per share calculation, which is calculated using the treasury stock method, includes the impact of 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.
The following table provides a reconciliation of the numerator and denominator used for basic and diluted (loss) earnings (loss) per share (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2019 | 2019 | 2018 | | 2019 | 2019 | 2018 |
| As presented | Previous revenue standard (a) | | As presented | Previous revenue standard (a) |
Numerator for basic earnings (loss) per share: | | | | | | | |
Net income (loss) attributable to stockholders | $ | 265,808 |
| $ | 262,675 |
| $ | (103,537 | ) | | $ | 278,364 |
| $ | 252,985 |
| $ | 514,093 |
|
| | | | | | | |
Numerator for diluted earnings (loss) per share: | | | | | | | |
Net income (loss) attributable to stockholders | $ | 265,808 |
| $ | 262,675 |
| $ | (103,537 | ) | | $ | 278,364 |
| $ | 252,985 |
| $ | 514,093 |
|
Adjustment of redeemable limited partners' capital to redemption amount | (235,394 | ) | (233,713 | ) | — |
| | (178,910 | ) | (164,609 | ) | (511,301 | ) |
Net income attributable to non-controlling interest in Premier LP | 43,388 |
| 40,660 |
| — |
| | 161,132 |
| 141,818 |
| 154,142 |
|
Net income (loss) | 73,802 |
| 69,622 |
| (103,537 | ) | | 260,586 |
| 230,194 |
| 156,934 |
|
Tax effect on Premier, Inc. net income (b) | (11,762 | ) | (12,278 | ) | — |
| | (38,503 | ) | (36,128 | ) | (47,951 | ) |
Adjusted net income (loss) | $ | 62,040 |
| $ | 57,344 |
| $ | (103,537 | ) | | $ | 222,083 |
| $ | 194,066 |
| $ | 108,983 |
|
| | | | | | | |
Denominator for basic earnings (loss) per share: | | | | | | | |
Weighted average shares (c) | 62,020 |
| 62,020 |
| 53,529 |
| | 58,346 |
| 58,346 |
| 53,885 |
|
| | | | | | | |
Denominator for diluted earnings (loss) per share: | | | | | | | |
Weighted average shares (c) | 62,020 |
| 62,020 |
| 53,529 |
| | 58,346 |
| 58,346 |
| 53,885 |
|
Effect of dilutive securities: (d) | | | | | | | |
Stock options | 474 |
| 474 |
| — |
| | 630 |
| 630 |
| 266 |
|
Restricted stock | 256 |
| 256 |
| — |
| | 304 |
| 304 |
| 285 |
|
Class B shares outstanding | 66,322 |
| 66,322 |
| — |
| | 72,969 |
| 72,969 |
| 83,818 |
|
Weighted average shares and assumed conversions | 129,072 |
| 129,072 |
| 53,529 |
| | 132,249 |
| 132,249 |
| 138,254 |
|
| | | | | | | |
Basic earnings (loss) per share (e) | $ | 4.29 |
| $ | 4.24 |
| $ | (1.93 | ) | | $ | 4.77 |
| $ | 4.34 |
| $ | 9.54 |
|
Diluted earnings (loss) per share (e) | $ | 0.48 |
| $ | 0.44 |
| $ | (1.93 | ) | | $ | 1.68 |
| $ | 1.47 |
| $ | 0.79 |
|
|
| | | | | | | | | | | | |
| Three Months Ended March 31, | Nine Months Ended March 31, |
| 2020 | 2019 | 2020 | 2019 |
Numerator for basic earnings per share: | | | | |
Net income from continuing operations attributable to stockholders (a) | $ | 340,726 |
| $ | 266,524 |
| $ | 620,262 |
| $ | 280,128 |
|
Net income (loss) from discontinued operations attributable to stockholders | 2 |
| (716 | ) | 529 |
| (1,764 | ) |
Net income attributable to stockholders | $ | 340,728 |
| $ | 265,808 |
| $ | 620,791 |
| $ | 278,364 |
|
| |
| |
|
Numerator for diluted earnings per share: | |
| |
|
Net income from continuing operations attributable to stockholders (a) | $ | 340,726 |
| $ | 266,524 |
| $ | 620,262 |
| $ | 280,128 |
|
Adjustment of redeemable limited partners' capital to redemption amount | (302,569 | ) | (235,394 | ) | (516,725 | ) | (178,910 | ) |
Net income from continuing operations attributable to non-controlling interest in Premier LP | 35,055 |
| 44,135 |
| 132,189 |
| 163,230 |
|
Net income from continuing operations | 73,212 |
| 75,265 |
| 235,726 |
| 264,448 |
|
Tax effect on Premier, Inc. net income (b) | (7,067 | ) | (11,762 | ) | (30,007 | ) | (38,503 | ) |
Adjusted net income from continuing operations | $ | 66,145 |
| $ | 63,503 |
| $ | 205,719 |
| $ | 225,945 |
|
| |
| |
|
Net income (loss) from discontinued operations attributable to stockholders | $ | 2 |
| $ | (716 | ) | $ | 529 |
| $ | (1,764 | ) |
Net income (loss) from discontinued operations attributable to non-controlling interest in Premier LP | 3 |
| (747 | ) | 480 |
