ON A MISSION TO TRANSFORM HEALTHCARE
2016 ANNUAL REPORT
Dear fellow stockholders, teammates and friends:
We are pleased to report that fiscal 2016 marked our third consecutive year of delivering
strong and consistent growth as a public company. Premier continued to build on the
value we provide to our expanding base of member health systems and other provider
organizations. Once again, we achieved double-digit annual growth in consolidated net
revenue, non-GAAP adjusted EBITDA and non-GAAP adjusted fully distributed earnings
per share. We continued to grow our business organically and through acquisitions.
We are proud of our accomplishments in creating innovative solutions during the year.
We developed and are launching our holistic quality improvement technology that allows
health systems to manage quality throughout the entire care episode. We created and rolled
out our enterprise analytics offering, which supports our health systems’ efforts to improve
quality and safety while lowering the cost of care for discrete conditions. We launched our
technology to integrate all pharmacy applications for both the traditional and specialty
pharmacy drugs in a single-user domain.
Our strong performance positions Premier to drive meaningful change in healthcare delivery,
leveraging our highly differentiated business model and working from inside our member
health systems to reduce costs, improve quality and transition to the alternative payment
models that are defining this nation’s move to population health. It is in this rapidly-evolving
environment that we believe Premier is uniquely positioned to leverage our supply chain
services, information technology and analytics capabilities, and advisory services to deliver
comprehensive insights and integrated solutions that will continue to improve healthcare
provider operating performance.
Looking forward, we see Premier continuing to grow as a highly differentiated market leader,
addressing our industry’s most pressing needs and delivering on the promises of growth,
opportunity and transformation, all while staying true to our mission to improve the health of
our communities. This mission is built on a foundation of alignment with health systems and
financial strength, and we believe our ability to execute on the combined promise of
mission and margin will drive our future success and help Premier deliver long-term
stockholder value.
On behalf of our board of directors, management team and employees, thank you for your
continued support.
Richard J. Statuto
Chairman of the Board of Directors
Susan D. DeVore
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year ended June 30, 2016
Commission File Number 001-36092
Premier, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
13034 Ballantyne Corporate Place
Charlotte, North Carolina
(Address of principal executive offices)
35-2477140
(I.R.S. Employer
Identification No.)
28277
(Zip Code)
Registrant's telephone number, including area code: (704) 357-0022
_____________________________________________________________________
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Class A Common Stock, $0.01 Par Value
Name of Each Exchange on Which Registered
NASDAQ Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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
No
subject to such filing requirements for the past 90 days. Yes
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 during the preceding 12 months (or for such shorter period
that the Registrant was required to submit and post such files). Yes
No
No
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the Class A common stock held by non-affiliates of the Registrant as of the last business day of the Registrant’s
most recently completed second fiscal quarter was approximately $1,537.3 million. For purposes of the foregoing calculation only, executive
officers and directors of the registrant have been deemed to be affiliates.
As of August 19, 2016, there were 47,394,515 shares of the Registrant’s Class A common stock, par value $0.01 per share, outstanding and
94,809,069 shares of the Registrant’s Class B common stock, par value $0.000001 per share, outstanding.
The Registrant’s definitive proxy statement for its 2016 Annual Meeting of Stockholders to be held on or about December 2, 2016 are
incorporated by reference into Part III hereof to the extent described herein.
DOCUMENTS INCORPORATED BY REFERENCE
PREMIER, INC
FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
SIGNATURES
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EXPLANATORY NOTE
This report represents the annual report for the fiscal year ended June 30, 2016 for Premier, Inc. (this "Annual Report"). On
October 1, 2013, Premier, Inc. completed the initial public offering ("IPO") of its Class A common stock (the "Class A common
stock"). Premier, Inc. is a holding company that was incorporated as a Delaware corporation on May 14, 2013 which, prior to the
IPO, had no substantial assets and conducted no substantial activity except in connection with the IPO. Premier, Inc.'s sole asset
is a controlling equity interest in Premier Services, LLC, a Delaware limited liability company ("Premier GP"). Premier GP is the
general partner of Premier Healthcare Alliance, L.P. ("Premier LP"), a California limited partnership, which historically conducted
the group purchasing portion of our supply chain services business. Unless the context suggests otherwise, references in this Annual
Report to "Premier," the "Company," "we," "us" and "our" refer (1) prior to the IPO and related transactions, to PHSI (as defined
herein) and its consolidated subsidiaries and (2) after our IPO and related transactions, to Premier, Inc. and its consolidated
subsidiaries.
Immediately following the consummation of the IPO, a series of transactions, which we refer to as the "Reorganization" (and,
collectively with the IPO, the "Reorganization and IPO"), occurred by which Premier GP became the general partner of Premier
LP. Premier Healthcare Solutions, Inc. ("PHSI"), a Delaware corporation, through which we historically conducted the majority
of the performance services portion of our business under the name "Premier, Inc.", became our indirect subsidiary through Premier
LP. PHSI, Premier LP and Premier Supply Chain Improvement, Inc., ("PSCI"), a Delaware corporation and our indirect subsidiary
(through Premier LP) through which we historically conducted certain portions of our supply chain services business, historically
conducted all of our business. Upon the consummation of the Reorganization and the IPO, our assets and business operations were
substantially similar to those of PHSI, Premier LP and PSCI prior to the Reorganization and the IPO, and we conduct all of our
business through Premier LP and its subsidiaries.
Because the Reorganization and the IPO had not yet been consummated and Premier, Inc. had no substantial assets and
conducted no substantial activities until October 1, 2013, the financial statements and other information of PHSI and its consolidated
subsidiaries are included in this Annual Report for periods prior to October 1, 2013. For more information about the Reorganization
and the IPO, refer to Note 2 - Initial Public Offering and Reorganization to the audited consolidated financial statements of this
Annual Report.
Throughout this Annual Report, references to (1) "members" refer collectively to our past, present and future customers and
(2) "member owners" refer collectively to our past, present and future members, who have owned, or who currently own, limited
partnership interests in Premier LP and/or common stock of PHSI, and, as the context relates to the completion of the Reorganization
and the IPO, as described in Note 2 - Initial Public Offering and Reorganization to the audited consolidated financial statements
of this Annual Report, beneficially own shares of Premier, Inc. Class B common stock, (the "Class B common stock"), and Class B
common units of Premier LP (the "Class B common units") after giving effect to the Reorganization, provided, that, in the context
of discussions of the group purchasing organization ("GPO") participation agreements throughout this Annual Report, the term
"member owner" also includes any related entity or affiliate of a member owner that is approved by Premier LP to be the signatory
of such GPO participation agreement in lieu of the member owner.
3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this Annual 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;
consolidation in the healthcare industry;
potential delays recognizing or increasing revenue if the sales cycle or implementation period takes longer than expected;
the terminability of member participation in our group purchasing organization ("GPO") programs with limited or no
notice;
the rate at which the markets for our non-GPO services and products develop;
the dependency of our members on payments from third-party payers;
our reliance on administrative fees which we receive from GPO suppliers;
our ability to maintain third-party provider and strategic alliances or enter into new alliances;
our ability to timely offer new and innovative products and services;
the portion of revenues we receive from our largest members;
risks and expenses related to future acquisition opportunities and integration of acquisitions;
financial and operational risks associated with investments in, or partnerships or joint ventures with, other businesses,
particularly those that we do not control;
potential litigation;
our reliance on Internet infrastructure, bandwidth providers, data center providers and other third parties and our own
systems for providing services to our users;
data loss or corruption due to failures or errors in our systems and service disruptions at our data centers, or breaches or
failures of our security measures;
the financial and reputational consequences of cyber-attacks or other data security breaches that disrupt our operations
or result in the dissemination of proprietary or confidential information about us or our members or other third parties;
our ability to use, disclose, de-identify or license data and to integrate third-party technologies;
our use of "open source" software;
changes in industry pricing benchmarks;
any increase in the safety risk profiles of prescription drugs or the withdrawal of prescription drugs from the market;
our ability to maintain and expand our existing base of drugs in our specialty pharmacy;
our dependency on contract manufacturing facilities located in various parts of the world;
our ability to attract, hire, integrate and retain key personnel;
adequate protection of our intellectual property and potential claims against our use of the intellectual property of third
parties;
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potential sales and use tax liability in certain jurisdictions;
our indebtedness and our ability to obtain additional financing on favorable terms;
fluctuation of our cash flows, quarterly revenues and results of operations;
changes in the political, economic or regulatory healthcare environment;
our compliance with complex federal and state laws governing financial relationships among healthcare providers and
the submission of false or fraudulent healthcare claims;
interpretation and enforcement of current or future antitrust laws and regulations;
compliance with complex federal and state privacy, security and breach notification laws;
compliance with, and potential changes to, extensive federal, state and local laws, regulations and procedures governing
our specialty pharmacy operations;
risks inherent in the filling, packaging and distribution of pharmaceuticals, including the counseling required to be provided
by our pharmacists for dispensing of products;
our holding company structure and dependence on distributions from Premier Healthcare Alliance, L.P. ("Premier LP");
different interests among our member owners or between us and our member owners;
the ability of our member owners to exercise significant control over us, including through the election of all of our
directors;
exemption from certain corporate governance requirements due to our status as a "controlled company" within the meaning
of the NASDAQ rules;
the terms of agreements between us and our member owners;
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;
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;
provisions in our certificate of incorporation and bylaws and the Amended and Restated Limited Partnership Agreement
of Premier LP (as amended, the "LP Agreement") and provisions of Delaware law that discourage or prevent strategic
transactions, including a takeover of us;
failure to maintain an effective system of internal controls;
the number of shares of Class A common stock that will be eligible for sale or exchange in the near future and the dilutive
effect of such issuances;
our intention not to pay cash dividends on our Class A common stock;
possible future issuances of common stock, preferred stock, limited partnership units or debt securities and the dilutive
effect of such issuances; and
•
the risk factors discussed under the heading "Risk Factors" in Item 1A herein.
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 Annual Report and our other periodic and current filings made
from time to time with the Securities and Exchange Commission ("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.
5
Market Data and Industry Forecasts and Projections
We use market data and industry forecasts and projections throughout this Annual Report and in particular, under Item 1,
Business-Industry Overview. We have obtained the market data from certain publicly available sources of information, including
publicly available industry publications. We believe the data others have compiled are reliable, but we have not independently
verified the accuracy of this information. While we are not aware of any misstatements regarding the industry data presented
herein, forecasts and projections involve risks and uncertainties and are subject to change based on various factors, including those
discussed under Item 1A, Risk Factors of this Annual Report. You should not place undue reliance on any such market data or
industry forecasts and projections. We undertake no obligation to publicly update or revise any such market data or industry
forecasts and projections, whether as a result of new information, future events or otherwise.
Trademarks, Trade Names and Service Marks
This Annual Report includes trademarks, trade names and service marks that we either own or license, such as “Premier,”
“PremierConnect,” “PremierPro,” “Premier REACH,” “Commcare,” “ProviderSelect MD” and “QUEST,” which are protected
under applicable intellectual property laws. Solely for convenience, trademarks, trade names and service marks referred to in this
Annual Report may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we
will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade
names and service marks. This Annual Report also may contain trademarks, trade names and service marks of other parties, and
we do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display
should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.
6
Item 1. Business
PART I
The following discussion should be read in conjunction with our audited consolidated financial statements and accompanying
notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion includes certain forward-looking
statements. For a discussion of important factors, including the continuing development of our business and other factors which
could cause actual results to differ materially from the results referred to in the historical information and the forward-looking
statements presented herein, see "Item 1A, Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" contained
in this Annual Report.
Our Company
Premier, Inc., incorporated in Delaware on May 14, 2013, is primarily owned by hospitals, health systems and other healthcare
organizations (such owners are referred to herein as member owners) located in the United States, as well as public stockholders.
Together with our subsidiaries and affiliates, we are a leading healthcare improvement company, uniting an alliance of approximately
3,750 U.S. hospitals and more than 130,000 other providers to transform healthcare. With integrated data and analytics,
collaboratives, supply chain solutions, and advisory and other services, Premier enables better care and outcomes at a lower cost.
We believe that we play a critical role in the rapidly evolving healthcare industry, collaborating with members to co-develop long-
term innovations that reinvent and improve the way care is delivered to patients nationwide. We deliver value through a
comprehensive technology-enabled platform that offers critical supply chain services, clinical, financial, operational and population
health software-as-a-service ("SaaS") informatics products, advisory services and performance improvement collaborative
programs.
As of June 30, 2016, we were controlled by 171 U.S. hospitals, health systems and other healthcare organizations that represent
approximately 1,400 owned, leased and managed acute care facilities and other non-acute care organizations. Our current
membership base includes many of the country's most progressive and forward-thinking healthcare organizations, and we
continually seek to add new members that are at the forefront of innovation in the healthcare industry. Our Class A common stock
is generally held by the public, and our Class B common stock is held by the limited partners of Premier LP, referred to as our
member owners.
As a member-owned healthcare alliance, our mission, products and services, and long-term strategy have been developed in
partnership with our member hospitals, health systems and other healthcare organizations. We believe that this partnership-driven
business model creates a relationship between our members and us that is characterized by aligned incentives and mutually
beneficial collaboration. This relationship affords us access to critical proprietary data and encourages member participation in
the development and introduction of new Premier products and services. Our interaction with our members provides us with a
window into the latest challenges confronting the industry we serve and innovative best practices that we can share broadly within
the healthcare industry, including throughout our membership. This model has enabled us to develop size and scale, data and
analytics assets, expertise and customer engagement required to accelerate innovation, provide differentiated solutions and facilitate
growth.
We seek to address challenges facing healthcare delivery organizations through our comprehensive suite of solutions that we
believe:
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improve the efficiency and effectiveness of the healthcare supply chain;
deliver improvement in cost and quality;
innovate and enable success in emerging healthcare delivery and payment models to manage the health of populations;
and
utilize data and analytics to drive increased connectivity, and clinical, financial and operational improvement.
Our business model and solutions are designed to provide our members access to scale efficiencies, spread the cost of their
development, derive intelligence from our data warehouse, mitigate the risk of innovation and disseminate best practices that will
help our member organizations succeed in their transformation to higher quality and more cost-effective healthcare.
We deliver our solutions and manage our business through two reportable business segments: supply chain services and
performance services. The supply chain services segment includes our group purchasing organization or GPO, specialty pharmacy
offerings and direct sourcing activities. The performance services segment includes our informatics, collaborative, advisory services
and insurance services businesses.
7
Industry Overview
According to data from the Centers for Medicare & Medicaid Services, or CMS, healthcare expenditures are a large component
of the U.S. economy expected to grow by an average of 5.8% per year for the period 2015-2025, reaching 20.1% of gross domestic
product, or GDP, by 2025. According to data from the 2014 American Hospital Association's Annual Survey, published in the 2016
edition of the AHA Hospital Statistics™, there were approximately 5,000 U.S. community hospitals with approximately 786,900
staffed beds in the United States. Of these acute care facilities, approximately 3,200 were part of either multi-hospital or diversified
single hospital systems, meaning they were owned, leased, sponsored or contract managed by a central organization. According
to the May 2016 edition of IMS Health’s Healthcare Market Index, in addition to U.S. hospitals, there were approximately 520,000
alternate site facilities and providers across the continuum of care in the United States. These alternate site facilities include primary/
ambulatory care and post-acute care providers. Increasingly, these alternate site facilities are being acquired by, integrated into or
aligned with acute care facilities creating integrated delivery networks.
Healthcare Supply Chain Services Industry
According to CMS data, total spending on hospital services in the United States is projected to be approximately $1.1 trillion,
or approximately 32% of total healthcare expenditures, in 2016. Expenses associated with the hospital supply chain, such as
supplies and operational and capital expenditures, typically represent between 20% and 30% of a hospital's budget according to
Booz & Company. With continued reimbursement rate pressure across government and managed care payers, a transitioning
payment model from fee-for-service to value-based payment, and national health expenditures representing a significant portion
of the economy, healthcare providers are examining all sources of cost savings, with supply chain spending a key area of focus.
We believe opportunities to drive cost out of the healthcare supply chain include improved pricing for medical supplies and
pharmaceuticals, appropriate resource utilization and increased operational efficiency.
From origination at the supplier to final consumption by the provider or patient, healthcare products pass through an extensive
supply chain incorporating manufacturers, distributors, GPOs, pharmacy benefit managers, and retail, long-term care and specialty
pharmacies, among others. In response to the national focus on health spending and managing healthcare costs, supply chain
participants are seeking more convenient and cost-efficient ways to deliver products to patients and providers. We believe that
improvements to the healthcare supply chain to bring it on par with other industries that have more sophisticated supply chain
management can drive out significant inefficiencies and cost.
Healthcare Performance Services Industry
Legislative reform, unsustainable cost trends, and the need for improved quality and outcomes have generated greater focus
among healthcare providers on cost management, quality and safety, and population health management. In 2015, the Department
of Health and Human Services (HHS) announced its goals for aligning future Medicare payments with quality and value, including
tying 85 and 90 percent of Medicare fee-for-service payments to performance in 2016 and 2018, respectively, and shifting up to
50 percent of Medicare fee-for-service payments to alternative payment models, such as accountable care organizations (ACOs)
or bundled payment arrangements by the end of 2018. In order to meet these goals, health systems will need to continually monitor
performance and manage costs, while maintaining high levels of quality and testing new care delivery models. In response to this
changing environment, we expect the markets for performance services and solutions in the areas of cost management, quality
and safety and population health management to grow significantly.
We expect information technology to continue to play a key enabling role in efficiency and cost reduction, performance
improvement and care transformation across the healthcare industry. In particular, the trends toward value-based purchasing and
population-based healthcare are proving to require more sophisticated business intelligence and technology solutions. To achieve
higher-quality outcomes and control costs, providers exhibit a strong and continuing need for data and data analytics to help them
understand their current performance and identify opportunities for improvement. We expect demand for data management and
data analytics products to complement the focus on electronic health record adoption. According to Frost and Sullivan, 50% of
hospitals in the United States are expected to adopt data analytics capabilities by 2016, up from 10% in 2011. Similarly, the advisory
services business is growing rapidly in the areas of business model redesign, process improvement, labor productivity, non-labor
cost management, clinical integration and change management.
Our Membership
Our current membership base includes many of the country's most progressive and forward-thinking healthcare organizations.
The participation of these organizations in our membership provides us with a window into the latest challenges confronting the
industry we serve and innovative best practices that we can share broadly throughout our membership. At June 30, 2016, our
members included approximately 3,750 U.S. hospitals and more than 130,000 other providers. Approximately 390 individuals,
representing approximately 165 of our U.S. hospital members, sit on 23 of our strategic and sourcing committees, and as part of
these committees, use their industry expertise to advise on ways to improve the development, quality and value of our products
8
and services. In addition, ten senior executives from our U.S. hospital member owner systems currently serve on our board of
directors. Other than GNYHA Purchasing Alliance, LLC and its member organizations, which accounted for 9%, 9% and 8% of
our net revenue in the fiscal years ended June 30, 2016, 2015 and 2014, respectively, no individual member or member owner
systems accounted for more than 5% of our net revenue in such periods. Total GPO purchasing volume by all members participating
in our GPO was approximately $48 billion and $44 billion for the calendar years 2015 and 2014, respectively.
The following table sets forth certain information with respect to retention rates for members participating in our GPO in the
supply chain services segment and renewal rates for our SaaS informatics products subscriptions in the performance services
segment for the fiscal years shown:
GPO retention rate (a)
SaaS institutional renewal rate (b)
Year Ended June 30,
2016
97%
92%
2015
99%
94%
2014
99%
94%
3 Year
Average
98%
93%
(a) The retention rate is calculated based upon the aggregate purchasing volume among all members participating in our GPO for such fiscal year less the
annualized GPO purchasing volume for departed members for such fiscal year, divided by the aggregate purchasing volume among all members participating
in our GPO for such fiscal year.
(b) The renewal rate is calculated based upon the total number of members that have SaaS revenue in a given period that also have revenue in the corresponding
prior year period divided by the total number of members that have SaaS revenue in the same period of the prior year.
Our Business Segments
We deliver our integrated platform of solutions that address the areas of total cost management, quality and safety improvement
and population health management through two business segments: supply chain services and performance services, as addressed
in Note 23 - Segments to the audited consolidated financial statements of the Annual Report. We have no significant foreign
operations or revenues.
Supply Chain Services
Our supply chain services segment assists our members in managing their non-labor expense and capital spend through a
combination of products, services and technologies, including one of the largest national healthcare GPOs in the United States
serving acute and alternate sites, specialty pharmacy offerings and direct sourcing activities. Membership in our GPO also provides
access to certain SaaS informatics products related to the supply chain and the opportunity to participate in our ASCEND®
collaborative. Our supply chain services segment consists of the following products and solutions:
Group Purchasing. Our national portfolio of approximately 2,200 contracts with approximately 1,200 suppliers provides
our members with access to a wide range of products and services, including medical and surgical products, pharmaceuticals,
laboratory supplies, capital equipment, information technology, facilities and construction, food and nutritional products and
purchased services (such as clinical engineering and document shredding services). We use our members' aggregate purchasing
power to negotiate pricing discounts and improved contract terms with suppliers. Contracted suppliers pay us administrative
fees based on the purchase volume of goods and services sold to our healthcare provider members under the contracts we
have negotiated. We also partner with other organizations, including regional GPOs, to extend our network base to their
members.
Our contract portfolio is designed to offer our healthcare provider members a flexible solution comprised of multi-sourced
supplier contracts, as well as pre-commitment and/or single-sourced contracts that offer higher discounts. Our multi-sourced
contracts offer pricing tiers based on purchasing volume and/or commitment and multiple suppliers for many products and
services. Our pre-commitment contracts require that a certain amount of our members commit in advance to a specified amount
or percentage of purchasing volume before we enter into a contract with a particular supplier. Our single-source contracts are
entered into with a specified supplier, and through this exclusive relationship, allow us to contract for products that meet our
members' specifications. In the case of pre-commitment contracts, we provide the particular supplier with a list of members
that have pre-committed to a specified amount or percentage of purchasing volume and the supplier directly handles the
tracking and monitoring of fulfillment of such purchasing volume. In the case of single and multi-sourced contracts we
negotiate and execute the contracts on behalf of our members and make such contracts available to our members to access.
The utilization of such single and multi-sourced contracts is determined by the particular member with assistance from our
field force. Since there are no specific fulfillment requirements needed in our single and multi-source contracts in order to
obtain certain pricing levels, each particular member and supplier agree on the appropriate pricing tier based on expected
purchasing volume with tracking and ongoing validation of such purchasing volume provided by the supplier. The flexibility
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provided by our expansive contract portfolio allows us to effectively address the varying needs of our members and the
significant number of factors that influence and dictate these needs, including overall size, service mix, and the degree of
integration between hospitals in a health system.
We continually innovate our GPO programs and supply chain platforms. For example, our EXPRESSbuy® program enables
coordinated, limited-time, volume-driven purchasing opportunities that offer savings beyond regular contract pricing. Through
a proprietary web-based application, we offer our members the opportunity to aggregate committed volumes and achieve
additional price discounts while allowing our suppliers to sell targeted products, including time-sensitive or excess inventory,
more efficiently and at reduced costs.
Our GPO programs target multiple markets, including acute care and alternate site settings. Our alternate site program, one
of the largest in the United States with approximately 130,000 members as of June 30, 2016, includes the following:
Continuum of Care. Alternate sites served by our Continuum of Care GPO program include long-term care and senior
living, ambulatory care, first responders and emergency medical services, home health, imaging centers and surgery
centers. Our Continuum of Care GPO members have access to nearly all of our GPO supplier contracts, including medical
and surgical products, pharmaceuticals, laboratory supplies, facilities and construction, capital equipment, information
technology, food and nutritional products and purchased services, as well as additional GPO supplier contracts accessed
through our 50% ownership interest in Innovatix, LLC, one of the nation's largest alternate site GPOs.
ProviderSelect MD®. ProviderSelect MD® is one of the nation's largest group purchasing programs for physicians.
Focused specifically on independent physician practices, the program offers members access to nearly all of our GPO
supplier contracts.
Premier REACH®. Premier REACH® is a group purchasing program for non-healthcare entities, including education
(e.g., K-12 schools, colleges and universities, and early childhood education), hospitality, recreation (e.g., stadiums, parks
and fairgrounds) and employee food programs. Our Premier REACH® members have access to nearly all of our GPO
supplier contracts including food service, facilities products and services, information technology and administrative
services.
Specialty Pharmacy. Through our specialty pharmacy business, we developed a complete service offering for our members
to improve access to medication and to better manage patient therapy for chronically-ill patients with specialty drug needs
and genetic disorders. Our specialty pharmacy business provides traditional pharmacy dispensing services (i.e., retail and
mail order), as well as “specialty pharmacy” services, which fully integrate the administrative coordination, patient care
management, and data management reporting functions that ultimately service the needs of patients, providers, payers, and
pharmaceutical manufacturers. The business was specifically designed to serve as a scaled solution for our members and to
provide a specialty pharmacy “care hub” to meet the unique specialty pharmacy needs of health systems across the continuum
of care. We provide robust clinical management programs that are targeted toward those disease states where best-in-class
care pathways and interventions by clinically-trained pharmacists are essential for patient adherence and compliance. Our
“care hub” capabilities enable members to more effectively care for complex patient populations, improve clinical quality
and safety, and harness otherwise unavailable clinical data.
Direct Sourcing. Our direct sourcing business, SVS, LLC d/b/a S2S Global ("S2S Global"), was established to help our
members access a diverse product portfolio and to provide transparency to manufacturing costs and competitive pricing to
our members. Through our consolidated subsidiary, S2S Global, we facilitate the development of product specifications with
our members, source or contract manufacture the products to member specifications and sell products directly to our members
or suppliers. By engaging with our members at the beginning of the sourcing process to define product specifications and
then sourcing, or contract manufacturing, products to meet the exact needs of our members, we eliminate the need for
unnecessary product features and specifications that may typically be included by suppliers and result in higher prices for our
members without providing incremental value. Therefore, our direct sourcing activities benefit our members by providing
them with an expanding portfolio of medical products through more efficient means, and with greater cost transparency, than
if such products were purchased from other third-party suppliers. We market our direct sourcing activities under two distinct
brands: PremierPro™, which is designated for our members, and Prime Plus™, which is designated for our other customers,
primarily regional distributors with private-label product programs.
Managed Services. Our managed services line of business is a fee for service model created to perform supply chain related
services for members. Through a partnership with a national pharmacy benefit manager, we provide contract negotiation and
administration, claims data and rebate processing and evaluation of current pharmacy formulary and utilization.
SaaS Informatics Products. Members of our GPO have access to certain components of our PremierConnect Supply Chain
offering and its associated applications and the ability to purchase additional elements that are discussed in more detail below.
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ASCEND® Collaborative. Our ASCEND® Collaborative has developed a process to aggregate purchasing data for our
members, enabling such members to determine whether to negotiate committed group purchases within the collaborative.
Through our ASCEND® Collaborative, members receive group purchasing programs, tiers and prices specifically negotiated
for them, as well as benchmarking metrics to assist them in identifying additional supply chain and operations cost savings
opportunities and knowledge sharing with other member participants and industry experts. As of June 30, 2016, approximately
780 U.S. hospital members, which represent approximately 111,000 hospital beds, participated in our ASCEND® Collaborative.
These hospital member participants have identified approximately $300 million in additional savings as compared to their
U.S. hospital peers not participating in ASCEND® since its inception in 2009. For calendar year 2015, these member participants
had approximately $14.6 billion in annual supply chain purchasing spend.
Performance Services
Our offerings in the performance services sector of the healthcare industry are primarily information technology analytics
and workflow automation and advisory services. We believe we are one of the largest informatics and advisory services businesses
in the United States focused exclusively on healthcare providers. Our SaaS informatics products utilize our comprehensive data
set to provide actionable intelligence to our members, enabling them to benchmark, analyze and identify areas of improvement
across three main categories: cost management, quality and safety, and population health management. This segment also includes
our technology-enabled performance improvement collaboratives, through which we convene members, design programs and
facilitate, foster and advance the exchange of clinical, financial and operational data among our members to measure patient
outcomes and determine best practices that drive clinical, financial and operational improvements. Our performance services
segment includes our PremierConnect® technology offerings, advisory services and collaboratives and insurance services, as
follows:
PremierConnect®:
We have created a world-class integrated technology platform for continuous performance improvement called
PremierConnect®. This platform allows members to analyze performance using established data standards, benchmarking,
interactive dashboards and custom report services. This portfolio of performance improvement solutions is comprised of the
following domains:
PremierConnect Quality & Regulatory. The PremierConnect Quality & Regulatory domain enables health systems and
providers to identify and target high-value quality improvement areas that drive greater clinical effectiveness and efficiency
across the continuum of care. This solution provides clinical benchmarking, population analyses and predictive analytics to
help hospitals and physician practices be successful in the transition to value-based care.
PremierConnect Safety. The PremierConnect Safety domain enables health systems and providers to improve patient safety,
including ongoing infection prevention, antimicrobial stewardship, reduction of hospital-acquired conditions and real-time
clinical surveillance used to drive faster, more informed decisions.
PremierConnect Supply Chain & ERP. The PremierConnect Supply Chain domain enables health systems and providers to
lower supply chain costs through leading supply chain management analytics, evidence-based purchasing, and innovative
enterprise resource planning ("ERP") workflow that drives efficiency and effectiveness throughout the entire procurement
life cycle. This healthcare-only ERP solution also extends into accounts payable, general ledger and financial reporting.
PremierConnect Operations. The PremierConnect Operations domain enables health systems and providers to optimize
labor management with integrated financial reporting and budgeting across the continuum of care. These applications integrate
benchmarking and productivity data from acute, outpatient and ambulatory settings.
PremierConnect Population Health. The PremierConnect Population Health domain enables health systems and providers
to transition to optimal resource and risk management through actionable business intelligence utilizing analytics that provide
population and provider insights from measuring and benchmarking acute and ambulatory clinical performance.
PremierConnect® Enterprise. The PremierConnect Enterprise domain enables health systems and providers to leverage
integrated analytics across all of Premier's subject matter expertise. This solution includes integrating a member's custom data
into a hosted and integrated data warehouse and analytics platform. This solution provides data acquisition, management and
governance capabilities for health systems and extends this capability to research and life sciences.
Advisory Services:
Our advisory services, provided through Premier Performance Partners, seek to drive change and improvement in cost
reduction, quality of care and patient safety, and prepare our members to succeed in a population health environment. We use
an income statement method to address every area affecting the member's bottom line, finding opportunities in both revenue
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enhancement and expense management. Premier Performance Partners offers expertise and capabilities in the following areas:
care coordination and physician engagement, clinical, financial and operational performance, facilities and capital asset
management, organizational transformation, physician preference items (PPI), reform readiness assessment, clinical integrated
and population health operations and analytics, purchased services assessment, revenue cycle management and recovery audit
contractor (RAC) readiness, service line improvement, strategic and business planning and supply chain transformation.
We provide a data-driven approach and expertise to deliver targeted results in reducing costs, increasing margin and improving
quality. Using various specialists and advisors, we provide wrap-around services for our major SaaS informatics products and
our GPO to enhance the member value from these programs. For example, our clinical performance partners provide U.S.
hospitals with access to performance improvement and operational specialists. Using our informatics tools and applications,
these clinical performance partners mine data for improvement opportunities and then lead or assist with improvement projects
in such areas as resource and operational assessments, process improvement, performance improvement monitoring, strategic
planning and knowledge transfer for organizational change. U.S. hospitals contract for clinical, financial and/or operational
performance partner support for a given number of days per month, with contracts lasting from less than a year to five years
in duration.
Performance Improvement Collaboratives:
QUEST® Collaborative. Through our QUEST® Collaborative (QUEST®), we work with our members to identify improvement
opportunities and best practices and engage them to participate in performance improvement exercises using identified best
practices, to collaborate to define performance goals and to use healthy competition to drive performance improvement.
QUEST® builds on the past success of our partnership with CMS in the Premier Hospital Quality Incentive Demonstration,
a value-based purchase program through which CMS awarded bonus payments to hospitals for high quality in several clinical
areas and reported quality data on its website. The collaborative currently targets improvements in seven domains, including
evidence-based care, cost and efficiency of care, patient and family engagement, safety, mortality and appropriate hospital
use and community health. As of June 30, 2016, QUEST® had approximately 350 participating U.S. hospitals working together
and utilizing our SaaS informatics products to develop highly standardized quality, safety and cost metrics. QUEST® seeks
to develop next-generation quality, safety and cost metrics with a consistency and standardization we do not believe exists
today. We believe that our members who participate in QUEST® are better prepared to deal with healthcare reform requirements
and, by improving in the seven domains referenced above, can earn Medicare incentives, avoid Medicare penalties and better
manage reimbursement cuts.
Bundled Payment Collaborative. Our Bundled Payment Collaborative assists our members in their participation in the CMS
Bundled Payments for Care Improvement Initiative, an initiative by which organizations enter into payment arrangements
that include financial and performance accountability for episodes of care. Our Bundled Payment Collaborative offers ongoing
analysis of our members' Medicare Part A and Medicare Part B data, dashboards for managing bundled payment programs
and gainsharing, in addition to providing knowledge, expertise, and best practices from experts and members.
The Population Health Management Collaboratives. Our Population Health Management Collaborative, or PHM
Collaborative (the successor to our PACTTM-Partnership for Care Transformation collaborative), is focused on helping
members develop and implement effective models of care and payment for connected groups of providers who take
responsibility for improving the health status, efficiency and experience of care (quality and satisfaction) for a defined
population (i.e., accountable care organizations) and how to align this care redesign with new value based payment
arrangements. Our PHM Collaborative provides members with the opportunity to share value based case and payment
developmental strategies, programs, and other best practices. The PHM Collaborative provides valuable assistance and access
to over 30 PHM subject matter experts to members in developing the tools necessary to manage the health of a population
and to exchange knowledge with each other and with industry and government experts. As of June 30, 2016, we had 67 health
systems and Clinically Integrated Networks, comprised of over 445 hospitals in 33 states participating in our PHM
Collaborative.
Partnership for Patients Collaborative. We participated in the CMS-established Partnership for Patients initiative, a public-
private collaborative working to improve the quality, safety and affordability of healthcare. Physicians, nurses, hospitals,
employers, patients and their advocates, and the federal and state governments have joined together to form Partnership for
Patients to decrease preventable hospital-acquired conditions and readmissions. Our Hospital Engagement Network (HEN)
serves as a mobile classroom with Clinical Improvement Advisors (CIAs). In September 2015, CMS renewed the Partnership
for Patients initiative.
Data Alliance Collaborative. A group of the nation’s leading health systems have launched the Data Alliance Collaborative
to ensure that healthcare providers have the technology and analytics in place to improve quality and lower costs. These
forward-thinking providers are working together with Premier to disrupt the way healthcare information technology is
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developed. Data Alliance Collaborative members are using integrated data (e.g., clinical, claims, labor, supply chain,
administrative, financial, patient experience, genomics, etc.) to develop new insights and answer the complex questions driven
by the transformation to population-based care. They are innovating collaboratively to meet their current needs and are creating
the conceptual and technical foundation that enables them to respond nimbly to an uncertain future.
Insurance Services. We provide insurance programs and services to assist U.S. hospital and healthcare system members
with liability and benefits insurance services, along with risk management services. We design insurance programs and services
for our members to improve their quality, patient safety and financial performance while lowering costs. We provide
management services for American Excess Insurance Exchange, Risk Retention Group, a reciprocal risk retention group that
provides excess hospital, professional, umbrella and general liability insurance to certain U.S. hospital and healthcare system
members. We also negotiate the purchase of other insurance products from commercial insurance carriers on behalf of our
members.
Pricing and Contracts
We generate revenue from our supply chain services segment through fees received from suppliers based on the total dollar
volume of supplies purchased by our members in connection with our GPO programs and through product sales in connection
with our specialty pharmacy and direct sourcing activities. Our performance services segment has three main sources of revenue:
(i) three to five-year subscription agreements to our SaaS informatics products, (ii) annual subscriptions to our performance
improvement collaboratives and (iii) professional fees for our advisory services.
Supply Chain Services
In connection with the Reorganization and IPO, our member owners entered into GPO participation agreements with
Premier LP which became effective upon the completion of the Reorganization and the IPO. Pursuant to the terms of its GPO
participation agreement, each of these member owners generally receives 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 owned, leased, managed and affiliated
facilities through our GPO supplier contracts. In addition, our two largest regional GPO member owners, which represented
approximately 16% of our gross administrative fees revenue for the year ended June 30, 2016, each remit gross administrative
fees collected by such member owner based upon purchasing by such member owner's owned, leased, managed and affiliated
facilities through the member owner's own GPO supplier contracts, in accordance with their Premier GPO Agreement, and receive
revenue share from Premier LP equal to 30% of such gross administrative fees remitted to us. Subject to certain termination rights,
these GPO participation agreements are for an initial five-year term, although our two largest regional GPO member owners have
entered into agreements with seven-year terms. The terms of the GPO participation agreements vary as a result of provisions in
our existing arrangements with member owners that conflict with the terms of the GPO participation agreement and which by the
express terms of the GPO participation agreement are incorporated by reference and deemed controlling and will continue to
remain in effect. In limited circumstances, Premier LP and certain member owners entered into GPO participation agreements
with certain terms that vary from the standard form, which were approved by the member agreement review committee of our
board of directors, based upon regulatory constraints, pending merger and acquisition activity or other exigent circumstances
affecting those member owners. Certain non-owner members operate under contractual relationships that provide for a specific
revenue share that differs from the 30% revenue share that we provide to our member owners under the current GPO participation
agreements.
In our specialty pharmacy, we earn revenue from product sales and other services. Revenues are earned through traditional
pharmacy dispensing services (i.e., retail and mail order), as well as “specialty pharmacy” services, including 340B drug pricing
program dispensing services, administrative coordination, patient care management and data management reporting functions.
Our specialty pharmacy contracts generally range from one to three years in length and, except for exclusive networks, there are
generally no guaranteed sales associated with a payer network contract.
In our direct sourcing activities, we earn revenue from product sales. Products are sold to our members through direct shipment
and distributor and wholesale channels. Products are also sold to regional medical-surgical distributors and other non-healthcare
industries (i.e., foodservice). We have contracts with our members that buy products through our direct shipment option. These
contracts do not usually provide a guaranteed purchase or volume commitment requirement.
