Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________________________
FORM 10-Q/A
Amendment No. 1
__________________________________________________________________________________________
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2016
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 February 3, 2017, there were 50,701,862 shares of the registrant's Class A common stock, par value $0.01 per share, and 88,464,859 shares of the registrant's Class B common stock, par value $0.000001 per share, outstanding.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A ("Amendment No. 1") is being filed in order to reflect the adjustments set forth below to adjust Premier Inc.'s ("Premier" or the "Company") income tax accounting for the December 2, 2016 acquisition of the remaining 50% ownership interest of Innovatix, LLC not previously owned by the Company. This Amendment No. 1 amends and restates in their entirety the following items of the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2016, originally filed with the Securities and Exchange Commission ("SEC") on February 7, 2017 (the "Original Form 10-Q"):
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• | Part I. Financial Information: |
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◦ | Item 1. Financial Statements; |
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◦ | Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations; and |
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◦ | Item 4. Controls and Procedures. |
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• | Part II. Other Information - Item 6. Exhibits. |
The Company has also updated the signature page, the certifications of its Chief Executive Officer and Chief Financial Officer in Exhibits 31.1, 31.2, 32.1 and 32.2, and the financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibits 101.
No other sections were changed, but for the convenience of the reader, this Amendment No. 1 restates in its entirety, as amended, the Company's Original Form 10-Q. This Amendment No. 1 is presented as of the filing date of the Original Form 10-Q and does not modify or update disclosures in any way other than as required to reflect the restatement described below. Readers should refer to the documents the Company has filed with or furnished to the SEC subsequent to the date of the Company's Original Form 10-Q for updated information.
Prior to December 2, 2016, the Company, through its consolidated subsidiary, Premier Supply Chain Improvement, Inc., held a 50% ownership interest in Innovatix, LLC, which was accounted for under the equity method and classified as a partnership for tax purposes. On December 2, 2016, the Company acquired the remaining 50% ownership interest of Innovatix, LLC. In connection with the acquisition, the Company’s historical 50% investment was remeasured under business combination accounting rules to fair value, resulting in a one-time gain of $204.8 million. At the time of the acquisition, a deferred tax liability of $95.8 million and a corresponding net deferred income tax expense of $95.8 million associated with the one-time gain were recorded by the Company. The Company has determined that a portion of the deferred tax liability and a portion of the deferred tax expense associated with the $204.8 million gain should not have been recorded.
Accordingly, the Company determined it necessary to adjust the Original Form 10-Q to remove the incorrectly recorded deferred tax liability and instead record deferred tax liabilities associated with the book and tax bases differences of the individual assets acquired and liabilities assumed. Based on the Company’s determination, the net effect of this adjustment increased goodwill by $43.9 million, decreased deferred tax liabilities by $34.1 million, decreased deferred tax assets by $10.5 million and decreased income tax expense by $67.5 million as of and for the three months ended December 31, 2016. Correspondingly, net income has been adjusted higher by $67.5 million for the three and six months ended December 31, 2016.
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
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; |
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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 which 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 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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• | any increase in the safety risk profiles of prescription drugs or the withdrawal of prescription drugs from the market; |
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• | our ability to maintain and expand our existing base of drugs in our specialty 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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• | our indebtedness and our ability to obtain additional financing on favorable terms; |
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• | fluctuation of our cash flows, quarterly revenues and results of operations; |
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• | changes in the political, economic or regulatory healthcare environment; |
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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, and potential changes to, extensive federal, state and local laws, regulations and procedures governing our specialty 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 tax receivable agreements to Premier LP's limited partners and our ability to realize the expected tax benefits related to the acquisition of Class B common units; |
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• | changes to Premier LP's allocation methods 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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• | 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 herein and under Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2016 (the "2016 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)
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| | | | | | |
| December 31, 2016 | June 30, 2016 |
| (Restated) |
Assets | | |
Cash and cash equivalents | $ | 218,892 |
| $ | 248,817 |
|
Marketable securities | — |
| 17,759 |
|
Accounts receivable (net of $3,725 and $1,981 allowance for doubtful accounts, respectively) | 181,083 |
| 144,424 |
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Inventory | 65,690 |
| 29,121 |
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Prepaid expenses and other current assets | 45,674 |
| 19,646 |
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Due from related parties | 2,611 |
| 3,123 |
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Total current assets | 513,950 |
| 462,890 |
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Marketable securities | — |
| 30,130 |
|
Property and equipment (net of $288,565 and $265,751 accumulated depreciation, respectively) | 180,408 |
| 174,080 |
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Intangible assets (net of $71,230 and $50,870 accumulated amortization, respectively) | 411,343 |
| 158,217 |
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Goodwill | 906,867 |
| 537,962 |
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Deferred income tax assets | 452,141 |
| 422,849 |
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Deferred compensation plan assets | 38,306 |
| 39,965 |
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Investments in unconsolidated affiliates | 98,795 |
| 16,800 |
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Other assets | 14,344 |
| 12,490 |
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Total assets | $ | 2,616,154 |
| $ | 1,855,383 |
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Liabilities, redeemable limited partners' capital and stockholders' deficit | | |
Accounts payable | $ | 70,163 |
| $ | 46,003 |
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Accrued expenses | 60,036 |
| 56,774 |
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Revenue share obligations | 69,183 |
| 63,603 |
|
Limited partners' distribution payable | 22,733 |
| 22,493 |
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Accrued compensation and benefits | 42,090 |
| 60,425 |
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Deferred revenue | 52,156 |
| 54,498 |
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Current portion of tax receivable agreements | 13,912 |
| 13,912 |
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Current portion of long-term debt | 338,505 |
| 5,484 |
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Deferred purchase price payable, acquisition of Innovatix, LLC and Essensa Ventures, LLC | 97,500 |
| — |
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Other liabilities | 25,417 |
| 2,871 |
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Total current liabilities | 791,695 |
| 326,063 |
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Long-term debt, less current portion | 6,999 |
| 13,858 |
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Tax receivable agreements, less current portion | 309,380 |
| 265,750 |
|
Deferred compensation plan obligations | 38,306 |
| 39,965 |
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| December 31, 2016 | June 30, 2016 |
| (Restated) |
Deferred tax liabilities | 50,243 |
| — |
|
Other liabilities | 46,262 |
| 23,978 |
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Total liabilities | 1,242,885 |
| 669,614 |
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Redeemable limited partners' capital | 2,720,009 |
| 3,137,230 |
|
Stockholders' deficit: | | |
Class A common stock, $0.01 par value, 500,000,000 shares authorized; 50,155,907 and 45,995,528 shares issued and outstanding at December 31, 2016 and June 30, 2016, respectively | 502 |
| 460 |
|
Class B common stock, $0.000001 par value, 600,000,000 shares authorized; 89,761,541 and 96,132,723 shares issued and outstanding at December 31, 2016 and June 30, 2016, respectively | — |
| — |
|
Additional paid-in-capital | — |
| — |
|
Accumulated deficit | (1,347,242 | ) | (1,951,878 | ) |
Accumulated other comprehensive loss | — |
| (43 | ) |
Total stockholders' deficit | (1,346,740 | ) | (1,951,461 | ) |
Total liabilities, redeemable limited partners' capital and stockholders' deficit | $ | 2,616,154 |
| $ | 1,855,383 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
|
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| Three months ended December 31, | Six months ended December 31, |
| 2016 | 2015 | 2016 | 2015 |
| (Restated) | (Restated) |
Net revenue: | | | | |
Net administrative fees | $ | 129,071 |
| $ | 120,733 |
| $ | 255,047 |
| $ | 238,682 |
|
Other services and support | 87,051 |
| 89,620 |
| 168,218 |
| 164,725 |
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Services | 216,122 |
