Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________________________
FORM 10-Q
__________________________________________________________________________________________
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2018
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-36092
__________________________________________________________________________________________
Premier, Inc.
(Exact name of registrant as specified in its charter)
___________________________________________________________________________________________
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Delaware | | 35-2477140 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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13034 Ballantyne Corporate Place Charlotte, North Carolina | | 28277 |
(Address of principal executive offices) | | (Zip Code) |
(704) 357-0022
(Registrant's telephone number, including area code)
__________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | x | | Accelerated filer | o | | Non-accelerated filer | o |
Smaller reporting company | o | | Emerging growth company | o | | (Do not check if a smaller reporting company) |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 4, 2018, there were 52,587,645 shares of the registrant's Class A common stock, par value $0.01 per share, and 80,335,701 shares of the registrant's Class B common stock, par value $0.000001 per share, outstanding.
TABLE OF CONTENTS
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Item 1. | | |
| Condensed Consolidated Balance Sheets as of March 31, 2018 and June 30, 2017 (Unaudited) | |
| Condensed Consolidated Statements of Income for the three and nine months ended March 31, 2018 and 2017 (Unaudited) | |
| Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended March 31, 2018 and 2017 (Unaudited) | |
| Condensed Consolidated Statement of Stockholders' Deficit for the nine months ended March 31, 2018 and 2017 (Unaudited) | |
| Condensed Consolidated Statements of Cash Flow for the nine months ended March 31, 2018 and 2017 (Unaudited) | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 5. | Other Information | |
Item 6. | | |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this Quarterly Report that are not statements of historical or current facts, such as those under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from historical results or from any future results or projections expressed or implied by such forward-looking statements. In addition to statements that explicitly describe such risks and uncertainties, readers are urged to consider statements in conditional or future tenses or that include terms such as "believes," "belief," "expects," "estimates," "intends," "anticipates" or "plans" to be uncertain and forward-looking. Forward-looking statements may include comments as to our beliefs and expectations regarding future events and trends affecting our business and are necessarily subject to uncertainties, many of which are outside our control. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:
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• | competition which could limit our ability to maintain or expand market share within our industry; |
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• | consolidation in the healthcare industry; |
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• | potential delays recognizing or increasing revenue if the sales cycle or implementation period takes longer than expected; |
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• | the terminability of member participation in our group purchasing organization ("GPO") programs with limited or no notice, or the failure of a significant number of members to renew their GPO participation agreements; |
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• | the rate at which the markets for our non-GPO services and products develop; |
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• | the dependency of our members on payments from third-party payers; |
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• | our reliance on administrative fees that we receive from GPO suppliers; |
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• | our ability to maintain third-party provider and strategic alliances or enter into new alliances; |
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• | our ability to timely offer new and innovative products and services; |
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• | the portion of revenues we receive from our largest members; |
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• | risks and expenses related to future acquisition opportunities and integration of acquisitions; |
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• | financial and operational risks associated with investments in, or partnerships or joint ventures with, other businesses, particularly those that we do not control; |
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• | our reliance on Internet infrastructure, bandwidth providers, data center providers and other third parties and our own systems for providing services to our users; |
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• | data loss or corruption due to failures or errors in our systems and service disruptions at our data centers, or breaches or failures of our security measures; |
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• | the financial, operational and reputational consequences of cyber-attacks or other data security breaches that disrupt our operations or result in the dissemination of proprietary or confidential information about us or our members or other third parties; |
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• | our ability to use, disclose, de-identify or license data and to integrate third-party technologies; |
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• | our use of "open source" software; |
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• | changes in industry pricing benchmarks; |
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• | our inability to grow our integrated pharmacy business or maintain current patients due to increases in the safety risk profiles of prescription drugs or the withdrawal of prescription drugs from the market, or our inability to maintain and expand our existing base of drugs in our integrated pharmacies; |
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• | our dependency on contract manufacturing facilities located in various parts of the world; |
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• | our ability to attract, hire, integrate and retain key personnel; |
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• | adequate protection of our intellectual property and potential claims against our use of the intellectual property of third parties; |
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• | potential sales and use tax liability in certain jurisdictions; |
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• | changes in tax laws that materially impact our tax rate, income tax expense, cash flows or tax receivable agreement ("TRA") liabilities; |
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• | our indebtedness and our ability to obtain additional financing on favorable terms; |
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• | fluctuation of our quarterly cash flows, revenues and results of operations; |
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• | changes and uncertainty in the political, economic or regulatory environment affecting healthcare organizations, including with respect to the status of the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act of 2010, collectively referred to as the "ACA"; |
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• | our compliance with complex federal and state laws governing financial relationships among healthcare providers and the submission of false or fraudulent healthcare claims; |
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• | interpretation and enforcement of current or future antitrust laws and regulations; |
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• | compliance with complex federal and state privacy, security and breach notification laws; |
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• | compliance with current or future laws, rules or regulations adopted by the Food & Drug Administration ("FDA") applicable to our software applications that may be considered medical devices; |
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• | compliance with, and potential changes to, extensive federal, state and local laws, regulations and procedures governing our integrated pharmacy operations; |
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• | risks inherent in the filling, packaging and distribution of pharmaceuticals, including the counseling required to be provided by our pharmacists for dispensing of products; |
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• | our holding company structure and dependence on distributions from Premier Healthcare Alliance, L.P. ("Premier LP"); |
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• | different interests among our member owners or between us and our member owners; |
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• | the ability of our member owners to exercise significant control over us, including through the election of all of our directors; |
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• | exemption from certain corporate governance requirements due to our status as a "controlled company" within the meaning of the NASDAQ rules; |
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• | the terms of agreements between us and our member owners; |
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• | payments made under the TRAs to Premier LP's limited partners and our ability to realize the expected tax benefits related to the acquisition of Class B common units from Premier LP's limited partners; |
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• | changes to Premier LP's allocation methods or examinations or changes in interpretation of applicable tax laws and regulations by various taxing authorities that may increase a tax-exempt limited partner's risk that some allocated income is unrelated business taxable income; |
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• | provisions in our certificate of incorporation and bylaws and the Amended and Restated Limited Partnership Agreement of Premier LP (as amended, the "LP Agreement") and provisions of Delaware law that discourage or prevent strategic transactions, including a takeover of us; |
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• | failure to maintain an effective system of internal controls; |
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• | the number of shares of Class A common stock that will be eligible for sale or exchange in the near future and the dilutive effect of such issuances; |
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• | our intention not to pay cash dividends on our Class A common stock; |
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• | when or whether we implement our recently announced Class A common stock repurchase program and the number of shares of Class A common stock, if any, purchased under the program; |
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• | possible future issuances of common stock, preferred stock, limited partnership units or debt securities and the dilutive effect of such issuances; and |
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• | the risk factors discussed under the heading "Risk Factors" in Item 1A of Part II herein and under Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2017 (the "2017 Annual Report"), filed with the Securities and Exchange Commission ("SEC"). |