| (2,098 | ) |
Adjusted net income (loss) from discontinued operations | $ | 5 |
| $ | (1,463 | ) | $ | 1,009 |
| $ | (3,862 | ) |
| |
| |
|
Adjusted net income | $ | 66,150 |
| $ | 62,040 |
| $ | 206,728 |
| $ | 222,083 |
|
| |
| |
|
Denominator for earnings per share: | |
|
|
|
Basic weighted average shares outstanding | 69,451 |
| 62,020 |
| 65,582 |
| 58,346 |
|
Effect of dilutive securities: (d) | |
| |
|
Stock options | 232 |
| 474 |
| 357 |
| 630 |
|
Restricted stock | 216 |
| 256 |
| 239 |
| 304 |
|
Performance share awards | 197 |
| — |
| 66 |
| — |
|
Class B shares outstanding | 52,374 |
| 66,322 |
| 57,786 |
| 72,969 |
|
Diluted weighted average shares and assumed conversions | 122,470 |
| 129,072 |
| 124,030 |
| 132,249 |
|
|
| | | | | | | | | | | | |
| Three Months Ended March 31, | Nine Months Ended March 31, |
| 2020 | 2019 | 2020 | 2019 |
| | | | |
Basic earnings per share: | | | | |
Basic earnings per share from continuing operations | $ | 4.91 |
| $ | 4.30 |
| $ | 9.46 |
| $ | 4.80 |
|
Basic earnings (loss) per share from discontinued operations | — |
| (0.01 | ) | 0.01 |
| (0.03 | ) |
Basic earnings per share attributable to stockholders | $ | 4.91 |
| $ | 4.29 |
| $ | 9.47 |
| $ | 4.77 |
|
| | | | |
Diluted earnings per share: | | | | |
Diluted earnings per share from continuing operations | $ | 0.54 |
| $ | 0.49 |
| $ | 1.66 |
| $ | 1.71 |
|
Diluted earnings (loss) per share from discontinued operations | — |
| (0.01 | ) | — |
| (0.03 | ) |
Diluted earnings per share attributable to stockholders | $ | 0.54 |
| $ | 0.48 |
| $ | 1.66 |
| $ | 1.68 |
|
| |
(a) | The Company adopted Topic 606 effective July 1, 2018, while comparative results are presented under Topic 605. ReferNet income from continuing operations attributable to Note 2 - Significant Accounting Policies for more information.stockholders was calculated as follows (in thousands): |
|
| | | | | | | | | | | | |
| Three Months Ended March 31, | Nine Months Ended March 31, |
| 2020 | 2019 | 2019 | 2018 |
Net income from continuing operations | $ | 73,212 |
| $ | 75,265 |
| $ | 235,726 |
| $ | 264,448 |
|
Net income from continuing operations attributable to non-controlling interest in Premier LP | (35,055 | ) | (44,135 | ) | (132,189 | ) | (163,230 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | 302,569 |
| 235,394 |
| 516,725 |
| 178,910 |
|
Net income from continuing operations attributable to stockholders | $ | 340,726 |
| $ | 266,524 |
| $ | 620,262 |
| $ | 280,128 |
|
| |
(b) | Represents income tax expense related to Premier, Inc. retaining the portion of net income from continuing operations attributable to income from non-controlling interest in Premier, LP for the purpose of diluted earnings (loss) per share. |
| |
(c) | Weighted average number of common shares used for basic earnings (loss) 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 nine months ended March 31, 20192020 and 2018.2019. |
| |
(d) | For the three and nine months ended March 31, 2019,2020, the effect of 0.60.8 million stock options and restricted stock units was excluded from diluted weighted average shares outstanding as they had an anti-dilutive effect, andeffect. Additionally, the effect of 0.7less than $0.1 million performance share awards was excluded from diluted weighted average shares outstanding as theythe awards had not satisfied the applicable performance criteria at the end of the period. |
For the three months ended March 31, 2018, the effect of 2.9 million stock options, restricted stock units and performance share awards and 81.4 million Class B common units exchangeable for Class A common shares were excluded from diluted weighted average shares outstanding due to the net loss attributable to stockholders sustained for the quarter and as including them would have had been anti-dilutive for the period. For the nine months ended March 31, 2018,2019, the effect of 1.70.6 million stock options and restricted stock units was excluded from diluted weighted average shares outstanding as they had an anti-dilutive effect, andeffect. Additionally, the effect of 0.60.7 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.