| 210,353 |
| 423,265 |
| 403,407 |
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Products | 142,378 |
| 81,316 |
| 248,507 |
| 159,097 |
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Net revenue | 358,500 |
| 291,669 |
| 671,772 |
| 562,504 |
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Cost of revenue: | | | | |
Services | 44,856 |
| 40,492 |
| 87,546 |
| 78,616 |
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Products | 131,158 |
| 72,105 |
| 226,971 |
| 143,104 |
|
Cost of revenue | 176,014 |
| 112,597 |
| 314,517 |
| 221,720 |
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Gross profit | 182,486 |
| 179,072 |
| 357,255 |
| 340,784 |
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Operating expenses: | | | | |
Selling, general and administrative | 95,927 |
| 99,284 |
| 188,165 |
| 186,222 |
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Research and development | 767 |
| 424 |
| 1,573 |
| 880 |
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Amortization of purchased intangible assets | 11,151 |
| 9,271 |
| 20,360 |
| 15,318 |
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Operating expenses | 107,845 |
| 108,979 |
| 210,098 |
| 202,420 |
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Operating income | 74,641 |
| 70,093 |
| 147,157 |
| 138,364 |
|
Remeasurement gain attributable to acquisition of Innovatix, LLC | 204,833 |
| — |
| 204,833 |
| — |
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Equity in net income of unconsolidated affiliates | 5,127 |
| 4,785 |
| 14,706 |
| 9,375 |
|
Interest and investment income (loss), net | (857 | ) | (937 | ) | (1,009 | ) | (696 | ) |
Loss on disposal of long-lived assets | — |
| — |
| (1,518 | ) | — |
|
Other income (expense), net | (131 | ) | (272 | ) | 875 |
| (2,081 | ) |
Other income, net | 208,972 |
| 3,576 |
| 217,887 |
| 6,598 |
|
Income before income taxes | 283,613 |
| 73,669 |
| 365,044 |
| 144,962 |
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Income tax expense | 37,429 |
| 12,674 |
| 60,765 |
| 31,714 |
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Net income | 246,184 |
| 60,995 |
| 304,279 |
| 113,248 |
|
Net income attributable to non-controlling interest in Premier LP | (181,173 | ) | (49,817 | ) | (230,774 | ) | (97,717 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | 335,264 |
| (65,561 | ) | 397,072 |
| 401,240 |
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Net income (loss) attributable to stockholders | $ | 400,275 |
| $ | (54,383 | ) | $ | 470,577 |
| $ | 416,771 |
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Weighted average shares outstanding: | | | | |
Basic | 49,445 |
| 41,575 |
| 48,330 |
| 39,655 |
|
Diluted | 141,308 |
| 41,575 |
| 142,133 |
| 145,927 |
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| | | | |
Earnings (loss) per share attributable to stockholders: | | | | |
Basic | $ | 8.10 |
| $ | (1.31 | ) | $ | 9.74 |
| $ | 10.51 |
|
Diluted | $ | 1.50 |
| $ | (1.31 | ) | $ | 1.75 |
| $ | 0.60 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
|
| | | | | | | | | | | | |
| Three months ended December 31, | Six months ended December 31, |
| 2016 | 2015 | 2016 | 2015 |
| (Restated) | (Restated) |
Net income | $ | 246,184 |
| $ | 60,995 |
| $ | 304,279 |
| $ | 113,248 |
|
Net unrealized gain (loss) on marketable securities | — |
| 143 |
| 128 |
| (509 | ) |
Total comprehensive income | 246,184 |
| 61,138 |
| 304,407 |
| 112,739 |
|
Less: Comprehensive income attributable to non-controlling interest | (181,173 | ) | (49,916 | ) | (230,859 | ) | (97,359 | ) |
Comprehensive income attributable to Premier, Inc. | $ | 65,011 |
| $ | 11,222 |
| $ | 73,548 |
| $ | 15,380 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
Condensed Consolidated Statement of Stockholders' Deficit
Six months ended December 31, 2016
(Unaudited)
(In thousands)
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| | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Accumulated Deficit (Restated) | Accumulated Other Comprehensive Loss | Total Stockholders' Deficit (Restated) |
| 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 | 3,338 |
| 33 |
| (3,338 | ) | — |
| 107,180 |
| — |
| — |
| 107,213 |
|
Exchange of Class B units for cash by member owners | — |
| — |
| (3,033 | ) | — |
| — |
| — |
| — |
| — |
|
Increase in additional paid-in capital related to quarterly exchange by member owners | — |
| — |
| — |
| — |
| 28,286 |
| — |
| — |
| 28,286 |
|
Issuance of Class A common stock under equity incentive plan | 781 |
| 8 |
| — |
| — |
| 2,901 |
| — |
| — |
| 2,909 |
|
Issuance of Class A common stock under employee stock purchase plan | 41 |
| 1 |
| — |
| — |
| 1,255 |
| — |
| — |
| 1,256 |
|
Stock-based compensation expense | — |
| — |
| — |
| — |
| 12,066 |
| — |
| — |
| 12,066 |
|
Repurchase of vested restricted units for employee tax-withholding | — |
| — |
| — |
| — |
| (17,629 | ) | — |
| — |
| (17,629 | ) |
Net income | — |
| — |
| — |
| — |
| — |
| 304,279 |
| — |
| 304,279 |
|
Net income attributable to non-controlling interest in Premier LP | — |
| — |
| — |
| — |
| — |
| (230,774 | ) | — |
| (230,774 | ) |
Net unrealized loss on marketable securities | — |
| — |
| — |
| — |
| — |
| — |
| 43 |
| 43 |
|
Adjustment of redeemable limited partners' capital to redemption amount | — |
| — |
| — |
| — |
| (134,059 | ) | 531,131 |
| — |
| 397,072 |
|
Balance at December 31, 2016 (restated) | 50,156 |
| $ | 502 |
| 89,762 |
| $ | — |
| $ | — |
| $ | (1,347,242 | ) | $ | — |
| $ | (1,346,740 | ) |
See accompanying notes to the unaudited condensed consolidated financial statements.
PREMIER, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) |
| | | | | | |
| Six months ended December 31, |
| 2016 | 2015 |
| (Restated) |
Operating activities | | |
Net income | $ | 304,279 |
| $ | 113,248 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation and amortization | 48,576 |
| 39,382 |
|
Equity in net income of unconsolidated affiliates | (14,706 | ) | (9,375 | ) |
Deferred income taxes | 48,705 |
| 21,331 |
|
Stock-based compensation | 12,066 |
| 25,022 |
|
Adjustment to tax receivable agreement liability | (5,722 | ) | (4,818 | ) |
Remeasurement gain attributable to acquisition of Innovatix, LLC | (204,833 | ) | — |
|
Loss on disposal of long-lived assets | 1,518 |
| — |
|
Changes in operating assets and liabilities: | | |
Accounts receivable, prepaid expenses and other current assets | (11,888 | ) | (26,245 | ) |
Other assets | 274 |
| (10,853 | ) |
Inventories | (31,832 | ) | 2,814 |
|
Accounts payable, accrued expenses and other current liabilities | (4,136 | ) | (12,376 | ) |
Long-term liabilities | (4,100 | ) | (3,943 | ) |
Other operating activities | 163 |
| 540 |
|
Net cash provided by operating activities | 138,364 |
| 134,727 |
|
Investing activities | | |
Purchase of marketable securities | — |
| (19,211 | ) |
Proceeds from sale of marketable securities | 48,013 |
| 339,674 |
|
Acquisition of Innovatix, LLC and Essensa Ventures, LLC, net of cash acquired | (222,217 | ) | — |
|
Acquisition of Acro Pharmaceutical Services LLC and Community Pharmacy Services, LLC, net of cash acquired | (68,745 | ) | — |
|
Acquisition of CECity.com, Inc., net of cash acquired | — |
| (398,261 | ) |
Acquisition of Healthcare Insights, LLC, net of cash acquired | — |
| (64,634 | ) |
Acquisition of InFlow Health, LLC | — |
| (6,088 | ) |
Investment in unconsolidated affiliates | (65,660 | ) | (1,000 | ) |
Distributions received on equity investment | 6,550 |
| 11,743 |
|
Purchases of property and equipment | (34,325 | ) | (38,882 | ) |
Other investing activities | 26 |
| (5 | ) |
Net cash used in investing activities | (336,358 | ) | (176,664 | ) |
Financing activities | | |
Payments made on notes payable | (1,338 | ) | (1,336 | ) |
Proceeds from credit facility | 327,500 |
| 150,000 |
|
Payments on credit facility | — |
| (50,000 | ) |
Proceeds from exercise of stock options under equity incentive plan | 2,909 |
| 237 |
|
Proceeds from issuance of Class A common stock under stock purchase plan | 1,256 |
| 1,302 |
|
Repurchase of vested restricted units for employee tax-withholding | (17,629 | ) | (46 | ) |
Settlement of exchange of Class B units by member owners | (99,999 | ) | — |
|
Final remittance of net income attributable to former S2S Global minority shareholder | — |
| (1,890 | ) |
|
| | | | | | |
| Six months ended December 31, |
| 2016 | 2015 |
| (Restated) |
Distributions to limited partners of Premier LP | (44,630 | ) | (45,461 | ) |
Other financing activities | — |
| 19 |
|
Net cash provided by financing activities | 168,069 |
| 52,825 |
|
Net increase (decrease) in cash and cash equivalents | (29,925 | ) | 10,888 |
|
Cash and cash equivalents at beginning of year | 248,817 |
| 146,522 |
|
Cash and cash equivalents at end of period | $ | 218,892 |
| $ | 157,410 |
|
| | |
Supplemental schedule of non cash investing and financing activities: | | |
Decrease in redeemable limited partners' capital for adjustment to fair value, with offsetting decrease in additional paid-in-capital and accumulated deficit | $ | (397,072 | ) | $ | (401,240 | ) |
Reduction in redeemable limited partners' capital, with offsetting increase in common stock and additional paid-in capital related to quarterly exchanges by member owners | $ | (107,213 | ) | $ | (209,549 | ) |
Reduction in redeemable limited partners' capital for limited partners' distribution payable | $ | (44,870 | ) | $ | (22,505 | ) |
Distributions utilized to reduce subscriptions, notes, interest and accounts receivable from member owners | $ | 1,074 |
| $ | 3,374 |
|
Increase in deferred tax assets related to quarterly exchanges by member owners | $ | 77,638 |
| $ | 76,504 |
|
Increase in tax receivable agreement liability related to quarterly exchanges by member owners | $ | 49,352 |
| $ | 56,609 |
|
Increase in additional paid-in capital related to quarterly exchanges by member owners | $ | 28,286 |
| $ | 20,479 |
|
Reduction in deferred tax assets related to departed member owners | $ | — |
| $ | 383 |
|
Payable to member owners incurred upon repurchase of ownership interest | $ | — |
| $ | 552 |
|
Reduction in tax receivable agreement liability related to departed member owners | $ | — |
| $ | 967 |
|
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 primarily 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 that will 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 organizations ("GPOs") in the United States and integrated pharmacy and direct sourcing activities. The performance services segment includes one of the largest informatics and advisory services businesses in the United States focused on healthcare providers. The Company's software as a service ("SaaS") informatics products utilize its 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, advisory services, government services and insurance management services.