Performance Services
Performance services revenue consists of SaaS informatics products subscriptions, certain perpetual and term licenses,
performance improvement collaborative and other service subscriptions, professional fees for advisory services, and insurance
services management fees and commissions from group-sponsored insurance programs.
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SaaS informatics products subscriptions include the right to use our proprietary hosted technology on a SaaS basis, training
and member support to deliver improvements in cost management, quality and safety, population health management and provider
analytics. Pricing varies by subscription and size of the subscriber. Informatics subscriptions are generally three to five-year
agreements with automatic renewal clauses and annual price escalators that typically do not allow for early termination. These
agreements do not allow for physical possession of the software. Subscription fees are typically billed on a monthly basis and
revenue is recognized as a single deliverable on a straight-line basis over the remaining contractual period following implementation.
Implementation involves the completion of data preparation services that are unique to each member's data set and, in certain
cases, the installation of member site-specific software, in order to access and transfer member data into our hosted SaaS informatics
products. Implementation is generally 90 to 170 days following contract execution before the SaaS informatics products can be
fully utilized by the member.
Performance improvement collaborative and other service subscription revenue to support our offerings in cost management,
quality and safety and population health management is recognized over the service period, which is generally one year.
Professional fees for advisory services are sold under contracts, the terms of which vary based on the nature of the engagement.
Fees are billed as stipulated in the contract, and revenue is recognized on a proportional performance method as services are
performed and deliverables are provided. In situations where the contracts have significant contract performance guarantees or
member acceptance provisions, revenue recognition occurs when the fees are fixed and determinable and all contingencies,
including any refund rights, have been satisfied. Fees are based either on time and materials or the savings that are delivered.
Sales
We conduct sales through our embedded field force, our dedicated national sales team and our Premier Performance Partners
advisors, collectively comprised of approximately 620 employees as of June 30, 2016.
Our field force works closely with our U.S. hospital members and other members to target new opportunities by developing
strategic and operational plans to drive cost management and quality and safety improvement initiatives. As of June 30, 2016, our
field force was deployed to seven geographic regions and several strategic/affinity members across the United States. This field
force works at our member sites to identify and recommend best practices for both supply chain and clinical integration cost
savings opportunities. The regionally deployed field force is augmented by a national team of subject matter specialists who focus
on key areas such as lab, surgery, cardiology, orthopedics, imaging, pharmacy, information technology and construction. Our field
force assists our members in growing and supporting their alternate site membership.
Our sales team provides national sales coverage for establishing initial member relationships and works with our field force
to increase sales to existing members. Our regional sales teams are aligned with the seven regions in our field force model.
Our Premier Performance Partners team identifies and targets advisory engagements and wrap-around services for our major
SaaS informatics products and our GPO to enhance the member value from these programs.
Intellectual Property
We offer our members a range of products to which we own intellectual property rights, including online services, best practices
content, databases, electronic tools, web-based applications, performance metrics, business methodologies, proprietary algorithms,
software products and advisory services deliverables. We own and control a variety of trade secrets, confidential information,
trademarks, trade names, copyrights, domain names and other intellectual property rights that, in the aggregate, are of material
importance to our business.
We protect our intellectual property by relying on federal, state and common law rights, as well as contractual arrangements.
We are licensed to use certain technology and other intellectual property rights owned and controlled by others, and, similarly,
other companies are licensed to use certain technology and other intellectual property rights owned and controlled by us.
Research and Development
Our research and development, or R&D, expenditures primarily consist of our strategic investment in internally developed
software to further our initiatives, and new product development in the areas of cost management, quality and safety and population
health management. We have also made significant investments in our SaaS informatics product offerings. We expensed $2.9
million, $2.9 million and $3.4 million for R&D activities for fiscal years 2016, 2015 and 2014, respectively, and capitalized
software development costs of $61.0 million, $57.9 million and $41.1 million for fiscal years 2016, 2015 and 2014, respectively.
We experience fluctuations in our research and development expenditures, including capitalized software development costs,
across reportable periods due to the timing of our software development life cycles, with new product features and functionality,
new technologies and upgrades to our service offerings.
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Competition
The markets for our products and services in both our supply chain services segment and performance services segment are
fragmented, intensely competitive and characterized by rapidly evolving technology and product standards, user needs and the
frequent introduction of new products and services. We have experienced and expect to continue to experience intense competition
from a number of companies.
The primary competitors to our supply chain services segment are other large GPOs such as HealthTrust Purchasing Group
(a subsidiary of HCA Holdings, Inc.), Intalere Inc., Managed Health Care Associates, Inc. and Vizient, Inc. In addition, we compete
against certain healthcare provider-owned GPOs in this segment. Our specialty pharmacy competes with Caremark Inc. (owned
by CVS Caremark Corporation), Curascript, Inc./Accredo (owned by Express Scripts Holding Co.), Diplomat Specialty Pharmacy
and many smaller local specialty pharmacies. Finally, our direct sourcing activities compete primarily with private label offerings/
programs, product manufacturers and distributors, such as Cardinal Health, Inc., McKesson Corporation, Medline Industries, Inc.
and Owens & Minor, Inc.
The competitors in our performance services segment range from smaller niche companies to large, well-financed and
technologically-sophisticated entities. Our primary competitors in this segment include (i) information technology providers such
as Allscripts Healthcare Solutions, Inc., Caradigm USA LLC, Cerner Corporation, Epic Systems Corporation, IBM Corporation,
Infor, Inc., McKesson Corporation and Oracle Corporation, and (ii) consulting and outsourcing firms such as The Advisory Board
Company, Deloitte & Touche LLP, Evolent Health, Inc., Healthagen, LLC (a subsidiary of Aetna, Inc.), Huron Consulting, Inc.,
Navigant Consulting, Inc. and Optum, Inc. (a subsidiary of UnitedHealth Group, Inc.).
With respect to our products and services across both segments, we compete on the basis of several factors, including breadth,
depth and quality of product and service offerings, ability to deliver clinical, financial and operational performance improvements
through the use of products and services, quality and reliability of services, ease of use and convenience, brand recognition and
the ability to integrate services with existing technology. With respect to our products and services across both of our business
segments, we also compete on the basis of price.
Government Regulation
General
The healthcare industry is highly regulated by federal and state authorities and is subject to changing political, economic and
regulatory influences. Factors such as changes in reimbursement policies for healthcare expenses, consolidation in the healthcare
industry, regulation, litigation and general economic conditions affect the purchasing practices, operations and the financial health
of healthcare organizations. In particular, changes in laws and regulations affecting the healthcare industry, such as increased
regulation of the purchase and sale of medical products, or restrictions on permissible discounts and other financial arrangements,
could require us to make unplanned modifications of our products and services, result in delays or cancellations of orders or reduce
funds and demand for our products and services.
We are subject to numerous risks arising from governmental oversight and regulation. You should carefully review the following
discussion and the risks discussed under “Item 1A, Risk Factors” for a more detailed discussion.
Affordable Care Act
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education and Reconciliation Act of
2010, collectively referred to as the Affordable Care Act, is a sweeping measure designed to expand access to affordable health
insurance, control healthcare spending and improve healthcare quality. The law includes provisions to tie Medicare provider
reimbursement to healthcare quality and incentives, mandatory compliance programs, enhanced transparency disclosure
requirements, increased funding and initiatives to address fraud and abuse and incentives to state Medicaid programs to promote
community-based care as an alternative to institutional long-term care services. In addition, the law provides for the establishment
of a national voluntary pilot program to bundle Medicare payments for hospital and post-acute services, which could lead to
changes in the delivery of healthcare services. Likewise, many states have adopted or are considering changes in healthcare policies
in part due to state budgetary shortfalls. Because implementation of many provisions of the Affordable Care Act remains unsettled,
we do not know what effect the federal Affordable Care Act or state law proposals may have on our business.
Civil and Criminal Fraud and Abuse Laws
We are subject to federal and state laws and regulations designed to protect patients, governmental healthcare programs and
private health plans from fraudulent and abusive activities. These laws include anti-kickback restrictions and laws prohibiting the
submission of false or fraudulent claims. These laws are complex and broadly-worded, and their application to our specific products,
services and relationships may not be clear and may be applied to our business in ways that we do not anticipate. Federal and state
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regulatory and law enforcement authorities have over time increased enforcement activities with respect to Medicare and Medicaid
fraud and abuse regulations and other reimbursement laws and rules. These laws and regulations include:
Anti-Kickback Laws. The federal Anti-Kickback Statute prohibits the knowing and willful offer, payment, solicitation or
receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in
return for the recommendation, arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by
a federal healthcare program such as Medicare or Medicaid. The definition of "remuneration" has been broadly interpreted to
include anything of value such as gifts, discounts, rebates, waiver of payments or providing anything at less than its fair market
value. Many states have adopted similar prohibitions against kickbacks and other practices that are intended to influence the
purchase, lease or ordering of healthcare items and services regardless of whether the item or service is covered under a governmental
health program or private health plan. Certain statutory and regulatory safe harbors exist that protect specified business arrangements
from prosecution under the Anti-Kickback Statute if all elements of an applicable safe harbor are met, however these safe harbors
are narrow and often difficult to comply with. Congress has appropriated an increasing amount of funds in recent years to support
enforcement activities aimed at reducing healthcare fraud and abuse.
The U.S. Department of Health and Human Services, or HHS, created certain safe harbor regulations which, if fully complied
with, assure parties to a particular arrangement covered by a safe harbor that they will not be prosecuted under the Anti-Kickback
Statute. We attempt to structure our group purchasing services, pricing discount arrangements with suppliers, and revenue share
arrangements with applicable members to meet the terms of the safe harbor for GPOs set forth at 42 C.F.R. § 1001.952(j) and the
discount safe harbor set forth at 42 C.F.R. § 1001.952(h). Although full compliance with the provisions of a safe harbor ensures
against prosecution under the Anti-Kickback Statute, failure of a transaction or arrangement to fit within a safe harbor does not
necessarily mean that the transaction or arrangement is illegal or that prosecution under the Anti-Kickback Statute will be pursued.
From time to time, HHS, through its Office of Inspector General, makes formal and informal inquiries, conducts investigations
and audits the business practices of GPOs, including our GPO, the result of which could be new rules, regulations or in some
cases, a formal enforcement action.
To help ensure regulatory compliance with HHS rules and regulations, our members that report their costs to Medicare are
required under the terms of the Premier Group Purchasing Policy to appropriately reflect all elements of value received in connection
with our Reorganization and IPO on their cost reports. We are required to furnish applicable reports to such members setting forth
the amount of such value, to assist their compliance with such cost reporting requirements. There can be no assurance that the
HHS Office of Inspector General or the U.S. Department of Justice, or DOJ, will concur that these actions satisfy their applicable
rules and regulations.
False Claims Act. Our business in general, and our specialty pharmacy in particular, is also subject to numerous federal and
state laws that forbid the submission or "causing the submission" of false or fraudulent information or the failure to disclose
information in connection with the submission and payment of claims for reimbursement to Medicare, Medicaid, other federal
healthcare programs or private health plans. In particular, the False Claims Act, or FCA, prohibits a person from knowingly
presenting or causing to be presented a false or fraudulent claim for payment or approval by an officer, employee or agent of the
United States. In addition, the FCA prohibits a person from knowingly making, using, or causing to be made or used a false record
or statement material to such a claim. Violations of the FCA may result in treble damages, significant monetary penalties, and
other collateral consequences including, potentially, exclusion from participation in federally funded healthcare programs. The
scope and implications of the amendments to the FCA pursuant to the Fraud Enforcement and Recovery Act, or FERA, have yet
to be fully determined or adjudicated and as a result it is difficult to predict how future enforcement initiatives may impact our
business. A claim that includes items or services resulting from a violation of the Anti-Kickback Statute constitutes a false or
fraudulent claim for purposes of the FCA.
Privacy and Security Laws. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, contains substantial
restrictions and requirements with respect to the use and disclosure of certain individually identifiable health information, referred
to as "protected health information." The HIPAA Privacy Rule prohibits a covered entity or a business associate (essentially, a
third party engaged to assist a covered entity with enumerated operational and/or compliance functions) from using or disclosing
protected health information unless the use or disclosure is validly authorized by the individual or is specifically required or
permitted under the Privacy Rule and only if certain complex requirements are met. In addition to establishing these complex
requirements, covered entities and business associates must also meet additional compliance obligations set forth in the Privacy
Rule. In addition, the HIPAA Security Rule establishes administrative, organization, physical and technical safeguards to protect
the privacy, integrity and availability of electronic protected health information maintained or transmitted by covered entities and
business associates. The HIPAA Security Rule requirements are intended to mandate that covered entities and business associates
regularly re-assess the adequacy of their safeguards in light of changing and evolving security risks. Finally, the HIPAA Breach
Notification Rule requires that covered entities and business associates, under certain circumstances, notify patients/beneficiaries
and HHS when there has been an improper use or disclosure of protected health information.
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Our specialty pharmacy, our self-funded health benefit plan and our healthcare provider members (provided that these members
engage in HIPAA-defined standard electronic transactions with health plans, which will be all or the vast majority) are directly
regulated by HIPAA as "covered entities." From time to time, as part of our specialty pharmacy business, certain of our affiliates
act as business associates of retail and other pharmacies in connection with co-branding initiatives. As such, we are subject to
HIPAA and other risks discussed herein associated with being a business associate. Additionally, because most of our U.S. hospital
members disclose protected health information to us so that we may use that information to provide certain data analytics,
benchmarking, advisory or other operational and compliance services to these members, we are a "business associate" of those
members. In these cases, in order to provide members with services that involve the use or disclosure of protected health information,
HIPAA require us to enter into "business associate agreements" with our covered entity members. Such agreements must, among
other things, provide adequate written assurances:
(i) as to how we will use and disclose the protected health information within certain allowable parameters established
by HIPAA,
(ii) that we will implement reasonable administrative, organizational, physical and technical safeguards to protect such
information from misuse,
(iii) that we will enter into similar agreements with our agents and subcontractors that have access to the information,
(iv) that we will report breaches of unsecured protected health information, security incidents and other inappropriate
uses or disclosures of the information, and
(v) that we will assist the covered entity with certain of its duties under HIPAA.
With the enactment of the Health Information Technology for Economic and Clinical Health, or HITECH Act, the privacy
and security requirements of HIPAA were modified and expanded. The HITECH Act applies certain of the HIPAA privacy and
security requirements directly to business associates of covered entities. Prior to this change, business associates had contractual
obligations to covered entities but were not subject to direct enforcement by the federal government. In 2013, HHS released final
rules implementing the HITECH Act changes to HIPAA. These amendments expanded the protection of protected health
information by, among other things, imposing additional requirements on business associates, further restricting the disclosure of
protected health information in certain cases when the disclosure is part of a remunerated transaction, and modifying the HIPAA
Breach Notification Rule, which has been in effect since September 2009, to create a rebuttable presumption that any improper
use or disclosure of protected health information requires notice to affected patients/beneficiaries and HHS.
Transaction Requirements. HIPAA also mandates format, data content and provider identifier standards that must be used
in certain electronic transactions, such as claims, payment advice and eligibility inquiries. Although our systems are fully capable
of transmitting transactions that comply with these requirements, some payers and healthcare clearinghouses with which we conduct
business may interpret HIPAA transaction requirements differently than we do or may require us to use legacy formats or include
legacy identifiers as they make the transition to full compliance. In cases where payers or healthcare clearinghouses require
conformity with their interpretations or require us to accommodate legacy transactions or identifiers as a condition of successful
transactions, we attempt to comply with their requirements, but may be subject to enforcement actions as a result. In 2009, CMS
published a final rule adopting updated standard code sets for diagnoses and procedures known as ICD-10 code sets and changing
the formats to be used for electronic transactions subject to the ICD-10 code sets, known as Version 5010. All healthcare providers
are required to comply with Version 5010 and use the ICD-10 code sets. We are actively working to make the proper modifications
in preparation for the upcoming release of new ICD-10 code sets on October 1, 2016.
Other Federal and State Laws. In addition to our obligations under HIPAA there are other federal laws that impose specific
privacy and security obligations, above and beyond HIPAA, for certain types of health information and impose additional sanctions
and penalties. These rules are not preempted by HIPAA. Most states have enacted patient and/or beneficiary confidentiality laws
that protect against the disclosure of confidential medical information, and many states have adopted or are considering adopting
further legislation in this area, including privacy safeguards, security standards, data security breach notification requirements,
and special rules for so-called "sensitive" health information, such as mental health, genetic testing results, or Human
Immunodeficiency Virus, or HIV, status. These state laws, if more stringent than HIPAA requirements, are not preempted by the
federal requirements, and we are required to comply with them as well.
We are unable to predict what changes to HIPAA or other federal or state laws or regulations might be made in the future or
how those changes could affect our business or the associated costs of compliance. For example, the federal Office of the National
Coordinator for Health Information Technology, or ONCHIT, is coordinating the development of national standards for creating
an interoperable health information technology infrastructure based on the widespread adoption of electronic health records in the
healthcare sector. We are yet unable to predict what, if any, impact the creation of such standards and the further developments at
ONCHIT will have on the necessary specifications or demand for our products, services, or on associated compliance costs.
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Antitrust Laws
The Sherman Antitrust Act and related federal and state antitrust laws are complex laws that prohibit contracts in restraint of
trade or other activities that are designed to or that have the effect of reducing competition in the market. The federal antitrust laws
promote fair competition in business and are intended to create a level playing field so that both small and large companies are
able to compete in the market. In their 1996 Statements of Antitrust Enforcement Policy in Health Care, first issued in 1993, or
the Healthcare Statements, the DOJ and the Federal Trade Commission, or FTC, set forth guidelines specifically designed to help
GPOs gauge whether a particular purchasing arrangement may raise antitrust concerns and established an antitrust safety zone for
joint purchasing arrangements among healthcare providers. Under this antitrust safety zone, the DOJ and FTC will not challenge,
except in extraordinary circumstances, joint purchasing arrangements among healthcare providers that meet two basic conditions:
(i) the purchases made by the healthcare providers account for less than 35% of the total sales of the purchased product or service
in the relevant market; and (ii) the cost of the products and services purchased jointly account for less than 20% of the total revenues
from all products and services sold by each competing participant in the joint purchasing arrangement.
We have attempted to structure our contracts and pricing arrangements in accordance with the Healthcare Statements and
believe that our GPO supplier contracts and pricing discount arrangements should not be found to violate the antitrust laws.
However, no assurance can be given that enforcement authorities will agree with this assessment. From time to time, the group
purchasing industry comes under review by congress and other governmental bodies with respect to antitrust laws. In connection
with the 2002 hearing by the U.S. Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, we and
other operators of GPOs formed the Healthcare Supply Chain Association, or HSCA, which developed a code of conduct to assure
compliance with ethical and legal standards, including the antitrust laws. In addition, in 2002 we adopted our own Code of Conduct
in consultation with a leading ethicist.
On August 11, 2009, we and several other operators of GPOs received a letter from Senators Charles Grassley, Herb Kohl
and Bill Nelson requesting information concerning the different relationships between and among us and our members, distributors,
manufacturers and other suppliers, and requesting certain information about the services we perform and the payments we receive
in connection with our GPO programs. On September 25, 2009, we and several other operators of GPOs received a request for
information from the U.S. Government Accountability Office, or GAO, also concerning our services and relationships with our
members in connection with our GPO programs. Subsequently, we and other operators of GPOs received follow-up requests for
additional information. We fully complied with all of these requests. On September 27, 2010, the GAO released a report titled
"Group Purchasing Organizations-Services Provided to Customers and Initiatives Regarding Their Business Practices." On that
same day, the Minority Staff of the U.S. Senate Finance Committee released a report titled "Empirical Data Lacking to Support
Claims of Savings with Group Purchasing Organizations." On March 30, 2012, the GAO released a report titled "Group Purchasing
Organizations-Federal Oversight and Self-Regulation." On November 24, 2014, the GAO released a report titled "Funding Structure
Has Potential Implications for Medicare Costs."
Congress, the DOJ, the FTC, the U.S. Senate or another state or federal entity could at any time open a new investigation of
the group purchasing industry, or develop new rules, regulations or laws governing the industry, that could adversely impact our
ability to negotiate pricing arrangements with suppliers, increase reporting and documentation requirements, or otherwise require
us to modify our arrangements in a manner that adversely impacts our business. We may also face private or government lawsuits
alleging violations arising from the concerns articulated by these governmental factors or alleging violations based solely on
concerns of individual private parties.
Governmental Audits
Because we act as a GPO for healthcare providers that participate in governmental programs, our group purchasing services
have in the past and may again in the future be subject to periodic surveys and audits by governmental entities or contractors for
compliance with Medicare and Medicaid standards and requirements. We will continue to respond to these government reviews
and audits but cannot predict what the outcome of any future audits may be or whether the results of any audits could significantly
or negatively impact our business, our financial condition or results of operations.
Compliance Department
We have developed a compliance program that is designed to monitor that our operations are conducted in compliance with
applicable laws and regulations and, if violations occur, to promote early detection and prompt resolution. These objectives are
achieved through education, monitoring, disciplinary action and other remedial measures we believe to be appropriate. We provide
all of our employees with a compliance education that has been developed to communicate our code of conduct, standards of
conduct, and compliance policies and procedures, as well as policies for monitoring, reporting and responding to compliance
issues. We also provide all of our employees with a third party toll-free number and Internet website address in order to report any
compliance or privacy concerns. In addition, our Chief Ethics and Compliance Officer individually, and along with the Audit and
Compliance Committee of the Board of Directors, helps oversee compliance and ethics matters across our business operations.
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Employees
As of June 30, 2016, we employed approximately 2,100 persons, approximately 47% of whom are based in our headquarters
in Charlotte, North Carolina. None of our employees are working under a collective bargaining arrangement.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy
the documents that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You
may obtain further information about the operation of the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330.
You may also inspect these reports and other information without charge at a website maintained by the SEC. The address of this
site is https://www.sec.gov. In addition, our website address is www.premierinc.com. We make available through our website the
documents identified above, free of charge, promptly after we electronically file such material with, or furnish it to, the SEC.
We also provide information about our company through: Twitter (https://twitter.com/premierha), Facebook (https://
www.facebook.com/premierhealthcarealliance), LinkedIn
(https://
www.youtube.com/user/premieralliance), Instagram (https://instagram.com/premierha), Foursquare (https://foursquare.com/
premierha) and Premier’s blog (https://www.actionforbetterhealthcare.com).
(https://www.linkedin.com/company/6766), YouTube
Except as specifically indicated otherwise, the information available on our website, the SEC's website and the social media
outlets identified above, is not and shall not be deemed a part of this Annual Report.
19
Item 1A. Risk Factors
Our business, operations, and financial position are subject to various risks. Before making an investment in our Class A
common stock or other securities we may have outstanding from time to time, you should carefully consider the following risks,
as well as the other information contained in this annual report. Any of the risks described below could materially harm our business,
financial condition, results of operations and prospects, and as a result, an investment in our Class A common stock or other
securities we may have outstanding from time to time could decline, and you may lose part or all of the value of your investment.
This section does not describe all risks that are or may become applicable to us, our industry, or our business, and it is intended
only as a summary of certain material risk factors. Some statements in this annual report, including such statements in the following
risk factors, constitute forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking
Statements.” More detailed information concerning other risks or uncertainties we face, as well as the risk factors described below,
is contained in other sections of this annual report.
Risks Related to Our Business
We face intense competition, which could limit our ability to maintain or expand market share within our industry and harm
our business and operating results.
The market for products and services in each of our operating segments is fragmented, intensely competitive and characterized
by rapidly evolving technology and product standards, dynamic user needs and the frequent introduction of new products and
services. We face intense competition from a number of companies, including the companies listed under “Item 1 - Business -
Competition.” The primary competitors for our supply chain services segment are other large GPOs, including in certain cases
GPOs owned by healthcare providers. Our specialty pharmacy competes both with large national pharmacies and smaller local
specialty pharmacies. Our direct sourcing activities compete primarily with private label offerings and programs, product
manufacturers and distributors. The competitors in our performance services segment range from smaller niche companies to large,
well-financed and technologically-sophisticated entities, and includes information technology providers and consulting and
outsourcing firms.
With respect to our products and services in both segments, we compete on the basis of several factors, including breadth,
depth and quality of our product and service offerings, ability to deliver clinical, financial and operational performance improvement
through the use of products and services, quality and reliability of services, ease of use and convenience, brand recognition and
the ability to integrate services with existing technology. Some of our competitors are more established, benefit from greater name
recognition, have larger member bases and have substantially greater financial, technical and marketing resources. Other of our
competitors have proprietary technology that differentiates their product and service offerings from our offerings. As a result of
these competitive advantages, our competitors and potential competitors may be able to respond more quickly to market forces,
undertake more extensive marketing campaigns for their brands, products and services and make more attractive offers to our
members.
We also compete on the basis of price in both of our segments. We may be subject to pricing pressures as a result of, among
other things, competition within the industry, consolidation of healthcare industry participants, practices of managed care
organizations, changes in laws and regulations applicable to our business operations, government action affecting reimbursement
and financial stress experienced by our members. If our pricing experiences significant downward pressure, our business will be
less profitable and our results of operations will be adversely affected. In this competitive environment, we cannot be certain that
we will be able to retain our current members or expand our member base. If we do not retain current members or expand our
member base, our business, financial condition and results of operations will be harmed. Moreover, we expect that competition
will continue to increase as a result of consolidation in both the healthcare information technology and healthcare services industries.
If one or more of our competitors or potential competitors were to merge or partner with another of our competitors, the change
in the competitive landscape could also adversely affect our ability to compete effectively and could harm our business, financial
condition and results of operations.
Consolidation in the healthcare industry could have a material adverse effect on our business, financial condition and results
of operations.
Many healthcare industry participants are consolidating to create larger and more integrated healthcare delivery systems with
greater market power. We expect regulatory and economic conditions to force additional consolidation in the healthcare industry
in the future. As consolidation accelerates, the economies of scale of our members’ organizations may grow. If a member experiences
sizable growth following consolidation, it may determine that it no longer needs to rely on us and may reduce its demand for our
products and services. Some of these large and growing healthcare systems may choose to contract directly with suppliers for
certain supply categories, and some suppliers may seek to contract directly with the healthcare providers rather than with GPOs
such as ours. In connection with any consolidation, certain of our members may also move their business to another GPO. In
addition, as healthcare providers consolidate to create larger and more integrated healthcare delivery systems with greater market
20
power, these providers may try to use their market power to negotiate fee reductions for our products and services across both of
our business segments. Finally, consolidation may also result in the acquisition or future development by our members of products
and services that compete with our products and services. Any of these potential results of consolidation could have a material
adverse effect on our business, financial condition and results of operations.
We may experience significant delays in recognizing revenue or increasing revenue if the sales cycle or implementation period
with potential new members takes longer than anticipated.
A key element of our strategy is to market the various products and services in our supply chain services and performance
services segments directly to healthcare providers, such as health systems and acute care hospitals, and to increase the number of
our products and services utilized by existing members. The evaluation process is often lengthy and involves significant technical
evaluation and commitment of personnel by these organizations. Further, the evaluation process depends on a number of factors,
many of which we may not be able to control, including potential new members’ internal approval processes, budgetary constraints
for technology spending, member concerns about implementing new procurement methods and strategies and other timing effects.
In addition, the contract or software implementation process for new products or services can take six months or more and,
accordingly, delay our anticipated financial benefits from sales of such products or services. If we experience an extended or
delayed implementation cycle in connection with the sale of additional products and services to existing or new members, it could
have a material adverse effect on our business, financial condition and results of operations.
Member participation in our GPO programs may be terminated with limited or no notice and without significant termination
payments. If our members reduce activity levels or terminate or elect not to renew their contracts, our revenue and results of
operations may decrease materially.
In connection with the Reorganization, we entered into new GPO participation agreements with all of our member owners
existing immediately prior to the completion of the Reorganization. These GPO participation agreements are generally terminable
at any time by either party, upon one year’s prior written notice, in addition to being terminable for cause. Our success in retaining
member participation in our GPO programs depends upon our reputation, strong relationships with such members and our ability
to deliver consistent, reliable and high quality products and services. In addition, members may seek to reduce, cancel or elect not
to renew their contracts due to factors that are beyond our control and are unrelated to our performance, including their business
or financial condition, changes in their strategies or business plans or economic conditions in general. When contracts are reduced,
canceled or not renewed for any reason, we lose the anticipated future revenue associated with such contracts and, consequently,
our revenue and results of operations may decrease materially.
The markets for our non-GPO services and products may develop more slowly than we expect, which could adversely affect
our revenue and our ability to maintain or increase our profitability.
The market for products and services in our non-GPO lines of business is narrowly based, and our success will depend to a
substantial extent on the willingness of existing and potential new members to increase their use of our SaaS informatics products.
Many companies have invested substantial resources to integrate established enterprise software into their businesses and therefore
may be reluctant or unwilling to switch to our products and services. Furthermore, some companies may have concerns regarding
the risks associated with the security and reliability of the technology delivery model associated with these services. If companies
do not perceive the benefits of our products and services, then the market for these products and services may not expand as much
or develop as quickly as we expect, which would significantly adversely affect our business, financial condition and results of
operations.
Our members are highly dependent on payments from third-party healthcare payers, including Medicare, Medicaid and other
government-sponsored programs, and reductions or changes in third-party reimbursement could adversely affect these members
and consequently our business.
Our members derive a substantial portion of their revenue from third-party private and governmental payers, including
Medicare, Medicaid and other government sponsored programs. Our sales and profitability depend, in part, on the extent to which
coverage of and reimbursement for our products and services our members purchase or otherwise obtain through us is available
to our members from governmental health programs, private health insurers, managed care plans and other third-party payers.
These third-party payers are increasingly using their enhanced bargaining power to secure discounted reimbursement rates and
may impose other requirements that adversely impact our members’ ability to obtain adequate reimbursement for our products
and services. If third-party payers do not approve our products and services for reimbursement or fail to reimburse for them
adequately, our members may suffer adverse financial consequences which, in turn, may reduce the demand for and ability to
purchase our products or services.
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In addition, government actions could limit government spending generally for the Medicare and Medicaid programs, limit
payments to healthcare providers and increase emphasis on competitive bidding programs that could have an adverse impact on
our members and, in turn, on our business, financial condition and results of operations.
We rely on the administrative fees we receive from our GPO suppliers, and the failure to maintain contracts with these GPO
suppliers could have a generally negative effect on our relationships with our members and could adversely affect our business,
financial condition and results of operations.
Historically, we have derived a substantial amount of our revenue from the administrative fees that we receive from our GPO
suppliers. We maintain contractual relationships with these suppliers which provide products and services to our members at
reduced costs and which pay us administrative fees based on the dollars spent by our members for such products and services. Our
contracts with these GPO suppliers generally may be terminated upon 90 days’ notice. A termination of any relationship or agreement
with a GPO supplier would result in the loss of administrative fees pursuant to our arrangement with that supplier, which could
adversely affect our business, financial condition and results of operations. In addition, if we lose a relationship with a GPO supplier
we may not be able to negotiate similar arrangements for our members with other suppliers on the same terms and conditions or
at all, which could damage our reputation with our members and adversely impact our ability to maintain our member agreements
or expand our membership base and could have a material adverse effect on our business, financial condition and results of
operations.
In addition, CMS, which administers the Medicare and federal aspects of state Medicaid programs, has issued complex rules
requiring pharmaceutical manufacturers to calculate and report drug pricing for multiple purposes, including the limiting of
reimbursement for certain drugs. These rules generally exclude from the pricing calculation administrative fees paid by drug
manufacturers to GPOs to the extent that such fees meet CMS’s “bona fide service fee” definition. There can be no assurance that
CMS will continue to allow exclusion of GPO administrative fees from the pricing calculation, which could negatively affect the
willingness of pharmaceutical manufacturers to pay administrative fees to us.
If we are unable to maintain our relationships with third-party providers or maintain or enter into new strategic alliances, we
may be unable to grow our current base business.
Our business strategy includes entering into and maintaining strategic alliances and affiliations with leading service providers
and other GPOs. These companies may pursue relationships with our competitors, develop or acquire products and services that
compete with our products and services, experience financial difficulties, be acquired by one of our competitors or other third
party or exit the healthcare industry, any of which may adversely affect our relationship with them. In addition, in many cases,
these companies may terminate their relationships with us for any reason with limited or no notice. If existing relationships with
third-party providers or strategic alliances are adversely impacted or are terminated or we are unable to enter into relationships
with leading healthcare service providers and other GPOs, we may be unable to maintain or increase our industry presence or
effectively execute our business strategy.
If we are not able to timely offer new and innovative products and services, we may not remain competitive and our revenue
and results of operations may suffer.
Our success depends on providing products and services within our supply chain services and performance services segments
that healthcare providers use to improve clinical, financial and operational performance. Information technology providers and
other competitors are incorporating enhanced analytical tools and functionality and otherwise developing products and services
that may become viewed as more efficient or appealing to our members. If we cannot adapt to rapidly evolving industry standards,
technology and member needs, including changing regulations and provider reimbursement policies, we may be unable to anticipate
changes in our current and potential new members’ requirements that could make our existing technology, products or service
offerings obsolete. We must continue to invest significant resources in research and development in order to enhance our existing
products and services, maintain or improve our product category rankings and introduce new high quality products and services
that members and potential new members will want. If our enhanced existing or new products and services are not responsive to
the needs of our members or potential new members, are not appropriately timed with market opportunity or are not effectively
brought to market we may lose existing members and be unable to obtain new members and our results of operations may suffer.
We derive a significant portion of our revenues from our largest members, some of which are also GPOs that serve our members.
Our top five members, all of which are participants in our group purchasing programs, comprised approximately 18% of our
consolidated net revenues for the year ended June 30, 2016. Our largest member, GNYHA Purchasing Alliance, LLC and its
member organizations, comprised approximately 9% of our consolidated net revenues for the same period. The sudden loss of any
significant member or a number of smaller members that are participants in our group purchasing programs could materially and
adversely affect our operating results. In addition, certain of our significant members are themselves GPOs with their own respective
direct contracting relationships, including relationships with some of our other members. The sudden loss of any of these members
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may also result in increased competition for our supply chain services segment and materially and adversely affect our operating
results.
Acquisitions could result in operating difficulties, dilution and other adverse consequences.
Our business strategy includes growth through acquisitions of additional businesses and assets. Future acquisitions may not
be completed on preferred terms, and acquired assets or businesses may not be successfully integrated into our operations. Any
of these acquisitions will involve the risks commonly encountered in acquisitions of businesses. Such risks include, among other
things:
•
•
•
•
failing to integrate the operations and personnel of the acquired businesses in an efficient, timely manner;
assuming potential liabilities of an acquired company, some of which may not become known until after the
acquisition;
an acquired company's lack of compliance with laws and governmental rules and regulations, and the related costs
and expenses necessary to bring such entity into compliance;
an acquired company's general information technology controls may not be sufficient to prevent unauthorized access
or transactions, cyber-attacks or other data security breaches;
• managing the potential disruption to our ongoing business;
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distracting management focus from our core businesses;
encountering difficulties in identifying and acquiring products, technologies, or businesses that will help us execute
our business strategy;
entering new markets in which we have little to no experience;
impairing relationships with employees, members, and strategic partners;
failing to implement or remediate controls, procedures and policies appropriate for a public company at acquired
companies that prior to the acquisition lacked such controls, procedures and policies;
the amortization of purchased intangible assets;
incurring expenses associated with an impairment of all or a portion of goodwill and other intangible assets due to
the failure of certain acquisitions to realize expected benefits; and
diluting the share value and voting power of existing stockholders.
Anticipated benefits of our previous and future acquisitions may not materialize. Future acquisitions or dispositions of under-
performing businesses could result in the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill
and other intangible assets, any of which could harm our results of operations and financial condition. In addition, expenses
associated with potential acquisitions, including, among others, due diligence costs, legal, accounting, technology and financial
advisory fees, travel and internal resources utilization, can be significant. These expenses may be incurred regardless of whether
any potential acquisition is completed. In instances where acquisitions are not ultimately completed, these expenses typically
cannot be recovered or offset by the anticipated financial benefits of a successful acquisition. As we pursue our business strategy
and evaluate opportunities, these expenses may adversely impact our results of operations and earnings per share.
Our business and growth strategy also includes non-controlling investments in other businesses. In the event these investments
do not perform as well as expected, we could experience the loss of some or all of the value of our investment which loss could
adversely impact our financial condition and results of operations.
Although we conduct accounting, financial, legal and business due diligence prior to making investments, we cannot guarantee
that we will discover all material issues that may affect a particular target business, or that factors outside the control of the target
business and outside of our control will not later arise. To the extent we invest in a financially underperforming or unstable company
or an entity in its development stage that does not successfully mature, we may lose the value of our investment. Occasionally,
current and future investments are, and will be, made on a non-controlling basis, in which case we have limited ability to influence
the financial or business operations of the companies in which we invest. If our investment loses value, we may be required to
write down or write off our investment, or recognize impairment or other charges that could adversely impact our financial condition
or results of operations and our stock price. Even though these charges may be non-cash items and not have a material impact on
our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us and our business
strategy and our Class A common stock.
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We are subject to litigation from time to time, which could have a material adverse effect on our business, financial condition
and results of operations.
We participate in businesses that are subject to substantial litigation. We are from time to time involved in litigation, which
may include claims relating to commercial, product liability, personal injury, employment, antitrust, intellectual property or other
regulatory matters. Additionally, if current or future government regulations are interpreted or enforced in a manner adverse to us
or our business, specifically those with respect to antitrust or healthcare laws, we may be subject to enforcement actions, penalties,
damages and other material limitations on our business.
From time to time, we have been named as a defendant in lawsuits brought by suppliers of medical products. Typically, these
lawsuits have alleged the existence of a conspiracy among manufacturers of competing products and operators of GPOs, including
us, to deny the plaintiff access to a market for its products. No assurance can be given that we will not be subjected to similar
actions in the future or that such matters will be resolved in a manner satisfactory to us or which will not harm our business,
financial condition or results of operations.
We may become subject to additional litigation in the future. Some of these claims may result in significant defense costs or
may compel us to pay significant fines, judgments or settlements, which, if uninsured, could have a material adverse effect on our
business, financial condition, results of operations and cash flows. In addition, certain litigation matters could adversely impact
our commercial reputation, which is critical for attracting and retaining suppliers and member participation in our GPO programs.