| |
(e) | We have corrected prior period information within the current period financial statements related to a specific component used in calculating the tax effect on Premier, Inc. net income for purposes of diluted earnings per share. Diluted earnings (loss) per share for the nine months ended March 31, 2018 was previously stated at ($0.84) per share and has been corrected to $0.79 per share. We believe the correction is immaterial and the corrected amount had no impact on our overall financial condition, results of operations or cash flows. |
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 10 - 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, 2018 | 816,468 |
| 79,519,233 |
| 53,256,897 |
| 60%/40% |
October 31, 2018 | 9,807,651 |
| 69,601,752 |
| 63,734,585 |
| 53%/47% |
January 31, 2019 | 3,705,459 |
| 65,778,688 |
| 63,841,210 |
| 51%/49% |
April 30, 2019 (c) | 435,188 |
| 64,548,044 |
| 61,826,763 |
| 51%/49% |
|
| | | | | | | |
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, 2019 | 1,310,771 |
| 62,767,860 |
| 63,274,182 |
| 49.8%/50.2% |
October 31, 2019 | 6,873,699 |
| 55,581,646 |
| 66,522,023 |
| 46%/54% |
January 31, 2020 | 4,866,082 |
| 50,715,564 |
| 71,066,141 |
| 42%/58% |
April 30, 2020 (c) | 502,466 |
| 50,213,098 |
| 71,574,119 |
| 41%/59% |
| |
(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 11 - Stockholders' DeficitEquity (Deficit)), and equity incentive plan (see Note 13 - Stock-Based Compensation) and departed member owners (see Note 10 - Redeemable Limited Partners' Capital). |
| |
(c) | As the quarterly exchange occurred on April 30, 2019,2020, the impact of the exchange is not reflected in the condensed consolidated financial statements for the quarter ended March 31, 2019. The Company utilized 435,188 treasury shares to facilitate this exchange, and as a result had 2,419,148 Class A common shares held in treasury as of April 30, 2019, after the exchange.2020. |
(13) STOCK-BASED COMPENSATION
Stock-based compensation expense is recognized over the requisite service period, which generally equals the stated vesting period. The associated deferred tax benefit was calculated at a rate of 25%, for the three and nine months ended March 31, 2020 and 2019, which represents the expected effective income tax rate at the time of the compensation expense deduction primarily at PHSI, and differs from the Company's current effective income tax rate which includes the impact of partnership income not subject to federal and state income taxes (seetaxes. See Note 14 - Income Taxes).
Taxes for further information.
Stock-based compensation expense and the resulting deferred tax benefits were as follows (in thousands):
|
| | | | | | | | | | | | |
| Three Months Ended March 31, | Nine Months Ended March 31, |
| 2020 | 2019 | 2020 | 2019 |
Pre-tax stock-based compensation expense (a) | $ | 7,568 |
| $ | 6,666 |
| $ | 19,048 |
| $ | 20,354 |
|
Deferred tax benefit | 1,915 |
| 1,647 |
| 4,819 |
| 5,027 |
|
Total stock-based compensation expense, net of tax | $ | 5,653 |
| $ | 5,019 |
| $ | 14,229 |
| $ | 15,327 |
|
|
| | | | | | | | | | | | |
| Three Months Ended March 31, | Nine Months Ended March 31, |
| 2019 | 2018 | 2019 | 2018 |
Pre-tax stock-based compensation expense | $ | 6,781 |
| $ | 7,231 |
| $ | 20,692 |
| $ | 24,930 |
|
Deferred tax benefit | 1,675 |
| 1,787 |
| 5,111 |
| 6,160 |
|
Total stock-based compensation expense, net of tax | $ | 5,106 |
| $ | 5,444 |
| $ | 15,581 |
| $ | 18,770 |
|
| |
(a) | Pre-tax stock based compensation expense attributable to discontinued operations of $0.1 million and $0.3 million, respectively, for the three and nine months ended March 31, 2019 is not included in the above table. |
Premier 2013 Equity Incentive Plan
The Premier 2013 Equity Incentive Plan, as amended and restated (and including any further amendments thereto, the "2013 Equity Incentive Plan") provides for grants of up to 14.8 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 March 31, 2019,2020, there were 6.65.9 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 nine months ended March 31, 2019:2020:
|
| | | | | | | | | | | | | | | | | |
| 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 |