Basis of Presentation and Consolidation
Basis of Presentation
The Company, through its wholly-owned subsidiary, Premier Services, LLC ("Premier GP"), held an approximate 36% and 32% general partner interest in Premier Healthcare Alliance, L.P. ("Premier LP") at December 31, 2016 and June 30, 2016, respectively. Premier LP's limited partners held an approximate 64% and 68% ownership interest at December 31, 2016 and June 30, 2016, respectively. The limited partners' interest is reflected as redeemable limited partners' capital in the Company's accompanying condensed consolidated balance sheets, and the limited partners' proportionate share of income in Premier LP is reflected within net income attributable to non-controlling interest in Premier LP in the Company's accompanying condensed consolidated statements of income and within comprehensive income attributable to non-controlling interest in Premier LP in the Company's accompanying condensed consolidated statements of comprehensive income.
At December 31, 2016 and June 30, 2016, the member owners owned approximately 64% and 68%, respectively, of the Company's combined Class A and Class B common stock (the "common stock") through their ownership of Class B common stock. During the three months ended September 30, 2016, the member owners exchanged 1.3 million Class B common units and associated Class B common shares for an equal number of Class A common shares. During the three months ended December 31, 2016, the member owners exchanged 2.0 million Class B common units and associated Class B common shares for an equal number of Class A common shares, and exchanged 3.0 million Class B common units and associated Class B common shares for cash as part of their quarterly exchange rights under an exchange agreement (the "Exchange Agreement") entered into by the member owners in connection with the completion of a series of transactions (the "Reorganization") concurrent with the consummation of the Company's initial public offering (the "IPO," and together with the Reorganization, the "Reorganization and IPO") on October 1, 2013 (see Note 11 - Earnings Per Share). During the three months ended September 30, 2016 and December 31, 2016, approximately (i) 1.3 million and 5.0 million Class B common shares, respectively, were retired, (ii) zero and 3.0 million Class B common units, respectively, were retired, and (iii) 1.3 million and 2.0 million Class B common units, respectively, were contributed to Premier LP, converted to Class A common units and remain outstanding.
Refer to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2016 (the "2016 Annual Report") filed with the SEC on August 25, 2016 for further discussion of the Exchange Agreement and Reorganization and IPO. At December 31, 2016 and June 30, 2016, 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 36% and 32%, respectively, of the Company's outstanding common stock through their ownership of Class A common stock.
Premier LP is a variable interest entity ("VIE") in which 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. Premier LP is a VIE as the limited partners do not have the ability to exercise a substantive removal right with respect to the general partner. See Note 2 - Significant Accounting Policies for further discussion of recently adopted accounting standards related to VIEs.
The assets and liabilities of Premier LP at December 31, 2016 (restated) and June 30, 2016 consisted of the following (in thousands):
|
| | | | | | |
| December 31, 2016 | June 30, 2016 |
| (Restated) |
Assets | | |
Current | $ | 445,013 |
| $ | 423,969 |
|
Noncurrent | 1,650,063 |
| 973,741 |
|
Total assets of Premier LP | $ | 2,095,076 |
| $ | 1,397,710 |
|
| | |
Liabilities | | |
Current | $ | 803,728 |
| $ | 380,001 |
|
Noncurrent | 137,921 |
| 74,709 |
|
Total liabilities of Premier LP | $ | 941,649 |
| $ | 454,710 |
|
Net income attributable to Premier LP was as follows (in thousands):
|
| | | | | | | | | | | | |
| Three months ended December 31, | Six months ended December 31, |
| 2016 | 2015 | 2016 | 2015 |
| (Restated) | (Restated) |
Premier LP net income | $ | 281,629 |
| $ | 70,495 |
| $ | 355,974 |
| $ | 135,447 |
|
Premier LP's cash flows for the six months ended December 31, 2016 (restated) and 2015 consisted of the following (in thousands):
|
| | | | | | |
| Six months ended December 31, |
| 2016 | 2015 |
Net cash provided by (used in): | | |
Operating activities | $ | 121,731 |
| $ | 148,405 |
|
Investing activities | (336,358 | ) | (180,773 | ) |
Financing activities | 159,533 |
| 34,879 |
|
Net increase (decrease) in cash and cash equivalents | (55,094 | ) | 2,511 |
|
Cash and cash equivalents at beginning of year | 210,048 |
| 126,662 |
|
Cash and cash equivalents at end of period | $ | 154,954 |
| $ | 129,173 |
|
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 Securities and Exchange Commission (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 2016 Annual Report.
In the Company's Form 10-Q for the quarter ended September 30, 2016, the Company understated the fair value of the put right liability and overstated the fair value of the call right asset obtained pursuant to a shareholders' agreement entered into in connection with the Company's equity investment in FFF Enterprises, Inc. ("FFF") on July 26, 2016 (see Note 4 - Investments and Note 5 - Fair Value Measurements) by $1.9 million and $6.2 million, respectively. In addition, the deferred tax liability attributed to the fair value of the put and call rights was understated by $3.1 million. As a result, the investment in FFF was understated by $11.2 million, of which $8.1 million was attributed to the aforementioned adjustments to the net fair value of the put and call rights and $3.1 million was attributed to the adjustment to the deferred tax liability. The Company has corrected this immaterial error in the second quarter condensed consolidated balance sheets at December 31, 2016 and associated disclosures in Note 4 - Investments and Note 5 - Fair Value Measurements.
In the Company's Form 10-Q for the quarter ended December 31, 2015, the Company overstated cash flows used in investing activities for the six months ended December 31, 2015 by $4.1 million and overstated cash flows provided by operating activities by $4.1 million related to the earn-out liability for InFlowHealth, LLC ("InFlow"). The Company has corrected this immaterial error in the statement of cash flows for the six months ended December 31, 2015 in the accompanying condensed consolidated financial statements.
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 including estimates for allowances for doubtful accounts, useful lives of property and equipment, stock-based compensation, payables under tax receivable agreements, values of investments not publicly traded, the valuation allowance on deferred tax assets, uncertain income taxes, deferred revenue, future cash flows associated with asset impairments, values of put and call rights and the allocation of purchase price are evaluated on an ongoing basis. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Restatement of Previously Reported Financial Information
Prior to December 2, 2016, the Company, through its consolidated subsidiary, Premier Supply Chain Improvement, Inc. ("PSCI"), held a 50% ownership interest in Innovatix, LLC ("Innovatix"), which was accounted for under the equity method and classified as a partnership for tax purposes. On December 2, 2016, the Company acquired the remaining 50% ownership interest of Innovatix. In connection with the acquisition, the Company’s historical 50% investment was remeasured under business combination accounting rules to fair value, resulting in a one-time gain of $204.8 million. At the time of the acquisition, a deferred tax liability of $95.8 million and a corresponding deferred income tax expense of $95.8 million associated with the one-time gain were recorded by the Company and are reflected in the previously issued financial statements included in the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2016, originally filed with the Securities and Exchange Commission ("SEC") on February 7, 2017 (the "Original Form 10-Q").
Subsequent to the issuance of the financial statements included in the Company's Original Form 10-Q, the Company adjusted its income tax accounting for this acquisition. The Company determined that a portion of the deferred tax liability and a portion of the deferred tax expense associated with the $204.8 million gain that were reflected in the previously issued financial statements should not have been recorded. Accordingly, the Company determined it necessary to adjust the Original Form 10-Q to restate the previously recorded deferred tax liability and deferred income tax expense, and record deferred tax liabilities associated with the book and tax bases differences of the individual assets acquired and liabilities assumed.