We rely on Internet infrastructure, bandwidth providers, data center providers and other third parties and our own systems for
providing services to our users, and any failure or interruption in the services provided by these third parties or our own systems
could expose us to litigation and negatively impact our relationships with users, adversely affecting our brand, our business
and our financial performance.
Our ability to deliver our performance services segment products is dependent on the development and maintenance of the
infrastructure of the Internet and other telecommunications services by third parties. This includes maintenance of a reliable network
backbone with the necessary speed, data capacity and security for providing reliable Internet access and services and reliable
telephone, facsimile and pager systems. We have experienced and expect that we will experience in the future interruptions and
delays in these services and availability from time to time. We rely on internal systems as well as third-party suppliers, including
bandwidth and telecommunications equipment providers, to provide our services. We are also currently in the process of migrating
some of our data center operations to third-party data-hosting facilities. We do not maintain redundant systems or facilities for
some of these services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may
experience an extended period of system unavailability, which could negatively impact our relationship with users. To operate
without interruption, both we and our service providers must guard against:
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damage from fire, power loss, and other natural disasters;
communications failures;
software and hardware errors, failures, and crashes;
security breaches and computer viruses and similar disruptive problems; and
other potential interruptions.
Any disruption in the network access, telecommunications or co-location services provided by our third-party providers or
any failure of or by these third-party providers or our own systems to handle current or higher volume of use could significantly
harm our business. We exercise limited control over these third-party suppliers, which increases our vulnerability to problems with
services they provide. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies
and information services or our own systems could negatively impact our relationships with users and adversely affect our business
and financial performance and could expose us to third-party liabilities, some of which may not be adequately insured.
Data loss or corruption due to failures or errors in our systems and service disruptions at our data centers may adversely affect
our reputation and relationships with existing members, which could have a negative impact on our business, financial condition
and results of operations.
Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems
could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our
members regard as significant. Complex software such as ours may contain errors or failures that are not detected until after the
software is introduced or updates and new versions are released. We continually introduce new software and updates and
enhancements to our software. Despite testing by us, from time to time we have discovered defects or errors in our software, and
such defects or errors may be discovered in the future. Any defects or errors could expose us to risk of liability to members and
the government and could cause delays in the introduction of new products and services, result in increased costs and diversion
24
of development resources, require design modifications, decrease market acceptance or member satisfaction with our products
and services or cause harm to our reputation.
Furthermore, our members might use our software together with products from other companies. As a result, when problems
occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the
existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our product
development efforts, impact our reputation and lead to significant member relations problems.
Moreover, our internal data centers and service provider locations store and transmit critical member data that is essential to
our business. While these locations are chosen for their stability, failover capabilities and system controls, we do not directly
control the continued or uninterrupted availability of every location. In addition to the services we provide from our offices, we
are currently in the process of migrating some of our data center operations to third-party data-hosting facilities. Data center
facilities are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and
similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism, cyber-attacks and similar misconduct.
Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the
facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in our service. These service
interruption events could impair our ability to deliver services or deliverables or cause us to fail to achieve service levels required
in agreements with our members, which could negatively affect our ability to retain existing members and attract new members.
If our security measures are breached or fail and unauthorized access to a member’s data is obtained, or our members fail to
obtain proper permission for the use and disclosure of information, our services may be perceived as not being secure, members
may curtail or stop using our services and we may incur significant liabilities.
Our services involve the web-based storage and transmission of members’ proprietary information and protected health
information of patients. From time to time we may detect vulnerabilities in our systems, which, even if not resulting in a security
breach, may reduce member confidence and require substantial resources to address. If our security measures are breached or fail
as a result of third-party action, employee error, malfeasance, insufficiency, defective design or otherwise, someone may be able
to obtain unauthorized access to member or patient data. As a result, our reputation could be damaged, our business may suffer
and we could face damages for contract breach, penalties for violation of applicable laws or regulations and significant costs for
remediation and efforts to prevent future occurrences.
We rely upon our members as users of our system for key activities to promote security of the system and the data within it.
On occasion, our members have failed to perform these activities. Failure of members to perform these activities may result in
claims against us that could expose us to significant expense and harm our reputation. In addition, our members may authorize or
enable third parties to access their data or the data of their patients on our systems. Because we do not control such access, we
cannot ensure the complete propriety of that access or integrity or security of such data in our systems. Any breach of our security
could have a material adverse effect on our business, financial condition and results of operations.
Additionally, we require our members to provide necessary notices and to obtain necessary permissions and waivers for use
and disclosure of the information that we receive. If our members do not obtain necessary permissions and waivers, then our use
and disclosure of information that we receive from them or on their behalf may be limited or prohibited by state or federal privacy
laws or other laws. Any such failure to obtain proper permissions and waivers could impair our functions, processes and databases
that reflect, contain or are based upon such data and may prevent use of such data. Moreover, we may be subject to claims or
liability for use or disclosure of information by reason of our lack of a valid notice, permission or waiver. These claims or liabilities
could subject us to unexpected costs and adversely affect our business, financial condition and results of operations.
We could suffer a loss of revenue and increased costs, exposure to significant liability, reputational harm, and other serious
negative consequences if we sustain 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.
We manage and store proprietary information and sensitive or confidential data relating to our operations. We may be subject
to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers
may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third
parties, create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy
viruses, worms, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities
of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure
from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly
interfere with the operation of our systems.
The costs to us to eliminate or address the foregoing security problems and security vulnerabilities before or after a cyber
incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays or cessation
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of service and loss of existing or potential members. In addition, breaches of our security measures and the unapproved use or
disclosure of proprietary information or sensitive or confidential data about us or our members or other third parties could expose
us, our members or other affected third parties to a risk of loss or misuse of this information, result in litigation, governmental
inquiry and potential liability for us, damage our brand and reputation or otherwise harm our business. Furthermore, we are exposed
to additional risks because we rely in certain capacities on third-party data management providers whose possible security problems
and security vulnerabilities are beyond our control.
Any restrictions on our use of, or ability to license, data or our failure to license data and integrate third-party technologies,
could have a material adverse effect on our business, financial condition and results of operations.
We depend upon licenses from third parties, most of which are non-exclusive, for some of the technology and data used in
our applications, and for some of the technology platforms upon which these applications are built and operate. We also obtain a
portion of the data that we use from government entities and public records and from our members for specific member engagements.
We cannot assure you that our licenses for information will allow us to use that information for all potential or contemplated
applications and products. In addition, if our members revoke their consent for us to maintain, use, de-identify and share their data,
our data assets could be degraded.
In the future, data providers could withdraw their data from us or restrict our usage due to competitive reasons or because of
new legislation or judicial interpretations restricting use of the data currently used in our products and services. In addition, data
providers could fail to adhere to our quality control standards in the future, causing us to incur additional expense to appropriately
utilize the data. If a substantial number of data providers were to withdraw or restrict their data, or if they fail to adhere to our
quality control standards, and if we are unable to identify and contract with suitable alternative data suppliers and integrate these
data sources into our service offerings, our ability to provide products and services to our members would be materially and
adversely impacted, resulting in a material adverse effect on our business, financial condition and results of operations.
We also integrate into our proprietary applications and use third-party software to maintain and enhance, among other things,
content generation and delivery, and to support our technology infrastructure. Some of this software is proprietary and some is
open source. Our use of third-party technologies exposes us to increased risks, including, but not limited to, risks associated with
the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary
technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and
maintenance costs. These technologies may not be available to us in the future on commercially reasonable terms or at all and
could be difficult to replace once integrated into our own proprietary applications. Our inability to obtain, maintain or comply with
any of these licenses could delay development until equivalent technology can be identified, licensed and integrated, which would
harm our business, financial condition and results of operations.
Most of our third-party licenses are non-exclusive and our competitors may obtain the right to use any of the technology
covered by these licenses to compete directly with us. Our use of third-party technologies exposes us to increased risks, including,
but not limited to, risks associated with the integration of new technology into our solutions, the diversion of our resources from
development of our own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset
associated acquisition and maintenance costs. In addition, if our data suppliers choose to discontinue support of the licensed
technology in the future, we might not be able to modify or adapt our own solutions.
Our use of “open source” software could adversely affect our ability to sell our products and subject us to possible litigation.
The products or technologies acquired, licensed or developed by us may incorporate so-called “open source” software, and
we may incorporate open source software into other products in the future. There is little or no legal precedent governing the
interpretation of many of the terms of certain of these licenses, and therefore the potential impact of these terms on our business
is unknown and may result in unanticipated obligations or litigation regarding our products and technologies. For example, we
may be subjected to certain conditions, including requirements that we offer our products that use particular open source software
at no cost to the user, that we make available the source code for modifications or derivative works we create based upon,
incorporating or using the open source software, and/or that we license such modifications or derivative works under the terms of
the particular open source license. In addition, if we combine our proprietary software with open source software in a certain
manner, under some open source licenses we could be required to release the source code of our proprietary software, which could
substantially help our competitors develop products that are similar to or better than ours. If an author or other party that distributes
such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could
be required to incur significant legal costs defending ourselves against such allegations and could be subject to significant damages.
Changes in industry pricing benchmarks could materially impact our financial performance.
Contracts in the prescription drug industry, including our contracts with our specialty pharmacy members, generally use
“average wholesale price,” or AWP, which is published by a third party, as a benchmark to establish pricing for prescription drugs.
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Various federal and state government agencies and prosecutors, as well as legislators and private litigants, have challenged the use
of AWP for prescription drug reimbursement, as well as the manner by which AWP is calculated. Thus, some publishers have
ceased providing AWP information, and the uncertainty related to continued AWP industry pricing benchmarks and the lack of
reliable alternate pricing sources could have a material adverse effect on our business, financial condition and results of operations
in future periods.
Prescription volumes may decline, and our net revenues and profitability may be negatively impacted, if the safety risk profiles
of drugs increase or if drugs are withdrawn from the market, including as a result of manufacturing issues, or if prescription
drugs transition to over-the-counter products.
We dispense significant volumes of brand-name and generic drugs from our specialty pharmacies. When increased safety risk
profiles or manufacturing issues of specific drugs or classes of drugs result in utilization decreases, physicians may cease writing
or otherwise reduce the numbers of prescriptions for these drugs. Additionally, negative press regarding drugs with higher safety
risk profiles may result in reduced global consumer demand for such drugs. On occasion, products are withdrawn by their
manufacturers or transition to over-the-counter products. In cases where there are no acceptable prescription drug equivalents or
alternatives for these prescription drugs, our volumes, net revenues, profitability and cash flows may decline.
Our ability to grow our specialty pharmacy could be limited if we do not maintain and expand our existing base of drugs, if we
lose patients or if manufacturers limit or cease doing business with us.
Our specialty pharmacy focuses on complex and high-cost medications that serve a relatively small patient population.
Accordingly, our future growth relies in part on maintaining and expanding our base of drugs or penetration in certain treatment
categories. Sales volumes at our specialty pharmacy could also be negatively impacted due to increases in the safety risk profiles
or manufacturing issues of specific drugs, product withdrawals by manufacturers or transitions to over-the-counter products. Any
loss of patient base or reduction in demand for any reason for the medications we currently dispense could have a material adverse
effect on our business, financial condition and results of operations.
In addition, industry trends may result in health plans contracting with a single provider for specialty pharmacy services and
manufacturers limiting their business with regional providers of these services. If we are unable to obtain managed care contracts
in the areas in which we provide specialty pharmacy services or are unable to obtain specialty pharmacy products at reasonable
costs or at all, our business, financial condition and results of operations could be adversely affected.
Our direct sourcing activities depend on contract manufacturing facilities located in various parts of the world, and any physical,
financial, regulatory, environmental, labor or operational disruption or product quality issues could result in a reduction in
sales volumes and the incurrence of substantial expenditures.
As part of our direct sourcing activities, we contract with manufacturing facilities in various parts of the world, including
facilities in China. Operations at these manufacturing facilities could be curtailed or partially or completely shut down as the result
of a number of circumstances, most of which are outside of our control, such as unscheduled maintenance, an earthquake, hurricane,
flood, tsunami or other natural disaster or significant labor strikes, work stoppages or political unrest. Any significant curtailment
of production at these facilities, or production issue resulting in a substandard product, could result in litigation or governmental
inquiry or materially reduced revenues and cash flows in our direct sourcing activities. In addition our business practices in
international markets are subject to the requirements of the U.S. Foreign Corrupt Practices Act of 1977, as amended, any violation
of which could subject us to significant fines, criminal sanctions and other penalties. We expect all of our contracted manufacturing
facilities, including facilities located in China, to comply with all applicable laws, including labor, safety and environmental laws,
and to otherwise meet our standards of conduct. Our ability to find manufacturing facilities that uphold these standards is a challenge,
especially with respect to facilities located outside the United States. We also are subject to the risk that one or more of these
manufacturing facilities will engage in business practices in violation of our standards or applicable laws, which could damage
our reputation and adversely impact our business and results of operations.
A substantial portion of the manufacturing for our direct sourcing activities is conducted in China. As a result, our business,
financial condition, results of operations and prospects are affected significantly by economic, political and legal developments
in China. The Chinese economy differs from the economies of most developed countries in many respects, including the degree
of government involvement, the level of development, the growth rate, the control of foreign exchange, access to financing and
the allocation of resources. Additionally, the facilities in China with which we contract are particularly susceptible to rising labor
costs and interruptions as a result of minimum wage laws, scheduling and overtime requirements, labor disputes and strikes.
If we lose key personnel or if we are unable to attract, hire, integrate and retain key personnel, our business would be harmed.
Our future success depends in part on our ability to attract, hire, integrate and retain key personnel, including our executive
officers and other highly skilled technical, managerial, editorial, sales, marketing and customer service professionals. Competition
for such personnel is intense. We have from time to time in the past experienced, and we expect to continue to experience in the
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future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with
which we compete for experienced personnel have greater resources than we have. We cannot be certain of our ability to identify,
hire and retain adequately qualified personnel. Failure to identify, hire and retain necessary key personnel could have a material
adverse effect on our business, financial condition and results of operations.
Failure to protect our intellectual property and claims against our use of the intellectual property of third parties could cause
us to incur unanticipated expense and prevent us from providing our products and services, which could adversely affect our
business, financial condition and results of operations.
Our success depends in part upon our ability to protect our core technology and intellectual property. To accomplish this, we
rely on a combination of intellectual property rights, including trade secrets, copyrights and trademarks, as well as customary
contractual and confidentiality protections and internal policies applicable to employees, contractors, members and business
partners. These protections may not be adequate, however, and we cannot assure you that they will prevent misappropriation of
our intellectual property. In addition, parties that gain access to our intellectual property might fail to comply with the terms of
our agreements and policies and we may not be able to enforce our rights adequately against these parties. The disclosure to, or
independent development by, a competitor of any trade secret, know-how or other technology not protected by a patent could
materially and adversely affect any competitive advantage we may have over such competitor. The process of enforcing our
intellectual property rights through legal proceedings would likely be burdensome and expensive and our ultimate success cannot
be assured. Our failure to adequately protect our intellectual property and proprietary rights could adversely affect our business,
financial condition and results of operations.
In addition, we could be subject to claims of intellectual property infringement, misappropriation or other intellectual property
violations as our applications’ functionalities overlap with competitive products, and third parties may claim that we do not own
or have rights to use all intellectual property used in the conduct of our business. We could incur substantial costs and diversion
of management resources defending any such claims. Furthermore, a party making a claim against us could secure a judgment
awarding substantial damages as well as injunctive or other equitable relief that could effectively block our ability to provide
products or services. Such claims also might require indemnification of our members at significant expense.
A number of our contracts with our members contain indemnity provisions whereby we indemnify them against certain losses
that may arise from third-party claims that are brought in connection with the use of our products.
Our exposure to risks associated with the protection and use of intellectual property may be increased as a result of acquisitions,
as we have limited visibility into the development process of acquired entities or businesses with respect to their technology or
the care taken by acquired entities or businesses to safeguard against infringement risks. In addition, third parties may make
infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition
thereof.
If we are required to collect sales and use taxes on the products and services we sell in certain jurisdictions or online, we may
be subject to tax liability for past sales, future sales may decrease and our financial condition may be materially and adversely
affected.
Sales tax is currently not imposed on the administrative fees we collect in connection with our GPO programs. If sales tax
were imposed in the future on such fees, the profitability of our GPO programs may be materially and adversely affected.
Rules and regulations applicable to sales and use tax vary significantly by tax jurisdiction. In addition, the applicability of
these rules given the nature of our products and services is subject to change.
We may lose sales or incur significant costs should various tax jurisdictions be successful in imposing sales and use taxes on
a broader range of products and services than those currently so taxed, including products and services sold online. A successful
assertion by one or more taxing authorities that we should collect sales or other taxes on the sale of our solutions could result in
substantial tax liabilities for past and future sales, decrease our ability to compete and otherwise harm our business.
If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our products and
services, including products and services sold online, we may be liable for past taxes in addition to taxes going forward. Liability
for past taxes may also include very substantial interest and penalty charges. If we are required to collect and pay back taxes (and
the associated interest and penalties) and if our members fail or refuse to reimburse us for all or a portion of these amounts, we
will have incurred unplanned costs that may be substantial. Moreover, imposition of such taxes on our services going forward will
effectively increase the cost of such services to our members and may adversely affect our ability to retain existing members or
to gain new members in the areas in which such taxes are imposed.
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We may need to obtain additional financing which may not be available or may be on unfavorable terms and result in dilution
to, or a diminution of the rights of, our then-existing stockholders and cause a decrease in the price of our Class A common
stock.
We may need to raise additional funds in order to:
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finance unanticipated working capital requirements;
develop or enhance our technological infrastructure and our existing products and services;
fund strategic relationships;
respond to competitive pressures; and
acquire complementary businesses, assets, technologies, products or services.
Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund our expansion strategy, take advantage of unanticipated opportunities, develop
or enhance technology or services or otherwise respond to competitive pressures would be significantly limited. If we raise additional
funds by issuing equity or convertible debt securities, our then-existing stockholders may be diluted and holders of these newly
issued securities may have rights, preferences or privileges senior to those of our then-existing stockholders. The issuance of these
securities may cause downward pressures on the trading price of our Class A common stock.
Our indebtedness could adversely affect our business and our liquidity position.
We have a five-year $750 million unsecured revolving credit facility, which includes an accordion feature granting us the
ability to increase the size of the facility by an additional $250 million on terms and conditions mutually acceptable to the parties.
As of June 30, 2016, we had no amounts outstanding under this credit facility.
Our indebtedness may increase from time to time in the future for various reasons, including fluctuations in operating results,
capital expenditures and potential acquisitions. Any indebtedness we incur and restrictive covenants contained in the agreements
related thereto could:
• make it difficult for us to satisfy our obligations, including making interest payments on our debt obligations;
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limit our ability to obtain additional financing to operate our business;
require us to dedicate a substantial portion of our cash flow to payments on our debt, reducing our ability to use our
cash flow to fund capital expenditures and working capital and other general operational requirements;
limit our flexibility to execute our business strategy and plan for and react to changes in our business and the healthcare
industry;
place us at a competitive disadvantage relative to some of our competitors that have less debt than us;
limit our ability to pursue acquisitions; and
increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates
or a downturn in our business or the economy.
The occurrence of any one of these events could have a material adverse effect on our business, financial condition and results
of operations or cause a significant decrease in our liquidity and impair our ability to pay amounts due on our indebtedness.
Our unsecured revolving credit facility contains, among other things, restrictive covenants that will limit our and our
subsidiaries’ ability to finance future operations or capital needs or to engage in other business activities. The credit facility restricts,
among other things, our ability and the ability of our subsidiaries to incur additional indebtedness or issue guarantees, create liens
on our assets, make distributions on or redeem equity interests, make investments, transfer or sell properties or other assets, and
engage in mergers, consolidations or acquisitions. Furthermore, the credit facility includes cross-default provisions and requires
us to meet specified financial ratios and tests. In addition, any debt securities we may issue in the future may have similar or more
restrictive financial or operational covenants that may limit our ability to execute our business strategies or operate our Company.
Our quarterly revenues and results of operations have fluctuated in the past and may continue to fluctuate in the future.
Fluctuations in our quarterly results of operations may be due to a number of factors, some of which are not within our control,
including:
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our ability to offer new and innovative products and services;
regulatory changes, including changes in healthcare laws;
unforeseen legal expenses, including litigation and settlement costs;
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the purchasing and budgeting cycles of our members;
the lengthy sales cycles for our products and services, which may cause significant delays in generating revenues or
an inability to generate revenues;
pricing pressures with respect to our future sales;
the timing and success of new product and service offerings by us or by our competitors;
• member decisions regarding renewal or termination of their contracts, especially those involving our larger member
relationships;
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the amount and timing of costs related to the maintenance and expansion of our business, operations and infrastructure;
the amount and timing of costs related to the development, adaptation, acquisition, or integration of acquired
technologies or businesses;
the financial condition of our current and potential new members; and
general economic and market conditions and conditions specific to the healthcare industry.
We believe that our quarterly results of operations may vary significantly in the future and that period-to-period comparisons
of our results of operations may not be meaningful. You should not rely on the results of one quarter as an indication of future
performance. If our quarterly results of operations fall below the expectations of securities analysts or investors, the price of the
Class A common stock could decline substantially. In addition, any adverse impacts on the Class A common stock may harm the
overall reputation of our organization, cause us to lose members and impact our ability to raise additional capital in the future.
Risks Related to Healthcare Regulation
The healthcare industry is highly regulated. Any material changes in the political, economic or regulatory environment that
affect the GPO business or the purchasing practices and operations of healthcare organizations, or that lead to consolidation
in the healthcare industry, could reduce the funds available to providers to purchase our products and services or otherwise
require us to modify our services.
Our business, financial condition and results of operations depend upon conditions affecting the healthcare industry generally
and hospitals and health systems particularly, as well as our ability to increase the number of programs and services that we sell
to our members. The healthcare industry is highly regulated by federal and state authorities and is subject to changing political,
economic and regulatory influences. Factors such as changes in reimbursement policies for healthcare expenses, consolidation in
the healthcare industry, regulation, litigation and general economic conditions affect the purchasing practices, operations and the
financial health of healthcare organizations. In particular, changes in regulations affecting the healthcare industry, such as increased
regulation of the purchase and sale of medical products, or restrictions on permissible discounts and other financial arrangements,
could require us to make unplanned modifications of our products and services, result in delays or cancellations of orders or reduce
funds and demand for our products and services.
In March 2010, President Obama signed into law the Affordable Care Act. The Affordable Care Act is a sweeping measure
designed to expand access to affordable health insurance, control healthcare spending and improve healthcare quality. In addition,
many states have adopted or are considering changes in healthcare laws or policies in part due to state budgetary shortfalls.
Regulations for implementing various provisions of the Affordable Care Act are being released on an ongoing basis, and we do
not know what effect the federal Affordable Care Act or any state law proposals may have on our business. Further, disparate
political views regarding the Affordable Care Act create uncertainty regarding the law’s continued existence in its current form or
an amended form or a total replacement. This uncertainty as to the law’s future, or the amendment or replacement of the law in
the future, could adversely affect our business.
If we fail to comply with complex federal and state laws governing financial relationships among healthcare providers and
submission of false or fraudulent claims to government healthcare programs, we may be subject to civil and criminal penalties
or loss of eligibility to participate in government healthcare programs.
Anti-Kickback Regulations
We are subject to federal and state laws and regulations designed to protect patients, government healthcare programs and
private health plans from fraudulent and abusive activities. These laws include anti-kickback restrictions and laws prohibiting the
submission of false or fraudulent claims. These laws are complex, and their application to our specific products, services and
relationships may not be clear and may be applied to our business in ways that we do not anticipate. Federal and state regulatory
and law enforcement authorities have over time increased enforcement activities with respect to Medicare and Medicaid fraud and
abuse regulations and other reimbursement laws and rules. From time to time, we and others in the healthcare industry have received
inquiries or requests to produce documents in connection with such activities. We could be required to expend significant time
and resources to comply with these requests, and the attention of our management team could be diverted to these efforts.
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Furthermore, if we are found to be in violation of any federal or state fraud and abuse laws, we could be subject to civil and criminal
penalties and we could be excluded from participating in federal and state healthcare programs such as Medicare and Medicaid.
The occurrence of any of these events could significantly harm our business, financial performance and financial condition.
Provisions in Title XI of the Social Security Act, commonly referred to as the federal Anti-Kickback Statute, prohibit the
knowing and willful offer, payment, solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients
or arranging for the referral of patients, or in return for the recommendation, arrangement, purchase, lease or order of items or
services that are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The definition of
“remuneration” has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments or
providing anything at less than its fair market value. Many states have adopted similar prohibitions against kickbacks and other
practices that are intended to influence the purchase, lease or ordering of healthcare items and services regardless of whether the
item or service is covered under a governmental health program or private health plan. Although certain statutory and regulatory
safe harbors exist, these safe harbors are narrow and often difficult to comply with. Congress has appropriated an increasing amount
of funds in recent years to support enforcement activities aimed at reducing healthcare fraud and abuse. We cannot assure you that
our arrangements will be protected by such safe harbors or that such increased enforcement activities will not directly or indirectly
have an adverse effect on our business, financial condition or results of operations. Any determination by a state or federal agency
that any of our activities, or those of our suppliers or members, violate any of these laws could subject us to civil or criminal
penalties, could require us to change or terminate some portions of our operations or business or could disqualify us from providing
services to healthcare providers doing business with government programs and, thus, could have a material adverse effect on our
business, financial condition and results of operations.
In 2005, the Department of Health and Human Services, or HHS, Office of Inspector General conducted an extensive audit
of the business practices of three GPOs, including us, and published a report thereon. Subsequently, CMS provided specific guidance
on the proper treatment on Medicare cost reports of revenue distributions received from GPOs, including us. Our members that
report their costs to Medicare are required under the terms of the Premier Group Purchasing Policy to appropriately reflect all
elements of value received in connection with the Reorganization and our IPO (including, without limitation, increases in the fair
market value of equity held by such member owners, proceeds from the purchase of Class B common units from such member
owners immediately following our IPO and as a result of subsequent exchanges, Premier LP cash distributions, administrative fee
revenue share paid by Premier LP to our members based upon their owned, leased, managed and affiliated facilities’ purchases
through GPO supplier contracts and payments under the tax receivable agreements) on their cost reports. We are required to furnish
applicable reports to such members setting forth the amount of such value, to assist their compliance with such cost reporting
requirements. We cannot assure you, however, that the HHS Office of Inspector General or the U.S. Department of Justice, or
DOJ, would concur with such approach. Any determination by a state or federal agency that the provision of such forms of value
violate any of these laws could subject us to civil or criminal penalties, could require us to change or terminate some portions of
our operations or business, or could disqualify us from providing services to healthcare providers doing business with government
programs, and, thus could have a material adverse effect on our business, financial condition and results of operations.
In the lead-up to our 2013 IPO, we received correspondence from a former GPO competitor expressing concern that the
manner in which our IPO was explained to our current and prospective member owners could violate the Anti-Kickback Statute.
We believe that our discussions with then-current and prospective member owners regarding our IPO were conducted in compliance
with the Anti-Kickback Statute and other applicable laws. However, enforcement authorities could question or disagree with our
assessment. Although a process exists for requesting advisory opinions from the HHS Office of Inspector General regarding
compliance of particular arrangements with the Anti-Kickback Statute, we have not sought such an opinion and do not believe
that the issues raised in the competitor’s correspondence are capable of being addressed in an advisory opinion because the content
and specifics of each discussion would be at issue. Any determination by a state or federal agency that the manner in which the
opportunity to participate in our IPO was presented to our member owners and prospective member owners, either in and of itself
or when viewed in conjunction with the requirements for ownership in Premier LP and participation in our group purchasing
program or the various forms of value received by our member owners in connection with or related to our IPO, violated any of
these laws could subject us to civil or criminal penalties, could require us to change or terminate some portions of our operations
or business or could disqualify us from providing services to healthcare providers doing business with government programs and,
thus, could have a material adverse effect on our business, financial condition and results of operations.
We periodically receive and respond to questions from government agencies on various matters, and we responded to an
informal request in July 2014 from the HHS Office of Inspector General to analyze our Reorganization and to discuss how the
GPO Participation Agreements comply with the discount safe harbor to the Anti-Kickback Statute. We have had no further
correspondence or interaction, oral or written, with the HHS Office of Inspector General regarding Anti-Kickback Statute
compliance since that time. There is no safe harbor to the Anti-Kickback Statute that is applicable to the Reorganization in its
entirety across all of the agreements, and no assurance can be given that the HHS Office of Inspector General or other regulators
or enforcement authorities will agree with our assessment. Any determination by a state or federal agency that the terms of our
Reorganization or our relationship with our members violate the Anti-Kickback Statute or any other federal or state laws could
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subject us to civil or criminal penalties, could require us to change or terminate some portions of our operations or business or
could disqualify us from providing services to healthcare providers doing business with government programs and, thus, could
have a material adverse effect on our business, financial condition and results of operations.
False Claims Regulations
Our business is also subject to numerous federal and state laws that forbid the submission or “causing the submission” of false
or fraudulent information or the failure to disclose information in connection with the submission and payment of claims for
reimbursement to Medicare, Medicaid, other federal healthcare programs or private health plans. In particular, the False Claims
Act, or FCA, prohibits a person from knowingly presenting or causing to be presented a false or fraudulent claim for payment or
approval by an officer, employee or agent of the United States. In addition, the FCA prohibits a person from knowingly making,
using, or causing to be made or used a false record or statement material to such a claim. Violations of the FCA may result in treble
damages, significant monetary penalties and other collateral consequences, potentially including exclusion from participation in
federally funded healthcare programs. The scope and implications of the amendments to the FCA pursuant to the Fraud Enforcement
and Recovery Act of 2009, or FERA, have yet to be fully determined or adjudicated, and as a result it is difficult to predict how
future enforcement initiatives may impact our business. The minimum and maximum per claim monetary damages have roughly
doubled effective August 1, 2016 for violations occurring on or after November 2, 2015, from $5,500.00 to $11,000.00 per claim
to $10,781.40 to $21,562.80 per claim, and will be periodically readjusted for inflation hereafter. If enforcement authorities find
that we have violated the FCA, it could have a material adverse effect on our business, financial condition and results of operations.
Pursuant to the 2010 healthcare reform legislation, a claim that includes items or services resulting from a violation of the Anti-
Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA.
These laws and regulations may change rapidly and it is frequently unclear how they apply to our business. Errors in claims
submitted by our specialty pharmacies and pharmacy benefits management businesses, as well as errors created by our products
or advisory services that relate to entry, formatting, preparation or transmission of claim or cost report information by our members
may be determined or alleged to be in violation of these laws and regulations. Any failure of our businesses or our products or
services to comply with these laws and regulations, or the assertion that any of our relationships with suppliers or members violated
the Anti-Kickback Statute and therefore caused the submission of false or fraudulent claims, could (i) result in substantial civil or
criminal liability, (ii) adversely affect demand for our services, (iii) invalidate all or portions of some of our member contracts,
(iv) require us to change or terminate some portions of our business, (v) require us to refund portions of our services fees, (vi) cause
us to be disqualified from serving members doing business with government payers, and (vii) have a material adverse effect on
our business, financial condition and results of operations.
If current or future antitrust laws and regulations are interpreted or enforced in a manner adverse to us or our business, we
may be subject to enforcement actions, penalties and other material limitations on our business.
We are subject to federal and state laws and regulations designed to protect competition which, if enforced in a manner adverse
to us or our business, could have a material adverse effect on our business, financial condition and results of operations. Over the
last decade or so, the group purchasing industry has been the subject of multiple reviews and inquiries by the U.S. Senate and its
members with respect to antitrust laws. Additionally, the U.S. General Accounting Office, or GAO, has published several reports
examining GPO pricing, contracting practices, activities and fees. We and several other operators of GPOs have responded to GAO
inquiries in connection with the development of such reports. No assurance can be given regarding any further inquiries or actions
arising or resulting from these examinations and reports, or any related impact on our business, financial condition or results of
operations.
Congress, the DOJ, the Federal Trade Commission, or FTC, the U.S. Senate or another state or federal entity could at any
time open a new investigation of the group purchasing industry, or develop new rules, regulations or laws governing the industry,
that could adversely impact our ability to negotiate pricing arrangements with suppliers, increase reporting and documentation
requirements, or otherwise require us to modify our arrangements in a manner that adversely impacts our business, financial
condition and results of operations. We may also face private or government lawsuits alleging violations arising from the concerns
articulated by these governmental factors or alleging violations based solely on concerns of individual private parties.
If we are found to be in violation of the antitrust laws we could be subject to civil and criminal penalties or damages. The
occurrence of any of these events could significantly harm our business, financial condition and results of operations.
Complex federal and state privacy, security and breach notification laws may increase the costs of operation and expose us to
civil and criminal government sanctions and third-party civil litigation.
We must comply with extensive federal and state requirements regarding the use, retention, security and re-disclosure of
patient/beneficiary healthcare information. The Health Insurance Portability and Accountability Act of 1996, as amended, and the
regulations that have been issued under it, which we refer to collectively as HIPAA, contain substantial restrictions and complex
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requirements with respect to the use and disclosure of certain individually identifiable health information, referred to as “protected
health information.” The HIPAA Privacy Rule prohibits a covered entity or a business associate (essentially, a third party engaged
to assist a covered entity with enumerated operational and/or compliance functions) from using or disclosing protected health
information unless the use or disclosure is validly authorized by the individual or is specifically required or permitted under the
Privacy Rule and only if certain complex requirements are met. The HIPAA Security Rule establishes administrative, organization,
physical and technical safeguards to protect the privacy, integrity and availability of electronic protected health information
maintained or transmitted by covered entities and business associates. The HIPAA Breach Notification Rule requires that covered
entities and business associates, under certain circumstances, notify patients/beneficiaries and HHS when there has been an improper
use or disclosure of protected health information.
Our specialty pharmacy, our self-funded health benefit plan, and our healthcare provider members (provided that these members
engage in HIPAA-defined standard electronic transactions with health plans, which will be all or the vast majority) are directly
regulated by HIPAA as “covered entities.” From time to time, as part of our specialty pharmacy business, certain of our affiliates
act as business associates of retail and other pharmacies in connection with co-branding initiatives. As such, we are subject to
HIPAA and other risks discussed herein associated with being a business associate. Additionally, because most of our U.S. hospital
members disclose protected health information to us so that we may use that information to provide certain data analytics,
benchmarking, advisory or other operational and compliance services to these members, we are a “business associate” of those
members and are required to protect such health information under HIPAA. With the enactment of the HITECH Act, the privacy
and security requirements of HIPAA were modified and expanded, including further restrictions on the disclosure of protected
health information by business associates of covered entities in certain cases when the disclosure is part of a remunerated transaction,
and modifying the HIPAA Breach Notification Rule, which has been in effect since September 2009, to create a rebuttable
presumption that any improper use or disclosure of protected health information requires notice to affected patients/beneficiaries
and HHS.
Any failure or perceived failure of our products or services to meet HIPAA standards and related regulatory requirements
could expose us to certain notification, penalty and/or enforcement risks, damage our reputation and adversely affect demand for
our products and services and force us to expend significant capital, research and development and other resources to modify our
products or services to address the privacy and security requirements of our members and HIPAA.
In addition to our obligations under HIPAA there are other federal laws that include specific privacy and security obligations,
above and beyond HIPAA, for certain types of health information and impose additional sanctions and penalties. These rules are
not preempted by HIPAA. Finally, most states have enacted patient and/or beneficiary confidentiality laws that protect against the
disclosure of confidential medical information, and many states have adopted or are considering adopting further legislation in
this area, including privacy safeguards, security standards, data security breach notification requirements and special rules for so-
called “sensitive” health information, such as mental health, genetic testing results or HIV status. These state laws, if more stringent
than HIPAA requirements, are not preempted by the federal requirements, and we are required to comply with them as well.
We are unable to predict what changes to HIPAA or other federal or state laws or regulations might be made in the future or
how those changes could affect our business or the associated costs of compliance. For example, the federal Office of the National
Coordinator for Health Information Technology, or ONCHIT, is coordinating the development of national standards for creating
an interoperable health information technology infrastructure based on the widespread adoption of electronic health records in the
healthcare sector. We are yet unable to predict what, if any, impact the creation of such standards and the further developments at
ONCHIT will have on the necessary specifications, demand for our products and services or associated compliance costs.
Failure to comply with any of the federal and state standards regarding patient privacy, identity theft prevention and detection
and data security may subject us to penalties, including civil monetary penalties and, in some circumstances, criminal penalties.
In addition, such failure may materially injure our reputation and adversely affect our ability to retain members and attract new
members and, accordingly, adversely affect our financial performance.
Our specialty pharmacy operations are subject to governmental regulations, procedures and requirements; our noncompliance
or a significant regulatory change could adversely affect our business, the results of our operations or our financial condition.
In addition to the other laws and regulations we face, our specialty pharmacy business is subject to numerous federal, state
and local laws and regulations. Changes in these regulations may require extensive system and operating changes that may be
difficult to implement. The regulations to which our specialty pharmacy operations are subject include, but are not limited to,
federal, state and local registration and regulation of pharmacies; supply chain security; dispensing and sale of controlled substances;
applicable Medicare and Medicaid regulations, including the Medicare Part D program; HIPAA; regulations governing aspects of
healthcare plan arrangements; regulations relating to the protection of the environment and health and safety matters, including
those governing exposure to and the management and disposal of hazardous substances; regulations enforced by the U. S. Federal
Trade Commission, the U. S. Department of Health and Human Services and the Drug Enforcement Administration, as well as
state boards of pharmacy and other state regulatory authorities, governing the sale, advertisement and promotion of products we
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sell; anti-kickback laws; false claims laws and federal and state laws governing the practice of the profession of pharmacy. Untimely
compliance or noncompliance with applicable regulations could result in the imposition of civil and criminal penalties that could
adversely affect the continued operation of our business, including: (i) suspension or disgorgement of payments from government
programs; (ii) loss of required government certifications; (iii) loss of authorizations to participate in or exclusion from government
reimbursement programs, such as the Medicare and Medicaid programs; (iv) loss of licenses; or (v) significant fines or monetary
penalties.
Certain risks are inherent in providing pharmacy services; our insurance may not be adequate to cover any claims against us.
Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products,
such as with respect to improper filling or labeling of prescriptions, adequacy of warnings, unintentional distribution of counterfeit,
defective, expired or contaminated drugs, product tampering or recalls, and changes to shipping regulations or costs. Errors in the
dispensing and packaging of pharmaceuticals could lead to serious injury or death. In addition, federal and state laws that require
our pharmacists to offer counseling, without additional charge, to their customers about medication, dosage, delivery systems,
common side effects and other information the pharmacists deem significant can impact our business. Our pharmacists may also
have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce, negate
or help manage these effects. Product liability or personal injury claims may be asserted against us with respect to any of the
products or pharmaceuticals we sell or services we provide. Should a product or other liability issue arise, the coverage limits
under our insurance programs and the indemnification amounts available to us may not be adequate to protect us against claims.
We also may not be able to maintain this insurance on acceptable terms in the future. Damage to our reputation in the event of a
product liability or personal injury issue, material financial judgment against us, or a product recall could have a material adverse
effect on our business operations, financial condition and results of operations.
Risks Related to Our Structure
Premier, Inc. is a holding company with no material business operations of its own, and it depends on distributions from
Premier LP to pay taxes, make payments under the tax receivable agreements and pay any cash dividends, if declared, on our
Class A common stock.
Premier, Inc. is a holding company with no material operations of its own, and it currently has no independent ability to
generate revenue. Consequently, Premier, Inc.’s ability to obtain operating funds currently depends upon distributions from
Premier LP to Premier GP and then from Premier GP to Premier, Inc. In accordance with the LP Agreement, subject to applicable
laws and regulations and the terms of Premier LP’s financing agreements, Premier GP causes Premier LP to make quarterly
distributions to Premier GP and to the holders of Class B common units to facilitate the payment of taxes, as may be required.
Premier GP distributes any amounts it receives from Premier LP to Premier, Inc., and Premier, Inc. uses such amounts to (i) pay
applicable taxes, (ii) meet its obligations under the tax receivable agreements and (iii) meet its obligations to the member owners
under the Exchange Agreement if such member owners elect to exchange their Class B common units for shares of our Class A
common stock and we elect to pay some or all of the consideration to such member owners in cash.
In addition, pursuant to the GPO participation agreements, Premier LP generally is contractually required to pay each member
owner a 30% revenue share, and pay other designated revenue shares to some members, of all gross administrative fees collected
by Premier LP based upon purchasing by such member owner’s owned, leased, managed and affiliated facilities through our GPO
agreements and contracts. Additionally, our two largest regional GPO member owners, which represented approximately 16% of
our gross administrative fee revenue for the year ended June 30, 2016, each remit gross administrative fees collected by such
member owner based upon purchasing by such member owner’s owned, leased, managed and affiliated facilities through the
member owner’s own GPO supplier contracts, in accordance with their Premier GPO Agreement, and receive revenue share from
Premier LP equal to 30% of such gross administrative fees remitted to us.
To the extent that Premier, Inc. needs funds and Premier LP is restricted from making distributions under applicable law or
regulation or under the terms of our unsecured revolving credit facility or is otherwise unable to provide such funds, Premier, Inc.’s
liquidity and financial condition could be materially and adversely affected. The declaration and payment of future dividends by
us, if any, will be at the discretion of our board of directors and will depend on, among other things, financial results and cash
flows from Premier LP’s operations, our strategic plans and such other factors as our board of directors considers relevant. In
addition, Premier LP is generally prohibited under Delaware law from making a distribution to a partner to the extent that, at the
time of the distribution, after giving effect to the distribution, liabilities of the limited partnership (with certain exceptions) exceed
the fair value of its assets.
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Different interests among our member owners or between our member owners and us, including with respect to related party
transactions, could prevent us from achieving our business goals.
For the foreseeable future, we expect that a majority of our board of directors will include directors and executive officers of
our member owners and other directors who may have commercial relationships with our member owners. Certain of our member
owners could have business interests that may conflict with those of the other member owners, which may make it difficult for us
to pursue strategic initiatives that require consensus among our member owners.
In addition, our relationship with our member owners, who are both our members and own a significant percentage of our
common stock and the units of Premier LP, could create conflicts of interest among the member owners, or between the member
owners and us, in a number of areas relating to our past and ongoing relationships. For example, certain of our products and services
compete (or may compete in the future) with various products and services of our member owners. In addition, conflicts of interest
may arise among the member owners based on certain allocations of net profits that the member owners may receive in proportion
to their relative participation in our products and services. Except as set forth in the tax receivable agreements, the GPO participation
agreements and the LP Agreement, there are not any formal dispute resolution procedures in place to resolve conflicts between us
and a member owner or between member owners. We may not be able to resolve any potential conflicts between us and a member
owner and, even if we do, the resolution may be less favorable to us than if we were negotiating with an unaffiliated party.
Our member owners are able to exercise significant control over us, including through the election of all of our directors.
In addition to board members that are employees of member owners, our member owners beneficially own, in the aggregate,
100% of our outstanding shares of Class B common stock, giving them control of approximately 68% of the combined voting
power of our Class A common stock and Class B common stock as of June 30, 2016. Our member owners may also own, from
time to time, shares of our Class A common stock, thereby further increasing their aggregate voting power. Pursuant to the terms
of a voting trust agreement (the "Voting Trust Agreement"), the trustee will vote all of the member owners’ 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 our board of directors, and by a majority of the votes received by the trustee from the member owners for
all other matters. As a result, our member owners have the ability to elect all of the members of our board of directors and thereby
control our management and affairs. In addition, our member owners will be able to determine the outcome of substantially all
matters requiring action by our stockholders, including amendments to our certificate of incorporation and bylaws, any proposed
merger, consolidation or sale of all or substantially all of our assets and other corporate transactions even if such actions are not
favored by our other stockholders. This concentration of ownership may also prevent a change in the composition of our board of
directors or a change in control of our company that could deprive other stockholders of an opportunity to receive a premium for
their Class A common stock as part of a sale of our company and might ultimately affect the market price of our Class A common
stock.
In addition, at June 30, 2016 our member owners owned 100% of our outstanding Class B common units, representing
approximately 68% of the outstanding units of Premier LP. Because they hold their economic ownership interest in our business
through Premier LP, rather than through Premier, Inc., due to the fact that shares of Class B common stock are not entitled to any
economic rights, these member owners may have conflicting interests with holders of shares of our Class A common stock. For
example, many of our member owners are not-for-profit organizations which, as a result of their tax-exempt status, could influence
their decisions regarding whether and when to dispose of assets, whether and when to incur new, or refinance existing, indebtedness,
and whether and when Premier should terminate the tax receivable agreements and accelerate its obligations thereunder. In addition,
the structuring of future transactions may be influenced by these member owners’ tax or other considerations even where no similar
benefit would accrue to us.
Our member owners are able to exercise a greater degree of influence in the operation of our business and that of Premier LP
and the management of our affairs and those of Premier LP than is typically available to stockholders of a publicly-traded company.
Even if our member owners own a minority economic interest in Premier LP, they may be able to continue to exert significant
influence over us and Premier LP through their ownership of our Class B common stock and the Voting Trust Agreement among
the member owners and the trustee of Premier Trust.
We are exempt from certain corporate governance requirements because we are a “controlled company” within the meaning
of NASDAQ rules. As a result, our stockholders do not have the protections afforded by these corporate governance requirements,
which may make our Class A common stock less attractive to investors.
Our member owners, acting as a group pursuant to the terms of the Voting Trust Agreement, own more than 50% of the total
voting power of our outstanding common stock and we are a “controlled company” under NASDAQ corporate governance
standards. As a controlled company, we are not required by NASDAQ for continued listing of Class A common stock to (i) have
a majority of independent directors, (ii) maintain an independent compensation committee or (iii) maintain an independent
nominating function. We are taking advantage of all of these exemptions from NASDAQ listing requirements. Accordingly, our
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stockholders do not have the same protection afforded to stockholders of companies that are subject to all of the NASDAQ corporate
governance requirements and the ability of our independent directors to influence our business policies and affairs may be reduced.
As a result, our status as a “controlled company” could make our Class A common stock less attractive to some investors or could
otherwise harm our Class A common stock price.
The agreements between us and our member owners were made in the context of an affiliated relationship and may contain
different terms than comparable agreements with unaffiliated third parties.
The contractual agreements that we have with each of our member owners were negotiated in the context of an affiliated
relationship in which representatives of our member owners and their affiliates comprised a significant portion of our board of
directors. As a result, the financial and other terms of these agreements, including covenants and other contractual obligations on
our part and on the part of our member owners and termination and default provisions, may be less favorable to us than terms that
we might have obtained in negotiations with unaffiliated third parties in similar circumstances. These potentially different terms
could have a material adverse effect on our business, financial condition and results of operations.
Any payments made under the tax receivable agreements with our member owners will reduce the amount of overall cash flow
that would otherwise be available to us. In addition, we may not be able to realize all or a portion of the tax benefits that are
expected to result from the acquisition of Class B common units from the limited partners.
As a result of Premier, Inc.’s acquisition of Class B common units of Premier LP from the member owners in connection with
our IPO, and any subsequent exchanges of Class B common units with us for shares of Class A common stock, we expect to become
entitled to special tax benefits attributable to tax basis adjustments involving amounts generally equal to the difference between
our purchase price for the acquired Class B common units (or, in the case of an exchange, the value of the shares of Class A common
stock issued by us) and our share of the historic tax basis in Premier LP’s tangible and intangible assets that is attributable to the
acquired Class B common units. Pursuant to an agreement with each of our member owners in connection with our IPO, we must
pay to the member owners 85% of the amount, if any, by which our tax payments to various tax authorities are reduced as a result
of these special tax benefits. We are also obligated to make certain other payments on the occurrence of certain events that would
terminate the agreement with respect to certain member owners. The tax basis adjustments, as well as the amount and timing of
any payments under the tax receivable agreements, will vary depending upon a number of factors, including the timing of any
exchanges between us and the member owners, the amount and timing of our income and the amount and timing of the amortization
and depreciation deductions and other tax benefits attributable to the tax basis adjustments.
As a result of the tax basis adjustments from our IPO and subsequent exchanges, presuming that Premier is able to timely
realize the anticipated tax benefits, the future aggregate amount of payments to be made by the Company to the member owners
is approximately $279.7 million as of June 30, 2016. Pursuant to the tax receivable agreements, payments are due to member
owners to the extent that the Company recognizes the tax benefits attributable to the initial purchase of Class B common units
from the member owners in the Reorganization and subsequent quarterly exchanges between the Company and its member owners.
We expect Premier, Inc. to fund the required payments from distributions received from Premier LP.
The tax receivable agreements provide that, in the event we exercise our right to early termination or in the event of a change
in control or a material breach by us of our obligations, the agreements will terminate and the Company will be required to make
a lump-sum payment equal to the present value of all forecasted future payments that would have otherwise been made under the
tax receivable agreements. These payments could be substantial and could exceed the actual tax benefits that we eventually receive
as a result of acquiring Class B common units from the member owners. In the event that we do not have available capital on hand
or access to adequate funds to make these payments, our financial condition would be materially adversely impacted.
Additionally, our ability to realize our 15% share of the total tax savings that we are entitled to retain under the tax receivable
agreements depends on a number of assumptions. If our actual taxable income were insufficient or there were adverse changes in
applicable law or regulations, we may be unable to realize all or a portion of these expected benefits and our cash flows and
stockholders’ equity could be negatively affected.
Changes to Premier LP’s allocation methods may increase a tax-exempt limited partner’s risk that some allocated income is
unrelated business taxable income.
The LP Agreement provides for the allocation of retained income to the limited partners of Premier LP, in part, according to
the number of units owned rather than relative participation of the limited partners. A member owner that is a tax-exempt limited
partner of Premier LP whose relative Class B common unit ownership is high compared to its relative participation may conclude,
based on an analysis of its own facts and circumstances, that it has more unrelated business taxable income, or UBTI, subject to
tax than it had reported in the past, or may be at increased risk that the Internal Revenue Service, or IRS, will seek to increase the
amount of income reported by the tax-exempt limited partner as UBTI. Further, the LP Agreement provides for the allocation of
distributed income to be adjusted based on facts and circumstances as are determined appropriate by Premier GP. Such adjustments
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may also increase the amount of income reported by certain tax-exempt limited partners as UBTI. Any increase in UBTI may
cause a limited partner to leave Premier LP, which could have an adverse effect on our business, financial condition and results
of operations.
Our certificate of incorporation and bylaws and the LP Agreement and provisions of Delaware law may discourage or prevent
strategic transactions, including a takeover of our company, even if such a transaction would be beneficial to our stockholders.
Provisions contained in our certificate of incorporation and bylaws and the LP Agreement and provisions of the Delaware
General Corporation Law, or DGCL, could delay or prevent a third party from entering into a strategic transaction with us, even
if such a transaction would benefit our stockholders. For example, our certificate of incorporation and bylaws:
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divide our board of directors into three classes with staggered three-year terms, which may delay or prevent a change
of our management or a change in control;
authorize our board of directors to issue “blank check” preferred stock in order to increase the aggregate number of
outstanding shares of capital stock and thereby make a takeover more difficult and expensive;
do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of
stockholders to elect director candidates;
do not permit stockholders to take action by written consent other than during the period following our IPO in which
we qualify as a “controlled company” within the meaning of NASDAQ rules;
provide that special meetings of the stockholders may be called only by or at the direction of the board of directors,
the chair of our board or the chief executive officer;
require advance notice to be given by stockholders of any stockholder proposals or director nominees;
require a super-majority vote of the stockholders to amend our certificate of incorporation; and
allow our board of directors to make, alter or repeal our bylaws but only allow stockholders to amend our bylaws
upon the approval of 662/3% or more of the voting power of all of the outstanding shares of our capital stock entitled
to vote.
In addition, we are subject to the provisions of Section 203 of the DGCL which limits, subject to certain exceptions, the right
of a corporation to engage in a business combination with a holder of 15% or more of the corporation’s outstanding voting securities,
or certain affiliated persons.
The Exchange Agreement contains rights of first refusal in favor of the other member owners and Premier LP in the event
that a member owner desires to exchange its Class B common units for shares of our Class A common stock, cash or a combination
of both. In addition, the Tax Receivable Agreements contain a change of control provision which, if triggered, would require us
to make a one-time cash payment to the member owners equal to the present value of the payments that are forecasted to be made
under the Tax Receivable Agreements based on certain assumptions.
These restrictions and provisions could keep us from pursuing relationships with strategic partners and from raising additional
capital, which could impede our ability to expand our business and strengthen our competitive position. These restrictions could
also limit stockholder value by impeding a sale of Premier, Inc. or Premier LP and discouraging potential takeover attempts that
might otherwise be financially beneficial to stockholders.
Risks Related to Our Class A Common Stock
If we fail to maintain an effective system of integrated internal controls, we may not be able to report our financial results
accurately, which could have a material adverse effect on our business, financial condition and results of operations.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce
accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently.
Section 404 of the Sarbanes-Oxley Act requires public companies to conduct an annual review and evaluation of their internal
controls and attestations of the effectiveness of internal controls by independent auditors. Maintaining effective internal controls
has been and will continue to be costly and may divert management’s attention.
Our evaluation of our internal controls over financial reporting may identify material weaknesses that may cause us to be
unable to report our financial information on a timely basis and thereby result in adverse regulatory consequences, including
sanctions by the SEC or violations of NASDAQ listing rules. There also could be a negative reaction in the financial markets due
to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial
statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our
internal controls over financial reporting. This could materially adversely affect our business, financial condition and results of
operations and could also lead to a decline in the price of our Class A common stock.
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The substantial number of shares of Class A common stock that will be eligible for sale or exchange by our member owners
in the near future could cause the market price for our Class A common stock to decline or make it difficult for us to raise
financing through the sale of equity securities in the future.
We cannot predict the effect, if any, that market sales of shares of Class A common stock or the availability of shares of Class A
common stock for sale by our member owners will have on the market price of our Class A common stock from time to time. At
June 30, 2016, we had 45,995,528 shares of our Class A common stock outstanding. Sales of substantial amounts of shares of our
Class A common stock in the public market, or the perception that those sales will occur, could cause the market price of our
Class A common stock to decline or make future offerings of our equity securities more difficult. If we are unable to sell equity
securities at times and prices that we deem appropriate, we may be unable to fund our future growth.
At June 30, 2016, there were 96,132,723 Class B common units of Premier LP outstanding. In connection with the
Reorganization and IPO, Premier, Inc., Premier LP and the member owners entered into an Exchange Agreement which became
effective upon the completion of the Reorganization and IPO. Under this agreement, subject to certain restrictions, commencing
on October 31, 2014, and during each year thereafter, each member owner has the cumulative right to exchange up to one-seventh
of the Premier LP Class B common units initially allocated to such member owner (or subsequently purchased by such member
owner pursuant to the related right of first refusal set forth in the Exchange Agreement), for shares of our Class A common stock,
cash or a combination of both, the form of consideration to be at the discretion of the audit and compliance committee of our board
of directors, subject to certain restrictions. Currently, we expect to settle these exchanges with our Class A common stock for the
foreseeable future. This exchange right can generally be exercised on a quarterly basis (subject to rights of first refusal in favor of
the other holders of Class B common units and Premier LP). In November 2014, we filed a registration statement with the SEC
that registered under the Securities Act the resale of shares of Class A common stock received under the Exchange Agreement.
On October 31, 2016, the third tranche of Class B common units, representing 15,441,618 units, will become eligible for exchange.
Including Class B common units eligible for exchange as of the date of this Annual Report, a cumulative amount of 33,042,602
Class B common units are expected to be eligible for exchange on October 31, 2016.
We do not intend to pay any cash dividends on our Class A common stock in the foreseeable future.
We do not expect to pay any dividends on our Class A common stock in the foreseeable future. Payments of future dividends,
if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating
results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on
our ability to pay dividends. As a result, capital appreciation in the price of our Class A common stock, if any, may be your only
source of gain on an investment in our Class A common stock.
Our future issuance of common stock, preferred stock, limited partnership units or debt securities could have a dilutive effect
on our common stockholders and adversely affect the market value of our Class A common stock.
In the future, we could issue a significant number of shares of Class A common stock or Class B common stock, which could
dilute our existing stockholders significantly and have a material adverse effect on the market price for the shares of our Class A
common stock. Furthermore, the future issuance of shares of preferred stock with voting rights may adversely affect the voting
power of our common stockholders, either by diluting the voting power of our common stock if the preferred stock votes together
with the common stock as a single class or by giving the holders of any such preferred stock the right to block an action on which
they have a separate class vote even if the action were approved by the holders of our common stock. The future issuance of shares
of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of
preferred stock could adversely affect the market price for our Class A common stock by making an investment in the Class A
common stock less attractive.
Moreover, Premier LP may issue additional limited partnership units to third parties without the consent of Class A common
stockholders, which would reduce Premier, Inc.’s ownership percentage in Premier LP and would have a dilutive effect on the
amount of distributions made to Premier, Inc. by Premier LP. Any newly admitted Premier LP limited partners will receive Class B
common units in Premier LP and an equal amount of shares of our Class B common stock. Any such issuances could materially
and adversely affect the market price of our Class A common stock.
In addition to potential equity issuances described above, we also may issue debt securities that would rank senior to shares
of our Class A common stock.
Upon our liquidation, holders of our preferred shares and debt securities and instruments will receive a distribution of our
available assets before holders of shares of our Class A common stock. We are not required to offer any such additional debt or
equity securities to existing stockholders on a preemptive basis. Therefore, additional issuances of our Class A common stock,
directly or through convertible or exchangeable securities (including Class B common units), warrants or options, will dilute the
holders of shares of our existing Class A common stock and such issuances, or the anticipation of such issuances, may reduce the
38
market price of shares of our Class A common stock. Any preferred shares, if issued, would likely have a preference on distribution
payments, periodically or upon liquidation, which could limit our ability to make distributions to holders of shares of our Class A
common stock. Because our decision to issue debt or equity securities or otherwise incur debt in the future will depend on market
conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future capital
raising efforts.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
We occupy our Charlotte, North Carolina headquarters under a long-term lease which expires in 2026 and includes options
for us, at our discretion, to renew the lease for up to fifteen years in total beyond that date. We also lease our specialty pharmacy
location in Fort Lauderdale, Florida, our advocacy public affairs office in Washington, DC, and several other smaller facilities.
Our headquarters and other properties are suitable for their respective uses and are, in all material respects, adequate for our present
needs. As of June 30, 2016, we occupy and lease the following facilities:
Tenant
Aperek, Inc.
Commcare Pharmacy FTL, LLC
Commcare Pharmacy Plantation
Commcare Pharmacy MIA, LLC
Commcare Pharmacy WPB, LLC
CECity.com, Inc.
Meddius, LLC
MEMdata, LLC
Premier, Inc.
Premier, Inc.
Premier Insurance Management Services, Inc.
SVS, LLC
SVS, LLC
SYMMEDRx, LLC
TheraDoc, Inc.
Location
Lease Expiration Date
Raleigh, NC
June 30, 2019
Ft. Lauderdale, FL
August 31, 2016
Plantation, FL
Miami, FL
November 30, 2022
January 31, 2018
West Palm Beach, FL November 15, 2016
Homestead, PA
August 31, 2020
Charlottesville, VA
November 1, 2017
College Station, TX
April 3, 2017
Charlotte, NC
February 28, 2026
Washington, DC
April 30, 2019
San Diego, CA
Charlotte, NC
Rockville, MD
November 30, 2019
October 30, 2016
November 30, 2017
Overland Park, KS
November 30, 2019
Salt Lake City, UT
March 31, 2017
Leases approaching their stated expiration dates are generally extended pursuant to their terms or renegotiated as required.
With respect to leases with stated expiration dates during the next year, we believe we will be able to extend or renegotiate such
leases as necessary to meet our business needs.
Item 3. Legal Proceedings
We participate in businesses that are subject to substantial litigation. We are periodically involved in litigation, arising in the
ordinary course of business or otherwise, which from time to time may include claims relating to commercial, product liability,
employment, antitrust, intellectual property or other regulatory matters, among others. If current or future government regulations
are interpreted or enforced in a manner adverse to us or our business, specifically those with respect to antitrust or healthcare laws,
we may be subject to enforcement actions, penalties, damages and other material limitations on our business.
From time to time we have been named as a defendant in several lawsuits brought by suppliers of medical products. Typically,
these lawsuits have alleged the existence of a conspiracy among manufacturers of competing products and operators of GPOs,
including us, to deny the plaintiff access to a market for its products. We believe that we have at all times conducted our business
affairs in an ethical and legally compliant manner and have successfully resolved all such actions. No assurance can be given that
we will not be subjected to similar actions in the future or that such matters will be resolved in a manner satisfactory to us or which
will not harm our business, financial condition or results of operations.
39
Additional information relating to certain legal proceedings in which we are involved is included in Note 22 - Commitments
and Contingencies, to the accompanying consolidated financial statements, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not Applicable
40
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our Class A common stock is publicly traded on the NASDAQ Global Select Market under the ticker symbol "PINC." Our
Class B common stock is not publicly traded. The following table sets forth, for the periods indicated, the high and low prices of
our Class A common stock on the NASDAQ Global Select Market.
Fiscal Year Ended June 30, 2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal Year Ended June 30, 2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Holders
Price Range of
Common Stock
High
Low
$
$
$
$
$
$
$
$
35.11 $
37.00 $
37.24 $
39.11 $
39.81 $
39.20 $
35.27 $
32.98 $
30.36
29.68
33.27
32.62
36.04
31.36
29.29
27.95
Based on the records of our Class A common stock transfer agent, as of August 19, 2016, there were 47,394,515 shares of our
Class A common stock issued and outstanding, held by 29 holders of record. Because substantially all of our Class A common
stock is held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of beneficial
owners currently holding our Class A common stock. As of August 19, 2016, 94,809,069 shares of our Class B common stock are
issued and outstanding, held by one holder of record, the trustee of the Class B common stock voting trust. However, as of August 19,
2016, our Class B common stock is beneficially owned by our 171 member owners.
Dividend Policy
We did not pay any dividends during the fiscal years ended June 30, 2016 and 2015. We do not anticipate paying any cash
dividends for the foreseeable future. Furthermore, shares of our Class B common stock are not entitled to any dividend payments.
The payment of dividends, if any, is subject to the discretion of our board of directors and will depend on many factors, including
our results of operations, financial condition and capital requirements, earnings, general business conditions, restrictions imposed
by our current and any future financing arrangements, legal restrictions on the payment of dividends and other factors our board
of directors deems relevant. Our current credit facility includes restrictions on our ability to pay dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by Item 201(d) of Regulation S-K is provided under Item 12, Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters incorporated herein by reference.
Purchases of Equity Securities
There were no repurchases of equity securities during the year ended June 30, 2016. We do not have any publicly announced
or other repurchase plans regarding our Class A common stock.
41
Company Stock Performance
The performance graph below shows a 33-month comparison of the total cumulative return, assuming reinvestment of all
dividends, had $100 been invested at the close of business on September 26, 2013 (our first trading day), in each of:
•
•
•
our Class A common stock;
the NASDAQ Composite stock index (“NASDAQ Composite index”); and
a customized peer group of fourteen companies selected by us (the “Peer Group”).
We have used the Peer Group, a group selected in good faith and used by our compensation committee for benchmarking
purposes, for peer comparison purposes because we believe this group provides an accurate representation of our peers. The Peer
Group consists of the following fourteen companies: Advisory Board Co, Allscripts Healthcare Solutions Inc., Athenahealth Inc.,
Cerner Corp, HMS Holdings Corp, Huron Consulting Group Inc., IHS Inc., IMS Health Holdings Inc., Magellan Health Inc.,
MedAssets Inc., Navigant Consulting Inc., Owens & Minor Inc., Patterson Companies Inc. and Quality Systems Inc.
Our compensation committee last reviewed and selected the fourteen companies in our Peer Group in August 2015. For the
performance graph below, MedAssets Inc. has been included in the Peer Group through November 1, 2015, the day before it
announced it would be acquired. As we grow and develop as a public company, and as the companies in our Peer Group change,
our Compensation Committee will continue to review and reconfigure our Peer Group as applicable.
The information contained in the performance graph below shall not be deemed “soliciting material” or to be “filed” with
the SEC nor shall such information be deemed incorporated by reference into any future filing under the Securities Act or the
Exchange Act except to the extent we specifically incorporate it by reference into such filing.
42
Value of Investment as of Stated Date:
Company/Index Name
Premier, Inc. Class A Common Stock(a)
NASDAQ Composite
Peer Group(b)
9/26/2013 6/30/2014 6/30/2015 6/30/2016
$
$
$
100.00 $
94.62 $
125.48 $
106.69
100.00 $
117.85 $
133.69 $
130.50
100.00 $
106.38 $
119.55 $
107.42
(a) As noted above, we have not paid any cash dividends during the period covered by the graph.
(b)
Includes the performance of MedAssets Inc. through November 1, 2015, the date before it announced it would be acquired.
We will neither make nor endorse any predictions as to future stock performance or whether the trends depicted in the graph
above will continue or change in the future. The stock price performance included in this graph is not necessarily indicative of
future stock price performance.
Item 6. Selected Financial Data
As of June 30, 2016, the Company, through its wholly-owned subsidiary, Premier GP, held a controlling general partner interest
of approximately 32% in, and, as a result, consolidated the financial statements of, Premier LP. The limited partners' ownership
of Premier LP of approximately 68% at June 30, 2016 is reflected as redeemable limited partners' capital in the Company's
consolidated balance sheets, and their proportionate share of income in Premier LP is reflected within net income attributable to
non-controlling interest in Premier LP in the Company's consolidated statements of income and within comprehensive income
attributable to non-controlling interest in the consolidated statements of comprehensive income.
After the completion of the Reorganization following the consummation of our IPO, PHSI became our consolidated subsidiary
and is considered our predecessor for accounting purposes. Accordingly, PHSI's consolidated financial statements are our historical
financial statements, for periods prior to October 1, 2013. The historical consolidated financial statements of PHSI are reflected
herein based on PHSI's historical ownership interests of Premier LP and its consolidated subsidiaries.
43
We derived the selected historical consolidated financial data presented below for the years ended June 30, 2016, 2015, 2014,
2013 and 2012 from the audited consolidated financial statements and related notes of Premier, Inc. and PHSI, as applicable,
included elsewhere in this Annual Report or as presented in previous SEC filings. You should refer to Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, and the notes to the accompanying consolidated financial
statements for additional information regarding the financial data presented below, including matters that might cause this data
not to be indicative of our future financial position or results of operations.
We have reclassified certain prior period amounts for deferred income tax assets to be consistent with the current period
presentation (see Note 3 - Significant Accounting Policies).
The following tables set forth selected historical consolidated financial and operating data for the five-year period ended
June 30, 2016 and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results
of Operations, and our audited consolidated financial statements contained elsewhere herein.
(In Thousands, Except Per Share Amounts)
Consolidated Statements of Income Data:
2016 (1)
2015 (2)
Year ended June 30,
2014 (3)
2013
2012 (4)
Net revenue:
Net administrative fees (5)
Other services and support
Services
Products
Net revenue
Cost of revenue
Gross profit
Operating expenses:
$
498,394 $
457,020 $
464,837 $
519,219 $
473,249
337,554
835,948
326,646
270,748
727,768
279,261
1,162,594
1,007,029
457,056
705,538
396,910
610,119
233,186
698,023
212,526
910,549
307,625
602,924
205,685
724,904
144,386
869,290
237,413
631,877
178,552
651,801
116,484
768,285
189,719
578,566
Selling, general and administrative
403,611
332,004
294,421
248,301
240,748
Research and development
Amortization of purchased intangible assets
Operating expenses
Operating income
Other income, net (6)
Income before income taxes
Income tax expense
Net income
Net (income) loss attributable to non-controlling
interest in S2S Global (7)
Net income attributable to non-controlling interest
in Premier LP (8)
Net income attributable to non-controlling interest
Adjustment of redeemable limited partners' capital
to redemption amount
Net income (loss) attributable to stockholders
2,925
33,054
439,590
265,948
18,934
284,882
49,721
235,161
2,937
9,136
344,077
266,042
5,085
271,127
36,342
234,785
3,389
3,062
300,872
302,052
58,274
360,326
27,709
332,617
9,370
1,539
259,210
372,667
12,145
384,812
9,726
375,086
12,583
3,146
256,477
322,089
12,808
334,897
8,229
326,668
—
(1,836)
(949)
1,479
608
(193,547)
(193,547)
(194,206)
(196,042)
(303,336)
(304,285)
(369,189)
(367,710)
(323,339)
(322,731)
776,750
$
818,364 $
(904,035)
(865,292) $ (2,713,256) $
(2,741,588)
—
7,376 $
—
3,937
Weighted average shares outstanding:
Basic
Diluted
Earnings (loss) per share attributable to
stockholders:
Basic
Diluted
42,368
145,308
35,681
35,681
25,633
25,633
5,858
5,858
6,183
6,183
$
$
19.32 $
1.33 $
(24.25) $
(24.25) $
(105.85) $
(105.85) $
1.26 $
1.26 $
0.64
0.64
44
(In Thousands)
Consolidated Balance Sheets Data:
Cash, cash equivalents and marketable securities,
current
Working capital (9)
Property and equipment, net
Total assets
Deferred revenue (10)
Total liabilities
Redeemable limited partners' capital (11)
Class A common stock
Additional paid-in capital
(Accumulated deficit) retained earnings
Total stockholders' (deficit) equity
2016
2015
June 30,
2014
2013
2012
$
266,576 $
387,189 $
291,606 $
255,619 $
241,669
136,827
174,080
275,533
147,625
188,527
134,551
212,490
115,587
189,680
101,630
$ 1,855,383 $ 1,530,191 $ 1,246,656 $
598,916 $
554,939
54,498
39,824
15,694
18,880
19,820
$
669,614 $
568,461 $
472,293 $
213,513 $
196,990
3,137,230
4,079,832
3,244,674
307,635
279,513
460
377
324
—
(1,951,878)
—
(3,118,474)
$ (1,951,461) $ (3,118,102) $ (2,470,311) $
—
(2,469,873)
57
28,866
50,599
77,768 $
61
35,427
43,223
78,436
(1) Amounts include the results of operations of InFlowHealth, LLC ("InFlow"), CECity.com, Inc. ("CECity") and Healthcare
Insights, LLC ("HCI"), all in our performance services segment, from October 1, 2015, August 20, 2015 and July 31, 2015,
respectively, the dates of acquisition of all the membership interests of InFlow for $6.1 million and HCI for $64.3 million,
respectively, and all the outstanding shares of CECity for $398.3 million. See Note 4 - Business Acquisitions to the audited
consolidated financial statements of this Annual Report for further information related to acquisitions completed during the
year ended June 30, 2016.
(2) Amounts include the results of operations of TheraDoc, Inc. ("TheraDoc") and Aperek, Inc. ("Aperek"), both in our performance
services segment, from September 1, 2014 and August 29, 2014, respectively, the dates of acquisition of all the outstanding
shares of common stock of TheraDoc for $108.6 million and Aperek for $47.4 million. Further, on February 2, 2015, we
purchased the remaining 40% of the outstanding limited liability company membership interests of S2S Global, our direct
sourcing business, for approximately $14.5 million. See Note 4 - Business Acquisitions to the audited consolidated financial
statements of this Annual Report for further information related to acquisitions completed during the year ended June 30,
2015.
(3) Amounts include the results of operations of MEMdata, LLC ("MEMdata"), Meddius, L.L.C. ("Meddius") and SYMMEDRx,
LLC ("SYMMEDRx"), all in our performance services segment, from April 7, 2014, October 31, 2013 and July 19, 2013,
respectively, the dates of acquisition of all the outstanding shares of common stock of MEMdata for $6.1 million, Meddius
for $7.7 million and SYMMEDRx for $28.7 million.
(4) Amounts include the results of operations of S2S Global in our supply chain services segment from December 6, 2011, the
date of acquisition of 60% of the outstanding limited liability company membership interests of S2S Global for $0.5 million.
(5) Following the completion of the Reorganization and IPO, we are contractually required under the GPO participation agreements
to pay each member owner revenue share from Premier LP generally equal to 30% of all gross administrative fees collected
by Premier LP based upon purchasing by such member owner's owned, leased, managed and affiliated facilities through our
GPO supplier contracts. Prior to the Reorganization and IPO, we did not generally have a contractual requirement to pay
revenue share to member owners participating in our GPO programs, but paid semi-annual distributions of partnership income.
In addition, certain non-owner members have historically operated under, and, following the Reorganization and IPO, continue
to operate under contractual relationships that provide for a specific revenue share that differs from the 30% revenue share
that we provide to our member owners under the GPO participation agreements following the Reorganization and IPO. As a
result, our revenue share expense as a percentage of gross administrative fees increased for the years ended June 30, 2016,
2015 and 2014 which resulted in a decrease in net administrative fees for the years ended June 30, 2016, 2015 and 2014 when
compared to the actual net administrative fees for the prior fiscal years.
(6) Other income, net consists primarily of equity in net income of unconsolidated affiliates related to our 50% ownership interest
in Innovatix, interest income, net and realized gains and losses on our marketable securities (which represent our interest and
investment income, net) and gain or loss on disposal of assets.
(7) PSCI currently owns a 100% voting and economic interest in S2S Global as a result of its February 2, 2015 purchase of the
remaining non-controlling interest (40%) in S2S Global. Prior to February 2, 2015, PSCI owned a 60% voting and economic
45
interest in S2S Global. Net (income) loss attributable to non-controlling interest in S2S Global represents the portion of net
(income) loss attributable to the non-controlling equity holders of S2S Global (40%) prior to the February 2, 2015 purchase.
(8) PHSI, through Premier Plans, owned a 1% controlling general partnership interest in Premier LP prior to the Reorganization.
Net income attributable to non-controlling interest in Premier LP represents the portion of net income attributable to the limited
partners of Premier LP, which was 78% following the Reorganization and 99% prior to the Reorganization and may change
each period as member ownership changes.
(9) Working capital represents the excess of total current assets over total current liabilities.
(10) Deferred revenue is primarily related to deferred subscription fees and deferred advisory fees in our performance services
segment and consists of unrecognized revenue related to advanced member invoicing or member payments received prior to
fulfillment of our revenue recognition criteria.
(11) Redeemable limited partners' capital consists of the limited partners' approximately 68% ownership of Premier LP after the
Reorganization and IPO and subsequent quarterly exchanges pursuant to the Exchange Agreement and 99% ownership of
Premier LP prior to the Reorganization and IPO. Pursuant to the terms of the existing limited partnership agreement of Premier
LP, Premier LP is required to repurchase a limited partner's interest upon the withdrawal of such limited partner and therefore
the interest in Premier LP is classified as temporary equity in the mezzanine section of the consolidated balance sheets. The
Company records redeemable limited partners' capital at the greater of the book value or redemption amount per the LP
Agreement at the reporting date, with the corresponding offset to additional paid-in-capital and retained earnings (accumulated
deficit).
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our audited consolidated financial statements and the notes
thereto included elsewhere in this Annual Report. This discussion is designed to provide the reader with information that will assist
in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year
to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our consolidated
financial statements. In addition, the following discussion includes certain forward-looking statements. For a discussion of important
factors, including the continuing development of our business and other factors which could cause actual results to differ materially
from the results referred to in the forward-looking statements, see "Item 1A, Risk Factors" and "Cautionary Note Regarding
Forward-Looking Statements" contained in this Annual Report.
Business Overview
Our Business
Premier, Inc. ("Premier", the "Company", "We", or "Our") is a leading healthcare improvement company, uniting an alliance
of approximately 3,750 U.S. hospitals and more than 130,000 other providers to transform healthcare. We unite hospitals, health
systems, physicians and other healthcare providers with the common goal of improving and innovating in the clinical, financial
and operational areas of their business to meet the demands of a rapidly evolving healthcare industry. We deliver value through a
comprehensive technology-enabled platform that offers critical supply chain services, clinical, financial, operational and population
health software-as-a-service ("SaaS") informatics products, advisory services and performance improvement collaborative
programs.