More information on potential factors that could affect our financial results is included from time to time in the "Cautionary Note Regarding Forward-Looking Statements," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" or similarly captioned sections of this Quarterly Report and our other periodic and current filings made from time to time with the SEC, which are available on our website at http://investors.premierinc.com. You should not place undue reliance on any of our forward-looking statements which speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Furthermore, we cannot guarantee future results, events, levels of activity, performance or achievements.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PREMIER, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
|
| | | | | | |
| March 31, 2018 | June 30, 2017 |
Assets | | |
Cash and cash equivalents | $ | 149,410 |
| $ | 156,735 |
|
Accounts receivable (net of $2,149 and $1,812 allowance for doubtful accounts, respectively) | 174,092 |
| 159,745 |
|
Inventory | 57,230 |
| 50,426 |
|
Prepaid expenses and other current assets | 24,374 |
| 35,164 |
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Due from related parties | 491 |
| 6,742 |
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Total current assets | 405,597 |
| 408,812 |
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Property and equipment (net of $282,678 and $236,460 accumulated depreciation, respectively) | 198,853 |
| 187,365 |
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Intangible assets (net of $139,802 and $99,198 accumulated amortization, respectively) | 335,948 |
| 377,962 |
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Goodwill | 906,545 |
| 906,545 |
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Deferred income tax assets | 306,738 |
| 482,484 |
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Deferred compensation plan assets | 43,267 |
| 41,518 |
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Investments in unconsolidated affiliates | 93,448 |
| 92,879 |
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Other assets | 4,241 |
| 10,271 |
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Total assets | $ | 2,294,637 |
| $ | 2,507,836 |
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| | |
Liabilities, redeemable limited partners' capital and stockholders' deficit | | |
Accounts payable | $ | 43,708 |
| $ | 42,815 |
|
Accrued expenses | 69,094 |
| 55,857 |
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Revenue share obligations | 75,341 |
| 72,078 |
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Limited partners' distribution payable | 13,157 |
| 24,951 |
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Accrued compensation and benefits | 52,857 |
| 53,506 |
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Deferred revenue | 44,534 |
| 44,443 |
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Current portion of tax receivable agreements | 17,925 |
| 17,925 |
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Current portion of long-term debt | 200,255 |
| 227,993 |
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Other liabilities | 7,044 |
| 32,019 |
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Total current liabilities | 523,915 |
| 571,587 |
|
Long-term debt, less current portion | 6,962 |
| 6,279 |
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Tax receivable agreements, less current portion | 232,783 |
| 321,796 |
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Deferred compensation plan obligations | 43,267 |
| 41,518 |
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Deferred tax liabilities | 33,787 |
| 48,227 |
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Other liabilities | 56,456 |
| 42,099 |
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Total liabilities | 897,170 |
| 1,031,506 |
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| March 31, 2018 | June 30, 2017 |
|
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|
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Redeemable limited partners' capital | 2,532,731 |
| 3,138,583 |
|
Stockholders' deficit: | | |
Class A common stock, $0.01 par value, 500,000,000 shares authorized; 57,352,698 shares issued and 51,940,576 shares outstanding at March 31, 2018 and 51,943,281 shares issued and outstanding at June 30, 2017 | 574 |
| 519 |
|
Class B common stock, $0.000001 par value, 600,000,000 shares authorized; 80,978,267 and 87,298,888 shares issued and outstanding at March 31, 2018 and June 30, 2017, respectively | — |
| — |
|
Treasury stock, at cost; 5,412,122 shares | (170,274 | ) | — |
|
Additional paid-in-capital | — |
| — |
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Accumulated deficit | (965,564 | ) | (1,662,772 | ) |
Accumulated other comprehensive income (loss) | — |
| — |
|
Total stockholders' deficit | (1,135,264 | ) | (1,662,253 | ) |
Total liabilities, redeemable limited partners' capital and stockholders' deficit | $ | 2,294,637 |
| $ | 2,507,836 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
|
| | | | | | | | | | | | |
| Three Months Ended March 31, | Nine Months Ended March 31, |
| 2018 | 2017 | 2018 | 2017 |
Net revenue: | | | | |
Net administrative fees | $ | 161,612 |
| $ | 143,915 |
| $ | 471,946 |
| $ | 398,962 |
|
Other services and support | 97,492 |
| 97,756 |
| 274,357 |
| 265,974 |
|
Services | 259,104 |
| 241,671 |
| 746,303 |
| 664,936 |
|
Products | 166,234 |
| 138,132 |
| 480,997 |
| 386,639 |
|
Net revenue | 425,338 |
| 379,803 |
| 1,227,300 |
| 1,051,575 |
|
Cost of revenue: | | | | |
Services | 47,037 |
| 47,319 |
| 141,228 |
| 134,865 |
|
Products | 156,511 |
| 129,929 |
| 454,222 |
| 356,900 |
|
Cost of revenue | 203,548 |
| 177,248 |
| 595,450 |
| 491,765 |
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Gross profit | 221,790 |
| 202,555 |
| 631,850 |
| 559,810 |
|
Other operating income: | | | | |
Remeasurement of tax receivable agreement liabilities | — |
| — |
| 177,174 |
| 5,722 |
|
Other operating income | — |
| — |
| 177,174 |
| 5,722 |
|
Operating expenses: | | | | |
Selling, general and administrative | 109,007 |
| 108,668 |
| 331,948 |
| 302,555 |
|
Research and development | 292 |
| 755 |
| 1,105 |
| 2,328 |
|
Amortization of purchased intangible assets | 13,881 |
| 14,080 |
| 41,597 |
| 34,440 |
|
Operating expenses | 123,180 |
| 123,503 |
| 374,650 |
| 339,323 |
|
Operating income | 98,610 |
| 79,052 |
| 434,374 |
| 226,209 |
|
Remeasurement gain attributable to acquisition of Innovatix, LLC | — |
| — |
| — |
| 204,833 |
|
Equity in net income (loss) of unconsolidated affiliates | (4,939 | ) | 83 |
| 570 |
| 14,789 |
|
Interest and investment loss, net | (1,236 | ) | (2,017 | ) | (4,239 | ) | (3,026 | ) |
Loss on disposal of long-lived assets | (5 | ) | (725 | ) | (1,725 | ) | (2,243 | ) |
Other income (expense) | (2,593 | ) | 2,260 |
| (14,486 | ) | 3,135 |
|
Other income (expense), net | (8,773 | ) | (399 | ) | (19,880 | ) | 217,488 |
|
Income before income taxes | 89,837 |
| 78,653 |
| 414,494 |
| 443,697 |
|
Income tax expense | 13,288 |
| 7,315 |
| 257,560 |
| 68,080 |
|
Net income | 76,549 |
| 71,338 |
| 156,934 |
| 375,617 |
|
Net income attributable to non-controlling interest in Premier LP | (53,047 | ) | (51,433 | ) | (154,142 | ) | (282,207 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | (127,039 | ) | (100,506 | ) | 511,301 |
| 296,566 |
|
Net income (loss) attributable to stockholders | $ | (103,537 | ) | $ | (80,601 | ) | $ | 514,093 |
| $ | 389,976 |
|
| | | | |
Weighted average shares outstanding: | | | | |
Basic | 53,529 |
| 50,525 |
| 53,885 |
| 49,051 |
|
Diluted | 53,529 |
| 50,525 |
| 138,254 |
| 141,372 |
|
| | | | |
Earnings (loss) per share attributable to stockholders: | | | | |
Basic | $ | (1.93 | ) | $ | (1.60 | ) | $ | 9.54 |
| $ | 7.95 |
|
Diluted | $ | (1.93 | ) | $ | (1.60 | ) | $ | (0.84 | ) | $ | 2.22 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
|
| | | | | | | | | | | | |
| Three Months Ended March 31, | Nine Months Ended March 31, |
| 2018 | 2017 | 2018 | 2017 |
Net income | $ | 76,549 |
| $ | 71,338 |
| $ | 156,934 |
| $ | 375,617 |
|
Net unrealized gain on marketable securities | — |
| — |
| — |
| 128 |
|
Total comprehensive income | 76,549 |
| 71,338 |
| 156,934 |
| 375,745 |
|
Less: comprehensive income attributable to non-controlling interest | (53,047 | ) | (51,433 | ) | (154,142 | ) | (282,292 | ) |
Comprehensive income attributable to stockholders | $ | 23,502 |
| $ | 19,905 |
| $ | 2,792 |
| $ | 93,453 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
Condensed Consolidated Statement of Stockholders' Deficit
Nine Months Ended March 31, 2018
(Unaudited)
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | Class B Common Stock | Treasury Stock | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders' Deficit |
| Shares | Amount | Shares | Amount | Shares | Amount |
Balance at June 30, 2017 | 51,943 |
| $ | 519 |
| 87,299 |
| $ | — |
| — |
| $ | — |
| $ | — |
| $ | (1,662,772 | ) | $ | (1,662,253 | ) |
Exchange of Class B units for Class A common stock by member owners | 5,889 |
| 50 |
| (5,889 | ) | — |
| (1,006 | ) | 29,855 |
| 165,019 |
| — |
| 194,924 |
|
Redemption of limited partners | — |
| — |
| (432 | ) | — |
| — |
| — |
| — |
| — |
| — |
|
Decrease in additional paid-in capital related to quarterly exchange by member owners, including associated TRA revaluation | — |
| — |
| — |
| — |
| — |
| — |
| (5,916 | ) | — |
| (5,916 | ) |
Issuance of Class A common stock under equity incentive plan | 479 |
| 5 |
| — |
| — |
| — |
| — |
| 3,610 |
| — |
| 3,615 |
|
Issuance of Class A common stock under employee stock purchase plan | 48 |
| — |
| — |
| — |
| — |
| — |
| 1,388 |
| — |
| 1,388 |
|
Treasury stock | (6,418 | ) | — |
| — |
| — |
| 6,418 |
| (200,129 | ) | — |
| — |
| (200,129 | ) |
Stock-based compensation expense | — |
| — |
| — |
| — |
| — |
| — |
| 24,930 |
| — |
| 24,930 |
|
Repurchase of vested restricted units for employee tax-withholding | — |
| — |
| — |
| — |
| — |
| — |
| (5,916 | ) | — |
| (5,916 | ) |
Net income | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 156,934 |
| 156,934 |
|
Net income attributable to non-controlling interest in Premier LP | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (154,142 | ) | (154,142 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| — |
| — |
| — |
| — |
| — |
| (183,115 | ) | 694,416 |
| 511,301 |
|
Balance at March 31, 2018 | 51,941 |
| $ | 574 |
| 80,978 |
| $ | — |
| 5,412 |
| $ | (170,274 | ) | $ | — |
| $ | (965,564 | ) | $ | (1,135,264 | ) |
See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
Condensed Consolidated Statement of Stockholders' Deficit
Nine Months Ended March 31, 2017
(Unaudited)
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Deficit |
| Shares | Amount | Shares | Amount |
Balance at June 30, 2016 | 45,996 |
| $ | 460 |
| 96,133 |
| $ | — |
| $ | — |
| $ | (1,951,878 | ) | $ | (43 | ) | $ | (1,951,461 | ) |
Exchange of Class B units for Class A common stock by member owners | 3,858 |
| 38 |
| (3,858 | ) | — |
| 123,743 |
| — |
| — |
| 123,781 |
|
Exchange of Class B units for cash by member owners | — |
| — |
| (3,810 | ) | — |
| — |
| — |
| — |
| — |
|
Redemption of limited partners | — |
| — |
| (58 | ) | — |
| — |
| — |
| — |
| — |
|
Increase in additional paid-in capital related to quarterly exchange by member owners, including associated TRA revaluation | — |
| — |
| — |
| — |
| 23,886 |
| — |
| — |
| 23,886 |
|
Issuance of Class A common stock under equity incentive plan | 812 |
| 8 |
| — |
| — |
| 3,314 |
| — |
| — |
| 3,322 |
|
Issuance of Class A common stock under employee stock purchase plan | 41 |
| 1 |
| — |
| — |
| 1,255 |
| — |
| — |
| 1,256 |
|
Stock-based compensation expense | — |
| — |
| — |
| — |
| 19,125 |
| — |
| — |
| 19,125 |
|
Repurchase of vested restricted units for employee tax-withholding | — |
| — |
| — |
| — |
| (17,678 | ) | — |
| — |