Outstanding at June 30, 2019 | 589,550 |
| $ | 37.06 |
| | 1,439,815 |
| $ | 36.38 |
| | 2,798,673 |
| $ | 30.22 |
|
Granted | 350,700 |
| $ | 36.73 |
| | 738,118 |
| $ | 36.06 |
| | — |
| $ | — |
|
Vested/exercised | (217,356 | ) | $ | 33.55 |
| | (493,759 | ) | $ | 31.58 |
| | (221,147 | ) | $ | 30.49 |
|
Forfeited | (32,989 | ) | $ | 38.65 |
| | (71,444 | ) | $ | 38.82 |
| | (18,121 | ) | $ | 32.90 |
|
Outstanding at March 31, 2020 | 689,905 |
| $ | 37.92 |
| | 1,612,730 |
| $ | 37.59 |
| | 2,559,405 |
| $ | 30.18 |
|
| | | | | | | | |
Stock options outstanding and exercisable at March 31, 2020 | | | | | | | 2,428,055 |
| $ | 30.04 |
|
|
| | | | | | | | | | | | | | | | | |
| 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 |
Outstanding at June 30, 2018 | 605,873 |
| $ | 33.25 |
| | 1,318,047 |
| $ | 33.00 |
| | 3,499,251 |
| $ | 30.53 |
|
Granted | 279,973 |
| $ | 43.22 |
| | 607,339 |
| $ | 43.16 |
| | — |
| $ | — |
|
Vested/exercised | (238,206 | ) | $ | 34.82 |
| | (359,751 | ) | $ | 35.43 |
| | (548,455 | ) | $ | 32.03 |
|
Forfeited | (53,751 | ) | $ | 36.15 |
| | (117,595 | ) | $ | 36.27 |
| | (56,450 | ) | $ | 32.66 |
|
Outstanding at March 31, 2019 | 593,889 |
| $ | 37.06 |
| | 1,448,040 |
| $ | 36.39 |
| | 2,894,346 |
| $ | 30.21 |
|
| | | | | | | | |
Stock options outstanding and exercisable at March 31, 2019 | | | | | | | 2,478,892 |
| $ | 29.83 |
|
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 expire either after twelve months ofafter an employee's termination with Premier or immediately upon an employee's termination with Premier, depending on the termination circumstances. Stock options generally vest in equal annual installments over three years.
Unrecognized stock-based compensation expense at March 31, 20192020 was as follows (in thousands):
|
| | | | |
| Unrecognized Stock-Based Compensation Expense | Weighted Average Amortization Period |
Restricted stock | $ | 14,745 |
| 1.9 years |
Performance share awards | 29,777 |
| 1.9 years |
Stock options | 617 |
| 0.5 years |
Total unrecognized stock-based compensation expense | $ | 45,139 |
| 1.9 years |
|
| | | | |
| Unrecognized Stock-Based Compensation Expense | Weighted Average Amortization Period |
Restricted stock | $ | 12,432 |
| 1.9 years |
Performance share awards | 26,567 |
| 1.9 years |
Stock options | 2,941 |
| 1.2 years |
Total unrecognized stock-based compensation expense | $ | 41,940 |
| 1.9 years |
The aggregate intrinsic value of stock options at March 31, 20192020 was as follows (in thousands):
|
| | | |
| Intrinsic Value of Stock Options |
Outstanding and exercisable | $ | 7,762 |
|
Expected to vest | 12 |
|
Total outstanding | $ | 7,774 |
|
| |
Exercised during the nine months ended March 31, 2020 | $ | 1,541 |
|
|
| | | |
| Intrinsic Value of Stock Options |
Outstanding and exercisable | $ | 12,074 |
|
Expected to vest | 851 |
|
Total outstanding | $ | 12,925 |
|
| |
Exercised during the nine months ended March 31, 2019 | $ | 5,381 |
|
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:
|
| |
| Nine Months Ended March 31, 2018 |
Expected life (a)
| 6 years |
Expected dividend (b)
| — |
Expected volatility (c)
| 29.44% - 32.26% |
Risk-free interest rate (d)
| 1.89% - 2.75% |
Weighted average option grant date fair value | $9.48 - $11.42 |
| |
(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) | 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. |
| |
(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. |
(14) INCOME TAXES
The Company's income tax expense is attributable to the activities of the Company, PHSI, PSCI and PSCI,Premier Marketplace, LLC ("PMLLC"), 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,statutes, Premier LP is not subject to federal and state income taxes, as the income realized by Premier LP is taxable to its partners.
On November 8, 2019, the State of North Carolina made significant changes to its income tax law, effective for tax years beginning on or after January 1, 2020. As a result, the Company remeasured its deferred tax assets and liabilities as of the enactment date and recorded an income tax expense of $38.6 million as a discrete item in the Company's income tax provision during the quarter ended December 31, 2019.