As of June 30, 2016, we were controlled by 171 U.S. hospitals, health systems and other healthcare organizations that represent
approximately 1,400 owned, leased and managed acute care facilities and other non-acute care organizations, through the ownership
of Class B common stock, which they received upon the completion of a series of transactions (the "Reorganization") concurrent
with the consummation of our Initial Public Offering ("IPO"), and collectively with the Reorganization, the "Reorganization and
IPO") on October 1, 2013. As of June 30, 2016, the Class A common stock and Class B common stock represented approximately
32% and 68% of our combined Class A and Class B common stock, collectively (the "Common Stock"). All of our Class B common
stock was held beneficially by our member owners and all of our Class A common stock was held by public investors, which may
include member owners that have received shares of our Class A common stock in connection with previous quarterly exchanges
pursuant to the Exchange Agreement.
We generated net revenue of $1,162.6 million, $1,007.0 million and $910.5 million, net income of $235.2 million, $234.8
million and $332.6 million and Adjusted EBITDA of $441.0 million, $393.2 million and $392.3 million for the years ended June
30, 2016, 2015 and 2014, respectively. On a Non-GAAP pro forma basis, after giving effect to the Reorganization and the IPO,
we generated net revenue of $869.3 million, net income of $294.6 million and Adjusted EBITDA of $351.0 million for the year
46
ended June 30, 2014. Non-GAAP pro forma adjustments reflect the impact of the Reorganization and IPO for periods prior to
October 1, 2013 and accordingly, do not impact operating results for the years ended June 30, 2016 and 2015.
Our Business Segments
Our business model and solutions are designed to provide our members access to scale efficiencies, spread the cost of their
development, provide actionable intelligence derived from anonymized data in our data warehouse provided by our members,
mitigate the risk of innovation and disseminate best practices that will help our member organizations succeed in their transformation
to higher quality and more cost-effective healthcare. We deliver our integrated platform of solutions that address the areas of total
cost management, quality and safety improvement and population health management through two business segments: supply
chain services and performance services.
Our supply chain services segment includes one of the largest healthcare group purchasing organizations ("GPO") in the
United States, serving acute and alternate sites, a specialty pharmacy and our direct sourcing activities. Supply chain services net
revenue grew from $738.3 million for the year ended June 30, 2015 to $829.4 million for the year ended June 30, 2016, representing
net revenue growth of 12%, and accounted for 71% of our overall net revenue. Supply chain services net revenue grew from $678.1
million for the year ended June 30, 2014 to $738.3 million for the year ended June 30, 2015, representing net revenue growth of
9%, and accounted for 73% of our overall net revenue. We generate revenue in our supply chain services segment from fees
received from suppliers based on the total dollar volume of supplies purchased by our members and through product sales in
connection with our specialty pharmacy and direct sourcing activities.
Our performance services segment includes one of the largest informatics and advisory services businesses in the United
States focused on healthcare providers. Performance services net revenue grew from $268.8 million for the year ended June 30,
2015 to $333.2 million for the year ended June 30, 2016, representing revenue growth of 24%, and accounted for 29% of our
overall net revenue. Performance services net revenue grew from $232.4 million for the year ended June 30, 2014 to $268.8 million
for the year ended June 30, 2015, representing net revenue growth of 16%, and accounted for 27% of our overall net revenue. Our
SaaS informatics products utilize our comprehensive data set to provide actionable intelligence to our members, enabling them to
benchmark, analyze and identify areas of improvement across three main categories: cost management, quality and safety and
population health management. This segment also includes our advisory services and technology-enabled collaboratives.
Reorganization and IPO
On October 1, 2013, we completed our IPO by issuing 32,374,751 shares of our Class A common stock at a price of $27.00
per share, raising net proceeds of approximately $821.7 million, after underwriting discounts and commissions, but before expenses.
In addition, on October 1, 2013, upon the consummation of the IPO, we completed the Reorganization. See Note 2 - Initial Public
Offering and Reorganization to the audited consolidated financial statements contained herein for more information.
We incurred strategic and financial restructuring expenses in connection with the Reorganization and IPO of approximately
$0.3 million, $1.4 million and $3.8 million during the years ended June 30, 2016, 2015 and 2014, respectively. During the years
ended June 30, 2016 and 2015, strategic and financial restructuring expenses were incurred in connection with the quarterly
exchanges pursuant to the Exchange Agreement and the company-directed offerings related to the Registration Rights Agreement
discussed in Note 2 - Initial Public Offering and Reorganization to the accompanying audited consolidated financial statements,
respectively.
We may incur additional strategic and financial and restructuring expenses in connection with future quarterly exchanges
pursuant to the Exchange Agreement and company-directed offerings pursuant to the Registration Rights Agreement.
Acquisitions
Acquisition of InFlowHealth, LLC
On October 1, 2015, we acquired all of the limited liability company membership interests of InFlowHealth, LLC (“InFlow”),
a SaaS-based software developer specializing in improving the operational, financial and strategic performance of physician
practices, for $6.1 million in cash. The acquisition provides selling members an earn-out opportunity of up to $26.9 million based
on InFlow’s future annual contractual subscription revenues through December 31, 2019. The selling members also received
restricted stock units of Premier with an aggregate equity grant value of $2.1 million which vest over a three-year period with
restrictions tied to continued employment. We utilized available funds on hand to complete the acquisition. Assets acquired and
liabilities assumed were recorded at their estimated fair values as of October 1, 2015, with the remaining unallocated purchase
price recorded as goodwill (see Note 4 - Business Acquisitions).
47
Acquisition of CECity.com, Inc.
On August 20, 2015, we acquired 100% of the outstanding shares of capital stock of CECity.com, Inc. ("CECity"), a cloud-
based healthcare solutions provider specializing in performance management and improvement, pay-for-value reporting and
professional education, for $398.3 million in cash. The Company funded the acquisition with $250.0 million of cash and $150.0
million of borrowings under the Company’s unsecured credit agreement (the "Credit Facility") (see Note 13 - Debt). Assets acquired
and liabilities assumed were recorded at their estimated fair values as of August 20, 2015, with the remaining unallocated purchase
price recorded as goodwill (see Note 4 - Business Acquisitions).
Acquisition of Healthcare Insights, LLC
On July 31, 2015, we acquired all of the limited liability company membership interests of Healthcare Insights, LLC ("HCI"),
a financial management software developer that provides hospitals and healthcare systems with budgeting, forecasting, labor
productivity and cost analytic capabilities, for $64.3 million in cash. The acquisition also provides selling members with an earn-
out opportunity of up to $4.0 million based on HCI’s revenues during the twelve months ended December 31, 2017. We utilized
available funds on hand to complete the acquisition. Assets acquired and liabilities assumed were recorded at their estimated fair
values as of July 31, 2015, with the remaining unallocated purchase price recorded as goodwill (see Note 4 - Business Acquisitions).
Acquisition of Non-Controlling Interest in S2S Global
On February 2, 2015, we purchased the remaining 40% of the outstanding limited liability company membership interests of
SVS LLC d/b/a S2S Global ("S2S Global"), our direct sourcing business, for approximately $14.5 million. In connection with the
purchase, we repaid the $14.2 million balance outstanding under the S2S Global line of credit and terminated the line of credit
(see Note 13 - Debt). We utilized available funds on hand to complete the acquisition and payoff the S2S Global line of credit (see
Note 4 - Business Acquisitions).
Acquisition of TheraDoc, Inc.
On September 1, 2014, we completed the acquisition of TheraDoc, Inc. ("TheraDoc"), a leading provider of clinical surveillance
software to healthcare organizations across the country that bring together disparate data from a hospital's source systems and
helps alert clinicians to potential risks, for $108.6 million. We utilized available funds on hand to complete the acquisition (see
Note 4 - Business Acquisitions).
Acquisition of Aperek, Inc.
On August 29, 2014 we completed the acquisition of Aperek, Inc. ("Aperek"), (formerly Mediclick), a SaaS-based supply
chain solutions company focused on purchasing workflow and analytics, for $47.4 million. We utilized available funds on hand
to complete the acquisition (see Note 4 - Business Acquisitions).
See Note 24 - Subsequent Events to the accompanying audited consolidated financial statements for more information regarding
our acquisition activities subsequent to June 30, 2016.
Market and Industry Trends and Outlook
We expect that certain trends and economic or industry-wide factors will continue to affect our business, both in the short-
term and long-term. We have based our expectations described below on assumptions made by us and on information currently
available to us. To the extent our underlying assumptions about, or interpretation of, available information prove to be incorrect
our actual results may vary materially from our expected results. See "Cautionary Note Regarding Forward-Looking Statements."
Trends in the U.S. healthcare market affect our revenues in the supply chain services and performance services segments.
The trends we see affecting our current healthcare business include the implementation of healthcare reform legislation, enactment
of new regulatory and reporting requirements, expansion of insurance coverage, intense cost pressure, payment reform, provider
consolidation, shift in care to the alternate site market and increased data availability and transparency. To meet the demands of
this environment, there will be increased focus on scale and cost containment and healthcare providers will need to measure and
report on and bear financial risk for outcomes. We believe these trends will result in increased demand for our supply chain services
and performance services solutions in the areas of cost management, quality and safety, and population health management.
48
Key Components of Our Results of Operations
Net Revenue
Net revenue consists of (i) service revenue, which includes net administrative fees revenue and other services and support
revenue and (ii) product revenue. Net administrative fees revenue consists of GPO administrative fees in our supply chain services
segment. Other services and support revenue consists primarily of fees generated by our performance services segment in connection
with our SaaS informatics products subscriptions, license fees, advisory services and performance improvement collaborative
subscriptions. Product revenue consists of specialty pharmacy and direct sourcing product sales, which are included in the supply
chain services segment.
Supply Chain Services
Supply chain services revenue consists of GPO net administrative fees (gross administrative fees received from suppliers,
reduced by the amount of any revenue share paid to members), specialty pharmacy revenue, direct sourcing revenue and managed
service revenue.
The success of our supply chain services revenue streams are influenced by the number of members that utilize our GPO
supplier contracts and the volume of their purchases, the number of members that utilize our specialty pharmacy, as well as the
impact of changes in the defined allowable reimbursement amounts determined by Medicare, Medicaid and other managed care
plans and the number of members that purchase products through our direct sourcing activities and the impact of competitive
pricing. Our managed services line of business is a fee for service model created to perform supply chain related services for
members.
Performance Services
Performance services revenue consists of SaaS informatics products subscriptions, license fees, performance improvement
collaborative and other service subscriptions, professional fees for advisory services, insurance services management fees and
commissions from endorsed commercial insurance programs.
Our performance services growth will depend upon the expansion of our SaaS informatics products, performance improvement
collaboratives and advisory services to new and existing members, impact of applied research initiatives, renewal of existing
subscriptions to our SaaS informatics products and expansion into new markets with potential future acquisitions.
Cost of Revenue
Cost of service revenue includes expenses related to employees (including compensation and benefits) and outside consultants
who directly provide services related to revenue-generating activities, including advisory services to members and implementation
services related to SaaS informatics products. Cost of service revenue also includes expenses related to hosting services, related
data center capacity costs, third-party product license expenses and amortization of the cost of internal use software.
Cost of product revenue consists of purchase and shipment costs for specialty pharmaceuticals and direct sourced medical
products. Our cost of product revenue will be influenced by the cost and availability of specialty pharmaceuticals and the
manufacturing and transportation costs associated with direct sourced medical products.
Operating Expenses
Selling, general and administrative expenses consist of expenses directly associated with selling and administrative functions
and support of revenue-generating activities including expenses to support and maintain our software-related products and services.
In general, selling, general and administrative expenses are comprised of compensation and benefits related costs, travel-related
expenses, business development expenses including costs for business acquisition opportunities and indirect costs such as insurance,
professional fees and other general overhead expenses. General and administrative expenses have increased as a result of being a
public company, including stock-based compensation expense related to the equity incentive plan established in connection with
the Reorganization and IPO.
Research and development expenses consist of employee-related compensation and benefit expenses and third-party
consulting fees of technology professionals, net of capitalized labor, incurred to develop our software-related products and services.
Amortization of purchased intangible assets includes the amortization of all identified intangible assets resulting from
acquisitions.
Other Income, Net
Other income, net consists primarily of equity in net income of our unconsolidated affiliates, primarily generated from our
50% ownership interest in Innovatix, LLC ("Innovatix"). A change in the number of, and use by, members that participate in our
49
GPO programs through Innovatix could have a significant effect on the amounts earned from this investment. Other income, net
also includes interest income, net, and realized gains and losses on our marketable securities as well as gains or losses on the
disposal of assets.
Income Tax Expense
Income tax expense includes the income tax expense attributable to Premier, Premier Healthcare Solutions, Inc. ("PHSI")
and Premier Supply Chain Improvement ("PSCI"). For federal and state income tax purposes, income realized by Premier LP is
taxable to its partners. As such, the low effective tax rate is attributable to the flow through of Premier LP income, which is not
subject to federal and state income tax at Premier.
Net Income Attributable to Non-Controlling Interest
As of June 30, 2016, we owned an approximate 32% controlling general partner interest in Premier LP through Premier GP.
Net income attributable to non-controlling interest represents the portion of net income attributable to the limited partners of
Premier LP (approximately 68%), and the portion of net income or loss attributable to the 40% non-controlling equity interest in
S2S Global prior to our February 2, 2015 purchase when we increased our 60% ownership in S2S Global to 100%. Our non-
controlling interest attributable to limited partners of Premier LP was reduced from 99% to approximately 78% upon the
Reorganization, and further reduced to approximately 68% as of June 30, 2016, as a result of completed quarterly exchanges
pursuant to the Exchange Agreement (see Note 15 - Redeemable Limited Partners' Capital).
Other Key Business Metrics
The other key business metrics we consider are EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully
Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow.
We define EBITDA as net income before interest and investment income, net, income tax expense, depreciation and
amortization and amortization of purchased intangible assets. We define Adjusted EBITDA as EBITDA before merger and
acquisition related expenses and non-recurring, non-cash or non-operating items and including equity in net income of
unconsolidated affiliates. For all financial measures not determined in accordance with generally accepted accounting principles
(“Non-GAAP”), we consider non-recurring items to be expenses and other items that have not been incurred within the prior two
years and are not expected to recur within the next two years. Such expenses include certain strategic and financial restructuring
expenses. Non-operating items include gain or loss on the disposal of assets.
We define Segment Adjusted EBITDA as the segment's net revenue less operating expenses directly attributable to the segment
excluding depreciation and amortization, amortization of purchased intangible assets, merger and acquisition related expenses and
non-recurring or non-cash items and including equity in net income of unconsolidated affiliates. Operating expenses directly
attributable to the segment include expenses associated with sales and marketing, general and administrative, and product
development activities specific to the operation of each segment. General and administrative corporate expenses that are not specific
to a particular segment are not included in the calculation of Segment Adjusted EBITDA.
We define Adjusted Fully Distributed Net Income as net income attributable to Premier (i) excluding income tax expense,
(ii) excluding the impact of adjustment of redeemable limited partners' capital to redemption amount, (iii) excluding the effect of
non-recurring and non-cash items, (iv) assuming the exchange of all the Class B common units into shares of Class A common
stock, which results in the elimination of non-controlling interest in Premier LP and (v) reflecting an adjustment for income tax
expense on Non-GAAP fully distributed net income before income taxes at our estimated effective income tax rate. Adjusted Fully
Distributed Net Income is a Non-GAAP financial measure because it represents net income attributable to Premier before merger
and acquisition related expenses and non-recurring or non-cash items, the effects of non-controlling interests in Premier LP and
the impact of the adjustment of redeemable limited partners' capital to redemption amount.
We define Adjusted Fully Distributed Earnings per Share as earnings per share attributable to Premier (i) excluding income
tax expense, (ii) excluding the impact of adjustment of redeemable limited partners' capital to redemption amount, (iii) excluding
the effect of non-recurring and non-cash items, (iv) assuming the exchange of all the Class B common units into shares of Class
A common stock, which results in the elimination of non-controlling interest in Premier LP and (v) reflecting an adjustment for
income tax expense on Non-GAAP fully distributed net income before income taxes at our estimated effective income tax rate.
Adjusted Fully Distributed Earnings per Share is a Non-GAAP financial measure because it represents earnings per share attributable
to Premier before merger and acquisition related expenses and non-recurring or non-cash items, the effects of non-controlling
interests in Premier LP, and the impact of the adjustment of redeemable limited partners' capital to redemption amount.
We define Free Cash Flow as net cash provided by operating activities less distributions and tax receivable agreement payments
to limited partners and purchases of property and equipment. Free Cash Flow is a Non-GAAP financial measure because it does
not represent net cash provided by operating activities alone but takes into consideration the ongoing distributions to limited
partners and purchase of property and equipment that are necessary for ongoing business operations and long-term value creation.
50
We believe Free Cash Flow is an important measure because it represents the cash that we generate after payment of tax distributions
to limited partners and capital investment to maintain existing products and services as well as development of new and upgraded
products and services to support future growth. Free Cash Flow is important because it allows us to enhance stockholder value
through acquisitions, partnerships, joint ventures, investments in related business and/or debt reduction. Also, Free Cash Flow
does not represent discretionary cash available for spending as it excludes certain contractual obligations such as debt repayment.
Adjusted EBITDA and Free Cash Flow are supplemental financial measures used by us and by external users of our financial
statements. We consider Adjusted EBITDA and Free Cash Flow to be indicators of the operational strength and performance of
our business. Adjusted EBITDA and Free Cash Flow measures allow us to assess our performance without regard to financing
methods and capital structure and without the impact of other matters that we do not consider indicative of the operating performance
of our business. Segment Adjusted EBITDA is the primary earnings measure we use to evaluate the performance of our business
segments.
We use Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income and Adjusted Fully
Distributed Earnings per Share to facilitate a comparison of our operating performance on a consistent basis from period to period
that, when viewed in combination with our results prepared in accordance with generally accepted accounting principles (“GAAP”),
provides a more complete understanding of factors and trends affecting our business than GAAP measures alone. We believe
Adjusted EBITDA and Segment Adjusted EBITDA assist our board of directors, management and investors in comparing our
operating performance on a consistent basis from period to period because they remove the impact of our asset base (primarily
depreciation and amortization) and items outside the control of our management team, e.g. taxes, as well as other non-cash (such
as impairment of intangible assets, purchase accounting adjustments and stock-based compensation) and non-recurring items (such
as strategic and financial restructuring expenses), from our operations. We believe Adjusted Fully Distributed Net Income and
Adjusted Fully Distributed Earnings per Share assist our board of directors, management and investors in comparing our net income
and earnings per share on a consistent basis from period to period because it removes non-cash (such as impairment of intangible
assets, purchase accounting adjustments and stock-based compensation) and non-recurring items (such as strategic and financial
restructuring expenses), and eliminates the variability of non-controlling interest as a result of member owner exchanges of Class
B common units into shares of Class A common stock (which exchanges are a member owner’s cumulative right, but not obligation,
which began on October 31, 2014, and occur each year thereafter, and are limited to one-seventh of the member owner’s initial
allocation of Class B common units).
Despite the importance of these Non-GAAP financial measures in analyzing our business, determining compliance with
certain financial covenants in our Credit Facility, measuring and determining incentive compensation and evaluating our operating
performance relative to our competitors, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed
Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow are not measurements of financial performance
under GAAP, may have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, net
income, net cash provided by operating activities, or any other measure of our performance derived in accordance with GAAP.
Some of the limitations of EBITDA, Adjusted EBITDA and Segment Adjusted EBITDA include that they do not reflect: our
capital expenditures or our future requirements for capital expenditures or contractual commitments; changes in, or cash
requirements for, our working capital needs; the interest expense or the cash requirements to service interest or principal payments
under our Credit Facility; income tax payments we are required to make; and any cash requirements for replacements of assets
being depreciated or amortized. In addition, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA and Free Cash Flow are
not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flows from continuing operating activities.
Some of the limitations of Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share are that
they do not reflect income tax expense or income tax payments we are required to make. In addition, Adjusted Fully Distributed
Net Income and Adjusted Fully Distributed Earnings per Share are not measures of profitability under GAAP.
We also urge you to review the reconciliation of these Non-GAAP measures included elsewhere in this Annual Report. To
properly and prudently evaluate our business, we encourage you to review the consolidated financial statements and related notes
included elsewhere in this Annual Report, and to not rely on any single financial measure to evaluate our business. In addition,
because EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully
Distributed Earnings per Share and Free Cash Flow are susceptible to varying calculations, the EBITDA, Adjusted EBITDA,
Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash
Flow measures, as presented in this Annual Report, may differ from, and may therefore not be comparable to, similarly titled
measures used by other companies.
As discussed in more detail below under "Results of Operations," we also use a non-GAAP pro forma presentation in this
Annual Report for consolidated operating results prior to October 1, 2013, the effective date of the Reorganization and IPO. We
believe this presentation is useful because our consolidated operating results prior to the Reorganization and IPO are not indicative
of our results for periods after the Reorganization and IPO. This non-GAAP pro forma presentation is for informational purposes
only and does not purport to reflect our historical results or operations or financial position. This non-GAAP pro forma presentation
should not be relied upon as being indicative of our financial condition or results of operations had the Reorganization and IPO
51
occurred on the dates assumed. Further, this presentation does not project our results of operations or financial position for any
future period or date. You should carefully review our historical actual results presented herein.
Results of Operations
Years Ended June 30, 2016 and 2015
The following table summarizes our results of operations for the years ended June 30, 2016 and 2015 (in thousands, except
per share data):
Net revenue:
Net administrative fees
Other services and support
Services
Products
Net revenue
Cost of revenue:
Services
Products
Cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of purchased intangible assets
Operating expenses
Operating income
Other income, net
Income before income taxes
Income tax expense
Net income
Net income attributable to non-controlling interest in S2S Global
Net income attributable to non-controlling interest in Premier LP
Net income attributable to non-controlling interest
Adjustment of redeemable limited partners' capital to redemption amount
Net income (loss) attributable to stockholders
Weighted average shares outstanding:
Basic
Diluted
Earnings (loss) per share attributable to stockholders:
Basic
Diluted
Certain Non-GAAP Financial Data:
Adjusted EBITDA (1)
Adjusted Fully Distributed Net Income (2)
Adjusted Fully Distributed Earnings Per Share (3)
52
$
$
$
$
$
$
$
Year Ended June 30,
2016
2015
$
Amount
498,394
337,554
835,948
326,646
1,162,594
% of Net
Revenue
43 % $
29 %
72 %
28 %
100 %
Amount
457,020
270,748
727,768
279,261
1,007,029
163,240
293,816
457,056
705,538
403,611
2,925
33,054
439,590
265,948
18,934
284,882
49,721
235,161
—
(193,547)
(193,547)
776,750
818,364
14 %
25 %
39 %
61 %
35 %
— %
3 %
38 %
23 %
1 %
24 %
4 %
20 %
— %
(17)%
(17)%
nm $
nm $
143,290
253,620
396,910
610,119
332,004
2,937
9,136
344,077
266,042
5,085
271,127
36,342
234,785
(1,836)
(194,206)
(196,042)
(904,035)
(865,292)
42,368
145,308
nm
nm
35,681
35,681
19.32
1.33
nm $
nm $
(24.25)
(24.25)
% of Net
Revenue
45 %
27 %
72 %
28 %
100 %
14 %
25 %
39 %
61 %
33 %
— %
1 %
34 %
26 %
1 %
27 %
4 %
23 %
— %
(19)%
(19)%
nm
nm
nm
nm
nm
nm
440,975
233,259
1.61
38 % $
20 % $
nm $
393,175
208,169
1.43
39 %
21 %
nm
nm = Not meaningful
(1) The following table shows the reconciliation of net income to Adjusted EBITDA and the reconciliation of Segment Adjusted
EBITDA to income before income taxes for the periods presented (in thousands):
Net income
Interest and investment loss (income), net (a)
Income tax expense
Depreciation and amortization
Amortization of purchased intangible assets
EBITDA
Stock-based compensation (b)
Acquisition related expenses (c)
Strategic and financial restructuring expenses (d)
Adjustment to tax receivable agreement liability (e)
Loss on investment (f)
ERP implementation expenses (g)
Loss on disposal of long-lived assets
Acquisition related adjustment - deferred revenue (h)
Other expense, net (i)
Adjusted EBITDA
Segment Adjusted EBITDA:
Supply Chain Services
Performance Services
Corporate (j)
Adjusted EBITDA
Depreciation and amortization
Amortization of purchased intangible assets
Stock-based compensation (b)
Acquisition related expenses (c)
Strategic and financial restructuring expenses (d)
Adjustment to tax receivable agreement liability (e)
ERP implementation expenses (g)
Acquisition related adjustment - deferred revenue (h)
Equity in net income of unconsolidated affiliates
Deferred compensation plan income
Operating income
Equity in net income of unconsolidated affiliates
Interest and investment (loss) income, net (a)
Loss on investment (f)
Loss on disposal of long-lived assets
Other expense, net (i)
Income before income taxes
Year Ended June 30,
2016
2015
$
235,161 $
1,021
49,721
51,102
33,054
370,059
49,081
15,804
268
(4,818)
—
4,870
—
5,624
87
234,785
(866)
36,342
45,186
9,136
324,583
28,498
9,037
1,373
—
1,000
—
15,243
13,371
70
$
440,975 $
393,175
$
439,013 $
391,180
110,787
(108,825)
440,975
(51,102)
(33,054)
(49,081)
(15,804)
(268)
4,818
(4,870)
(5,624)
(21,647)
1,605
265,948
21,647
(1,021)
—
—
(1,692)
284,882 $
$
90,235
(88,240)
393,175
(45,186)
(9,136)
(28,498)
(9,037)
(1,373)
—
—
(13,371)
(21,285)
753
266,042
21,285
866
(1,000)
(15,243)
(823)
271,127
(a) Represents interest expense (income), net and realized gains and losses on our marketable securities.
(b) Represents non-cash employee stock based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016.
53
(c) Represents legal, accounting and other expenses related to acquisition activities.
(d) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities, including costs incurred in connection
with quarterly exchanges pursuant to the Exchange Agreement and the company-directed offerings conducted pursuant to the Registration Rights
Agreement.
(e) Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June
30, 2016.
(f) Represents the loss on investment for the year ended June 30, 2015.
(g) Represents implementation and other costs of new enterprise resource planning ("ERP") system.
(h) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a
deferred revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The
fair value is based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction
to the purchased deferred revenue balance, which was based on upfront fees associated with software license updates and product support contracts
assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-year period
subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have
otherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended
to include, and thus reflect, the full amount of such revenues.
(i) Represents loss on sale of assets and unrealized loss on deferred compensation plan assets.
(j) Corporate consists of general and administrative corporate expenses that are not specific to either of our reporting segments.
(2) The following table shows the reconciliation of net income (loss) attributable to stockholders to Non-GAAP Adjusted Fully
Distributed Net Income for the periods presented (in thousands):
Net income (loss) attributable to stockholders
Adjustment of redeemable limited partners' capital to redemption amount
Income tax expense
Amortization of purchased intangible assets
Stock-based compensation (a)
Acquisition related expenses (b)
Strategic and financial restructuring expenses (c)
Adjustment to tax receivable agreement liability (d)
Loss on investment (e)
ERP implementation expenses (f)
Loss on disposal of long-lived assets
Acquisition related adjustment - deferred revenue (g)
Net income attributable to non-controlling interest in Premier LP (h)
Non-GAAP adjusted fully distributed income before income taxes
Income tax expense on fully distributed income before income taxes (i)
Non-GAAP Adjusted Fully Distributed Net Income
Year Ended June 30,
$
2016
818,364 $
(776,750)
49,721
33,054
49,081
15,804
268
(4,818)
—
4,870
—
5,624
193,547
388,765
155,506
233,259 $
$
2015
(865,292)
904,035
36,342
9,136
28,498
9,037
1,373
—
1,000
—
15,243
13,371
194,206
346,949
138,780
208,169
(a) Represents non-cash employee stock based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016.
(b) Represents legal, accounting and other expenses related to acquisition activities.
(c) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities, including costs incurred in connection
with quarterly exchanges pursuant to the Exchange Agreement and the company-directed offerings conducted pursuant to the Registration Rights
Agreement.
(d) Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June
30, 2016.
(e) Represents the loss on investment for the year ended June 30, 2015.
(f) Represents implementation and other costs of new ERP system.
(g) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a
deferred revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The
fair value is based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction
to the purchased deferred revenue balance, which was based on upfront fees associated with software license updates and product support contracts
assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-year period
subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have
otherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended
to include, and thus reflect, the full amount of such revenues.
54
(h) Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common
units for shares of Class A common stock.
(i) Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes.
(3) The following table shows the reconciliation of the numerator and denominator for earnings (loss) per share attributable to
stockholders to Non-GAAP Adjusted Fully Distributed Earnings per Share for the periods presented (in thousands):
Reconciliation of numerator for earnings (loss) per share attributable to stockholders
to Non-GAAP Adjusted Fully Distributed Earnings per Share:
Net income (loss) attributable to stockholders
Adjustment of redeemable limited partners' capital to redemption amount
Income tax expense
Amortization of purchased intangible assets
Stock-based compensation (a)
Acquisition related expenses (b)
Strategic and financial restructuring expenses (c)
Adjustment to tax receivable agreement liability (d)
Loss on investment (e)
ERP implementation expenses (f)
Loss on disposal of long-lived assets
Acquisition related adjustment - deferred revenue (g)
Net income attributable to non-controlling interest in Premier LP (h)
Non-GAAP adjusted fully distributed income before income taxes
Income tax expense on fully distributed income before income taxes (i)
Non-GAAP Adjusted Fully Distributed Net Income
Year Ended June 30,
2016
2015
$
818,364 $
(776,750)
49,721
33,054
49,081
15,804
268
(4,818)
—
4,870
—
5,624
193,547
388,765
155,506
233,259 $
$
(865,292)
904,035
36,342
9,136
28,498
9,037
1,373
—
1,000
—
15,243
13,371
194,206
346,949
138,780
208,169
Reconciliation of denominator for earnings (loss) per share attributable to stockholders
to Non-GAAP Adjusted Fully Distributed Earnings per Share:
Weighted average:
Common shares used for basic and diluted earnings (loss) per share
Potentially dilutive shares
Conversion of Class B common units
Weighted average fully distributed shares outstanding - diluted
42,368
2,366
100,574
145,308
35,681
1,048
108,518
145,247
(a) Represents non-cash employee stock based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016.
(b) Represents legal, accounting and other expenses related to acquisition activities.
(c) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities, including costs incurred in connection
with quarterly exchanges pursuant to the Exchange Agreement and the company-directed offerings conducted pursuant to the Registration Rights
Agreement.
(d) Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June
30, 2016.
(e) Represents the loss on investment for the year ended June 30, 2015.
(f) Represents implementation and other costs of new ERP system.
(g) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a
deferred revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The
fair value is based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction
to the purchased deferred revenue balance, which was based on upfront fees associated with software license updates and product support contracts
assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-year period
subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have
otherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended
to include, and thus reflect, the full amount of such revenues.
(h) Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common
units for shares of Class A common stock.
55
(i) Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes.
The following table shows the reconciliation of earnings (loss) per share attributable to stockholders to Non-GAAP Adjusted
Fully Distributed Earnings per Share for the periods presented:
Earnings (loss) per share attributable to stockholders:
Adjustment of redeemable limited partners' capital to redemption amount
Impact of additions:
Income tax expense
Stock-based compensation (a)
Acquisition related expenses (b)
Strategic and financial restructuring expenses (c)
ERP implementation expense (d)
Adjustment to tax receivable agreement liability (e)
Loss on investment (f)
Acquisition related adjustment - deferred revenue (g)
Loss on disposal of long-lived assets
Amortization of purchased intangible assets
Net income attributable to non-controlling interest in Premier LP (h)
Impact of corporation taxes (i)
Impact of increased share count (j)
Non-GAAP Adjusted Fully Distributed Earnings per Share
Year Ended June 30,
2016
2015
$
19.32 $
(18.33)
(24.25)
25.34
1.17
1.16
0.37
0.01
0.11
(0.11)
—
0.13
—
0.78
4.57
(3.67)
(3.90)
1.61 $
1.02
0.80
0.25
0.04
—
—
0.03
0.37
0.43
0.26
5.44
(3.90)
(4.40)
1.43
$
(a) Represents non-cash employee stock based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016.
(b) Represents legal, accounting and other expenses related to acquisition activities.
(c) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities, including costs incurred in connection with
quarterly exchanges pursuant to the Exchange Agreement and the company-directed offerings conducted pursuant to the Registration Rights Agreement.
(d) Represents implementation and other costs of new ERP system.
(e) Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June 30,
2016.
(f) Represents the loss on investment for the year ended June 30, 2015.
(g) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred
revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is
based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction to the purchased
deferred revenue balance, which was based on upfront fees associated with software license updates and product support contracts assumed in connection
with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-year period subsequent to our acquisition
of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwise been recorded by the acquired
entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, the full amount of
such revenues.
(h) Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common
units for shares of Class A common stock.
(i) Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes.
(j) Reflects impact of increased share counts assuming the conversion of all Class B common units into shares of Class A common stock.
56
Net Revenue
The following table summarizes our net revenue for the years ended June 30, 2016 and 2015, indicated both in dollars (in
thousands) and as a percentage of net revenue:
Net Revenue:
Supply Chain Services
Net administrative fees
Other services and support
Services
Products
Total Supply Chain Services
Performance Services
Total
Year Ended June 30,
2016
2015
Amount
% of Net
Revenue
Amount
% of Net
Revenue
$
498,394
43% $
457,020
4,385
502,779
326,646
829,425
—%
43%
28%
71%
1,977
458,997
279,261
738,258
333,169
$ 1,162,594
29%
268,771
100% $ 1,007,029
45%
—%
45%
28%
73%
27%
100%
Total net revenue for the year ended June 30, 2016 was $1,162.6 million, an increase of $155.6 million, or 15% from $1,007.0
million for the year ended June 30, 2015. Our supply chain services net revenue was 71% and 73% of total net revenue for the
years ended June 30, 2016 and 2015, respectively.
Supply Chain Services
Our supply chain services segment net revenue for the year ended June 30, 2016 was $829.4 million, an increase of $91.1
million, or 12%, from $738.3 million for the year ended June 30, 2015.
Net administrative fees revenue in our supply chain services segment for the year ended June 30, 2016 was $498.4 million,
an increase of $41.4 million, or 9%, from $457.0 million for the year ended June 30, 2015. The increase in net administrative fees
revenue was primarily attributable to the further contract penetration of existing members. We may experience quarterly fluctuations
in net administrative fees revenue due to periodic variability associated with the receipt of supplier member purchasing reports
and administrative fee payments at quarter-end; however, we expect our net administrative fees revenue to continue to grow to
the extent our existing members increase the utilization of our contracts and additional members convert to our contract portfolio.
Product revenue in our supply chain services segment for the year ended June 30, 2016 was $326.6 million, an increase of
$47.3 million, or 17%, from $279.3 million for the year ended June 30, 2015. Product revenue in our supply chain services segment
increased for the year ended June 30, 2016 primarily due to $28.0 million of increased direct sourcing revenue as a result of ongoing
expansion of member participation in our direct sourcing business, resulting from higher demand for exam and food services
gloves and patient apparel, and $19.6 million of increased revenue from specialty pharmaceuticals for disease states such as
oncology and rheumatoid arthritis, offset by a decrease in Hepatitis C pharmaceutical sales. We expect our direct sourcing and
specialty pharmacy product revenue to continue to grow to the extent we are able to increase our product offerings, expand our
product sales to existing members and additional members begin to utilize our programs.
Performance Services
Our performance services segment net revenue for the year ended June 30, 2016 was $333.2 million, an increase of $64.4
million, or 24%, from $268.8 million for the year ended June 30, 2015. The increase was primarily driven by revenues from the
Company's CECity and HCI acquisitions of $31.0 million, growth in our SaaS subscription and license revenue of $14.9 million,
including increased revenue from TheraDoc, which was lower in the prior year due to purchase accounting, and growth of $12.7
million in our advisory services engagements primarily from cost management, population health and applied research.
We believe that additional growth from our CECity acquisition during the year was constrained by the impact of the Centers
for Medicare & Medicaid Services (“CMS”) regulatory developments that allowed certain exemptions to CMS’ Meaningful Use
reporting requirements. In addition, the market’s continued evolution to more integrated technology solutions has resulted in
lengthier implementations for some of our more complex solutions, and has also impacted growth of certain less-integrated, acute
focused solutions. Similarly, growth in our advisory services was more limited due to delays and re-scoping of certain large projects
during the year.
57
We expect to experience variability in revenues generated from our performance services segment due to the timing of
revenue recognition from certain advisory services and performance-based engagements in which our revenue is based on a
percentage of identified member savings and recognition occurs upon approval and documentation of the savings. We expect our
performance services net revenue to continue to grow to the extent we are able to expand our sales to existing members and
additional members begin to utilize our products and services.
Cost of Revenue
The following table summarizes our cost of revenue for the years ended June 30, 2016 and 2015 indicated both in dollars (in
thousands) and as a percentage of net revenue:
Cost of revenue:
Services
Products
Total cost of revenue
Cost of revenue by segment:
Supply Chain Services
Performance Services
Total cost of revenue
Year Ended June 30,
2016
2015
Amount
% of Net
Revenue
Amount
% of Net
Revenue
$
$
$
$
163,240
293,816
457,056
296,939
160,117
457,056
14% $
143,290
25%
39% $
253,620
396,910
25% $
255,794
14%
39% $
141,116
396,910
14%
25%
39%
25%
14%
39%
Cost of revenue for the year ended June 30, 2016 was $457.1 million, an increase of $60.2 million, or 15%, from $396.9
million for the year ended June 30, 2015. Cost of product revenue increased by $40.2 million, which was primarily attributable
to the increases in direct sourcing and specialty pharmacy revenue. We expect our cost of product revenue to increase as we sell
additional direct-sourced medical products to new and existing members and enroll additional members into our specialty pharmacy
program. Cost of service revenue increased by $20.0 million primarily due to an increase in personnel to support growth in SaaS-
based implementations and population health advisory services. We expect cost of service revenue to increase to the extent we
expand our performance improvement collaboratives and advisory services to members, increase sales of our population health
management SaaS informatics products under reseller agreements, continue to develop new and existing internally-developed
software applications, and expand into new product offerings as a result of our acquisitions of CECity, HCI and InFlow.
Cost of revenue for the supply chain services segment for the year ended June 30, 2016 was $296.9 million, an increase of
$41.1 million, or 16%, from $255.8 million for the year ended June 30, 2015. The increase is primarily attributable to the growth
in the direct sourcing and specialty pharmacy businesses, which have higher associated cost of revenue as compared to group
purchasing. As a result, there is a higher increase in cost of revenue relative to net revenue because product revenue is growing at
a higher rate than net administrative fees.