The impact of these changes on selected financial amounts within the accompanying condensed consolidated financial statements is summarized below:
|
| | | | | | | | | |
| December 31, 2016 |
Condensed Consolidated Balance Sheet | Previously Reported | Effect of Restatement | Restated |
Assets: | | | |
Goodwill | $ | 862,939 |
| $ | 43,928 |
| $ | 906,867 |
|
Deferred income tax assets | $ | 462,658 |
| $ | (10,517 | ) | $ | 452,141 |
|
Total assets | $ | 2,582,743 |
| $ | 33,411 |
| $ | 2,616,154 |
|
| | | |
Liabilities and stockholders' deficit: | | | |
Deferred tax liabilities | $ | 84,341 |
| $ | (34,098 | ) | $ | 50,243 |
|
Total liabilities | $ | 1,276,983 |
| $ | (34,098 | ) | $ | 1,242,885 |
|
Accumulated deficit | $ | (1,414,751 | ) | $ | 67,509 |
| $ | (1,347,242 | ) |
Total stockholders' deficit | $ | (1,414,249 | ) | $ | 67,509 |
| $ | (1,346,740 | ) |
Total liabilities, redeemable limited partners' capital and stockholders' deficit | $ | 2,582,743 |
| $ | 33,411 |
| $ | 2,616,154 |
|
| | | |
| Three months ended December 31, 2016 |
Condensed Consolidated Statements of Income | Previously Reported | Effect of Restatement | Restated |
Income tax expense | $ | 104,938 |
| $ | (67,509 | ) | $ | 37,429 |
|
Net income | $ | 178,675 |
| $ | 67,509 |
| $ | 246,184 |
|
Net income attributable to non-controlling interest in Premier LP | $ | (131,117 | ) | $ | (50,056 | ) | $ | (181,173 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | $ | 285,208 |
| $ | 50,056 |
| $ | 335,264 |
|
Net income attributable to stockholders | $ | 332,766 |
| $ | 67,509 |
| $ | 400,275 |
|
| | | |
Earnings per share attributable to stockholders: | | | |
Basic | $ | 6.73 |
| $ | 1.37 |
| $ | 8.10 |
|
Diluted | $ | 1.09 |
| $ | 0.41 |
| $ | 1.50 |
|
| | | |
| Six months ended December 31, 2016 |
Condensed Consolidated Statements of Income | Previously Reported | Effect of Restatement | Restated |
Income tax expense | $ | 128,274 |
| $ | (67,509 | ) | $ | 60,765 |
|
Net income | $ | 236,770 |
| $ | 67,509 |
| $ | 304,279 |
|
Net income attributable to non-controlling interest in Premier LP | $ | (180,718 | ) | $ | (50,056 | ) | $ | (230,774 | ) |
Adjustment of redeemable limited partners' capital to redemption amount | $ | 347,016 |
| $ | 50,056 |
| $ | 397,072 |
|
Net income attributable to stockholders | $ | 403,068 |
| $ | 67,509 |
| $ | 470,577 |
|
| | | |
Earnings per share attributable to stockholders: | | | |
Basic | $ | 8.34 |
| $ | 1.40 |
| $ | 9.74 |
|
Diluted | $ | 1.35 |
| $ | 0.40 |
| $ | 1.75 |
|
| | | |
|
| | | | | | | | | |
| Three months ended December 31, 2016 |
Condensed Consolidated Statements of Comprehensive Income | Previously Reported | Effect of Restatement | Restated |
Net income | $ | 178,675 |
| $ | 67,509 |
| $ | 246,184 |
|
Comprehensive income attributable to non-controlling interest | $ | (131,117 | ) | $ | (50,056 | ) | $ | (181,173 | ) |
Comprehensive income attributable to Premier, Inc. | $ | 47,558 |
| $ | 17,453 |
| $ | 65,011 |
|
| | | |
| Six months ended December 31, 2016 |
Condensed Consolidated Statements of Comprehensive Income | Previously Reported | Effect of Restatement | Restated |
Net income | $ | 236,770 |
| $ | 67,509 |
| $ | 304,279 |
|
Comprehensive income attributable to non-controlling interest | $ | (180,803 | ) | $ | (50,056 | ) | $ | (230,859 | ) |
Comprehensive income attributable to Premier, Inc. | $ | 56,095 |
| $ | 17,453 |
| $ | 73,548 |
|
| | | |
| Six months ended December 31, 2016 |
Condensed Consolidated Statement of Stockholders' Deficit | Previously Reported | Effect of Restatement | Restated |
Net income | $ | 236,770 |
| $ | 67,509 |
| $ | 304,279 |
|
Net income attributable to non-controlling interest in Premier LP | $ | (180,718 | ) | $ | (50,056 | ) | $ | (230,774 | ) |
Accumulated deficit - Adjustment of redeemable limited partners' capital to redemption amount | $ | 481,075 |
| $ | 50,056 |
| $ | 531,131 |
|
Total stockholders' deficit - Adjustment of redeemable limited partners' capital to redemption amount | $ | 347,016 |
| $ | 50,056 |
| $ | 397,072 |
|
Total accumulated deficit (a) | $ | (1,414,751 | ) | $ | 67,509 |
| $ | (1,347,242 | ) |
Total stockholders' deficit (a) | $ | (1,414,249 | ) | $ | 67,509 |
| $ | (1,346,740 | ) |
| | | |
| Six months ended December 31, 2016 |
Condensed Consolidated Statements of Cash Flows | Previously Reported | Effect of Restatement | Restated |
Net income | $ | 236,770 |
| $ | 67,509 |
| $ | 304,279 |
|
Deferred income taxes | $ | 116,214 |
| $ | (67,509 | ) | $ | 48,705 |
|
| |
(a) | Balances presented as of December 31, 2016. |
(2) SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company's significant accounting policies as described in the 2016 Annual Report.
Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which is intended to simplify the accounting for employee share-based payments. The amendments in this updated guidance include changes to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of such share-based awards as either equity or liabilities and classification in the statement of cash flows. The Company early-adopted the standard effective July 1, 2016, using the prospective approach. Pursuant to the guidance, the Company recognized gross excess tax benefits of approximately $9.1 million ($3.6 million tax effected) during the three months ended September 30, 2016, which were fully offset by a valuation allowance at Premier Healthcare Solutions, Inc. ("PHSI"), the Company's consolidated subsidiary. No adjustments were made to prior periods, and the impact on prior periods would have been immaterial. All excess tax benefits related to share-based awards are reported as operating activities within the accompanying condensed consolidated statement of cash flows. In addition, the Company calculated diluted earnings per share without consideration of any tax benefits in determining dilutive shares.
In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarifies the SEC staff's position in ASU 2015-03 on presenting and measuring debt
issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. ASU 2015-15 states that the SEC staff would "not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement." The Company adopted the standard effective July 1, 2016 using the retrospective approach. The guidance had no impact on the Company's accounting for debt issuance costs associated with its line of credit.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which effectively eliminated the presumption that a general partner should consolidate a limited partnership, modified the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, and affected the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The Company adopted the standard effective July 1, 2016 using the modified retrospective approach. The adoption of ASU 2015-02 did not impact the Company's conclusions regarding consolidation or the consolidated financial statements other than providing additional disclosures around Premier's consolidation of Premier LP. As a result of ASU 2015-02, the Company no longer consolidates Premier LP under the presumption that the general partner controls a limited partnership but rather consolidates Premier LP under the Variable Interest Model. Premier LP meets the definition of a VIE as the limited partners do not have the ability to exercise a substantive removal right with respect to the general partner, Premier GP. Additionally, the Company, through Premier GP, has the exclusive power and authority to manage the business and affairs of Premier LP, to make all decisions with respect thereto driving the economic performance of Premier LP, and has both an obligation to absorb losses and a right to receive benefits.
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 requirements 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, 2019. 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 U.S. GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The ASU amendments add or clarify guidance on eight cash flow issues. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations of accounting for leasing arrangements. This guidance establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Entities will be required to recognize and measure leases as of the earliest period presented using a modified retrospective approach. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which is intended to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted for certain amendments. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In July 2015, the FASB issued 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 current guidance under which an entity must measure inventory at the lower of cost or market. This guidance will not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. The new standard will be effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2017. Early adoption is permitted. Upon transition, entities must disclose the nature of and reason for the accounting change. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance. The new standard requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new standard allows for either full retrospective or modified retrospective adoption.
The FASB subsequently issued an amendment in ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, in August 2015 to defer the effective date of the new standard for all entities by one year. The new standard, as amended, will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption as of the original effective date for public entities will be permitted.
The FASB issued another amendment in ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, in March 2016 related to a third party providing goods or services to a customer. When another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself or to arrange for the good or service to be provided by a third party. If the entity provides the specific good or service itself, the entity acts as a principal. If an entity arranges for the good or service to be provided by a third party, the entity acts as an agent. The standard requires the principal to recognize revenue for the gross amount and the agent to recognize revenue for the amount of any fee or commission for which it expects to be entitled in exchange for arranging for the specified good or service to be provided. The new standard will be effective with ASU 2014-09.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which amends specific aspects of ASU 2014-09, including how to identify performance obligations and guidance related to licensing implementation. This amendment provides guidance on determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property or a right to access the entity's intellectual property. The amendment will be effective with ASU 2014-09.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies specific aspects of ASU 2014-09, clarifying how to identify performance obligations and guidance related to its promise in granting a license of intellectual property. This new standard provides guidance to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised good or service is separately identifiable and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost. The new standard also clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property to help determine whether it recognizes revenue over time or at a point in time and addresses how entities should consider license renewals and restrictions. The new standard will be effective with ASU 2014-09.
In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which clarifies specific aspects of ASU 2014-09, including allowing entities not to make quantitative disclosures about remaining performance obligations in certain cases and requiring entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. The new standard also makes twelve other technical corrections and improvements to ASU 2014-09. The new standard will be effective with ASU 2014-09.
The new revenue recognition standards discussed above, as amended, will be effective for the Company for the fiscal year beginning July 1, 2018. The Company is currently evaluating the transition method that will be elected as well as the impact of the adoption of the new standards on its consolidated financial statements and related disclosures. The Company is also evaluating the impact of the deferral of the effective date on its plans for adopting the new standard.
(3) BUSINESS ACQUISITIONS
Acquisition of Innovatix, LLC and Essensa Ventures, LLC
Prior to December 2, 2016, the Company, through its consolidated subsidiary, PSCI, held 50% of the membership interests in Innovatix, LLC ("Innovatix") (see Note 4 - Investments). On December 2, 2016, the Company, through PSCI, acquired from GNYHA Holdings, LLC (see Note 14 - Related Party Transactions) the remaining 50% ownership interest of Innovatix and 100% of the ownership interest in Essensa Ventures, LLC ("Essensa") for $325.0 million, of which $227.5 million in cash was paid at closing and $97.5 million, included in deferred purchase price payable in the condensed consolidated balance sheets, was paid on January 10, 2017.
The purchase price is subject to adjustment based on Innovatix's and Essensa's (i) cash on hand and cash equivalents, (ii) outstanding indebtedness and (iii) net working capital at closing. With regard to Innovatix, the purchase price adjustments set forth in (i), (ii) and (iii) above are limited to 50% of the actual amount due to PSCI’s 50% ownership interest prior to the acquisition. Innovatix and Essensa are GPOs focused on serving nonacute and alternate site health care providers and other organizations throughout the United States.
In connection with the acquisition, the Company utilized its credit facility (the "Credit Facility") to fund the $325.0 million purchase price (see Note 8 - Debt). More specifically, the Company borrowed $227.5 million from the Credit Facility on December 1, 2016, which is reflected within current portion of long-term debt in our condensed consolidated balance sheets at December 31, 2016. The Company subsequently borrowed an additional $97.5 million from the Credit Facility on January 10, 2017.