On March 27, 2020, in response to COVID-19, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The CARES Act is an emergency economic stimulus package which contains, among other things, changes to income tax law including a modification to the net operating loss ("NOL") carryback period. The NOL carryback provision will allow the Company to carry back $21.1 million of NOLs to offset taxable income in prior years. As a result of the TCJA that was enacted on December 22, 2017,NOL carryback provision, the U.S. federal corporateCompany expects an income tax rate was reduced from 35% to 21%. In accordancerefund of $7.3 million with U.S. GAAP, the impact of changes in tax rates and tax laws is recognized as a component ofcorresponding income tax expense from continuing operations inbenefit of $2.9 million for the period of enactment. The Company has remeasured itsrate differential between the cash benefit at 35% and the deferred tax balances and recorded net provisional tax expense of $210.4 million in fiscal year 2018. During the first quarter of fiscal year 2019, the Company evaluated the impact of the TCJA with respect to the amendments to Section 162(m) based on the issuance of additional guidance by the Internal Revenue Service. The Company concluded no adjustment to its deferred tax balances is required. During the second quarter of fiscal year 2019, the Company further analyzed state tax conformity with respect to the net operating losses as amended by the TCJA, and as a result, recorded $0.5 million of tax benefit attributable to valuation allowance release. During the second quarter of fiscal year 2019, the Company completed its accounting for the income tax effects of the TCJA. To date, the Company has recorded $209.9 million in income tax expense associated with the enactment of the TCJA.valued at 21%.
Income tax expense for the three months ended March 31, 2020 and 2019 and 2018 was $11.1$4.2 million and $13.3$11.7 million, respectively, which reflects effective tax rates of 13%5% and 15%13%, respectively. Income tax expense for the nine months ended March 31, 2020 and 2019 and 2018 was $23.7$78.3 million and $257.6$25.8 million, respectively, which reflects effective tax rates of 8%25% and 62%9%, respectively. The decrease in the effective tax ratesrate for the three months ended March 31, 2020 is primarily attributable todriven by the deferredincome tax remeasurement related tobenefit associated with the aforementioned decreaseNOL carryback provisions under the CARES Act and the release of the valuation allowance. The increase in the U.S. federal corporate incomeeffective tax rate from 35% to 21% duringfor the nine months ended March 31, 2018. 2020 is largely attributable to the aforementioned remeasurement of deferred tax balances related to the change in North Carolina state income tax law. Excluding the deferred tax remeasurement, the effective tax rate is 13% for the nine months ended March 31, 2020.
The Company's effective tax rates differ from income taxes recorded using a statutory rate largely due to Premier LP income, which is not subject to federal, state or local income taxes as well as reductions in valuation allowances associated with deferred tax assets at PHSI.
The Company's existing reserve for uncertain income tax positions decreased $12.2 million during the second quarter of fiscal year 2019, primarily due to the closing of certain audits.taxes.
Net deferred tax assets increased $104.9by $5.7 million to $393.0$422.9 million at March 31, 20192020 from $288.1$417.2 million at June 30, 2018. The current period balance was comprised of $413.5 million in deferred tax assets at Premier, Inc., partially offset by $20.5 million in deferred tax liabilities at PHSI and PSCI.2019. The increase in net deferred tax assets from the prior period was largely driven by $131.2increase of $64.0 million in deferred tax assets generatedrelated to departures and quarterly exchanges of Class B common units of Premier LP by the member exchanges that occurredowners during the nine months ended March 31, 2019.2020, partially offset by a decrease of $38.6 million from remeasurement of deferred tax balances related to the change in North Carolina state income tax law and $19.7 million attributable to the deferred tax impact of tax-deductible goodwill and the NOL carryback provision taken as a result of the CARES Act.
The Company's TRA liabilities represent a payable to the limited partners for 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) 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 increased $86.3decreased by $49.3 million to $341.4$294.9 million at March 31, 20192020 from $255.1$344.1 million at June 30, 2018.2019. The change in TRA liabilities was driven primarily by the $114.9$86.3 million increaseattributable to member departures, $24.6 million in TRA liabilitiesremeasurements primarily due to the change in North Carolina state income tax law and $17.4 million in TRA payments during the nine months ended March 31, 2020. These decreases were partially offset by an increase of $79.0 million in connection with the quarterly member owner exchanges that occurred during the nine months ended March 31, 2019, partially offset by $18.0 million in TRA payments and $10.7 million attributable to member departures during the nine months ended March 31, 2019.2020.