| (17,678 | ) |
Net income | — |
| — |
| — |
| — |
| — |
| 375,617 |
| — |
| 375,617 |
|
Net income attributable to non-controlling interest in Premier LP | — |
| — |
| — |
| — |
| — |
| (282,207 | ) | — |
| (282,207 | ) |
Net unrealized loss on marketable securities | — |
| — |
| — |
| — |
| — |
| — |
| 43 |
| 43 |
|
Adjustment of redeemable limited partners' capital to redemption amount | — |
| — |
| — |
| — |
| (153,645 | ) | 450,211 |
| — |
| 296,566 |
|
Balance at March 31, 2017 | 50,707 |
| $ | 507 |
| 88,407 |
| $ | — |
| $ | — |
| $ | (1,408,257 | ) | $ | — |
| $ | (1,407,750 | ) |
See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) |
| | | | | | |
| Nine Months Ended March 31, |
| 2018 | 2017 |
Operating activities | | |
Net income | $ | 156,934 |
| $ | 375,617 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation and amortization | 93,998 |
| 77,758 |
|
Equity in net income of unconsolidated affiliates | (570 | ) | (14,789 | ) |
Deferred income taxes | 243,550 |
| 45,961 |
|
Stock-based compensation | 24,930 |
| 19,125 |
|
Remeasurement of tax receivable agreement liabilities | (177,174 | ) | (2,954 | ) |
Remeasurement gain attributable to acquisition of Innovatix, LLC | — |
| (204,833 | ) |
Loss on disposal of long-lived assets | 1,725 |
| 2,243 |
|
Changes in operating assets and liabilities: | | |
Accounts receivable, prepaid expenses and other current assets | (3,558 | ) | 7,037 |
|
Other assets | 378 |
| 405 |
|
Inventories | (6,804 | ) | (14,693 | ) |
Accounts payable, accrued expenses and other current liabilities | 9,690 |
| (11,082 | ) |
Long-term liabilities | 1,336 |
| (1,221 | ) |
Loss on FFF put and call rights | 18,674 |
| 86 |
|
Other operating activities | 6,625 |
| (4,449 | ) |
Net cash provided by operating activities | 369,734 |
| 274,211 |
|
Investing activities | | |
Purchases of property and equipment | (65,260 | ) | (51,892 | ) |
Proceeds from sale of marketable securities | — |
| 48,013 |
|
Acquisition of Innovatix, LLC and Essensa Ventures, LLC, net of cash acquired | — |
| (319,717 | ) |
Acquisition of Acro Pharmaceuticals, net of cash acquired | — |
| (64,500 | ) |
Investments in unconsolidated affiliates | — |
| (65,660 | ) |
Distributions received on equity investments in unconsolidated affiliates | — |
| 6,550 |
|
Other investing activities | — |
| 25 |
|
Net cash used in investing activities | (65,260 | ) | (447,181 | ) |
Financing activities | | |
Payments made on notes payable | (7,997 | ) | (3,336 | ) |
Proceeds from credit facility | 30,000 |
| 425,000 |
|
Payments on credit facility | (50,000 | ) | (57,500 | ) |
Proceeds from exercise of stock options under equity incentive plan | 3,615 |
| 3,322 |
|
Proceeds from issuance of Class A common stock under stock purchase plan | 1,388 |
| 1,256 |
|
Repurchase of vested restricted units for employee tax-withholding | (5,916 | ) | (17,678 | ) |
Settlement of exchange of Class B units by member owners | — |
| (123,330 | ) |
Distributions to limited partners of Premier LP | (66,098 | ) | (67,363 | ) |
Repurchase of Class A common stock (held as treasury stock) | (200,129 | ) | — |
|
Earn-out liability payment to GNYHA Holdings | (16,662 | ) | — |
|
Net cash provided by (used in) financing activities | (311,799 | ) | 160,371 |
|
Net decrease in cash and cash equivalents | (7,325 | ) | (12,599 | ) |
Cash and cash equivalents at beginning of year | 156,735 |
| 248,817 |
|
Cash and cash equivalents at end of period | $ | 149,410 |
| $ | 236,218 |
|
|
| | | | | | |
| Nine Months Ended March 31, |
| 2018 | 2017 |
| | |
Supplemental schedule of non-cash investing and financing activities: | | |
Decrease in redeemable limited partners' capital for adjustment to fair value, with offsetting increases in additional paid-in-capital and accumulated deficit | $ | 511,301 |
| $ | 296,566 |
|
Reduction in redeemable limited partners' capital, with offsetting increases in common stock and additional paid-in capital related to quarterly exchanges by member owners | $ | 194,924 |
| $ | 123,781 |
|
Reduction in redeemable limited partners' capital for limited partners' distribution payable | $ | 54,305 |
| $ | 67,941 |
|
Distributions utilized to reduce subscriptions, notes, interest and accounts receivable from member owners | $ | 1,478 |
| $ | 1,561 |
|
Net increase in deferred tax assets related to quarterly exchanges by member owners and other adjustments | $ | 82,244 |
| $ | 94,594 |
|
Net increase in tax receivable agreement liabilities related to quarterly exchanges by member owners and other adjustments | $ | 88,160 |
| $ | 70,708 |
|
Net increase (decrease) in additional paid-in capital related to quarterly exchanges by member owners and other adjustments | $ | (5,916 | ) | $ | 23,886 |
|
Net increase in investments in unconsolidated affiliates related to FFF Enterprises, Inc. put and call rights, with offsetting increases in other assets and other liabilities | $ | — |
| $ | 15,460 |
|
Net increase in investments in unconsolidated affiliates related to deferred taxes attributed to the net fair value of FFF Enterprises, Inc. put and call rights, with offsetting increases in deferred tax assets and deferred tax liabilities | $ | — |
| $ | 5,955 |
|
Payable to member owners incurred upon repurchase of ownership interest | $ | 942 |
| $ | 132 |
|
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 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. 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 two business segments: Supply Chain Services and Performance Services. See Note 16 - 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 includes one of the largest informatics and consulting services businesses in the United States focused on healthcare providers. The 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 three main categories of cost management, quality and safety, and population health management. The Performance Services segment also includes the Company's technology-enabled performance improvement collaboratives, consulting services, government services and insurance management services.
The Company, through its wholly-owned subsidiary, Premier Services, LLC ("Premier GP"), held an approximate 39% and 37% sole general partner interest in our main operating company, Premier Healthcare Alliance, L.P. ("Premier LP"), at March 31, 2018 and June 30, 2017, respectively. In addition to their ownership interest in Premier, our member owners held an approximate 61% and 63% limited partner interest in Premier LP at March 31, 2018 and June 30, 2017, respectively.
Basis of Presentation and Consolidation
Basis of Presentation
The member owners' interest in Premier LP is reflected as redeemable limited partners' capital in the Company's accompanying Condensed Consolidated Balance Sheets, and the limited partners' proportionate share of income in Premier LP is reflected within net income attributable to non-controlling interest in Premier LP in the Company's accompanying Condensed Consolidated Statements of Income and within comprehensive income attributable to non-controlling interest in Premier LP in the Company's accompanying Condensed Consolidated Statements of Comprehensive Income.
At March 31, 2018 and June 30, 2017, the member owners owned approximately 61% and 63%, 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, 2018, the member owners exchanged 5.9 million Class B common units and associated Class B common shares for an equal number of Class A common shares pursuant to an exchange agreement (the "Exchange Agreement") entered into by the member owners in connection with the completion of our initial public offering on October 1, 2013. The Exchange Agreement provides each member owner the cumulative right to exchange up to one-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 during the nine months ended March 31, 2018, approximately 5.9 million Class B common units were contributed to Premier LP and converted to Class A common units, which remain outstanding.
Refer to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2017 (the "2017 Annual Report") filed with the Securities and Exchange Commission ("SEC") on August 23, 2017 for further discussion of the Exchange Agreement. At March 31, 2018 and June 30, 2017, the public investors, which may include member owners that have received shares of Class
A common stock in connection with previous exchanges of their Class B common units and associated Class B common shares for an equal number of Class A common shares, owned approximately 39% and 37%, respectively, of the Company's outstanding common stock through their ownership of Class A common stock.
Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and pursuant to the rules and regulations of the SEC. 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 2017 Annual Report.
We have reclassified $5.7 million from selling, general and administrative expenses to the remeasurement of tax receivable agreement liabilities for the nine months ended March 31, 2017 within the Condensed Consolidated Statements of Income in order to conform with the current period presentation.
Variable Interest Entities
Premier LP is a variable interest entity ("VIE") as the limited partners do not have the ability to exercise a substantive removal right with respect to the general partner. The Company does not hold a majority interest but, through Premier GP, has the exclusive 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, 2018 and June 30, 2017 consisted of the following (in thousands):
|
| | | | | | |
| March 31, 2018 | June 30, 2017 |
Assets | | |
Current | $ | 367,537 |
| $ | 385,477 |
|
Noncurrent | 1,582,302 |
| 1,616,539 |
|
Total assets of Premier LP | $ | 1,949,839 |
| $ | 2,002,016 |
|
| | |
Liabilities | | |
Current | $ | 521,353 |
| $ | 560,582 |
|
Noncurrent | 136,235 |
| 134,635 |
|
Total liabilities of Premier LP | $ | 657,588 |
| $ | 695,217 |
|
Net income attributable to Premier LP during the three and nine months ended March 31, 2018 and 2017 was as follows (in thousands):
|
| | | | | | | | | | | | |
| Three Months Ended March 31, | Nine Months Ended March 31, |
| 2018 | 2017 | 2018 | 2017 |
Premier LP net income | $ | 87,920 |
| $ | 80,837 |
| $ | 255,050 |
| $ | 436,811 |
|
Premier LP's cash flows for the nine months ended March 31, 2018 and 2017 consisted of the following (in thousands):
|
| | | | | | |
| Nine Months Ended March 31, |
| 2018 | 2017 |
Net cash provided by (used in): | | |
Operating activities | $ | 388,340 |
| $ | 320,185 |
|
Investing activities | (65,260 | ) | (447,181 | ) |
Financing activities | (344,463 | ) | 121,090 |
|
Net decrease in cash and cash equivalents | (21,383 | ) | (5,906 | ) |
Cash and cash equivalents at beginning of year | 133,450 |
| 210,048 |
|
Cash and cash equivalents at end of period | $ | 112,067 |
| $ | 204,142 |
|
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 allowances for doubtful accounts, useful lives of property and equipment, stock-based compensation, payables under tax receivable agreements ("TRAs"), deferred tax balances including valuation allowances on deferred tax assets, uncertain tax positions, values of investments not publicly traded, deferred revenue, future cash flows associated with asset impairments, values of put and call rights, values of earn-out liabilities and the allocation of purchase prices. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Given the Company's use of estimates referenced above, it is important to highlight that on December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("TCJA"). The TCJA includes significant changes to the U.S. corporate income tax system, specifically reducing the U.S. federal corporate income tax rate from 35% to 21%. As changes under the TCJA are broad and complex, the Company continues to interpret the breadth of its immediate and long-term impacts. The Company notes that concurrent with the enactment of the TCJA, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the TCJA.
SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting required under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional amount on its financial statements. If a company cannot determine a provisional estimate to be included on its financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately prior to the enactment of the TCJA. With this in mind, the Company has prescribed such provisional relief via SAB 118 by incorporating various estimates regarding timing and determination of temporary difference recognition when calculating components of its deferred tax balances. While the Company is able to provide reasonable estimates of the impacts related to the TCJA, the final impact may differ from these estimates, due to, among other things, changes in interpretations, assumptions, additional guidance that may be released by the I.R.S. and other actions that we may take that are yet to be determined.
(2) SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company's significant accounting policies as described in the 2017 Annual Report.
Recently Adopted Accounting Standards
In July 2015, the FASB issued Accounting Standards Update ("ASU") 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires entities to measure most inventory "at the lower of cost and net realizable value," thereby simplifying the guidance under which an entity must measure inventory at the lower of cost or market. This guidance does not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. The Company adopted
this standard effective July 1, 2017 using the prospective approach. The implementation of this ASU did not have a material effect on the Company's condensed consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. The Company adopted this standard effective October 1, 2017 using the prospective approach. The implementation of this ASU did not have a material effect on the Company's condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The ASU amendments add or clarify guidance on eight cash flow issues. The Company adopted this standard effective January 1, 2018 using the retrospective approach. The implementation of this ASU did not impact the classification or presentation of cash flows within the Company's condensed consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. The guidance requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting 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 standard 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 evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which removes the prohibition in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The guidance is intended to reduce the complexity of GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations of accounting for leasing arrangements. This guidance establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Entities will be required to recognize and measure leases as of the earliest period presented using a modified retrospective approach. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which is intended to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted for certain amendments. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance. The new standard requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new standard allows for either full retrospective or modified retrospective adoption.
In August 2015, the FASB issued an amendment in ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of the new standard for all entities by one year. The new standard, as amended, will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption as of the original effective date for public entities will be permitted.
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 principal to recognize revenue for the gross amount and the agent to recognize revenue for the amount of any fee or commission for which it expects to be entitled in exchange for arranging for the specified good or service to be provided. The new standard will be effective with ASU 2014-09.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which amends specific aspects of ASU 2014-09, including how to identify performance obligations and guidance related to licensing implementation. This amendment provides guidance on determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property or a right to access the entity's intellectual property. The amendment will be effective with ASU 2014-09.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies specific aspects of ASU 2014-09, clarifying how to identify performance obligations and guidance related to its promise in granting a license of intellectual property. This new standard provides guidance to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised good or service is separately identifiable and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost. The new standard also clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property to help determine whether it recognizes revenue over time or at a point in time and addresses how entities should consider license renewals and restrictions. The new standard will be effective with ASU 2014-09.
In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606: Revenue from Contracts with Customers, which clarifies specific aspects of ASU 2014-09, including allowing entities not to make quantitative disclosures about remaining performance obligations in certain cases and requiring entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. The new standard also makes twelve other technical corrections and modifications to ASU 2014-09. The new standard will be effective with ASU 2014-09.
The new revenue recognition standard related to Topic 606 discussed above, as amended, will be effective for the Company for the fiscal year beginning July 1, 2018, at which time we plan to adopt the standard using the modified retrospective approach. To-date, the Company has identified the following preliminary impacts of adopting the new standard on various revenue streams across its operating segments.
Within the Supply Chain Services segment, the Company is continuing to assess the impact of adopting the new standard on its various revenue streams. Under the new standard, the Company expects to recognize administrative fee revenue upon the occurrence of a sale by suppliers to the Company’s members. This differs from the current treatment in which the Company recognizes revenue in the period that the respective supplier reports member purchasing data, which is usually a month or a quarter in arrears of the actual member purchase activity. This change is expected to result in the Company recognizing revenue sooner in the revenue cycle than under the Company's current revenue recognition policy and the creation of a contract asset associated with this shift in revenue recognition timing. With regards to product revenue, the Company does not expect a significant impact on the timing of revenue recognition. The Company is continuing to assess the impact of the new standard on the financial statements and disclosures.
Within the Performance Services segment, the Company is continuing to assess the impact of adopting the new standard on its various revenue streams. Under the new standard, the Company expects to recognize revenue associated with its perpetual and term licenses upon delivery to the customer (point in time) and the associated mandatory post-contract customer support ratably over the period during which the support is provided (over time). The Company expects that this change will result in a shift and acceleration in timing of revenue recognition relative to the existing guidance. Also under the new standard, the Company will be required to capitalize the incremental costs of obtaining a contract, which the Company has preliminarily identified as sales commissions and costs associated with implementing our SaaS informatics tools, and to amortize these costs in a manner that reflects the transfer of services to the customer. These costs are expensed as incurred under the Company's current policy. The Company is continuing to assess the impact of the new standard on the financial statements and disclosures.
Additionally, the Company is evaluating the potential impact of adopting the new standard on its business processes, systems and controls necessary to support revenue recognition and disclosure requirements under the new standard.
(3) BUSINESS ACQUISITIONS
Acquisition of Innovatix and Essensa
Innovatix, LLC ("Innovatix") and Essensa Ventures, LLC ("Essensa") are GPOs focused on serving alternate site healthcare providers and other organizations throughout the United States. Prior to December 2, 2016, the Company, through its consolidated subsidiary, Premier Supply Chain Improvement ("PSCI"), held 50% of the membership interests in Innovatix (see Note 4 - Investments). On December 2, 2016, the Company, through PSCI, acquired from GNYHA Holdings, LLC ("GNYHA Holdings") (see Note 14 - Related Party Transactions) the remaining 50% ownership interest of Innovatix and 100% of the ownership interest in Essensa for $325.0 million, of which $227.5 million in cash was paid at closing and $97.5 million in cash was paid on January 10, 2017. As a result of certain purchase price adjustments provided for in the purchase agreement, the adjusted purchase price was $336.0 million.
In connection with the acquisition, the Company utilized its credit facility dated June 24, 2014, as amended on June 4, 2015 (the "Credit Facility") to fund the $325.0 million purchase price (see Note 8 - Debt). The Company also incurred transaction costs related to this acquisition of $0.9 million and $0.4 million during the three months ended March 31, 2018 and 2017, respectively, and $4.2 million and $5.1 million during the nine months ended March 31, 2018 and 2017, respectively. These transaction costs were included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.
The Company has accounted for the Innovatix and Essensa acquisition as a business combination whereby the purchase price was allocated to tangible and intangible assets acquired (see Note 6 - Intangible Assets, Net) and liabilities assumed based on their fair values. The acquisition resulted in the recognition of approximately $334.7 million of goodwill (see Note 7 - Goodwill) attributable to the anticipated profitability of Innovatix and Essensa. The acquisition was considered an asset acquisition for tax purposes, and accordingly, the Company expects the goodwill to be deductible for tax purposes.
The fair values assigned to the net assets acquired and the liabilities assumed as of the acquisition date were as follows (in thousands):
|
| | | |
| Acquisition Date Fair Value |
Cash paid at closing | $ | 227,500 |
|
Cash paid on January 10, 2017 | 97,500 |
|
Purchase price | 325,000 |
|
Additional cash paid at closing | 10,984 |
|
Adjusted purchase price | 335,984 |
|
Earn-out liability | 16,662 |
|
Receivable from GNYHA Holdings, LLC | (3,000 | ) |
Total consideration paid | 349,646 |
|
Cash acquired | (16,267 | ) |
Net consideration | 333,379 |
|
50% ownership interest in Innovatix | 218,356 |
|
Payable to Innovatix and Essensa | (5,765 | ) |
Enterprise value | 545,970 |
|
| |
Accounts receivable | 21,242 |
|
Prepaid expenses and other current assets | 686 |
|
Fixed assets, net | 3,476 |
|
Intangible assets | 241,494 |
|
Total assets acquired | 266,898 |
|
Accrued expenses | 5,264 |
|
Revenue share obligations | 7,011 |
|
Other current liabilities | 694 |
|
Total liabilities assumed | 12,969 |
|
Deferred tax liability | 42,636 |
|
Goodwill | $ | 334,677 |
|
The acquisition provided the seller an earn-out opportunity of up to $43.0 million based on Innovatix's and Essensa's Adjusted EBITDA (as defined in the purchase agreement) for the fiscal year ending June 30, 2017. The Company and the seller finalized the amount payable pursuant to the earn-out opportunity and the Company paid the seller $21.1 million during the nine months ended March 31, 2018 (see Note 5 - Fair Value Measurements).
Certain executive officers of Innovatix and Essensa executed employment agreements that became effective upon the closing of the acquisition. The purchase agreement provides that in the event that Innovatix's and Essensa's Adjusted EBITDA exceeds agreed upon amounts, certain of those executive officers are entitled to receive a retention bonus payment of up to $3.0 million in the aggregate, for which the Company will be reimbursed by GNYHA Holdings of which $1.5 million was paid and reimbursed during the nine months ended March 31, 2018.
The Company's 50% ownership interest in Innovatix prior to the acquisition was accounted for under the equity method and had a carrying value of $13.3 million (see Note 4 - Investments). In connection with the acquisition, the Company's investment was remeasured under business combination accounting rules to a fair value of $218.4 million, resulting in a one-time gain of $205.1 million which was recorded as other income.
Pro forma results of operations for the acquisition have not been presented because the effects on revenue and net income were not material to our historic consolidated financial statements. The Company reports Innovatix and Essensa as part of its Supply Chain Services segment.
Acquisition of Acro Pharmaceuticals
Acro Pharmaceutical Services LLC ("Acro") and Community Pharmacy Services, LLC (collectively with Acro, "Acro Pharmaceuticals") are specialty pharmacy businesses that provide customized healthcare management solutions to members. On August 23, 2016, the Company, through its consolidated subsidiary, NS3 Health, LLC, acquired 100% of the membership interests of Acro Pharmaceuticals for $75.0 million in cash. As a result of certain purchase price adjustments provided for in the purchase agreement, the adjusted purchase price was $62.9 million. The acquisition was funded with available cash on hand.
The Company has accounted for the Acro Pharmaceuticals acquisition as a business combination whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their fair values. The Acro Pharmaceuticals acquisition resulted in the recognition of approximately $33.9 million of goodwill (see Note 7 - Goodwill) attributable to the anticipated profitability of Acro Pharmaceuticals. The Acro Pharmaceuticals acquisition was considered an asset acquisition for tax purposes and accordingly, the Company expects the goodwill to 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 our historic consolidated financial statements. The Company reports Acro Pharmaceuticals as part of its Supply Chain Services segment.