The Company incurred $4.4 million and $4.7 million of transaction costs related to this acquisition during the three and six months ended December 31, 2016, 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 (see Note 6 - Intangible Assets, Net) acquired and liabilities assumed based on their preliminary fair values. The purchase price allocation for the Innovatix and Essensa acquisition is preliminary and subject to changes in the fair value of working capital and valuation of the assets acquired and the liabilities assumed. The acquisition resulted in the recognition of approximately $331.2 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 a portion of the goodwill to be deductible for tax purposes.
The preliminary 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 (Restated) |
Cash paid at closing | $ | 227,500 |
|
Deferred purchase price | 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 | ) |
Estimated working capital settlement | 1,106 |
|
Total consideration paid | 350,752 |
|
Cash acquired | (16,267 | ) |
Net consideration | 334,485 |
|
50% ownership interest in Innovatix | 218,044 |
|
Payable to Innovatix and Essensa | (5,765 | ) |
Enterprise value | 546,764 |
|
| |
Accounts receivable | 23,458 |
|
Prepaid expenses and other current assets | 686 |
|
Fixed assets, net | 2,064 |
|
Intangible assets | 246,906 |
|
Total assets acquired | 273,114 |
|
Accrued expenses | 5,954 |
|
Revenue share obligations | 6,937 |
|
Other current liabilities | 694 |
|
Total liabilities assumed | 13,585 |
|
Deferred tax liability | 43,928 |
|
Goodwill | $ | 331,163 |
|
The acquisition provides the selling members 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. In accordance with GAAP, the contingent consideration is recorded at fair value based on a probability-weighted approach including multiple earnings scenarios. This value is not indicative of a known amount to be paid. As of December 31, 2016, the fair value of the earn-out liability was $16.7 million (see Note 5 - Fair Value Measurements).
Certain executive officers of Innovatix and Essensa executed employment agreements that became effective upon the closing of the acquisition. The purchase agreement provides that in the event that Innovatix's and Essensa's Adjusted EBITDA exceeds agreed upon amounts, certain of those executive officers are entitled to receive a retention bonus payment of up to $3.0 million in the aggregate for which the Company will be reimbursed by GNYHA Holdings, LLC.
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 $13.2 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 $218.0 million, resulting in a one-time gain of $204.8 million which was recorded in the accompanying condensed consolidated statements of income as other income.
The revenue and net income generated by Innovatix and Essensa during the three months ended December 31, 2016 were not material to the condensed consolidated statements of 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 Pharmaceutical Services LLC and Community Pharmacy Services, LLC
On August 23, 2016, the Company, through its consolidated subsidiary, NS3 Health, LLC, acquired 100% of the membership interests of Acro Pharmaceutical Services LLC and Community Pharmacy Services, LLC (collectively, "Acro Pharmaceuticals") for $68.7 million in cash, subject to adjustment based on Acro Pharmaceuticals' (i) cash on hand, (ii) outstanding indebtedness and (iii) net working capital at closing. Acro Pharmaceuticals is a specialty pharmacy business that provides customized healthcare management solutions to clients. 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 preliminary fair values. The purchase price allocation for the Acro Pharmaceuticals acquisition is preliminary and subject to changes in fair value of working capital and valuation of the assets acquired and the liabilities assumed. The Acro Pharmaceuticals acquisition resulted in the recognition of approximately $37.7 million of goodwill (see Note 7 - Goodwill) attributable to the anticipated profitability of Acro Pharmaceuticals. The Acro Pharmaceuticals acquisition is considered an asset acquisition for tax purposes and accordingly, the Company expects the goodwill to be deductible for tax purposes.
Acro Pharmaceuticals generated $56.5 million and $79.9 million of product revenue during the three and six months ended December 31, 2016, respectively. The net income generated by Acro Pharmaceuticals was not material to the condensed consolidated statements of 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 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 December 31, | Six months ended December 31, |
| December 31, 2016 | June 30, 2016 | | 2016 | 2015 | 2016 | 2015 |
FFF Enterprises, Inc. | $ | 91,253 |
| $ | — |
| | $ | 1,119 |
| $ | — |
| $ | 4,177 |
| $ | — |
|
BloodSolutions, LLC | 2,133 |
| 2,185 |
| | (34 | ) | — |
| (52 | ) | — |
|
PharmaPoint, LLC | 4,409 |
| 4,572 |
| | (85 | ) | (90 | ) | (162 | ) | (176 | ) |
Innovatix, LLC | — |
| 9,043 |
| | 4,127 |
| 4,875 |
| 10,743 |
| 9,258 |
|
Other investments | 1,000 |
| 1,000 |
| | — |
| — |
| — |
| 293 |
|
Total investments | $ | 98,795 |
| $ | 16,800 |
| | $ | 5,127 |
| $ | 4,785 |
| $ | 14,706 |
| $ | 9,375 |
|
On July 26, 2016, the Company, through its consolidated subsidiary, PSCI, acquired 49% of the issued and outstanding stock of 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 $87.1 million, of which $65.7 million was in cash, $15.4 million was consideration in the form of the net fair value of the FFF put and call rights and $6.0 million related to deferred taxes attributed to the 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.
On January 28, 2016, the Company, through its consolidated subsidiary, PSCI, purchased 5.3 million Class B Membership Units in BloodSolutions, LLC ("Bloodbuy") for approximately $2.3 million, which represented a 15% ownership interest in Bloodbuy. The Company accounts for its investment in Bloodbuy using the equity method of accounting as the Company has rights to appoint a board member, and includes the investment as part of the supply chain services segment.
The Company, through its consolidated subsidiary, PSCI, held a 28% ownership interest in PharmaPoint, LLC ("PharmaPoint") through its 5.0 million units of Class B Membership Interests at December 31, 2016 and June 30, 2016. The remaining 72% ownership interest is held by Nations Pharmaceuticals, LLC through its 13.0 million units of Class A Membership Interests. 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.
Innovatix is a privately held limited liability company that provides group purchasing services to alternate site providers in specific classes of trade. 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). As a result, the Company recognized a one-time gain of $204.8 million related to the remeasurement of the existing 50% ownership share to fair value. Prior to the acquisition, the Company accounted for its investment in Innovatix using the equity method of accounting and included the investment as part of the supply chain services segment.
Marketable Securities
The Company has historically invested its excess cash in commercial paper, U.S. government debt securities, corporate debt securities and other securities with maturities generally ranging from three months to five years from the date of purchase. The Company uses the specific-identification method to determine the cost of securities sold. At December 31, 2016, the Company had no marketable securities. At June 30, 2016, corporate debt securities and asset-backed securities were classified as current and long-term marketable securities in the accompanying condensed consolidated balance sheets. See Note 5 - Fair Value Measurements for further information related to the Company's measurement of fair market value for its marketable securities. At June 30, 2016, marketable securities, classified as available-for-sale, consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value |
June 30, 2016 | | | | |
Corporate debt securities | $ | 33,267 |
| $ | — |
| $ | (135 | ) | $ | 33,132 |
|
Asset-backed securities | 14,755 |
| 3 |
| (1 | ) | 14,757 |
|
Total marketable securities | $ | 48,022 |
| $ | 3 |
| $ | (136 | ) | $ | 47,889 |
|
(5) FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The following table represents 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) |
December 31, 2016 | | | | |
Cash equivalents | $ | 129 |
| $ | 129 |
| $ | — |
| $ | — |
|
FFF call right | 10,750 |
| — |
| — |
| 10,750 |
|
Deferred compensation plan assets | 43,549 |
| 43,549 |
| — |
| — |
|
Total assets | $ | 54,428 |
| $ | 43,678 |
| $ | — |
| $ | 10,750 |
|
Earn-out liabilities | $ | 16,713 |
| $ | — |
| $ | — |
| $ | 16,713 |
|
FFF put right | 26,384 |
| — |
| — |
| 26,384 |
|
Total liabilities | $ | 43,097 |
| $ | — |
| $ | — |
| $ | 43,097 |
|
| | | | |
June 30, 2016 | | | | |
Cash equivalents | $ | 83,846 |
| $ | 83,846 |
| $ | — |
| $ | — |
|
Corporate debt securities | 33,132 |
| — |
| 33,132 |
| — |
|
Asset-backed securities | 14,757 |
| — |
| 14,757 |
| — |
|
Deferred compensation plan assets | 41,917 |
| 41,917 |
| — |
| — |
|
Total assets | $ | 173,652 |
| $ | 125,763 |
| $ | 47,889 |
| $ | — |
|
Earn-out liabilities | $ | 4,128 |
| $ | — |
| $ | — |
| $ | 4,128 |
|
Total liabilities | $ | 4,128 |
| $ | — |
| $ | — |
| $ | 4,128 |
|
Cash equivalents were included in cash and cash equivalents, and corporate debt securities and asset-backed securities were included in current and long-term marketable securities in the accompanying condensed consolidated balance sheets (see Note 4 - Investments). The fair value of the Company's corporate debt securities and asset-backed securities, classified as Level 2, were valued using quoted prices for similar securities in active markets or quoted prices for identical or similar securities in markets that are not active.