(15) RELATED PARTY TRANSACTIONS
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 (loss) of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income was $0.5$4.3 million and $0.1$0.5 million for the three months ended March 31, 20192020 and 2018,2019, respectively, and $4.4$10.8 million and $5.7$4.4 million for the nine months ended March 31, 20192020 and 2018,2019, respectively. The Company maintains group purchasing agreements with FFF and receives administrative fees for purchases made by the Company's members pursuant to those agreements. Net administrative fees revenue recorded from purchases under those agreements was $1.9$1.2 million as presented and $2.1 million under the Previous Revenue Standard during the three months ended March 31, 2019, and $1.8$1.9 million during the three months ended March 31, 2018 under the Previous Revenue Standard. Net administrative fees revenue recorded from purchases under those agreements was2020 and 2019, respectively, and $5.8 million and $6.1 million as presented and $5.9 million under the Previous Revenue Standard duringfor the nine months ended March 31, 2020 and 2019, respectively.
(16) COMMITMENTS AND CONTINGENCIES
Operating Leases
Operating lease expense for the three and $5.8 million during the nine months ended March 31, 2018 under the Previous Revenue Standard.
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 $2.02020 was $2.7 million and $1.4$8.2 million, during the three months ended March 31, 2019 and 2018, respectively, and $4.1 million and $4.2 million during the nine months ended March 31, 2019 and 2018, respectively. As of March 31, 20192020, the weighted average remaining lease term was 6.0 years and June 30, 2018, $0.5 million and $0.9 million, respectively,the weighted average discount rate was 3.9%.
Future minimum lease payments under noncancelable operating leases with initial lease terms in amounts receivable from AEIX are included in due from related parties in the accompanying Condensed Consolidated Balance Sheets.excess of one year were as follows (in thousands):
(16) COMMITMENTS AND CONTINGENCIES |
| | | | | | |
| March 31, 2020 | June 30, 2019 (a) |
2020 (b) | $ | 3,091 |
| $ | 12,130 |
|
2021 | 11,806 |
| 11,539 |
|
2022 | 11,735 |
| 11,468 |
|
2023 | 12,012 |
| 11,533 |
|
2024 | 12,145 |
| 11,510 |
|
Thereafter | 22,348 |
| 20,645 |
|
Total future minimum lease payments | 73,137 |
| 78,825 |
|
Less: imputed interest | 8,114 |
| — |
|
Total operating lease liabilities (c) | $ | 65,023 |
| $ | — |
|
| |
(a) | Presented in accordance with ASC Topic 840. |
| |
(b) | As of March 31, 2020, future minimum lease payments are for the period from April 1, 2020 to June 30, 2020. |
| |
(c) | As of March 31, 2020, total operating lease liabilities included $9.7 million within other liabilities, current in the Condensed Consolidated Balance Sheets. |
Other 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. If current or future government regulations, specifically, 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 enforcement actions, penalties and other material limitations which could have a material adverse effect on the Company's business, financial condition and results of operations.
(17) 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's GPO, integrated pharmacy offerings and direct sourcing activities. The Performance Services segment provides technology and data analytics with wrap-around service offerings and includes the Company's informatics, collaborative, consulting services government services and insurance services offerings. The Company disaggregates revenue into categories that best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.businesses.
The following table presents disaggregated revenue by business segment and underlying source (in thousands):
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | | | | | | | | |
| 2019 | 2018 | | 2019 | 2018 | Three Months Ended March 31, | Nine Months Ended March 31, |
| As presented | Previous revenue standard (a) | | As presented | Previous revenue standard (a) | 2020 | 2019 | 2020 | 2019 |
Net revenue: | | | | |
Supply Chain Services | | | | |
Net administrative fees | $ | 164,534 |
| $ | 165,425 |
| $ | 161,612 |
| | $ | 492,229 |
| $ | 481,997 |
| $ | 471,946 |
| $ | 174,049 |
| $ | 164,534 |
| $ | 518,566 |
| $ | 492,229 |
|
Other services and support | 3,310 |
| 4,047 |
| 2,899 |
| | 9,442 |
| 12,309 |
| 8,470 |
| 3,396 |
| 2,484 |
| 8,439 |
| 6,520 |
|
Services | 167,844 |
| 169,472 |
| 164,511 |
| | 501,671 |
| 494,306 |
| 480,416 |
| 177,445 |
| 167,018 |
| 527,005 |
| 498,749 |
|
Products | 162,404 |
| 173,590 |
| 166,234 |
| | 471,393 |
| 506,455 |
| 480,997 |
| 61,183 |
| 41,568 |
| 167,344 |
| 129,441 |
|
Total Supply Chain Services | 330,248 |
| 343,062 |
| 330,745 |
| | 973,064 |
| 1,000,761 |
| 961,413 |
| |
Performance Services | 92,627 |
| 89,640 |
| 94,593 |
| | 273,214 |
| 254,440 |
| 265,887 |
| |
Total Supply Chain Services (a) | | 238,628 |
| 208,586 |
| 694,349 |
| 628,190 |
|
Performance Services (a) | | 96,195 |
| 92,627 |
| 262,490 |
| 273,214 |
|
Net revenue | $ | 422,875 |