Cost of revenue for the performance services segment for the year ended June 30, 2016 was $160.1 million, an increase of
$19.0 million, or 13%, from $141.1 million for the year ended June 30, 2015 primarily due to an increase in personnel to support
growth in SaaS-based implementations and population health advisory services. We expect cost of service revenue to increase to
the extent we expand our performance improvement collaboratives and advisory services to members, continue to develop new
and existing internally-developed software applications, and expand into new product offerings as a result of our acquisitions of
CECity, HCI and InFlow.
58
Operating Expenses
The following table summarizes our operating expenses for the years ended June 30, 2016 and 2015 indicated both in dollars
(in thousands) and as a percentage of net revenue:
Operating expenses:
Selling, general and administrative
Research and development
Amortization of purchased intangible assets
Total operating expenses
Operating expenses by segment:
Supply Chain Services
Performance Services
Total segment operating expenses
Corporate
Total operating expenses
Selling, General and Administrative
Year Ended June 30,
2016
2015
Amount
% of Net
Revenue
Amount
% of Net
Revenue
$
403,611
35% $
332,004
2,925
33,054
439,590
—%
3%
38%
2,937
9,136
344,077
$
120,692
10% $
116,240
155,728
276,420
163,170
439,590
$
14%
24%
14%
38% $
105,252
221,492
122,585
344,077
33%
—%
1%
34%
12%
10%
22%
12%
34%
Selling, general and administrative expenses for the year ended June 30, 2016 were $403.6 million, an increase of $71.6
million, or 22%, from $332.0 million for the year ended June 30, 2015 primarily attributable to (i) increased salaries and benefits
of $20.8 million primarily due to increased staffing to support growth, additional expense due to the acquisitions of CECity and
HCI and severance expense, (ii) an increase in stock-based compensation of $20.2 million due to the layering of an additional
plan year of stock compensation along with the achievement for performance based shares, (iii) an increase in professional services
expenses of $10.3 million, (iv) increased acquisition-related expenses of $6.8 million and (v) ERP system implementation expenses
of $4.9 million.
We expect general and administrative expenses to decline in fiscal 2017 as a result of a reduction in anticipated stock
compensation expense. On a longer term basis, we would expect selling, general and administrative expenses to increase as we
grow our business.
Research and Development
Research and development expenses consist of employee-related compensation and benefit expenses and third-party
consulting fees of technology professionals, net of capitalized labor, incurred to develop our software-related products and services.
Research and development expenses were $2.9 million for each of the years ended June 30, 2016 and 2015. Including
capitalized labor, total research and development expenditures were $64.0 million for the year ended June 30, 2016, an increase
of $3.2 million from $60.8 million for the year ended June 30, 2015. We experience fluctuations in our research and development
expenditures across reportable periods due to the timing of our software development lifecycles, with new product features and
functionality, new technologies and upgrades to our service offerings.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets for the year ended June 30, 2016 was $33.1 million, an increase of $24.0 million,
from $9.1 million for the year ended June 30, 2015. The increase was primarily as a result of the additional amortization of
purchased intangible assets related to our acquisitions. As we execute on our growth strategy and further deploy capital, we expect
further increases in amortization of purchased intangible assets in connection with recent and future potential acquisitions.
Corporate
The increase in corporate expenses is primarily attributable to stock compensation expense as well as incremental corporate
infrastructure, primarily in technology services, finance and legal due to growth and the current year acquisitions.
59
Other Non-Operating Income and Expense
Other Income, Net
Other income, net for the year ended June 30, 2016 was $18.9 million, an increase of $13.8 million from $5.1 million for the
year ended June 30, 2015 due to a loss on disposal of assets of $15.2 million during the prior year.
Income Tax Expense
For the years ended June 30, 2016 and 2015 the Company recorded tax expense of $49.7 million and $36.3 million, respectively,
which equates to an effective tax rate of 17.5% and 13.4%, respectively. The effective tax rate has increased from the prior year
primarily due to the recording of a valuation allowance against deferred tax assets at PHSI and tax expense at Premier associated
with the revaluation of deferred tax assets in connection with a reduction in the North Carolina state income tax rate for years
2016 and beyond. 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 nondeductible expenses.
Net Income Attributable to Non-Controlling Interest
Net income attributable to non-controlling interest for the year ended June 30, 2016 was $193.5 million, a decrease of $2.5
million, or 1%, from $196.0 million for the year ended June 30, 2015, primarily as a result of a decrease in non-controlling interest
in Premier LP from approximately 74% at June 30, 2015 to approximately 68% at June 30, 2016 and the Company's purchase of
the remaining 40% ownership in S2S Global that resulted in the elimination of non-controlling interest in S2S Global for the year
ended June 30, 2016.
Non-GAAP Adjusted EBITDA
The following table summarizes our Non-GAAP Adjusted EBITDA for the years ended June 30, 2016 and 2015 indicated
both in dollars (in thousands) and as a percentage of net revenue:
Non-GAAP Adjusted EBITDA by segment:
Supply Chain Services
Performance Services
Total Segment Adjusted EBITDA
Corporate
Total Adjusted EBITDA
Year Ended June 30,
2016
2015
Amount
% of Net
Revenue
Amount
% of Net
Revenue
439,013
110,787
549,800
(108,825)
440,975
$
38 %
9 %
47 %
(9)%
38 % $
391,180
90,235
481,415
(88,240)
393,175
39 %
9 %
48 %
(9)%
39 %
Total Adjusted EBITDA for the year ended June 30, 2016 was $441.0 million, an increase of $47.8 million, or 12%, from
$393.2 million for the year ended June 30, 2015. The increase in Adjusted EBITDA is primarily driven by revenue growth in the
supply chain segment, as well as growth from the performance services segment, including contributions from the acquisitions of
CECity and HCI, partially offset by higher selling, general and administrative expenses at the corporate level.
Segment Adjusted EBITDA for the supply chain services segment of $439.0 million for the year ended June 30, 2016 reflects
an increase of $47.8 million, or 12%, compared to $391.2 million for the year ended June 30, 2015, primarily as a result of increased
net administrative fees and products revenue.
Segment Adjusted EBITDA for the performance services segment of $110.8 million for the year ended June 30, 2016 reflects
an increase of approximately $20.6 million, or 23%, compared to $90.2 million for the year ended June 30, 2015, primarily driven
by contributions from the acquisitions of CECity and HCI.
Adjusted EBITDA at the corporate level of $(108.8) million reflects a decrease of $20.6 million, or 23%, compared to $(88.2)
million for the year ended June 30, 2015, reflecting increased selling, general and administrative expenses primarily driven by
higher incremental corporate infrastructure costs, primarily in technology services, finance and legal due to growth and the current
year acquisitions.
60
Years Ended June 30, 2015 and 2014
The first three months of our fiscal year ended June 30, 2014 occurred prior to the Reorganization and IPO on October 1,
2013. As a result, our consolidated operating results prior to October 1, 2013 do not reflect (i) the Reorganization, (ii) the IPO and
the use of the proceeds from the IPO or (iii) additional expenses we incur as a public company. As a result, our consolidated
operating results prior to the Reorganization and IPO are not indicative of what our results of operations are for periods after the
Reorganization and IPO. In addition to presenting the historical actual results, we have presented Non-GAAP pro forma results
reflecting the following for the year ended June 30, 2014, to provide a more indicative comparison between current and prior
periods. The Non-GAAP pro forma consolidated financial information is included for informational purposes only and does not
purport to reflect our results of operations or financial position that would have occurred had we operated as a public company
during the year ended June 30, 2014. The Non-GAAP pro forma consolidated financial information should not be relied upon as
being indicative of our financial condition or results of operations had the Reorganization and IPO occurred prior to the start of
our fiscal year ended June 30, 2014. The Non-GAAP pro forma consolidated financial information also does not project our results
of operations or financial position for any future period or date. The Non-GAAP pro forma results reflect the following for the
year ended June 30, 2014:
• The contractual requirement under the GPO participation agreements 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 owned, leased, managed and affiliated facilities through Premier LP's GPO supplier contracts.
Historically, Premier LP did not generally have a contractual requirement to pay revenue share to member owners
participating in its GPO programs, but paid semi-annual distributions of partnership income.
• Additional U.S. federal, state and local income taxes with respect to its additional allocable share of any taxable
income of Premier LP.
• A decrease in non-controlling interest in Premier LP from 99% to approximately 78%.
61
The following table summarizes our actual results of operations for the years ended June 30, 2015 and 2014 and Non-GAAP
pro forma results of operations for the year ended June 30, 2014 (in thousands, except per share data):
Net revenue:
Net administrative fees
Other services and support
Services
Products
Net revenue
Cost of revenue:
Services
Products
Cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of purchased intangible assets
Operating expenses
Operating income
Other income, net
Income before income taxes
Income tax expense
Net income
Net income attributable to non-controlling
interest in S2S Global
Net income attributable to non-controlling
interest in Premier LP
Net income attributable to non-controlling
interest
Adjustment of redeemable limited partners'
capital to redemption amount
Net loss attributable to stockholders
Weighted average shares outstanding
Basic
Diluted
Loss per share attributable to stockholders
Basic
Diluted
Certain Non-GAAP Financial Data:
Adjusted EBITDA (5)
Adjusted Fully Distributed Net Income (6)
Adjusted Fully Distributed Earnings per
Share (7)
nm = Not meaningful
na = Not applicable
2015
Actual
Year Ended June 30,
2014
Actual
Adjustments
(1) Non-GAAP Pro Forma
Amount
% of Net
Revenue
Amount
% of Net
Revenue
Amount
Amount
% of Net
Revenue
$
457,020
45 % $
464,837
51 % $
(41,263)
(2) $
423,574
270,748
727,768
279,261
27 %
72 %
28 %
1,007,029
100 %
143,290
253,620
396,910
610,119
332,004
2,937
9,136
344,077
266,042
5,085
271,127
36,342
234,785
14 %
25 %
39 %
61 %
33 %
— %
1 %
34 %
26 %
1 %
27 %
4 %
23 %
233,186
698,023
212,526
910,549
115,740
191,885
307,625
602,924
294,421
3,389
3,062
300,872
302,052
58,274
360,326
27,709
332,617
26 %
77 %
23 %
100 %
13 %
21 %
34 %
66 %
33 %
— %
— %
33 %
33 %
6 %
39 %
3 %
36 %
—
(41,263)
—
(41,263)
—
—
—
(41,263)
—
—
—
—
(41,263)
—
(41,263)
(3,239)
(3)
(38,024)
233,186
656,760
212,526
869,286
115,740
191,885
307,625
561,661
294,421
3,389
3,062
300,872
260,789
58,274
319,063
24,470
294,593
49 %
27 %
76 %
24 %
100 %
13 %
22 %
35 %
65 %
35 %
— %
— %
35 %
30 %
7 %
37 %
3 %
34 %
(1,836)
— %
(949)
— %
—
(949)
— %
(194,206)
(19)%
(303,336)
(33)%
57,690
(4)
(245,646)
(28)%
(196,042)
(19)%
(304,285)
(33)%
57,690
(246,595)
(28)%
nm
nm
nm
nm
nm
nm
43 %
nm
na
—
nm
$(2,741,588)
$(2,693,590)
nm
nm
na
na
na
na
na
na
na
na
na
na
na
na
na
na
na
$
$
$
351,025
188,561
40 %
22 %
1.30
nm
$
$
(904,035)
(865,292)
nm $ (2,741,588)
nm $ (2,713,256)
$
$
$
$
$
35,681
35,681
nm
nm
25,633
25,633
(24.25)
(24.25)
nm $
(105.85)
nm $
(105.85)
393,175
208,169
39 % $
392,288
21 %
nm
na
1.43
nm
62
(1) Represents adjustments related to the Reorganization and IPO described below.
(2) Represents the impact related to the change in revenue share described above.
(3) Represents the income tax impact of the Reorganization and IPO effective October 1, 2013.
(4) Represents the decrease in non-controlling interest in Premier LP from 99% to 78%.
(5) The following table shows the reconciliation of net income to Adjusted EBITDA and the reconciliation of Segment Adjusted
EBITDA to income before income taxes on both an actual and Non-GAAP pro forma basis for the periods presented (in
thousands):
Net income
$
234,785
$
332,617 $
(38,024) $
294,593
2015
Actual
Year Ended June 30,
2014
Actual
Adjustments (a)
Non-GAAP
Pro Forma
Interest and investment income, net (b)
Income tax expense
Depreciation and amortization
Amortization of purchased intangible assets
EBITDA
Stock-based compensation
Acquisition related expenses (c)
Strategic and financial restructuring expenses (d)
Adjustment to tax receivable agreement liability (e)
Loss (gain) on investment (f)
Loss on disposal of long-lived assets
Acquisition related adjustment - deferred revenue (g)
Other expense, net (h)
Adjusted EBITDA
Segment Adjusted EBITDA:
Supply Chain Services
Performance Services
Corporate (i)
Adjusted EBITDA
Depreciation and amortization
Amortization of purchased intangible assets
Stock-based compensation
Acquisition related expenses (c)
Strategic and financial restructuring expenses (d)
Adjustment to tax receivable agreement liability (e)
Acquisition related adjustment - deferred revenue (f)
Equity in net income of unconsolidated affiliates
Deferred compensation plan income (expense)
Operating income
Equity in net income of unconsolidated affiliates
Interest and investment income, net (b)
Loss (gain) on investment (f)
Loss on disposal of long-lived assets
Other (expense) income, net (h)
(866)
36,342
45,186
9,136
324,583
28,498
9,037
1,373
—
1,000
15,243
13,371
70
(1,019)
27,709
36,761
3,062
399,130
19,476
2,014
3,760
6,215
(38,372)
—
—
65
—
(3,239)
—
—
(41,263)
—
—
—
—
—
—
(1,019)
24,470
36,761
3,062
357,867
19,476
2,014
3,760
6,215
(38,372)
—
—
65
$
$
393,175
$
392,288 $
(41,263) $
351,025
391,180
$
396,470 $
(41,263) $
355,207
90,235
(88,240)
393,175
(45,186)
(9,136)
(28,498)
(9,037)
(1,373)
—
(13,371)
(21,285)
753
266,042
21,285
866
(1,000)
(15,243)
(823)
73,898
(78,080)
392,288
(36,761)
(3,062)
(19,476)
(2,014)
(3,760)
(6,215)
—
(16,976)
(1,972)
302,052
16,976
1,019
38,372
—
1,907
—
—
(41,263)
—
—
—
—
—
—
—
—
—
(41,263)
—
—
—
—
—
73,898
(78,080)
351,025
(36,761)
(3,062)
(19,476)
(2,014)
(3,760)
(6,215)
—
(16,976)
(1,972)
260,789
16,976
1,019
38,372
—
1,907
Income before income taxes
$
271,127
$
360,326 $
(41,263) $
319,063
(a) Represents the adjustments related to the Reorganization and IPO described above.
63
(b) Represents interest income, net and realized gains and losses on our marketable securities.
(c) Represents legal, accounting and other expenses related to acquisition activities.
(d) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities. During the year ended June 30, 2015,
strategic and financial restructuring expenses were incurred in connection with the company-directed offering conducted pursuant to the Registration
Rights Agreement. During the year ended June 30, 2014, strategic and financial restructuring expenses were incurred in connection with the Reorganization
and IPO.
(e) Represents adjustment to tax receivable agreement liability for the Premier LP change in tax accounting method approved by the Internal Revenue
Service subsequent to the original recording of the tax receivable agreement liability.
(f) Represents the loss on investment for the year ended June 30, 2015 and the gain on the sale of our investment in GHX for the year ended June 30, 2014.
(g) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred
revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value
is based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction to the purchased
deferred revenue balance, which was based on upfront fees associated with software license updates and product support contracts assumed in connection
with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-year period subsequent to our
acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwise been recorded
by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect,
the full amount of such revenues.
(h) Represents loss on sale of assets and unrealized gain (loss) on deferred compensation plan assets.
(i) Corporate consists of general and administrative corporate expenses that are not specific to either of our reporting segments.
(6) The following table shows the reconciliation of net loss attributable to stockholders to Non-GAAP pro forma Adjusted Fully
Distributed Net Income for the periods presented (in thousands):
Year Ended June 30,
Net loss attributable to stockholders
$
Adjustment of redeemable limited partners' capital to redemption amount
Non-GAAP pro forma adjustment for revenue share post-IPO
Income tax expense
Stock-based compensation
Acquisition related expenses (a)
Strategic and financial restructuring expenses (b)
Loss (gain) on investment (c)
Adjustment to tax receivable agreement liability (d)
Loss on disposal of long-lived assets
Acquisition related adjustment - deferred revenue (e)
Amortization of purchased intangible assets
Net income attributable to non-controlling interest in Premier LP (f)
Non-GAAP adjusted fully distributed income before income taxes
Income tax expense on fully distributed income before income taxes (g)
Non-GAAP Adjusted Fully Distributed Net Income
2014
2015
(865,292) $ (2,713,256)
2,741,588
904,035
(41,263)
27,709
36,342
—
28,498
9,037
1,373
1,000
—
15,243
13,371
9,136
194,206
346,949
138,780
208,169 $
$
19,476
2,014
3,760
(38,372)
6,215
—
—
3,062
303,336
314,269
125,708
188,561
(a) Represents legal, accounting and other expenses related to acquisition activities.
(b) Represents legal, accounting and other expenses directly related to strategic and financial restructuring expenses. During the year ended June 30, 2015,
strategic and financial restructuring expenses were incurred in connection with the company-directed offering conducted pursuant to the Registration
Rights Agreement. During the year ended June 30, 2014, strategic and financial restructuring expenses were incurred in connection with the
Reorganization and IPO.
(c) Represents the loss on investment for the year ended June 30, 2015 and the gain on the sale of our investment in GHX for the year ended June 30,
2014.
(d) Represents adjustment to tax receivable agreement liability for the Premier LP change in tax accounting method approved by the Internal Revenue
Service subsequent to the original recording of the tax receivable agreement liability.
(e) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a
deferred revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The
fair value is based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction
to the purchased deferred revenue balance, which was based on upfront fees associated with software license updates and product support contracts
assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-year period
subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have
64
otherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended
to include, and thus reflect, the full amount of such revenues.
(f) Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common
units for shares of Class A common stock.
(g) Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes.
(7) The following table shows the reconciliation of the numerator and denominator for loss per share attributable to stockholders
to Non-GAAP pro forma Adjusted Fully Distributed Earnings per Share for the periods presented (in thousands):
Year Ended June 30,
2015
2014
Reconciliation of numerator for loss per share attributable to stockholders to Non-
GAAP Adjusted Fully Distributed Earnings per Share:
Net loss attributable to stockholders
$
Adjustment of redeemable limited partners' capital to redemption amount
Non-GAAP pro forma adjustment for revenue share post-IPO
Income tax expense
Stock-based compensation
Acquisition related expenses (a)
Strategic and financial restructuring expenses (b)
Loss (gain) on investment (c)
Adjustment to tax receivable agreement liability (d)
Loss on disposal of long-lived assets
Acquisition related adjustment - deferred revenue (e)
Amortization of purchased intangible assets
Net income attributable to non-controlling interest in Premier LP (f)
Non-GAAP adjusted fully distributed income before income taxes
Income tax expense on fully distributed income before income taxes (g)
Non-GAAP Adjusted Fully Distributed Net Income
Reconciliation of denominator for loss per share attributable to stockholders for Non-
GAAP Adjusted Fully Distributed Earnings per Share
Weighted average:
Common shares used for basic and diluted earnings (loss) per share
Potentially dilutive shares
Class A common shares outstanding
Conversion of Class B common units
Weighted average fully distributed shares outstanding - diluted
(a) Represents legal, accounting and other expenses related to acquisition activities.
(865,292) $ (2,713,256)
2,741,588
904,035
(41,263)
27,709
36,342
—
28,498
9,037
1,373
1,000
—
15,243
13,371
9,136
194,206
346,949
138,780
208,169 $
$
19,476
2,014
3,760
(38,372)
6,215
—
—
3,062
303,336
314,269
125,708
188,561
35,681
1,048
—
108,518
145,247
25,633
124
6,742
112,584
145,083
(b) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities. During the year ended June 30, 2015,
strategic and financial restructuring expenses were incurred in connection with the company-directed offering conducted pursuant to the Registration
Rights Agreement. During the year ended June 30, 2014, strategic and financial restructuring expenses were incurred in connection with the
Reorganization and IPO.
(c) Represents the loss on investment for the year ended June 30, 2015 and the gain on the sale of our investment in GHX for the year ended June 30,
2014.
(d) Represents adjustment to tax receivable agreement liability for the Premier LP change in tax accounting method approved by the Internal Revenue
Service subsequent to the original recording of the tax receivable agreement liability.
(e) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a
deferred revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The
fair value is based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction
to the purchased deferred revenue balance, which was based on upfront fees associated with software license updates and product support contracts
assumed in connection with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-year period
subsequent to our acquisition of a business do not reflect the full amount of support revenues on these assumed support contracts that would have
otherwise been recorded by the acquired entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended
to include, and thus reflect, the full amount of such revenues.
65
(f) Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common
units for shares of Class A common stock.
(g) Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes.
The following table shows the reconciliation of loss per share attributable to stockholders to Non-GAAP pro forma Adjusted
Fully Distributed Earnings per Share for the periods presented:
Loss per share attributable to stockholders:
Adjustment of redeemable limited partners' capital to redemption amount
Non-GAAP pro forma adjustment for revenue share post-IPO
Impact of additions:
Income tax expense
Stock-based compensation
Acquisition related expenses (a)
Strategic and financial restructuring expenses (b)
Adjustment to tax receivable agreement liability (c)
Loss (gain) on investment (d)
Acquisition related adjustment - deferred revenue (e)
Loss on disposal of long-lived assets
Amortization of purchased intangible assets
Net income attributable to non-controlling interest in Premier LP (f)
Impact of corporation taxes (g)
Impact of increased share count (h)
Non-GAAP Adjusted Fully Distributed Earnings per Share
(a) Represents legal, accounting and other expenses related to acquisition activities.
Year Ended June 30,
2015
$
(24.25) $
25.34
—
1.02
0.80
0.25
0.04
—
0.03
0.37
0.43
0.26
5.44
(3.90)
(4.40)
1.43 $
$
2014
(105.85)
106.96
(1.61)
1.08
0.76
0.08
0.15
0.24
(1.50)
—
—
0.12
11.83
(4.90)
(6.06)
1.30
(b) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities. During the year ended June 30, 2015,
strategic and financial restructuring expenses were incurred in connection with the company-directed offering conducted pursuant to the Registration Rights
Agreement. During the year ended June 30, 2014, strategic and financial restructuring expenses were incurred in connection with the Reorganization and
IPO.
(c) Represents adjustment to tax receivable agreement liability for the Premier LP change in tax accounting method approved by the Internal Revenue Service
subsequent to the original recording of the tax receivable agreement liability.
(d) Represents the loss on investment for the year ended June 30, 2015 and the gain on the sale of our investment in GHX for the year ended June 30, 2014.
(e) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred
revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is
based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction to the purchased
deferred revenue balance, which was based on upfront fees associated with software license updates and product support contracts assumed in connection
with acquisitions. Because these support contracts are typically one-year in duration, our GAAP revenues for the one-year period subsequent to our acquisition
of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwise been recorded by the acquired
entity. The Non-GAAP adjustment to our software license updates and product support revenues is intended to include, and thus reflect, the full amount of
such revenues.
(f) Reflects the elimination of the non-controlling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common
units for shares of Class A common stock.
(g) Reflects income tax expense at an estimated effective income tax rate of 40% of Non-GAAP adjusted fully distributed income before income taxes.
(h) Reflects impact of increased share counts assuming the conversion of all Class B common units into shares of Class A common stock.
66
Net Revenue
The following table summarizes our actual net revenue for the years ended June 30, 2015 and 2014 and our Non-GAAP pro
forma net revenue for the year ended June 30, 2014, indicated both in dollars (in thousands) and as a percentage of net revenue:
2015
Actual
Year Ended June 30,
2014
Actual
Adjustments
Non-GAAP Pro Forma
Amount
% of Net
Revenue
Amount
% of Net
Revenue
Amount
Amount
% of Net
Revenue
Net Revenue:
Supply Chain Services
Net administrative fees
$
457,020
45% $
464,837
51% $
(41,263) (a) $
423,574
Other services and support
Services
Products
Total Supply Chain Services
Performance Services
1,977
458,997
279,261
738,258
268,771
—%
45%
28%
73%
27%
778
465,615
212,526
678,141
232,408
—%
51%
23%
74%
26%
—
(41,263)
—
(41,263)
—
778
424,352
212,526
636,878
232,408
49%
—%
49%
24%
73%
27%
Total
$ 1,007,029
100% $
910,549
100% $
(41,263)
$
869,286
100%
(a) Represents the impact related to the change in revenue share.
Total net revenue for the year ended June 30, 2015 was $1,007.0 million, an increase of $96.5 million, or 11%, from total net
revenue of $910.5 million for the year ended June 30, 2014 and an increase of $137.7 million, or 16%, from Non-GAAP pro forma
net revenue of $869.3 million for the year ended June 30, 2014.
Supply Chain Services
Our supply chain services segment net revenue for the year ended June 30, 2015 was $738.3 million, an increase of $60.2
million, or 9%, from supply chain services segment net revenue of $678.1 million for the year ended June 30, 2014 and an increase
of $101.4 million, or 16%, from Non-GAAP pro forma supply chain services segment net revenue of $636.9 million for the year
ended June 30, 2014.
Net administrative fees revenue in our supply chain services segment for the year ended June 30, 2015 was $457.0 million,
a decrease of $7.8 million, or 2%, from $464.8 million for the year ended June 30, 2014. The decrease in net administrative fees
revenue is primarily due to the increase in revenue share of $43.4 million reflecting the 30% revenue share payable to member
owners after the Reorganization on October 1, 2013, offset by further contract penetration of existing members, continuing impact
of newer member conversion to our contract portfolio, as well as the impact of increased utilization trends. We may experience
quarterly fluctuations in net administrative fees revenue due to periodic variability associated with the receipts of supplier member
purchasing reports and administrative fee payments at quarter-end.
Net administrative fees revenue for the year ended June 30, 2015 was $457.0 million, an increase of $33.4 million, or 8%,
from Non-GAAP pro forma net administrative fees revenue of $423.6 million for the year ended June 30, 2014. The increase in
net administrative fees revenue was primarily attributable to the impact of further contract penetration of existing members,
continuing impact of newer member conversion to our contract portfolio, as well as the impact of increased utilization trends.
Product revenue in our supply chain services segment for the year ended June 30, 2015, was $279.3 million, an increase of
$66.8 million, or 31%, from $212.5 million for the year ended June 30, 2014. Product revenue in our supply chain services segment
increased for the year ended June 30, 2015, due to $37.4 million of increased specialty pharmacy revenue and $30.9 million of
increased direct sourcing revenue, as a result of growth in our specialty pharmacy, including member growth as well as access to
additional drug therapies entering the market, and ongoing expansion of member support for our direct sourcing offering. We
expect our specialty pharmacy and direct sourcing program revenue to continue to grow to the extent we are able to expand our
product sales to existing members and additional members begin to utilize our products.
Performance Services
Other services and support revenue in our performance services segment for the year ended June 30, 2015 was $268.8 million,
an increase of $36.4 million, or 16%, from $232.4 million for the year ended June 30, 2014. The increase was primarily the result
of growth in our SaaS subscription and license revenue of $31.7 million, primarily related to the acquisitions of TheraDoc and
Aperek, growth in advisory services of $12.5 million, primarily from cost management and population health management, offset
67
by decline in performance improvement collaboratives of $8.0 million, primarily related to the termination of Partnership for
Patients (PfP) contract in December 2014. We expect to experience quarterly variability in revenues generated from our performance
services segment due to the timing of revenue recognition from certain advisory services and performance-based engagements in
which our revenue is based on a percentage of identified member savings and recognition occurs upon approval and documentation
of savings. Non-GAAP pro forma adjustments do not impact financial results for our performance services segment.
Cost of Revenue
The following table summarizes our cost of revenue for the years ended June 30, 2015 and 2014, indicated both in dollars (in
thousands) and as a percentage of net revenue:
Cost of revenue:
Services
Products
Total cost of revenue
Cost of revenue by segment:
Supply Chain Services
Performance Services
Total cost of revenue
Year Ended June 30,
2015
2014
Amount
% of Net
Revenue
Amount
% of Net
Revenue
$
$
$
$
143,290
253,620
396,910
255,794
141,116
396,910
14% $
115,740
25%
39% $
191,885
307,625
25% $
194,689
14%
39% $
112,936
307,625
13%
21%
34%
21%
13%
34%
Cost of revenue for the year ended June 30, 2015 was $396.9 million, an increase of $89.3 million, or 29%, from $307.6
million for the year ended June 30, 2014. Cost of product revenue increased by $61.7 million, which was primarily attributable
to the increases in specialty pharmacy and direct sourcing revenue. We expect our cost of product revenue to increase as we enroll
additional members into our specialty pharmacy program and sell additional direct-sourced medical products to new and existing
members. The increase in specialty pharmacy is also driven by increased cost of revenue related to sales of new hepatitis-C
therapies, whose drug acquisition costs are generally higher than traditionally seen across other specialty therapies. Cost of service
revenue increased by $27.6 million primarily due to an increase in amortization of internally-developed software applications,
expenses related to population health management SaaS informatics products under reseller agreements and increased salary costs
related to advisory services. We expect cost of service revenue to increase to the extent we expand our performance improvement
collaboratives and advisory services to members, increase sales of our population health management SaaS informatics products
under reseller agreements, and continue to develop new and existing internally-developed software applications.
Cost of revenue for the supply chain services segment for the year ended June 30, 2015 was $255.8 million, an increase of
$61.1 million, or 31%, from $194.7 million for the year ended June 30, 2014. The increase is primarily attributable to the growth
in specialty pharmacy and direct sourcing, which have higher associated cost of revenue as compared to group purchasing. As a
result, there is a higher increase in cost of revenue relative to net revenue because product revenue is growing at a higher rate than
net administrative fees.
Cost of revenue for the performance services segment for the year ended June 30, 2015 was $141.1 million, an increase of
$28.2 million, or 25%, from $112.9 million for the year ended June 30, 2014. The increase is primarily attributable to the increase
in amortization of internally-developed software applications and expenses related to population health management SaaS
informatics products under reseller agreements, as well as increased salary costs related to advisory services.
68
Operating Expenses
The following table summarizes our operating expenses for the years ended June 30, 2015 and 2014, indicated both in dollars
(in thousands) and as a percentage of net revenue:
Operating expenses:
Selling, general and administrative
Research and development
Amortization of purchased intangible assets
Total operating expenses
Operating expenses by segment:
Supply Chain Services
Performance Services
Total segment operating expenses
Corporate
Total operating expenses
Selling, General and Administrative
Year Ended June 30,
2015
2014
Amount
% of Net
Revenue
Amount
% of Net
Revenue
$
332,004
33% $
294,421
2,937
9,136
344,077
—%
1%
34%
3,389
3,062
300,872
$
116,240
12% $
105,544
105,252
221,492
122,585
344,077
$
10%
22%
12%
34% $
80,808
186,352
114,520
300,872
33%
—%
—%
33%
11%
9%
20%
13%
33%
Selling, general and administrative expenses for the year ended June 30, 2015 were $332.0 million, an increase of $37.6
million, or 13%, from $294.4 million for the year ended June 30, 2014. The increase was attributable to increased salaries and
benefits, rent and utilities, and insurance expense due to the acquisitions of TheraDoc and Aperek as well as increased business
development expenses related to member meetings and increased hardware and software maintenance costs related to the expansion
and growth of SaaS informatics products. The increase is also the result of $9.0 million of increased stock-based compensation
expense, as a result of twelve months of stock-based compensation expense for the year ended June 30, 2015 as compared to only
nine months of stock-based compensation expense for the year ended June 30, 2014. In addition, increased acquisition-related
expenses of $7.0 million were recognized during the year ended June 30, 2015 as compared to the year ended June 30, 2014.
Research and Development
Research and development expenses for the year ended June 30, 2015 were $2.9 million, a decrease of $0.5 million, or 15%,
from $3.4 million for the year ended June 30, 2014. The decrease was primarily a result of a higher level of capitalized expenses
in the current fiscal year from software in the development stages of production. We experience fluctuations in our research and
development expenditures across reportable periods due to the timing of our software development lifecycles that result in new
product features and functionality, new technologies and upgrades to our service offerings.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets for the year ended June 30, 2015 was $9.1 million, an increase of $6.0 million,
or 194%, from $3.1 million for the year ended June 30, 2014. The increase was a result of the additional amortization of purchased
intangible assets obtained in the acquisitions of TheraDoc and Aperek. As we execute on our growth strategy and further deploy
our available capital, we expect increases in amortization of purchased intangible assets in connection with recent and future
potential acquisitions.
Other Non-Operating Income and Expense
Other Income, Net
Other income, net for the year ended June 30, 2015 was $5.1 million, a decrease of $53.2 million from $58.3 million for the
year ended June 30, 2014. This decrease is primarily attributable to the $15.2 million loss on disposal of long-lived assets recognized
during the year ended June 30, 2015 in connection with our operations integration as a result of the TheraDoc acquisition and the
$38.4 million gain recognized in connection with the sale of our 13% equity interest in GHX during the year ended June 30, 2014.
69
Income Tax Expense
Income tax expense for the year ended June 30, 2015 was $36.3 million, an increase of $8.6 million from $27.7 million for
the year ended June 30, 2014 which is primarily attributable to the establishment of a valuation allowance on the majority of PHSI
deferred tax assets due to uncertainties surrounding PHSI's ability to utilize these assets, offset by a reduction in book income in
the current year and the recognition of a one-time tax expense of $11.9 million on the sale of the general partner interest during
the year ended June 30, 2014. Our effective tax rate was 13.4% and 7.7% for the year ended June 30, 2015 and 2014, respectively.
The low effective tax rate compared to the statutory rate for both periods is attributable to the flow through of partnership income
which is not subject to federal and state income tax at the Company.
Income tax expense for the year ended June 30, 2015 was $36.3 million, an increase of $11.8 million, from $24.5 million of
income tax expense on a Non-GAAP basis, which reflects the impact of the Reorganization and IPO for the year ended June 30,
2014. The increase in tax expense is primarily due to the establishment of a valuation allowance on the majority of PHSI deferred
tax assets offset by lower taxable income within our taxable corporations. Our effective tax rate was 13.4% for the year ended
June 30, 2015 and 7.7% on a Non-GAAP pro forma basis for the year ended June 30, 2014. The low effective tax rate for both
periods is attributable to the flow through of partnership income which is not subject to federal and state income tax at the Company.
Net Income Attributable to Non-Controlling Interest
Net income attributable to non-controlling interest for the year ended June 30, 2015 was $196.0 million, a decrease of $108.3
million, or 36%, from $304.3 million for the year ended June 30, 2014, primarily as a result of the gain on sale of investment in
GHX of $38.4 million recognized during the year ended June 30, 2014, change in ownership of the limited partners of Premier
LP from 99% to approximately 74% in connection with the Reorganization and IPO and subsequent quarterly exchanges pursuant
to the Exchange Agreement, and increased revenue share in connection with the Reorganization and IPO. Net income attributable
to non-controlling interest was $196.0 million for the year ended June 30, 2015, a decrease of $50.6 million, or 21%, from $246.6
million on a Non-GAAP pro forma basis for the year ended June 30, 2014, primarily due to increased net administrative fee
revenue, offset by increased revenue share as a result of the Reorganization and IPO and the gain on sale of investment in GHX
of $38.4 million recognized during the year ended June 30, 2014.
Non-GAAP Adjusted EBITDA
The following table summarizes our Non-GAAP Adjusted EBITDA for the years ended June 30, 2015 and 2014 and our Non-
GAAP pro forma Adjusted EBITDA for the year ended June 30, 2014, indicated both in dollars (in thousands) and as a percentage
of net revenue:
2015
Actual
Year Ended June 30,
2014
Actual
Adjustments
Non-GAAP Pro Forma
Non-GAAP Adjusted EBITDA by
segment:
Amount
% of Net
Revenue
Amount
% of Net
Revenue
Amount
Amount
% of Net
Revenue
Supply Chain Services
$
391,180
39 % $
396,470
44 % $
(41,263) (a) $
355,207
Performance Services
Total Segment Adjusted EBITDA
Corporate
90,235
481,415
(88,240)
9 %
48 %
(9)%
73,898
470,368
(78,080)
8 %
52 %
(9)%
—
(41,263)
—
73,898
429,105
(78,080)
Total Adjusted EBITDA
$
393,175
39 % $
392,288
43 % $
(41,263)
$
351,025
41 %
8 %
49 %
(9)%
40 %
(a) Represents the impact related to the change in revenue share.
Adjusted EBITDA for the year ended June 30, 2015 was $393.2 million, an increase of $0.9 million, from $392.3 million for
the year ended June 30, 2014. Adjusted EBITDA for the year ended June 30, 2015 was $393.2 million, an increase of $42.2 million,
or 12%, from Non-GAAP pro forma Adjusted EBITDA of $351.0 million for the year ended June 30, 2014.
Segment Adjusted EBITDA for the supply chain services segment of $391.2 million for the year ended June 30, 2015 reflects
a decrease of $5.3 million, or 1%, compared to $396.5 million for the year ended June 30, 2014, primarily driven by the 30%
revenue share payable to member owners after the Reorganization on October 1, 2013. Segment Adjusted EBITDA for the supply
chain services segment of $391.2 million for the year ended June 30, 2015 reflects an increase of $36.0 million, or 10%, compared
to Non-GAAP pro forma Segment Adjusted EBITDA of $355.2 million for the year ended June 30, 2014, primarily as a result of
the increased net administrative fees revenue and growth in direct sourcing.
70
Segment Adjusted EBITDA for the performance services segment of $90.2 million for the year ended June 30, 2015 reflects
an increase of $16.3 million, or 22%, compared to $73.9 million for the year ended June 30, 2014, as a result of the sale of new
SaaS informatics products, effective management of operating expenses, and increased subscription and license revenue, partially
offset by increased operating expenses, related to our acquisitions of Aperek and TheraDoc.