Deferred compensation plan assets consisted of highly liquid mutual fund investments, which we have classified as Level 1. The current portion of deferred compensation plan assets was included in prepaid expenses and other current assets ($5.3 million and $2.0 million at December 31, 2016 and June 30, 2016, 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 incurred in connection with acquisitions of Inflow on October 1, 2015, Healthcare Insights, LLC ("HCI") on July 31, 2015 and Innovatix and Essensa on December 2, 2016 (see Note 3 - Business Acquisitions). At December 31, 2016 and June 30, 2016, the Company's earn-out liabilities were classified as Level 3. The fair values of the earn-out liabilities were determined based on estimated future earnings. 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 on July 26, 2016 (see Note 4 - Investments), the majority shareholder of FFF obtained a put right ("FFF put right") that provides such shareholder the right to sell all or any portion of its interest in FFF to the Company, which is exercisable beginning on the fourth anniversary of the investment closing date 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 shareholders' agreement provided the Company with a call right ("FFF call right") to purchase the remaining interest in FFF from the majority shareholder, which is exercisable at any time within 180 calendar days after the date of a Key Man Event (generally defined in the shareholders' agreement as the resignation, termination for cause, death or disability of the majority shareholder). 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, within the accompanying condensed consolidated balance sheets. Net changes in the fair value of the FFF put and call rights were recorded within other expense, net, 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 | Gain (loss) | Ending Balance |
Three months ended December 31, 2016 |
FFF call right asset | $ | 10,316 |
| $ | — |
| $ | 434 |
| $ | 10,750 |
|
Total Level 3 assets | $ | 10,316 |
| $ | — |
| $ | 434 |
| $ | 10,750 |
|
Earn-out liabilities | $ | 2,359 |
| $ | 16,662 |
| $ | 2,308 |
| $ | 16,713 |
|
FFF put right liability | 25,811 |
| — |
| (573 | ) | 26,384 |
|
Total Level 3 liabilities | $ | 28,170 |
| $ | 16,662 |
| $ | 1,735 |
| $ | 43,097 |
|
| | | | |
Three months ended December 31, 2015 |
Earn-out liabilities | $ | — |
| $ | 4,109 |
| $ | — |
| $ | 4,109 |
|
Total Level 3 liabilities | $ | — |
| $ | 4,109 |
| $ | — |
| $ | 4,109 |
|
| | | | |
Six months ended December 31, 2016 |
FFF call right asset | $ | — |
| $ | 10,361 |
| $ | 389 |
| $ | 10,750 |
|
Total Level 3 assets | $ | — |
| $ | 10,361 |
| $ | 389 |
| $ | 10,750 |
|
Earn-out liabilities | $ | 4,128 |
| $ | 16,662 |
| $ | 4,077 |
| $ | 16,713 |
|
FFF put right liability | — |
| 25,821 |
| (563 | ) | 26,384 |
|
Total Level 3 liabilities | $ | 4,128 |
| $ | 42,483 |
| $ | 3,514 |
| $ | 43,097 |
|
| | | | |
Six months ended December 31, 2015 |
Earn-out liabilities | $ | — |
| $ | 4,109 |
| $ | — |
| $ | 4,109 |
|
Total Level 3 liabilities | $ | — |
| $ | 4,109 |
| $ | — |
| $ | 4,109 |
|
Non-Recurring Fair Value Measurements
During the six months ended December 31, 2016, no non-recurring fair value measurements were required related to the testing of goodwill and intangible assets for impairment. However, purchase price allocations required significant non-recurring Level 3 inputs. The preliminary fair values of the acquired intangible assets resulting from the acquisitions of Acro Pharmaceuticals and Innovatix and Essensa were determined using the income approach (see Note 3 - Business Acquisitions).
The Company recognized a one-time gain of $204.8 million related to the remeasurement of the Company's 50% equity method investment in Innovatix to fair value upon acquisition of the remaining interest in Innovatix (see Note 3 - Business Acquisitions). The fair value of the investment was calculated using a discounted cash flow model.
Financial Instruments For Which Fair Value Only is Disclosed
The fair value of non-interest bearing notes payable, classified as Level 2, was less than their carrying value by approximately $0.6 million and $0.7 million at December 31, 2016 and June 30, 2016, respectively, based on assumed market interest rates of 2.4% and 2.1%, respectively.
Other Financial Instruments
The fair value of cash, accounts receivable, accounts payable and accrued liabilities 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 | December 31, 2016 | June 30, 2016 |
Member relationships | 14.7 years | $ | 224,100 |
| $ | — |
|
Technology | 5.0 years | 145,140 |
| 143,727 |
|
Customer relationships | 8.3 years | 48,120 |
| 48,120 |
|
Trade names | 8.3 years | 22,710 |
| 13,160 |
|
Distribution network | 10.0 years | 22,400 |
| — |
|
Favorable lease commitments | 10.1 years | 11,393 |
| — |
|
Non-compete agreements | 5.9 years | 8,710 |
| 4,080 |
|
Total intangible assets | | 482,573 |
| 209,087 |
|
Accumulated amortization | | (71,230 | ) | (50,870 | ) |
Intangible assets, net | | $ | 411,343 |
| $ | 158,217 |
|
The increase in total intangible assets was due to the acquisitions of Acro Pharmaceuticals in August 2016 and Innovatix and Essensa in December 2016 (see Note 3 - Business Acquisitions). Intangible asset amortization totaled $11.2 million and $9.3 million for the three months ended December 31, 2016 and 2015, respectively, and $20.4 million and $15.3 million for the six months ended December 31, 2016 and 2015, respectively.
(7) GOODWILL
Goodwill consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| Supply Chain Services | Performance Services | Acquisition adjustments (b) | Total |
June 30, 2016 | $ | 31,765 |
| $ | 506,197 |
| $ | — |
| $ | 537,962 |
|
Acro Pharmaceuticals (a) | 39,850 |
| — |
| (2,108 | ) | 37,742 |
|
Innovatix and Essensa (restated) (a) | 331,163 |
| — |
| — |
| 331,163 |
|
December 31, 2016 (restated) | $ | 402,778 |
| $ | 506,197 |
| $ | (2,108 | ) | $ | 906,867 |
|
| |
(a) | See Note 3 - Business Acquisitions for more information. |
| |
(b) | The initial purchase price allocations for the Company's acquisitions are preliminary and subject to changes in fair value of working capital and valuation of the assets acquired and the liabilities assumed. The Acro Pharmaceuticals acquisition adjustment related to working capital and was recorded in the Supply Chain Services segment. See Note 3 - Business Acquisitions for more information. |
(8) DEBT
Long-term debt consisted of the following (in thousands):
|
| | | | | | | | | | |
| Commitment Amount | Due Date | December 31, 2016 | June 30, 2016 |
Credit Facility | $ | 750,000 |
| June 24, 2019 | $ | 327,500 |
| $ | — |
|
Notes payable | $ | — |
| Various | 18,004 |
| 19,342 |
|
Total debt | | | 345,504 |
| 19,342 |
|
Less: Current portion | | | (338,505 | ) | (5,484 | ) |
Total long-term debt | | | $ | 6,999 |
| $ | 13,858 |
|
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 December 31, 2016, the interest rate for three-month Eurodollar Loans was 2.123% and the interest rate for the Base Rate Loans was 3.875%. 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 December 31, 2016, 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. The Company was in compliance with all such covenants at December 31, 2016.
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, settlements of Class B unit exchanges under the Exchange Agreement and other general corporate purposes. During the three months ended December 31, 2016, the Company utilized $327.5 million of the Credit Facility, including approximately $227.5 million to fund a portion of the acquisition price of Innovatix and Essensa on December 1, 2016 (see Note 3 - Business Acquisitions), approximately $50.0 million to fund a portion of the October 31, 2016 Class B common unit exchange under the Exchange agreement (see Note 9 - Redeemable Limited Partners' Capital), and the remainder to fund general corporate activities. These borrowings were classified as current liabilities in the condensed consolidated balance sheets as they were due within one year of the balance sheet date, but may be renewed or extended at the option of the Company through the maturity date of the Credit Facility.
In connection with the acquisition of Innovatix and Essensa, the Company borrowed an additional $97.5 million from the Credit Facility on January 10, 2017 to fund the settlement of the deferred purchase price payable recorded in the condensed consolidated balance sheets at December 31, 2016. On February 1, 2017, the Company repaid $50.0 million of borrowings under the Credit Facility.
Notes Payable
At December 31, 2016 and June 30, 2016, the Company had $18.0 million and $19.3 million, respectively, in notes payable consisting primarily of non-interest bearing notes payable outstanding to departed member owners, of which $11.0 million and $5.5 million, respectively, were included in current portion of long-term debt and $7.0 million and $13.9 million, respectively, are included in long-term debt, less current portion, in the accompanying consolidated balance sheets. Notes payable generally have stated maturities of five years from their date of issuance.
(9) REDEEMABLE LIMITED PARTNERS' CAPITAL
Pursuant to the terms of its limited partnership agreement in effect prior to the Reorganization and IPO, Premier LP was required to repurchase a limited partner's interest in Premier LP upon the sale of such limited partner's shares of PHSI common stock, such limited partner's withdrawal from Premier LP, or such limited partner's failure to comply with the applicable purchase commitments under the historical limited partnership agreement of Premier LP. Redeemable limited partners' capital is classified as temporary equity in the mezzanine section of the accompanying condensed consolidated balance sheets as the withdrawal is at the option of each limited partner and the conditions of the repurchase are not solely within the Company's control.
Upon the consummation of the Reorganization and IPO, each limited partner's shares of PHSI were contributed for Class B common units of Premier LP. Commencing on October 31, 2014, and during each year thereafter, 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 of the board of directors.
Redeemable limited partners' capital represents the member owners' 64% ownership of Premier LP through their ownership of Class B common units at December 31, 2016. The limited partners 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 in the mezzanine section of the accompanying condensed consolidated balance sheets at December 31, 2016 and June 30, 2016 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 six months ended December 31, 2016 and 2015, the Company recorded decreases to fair value for the redemption amount to redeemable limited partners' capital of $397.1 million (restated) and $401.2 million, respectively.