| $ | 432,702 |
| $ | 425,338 |
| | $ | 1,246,278 |
| $ | 1,255,201 |
| $ | 1,227,300 |
| $ | 334,823 |
| $ | 301,213 |
| $ | 956,839 |
| $ | 901,404 |
|
| |
(a) | The Company adopted Topic 606 effective July 1, 2018, while comparative resultsIncludes intersegment revenue that is eliminated in consolidation. Intersegment revenue is not separately identified in Segments as the amounts are presented under Topic 605. Refer to Note 2 - Significant Accounting Policies for more information.not material. |
Additional segment information related to depreciation and amortization expense, capital expenditures and total assets was as follows (in thousands):
| | | Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended March 31, | Nine Months Ended March 31, |
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 |
Depreciation and amortization expense (a): | | |
Supply Chain Services | $ | 5,472 |
| $ | 5,500 |
| $ | 16,541 |
| $ | 16,166 |
| $ | 6,896 |
| $ | 4,616 |
| $ | 16,592 |
| $ | 13,905 |
|
Performance Services | 27,977 |
| 24,541 |
| 81,208 |
| 71,093 |
| 30,950 |
| 27,977 |
| 91,862 |
| 81,208 |
|
Corporate | 2,776 |
| 2,424 |
| 8,203 |
| 6,739 |
| 1,897 |
| 2,776 |
| 6,184 |
| 8,203 |
|
Total depreciation and amortization expense | $ | 36,225 |
| $ | 32,465 |
| $ | 105,952 |
| $ | 93,998 |
| $ | 39,743 |
| $ | 35,369 |
| $ | 114,638 |
| $ | 103,316 |
|
| | |
Capital expenditures: | | |
Supply Chain Services | $ | 501 |
| $ | 390 |
| $ | 1,516 |
| $ | 1,238 |
| $ | 2,485 |
| $ | 469 |
| $ | 4,571 |
| $ | 1,305 |
|
Performance Services | 20,437 |
| 24,077 |
| 59,267 |
| 57,368 |
| 20,840 |
| 20,437 |
| 57,956 |
| 59,267 |
|
Corporate | 1,891 |
| 2,171 |
| 9,334 |
| 6,654 |
| 1,233 |
| 1,891 |
| 6,799 |
| 9,334 |
|
Total capital expenditures | $ | 22,829 |
| $ | 26,638 |
| $ | 70,117 |
| $ | 65,260 |
| $ | 24,558 |
| $ | 22,797 |
| $ | 69,326 |
| $ | 69,906 |
|
The Company uses Segment Adjusted EBITDA (a financial measure not determined in accordance with generally accepted accounting principles ("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's net revenue and equity in net income of unconsolidated affiliates less 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. 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 Use of Non-GAAP Financial Measures" within Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
A reconciliation of income before income taxes to Segment Adjusted EBITDA is as follows (in thousands):
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 from continuing operations to Non-GAAP Adjusted EBITDA.
Our business model and solutions are designed to provide our members access to scale efficiencies while focusing on optimization of information resources and cost 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 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 value-based carepopulation health management through two business segments: Supply Chain Services and Performance Services.
Our Supply Chain Services segment includes one of the largest healthcare group purchasing organization programs ("GPO") in the United States, serving acute, non-acute, (ornon-healthcare and alternate site) providerssites, and other non-healthcare organizations, and includes integrated pharmacy andour direct sourcing activities. Supply Chain Services net revenue declined from $330.7 million for the three months ended March 31, 2018 to $330.2 million for the three months ended March 31, 2019, and accounted for 78% of our overall net revenue for the three months ended March 31, 2019. Supply Chain Services net revenue grew from $961.4 million for the nine months ended March 31, 2018 to $973.1 million for the nine months ended March 31, 2019, and accounted for 78% of our overall net revenue for the nine months ended March 31, 2019.WeWe 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 through product sales in connection with our integrated pharmacy and direct sourcing activities.
We expect that certain trends and economic or industry-wide factors will continue to affect our business, both in the short-term 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 2019 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 regarding the status of the Affordable Care Act, its repeal, replacement, or other modification, the enactment of new regulatory and reporting requirements, expansion and contraction of insurance coverage and associated costs that may impact the number of uninsured or level of bad debt for providers,subscriber elections, intense cost pressure, payment reform, provider and supplier consolidation, vertical integration between payors, providers, and other organizations, 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. Moreover,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 comprehensive and integrated Supply Chain Services and Performance Services solutions in the areas of cost management, quality and safety, and value-based care. Therepopulation health management, however, there are however, 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 Note Regarding Forward-Looking Statements" for more information.