Off-Balance Sheet Arrangements
As of June 30, 2016, we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Business Combinations
We account for acquisitions using the acquisition method. All of the assets acquired, liabilities assumed, contractual
contingencies and contingent consideration are recognized at their fair value on the acquisition date. Any excess of the purchase
price over the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related costs are recorded as
expenses in the consolidated financial statements.
Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible
assets, we typically use the income method. This method starts with a forecast of all of the expected future net cash flows for each
asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors
associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or
other methods include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent
in the future cash flows and the assessment of the asset's life cycle and the competitive trends impacting the asset, including
consideration of any technical, legal, regulatory or economic barriers to entry. Determining the useful life of an intangible asset
also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be
considered to have indefinite useful lives.
Goodwill
Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is
not amortized. The Company performs its annual goodwill impairment testing on the first day of the last fiscal quarter of its fiscal
year unless impairment indicators are present which could require an interim impairment test.
Under accounting rules, the Company may elect to perform a qualitative assessment to determine if an impairment is more
likely than not to have occurred. This qualitative assessment requires an evaluation of any excess of fair value over the carrying
value for a reporting unit and significant judgment regarding potential changes in valuation inputs, including a review of the
Company's most recent long-range projections, analysis of operating results versus the prior year, changes in market values, changes
in discount rates and changes in terminal growth rate assumptions. If it is determined that an impairment is more likely than not
to exist, then we are required to perform a quantitative assessment to determine whether or not goodwill is impaired and to measure
the amount of goodwill impairment, if any.
Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value
of each of our reporting units to its carrying amount, including goodwill. In performing the first step, we determine the fair value
of a reporting unit using a discounted cash flow analysis that is corroborated by a market-based approach. Determining fair value
requires the exercise of significant judgment, including judgment about appropriate discount rates, perpetual growth rates and the
amount and timing of expected future cash flows. The cash flows employed in the discounted cash flow analyses are based on the
most recent budget and long-term forecast. The discount rates used in the discounted cash flow analyses are intended to reflect
the risks inherent in the future cash flows of the respective reporting units. If the estimated fair value of a reporting unit exceeds
its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary.
If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment
test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's
goodwill with its goodwill carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated
fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase
price paid. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment
charge is recognized in an amount equal to that excess.
71
The Company's most recent annual impairment testing, which consisted of a quantitative assessment, did not result in any
goodwill impairment charges during the fourth quarter of the year ended June 30, 2016.
Tax Receivable Agreements
The Company records a liability related to the tax receivable agreements based on 85% of the estimated amount of tax savings
the Company expects to receive, generally over a 15-year period, in connection with the additional tax benefits created in connection
with the Reorganization and IPO. Tax payments under the tax receivable agreements will be made to the member owners as the
Company realizes tax benefits attributable to the initial purchase of Class B common units from the member owners in the
Reorganization and IPO and any subsequent exchanges of Class B common units into Class A common stock or cash between the
Company and the member owners. Determining the estimated amount of tax savings the Company expects to receive requires
judgment as deductibility of goodwill amortization expense is not assured and the estimate of tax savings is dependent upon the
actual realization of the tax benefit and the tax rates in effect at that time.
Changes in the estimated tax receivable agreement liability that are the result of a change in tax accounting method are recorded
in selling, general and administrative expense in the consolidated statements of income. Changes in the estimated tax receivable
agreement liability that are related to new basis changes as a result of the exchange of Class B common units for a like number of
shares of Class A common stock or as a result of departed member owners are recorded as an increase to additional paid-in capital
in the consolidated statements of stockholders' (deficit) equity.
Revenue Recognition
Net Revenue
Net revenue consists of (i) service revenue which includes net administrative fees revenue and other services and support
revenue and (ii) product revenue. Net administrative fees revenue consists of net GPO administrative fees in the supply chain
segment. Other services and support revenue consists primarily of fees generated by the performance services segment in connection
with the Company's SaaS informatics products subscriptions, advisory services and performance improvement collaborative
subscriptions. Product revenue consists of specialty pharmacy and direct sourcing product sales, which are included in the supply
chain segment. The Company recognizes revenue when (i) there is persuasive evidence of an arrangement, (ii) the fee is fixed or
determinable, (iii) services have been rendered and payment has been contractually earned, and (iv) collectability is reasonably
assured.
Net Administrative Fees Revenue
Net administrative fees revenue is generated through administrative fees received from suppliers based on the total dollar
volume of supplies purchased by the Company's members in connection with its GPO programs.
The Company, through its group purchasing program, aggregates member purchasing power to negotiate pricing discounts
and improve contract terms with suppliers. Contracted suppliers pay the Company administrative fees which generally represent
1% to 3% of the purchase price of goods and services sold to members under the contracts the Company has negotiated.
Administrative fees are recognized as revenue in the period in which the respective supplier reports member purchasing data,
usually a month or a quarter in arrears of actual member purchase activity. The supplier report proves that the delivery of product
or service has occurred, the administrative fees are fixed and determinable based on reported purchasing volume, and collectability
is reasonably assured. Member and supplier contracts substantiate persuasive evidence of an arrangement. The Company does not
take title to the underlying equipment or products purchased by members through its GPO supplier contracts.
The Company pays a revenue share equal to a percentage of gross administrative fees that the Company collects based upon
purchasing by such members and their owned, leased, managed or affiliated facilities through its GPO supplier contracts. Revenue
share is recognized according to the members' contractual agreements with the Company as the related administrative fees revenue
is recognized. Considering GAAP relating to principal/agent considerations under revenue recognition, revenue share is recorded
as a reduction to gross administrative fees revenue to arrive at a net administrative fees revenue amount, which amount is included
in service revenue in the accompanying consolidated statements of income.
Other Services and Support Revenue
Performance services revenue consists of SaaS informatics products subscriptions, performance improvement collaborative
and other service subscriptions, professional fees for advisory services, and insurance services management fees and commissions
from group-sponsored insurance programs.
SaaS informatics subscriptions include the right to use the Company's proprietary hosted technology on a SaaS basis, training
and member support to deliver improvements in cost management, quality and safety, population health management and provider
72
analytics. Pricing varies by application and size of healthcare system. Informatics subscriptions are generally three to five year
agreements with automatic renewal clauses and annual price escalators that typically do not allow for early termination. These
agreements do not allow for physical possession of the software. Subscription fees are typically billed on a monthly basis and
revenue is recognized as a single deliverable on a straight-line basis over the remaining contractual period following implementation.
Implementation involves the completion of data preparation services that are unique to each member's data set and, in certain
cases, the installation of member site-specific software, in order to access and transfer member data into the Company's hosted
SaaS informatics products. Implementation is generally 90 to 170 days following contract execution before the SaaS informatics
products can be fully utilized by the member.
The Company sells certain perpetual and term licenses that include mandatory post-contract customer support in the form of
maintenance and support services. Pricing varies by application and size of healthcare system. Fees for the initial period can include
license fees, implementation fees and the initial bundled maintenance and support services fees. The fees for the initial period are
recognized straight-line over the remaining initial period following implementation. Subsequent renewal maintenance and support
services fees are recognized on a straight-line basis over the contractually stated renewal periods. Implementation services are
provided to the customer prior to the use of the software and do not involve significant customization or modification.
Implementation is generally 300 to 350 days following contract execution before the licensed software products can be fully
utilized by the member.
Revenue from performance improvement collaboratives and other service subscriptions that support the Company's offerings
in cost management, quality and safety and population health management is recognized over the service period, which is generally
one year.
Professional fees for advisory services are sold under contracts, the terms of which vary based on the nature of the engagement.
Fees are billed as stipulated in the contract, and revenue is recognized on a proportional performance method as services are
performed and deliverables are provided. In situations where the contracts have significant contract performance guarantees or
member acceptance provisions, revenue recognition occurs when the fees are fixed and determinable and all contingencies,
including any refund rights, have been satisfied.
Insurance services management fees are recognized in the period in which such services are provided. Commissions from
group sponsored insurance programs are recognized over the term of the insurance policies, generally one year.
Certain administrative and/or patient management specialty pharmacy services are provided in situations where prescriptions
are sent back to member health systems for dispensing. Additionally, the Company derives revenue from pharmaceutical
manufacturers for providing patient education and utilization data. Revenue is recognized as these services are provided.
Product Revenue
Specialty pharmacy revenue is recognized when a product is accepted and is recorded net of the estimated contractual
adjustments under agreements with Medicare, Medicaid and other managed care plans. Payments for the products provided under
such agreements are based on defined allowable reimbursements rather than on the basis of standard billing rates. The difference
between the standard billing rate and allowable reimbursement rate results in contractual adjustments which are recorded as
deductions from net revenue.
Direct sourcing revenue is recognized once the title and risk of loss of medical products have been transferred to members.
Multiple Deliverable Arrangements
The Company enters into agreements where the individual deliverables discussed above, such as SaaS subscriptions and
advisory services, are bundled into a single service arrangement. These agreements are generally provided over a time period
ranging from approximately three months to five years after the applicable contract execution date. Revenue is allocated to the
individual elements within the arrangement based on their relative selling price using vendor specific objective evidence ("VSOE"),
third-party evidence ("TPE") or the estimated selling price ("ESP"), provided that the total arrangement consideration is fixed and
determinable at the inception of the arrangement. The Company establishes VSOE, TPE, or ESP for each element of a service
arrangement based on the price charged for a particular element when it is sold separately in a stand-alone arrangement. All
deliverables which are fixed and determinable are recognized according to the revenue recognition methodology described above.
Certain arrangements include performance targets or other contingent fees that are not fixed and determinable at the inception
of the arrangement. If the total arrangement consideration is not fixed and determinable at the inception of the arrangement, the
Company allocates only that portion of the arrangement that is fixed and determinable to each element. As additional consideration
becomes fixed, it is similarly allocated based on VSOE, TPE or ESP to each element in the arrangement and recognized in accordance
with each element's revenue recognition policy.
73
Performance Guarantees
On limited occasions, the Company enters into agreements which provide for guaranteed performance levels to be achieved
by the member over the term of the agreement. In situations with significant performance guarantees, the Company defers revenue
recognition until the amount is fixed and determinable and all contingencies, including any refund rights, have been satisfied. In
the event that guaranteed savings levels are not achieved, the Company may have to perform additional services at no additional
charge in order to achieve the guaranteed savings or pay the difference between the savings that were guaranteed and the actual
achieved savings.
Deferred Revenue
Deferred revenue consists of unrecognized revenue related to advanced member invoicing or member payments received prior
to fulfillment of the Company's revenue recognition criteria. Substantially all deferred revenue consists of deferred subscription
fees and deferred advisory fees. Subscription fees for company-hosted SaaS applications are deferred until the member's unique
data records have been incorporated into the underlying software database, or until member site-specific software has been
implemented and the member has access to the software. Deferred advisory fees arise when cash is received from members prior
to delivery of service. When the fees are contingent upon meeting a performance target that has not yet been achieved, the advisory
fees are deferred until the performance target is met.
Software Development Costs
Costs to develop internal use computer software that are incurred in the preliminary project stage are expensed as incurred.
During the development stage, direct consulting costs and payroll and payroll-related costs for employees that are directly associated
with each project are capitalized and amortized over the estimated useful life of the software, once it is placed into operation.
Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the related software applications of up
to five years and amortization is included in depreciation and amortization expense. Replacements and major improvements are
capitalized, while maintenance and repairs are expensed as incurred. Some of the more significant estimates and assumptions
inherent in this process involve determining the stages of the software development project, the direct costs to capitalize and the
estimated useful life of the capitalized software.
Income Taxes
The Company accounts for income taxes under the asset and liability approach. Deferred tax assets or liabilities are determined
based on the differences between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates
which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets
when, based upon the available evidence, it is more likely than not that the deferred tax assets will not be realized.
The Company prepares and files tax returns based on interpretations of tax laws and regulations. The Company's tax returns
are subject to examination by various taxing authorities in the normal course of business. Such examinations may result in future
tax and interest assessments by these taxing authorities.
In determining the Company's tax expense for financial reporting purposes, the Company establishes a reserve for uncertain
income tax positions unless it is determined to be "more likely than not" that such tax positions would be sustained upon examination,
based on their technical merits. That is, for financial reporting purposes, the Company only recognizes tax benefits taken on the
tax return if it believes it is "more likely than not" that such tax positions would be sustained. There is considerable judgment
involved in determining whether it is "more likely than not" that positions taken on the tax returns would be sustained.
The Company adjusts its tax reserve estimates periodically because of ongoing examinations by, and settlements with, varying
taxing authorities, as well as changes in tax laws, regulations and interpretations. The consolidated tax expense of any given year
includes adjustments to prior year income tax accruals and related estimated interest charges that are considered appropriate. The
Company's policy is to recognize, when applicable, interest and penalties on uncertain income tax positions as part of income tax
expense.
New Accounting Standards
New accounting standards that we have recently adopted as well as those that have been recently issued but not yet adopted
by us are included in Note 3 - Significant Accounting Policies, to the accompanying audited consolidated financial statements,
which is incorporated herein by reference.
74
Liquidity and Capital Resources
Our principal source of cash has historically been cash provided by operating activities. From time to time we have used, and
expect to use in the future, borrowings under our Credit Facility as a source of liquidity. Our primary cash requirements involve
operating expenses, working capital fluctuations, capital expenditures, acquisitions and related business investments. Our capital
expenditures typically consist of internally-developed software costs, software purchases and computer hardware purchases. Prior
to the Reorganization and IPO, the vast majority of our excess cash had been distributed to our member owners.
As of June 30, 2016 and 2015, we had cash and cash equivalents totaling $248.8 million and $146.5 million, respectively,
and marketable securities with maturities ranging from three months to five years totaling $47.9 million and $415.4 million,
respectively. The decrease in marketable securities of $367.5 million is primarily attributable to funding the acquisitions of CECity
and HCI.
As of June 30, 2016, there were no outstanding borrowings under the Credit Facility. See Note 13 - Debt to the accompanying
audited consolidated financial statements contained herein for more information.
We expect cash generated from operations and borrowings under our Credit Facility to provide us with liquidity to fund our
anticipated working capital requirements, revenue share obligations, tax payments, capital expenditures and growth for the
foreseeable future. Our capital requirements depend on numerous factors, including funding requirements for our product and
service development and commercialization efforts and our information technology requirements and the amount of cash generated
by our operations. We currently believe that we have adequate capital resources at our disposal to fund currently anticipated capital
expenditures, business growth and expansion and current and projected debt service requirements; strategic growth initiatives,
however, will likely require the use of available cash on hand, cash generated from operations, borrowings under our Credit Facility
and other long-term debt and, potentially, proceeds from the issuance of additional equity or debt securities.
Discussion of cash flows for the years ended June 30, 2016 and 2015
A summary of net cash flows follows (in thousands):
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase in cash
Year Ended June 30,
2015
2016
$
$
371,470 $
(159,636)
(109,539)
102,295 $
364,058
(231,873)
(117,449)
14,736
Net cash provided by operating activities was $371.5 million for the year ended June 30, 2016 compared to $364.1 million
for the year ended June 30, 2015, with the increase of $7.4 million primarily attributable to increased cash from net administrative
fees offset by $14.6 million in additional tax payments during the year ended June 30, 2016 in comparison to the year ended June
30, 2015 and a $10.0 million net prepayment to a distributor in order to receive additional discounts on product purchases.
Net cash used in investing activities was $159.6 million for the year ended June 30, 2016 compared to net cash used in investing
activities of $231.9 million for the year ended June 30, 2015. Our investing activities for the year ended June 30, 2016 primarily
consisted of (i) the acquisitions of InFlow, CECity and HCI, net of cash acquired, for a total of $468.6 million, (ii) capital expenditures
for property and equipment of $77.0 million and (iii) investments in unconsolidated affiliates of $3.3 million, partially offset by
(i) net proceeds from the sale of marketable securities of $367.2 million and (ii) distributions from equity investments of $22.1
million.
Our investing activities for the year ended June 30, 2015 primarily consisted of (i) the acquisitions of Aperek and TheraDoc,
net of cash acquired, for a total of $156.0 million, (ii) capital expenditures for property and equipment of $70.7 million, (iii)
purchase of non-controlling interest in S2S Global of $14.5 million, (iv) net purchases of marketable securities of $9.5 million,
and (v) investment in PharmaPoint, LLC of $5.0 million, partially offset by (i) distributions from Innovatix of $18.9 million and
(ii) decrease in restricted cash of $5.0 million.
Net cash used in financing activities was $109.5 million for the year ended June 30, 2016, compared to $117.4 million for the
year ended June 30, 2015. Our financing activities for the year ended June 30, 2016 primarily included (i) distributions to Premier
LP limited partners of $92.7 million, (ii) payments to limited partners of Premier LP of $10.8 million related to tax receivable
agreements, (iii) repurchase of vested restricted units for employee tax-withholding for $7.9 million, (iv) payments made on notes
payable of $2.1 million and (v) final remittance of net income attributable to the former S2S Global minority shareholder of $1.9
75
million, partially offset by (i) proceeds from the exercise of stock options of $3.6 million and (ii) proceeds from the issuance of
Class A common stock under the stock purchase plan of $2.3 million. We also borrowed, and fully repaid, $150.0 million from
our Credit Facility during the year ended June 30, 2016.
Our financing activities for the year ended June 30, 2015 primarily included (i) net cash payments to Premier LP limited
partners of $92.2 million, (ii) payoff of S2S Global's revolving line of credit of $14.7 million, (iii) payments to Premier LP limited
partners of $11.5 million under tax receivable agreements and (iv) payments made on notes payable of $1.4 million, partially offset
by proceeds from the exercise of stock options of $1.5 million.
Discussion of Non-GAAP Free Cash Flow
We define Non-GAAP Free Cash Flow as net cash provided by operating activities less distributions to limited partners and
purchases of property and equipment. A summary of Non-GAAP Free Cash Flow and reconciliation to net cash provided by
operating activities for the periods presented follows (in thousands):
Net cash provided by operating activities
Purchases of property and equipment
Distributions to limited partners of Premier LP
Payments to limited partners of Premier LP related to tax receivable agreements
Non-GAAP Free Cash Flow
Year Ended June 30,
2016
2015
371,470 $
(76,990)
(92,707)
(10,805)
190,968 $
364,058
(70,734)
(92,212)
(11,499)
189,613
$
$
Non-GAAP Free Cash Flow for the year ended June 30, 2016 was $191.0 million, compared with $189.6 million for the year
ended June 30, 2015. The increase in Non-GAAP Free Cash Flow is primarily the result of increased cash generated from net
administrative fees, offset by $14.6 million additional tax payments during the year ended June 30, 2016 in comparison to the year
ended June 30, 2015, a $10.0 million net prepayment to a distributor in order to receive additional discounts on product purchases
and $6.3 million in increased purchases of property and equipment.
Contractual Obligations
At June 30, 2016, we had material commitments for obligations under notes payable, our non-cancellable office space lease
agreements and estimated payments due to limited partners under tax receivable agreements. Future payments for notes payable,
operating lease obligations due under long-term contractual obligations and estimated payments to limited partners under tax
receivable agreements as of June 30, 2016 are as follows:
Description of Contractual Obligations (In
Thousands)
Tax receivable agreement liability (a)
Operating lease obligations (b)
Notes payable (c)
Other
Total
Payments Due by Period
Total
Less than 1
year
1-3 years
3-5 years
Greater
than 5 years
$
279,662 $
13,912 $
31,197 $
33,029 $
201,524
76,049
19,342
9,620
5,484
474
375,527 $
$
230
29,246 $
17,637
8,255
244
57,333 $
15,557
5,603
—
54,189 $
33,235
—
—
234,759
(a) Estimated payments due to limited partners under tax receivable agreements are based on 85% of the estimated amount of tax savings we expect to receive,
generally over a 15 year period, in connection with the additional tax benefits created in connection with the Reorganization and IPO.
(b) Future contractual obligations for leases represent future minimum payments under non-cancellable operating leases primarily for office space.
(c) Notes payable represent an aggregate principal amount of $19.3 million owed to departed member owners, payable over five years.
2014 Credit Facility
On June 24, 2014, we entered into our current Credit Facility. The Credit Facility was 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. At our request, the Credit
Facility may be increased from time to time by up to an additional aggregate amount of $250.0 million, subject to the approval of
76
the lenders providing such increase. The Credit Facility includes an unconditional and irrevocable guaranty of all obligations under
the credit facility by Premier GP, certain domestic subsidiaries of Premier GP and future guarantors, if any. Premier, Inc. is not a
guarantor under the Credit Facility.
The Credit Facility permits us to prepay amounts outstanding without premium or penalty, though we are required to compensate
the lenders for losses and expenses incurred as a result of the prepayment of any Eurodollar Rate Loan (as defined in the Credit
Facility). Committed loans may be in the form of Eurodollar Rate Loans or Base Rate Loans (as defined in the Credit Facility) at
our option. Eurodollar Rate Loans bear interest at the Eurodollar Rate (defined as the London Interbank Offer Rate, or LIBOR)
plus the Applicable Rate (defined as a margin based on the Consolidated Total Leverage Ratio (as defined in the Credit Facility)).
Base Rate Loans bear interest at the Base Rate (defined as the highest of the prime rate announced by the administrative agent,
the federal funds effective rate plus 0.50% or the one-month LIBOR plus 1.0%) plus the Applicable Rate. The Applicable Rate
ranges from 1.125% to 1.75% for Eurodollar Rate Loans and 0.125% to 0.75% for Base Rate Loans. At June 30, 2016, the interest
rate for three-month Eurodollar Rate Loans was 1.779% and the interest rate for Base Rate Loans was 3.625%. We 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 June 30, 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 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 fiscal 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. We were in compliance with all such covenants
at June 30, 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.
Proceeds from borrowings under the Credit Facility may generally be used to finance ongoing working capital requirements,
including permitted acquisitions and other general corporate purposes. As of June 30, 2016, we had no outstanding borrowings
under the Credit Facility. The above summary does not purport to be complete, and is subject to, and qualified in its entirety by
reference to, the complete text of the Credit Facility, as amended, which is filed as an exhibit to this Annual Report. See also Note
13 - Debt to our audited consolidated financial statements contained in this Annual Report.
S2S Global Revolving Line of Credit
On February 2, 2015, we purchased the remaining 40% of the outstanding limited liability company membership interests of
S2S Global. In connection with the purchase, we repaid the $14.2 million balance outstanding under the S2S Global line of credit
and terminated the S2S Global line of credit prior to its February 16, 2015 maturity date.
Member-Owner Tax Receivable Agreement
In connection with the Reorganization and IPO, we entered into a tax receivable agreement with each of our member owners,
pursuant to which we agreed to pay to the member owners, generally over a 15 year period (under current law), 85% of the amount
of cash savings, if any, in U.S. federal, foreign, state and local income and franchise tax that we actually realize (or are deemed
to realize, in the case of payments required to be made upon certain occurrences under such Tax Receivable Agreements) as a
result of the increases in tax basis resulting from the initial sale of Class B common units by the member owners in connection
with the Reorganization, as well as subsequent exchanges by such member owners pursuant to the Exchange Agreement, and of
certain other tax benefits related to our entering into the Tax Receivable Agreements ("TRA"), including tax benefits attributable
to payments under the TRA.
The Company had TRA liabilities of $279.7 million and $235.9 million as of June 30, 2016 and 2015, respectively, which
represented 85% of the tax savings the Company expects to receive in connection with the Section 754 election. The increase of
$43.8 million in TRA liabilities from June 30, 2015 to June 30, 2016 was comprised of a $72.3 million increase for quarterly
member owner exchanges, offset by (i) a decrease of $4.8 million in connection with revaluing the deferred tax and TRA liabilities
in connection with the North Carolina state income tax rate reduction for 2016 and beyond, (ii) a decrease of $12.9 million in
connection with departed member owners and (iii) a decrease of $10.8 million related to payments made to member owners during
the year ended June 30, 2016.
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Certain Contractual Arrangements with Our Member Owners
In connection with the Reorganization, we entered into several agreements to define and regulate the governance and control
relationships among us, Premier LP and the member owners. Note 2 - Initial Public Offering and Reorganization to our audited
consolidated financial statements contained herein provides a summary of the material provisions of these agreements. These
summaries do not purport to be complete, and they are subject to, and qualified in their entirety by reference to, the complete text
of the agreements which are filed as exhibits to this Annual Report. These agreements should be carefully read before making any
investment decisions regarding our securities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk relates primarily to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of any interest expense we must pay with respect to outstanding
debt instruments. At June 30, 2016, we had no variable rate debt outstanding. We invest our excess cash in a portfolio of individual
cash equivalents and marketable securities. We do not currently hold, and we have never held, any derivative financial instruments.
As a result, we do not expect changes in interest rates to have a material impact on our results of operations or financial position.
We plan to ensure the safety and preservation of our invested principal funds by limiting default, market and investment risks. We
plan to mitigate default risk by investing in low-risk securities. Substantially all of our financial transactions are conducted in U.S.
dollars. We do not have significant foreign operations and, accordingly, do not have market risk associated with foreign currencies.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and related notes are filed together with this Annual Report. See the index to financial
statements under Item 15(a) on page 130 for a list of financial statements filed with this report, and under this item.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Controls Over Financial Reporting
Consolidated Balance Sheets as of June 30, 2016 and June 30, 2015
Consolidated Statements of Income for the years ended June 30, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended June 30, 2016, 2015 and 2014
Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended June 30, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended June 30, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
79
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Premier, Inc.
We have audited the accompanying consolidated balance sheets of Premier, Inc. (the "Company") as of June 30, 2016 and 2015,
and the related consolidated statements of income, comprehensive income, stockholders’ (deficit) equity and cash flows for each
of the three years in the period ended June 30, 2016. Our audits also included the financial statement schedule presented in Item
15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Premier, Inc. at June 30, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended June 30, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, the Company changed its classification of deferred tax liabilities
and assets and changed its method of accounting for measurement-period adjustments in business combinations.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Premier, Inc.’s internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and
our report dated August 25, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Charlotte, North Carolina
August 25, 2016
80
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Premier, Inc.
We have audited Premier, Inc.’s internal control over financial reporting as of June 30, 2016, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). Premier, Inc.’s management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Premier, Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30,
2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Premier, Inc. as of June 30, 2016 and 2015, and the related consolidated statements of income,
comprehensive income, stockholders’ (deficit) equity and cash flows for each of the three years in the period ended June 30, 2016
and our report dated August 25, 2016 expressed an unqualified opinion thereon.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment
of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of CECity.com,
Inc., Healthcare Insights, LLC and InFlowHealth, LLC, which are included in the 2016 consolidated financial statements of Premier,
Inc. and constituted 22%, 4% and 1%, of total assets, respectively, as of June 30, 2016. CECity.com, Inc. represented approximately
2%, and Healthcare Insights, LLC and InFlowHealth, LLC each represented less than 1%, of net revenue for the year then ended.
Our audit of internal control over financial reporting of Premier, Inc. also did not include an evaluation of the internal control over
financial reporting of CECity.com, Inc., Healthcare Insights, LLC and InFlowHealth, LLC.
/s/ Ernst & Young LLP
Charlotte, North Carolina
August 25, 2016
81
PREMIER, INC.
Consolidated Balance Sheets
(In thousands, except share data)
Assets
Cash and cash equivalents
Marketable securities
Accounts receivable (net of $1,981 and $1,153 allowance for doubtful accounts, respectively)
Inventory
Prepaid expenses and other current assets
Due from related parties
Total current assets
Marketable securities
Property and equipment (net of $265,751 and $220,685 accumulated depreciation, respectively)
Intangible assets (net of $50,870 and $17,815 accumulated amortization, respectively)
Goodwill
Deferred income tax assets
Deferred compensation plan assets
Other assets
Total assets
Liabilities, redeemable limited partners' capital and stockholders' deficit
Accounts payable
Accrued expenses
Revenue share obligations
Limited partners' distribution payable
Accrued compensation and benefits
Deferred revenue
Current portion of tax receivable agreement
Current portion of long-term debt
Other liabilities
Total current liabilities
Long-term debt, less current portion
Tax receivable agreements, less current portion
Deferred compensation plan obligations
Other liabilities
Total liabilities
Redeemable limited partners' capital
Stockholders' deficit:
Class A common stock, $0.01 par value, 500,000,000 shares authorized; 45,995,528 and
37,668,870 shares issued and outstanding at June 30, 2016 and June 30, 2015, respectively
Class B common stock, $0.000001 par value, 600,000,000 shares authorized; 96,132,723 and
106,382,552 shares issued and outstanding at June 30, 2016 and June 30, 2015, respectively
Additional paid-in-capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders' deficit
June 30, 2016
June 30, 2015
$
248,817 $
17,759
144,424
29,121
19,646
3,123
462,890
30,130
174,080
158,217
537,962
422,849
39,965
29,290
146,522
240,667
99,120
33,058
22,353
3,444
545,164
174,745
147,625
38,669
215,645
353,723
37,483
17,137
$
$
1,855,383 $
1,530,191
46,003 $
56,774
63,603
22,493
60,425
54,498
13,912
5,484
2,871
326,063
13,858
265,750
39,965
23,978
669,614
37,634
41,261
59,259
22,432
51,066
39,824
11,123
2,256
4,776
269,631
15,679
224,754
37,483
20,914
568,461
3,137,230
4,079,832
460
—
—
377
—
—
(1,951,878)
(3,118,474)
(43)
(5)
(1,951,461)
(3,118,102)
Total liabilities, redeemable limited partners' capital and stockholders' deficit
$
1,855,383 $
1,530,191
See accompanying notes to the consolidated financial statements.
82
PREMIER, INC.
Consolidated Statements of Income
(In thousands, except per share data)
Year Ended June 30,
2016
2015
2014
Net revenue:
Net administrative fees
Other services and support
Services
Products
Net revenue
Cost of revenue:
Services
Products
Cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Amortization of purchased intangible assets
Operating expenses
Operating income
Equity in net income of unconsolidated affiliates
Interest and investment income (loss), net
Gain (loss) on investment
Loss on disposal of long-lived assets
Other income (expense), net
Other income, net
Income before income taxes
Income tax expense
Net income
Net income attributable to non-controlling interest in S2S Global
Net income attributable to non-controlling interest in Premier LP
Net income attributable to non-controlling interest
Adjustment of redeemable limited partners' capital to redemption amount
$
498,394 $
457,020 $
337,554
835,948
326,646
270,748
727,768
279,261
1,162,594
1,007,029
464,837
233,186
698,023
212,526
910,549
115,740
191,885
307,625
602,924
143,290
253,620
396,910
610,119
332,004
294,421
2,937
9,136
344,077
266,042
21,285
866
(1,000)
(15,243)
(823)
5,085
271,127
36,342
234,785
(1,836)
(194,206)
(196,042)
3,389
3,062
300,872
302,052
16,976
1,019
38,372
—
1,907
58,274
360,326
27,709
332,617
(949)
(303,336)
(304,285)
(904,035)
(2,741,588)
163,240
293,816
457,056
705,538
403,611
2,925
33,054
439,590
265,948
21,647
(1,021)
—
—
(1,692)
18,934
284,882
49,721
235,161
—
(193,547)
(193,547)
776,750
Net income (loss) attributable to stockholders
$
818,364 $
(865,292) $ (2,713,256)
Weighted average shares outstanding:
Basic
Diluted
Earnings (loss) per share attributable to stockholders:
Basic
Diluted
42,368
145,308
35,681
35,681
25,633
25,633
$
$
19.32 $
1.33 $
(24.25) $
(24.25) $
(105.85)
(105.85)
See accompanying notes to the consolidated financial statements.
83
PREMIER, INC.
Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Net unrealized (loss) gain on marketable securities
Total comprehensive income
Less: comprehensive income attributable to non-controlling interest
Year Ended June 30,
2016
2015
2014
$
235,161 $
234,785 $
332,617
(110)
(213)
203
235,051
234,572
332,820
(193,470)
(195,885)
(304,448)
Comprehensive income attributable to Premier, Inc.
$
41,581 $
38,687 $
28,372
See accompanying notes to the consolidated financial statements.
84
PREMIER, INC.
Consolidated Statements of Stockholders' (Deficit) Equity
(In thousands)
PHSI Common
Stock
Class A Common
Stock
Class B Common
Stock
Shares Amount
Shares Amount
Shares Amount
Additional
Paid-In
Capital
Common Stock
Subscribed
Shares Amount
Subscriptions
Receivable
Retained
Earnings
(Accumulated
Deficit)
Non-
Controlling
Interest
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders'
(Deficit)
Equity
— $
— $
28,866
23 $
300 $
(300) $
50,599 $
(1,754) $
— $
77,768
57
(1)
—
— $
—
—
— 32,375
—
—
(56)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
324
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 112,608
—
—
—
—
—
—
—
—
(97)
—
—
—
—
—
—
—
Balance at June 30, 2013
Repurchase of PHSI common stock
Payment on stock subscriptions
Issuance of Class A common stock at IPO
Purchase of Class A common units from
Premier LP
Purchase of Class B common units from
PHSI
5,653 $
(49)
23
—
—
—
Contribution of PHSI common stock in
connection with the IPO
(5,627)
—
—
—
—
—
—
—
—
—
—
—
—
Capitalized IPO-related costs
Increase in deferred tax asset related to
the Reorganization
Increase in payables pursuant to the tax
receivable agreements
Acquisition of non-controlling interest
from member owners, net of sale of Class
B common stock
Redemption of limited partner
Adjustment of redeemable limited
partners' capital to redemption amount
Stock-based compensation expense
Repurchase of vested restricted units for
employee tax-withholding
Net income
Net income attributable to non-controlling
interest
Net income attributable to non-controlling
interest in S2S Global
Net unrealized gain on marketable
securities
Balance at June 30, 2014
Redemption of limited partners
Reduction in tax receivable agreement
liability related to departed member
owners
Exchange of Class B common units for
Class A common stock by member owners
Increase in additional paid-in capital
related to quarterly exchange by member
owners and departure of member owners
Issuance of Class A common stock under
equity incentive plan
— $
— 32,375 $
324
112,511 $
— $
—
—
—
—
—
—
—
—
—
— 5,218
—
—
—
76
—
(910)
—
53
—
—
—
(5,218)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(23)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(300)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
300
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2,548,804)
—
—
332,617
(304,285)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
949
—
—
—
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
40
(646)
300
821,671
(247,742)
(30,072)
(76,916)
(5,911)
282,972
(186,077)
(412,857)
—
(2,741,588)
19,476
(10)
332,617
(304,285)
949
40
— $
— $
— $
(2,469,873) $
(805) $
43 $
(2,470,311)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,905
175,115
18,097
1,508
(645)
300
821,347
(247,742)
(30,072)
(76,860)
(5,911)
282,972
(186,077)
(412,860)
—
(192,784)
19,476
(10)
—
—
—
—
—
—
1,905
175,062
18,097
1,508
85
Stock-based compensation expense
Repurchase of vested restricted units for
employee tax-withholding
Net income
Net income attributable to non-controlling
interest
Net income attributable to non-controlling
interest in S2S Global
Purchase of non-controlling interest in
S2S Global
Increase in deferred tax asset related to
purchase of non-controlling interest in
S2S Global
Net unrealized loss on marketable
securities
Adjustment to redeemable limited
partners' capital to redemption amount
Balance at June 30, 2015
Redemption of limited partners
Exchange of Class B common units for
Class A common stock by member owners
Increase in additional paid-in capital
related to quarterly exchange by member
owners and departure of member owners
Issuance of Class A common stock under
equity incentive plan
Employee stock purchase plan
Stock-based compensation expense
Repurchase of vested restricted units for
employee tax-withholding
Net income
Net income attributable to non-controlling
interest
Net unrealized loss on marketable
securities
Final remittance of net income
attributable to S2S Global before
February 1, 2015
Adjustment to redeemable limited
partners' capital to redemption amount
—
—
—
—
—
—
—
—
—
—
—
—
PHSI Common
Stock
Class A Common
Stock
Class B Common
Stock
Shares Amount
Shares Amount
Shares Amount
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
— 37,669 $
377
106,383 $
— $
—
—
— (2,527)
— 7,723
77
(7,723)
—
—
—
—
—
—
—
—
—
—
—
523
81
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5
1
—
—
—
—
—
—
—
460
Additional
Paid-In
Capital
28,498
(135)
—
—
—
(13,487)
5,243
—
(216,691)
—
—
267,604
35,431
3,552
2,728
48,670
(7,863)
—
—
—
—
(350,122)
—
—
—
—
—
—
—
—
—
—
—
—
Common Stock
Subscribed
Shares Amount
Subscriptions
Receivable
Retained
Earnings
(Accumulated
Deficit)
Non-
Controlling
Interest
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
234,785
(196,042)
—
—
—
—
(687,344)
—
—
—
—
1,836
(1,031)
—
—
—
— $
— $
— $
(3,118,474) $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
235,161
(193,547)
—
(1,890)
1,126,872
—
—
—
—
—
—
—
—
—
—
—
—
Accumulated
Other
Comprehensive
Income (Loss)
—
Total
Stockholders'
(Deficit)
Equity
28,498
—
—
—
—
—
—
(135)
234,785
(196,042)
1,836
(14,518)
5,243
(48)
(48)
—
(904,035)
(5) $
(3,118,102)
—
—
—
—
—
—
—
—
—
—
267,681
35,431
3,557
2,729
48,670
(7,863)
235,161
(193,547)
(38)
(38)
—
—
(1,890)
776,750
Balance at June 30, 2016
— $
— 45,996 $
96,133 $
— $
—
— $
— $
— $
(1,951,878) $
— $
(43) $
(1,951,461)
See accompanying notes to the consolidated financial statements.
86
PREMIER, INC.