During the six months ended December 31, 2016, the Company recorded total reductions of $207.2 million to redeemable limited partners' capital to reflect the exchange of Class B common units and associated shares of Class B common stock by member owners for a like number of shares of the Company's Class A common stock and the surrender of Class B common units and associated shares of Class B common stock by member owners for cash pursuant to the terms of the Exchange Agreement (see Note 11 - Earnings Per Share). The table below shows the changes in the redeemable limited partners' capital from June 30, 2016 to December 31, 2016 (in thousands):
|
| | | | | | | | | | | | |
| Receivables From Limited Partners | Redeemable Limited Partners' Capital | Accumulated Other Comprehensive Loss | Total Redeemable Limited Partners' Capital |
June 30, 2016 | $ | (6,226 | ) | $ | 3,143,541 |
| $ | (85 | ) | $ | 3,137,230 |
|
Distributions applied to receivables from limited partners | 1,074 |
| — |
| — |
| 1,074 |
|
Net income attributable to non-controlling interest in Premier LP (restated) | — |
| 230,774 |
| — |
| 230,774 |
|
Distributions to limited partners | — |
| (44,870 | ) | — |
| (44,870 | ) |
Net unrealized loss on marketable securities | — |
| — |
| 85 |
| 85 |
|
Exchange of Class B common units for Class A common stock by member owners | — |
| (107,213 | ) | — |
| (107,213 | ) |
Exchange of Class B common units for cash by member owners | — |
| (99,999 | ) | — |
| (99,999 | ) |
Adjustment to redemption amount (restated) | — |
| (397,072 | ) | — |
| (397,072 | ) |
December 31, 2016 | $ | (5,152 | ) | $ | 2,725,161 |
| $ | — |
| $ | 2,720,009 |
|
Receivables from limited partners represent amounts due from limited partners for their required capital in Premier LP. These receivables are either interest bearing notes that were issued to new limited partners or non-interest bearing loans (contribution loans) provided to existing limited partners. These receivables are reflected as a reduction to redeemable limited partners' capital so that amounts due from limited partners for capital are not reflected as redeemable limited partnership capital until paid. No interest bearing notes receivable were executed by limited partners of Premier LP during the six months ended December 31, 2016.
During the six months ended December 31, 2016, no limited partners withdrew from Premier LP.
Since the Reorganization and IPO, Premier LP's distribution policy has required 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, it is not based directly on revenue generated from an individual partner's participation as the distributions are based on the net income or loss of the partnership which encompass 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 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.
Actual and expected quarterly distributions made to limited partners during the current fiscal year are as follows (in thousands):
|
| | | |
Date | Distribution (a) |
August 25, 2016 | $ | 22,493 |
|
November 23, 2016 | $ | 22,137 |
|
February 28, 2017 (b) | $ | 22,733 |
|
| |
(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. |
| |
(b) | Premier LP expects to make a quarterly distribution on or before February 28, 2017. The distribution is reflected in limited partners’ distribution payable in the accompanying condensed consolidated balance sheets at December 31, 2016. |
(10) STOCKHOLDERS' DEFICIT
As of December 31, 2016, there were 50,155,907 shares of the Company's Class A common stock, par value $0.01 per share, and 89,761,541 shares of the Company's Class B common stock, par value $0.000001 per share, outstanding.
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 and not entitled to receive dividends or to receive a distribution upon the dissolution or a liquidation of Premier, other than dividends payable in shares of Premier's common stock. Pursuant to the terms of a voting trust agreement, the trustee will vote all of the Class B common stock as a block in the manner determined by the plurality of the votes received by the trustee from the member owners for the election of directors to serve 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 non-vested restricted stock units and awards, shares of non-vested performance share awards, shares that could be issued under the outstanding stock options and the effect of the assumed redemption of Class B common shares through the issuance of Class A common shares.
The following table provides a reconciliation of the numerator and denominator used for basic earnings (loss) per share and diluted earnings (loss) per share (in thousands, except per share amounts):
|
| | | | | | | | | | | | |
| Three months ended December 31, | Six months ended December 31, |
| 2016 | 2015 | 2016 | 2015 |
| (Restated) | (Restated) |
Numerator for basic earnings (loss) per share: | | | | |
Net income (loss) attributable to stockholders | $ | 400,275 |
| $ | (54,383 | ) | $ | 470,577 |
| $ | 416,771 |
|
| | | | |
Numerator for diluted earnings (loss) per share: | | | | |
Net income (loss) attributable to stockholders | $ | 400,275 |
| $ | (54,383 | ) | $ | 470,577 |
| $ | 416,771 |
|
Adjustment of redeemable limited partners' capital to redemption amount | (335,264 | ) | — |
| (397,072 | ) | (401,240 | ) |
Net income attributable to non-controlling interest in Premier LP | 181,173 |
| — |
| 230,774 |
| 97,717 |
|
Net income (loss) | 246,184 |
| (54,383 | ) | 304,279 |
| 113,248 |
|
Tax effect on Premier, Inc. net income (a) | (34,496 | ) | — |
| (55,448 | ) | (25,088 | ) |
Adjusted net income (loss) | $ | 211,688 |
| $ | (54,383 | ) | $ | 248,831 |
| $ | 88,160 |
|
| | | | |
Denominator for basic earnings (loss) per share: | | | | |
Weighted average shares (b) | 49,445 |
| 41,575 |
| 48,330 |
| 39,655 |
|
| | | | |
Denominator for diluted earnings (loss) per share: | | | | |
Weighted average shares - basic | 49,445 |
| 41,575 |
| 48,330 |
| 39,655 |
|
Effect of dilutive securities: (c) | | | | |
Stock options | 220 |
| — |
| 261 |
| 376 |
|
Restricted stock | 181 |
| — |
| 176 |
| 525 |
|
Performance share awards | — |
| — |
| — |
| 1,228 |
|
Class B shares outstanding | 91,462 |
| — |
| 93,366 |
| 104,143 |
|
Weighted average shares and assumed conversions | 141,308 |
| 41,575 |
| 142,133 |
| 145,927 |
|
| | | | |
Basic earnings (loss) per share | $ | 8.10 |
| $ | (1.31 | ) | $ | 9.74 |
| $ | 10.51 |
|
Diluted earnings (loss) per share | $ | 1.50 |
| $ | (1.31 | ) | $ | 1.75 |
| $ | 0.60 |
|
| |
(a) | Represents income tax expense related to Premier, Inc. retaining the portion of net income attributable to income from non-controlling interest in Premier, LP for the purpose of diluted earnings per share. |
| |
(b) | Weighted average number of common shares used for basic earnings per share excludes weighted average shares of non-vested stock options, non-vested restricted stock, non-vested performance share awards and Class B shares outstanding for the three and six months ended December 31, 2016 and 2015. |
| |
(c) | For the three and six months ended December 31, 2016, the effect of 1.9 million stock options, restricted stock units and performance share awards were excluded from diluted weighted average shares outstanding as they had an anti-dilutive effect. |
For the three months ended December 31, 2015, the effect of 2.3 million stock options, restricted stock units and performance share awards and 102.2 million Class B common units exchangeable for Class A common shares were excluded from diluted weighted average shares outstanding due to the net loss sustained for the quarter and as including them would have been anti-dilutive for the period. For the six months ended December 31, 2015, the effect of 1.2 million stock options were excluded from diluted weighted average shares outstanding as they have an anti-dilutive effect.
Pursuant to the terms of the Exchange Agreement, on a quarterly basis, Premier has the option 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 | Percentage of Combined Voting Power Class B/Class A Common Stock |
August 1, 2016 | 1,323,654 |
| 94,809,069 |
| 47,365,528 |
| 67%/33% |
October 31, 2016 (b) | 5,047,528 |
| 89,761,541 |
| 50,085,904 |
| 64%/36% |
January 31, 2017 (c) | 1,296,682 |
| 88,464,859 |
| 50,701,862 |
| 64%/36% |
| |
(a) | The number of Class B common shares retired or outstanding are equivalent to the number of Class B common units retired upon exchange or outstanding after the exchange, as applicable. |
| |
(b) | In connection with the October 31, 2016 exchange, 3.0 million Class B common units were exchanged for cash and 2.0 million Class B common units were exchanged for Class A common stock. |
| |
(c) | As the quarterly exchange occurred on January 31, 2017, the impact of the exchange is not reflected in the condensed consolidated financial statements for the quarter ended December 31, 2016. In connection with the January 31, 2017 exchange, 0.8 million Class B common units were exchanged for cash and 0.5 million Class B common units were exchanged for Class A common stock. |
(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 $6.3 million and $11.5 million for the three months ended December 31, 2016 and 2015, respectively, with a resulting deferred tax benefit of $2.4 million and $4.4 million, respectively. Pre-tax stock-based compensation expense was $12.1 million and $25.0 million for the six months ended December 31, 2016 and 2015, respectively, with a resulting tax benefit of $4.6 million and $9.5 million, respectively. The deferred tax benefit was calculated at a rate of 38%, 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.
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 11,260,783 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 awards. As of December 31, 2016, there were 4,638,901 shares available for grant under the 2013 Equity Incentive Plan.