(4) INVESTMENTS
Investments in Unconsolidated Affiliates
The Company's investments in unconsolidated affiliates consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Carrying Value | | Equity in Net Income (Loss) |
| | | | Three Months Ended March 31, | Nine Months Ended March 31, |
| March 31, 2018 | June 30, 2017 | | 2018 | 2017 | 2018 | 2017 |
FFF | $ | 91,189 |
| $ | 85,520 |
| | $ | 64 |
| $ | 217 |
| $ | 5,668 |
| $ | 4,394 |
|
Bloodbuy | 1,963 |
| 2,066 |
| | (37 | ) | (42 | ) | (102 | ) | (94 | ) |
PharmaPoint | — |
| 4,232 |
| | (4,073 | ) | (92 | ) | (4,232 | ) | (254 | ) |
Innovatix | — |
| — |
| | — |
| — |
| — |
| 10,743 |
|
Other investments | 296 |
| 1,061 |
| | (893 | ) | — |
| (764 | ) | — |
|
Total investments | $ | 93,448 |
| $ | 92,879 |
| | $ | (4,939 | ) | $ | 83 |
| $ | 570 |
| $ | 14,789 |
|
On July 26, 2016, the Company, through its consolidated subsidiary, PSCI, acquired 49% of the issued and outstanding stock of FFF Enterprises, Inc. ("FFF") for $65.7 million in cash plus consideration in the form of the FFF put and call rights. The Company recorded the initial investment in FFF in the accompanying Condensed Consolidated Balance Sheets at $81.1 million, of which $65.7 million was in cash and $15.4 million was consideration in the form of the initial net fair value of the FFF put and call rights (see Note 5 - Fair Value Measurements for additional information related to the fair values of the FFF put and call rights). 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 15% ownership interest in BloodSolutions, LLC ("Bloodbuy") through its ownership of 5.3 million units of Class B Membership Interests in Bloodbuy at March 31, 2018 and June 30, 2017. The Company accounts for its investment in Bloodbuy using the equity method of accounting as the Company has rights to appoint a Board member, and includes the investment as part of the Supply Chain Services segment.
The Company, through its consolidated subsidiary, PSCI, held a 28% ownership interest in PharmaPoint, LLC ("PharmaPoint") through its ownership of 5.0 million units of Class B Membership Interests in PharmaPoint at March 31, 2018 and June 30, 2017. 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.
The Company, through its consolidated subsidiary, PSCI, held 50% of the membership interests in Innovatix until December 2, 2016, at which time it acquired the remaining 50% membership interests (see Note 3 - Business Acquisitions and Note 14 - Related Party Transactions). Prior to the acquisition, the Company accounted for its investment in Innovatix using the equity method of accounting and included the investment as part of the Supply Chain Services segment.
Marketable Securities
The Company has historically invested its excess cash in commercial paper, U.S. government debt securities, corporate debt securities and other securities with maturities generally ranging from three months to five years from the date of purchase. The Company uses the specific-identification method to determine the cost of securities sold. At March 31, 2018 and June 30, 2017, the Company had no marketable securities other than those included in deferred compensation plan assets (see Note 5 - Fair Value Measurements).
(5) FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The following table provides a summary of the Company's financial assets and liabilities which are measured at fair value on a recurring basis (in thousands):
|
| | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
March 31, 2018 | | | | |
Cash equivalents | $ | 460 |
| $ | 460 |
| $ | — |
| $ | — |
|
FFF call right | 752 |
| — |
| — |
| 752 |
|
Deferred compensation plan assets | 46,773 |
| 46,773 |
| — |
| — |
|
Total assets | $ | 47,985 |
| $ | 47,233 |
| $ | — |
| $ | 752 |
|
Earn-out liabilities | $ | 61 |
| $ | — |
| $ | — |
| $ | 61 |
|
FFF put right | 38,821 |
| — |
| — |
| 38,821 |
|
Total liabilities | $ | 38,882 |
| $ | — |
| $ | — |
| $ | 38,882 |
|
| | | | |
June 30, 2017 | | | | |
Cash equivalents | $ | 22,218 |
| $ | 22,218 |
| $ | — |
| $ | — |
|
FFF call right | 4,655 |
| — |
| — |
| 4,655 |
|
Deferred compensation plan assets | 47,202 |
| 47,202 |
| — |
| — |
|
Total assets | $ | 74,075 |
| $ | 69,420 |
| $ | — |
| $ | 4,655 |
|
Earn-out liabilities | $ | 21,310 |
| $ | — |
| $ | — |
| $ | 21,310 |
|
FFF put right | 24,050 |
| — |
| — |
| 24,050 |
|
Total liabilities | $ | 45,360 |
| $ | — |
| $ | — |
| $ | 45,360 |
|
Cash equivalents were included in cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets (see Note 4 - Investments).
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 was included in prepaid expenses and other current assets ($3.5 million and $5.7 million at March 31, 2018 and June 30, 2017, respectively) in the accompanying Condensed Consolidated Balance Sheets.
Financial Instruments Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
Earn-out liabilities
Earn-out liabilities were established in connection with acquisitions of Healthcare Insights, LLC (acquired on July 31, 2015), Inflow Health, LLC (acquired on October 1, 2015) and Innovatix and Essensa (acquired on December 2, 2016) (see Note 3 - Business Acquisitions). At March 31, 2018 and June 30, 2017, the earn-out liabilities were classified within Level 3 of the fair
value hierarchy. The fair values of the earn-out liabilities were determined based on estimated future earnings and the probability of achieving them. The current portion of the earn-out liabilities was $0.0 million and $21.1 million at March 31, 2018 and June 30, 2017, respectively, and was included in other liabilities, current in the accompanying Condensed Consolidated Balance Sheets. The decrease in the current portion of the earn-out liabilities is attributable to the $21.1 million earn-out payment to GNYHA Holdings that occurred during the current year (see Note 3 - Business Acquisitions). The long-term portion of the earn-out liabilities was $0.1 million and $0.2 million at March 31, 2018 and June 30, 2017, respectively, and was included in other liabilities, non-current in the accompanying Condensed Consolidated Balance Sheets. Changes in the fair values of the earn-out liabilities were recorded within selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.
FFF put and call rights
Pursuant to a shareholders' agreement entered into in connection with the Company's equity investment in FFF (see Note 4 - Investments), which shareholders' agreement was amended and restated November 22, 2017, the majority shareholder of FFF holds a put right that (i) provides such shareholder the right to require the Company to purchase up to 50% of its interest in FFF, which is exercisable beginning on the fourth anniversary of the investment closing date, July 26, 2020, and (ii) requires the Company to purchase all or a portion of its remaining interest in FFF on or after December 31, 2020. Any such required purchases are to 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, the amended and restated shareholders' agreement provides the Company with a call right requiring the majority shareholder to sell its remaining interest in FFF to the Company, which is exercisable at any time within the later of 180 calendar days after the date of a Key Man Event (generally defined in the amended and restated shareholders' agreement as the resignation, termination for cause, death or disability of the majority shareholder) or 30 calendar days after December 31, 2020. In the event that the FFF put or call rights are exercised, the purchase price for the additional interest in FFF will be at a per share price equal to the Equity Value per Share.
The fair value of the FFF put and call rights were 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, in the accompanying Condensed Consolidated Balance Sheets. Net changes in the fair value of the FFF put and call rights were recorded within other income in the accompanying Condensed Consolidated Statements of Income.
A reconciliation of the Company's earn-out liabilities and FFF put and call rights is as follows (in thousands):
|
| | | | | | | | | | | | |
| Beginning Balance | Purchases (Settlements) | Gain (Loss) | Ending Balance |
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 |
|
| | | | |
Three Months Ended March 31, 2017 | | | | |
FFF call right | $ | 10,750 |
| $ | — |
| $ | (814 | ) | $ | 9,936 |
|
Total Level 3 assets | $ | 10,750 |
| $ | — |
| $ | (814 | ) | $ | 9,936 |
|
Earn-out liabilities | $ | 16,713 |
| $ | — |
| $ | (2,074 | ) | $ | 18,787 |
|
FFF put right | 26,384 |
| — |
| 902 |
| 25,482 |
|
Total Level 3 liabilities | $ | 43,097 |
| $ | — |
| $ | (1,172 | ) | $ | 44,269 |
|
| | | | |
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 |
|
| | | | |
Nine Months Ended March 31, 2017 | | | | |
FFF call right | $ | — |
| $ | 10,361 |
| $ | (425 | ) | $ | 9,936 |
|
Total Level 3 assets | $ | — |
| $ | 10,361 |
| $ | (425 | ) | $ | 9,936 |
|
Earn-out liabilities | $ | 4,128 |
| $ | 16,662 |
| $ | 2,003 |
| $ | 18,787 |
|
FFF put right | — |
| 25,821 |
| 339 |
| 25,482 |
|
Total Level 3 liabilities | $ | 4,128 |
| $ | 42,483 |
| $ | 2,342 |
| $ | 44,269 |
|
Non-Recurring Fair Value Measurements
During the nine months ended March 31, 2018, no non-recurring fair value measurements were required related to the measurement of goodwill and intangible assets for impairment.
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 values by approximately $0.6 million at March 31, 2018 and June 30, 2017, based on assumed market interest rates of 3.5% and 2.6% for March 31, 2018 and June 30, 2017, respectively.
Other Financial Instruments
The fair values of cash, accounts receivable, accounts payable, accrued liabilities and the Company's Credit Facility approximated carrying value due to the short-term nature of these financial instruments.