Refer to Note 1 - Organization and Basis of Presentation and Note 2 - Significant Accounting Policies to the accompanying condensed consolidated financial statements for more information related to our use of estimates in the preparation of financial statements as well as information related to material changes in our significant accounting policies that were included in our 20182019 Annual Report.
Net revenue consists of service revenue, which includes net administrative fees revenue and other services and support revenue, and product revenue. Net administrative fees revenue consists of GPO net 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 with our SaaS informatics products subscriptions, license fees, and consulting services and performance improvement collaborative subscriptions. Product revenue consists of integrated pharmacy and direct sourcing product sales, which are included in the Supply Chain Services segment.
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, 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 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 revenue consists of SaaS informatics products subscriptions, license fees, performance improvement collaborative and other service subscriptions, professional fees for consulting services, insurance services management fees and commissions from endorsed commercial insurance programs.
Our Performance Services growth will depend upon the expansion of our SaaS informatics products, performance improvement collaboratives and consulting services to new and existing members, renewal of existing subscriptions to our SaaS and licensed informatics products, along withand our ability to generate additional applied sciences engagements and expand into new markets.
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 consulting services to members and implementation services related to SaaS informatics 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 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.
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, business disposition related expenses, 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 that have been capitalized and reflect the incremental costs of obtaining and fulfilling a contract. Such amounts include sales commissions andAmortization of contract costs related to implementing SaaS informatics tools, which are components ofincluded within selling, general and administrative expenses and cost of revenue, respectively.include sales commissions.
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.
Amortization of purchased intangible assets includes the amortization of all identified intangible assets resulting from acquisitions.assets.
Our income tax expense is attributable to the activities of Premier, Inc., Premier Healthcare Solutions, Inc. ("PHSI") and ,Premier Supply Chain Improvement, Inc. ("PSCI") and Premier Marketplace, LLC ("PMLLC"), 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 Healthcare Alliance, L.P. ("Premier LP")LP is taxable to its partners. Our 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 14 - Income Taxes.Taxes to the accompanying condensed consolidated financial statements.
Given our 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 13 - Stock-Based Compensation)Compensation to the accompanying condensed consolidated financial statements) is calculated based on the effective tax rate of PHSI, the legal entity where the majority of stock-based compensation expense is recorded. Our effective tax rate, as discussed in Note 14 - Income Taxes to the accompanying condensed consolidated financial statements, represents the effective tax rate computed in accordance with GAAP based on total income tax expense (reflected in income tax expense in the Condensed Consolidated Statements of Income) of Premier, Inc., PHSI and PSCI, divided by consolidated pre-tax income.
Non-GAAP Adjusted Fully Distributed Net Income is calculated net of taxes based on our fully distributed tax rate for federal and state income tax for us as a whole as if we were one taxable entity with all of our subsidiaries' activities included. Prior to the enactment of the Tax Cuts and Jobs Act ("TCJA"), theThe rate used to compute the Non-GAAP Adjusted Fully Distributed Net Income was 39%. Effective as26% for the three and nine months ended March 31, 2020 and 2019.
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.
to recur within the next two years. Such items include certain strategic and financial restructuring expenses. Non-operating items include gains or losses on the disposal of assets and interest and investment income or expense.
We define Segment Adjusted EBITDA as the segment'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.
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' capital to redemption amount, (iii)(iv) excluding the effect of non-recurring and non-cash items, (iv)(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 effective income tax rate. We define Adjusted Fully Distributed Earnings per Share as Adjusted Fully Distributed Net Income divided by diluted weighted average shares (see Note 12 - Earnings (Loss) Per Share).
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 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, acquisition and disposition related expenses, remeasurement of TRA liabilities, enterprise resource planning ("ERP") implementation expenses, acquisition related adjustment - revenue, remeasurement gain attributable to acquisition of Innovatix, LLC, loss on disposal of long-lived assets, loss (gain) on FFF put and call rights, impairment on investmentsincome and expense that has been classified as discontinued operations and other expense. More information about certain of the more significant items follows below.
In addition to non-cash employee stock-based compensation expense, this item includes non-cash stock purchase plan expense of $0.1 million for both of the three months ended March 31, 20192020 and 20182019 and $0.3 million for both of the nine months ended March 31, 20192020 and 20182019 (see Note 13 - Stock-Based Compensation)Compensation to the accompanying condensed consolidated financial statements).
Acquisition related expenses include legal, accounting and other expenses related to acquisition activities and gains and losses on the change in fair value of earn-out liabilities. Disposition related expenses include severance and retention benefits and financial advisor fees and legal fees related to disposition activities.