The following table includes information related to restricted stock, performance share awards and stock options for the six months ended December 31, 2016:
|
| | | | | | | | | | | | | | | | | |
| 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, 2016 | 403,117 |
| $ | 33.86 |
| | 1,443,708 |
| $ | 30.02 |
| | 3,314,661 |
| $ | 30.04 |
|
Granted | 205,079 |
| $ | 31.59 |
| | 879,901 |
| $ | 29.71 |
| | 503,312 |
| $ | 31.59 |
|
Vested/exercised | (30,340 | ) | $ | 33.19 |
| | (1,181,820 | ) | $ | 27.00 |
| | (105,760 | ) | $ | 27.56 |
|
Forfeited | (33,220 | ) | $ | 33.76 |
| | (65,320 | ) | $ | 33.89 |
| | (92,229 | ) | $ | 34.26 |
|
Outstanding at December 31, 2016 | 544,636 |
| $ | 33.05 |
| | 1,076,469 |
| $ | 32.84 |
| | 3,619,984 |
| $ | 30.22 |
|
| | | | | | | | |
Stock options outstanding and exercisable at December 31, 2016 | | | | | | | 2,449,228 |
| $ | 28.77 |
|
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 three years 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 December 31, 2016 was as follows (in thousands):
|
| | | | |
| Unrecognized stock-based compensation expense | Weighted average amortization period |
Restricted stock | $ | 10,780 |
| 2.14 years |
Performance share awards | 22,299 |
| 2.08 years |
Stock options | 11,337 |
| 1.99 years |
Total unrecognized stock-based compensation expense | $ | 44,416 |
| 2.07 years |
The aggregate intrinsic value of stock options at December 31, 2016 was as follows (in thousands):
|
| | | |
| Intrinsic value of stock options |
Outstanding and exercisable | $ | 5,938 |
|
Expected to vest | 5 |
|
Total outstanding | $ | 5,943 |
|
| |
Exercised during the six months ended December 31, 2016 | $ | 541 |
|
The Company estimated the fair value of each stock option on the date of grant using a Black-Scholes option-pricing model, applying the following assumptions, and amortized expense over each option's vesting period using the straight-line attribution approach:
|
| | |
| Six months ended December 31, |
| 2016 | 2015 |
Expected life (a) | 6 years | 6 years |
Expected dividend (b) | — | — |
Expected volatility (c) | 32.0% - 33.0% | 32.7% - 33.3% |
Risk-free interest rate (d) | 1.31% - 2.00% | 1.74% - 1.82% |
Weighted average option grant date fair value | $10.48 - $10.80 | $12.17 - $12.40 |
| |
(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 subject to U.S. federal and state income taxes. In contrast, Premier LP is not subject to federal and state income taxes as its income is taxable to its partners.
For the three months ended December 31, 2016 and 2015, the Company recorded tax expense of $37.4 million (restated) and $12.7 million, respectively, which equates to effective tax rates of 13% and 17%, respectively, and for the six months ended December 31, 2016 and 2015, the Company recorded tax expense of $60.8 million (restated) and $31.7 million, respectively, which equates to effective tax rates of 17% and 22%, respectively. The decreases in effective tax rates are primarily attributable to the one-time gain recognized from the remeasurement of the 50% equity method investment in Innovatix to fair value upon acquisition of Innovatix and Essensa (see Note 3 - Business Acquisitions). The Company's effective tax rate differs from income taxes recorded at the statutory rate primarily due to partnership income not subject to federal income taxes, state and local taxes and valuation allowances against deferred tax assets at PHSI.
The Company had net deferred tax assets of $401.9 million (restated) and $422.8 million as of December 31, 2016 and June 30, 2016, respectively. The current period balance is comprised of $452.1 million (restated) in deferred tax assets at Premier, Inc. offset by $50.2 million (restated) in deferred tax liabilities at PHSI and PSCI. The decrease of $20.9 million was primarily attributable to a $27.5 million deferred tax liability associated with equity earnings from PSCI attributable to the one-time gain recognized from the remeasurement of the 50% equity method investment in Innovatix to fair value upon acquisition of Innovatix and Essensa and corresponding partnership income and basis differences in Premier LP at the Company (see Note 3 - Business Acquisitions), a $12.6 million valuation allowance recorded against deferred tax assets at PHSI, $9.3 million in connection with the Company’s revaluation of deferred tax assets related to a 1% reduction in the North Carolina state tax rate effective for tax years 2017 and beyond, and a $43.9 million deferred tax liability recorded upon acquisition of Innovatix primarily attributable to the excess of the financial reporting basis in the identifiable intangible assets over the tax basis. These decreases were partially offset by an increase of $77.6 million recorded in connection with the exchanges of member owners Class B common units pursuant to the Exchange Agreement that occurred during the six months ended December 31, 2016.
The Company had tax receivable agreement ("TRA") liabilities of $323.3 million and $279.7 million at December 31, 2016 and June 30, 2016, respectively, representing 85% of the tax savings payable to limited partners that the Company expects to receive in connection with the Section 754 election. The election results in adjustments to the tax bases 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. The $43.6 million increase was primarily attributable to $49.4 million of liabilities incurred in connection with quarterly member owner exchanges that occurred during the six months ended December 31, 2016, partially offset by a $5.7 million decrease in connection with the Company's revaluation of deferred tax assets and associated TRA liabilities in connection with an adjustment to the basis in assets related to a 1% reduction in the North Carolina state tax rate effective for tax years 2017 and later.
(14) RELATED PARTY TRANSACTIONS
GNYHA Services, Inc. ("GNYHA") and its affiliates beneficially owned approximately 9% of the outstanding partnership interests in Premier LP as of December 31, 2016. Net administrative fees revenue based on purchases by GNYHA and its member organizations was $17.2 million and $16.6 million for the three months ended December 31, 2016 and 2015, respectively, and $34.9 million and $32.1 million for the six months ended December 31, 2016 and 2015, 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 $7.4 million and $7.6 million of revenue share obligations in the accompanying condensed consolidated balance sheets relate to revenue share obligations to GNYHA and its member organizations at December 31, 2016 and June 30, 2016, respectively.
The Company historically maintained a group purchasing agreement with GNYHA Alternate Care Purchasing Corporation ("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 (see Note 3 - Business Acquisitions). Net administrative fees revenue recorded from Essensa prior to the acquisition was $0.5 million and $0.6 million for the three months ended December 31, 2016 and 2015, respectively, and $1.2 million and $1.3 million for the six months ended December 31, 2016 and 2015, respectively. At June 30, 2016, the Company had revenue share obligations to Essensa of $0.2 million.
In addition, of the $22.7 million and $22.5 million limited partners' distribution payable in the accompanying condensed consolidated balance sheets at December 31, 2016 and June 30, 2016, respectively, $2.5 million and $2.9 million were payable to GNYHA and its member organizations at December 31, 2016 and June 30, 2016, respectively. Services and support revenue earned from GNYHA and its member organizations was $3.5 million and $3.2 million during the three months ended December 31, 2016 and 2015, respectively, and $7.1 million and $6.4 million during the six months ended December 31, 2016 and 2015, respectively. Product revenue earned from, or attributable to services provided to, GNYHA and its member organizations was $4.3 million and $5.8 million during the three months ended December 31, 2016 and 2015, respectively, and $8.0 million and $10.8 million during the six months ended December 31, 2016 and 2015, respectively. Receivables from GNYHA and its member organizations, included in due from related parties in the accompanying condensed consolidated balance sheets, were $1.5 million and $2.6 million at December 31, 2016 and June 30, 2016, respectively.
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 (see Note 3 - Business Acquisitions). The Company's share of Innovatix's net income prior to the acquisition included in equity in net income of unconsolidated affiliates in the accompanying condensed consolidated statements of income was $4.1 million and $4.9 million during the three months ended December 31, 2016 and 2015, respectively, and $10.7 million and $9.3 million during the six months ended December 31, 2016 and 2015, respectively. The Company maintained a group purchasing agreement with Innovatix under which Innovatix members were permitted to utilize Premier LP's GPO supplier contracts. Gross administrative fees revenue and a corresponding revenue share recorded under the arrangement prior to the acquisition were $8.5 million and $10.3 million for the three months ended December 31, 2016 and 2015, respectively, and $19.9 million and $19.7 million during the six months ended December 31, 2016 and 2015, respectively. At June 30, 2016, the Company had revenue share obligations to Innovatix of $4.2 million in the accompanying condensed consolidated balance sheets.
The Company's 49% ownership share of net income of FFF, which was acquired on July 26, 2016, included in equity in net income of unconsolidated affiliates in the accompanying condensed consolidated statements of income was $1.1 million and $4.2 million for the three and six months ended December 31, 2016, 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 $1.6 million and $1.7 million during the three and six months ended December 31, 2016, respectively.
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 $1.1 million during both the three months ended December 31, 2016 and 2015, and $2.2 million and $2.1 million during the six months ended December 31, 2016 and 2015, respectively. The Company received $0.1 million in annual incentive management fees during the three and six months ended December 31, 2016, and received no fees during the three and six months ended December 31, 2015. As of December 31, 2016 and June 30, 2016, $0.9 million and $0.5 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, 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, advisory services, government services and insurance services businesses.
Segment information was as follows (in thousands):
|
| | | | | | | | | | | | |
| Three months ended December 31, | Six months ended December 31, |
| 2016 | 2015 | 2016 | 2015 |
Net revenue: | | | | |
Supply Chain Services | | | | |
Net administrative fees | $ | 129,071 |
| $ | 120,733 |
| $ | 255,047 |
| $ | 238,682 |
|
Other services and support | 1,201 |
| 1,040 |
| 2,846 |
| 1,859 |
|
Services | 130,272 |
| 121,773 |
| 257,893 |
| 240,541 |
|
Products | 142,378 |
| 81,316 |
| 248,507 |
| 159,097 |
|
Total Supply Chain Services | 272,650 |
| 203,089 |
| 506,400 |
| 399,638 |
|
Performance Services | 85,850 |
| 88,580 |
| 165,372 |
| 162,866 |
|
Net revenue | $ | 358,500 |
| $ | 291,669 |
| $ | 671,772 |
| $ | 562,504 |
|
| | | | |
Depreciation and amortization expense (a): | | |