(6) INTANGIBLE ASSETS, NET
Intangible assets, net consisted of the following (in thousands):
|
| | | | | | | |
| Useful Life | March 31, 2018 | June 30, 2017 |
Member relationships | 14.7 years | $ | 220,100 |
| $ | 220,100 |
|
Technology | 5.0 years | 142,317 |
| 143,727 |
|
Customer relationships | 8.3 years | 48,120 |
| 48,120 |
|
Trade names | 8.3 years | 22,710 |
| 22,710 |
|
Distribution network | 10.0 years | 22,400 |
| 22,400 |
|
Favorable lease commitments | 10.1 years | 11,393 |
| 11,393 |
|
Non-compete agreements | 5.9 years | 8,710 |
| 8,710 |
|
Total intangible assets | | 475,750 |
| 477,160 |
|
Accumulated amortization | | (139,802 | ) | (99,198 | ) |
Intangible assets, net | | $ | 335,948 |
| $ | 377,962 |
|
Intangible asset amortization totaled $13.9 million and $14.1 million for the three months ended March 31, 2018 and 2017, respectively, and $41.6 million and $34.4 million for the nine months ended March 31, 2018 and 2017, respectively.
(7) GOODWILL
Goodwill consisted of the following (in thousands):
|
| | | | | | |
| March 31, 2018 | June 30, 2017 |
Supply Chain Services | $ | 400,348 |
| $ | 400,348 |
|
Performance Services | 506,197 |
| 506,197 |
|
Total goodwill | $ | 906,545 |
| $ | 906,545 |
|
(8) DEBT
Long-term debt consisted of the following (in thousands):
|
| | | | | | | | | | |
| Commitment Amount | Due Date | March 31, 2018 | June 30, 2017 |
Credit Facility | $ | 750,000 |
| June 24, 2019 | $ | 200,000 |
| $ | 220,000 |
|
Notes payable | — |
| Various | 7,217 |
| 14,272 |
|
Total debt | | | 207,217 |
| 234,272 |
|
Less: Current portion | | | (200,255 | ) | (227,993 | ) |
Total long-term debt | | | $ | 6,962 |
| $ | 6,279 |
|
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 June 24, 2014 and amended on June 4, 2015. The Credit Facility has a maturity date of June 24, 2019. The Credit Facility provides for borrowings of up to $750.0 million with (i) a $25.0 million sub-facility for standby letters of credit and (ii) a $75.0 million sub-facility for swingline loans. The Credit Facility may be increased from time to time at the Company's request up to an aggregate additional amount of $250.0 million, subject to lender approval. The Credit Facility includes an unconditional and irrevocable guaranty of all obligations under the Credit Facility by Premier GP, certain domestic subsidiaries of Premier GP and future guarantors, if any. Premier, Inc. is not a guarantor under the Credit Facility.
At the Company's option, committed loans may be in the form of Eurodollar rate loans ("Eurodollar Loans") or base rate loans ("Base Rate Loans"). Eurodollar Loans bear interest at the Eurodollar rate (defined as the London Interbank Offered Rate, or LIBOR, plus the Applicable Rate (defined as a margin based on the Consolidated Total Leverage Ratio (as defined in the Credit Facility))). Base Rate Loans bear interest at the Base Rate (defined as the highest of the prime rate announced by the administrative agent, the federal funds effective rate plus 0.50% or the one-month LIBOR plus 1.0%) plus the Applicable Rate. The Applicable Rate ranges from 1.125% to 1.750% for Eurodollar Loans and 0.125% to 0.750% for Base Rate Loans. At March 31, 2018, the interest rate for three-month Eurodollar Loans was 3.435%, the interest rate for six-month Eurodollar Loans was 3.575% and the interest rate for Base Rate Loans was 4.875%. The Co-Borrowers are required to pay a commitment fee ranging from 0.125% to 0.250% per annum on the actual daily unused amount of commitments under the Credit Facility. At March 31, 2018, the commitment fee was 0.125%.
The Credit Facility contains customary representations and warranties as well as customary affirmative and negative covenants, including, among others, limitations on liens, indebtedness, fundamental changes, dispositions, restricted payments and investments, of which certain covenant calculations use EBITDA, a Non-GAAP financial measure. Under the terms of the Credit Facility, Premier GP is not permitted to allow its consolidated total leverage ratio (as defined in the Credit Facility) to exceed 3.00 to 1.00 for any period of four consecutive quarters. In addition, Premier GP must maintain a minimum consolidated interest coverage ratio (as defined in the Credit Facility) of 3.00 to 1.00 at the end of every fiscal quarter. Premier GP was in compliance with all such covenants at March 31, 2018.
The Credit Facility also contains customary events of default including, among others, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults of any indebtedness or guarantees in excess of $30.0 million, bankruptcy and other insolvency events, judgment defaults in excess of $30.0 million, and the occurrence of a change of control (as defined in the Credit Facility). 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 the required lenders, 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 a stock repurchase program, and other general corporate activities. During the nine months ended March 31, 2018, the Company repaid $50.0 million of borrowings and borrowed an additional $30.0 million under the Credit Facility. The Company had outstanding borrowings under the Credit Facility of $200.0 million at March 31, 2018. Borrowings due within one year of the balance sheet date are classified as current liabilities in the Condensed Consolidated Balance Sheets. They may be renewed or extended at the option of the Company through the maturity date of the Credit Facility.
Notes Payable
At March 31, 2018 and June 30, 2017, the Company had $7.2 million and $14.3 million, respectively, in notes payable consisting primarily of non-interest bearing notes payable outstanding to departed member owners, of which $0.2 million and $8.0 million, respectively, were included in current portion of long-term debt and $7.0 million and $6.3 million, respectively, were included in long-term debt, less current portion, in the accompanying Condensed Consolidated Balance Sheets. Notes payable generally have stated maturities of five years from their date of issuance.
(9) REDEEMABLE LIMITED PARTNERS' CAPITAL
Redeemable limited partners' capital represents the member owners' 61% ownership of Premier LP through their ownership of Class B common units at March 31, 2018. 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, 2018 and 2017, the Company recorded decreases 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 amount of $511.3 million and $296.6 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 table below provides a summary of the changes in the redeemable limited partners' capital from June 30, 2017 to March 31, 2018 (in thousands):
|
| | | | | | | | | |
| 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 | 1,478 |
| — |
| 1,478 |
|
Redemption of limited partners | — |
| (942 | ) | (942 | ) |
Net income attributable to non-controlling interest in Premier LP | — |
| 154,142 |
| 154,142 |
|
Distributions to limited partners | — |
| (54,305 | ) | (54,305 | ) |
Exchange of Class B common units for Class A common stock by member owners | — |
| (194,924 | ) | (194,924 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | — |
| (511,301 | ) | (511,301 | ) |
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 receivables are reflected as a reduction to redeemable limited partners' capital so that amounts due from limited partners for capital are not reflected as redeemable limited partnership capital until paid. No interest bearing notes receivable were executed by limited partners of Premier LP during the nine months ended March 31, 2018.
During the nine months ended March 31, 2018, four limited partners withdrew from Premier LP. The limited partnership agreement provides for the redemption of former limited partners' Class B common units that are not eligible for exchange in the form of a five-year, unsecured, non-interest bearing term promissory note, a cash payment equal to the present value of the redemption amount, or other mutually agreed upon terms. Partnership interest obligations to former limited partners are reflected in notes payable in the accompanying Condensed Consolidated Balance Sheets. Under the Exchange Agreement, Class B common units that are eligible for exchange by withdrawing limited partners must be exchanged in the subsequent 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 (loss) of the partnership which encompasses the operating expenses of the partnership as well as participation by non-owner members in Premier's service offerings. To the extent Premier LP incurred a net loss, the limited partners would not receive a quarterly distribution. As provided in the LP Agreement, the amount of actual cash distributed may be reduced by the amount of such distributions used by limited partners to offset contribution loans or other amounts payable to the Company.
Quarterly distributions made to limited partners during the current fiscal year are as follows (in thousands):
|
| | | |
Date | Distribution (a) |
August 24, 2017 | $ | 24,951 |
|
November 22, 2017 | $ | 20,752 |
|
February 22, 2018 | $ | 20,396 |
|
| |
(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 $13.2 million quarterly distribution on or before May 24, 2018. The distribution is reflected in limited partners' distribution payable in the accompanying Condensed Consolidated Balance Sheets at March 31, 2018. |
Pursuant to the Exchange Agreement (see Note 1 - Organization and Basis of Presentation for more information), each limited partner has the cumulative right to exchange up to one-seventh of its initial allocation of Class B common units for shares of Class A common stock, cash or a combination of both, the form of consideration to be at the discretion of the Company's independent Audit and Compliance Committee. During the nine months ended March 31, 2018, the Company recorded total reductions of
$194.9 million to redeemable limited partners' capital to reflect the exchange of approximately 5.9 million Class B common units and surrender of associated shares of Class B common stock by member owners for a like number of shares of the Company's Class A common stock (see Note 11 - Earnings Per Share for more information). Quarterly exchanges during the current fiscal year were as follows (in thousands, except Class B common units).
|
| | | | | |
Date of Quarterly Exchange | Number of Class B Common Units Exchanged | Reduction in Redeemable Limited Partners' Capital |
July 31, 2017 | 1,231,410 |
| $ | 42,976 |
|
October 31, 2017 | 3,651,294 |
| 119,289 |
|
January 31, 2018 | 1,006,435 |
| 32,659 |
|
Total | 5,889,139 |
| $ | 194,924 |
|
(10) STOCKHOLDERS' DEFICIT
As of March 31, 2018, there were 51,940,576 shares of the Company's Class A common stock, par value $0.01 per share, and 80,978,267 shares of the Company's Class B common stock, par value $0.000001 per share, outstanding.
On October 31, 2017, the Company's Board of Directors authorized the repurchase of up to $200.0 million of our outstanding Class A common stock as part of a balanced capital deployment strategy, such repurchases to be made from time to time in private or open market transactions at the Company's discretion in accordance with applicable federal securities laws. As of March 31, 2018, the Company completed its stock repurchase program and purchased approximately 6.4 million shares of Class A common stock at an average price of $31.16 per share for a total purchase price of $200.0 million.
Holders of Class A common stock are entitled to (i) one 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 one vote for each share held of record on all matters submitted to a vote of stockholders, but are not entitled to receive dividends, other than dividends payable in shares of Premier's common stock, or to receive a distribution upon the dissolution or a liquidation of Premier. Pursuant to the 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.
(11) EARNINGS PER SHARE
Basic earnings per share of Premier is computed by dividing net income attributable to stockholders by the weighted average number of shares of common stock outstanding for the period. Net income attributable to stockholders includes the adjustment recorded in the period to reflect redeemable limited partners' capital at the redemption amount, as a result of 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 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 earnings per share (in thousands, except per share amounts):
|
| | | | | | | | | | | | |
| Three Months Ended March 31, | Nine Months Ended March 31, |
| 2018 | 2017 | 2018 | 2017 |
Numerator for basic earnings (loss) per share: | | | | |
Net income (loss) attributable to stockholders | $ | (103,537 | ) | $ | (80,601 | ) | $ | 514,093 |
| $ | 389,976 |
|
| | | | |
Numerator for diluted earnings (loss) per share: | | | | |
Net income (loss) attributable to stockholders | $ | (103,537 | ) | $ | (80,601 | ) | $ | 514,093 |
| $ | 389,976 |
|
Adjustment of redeemable limited partners' capital to redemption amount | — |
| — |
| (511,301 | ) | (296,566 | ) |
Net income attributable to non-controlling interest in Premier LP | — |
| — |
| 154,142 |
| 282,207 |
|
Net income (loss) | (103,537 | ) | (80,601 | ) | 156,934 |
| 375,617 |
|
Tax effect on Premier, Inc. net income (a) | — |
| — |
| (272,822 | ) | (61,303 | ) |
Adjusted net income (loss) | $ | (103,537 | ) | $ | (80,601 | ) | $ | (115,888 | ) | $ | 314,314 |
|
| | | | |
Denominator for basic earnings (loss) per share: | | | | |
Weighted average shares (b) | 53,529 |
| 50,525 |
| 53,885 |
| 49,051 |
|
| | | | |
Denominator for diluted earnings (loss) per share: | | | | |
Weighted average shares (b) | 53,529 |
| 50,525 |
| 53,885 |
| 49,051 |
|
Effect of dilutive securities: (c) | | | | |
Stock options | — |
| — |
| 266 |
| 256 |
|
Restricted stock | — |
| — |
| 285 |
| 190 |
|
Performance share awards | — |
| — |
| — |
| — |
|
Class B shares outstanding | — |
| — |
| 83,818 |
| 91,875 |
|
Weighted average shares and assumed conversions | 53,529 |
| 50,525 |
| 138,254 |
| 141,372 |
|
| | | | |
Basic earnings (loss) per share | $ | (1.93 | ) | $ | (1.60 | ) | $ | 9.54 |
| $ | 7.95 |
|
Diluted earnings (loss) per share | $ | (1.93 | ) | $ | (1.60 | ) | $ | (0.84 | ) | $ | 2.22 |
|
| |
(a) | Represents income tax expense related to Premier, Inc. retaining the portion of net income attributable to income from non-controlling interest in Premier, LP for the purpose of diluted earnings per share. |
| |
(b) | Weighted average number of common shares used for basic earnings per share excludes weighted average shares of non-vested stock options, non-vested restricted stock, non-vested performance share awards and Class B shares outstanding for the three and nine months ended March 31, 2018 and 2017. |
| |
(c) | 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 been anti-dilutive for the period. For the nine months ended March 31, 2018, the effect of 1.7 million stock options was excluded from diluted weighted average shares outstanding as they had an anti-dilutive effect, and the effect of 0.6 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. |
For the three months ended March 31, 2017, the effect of 2.8 million stock options, restricted stock units and performance share awards and 88.9 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 shareholders sustained for the quarter and as including them would have been anti-dilutive for the period. For the nine months ended March 31, 2017, the effect of 1.8 million stock options were excluded from diluted weighted average shares outstanding as they had an anti-dilutive effect, and the effect of 0.5 million performance shares were excluded from diluted weighted average shares outstanding as they had not satisfied the applicable performance criteria at the end of the period.
Pursuant to the terms of the Exchange Agreement, on a quarterly basis, the Company has the option, as determined by the independent Audit and Compliance Committee, to settle the exchange of Class B common units of Premier LP by member owners for cash, an equal number of Class A common shares of Premier, Inc. or a combination of cash and shares of Class A common stock. In connection with the exchange of Class B common units by member owners, regardless of the consideration used to settle the
exchange, an equal number of shares of Premier's Class B common stock are surrendered by member owners and retired (see Note 9 - Redeemable Limited Partners' Capital). The following table presents certain information regarding the exchange of Class B common units and associated Class B common stock for Premier's Class A common stock and/or cash in connection with the quarterly exchanges pursuant to the terms of the Exchange Agreement, including activity related to the Class A and Class B common units and Class A and Class B common stock through the date of the applicable quarterly exchange:
|
| | | | | | | |
Quarterly Exchange by Member Owners | Class B Common Shares Retired Upon Exchange (a) | Class B Common Shares Outstanding After Exchange (a) | Class A Common Shares Outstanding After Exchange (b) | Percentage of Combined Voting Power Class B/Class A Common Stock |
July 31, 2017 | 1,231,410 |
| 86,067,478 |
| 53,212,057 |
| 62%/38% |
October 31, 2017 | 3,651,294 |
| 82,416,184 |
| 57,215,143 |
| 59%/41% |
January 31, 2018 | 1,006,435 |
| 81,169,319 |
| 54,829,086 |
| 60%/40% |
April 30, 2018 (c) | 642,566 |
| 80,335,701 |
| 52,585,392 |
| 60%/40% |
| |
(a) | The number of Class B common shares retired or outstanding is equivalent to the number of Class B common units retired upon exchange or outstanding after the exchange, as applicable. |
| |
(b) | The number of Class A common shares outstanding after exchange also includes activity related to the Company's share repurchase program (see Note 10 - Stockholders' Deficit), equity incentive plan (see Note 12 - Stock-Based Compensation) and departed member owners (see Note 9 - Redeemable Limited Partners' Capital). |
| |
(c) | As the quarterly exchange occurred on April 30, 2018, the impact of the exchange is not reflected in the condensed consolidated financial statements for the quarter ended March 31, 2018. |
(12) STOCK-BASED COMPENSATION
Stock-based compensation expense is recognized over the requisite service period, which generally equals the stated vesting period. Pre-tax stock-based compensation expense was $7.2 million and $7.1 million for the three months ended March 31, 2018 and 2017, respectively, with a resulting deferred tax benefit of $1.8 million and $2.7 million, respectively. Pre-tax stock-based compensation expense was $24.9 million and $19.1 million for the nine months ended March 31, 2018 and 2017, respectively, with a resulting deferred tax benefit of $6.2 million and $7.3 million, respectively. The deferred tax benefit was calculated at a rate of 25% for the three and nine months ended March 31, 2018 and 38% for the three and nine months ended March 31, 2017, 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. The decrease in the deferred tax benefit is a result of the Tax Cuts and Jobs Act, which was enacted on December 22, 2017 (see Note 13 - Income Taxes).
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 11.3 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, 2018, there were 3.5 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, 2018:
|
| | | | | | | | | | | | | | | | | |
| 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, 2017 | 576,988 |
| $ | 32.92 |
| | 1,085,872 |
| $ | 32.79 |
| | 3,372,499 |
| $ | 30.31 |
|
Granted | 258,262 |
| $ | 32.93 |
| | 698,881 |
| $ | 32.62 |
| | 558,744 |
| $ | 32.79 |
|
Vested/exercised | (178,482 | ) | $ | 31.79 |
| | (352,867 | ) | $ | 31.73 |
| | (128,559 | ) | $ | 28.93 |
|
Forfeited | (38,317 | ) | $ | 32.59 |
| | (91,185 | ) | $ | 32.47 |
| | (126,913 | ) | $ | 33.79 |
|
Outstanding at March 31, 2018 | 618,451 |
| $ | 33.27 |
| | 1,340,701 |
| $ | 33.00 |
| | 3,675,771 |
| $ | 30.62 |
|
| | | | | | | | |
Stock options outstanding and exercisable at March 31, 2018 | | | | | | | 2,642,538 |
| $ | 29.68 |
|
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 of 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, 2018 was as follows (in thousands):
|
| | | | |
| Unrecognized Stock-Based Compensation Expense | Weighted Average Amortization Period |
Restricted stock | $ | 10,315 |
| 1.77 years |
Performance share awards | 22,476 |
| 1.83 years |
Stock options | 8,258 |
| 1.88 years |
Total unrecognized stock-based compensation expense | $ | 41,049 |
| 1.82 years |
The aggregate intrinsic value of stock options at March 31, 2018 was as follows (in thousands):
|
| | | |
| Intrinsic Value of Stock Options |
Outstanding and exercisable | $ | 6,575 |
|
Expected to vest | 47 |
|
Total outstanding | $ | 6,622 |
|
| |
Exercised during the nine months ended March 31, 2018 | $ | 650 |
|
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 | 2017 |
Expected life (a) | 6 years | 6 years |
Expected dividend (b) | — | — |
Expected volatility (c) | 29.44% - 32.26% | 32.01% - 33.00% |
Risk-free interest rate (d) | 1.89% - 2.75% | 1.31% - 2.13% |
Weighted average option grant date fair value | $9.48 - $11.42 | $10.48 - $11.28 |
| |
(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. |
(13) INCOME TAXES
The Company's income tax expense is attributable to the activities of the Company, PHSI and PSCI, all of which are subchapter C corporations and are subject to U.S. federal and state income taxes. In contrast, under the provisions of federal and state laws, Premier LP is not subject to federal and state income taxes as the income realized by Premier LP is taxable to its partners.
As a result of the TCJA that was enacted on December 22, 2017, the U.S. federal corporate income tax rate was reduced from 35% to 21%. In accordance with U.S. GAAP, the impact of changes in tax rates and tax laws is recognized as a component of income tax expense from continuing operations in the period of enactment. For fiscal year-end companies, determination of temporary differences contemplates the use of a blended U.S. federal income tax rate (which blends the income tax rates that were in effect prior to and after enactment) depending on expected timing of recognition for such temporary differences. The Company has remeasured its deferred tax balances as of the enactment date, accordingly. Given the nature and relative timing of the TCJA enactment, the Company is continuing to evaluate the impact of the TCJA and has prescribed provisional relief pursuant to SAB 118 to certain components of its deferred tax balances. More specifically, the Company has incorporated various estimates regarding timing and determination of temporary difference recognition when calculating its net deferred tax expense. As a result, for the three months ended March 31, 2018, the Company continued to remeasure its deferred tax balances based on refinements to the various estimates regarding the timing and determination of temporary differences and recorded $3.5 million of income tax expense associated with the remeasurement of deferred tax balances. In addition, the estimates will be subject to further revision based on actual financial results for the fourth quarter of the current fiscal year. The Company expects to finalize the remeasurement of its deferred tax balances in the fourth quarter of the fiscal year ending June 30, 2018.
Income tax expense for the three months ended March 31, 2018 and 2017 was $13.3 million and $7.3 million, respectively, which reflects effective tax rates of 15% and 9%, respectively. Income tax expense for the nine months ended March 31, 2018 and 2017 was $257.6 million and $68.1 million, respectively, which reflects effective tax rates of 62% and 15%, respectively. The increase in effective tax rates is primarily attributable to the remeasurement of deferred tax balances, of which $224.7 million related to the aforementioned decrease in the U.S. federal corporate income tax rate. The Company's effective tax rates differ from income taxes recorded using a combined (or blended) rate largely due to Premier LP income, which is not subject to federal, state or local income taxes as well as valuation allowances associated with deferred tax assets at PHSI.
Deferred tax assets decreased $161.3 million to $273.0 million at March 31, 2018 from $434.3 million at June 30, 2017. The current period balance was comprised of $306.7 million in deferred tax assets at Premier, Inc. offset by $33.8 million in deferred tax liabilities at PHSI and PSCI. The decrease in deferred tax assets from the prior period was largely driven by $224.7 million in net reductions to deferred tax assets and liabilities in connection with the underlying revaluation associated with the previously mentioned decrease in the U.S. federal corporate income tax rate. This decrease was partially offset by a $71.9 million increase in deferred tax assets in connection with the quarterly member owner exchanges that occurred during the nine months ended March 31, 2018.
The Company's tax receivable agreement ("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 decreased $89.0 million to $250.7 million at March 31, 2018 from $339.7 million at June 30, 2017. The change in TRA liabilities was driven primarily by the $177.2 million decrease in valuation as a result of the TCJA's decrease in the U.S. federal corporate income tax rates, partially offset by $67.5 million in increases in TRA liabilities in connection with the quarterly member owner exchanges that occurred during the nine months ended March 31, 2018 and $20.9 million associated with the revaluation and remeasurement of the TRA liabilities due to the change in the allocation and realization of future anticipated payments.
(14) RELATED PARTY TRANSACTIONS
GNYHA
GNYHA Purchasing Alliance, LLC and its member organizations ("GNYHA PA") owned approximately 8% of the outstanding partnership interests in Premier LP as of March 31, 2018. Although we no longer consider GNYHA PA a related party under U.S. GAAP, prior period information is included below.
Net administrative fees revenue based on purchases by GNYHA Services, Inc. ("GNYHA") (an affiliate of GNYHA PA) and its member organizations was $16.9 million and $51.8 million for the three and nine months ended March 31, 2017, respectively. The Company has a contractual requirement under the GPO participation agreement to pay each member owner revenue share from Premier LP equal to 30% of all gross administrative fees collected by Premier LP based upon purchasing by such member owner's facilities through Premier LP's GPO supplier contracts. As GNYHA also remits to Premier LP all gross administrative fees collected by GNYHA based on purchases by its member organizations through GNYHA's own GPO supplier contracts, it also receives revenue share from Premier LP equal to 30% of such gross administrative fees remitted to the Company. Approximately $7.8 million of revenue share obligations in the accompanying Condensed Consolidated Balance Sheets related to revenue share obligations to GNYHA and its member organizations at June 30, 2017.
In addition, of the $25.0 million limited partners' distribution payable in the accompanying Condensed Consolidated Balance Sheets at June 30, 2017, $2.7 million was payable to GNYHA and its member organizations. Services and support revenue earned from GNYHA and its member organizations was $3.9 million and $11.0 million during the three and nine months ended March 31, 2017, respectively. Product revenue earned from, or attributable to services provided to, GNYHA and its member organizations was $4.3 million and $12.3 million during the three and nine months ended March 31, 2017, respectively. Receivables from GNYHA and its member organizations, included in due from related parties in the accompanying Condensed Consolidated Balance Sheets, were $5.4 million at June 30, 2017.
Innovatix and Essensa
The Company held 50% of the membership interests in Innovatix until December 2, 2016, at which time it acquired the remaining 50% of the membership interests from GNYHA Holdings (see Note 3 - Business Acquisitions). The Company's share of Innovatix's net income included in equity in net income (loss) of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income prior to the acquisition was $10.7 million during the nine months ended March 31, 2017. The Company maintained a group purchasing agreement with Innovatix under which Innovatix members were permitted to utilize Premier LP's GPO supplier contracts. Gross administrative fees revenue and a corresponding revenue share recorded under the arrangement prior to the acquisition were $19.9 million for the nine months ended March 31, 2017.
The Company historically maintained a group purchasing agreement with Essensa, under which Essensa utilized the Company's GPO supplier contracts. On December 2, 2016, the Company acquired 100% of the membership interests in Essensa from GNYHA Holdings (see Note 3 - Business Acquisitions). Net administrative fees revenue recorded from Essensa prior to the acquisition was $1.2 million for the nine months ended March 31, 2017.
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 $0.1 million and $0.2 million for the three months ended March 31, 2018 and 2017, respectively, and $5.7 million and $4.4 million for the nine months ended March 31, 2018 and 2017, 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 $1.8 million and $1.4 million during the three months ended March 31, 2018 and 2017, respectively, and $5.8 million and $3.0 million during the nine months ended March 31, 2018 and 2017, respectively.
AEIX
The Company conducts all operational activities for American Excess Insurance Exchange Risk Retention Group ("AEIX"), a reciprocal risk retention group that provides excess and umbrella healthcare professional and general liability insurance to certain hospital and healthcare system members. The Company is reimbursed by AEIX for actual costs, plus an annual incentive management fee not to exceed $0.5 million per calendar year. The Company received cost reimbursement of $1.4 million and $1.3 million during the three months ended March 31, 2018 and 2017, respectively, and $4.2 million and $3.5 million during the nine months ended March 31, 2018 and 2017, respectively. As of March 31, 2018 and June 30, 2017, $0.5 million and $0.6 million, respectively, in amounts receivable from AEIX are included in due from related parties in the accompanying Condensed Consolidated Balance Sheets.
(15) COMMITMENTS AND CONTINGENCIES
The Company is not currently involved in any litigation it believes to be significant. 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.
(16) SEGMENTS
The Company delivers its solutions and manages its business through two 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 includes the Company's informatics, collaborative, consulting services, government services and insurance services businesses.
Segment information was as follows (in thousands):
|
| | | | | | | | | | | | |
| Three Months Ended March 31, | Nine Months Ended March 31, |
| 2018 | 2017 | 2018 | 2017 |
Net revenue: | | | | |
Supply Chain Services | | | | |
Net administrative fees | $ | 161,612 |
| $ | 143,915 |
| $ | 471,946 |
| $ | 398,962 |
|
Other services and support | 2,899 |
| 3,116 |
| 8,470 |
| 5,962 |
|
Services | 164,511 |
| 147,031 |
| 480,416 |
| 404,924 |
|
Products | 166,234 |
| 138,132 |
| 480,997 |
| 386,639 |
|
Total Supply Chain Services | 330,745 |
| 285,163 |
| 961,413 |
| 791,563 |
|
Performance Services | 94,593 |
| 94,640 |
| 265,887 |
| 260,012 |
|
Net revenue | $ | 425,338 |
| $ | 379,803 |
| $ | 1,227,300 |
| $ | 1,051,575 |
|
| | | | |
Depreciation and amortization expense (a): | | | | |
Supply Chain Services | $ | 5,500 |
| $ | 5,717 |
| $ | 16,166 |
| $ | 8,637 |
|
Performance Services | 24,541 |
| 21,491 |
| 71,093 |
| 63,350 |
|
Corporate | 2,424 |
| 1,974 |
| 6,739 |
| 5,771 |
|
Total depreciation and amortization expense | $ | 32,465 |
| $ | 29,182 |
| $ | 93,998 |
| $ | 77,758 |
|
| | | | |
Capital expenditures: | | | | |
Supply Chain Services | $ | 390 |
| $ | 198 |
| $ | 1,238 |
| $ | 2,347 |
|
Performance Services | 24,077 |
| 16,308 |
| 57,368 |
| 47,079 |
|
Corporate | 2,171 |
| 1,061 |
| 6,654 |
| 2,466 |
|
Total capital expenditures | $ | 26,638 |
| $ | 17,567 |
| $ | 65,260 |
| $ | 51,892 |
|
| | | | |
Total assets: | | | March 31, 2018 | June 30, 2017 |
Supply Chain Services | | | $ | 971,628 |
| $ | 1,017,023 |
|
Performance Services | | | 862,704 |
| 888,862 |
|
Corporate | | | 460,305 |
| 601,951 |
|
Total assets | | | $ | 2,294,637 |
| $ | 2,507,836 |
|
| |
(a) | Includes amortization of purchased intangible assets. |
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 (loss) 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.
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):
|
| | | | | | | | | | | | |
| Three Months Ended March 31, | Nine Months Ended March 31, |
| 2018 | 2017 | 2018 | 2017 |
Income before income taxes | $ | 89,837 |
| $ | 78,653 |
| $ | 414,494 |
| $ | 443,697 |
|
Remeasurement gain attributable to acquisition of Innovatix, LLC | — |
| — |
| — |
| (204,833 | ) |
Equity in net loss (income) of unconsolidated affiliates (a) | 4,939 |
| (83 | ) | (570 | ) | (14,789 | ) |
Interest and investment loss, net (b) | 1,236 |
| 2,017 |
| 4,239 |
| 3,026 |
|
Loss on disposal of long-lived assets | 5 |
| 725 |
| 1,725 |
| 2,243 |
|
Other expense (income) | 2,593 |
| (2,260 | ) | 14,486 |
| (3,135 | ) |
Operating income | 98,610 |
| 79,052 |
| 434,374 |
| 226,209 |
|
Depreciation and amortization | 18,584 |
| 15,102 |
| 52,401 |
| 43,318 |
|
Amortization of purchased intangible assets | 13,881 | |