Consolidated Statements of Cash Flows
(In thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Year Ended June 30,
2016
2015
2014
$
235,161 $
234,785 $
332,617
Depreciation and amortization
Equity in net income of unconsolidated affiliates
Deferred income taxes
Loss (gain) on investment
Loss on disposal of long-lived assets
Stock-based compensation
Adjustment to tax receivable agreement liability
Changes in operating assets and liabilities:
Accounts receivable, prepaid expenses and other current assets
Other assets
Inventories
Accounts payable, accrued expenses and other current liabilities
Long-term liabilities
Other operating activities
Net cash provided by operating activities
Investing activities
Purchase of marketable securities
Proceeds from sale of marketable securities
Proceeds from sale of investment in GHX
Acquisition of CECity.com, Inc., net of cash acquired
Acquisition of Healthcare Insights, LLC, net of cash acquired
Acquisition of InFlowHealth, LLC
Acquisition of Aperek, Inc., net of cash acquired
Acquisition of TheraDoc, Inc., net of cash acquired
Acquisition of SYMMEDRx, net of cash acquired
Acquisition of Meddius, L.L.C, net of owner note receivable
Acquisition of MEMdata, LLC, net of cash acquired
Purchase of non-controlling interest in S2S Global
Investment in unconsolidated affiliates
Distributions received on equity investment
Decrease in restricted cash
Purchases of property and equipment
Other investing activities
Net cash used in investing activities
Financing activities
Payments made on notes payable
Proceeds from S2S Global revolving line of credit
Payments on S2S Global revolving line of credit
Proceeds from credit facility
Payments on credit facility
Payments made in connection with the origination of the credit facility
Proceeds from issuance of Class A common stock in connection with the IPO, net of
underwriting fees and commissions
Payments made in connection with the IPO
87
84,156
(21,647)
25,714
—
—
48,670
(4,818)
(37,250)
(9,638)
3,937
50,313
(4,195)
1,067
54,322
(21,285)
18,294
1,000
15,243
28,498
—
(18,964)
(1,736)
(12,235)
60,834
2,791
2,511
39,823
(16,976)
9,820
(38,372)
—
19,476
6,215
(18,924)
(1,680)
(8,082)
45,997
(3,585)
1,793
371,470
364,058
368,122
(19,211)
386,372
—
(398,261)
(64,274)
(6,088)
—
—
—
—
—
—
(3,250)
22,093
—
(395,302)
(500,835)
385,788
—
—
—
—
(47,446)
(108,561)
—
—
—
(14,518)
(5,000)
18,900
5,000
148,019
38,372
—
—
—
—
—
(28,690)
(7,737)
(6,142)
—
—
15,650
—
(76,990)
(70,734)
(55,740)
(27)
—
—
(159,636)
(231,873)
(397,103)
(2,143)
—
—
150,000
(150,000)
—
—
—
(1,403)
1,007
(14,715)
—
—
—
—
—
(9,297)
6,000
—
60,000
(60,000)
(2,511)
821,671
(2,822)
Year Ended June 30,
2016
2015
2014
—
—
—
(543,857)
300
12,685
—
—
(11)
—
(319,687)
—
(37,529)
(66,510)
198,296
131,786
Purchases of Class B common units from member owners
Proceeds from issuance of PSHI common stock
Proceeds from notes receivable from partners
Proceeds from exercise of stock options under equity incentive plans
Proceeds from issuance of Class A common stock under stock purchase plan
Repurchase of vested restricted units for employee tax-withholding
Final remittance of net income attributable to former S2S Global minority shareholder
Distributions to limited partners of Premier LP
Payments to limited partners of Premier LP related to tax receivable agreements
—
—
—
3,552
2,317
(7,863)
(1,890)
(92,707)
(10,805)
1,508
—
(135)
—
(92,212)
(11,499)
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental schedule of non cash investing and financing activities:
Issuance of limited partnership interest for notes receivable
Payable to member owners incurred upon repurchase of ownership interest
Reduction in tax receivable agreement liability related to departed member owners
Reduction in redeemable limited partners' capital to reduce outstanding receivable
Distributions and notes payable utilized to reduce subscriptions, notes, interest and accounts
receivable from member owners
Reduction in redeemable limited partners' capital for limited partners' distribution payable
Increase in redeemable limited partners' capital for adjustment to redemption amount, with
offsetting decrease in additional paid-in capital and accumulated deficit
Reduction in redeemable limited partners' capital, with offsetting increase in common stock
and additional paid-in capital related to quarterly exchanges by member owners
Increase in additional paid-in capital related to quarterly exchanges by member owners and
departure of member owners
Increase in tax receivable agreement liability related to quarterly exchanges by member
owners
Increase in deferred tax assets related to quarterly exchanges by member owners
Reduction in deferred tax assets related to departed member owners
Increase in deferred tax assets related to purchase of non-controlling interest in S2S Global
Increase in deferred tax assets and additional paid-in capital related to the Reorganization
Increase in payables and decrease in additional paid-in capital pursuant to the tax receivable
agreements
Reduction in prepaid expenses and other current assets for IPO costs capitalized to
additional paid-in capital
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(109,539)
(117,449)
102,295
146,522
14,736
131,786
248,817 $
146,522 $
— $
3,556 $
12,927 $
— $
— $
2,046 $
2,007 $
7,860
1,781
—
— $
28,009
5,407 $
6,506 $
22,493 $
22,432 $
6,227
22,351
(776,750) $
904,035 $
2,741,588
267,681 $
175,062 $
35,431 $
18,097 $
72,335 $
99,841 $
5,002 $
— $
— $
— $
— $
57,177 $
75,073 $
201 $
5,243 $
— $
282,972
— $
186,077
— $
2,822
—
—
—
—
—
—
See accompanying notes to the consolidated financial statements.
88
PREMIER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
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 23 - 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, a specialty 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 and insurance management services.
Basis of Presentation and Consolidation
Basis of Presentation
The Company, through its wholly-owned subsidiary, Premier Services, LLC ("Premier GP"), holds an approximate 32%
controlling general partner interest in, and, as a result, consolidates the financial statements of, Premier Healthcare Alliance, L.P.
("Premier LP"). The limited partners' approximate 68% ownership of Premier LP is reflected as redeemable limited partners' capital
in the Company's accompanying 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 consolidated statements of
income and within comprehensive income attributable to non-controlling interest in the consolidated statements of comprehensive
income.
The member owners owned approximately 68% and 74% of the Company's combined Class A and Class B common stock
(the "common stock") through their ownership of Class B common stock at June 30, 2016 and 2015, respectively. During the year
ended June 30, 2016, the member owners exchanged approximately 7.7 million of their Class B common units and associated
Class B common stock for an equal amount of Class A common stock 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") following the consummation of the Company's initial public offering (the "IPO," and
collectively with the Reorganization, the "Reorganization and IPO") on October 1, 2013 (See Note 17 - Earnings (Loss) Per Share).
See Note 2 - Initial Public Offering and Reorganization for further information on the Exchange Agreement. As a result, at June 30,
2016, the member owners owned approximately 68% of the Company's combined common stock through their ownership of Class
B common stock, and the public investors, which may include member owners that have received shares of Class A common stock
in connection with previous exchanges, owned approximately 32% of the Company's outstanding common stock.
Principles of Consolidation
After the completion of the Reorganization and IPO, Premier Healthcare Solutions, Inc. ("PHSI") became a consolidated
subsidiary of the Company. PHSI is considered the predecessor of the Company for accounting purposes and accordingly, PHSI's
consolidated financial statements are the Company's historical financial statements for periods prior to October 1, 2013. The
historical consolidated financial statements of PHSI are reflected herein based on PHSI's historical ownership interests of Premier
89
LP and its consolidated subsidiaries. See Note 2 - Initial Public Offering and Reorganization for further information related to the
IPO and the Reorganization.
The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC") and in accordance with U.S. generally accepted accounting principles ("GAAP") and
include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the Company exercised control
and when applicable, entities for which the Company had a controlling financial interest or was the primary beneficiary. All
intercompany transactions have been eliminated upon consolidation. Accordingly, the 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 periods shown, including normal recurring adjustments.
We have reclassified certain prior period amounts for deferred income tax assets to be consistent with the current period
presentation (see Note 3 - Significant Accounting Policies).
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company's 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 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.
(2) INITIAL PUBLIC OFFERING AND REORGANIZATION
Initial Public Offering
On October 1, 2013, Premier consummated its IPO of 32,374,751 shares of its Class A common stock, at a price of $27.00
per share, raising net proceeds of approximately $821.7 million after underwriting discounts and commissions, but before expenses.
Premier used approximately (i) $543.9 million of the net proceeds from the IPO to acquire 21,428,571 Class B common units
from the member owners, (ii) $30.1 million of the net proceeds to acquire 1,184,882 Class B common units from PHSI and (iii)
$247.7 million of the net proceeds to acquire 9,761,298 newly issued Class A common units of Premier LP, or the Class A common
units, from Premier LP, in each case for a price per unit equal to the price paid per share of Class A common stock by the underwriters
to Premier in connection with the IPO. All Class B common units purchased by Premier with the net proceeds from the IPO
automatically converted to Class A common units, pursuant to the terms of the LP Agreement, and were contributed by Premier
to Premier GP.
Reorganization
On October 1, 2013 (the "Effective Date"), Premier consummated the Reorganization. In connection with the Reorganization
and IPO, immediately following the Effective Date, all of Premier LP's limited partners that approved the Reorganization received
an amount of Class B common units and capital account balances in Premier LP equal to their percentage interests and capital
account balances in Premier LP immediately preceding the Reorganization. Additionally, immediately following the Effective
Date, all of the stockholders (consisting of member owners) of PHSI that approved the Reorganization contributed their PHSI
common stock to Premier LP in exchange for additional Class B common units based on such stockholder's percentage interest in
the fair market valuation of PHSI and Premier LP prior to the Reorganization. As a result of the foregoing contributions, PHSI
became a wholly-owned subsidiary of Premier LP.
In connection with the Reorganization, the member owners purchased from Premier 112,607,832 shares of Class B common
stock, for par value, $0.000001 per share, which number of shares of Class B common stock equaled the number of Class B units
held by the member owners immediately following the IPO, pursuant to a stock purchase agreement.
Below is a summary of the principal documents that effected the Reorganization and define and regulate the governance and
control relationships among Premier, Premier LP and the member owners after the completion of the Reorganization and IPO.
90
LP Agreement
In connection with the Reorganization and IPO, pursuant to the LP Agreement, Premier GP became the general partner of
Premier LP. As the general partner of Premier LP, Premier GP generally controls the day-to-day business affairs and decision-
making of Premier LP without the approval of any other partner, subject to certain limited partner approval rights. As the sole
member of Premier GP, Premier is responsible for all operational and administrative decisions of Premier LP. In accordance with
the LP Agreement, subject to applicable law or regulation and the terms of Premier LP's financing agreements, Premier GP will
cause Premier LP to make quarterly distributions out of its estimated taxable net income to Premier GP and to the holders of Class
B common units as a class in an aggregate amount equal to Premier LP's total taxable income other than net profit attributable to
dispositions not in the ordinary course of business for each such quarter multiplied by the effective combined federal, state and
local income tax rate then payable by Premier to facilitate payment by each Premier LP partner of taxes, if required, on its share
of taxable income of Premier LP. In addition, in accordance with the LP Agreement, Premier GP may cause Premier LP to make
additional distributions to Premier GP and to all limited partners holding of Class B common units as a class in proportion to their
respective number of units, subject to any applicable restrictions under Premier LP's financing agreements or applicable law.
Premier GP will distribute any amounts it receives from Premier LP to Premier, which Premier will use to (i) pay applicable taxes,
(ii) meet its obligations under the tax receivable agreements and (iii) meet its obligations to the member owners under the Exchange
Agreement if they elect to convert their Class B common units for shares of its Class A common stock and Premier elects to pay
some or all of the consideration to such member owners in cash.
In the event that a limited partner of Premier LP holding Class B common units not yet eligible to be exchanged for shares of
Premier's Class A common stock pursuant to the terms of the Exchange Agreement (i) ceases to participate in Premier's GPO
programs, (ii) ceases to be a limited partner of Premier LP (except as a result of a permitted transfer of its Class B common units),
(iii) ceases to be a party to a GPO participation agreement (subject to certain limited exceptions) or (iv) becomes a related entity
of, or affiliated with, a competing business of Premier LP, in each case, Premier LP will have the option to redeem all of such
limited partner's Class B common units not yet eligible to be exchanged at a purchase price set forth in the LP Agreement. In
addition, the limited partner will be required to exchange all Class B common units eligible to be exchanged on the next exchange
date following the date of the applicable termination event described above.
Voting Trust Agreement
Additionally, in connection with the Reorganization and IPO, Premier's member owners entered into a voting trust agreement
(the "Voting Trust Agreement") which became effective upon the completion of the Reorganization and IPO and pursuant to which
the member owners contributed their Class B common stock into Premier Trust, under which Wells Fargo Delaware Trust Company,
N.A., as trustee, acts on behalf of the member owners for purposes of voting their shares of Class B common stock. As a result of
the Voting Trust Agreement, the member owners retain beneficial ownership of the Class B common stock, while the trustee is
the legal owner of such equity. Pursuant to the Voting Trust Agreement, the trustee must vote all of the member owners' 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 our board of directors and by a majority of the votes received by the trustee from the
member owners for all other matters.
Exchange Agreement
In connection with the Reorganization and IPO, Premier, Premier LP and the member owners entered into the Exchange
Agreement which became effective upon the completion of the Reorganization and IPO. Pursuant to the terms of the Exchange
Agreement, subject to certain restrictions, commencing on October 31, 2014 and during each year thereafter, each member owner
has the cumulative right to exchange up to one-seventh of its initial allocation of Class B common units, as well as any additional
Class B common units purchased by such member owner pursuant to certain rights of first refusal (discussed below), for shares
of Class A common stock (on a one-for-one basis subject to customary adjustments for subdivisions or combinations by split,
reverse split, distribution, reclassification, recapitalization or otherwise), cash or a combination of both, the form of consideration
to be at the discretion of Premier's audit and compliance committee (or another committee of independent directors). This exchange
right can be exercised on a quarterly basis (subject to certain restrictions contained in the registration rights agreement described
below) and is subject to rights of first refusal in favor of the other holders of Class B common units and Premier LP. For each
Class B common unit that is exchanged pursuant to the Exchange Agreement, the member owner will also surrender one
corresponding share of our Class B common stock, which will automatically be retired.
Registration Rights Agreement
In connection with the Reorganization and IPO, Premier and the member owners entered into a registration rights agreement
(the "Registration Rights Agreement") which became effective upon the completion of the Reorganization and IPO. Pursuant to
the terms of the Registration Rights Agreement, Premier filed with the SEC a resale shelf registration statement for resales from
time to time of its Class A common stock issued to the member owners in exchange for their Class B common units pursuant to
91
the Exchange Agreement, subject to various restrictions. The registration statement was declared effective by the SEC in November
2014. Subject to certain exceptions, Premier will use reasonable efforts to keep the resale shelf registration statement effective for
seven years. In addition, Premier will undertake to conduct an annual company-directed underwritten public offering to allow the
member owners to resell Class A common stock and, at Premier's election, to permit it to sell primary shares, following the first
quarterly exchange date of each of the first three years during which the member owners have the right to exchange their Class B
common units for shares of Class A common stock. Premier will not be required to conduct a company-directed underwritten
public offering unless the number of shares of Class A common stock requested by the member owners (and any third parties) to
be registered in the applicable company-directed underwritten public offering constitutes the equivalent of at least 3.5% of the
aggregate number of Class A common units and Class B common units, or, collectively, the common units, outstanding. If the
offering minimum has not been met, Premier will either proceed with the company-directed underwritten public offering (such
decision being in Premier's sole discretion) or notify the member owners that Premier will abandon the offering. After the third
year during which member owners have the right to exchange their Class B common units for shares of Premier's Class A common
stock, Premier may elect to conduct a company-directed underwritten public offering in any subsequent year. Premier, as well as
the member owners, and third parties, will be subject to customary prohibitions on sale prior to and for 60 days following any
company-directed underwritten public offering. The Registration Rights Agreement also grants the member owners certain
"piggyback" registration rights with respect to other registrations of Class A common stock.
Tax Receivable Agreements
In connection with the Reorganization and IPO, Premier entered into a tax receivable agreement with the member owners
which became effective upon the completion of the Reorganization and IPO. Pursuant to the terms of the tax receivable agreement,
for as long as the member owner remains a limited partner, Premier has agreed to pay to the member owners, generally over a 15-
year period (under current law), 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income and
franchise tax that Premier actually realizes (or is deemed to realize, in the case of payments required to be made upon certain
occurrences under such tax receivable agreement) as a result of the increases in tax basis resulting from the initial sale of Class B
common units by the member owners in connection with the Reorganization, as well as subsequent exchanges by such member
owners pursuant to the Exchange Agreement, and of certain other tax benefits related to Premier entering into the tax receivable
agreements, including tax benefits attributable to payments under the tax receivable agreements.
GPO Participation Agreement
In connection with the Reorganization and IPO, Premier's member owners entered into GPO participation agreements with
Premier LP which became effective upon the completion of the Reorganization and IPO. Pursuant to the terms of its GPO
participation agreement, each member owner will receive cash sharebacks, or 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 acute and alternate site providers
and other eligible non-healthcare organizations that are owned, leased or managed by, or affiliated with, each such member owner,
or owned, leased, managed and affiliated facilities, through Premier's GPO supplier contracts. In addition, Premier's two largest
regional GPO member owners, which represented, in the aggregate, approximately 16% of Premier LP's gross administrative fees
revenue for fiscal year 2014, will each remit all gross administrative fees collected by such member owner based upon purchasing
by such member owner's owned, leased, managed and affiliated facilities through the member owner's own GPO supplier contracts
and receive revenue share from Premier LP equal to 30% of such gross administrative fees remitted to Premier LP. Subject to
certain termination rights, these GPO participation agreements will be for an initial five-year term, although Premier LP's two
largest regional GPO member owners have entered into agreements with seven-year terms.
The terms of the GPO participation agreements vary as a result of provisions in Premier's existing arrangements with member
owners that conflict with the terms of the GPO participation agreement and which by the express terms of the GPO participation
agreement are incorporated by reference and deemed controlling and will continue to remain in effect. In certain other instances,
Premier LP and member owners have entered into GPO participation agreements with certain terms that vary from the standard
form, which were approved by the member agreement review committee of Premier's board of directors, based upon regulatory
constraints, pending merger and acquisition activity or other circumstances affecting those member owners.
Effects of the Reorganization
Immediately following the consummation of the Reorganization and IPO:
• Premier became the sole member of Premier GP and Premier GP became the general partner of Premier LP. Through
Premier GP, Premier exercises indirect control over the business operated by Premier LP, subject to certain limited partner
approval rights. Premier GP has no employees and acts solely through its board of managers and appointed officers in
directing the affairs of Premier LP;
• the member owners held 112,607,832 shares of Class B common stock and 112,607,832 Class B common units;
92
• Premier GP held 32,374,751 Class A common units;
• through their holdings of Class B common stock, the member owners had approximately 78% of the voting power in
Premier;
• the investors in the IPO collectively owned all of Premier's outstanding shares of Class A common stock and collectively
had approximately 22% of the voting power in Premier; and
• Premier LP was the operating partnership and parent company to all of Premier's other operating subsidiaries, including
Premier Supply Chain Improvement, Inc. ("PSCI") and PHSI.
Any newly admitted Premier LP limited partners will also become parties to the Exchange Agreement, the Registration Rights
Agreement, the Voting Trust Agreement and the tax receivable agreements, in each case on the same terms and conditions as the
then existing member owners (except that any Class B common units acquired by such newly admitted Premier LP limited partners
will not be subject to the seven-year limitation on exchange of Class B common units set forth in the LP Agreement and the
Exchange Agreement). Any newly admitted Premier LP limited partner will also enter into a GPO participation agreement with
Premier LP.
Impact of the Reorganization
The impact of the Reorganization gave effect to:
• (i) the issuance of 32,374,751 shares of Class A common stock in the IPO, or approximately 22% of the Class A common
stock and Class B common stock, collectively, outstanding after the Reorganization and IPO, at an IPO price of $27.00
per share and the use of the net proceeds therefrom to purchase (A) Class A common units from Premier LP, (B) Class
B common units from PHSI and (C) Class B common units from Premier's member owners, (ii) the entry by Premier LP,
Premier GP and the member owners into the LP Agreement and (iii) the issuance of 112,607,832 shares of Class B common
stock to the member owners;
• the change from the 99% non-controlling interest held by the limited partners of Premier LP prior to the Reorganization
to the approximately 78% non-controlling interest held by the limited partners of Premier LP subsequent to the
Reorganization and IPO;
• the change in the allocation of Premier LP's income from 1% of operating income and 5% of investment income to PHSI
prior to the Reorganization and IPO to approximately 22% of Premier LP's income to Premier (indirectly through Premier
GP) subsequent to the Reorganization and IPO as the result of the modified income allocation provisions of the LP
Agreement and Premier's purchase of approximately 22% of the common units;
• adjustments to reflect redeemable limited partners' capital at the redemption amount, which is the greater of the book
value or redemption amount per the LP Agreement;
• adjustments that give effect to the tax receivable agreement, including the effects of the increase in the tax basis of Premier
LP's assets resulting from Premier's purchase of Class B common units from the member owners; and
• estimated payments due to member owners pursuant to the tax receivable agreement equal to 85% of the amount of cash
savings, if any, in U.S. federal, foreign, state and local income and franchise tax that Premier actually realizes (or is
deemed to realize) in the case of certain payments required to be made upon certain occurrences under such tax receivable
agreements as a result of the increases in the tax basis of Premier LP's assets resulting from Premier's purchase of Class
B common units from the member owners and of certain other tax benefits related to Premier entering into the tax receivable
agreement.
Premier accounted for the Reorganization as a non-substantive transaction in a manner similar to a transaction between entities
under common control pursuant to Accounting Standards Codification Topic 805, Business Combinations. Accordingly, after the
Reorganization, the assets and liabilities of Premier are reflected at their carryover basis.
(3) SIGNIFICANT ACCOUNTING POLICIES
Business Combinations
We account for acquisitions using the acquisition method. All of the assets acquired, liabilities assumed, contractual
contingencies and contingent consideration are recognized at their fair value on the acquisition date. Any excess of the purchase
93
price over the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related costs are recorded as
expenses in the consolidated financial statements.
Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible
assets, we typically use the income method. This method starts with a forecast of all of the expected future net cash flows for each
asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors
associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or
other methods include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent
in the future cash flows and the assessment of the asset's life cycle and the competitive trends impacting the asset, including
consideration of any technical, legal, regulatory or economic barriers to entry. Determining the useful life of an intangible asset
also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be
considered to have indefinite useful lives.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with remaining maturities of three months or less at the
time of acquisition.
Marketable Securities
The Company invests its excess cash in commercial paper, U.S. government securities, corporate debt securities and other
securities with maturities generally ranging from three months to five years from the date of purchase. Marketable securities,
classified as available-for-sale, are carried at fair market value, with the unrealized gains and losses on such investments reported
in comprehensive income as a separate component of stockholders' (deficit) equity or redeemable limited partners' capital as
appropriate. Realized gains and losses, and other-than-temporary declines in investments, are included in other income, net in the
accompanying consolidated statements of income. The Company uses the specific-identification method to determine the cost of
securities sold. The Company does not hold publicly traded equity investments.
Fair Value of Financial Instruments
The fair value of an asset or liability is based on the assumptions that market participants would use in pricing the asset or
liability. Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure
fair value. The Company follows a three-tiered fair value hierarchy when determining the inputs to valuation techniques. The fair
value hierarchy prioritizes the inputs to valuation techniques into three broad levels in order to maximize the use of observable
inputs and minimize the use of unobservable inputs. The levels of the fair value hierarchy are as follows:
Level 1: consists of financial instruments whose values are based on quoted market prices for identical financial instruments
in an active market;
Level 2: consists of financial instruments whose values are determined using models or other valuation methodologies
that utilize inputs that are observable either directly or indirectly, including (i) quoted prices for similar assets or liabilities
in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) pricing
models whose inputs are observable for substantially the full term of the financial instrument and (iv) pricing models
whose inputs are derived principally from or corroborated by observable market data through correlation or other means
for substantially the full term of the financial instrument;
Level 3: consists of financial instruments whose values are determined using pricing models that utilize significant inputs
that are primarily unobservable, discounted cash flow methodologies, or similar techniques, as well as instruments for
which the determination of fair value requires significant management judgment or estimation.
Accounts Receivable
Financial instruments, other than marketable securities, that subject the Company to potential concentrations of credit risk
consist primarily of the Company's receivables. Receivables consist primarily of amounts due from hospital and healthcare system
members for services and products. The Company maintains an allowance for doubtful accounts. This allowance is an estimate
and is regularly evaluated by the Company for adequacy by taking into consideration factors such as past experience, credit quality
of the member base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that
may affect a member's ability to pay. Provisions for the allowance for doubtful accounts attributable to bad debt are recorded in
selling, general and administrative expenses in the accompanying consolidated statements of income. Accounts deemed
uncollectible are written off, net of actual recoveries. If circumstances related to specific customers change, the Company’s estimate
of the recoverability of receivables could be further adjusted.
94
Inventory
Inventory consisting of finished goods, primarily medical products and other non-pharmaceutical products, are stated at the
lower of cost or market on an average cost basis. Inventories consisting of pharmaceuticals and pharmaceutical-related products
are stated at the lower of cost or market on a first-in, first-out basis. The Company performs periodic assessments to determine
the existence of obsolete, slow-moving and unusable inventory and records necessary provisions to reduce such inventory to net
realizable value.
Property and Equipment, Net
Property and equipment are recorded at cost, net of accumulated depreciation. Expenditures for major additions and
improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred. When property
and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated
useful lives (“EUL”) of the related assets using the straight-line method. Capitalized modifications to leased properties are amortized
using the straight-line method over the shorter of the lease term or the assets' EUL. See Note 8 - Property and Equipment, Net.
Costs to develop internal use computer software during the application development stage are capitalized. Internal use
capitalized software costs are included in property and equipment, net in the accompanying consolidated balance sheets. Capitalized
costs are amortized on a straight-line basis over the estimated useful lives of the related software applications of up to five years
and amortization is included in cost of revenue in the accompanying consolidated statements of income. The Company capitalized
costs related to software developed for internal use of $61.0 million and $57.9 million during the years ended June 30, 2016 and
2015, respectively.
The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances
indicate that the carrying value of an asset or asset group may not be recoverable from the estimated cash flows expected to result
from its use and eventual disposition. In cases where the undiscounted cash flows are less than the carrying value, an impairment
loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset or asset group. The factors
considered by the Company in performing this assessment include current and projected operating results, trends and prospects,
the manner in which the asset or asset group is used, and the effects of obsolescence, demand, competition and other economic
factors.
Intangible Assets
Definite-lived intangible assets consist primarily of acquired technology, customer relationships and trade names, and are
amortized on a straight-line basis over their EUL. See Note 9 - Intangible Assets, Net.
The Company reviews the carrying value of definite-lived intangible assets subject to amortization for impairment whenever
events and circumstances indicate that the carrying value of the intangible asset subject to amortization may not be recoverable
from the estimated cash flows expected to result from its use and eventual disposition. In cases where the undiscounted cash flows
are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair
value of the intangible asset subject to amortization. The factors considered by the Company in performing this assessment include
current and projected operating results, trends and prospects, the manner in which the definite-lived intangible asset is used, and
the effects of obsolescence, demand and competition, as well as other economic factors.
An impairment loss is recognized if the carrying amount of a definite-lived intangible asset exceeds the estimated fair value
on the measurement date.
Goodwill
Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is
not amortized. The Company performs its annual goodwill impairment testing on the first day of the last fiscal quarter of its fiscal
year unless impairment indicators are present which could require an interim impairment test.
Under accounting rules, the Company may elect to perform a qualitative assessment to determine if an impairment is more
likely than not to have occurred. This qualitative assessment requires an evaluation of any excess of fair value over the carrying
value for a reporting unit and significant judgment regarding potential changes in valuation inputs, including a review of the
Company's most recent long-range projections, analysis of operating results versus the prior year, changes in market values, changes
in discount rates and changes in terminal growth rate assumptions. If it is determined that an impairment is more likely than not
to exist, then we are required to perform a quantitative assessment to determine whether or not goodwill is impaired and to measure
the amount of goodwill impairment, if any.
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Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value
of each of our reporting units to its carrying amount, including goodwill. In performing the first step, we determine the fair value
of a reporting unit using a discounted cash flow analysis that is corroborated by a market-based approach. Determining fair value
requires the exercise of significant judgment, including judgment about appropriate discount rates, perpetual growth rates and the
amount and timing of expected future cash flows. The cash flows employed in the discounted cash flow analyses are based on the
most recent budget and long-term forecast. The discount rates used in the discounted cash flow analyses are intended to reflect
the risks inherent in the future cash flows of the respective reporting units. If the estimated fair value of a reporting unit exceeds
its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary.
If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment
test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's
goodwill with its goodwill carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated
fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase
price paid. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment
charge is recognized in an amount equal to that excess.
The Company's most recent annual impairment testing, which consisted of a quantitative assessment, did not result in any
goodwill impairment charges during the fourth quarter of the year ended June 30, 2016.
Deferred Compensation Plan Assets and Related Liabilities
The Company maintains a non-qualified deferred compensation plan for the benefit of eligible employees. This plan is designed
to permit employee deferrals in excess of certain tax limits and provides for discretionary employer contributions in excess of the
tax limits applicable to the Company's 401(k) plan. The amounts deferred are invested in assets at the direction of the employee.
Company assets designated to pay benefits under the plan are held by a rabbi trust and are subject to the general creditors of
the Company.
The assets, classified as trading securities, and liabilities of the rabbi trust are recorded at fair value and are accounted for as
assets and liabilities of the Company. The assets of the rabbi trust are used to fund the deferred compensation liabilities owed to
current and former employees. The deferred compensation plan contains both current and non-current assets. The current portion
of the deferred compensation plan assets is comprised of estimated amounts to be paid within one year to departed participants
following separation from the Company. The estimated current portion, totaling $2.0 million and $2.6 million at June 30, 2016
and 2015, respectively, is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets.
The corresponding current portion of deferred compensation plan liabilities is included in other current liabilities in the
accompanying consolidated balance sheets at June 30, 2016 and 2015. The non-current portion of the deferred compensation plan
assets, totaling $40.0 million and $37.5 million at June 30, 2016 and 2015, respectively, is included in long-term assets in the
accompanying consolidated balance sheets. The corresponding non-current portion of deferred compensation plan liabilities is
included in long-term liabilities in the accompanying consolidated balance sheets at June 30, 2016 and 2015. Unrealized gain
(loss) of $(1.6) million, $(0.8) million and $2.0 million respectively, on plan assets as of June 30, 2016, 2015 and 2014, respectively,
are included in other income (expense), net in the accompanying consolidated statements of income. Deferred compensation
income (expense) from the change in the corresponding liability of $1.6 million, $0.8 million and $(2.0) million, respectively, are
included in selling, general and administrative expense in the accompanying consolidated statements of income for the years ended
June 30, 2016, 2015 and 2014, respectively.
Investments
The Company uses the cost method to account for investments in businesses that are not publicly traded and for which the
Company does not control or have the ability to exercise significant influence over operating and financial policies. In accordance
with the cost method, these investments are recorded at lower of cost or fair value, as appropriate, and are classified as long-term
and included in other assets.
Investments held by the Company in businesses that are not publicly traded and for which the Company has the ability to
exercise significant influence over operating and financial management are accounted for under the equity method. In accordance
with the equity method, these investments are originally recorded at cost and are adjusted for the Company's proportionate share
of earnings, losses and distributions. These investments are classified as long-term and included in other assets. See Note 12 -
Investments.
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The Company assesses and records impairment losses when events and circumstances indicate the investments might be
impaired. Gains and losses are recognized when realized and recorded in other income (expense), net in the accompanying
consolidated statements of income.
Tax Receivable Agreements
The Company records a liability related to the tax receivable agreements based on 85% of the estimated amount of tax savings
the Company expects to receive, generally over a 15-year period, in connection with the additional tax benefits created in connection
with the Reorganization and IPO. Tax payments under the tax receivable agreements will be made to the member owners as the
Company realizes tax benefits attributable to the initial purchase of Class B common units from the member owners in the
Reorganization and IPO and any subsequent exchanges of Class B common units into Class A common stock or cash between the
Company and the member owners. Determining the estimated amount of tax savings the Company expects to receive requires
judgment as deductibility of goodwill amortization expense is not assured and the estimate of tax savings is dependent upon the
actual realization of the tax benefit and the tax rates in effect at that time.
Changes in the estimated tax receivable agreement liability that are the result of a change in tax accounting method are recorded
in selling, general and administrative expense in the consolidated statements of income. Changes in the estimated tax receivable
agreement liability that are related to new basis changes as a result of the exchange of Class B common units for a like number of
shares of Class A common stock or as a result of departed member owners are recorded as an increase to additional paid-in capital
in the consolidated statements of stockholders' (deficit) equity.
Redeemable Limited Partner's Capital
The LP agreement includes a provision that provides for redemption of a limited partner’s interest upon termination as
follows: For Class B common units not yet eligible for exchange, those will be redeemed at a purchase price which is the lower
of the limited partner’s capital account balance in Premier LP immediately prior to the IPO after considering any IPO proceeds
received and the fair market value of the Class A common stock of the Company on the date of the termination with either (a) a
five-year, unsecured, non-interest bearing term promissory note, (b) a cashier’s check or wire transfer of immediately available
funds in an amount equal to the present value of the Class B unit redemption amount, or (c) payment on such other terms mutually
agreed upon with Premier GP. For Class B common units that are eligible for exchange, the limited partner is also required to
exchange all eligible Class B common units on the next exchange date following the date of the termination.
A limited partner cannot redeem all or any part of its interest in Premier LP without the approval of Premier GP, which is
controlled by the board of directors. Given the limited partners hold the majority of the votes of the board of directors, limited
partners' capital has a redemption feature that is not solely within the control of the Company. As a result, the Company reflects
limited partners’ capital on the consolidated balance sheets as redeemable limited partners’ capital in temporary equity. In addition,
the limited partners have the ability to exchange their Class B common units for cash or Class A common shares on a one-for-one
basis. Accordingly, the Company records redeemable limited partners' capital at the redemption amount, which represents the
greater of the book value or redemption amount per the LP Agreement at the reporting date, with the corresponding offset to
additional paid-in-capital and retained earnings (accumulated deficit).
Distributions to Limited Partners under the LP Agreement
Premier LP makes quarterly distributions to Premier, Inc. as the general partner and to the limited partners in the form of a
legal partnership income distribution governed by the terms of the LP Agreement. The general partner distribution is based on the
general partner's ownership in Premier LP. The limited partner distributions are based on the limited partners' ownership in Premier
LP and relative participation across Premier service offerings. While the limited partner distributions are partially based on relative
participation across Premier service offerings, the actual distribution is not solely based on revenue generated from an individual
partner’s participation as distributions are based on the net income or loss of the partnership which encompass the operating
expenses of the partnership as well as income or loss generated by non-owner members' participation in Premier’s service
offerings. To the extent Premier LP incurred a net loss, the partners would not receive a quarterly distribution.
Revenue Recognition
Net Revenue
Net revenue consists of (i) service revenue which includes net administrative fees revenue and other services and support
revenue and (ii) product revenue. Net administrative fees revenue consists of net GPO administrative fees in the supply chain
segment. Other services and support revenue consists primarily of fees generated by the performance services segment in connection
with the Company's SaaS informatics products subscriptions, advisory services and performance improvement collaborative
subscriptions. Product revenue consists of specialty pharmacy and direct sourcing product sales, which are included in the supply
chain segment. The Company recognizes revenue when (i) there is persuasive evidence of an arrangement, (ii) the fee is fixed or
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determinable, (iii) services have been rendered and payment has been contractually earned, and (iv) collectability is reasonably
assured.
Net Administrative Fees Revenue
Net administrative fees revenue is generated through administrative fees received from suppliers based on the total dollar
volume of supplies purchased by the Company's members in connection with its GPO programs.
The Company, through its group purchasing program, aggregates member purchasing power to negotiate pricing discounts
and improve contract terms with suppliers. Contracted suppliers pay the Company administrative fees which generally represent
1% to 3% of the purchase price of goods and services sold to members under the contracts the Company has negotiated.
Administrative fees are recognized as revenue in the period in which the respective supplier reports member purchasing data,
usually a month or a quarter in arrears of actual member purchase activity. The supplier report proves that the delivery of product
or service has occurred, the administrative fees are fixed and determinable based on reported purchasing volume, and collectability
is reasonably assured. Member and supplier contracts substantiate persuasive evidence of an arrangement. The Company does not
take title to the underlying equipment or products purchased by members through its GPO supplier contracts.
The Company pays a revenue share equal to a percentage of gross administrative fees that the Company collects based upon
purchasing by such members and their owned, leased, managed or affiliated facilities through its GPO supplier contracts. Revenue
share is recognized according to the members' contractual agreements with the Company as the related administrative fees revenue
is recognized. Considering GAAP relating to principal/agent considerations under revenue recognition principles, revenue share
is recorded as a reduction to gross administrative fees revenue to arrive at a net administrative fees revenue amount, which amount
is included in service revenue in the accompanying consolidated statements of income.
Other Services and Support Revenue
Performance services revenue consists of SaaS informatics products subscriptions, certain perpetual and term licenses,
performance improvement collaborative and other service subscriptions, professional fees for advisory services, and insurance
services management fees and commissions from group-sponsored insurance programs.
SaaS informatics subscriptions include the right to use the Company's proprietary hosted technology on a SaaS basis, training
and member support to deliver improvements in cost management, quality and safety, population health management and provider
analytics. Pricing varies by application and size of healthcare system. Informatics subscriptions are generally three to five year
agreements with automatic renewal clauses and annual price escalators that typically do not allow for early termination. These
agreements do not allow for physical possession of the software. Subscription fees are typically billed on a monthly basis and
revenue is recognized as a single deliverable on a straight-line basis over the remaining contractual period following implementation.
Implementation involves the completion of data preparation services that are unique to each member's data set and, in certain
cases, the installation of member site-specific software, in order to access and transfer member data into the Company's hosted
SaaS informatics products. Implementation is generally 90 to 170 days following contract execution before the SaaS informatics
products can be fully utilized by the member.
The Company sells certain perpetual and term licenses that include mandatory post-contract customer support in the form of
maintenance and support services. Pricing varies by application and size of healthcare system. Fees for the initial period include
the license fees, implementation fees and the initial bundled maintenance and support services fees. The fees for the initial period
are recognized straight-line over the remaining initial period following implementation. Subsequent renewal maintenance and
support services fees are recognized on a straight-line basis over the contractually stated renewal periods. Implementation services
are provided to the customer prior to the use of the software and do not involve significant customization or modification.
Implementation is generally 300 to 350 days following contract execution before the licensed software products can be fully
utilized by the member.
Revenue from performance improvement collaboratives and other service subscriptions that support the Company's offerings
in cost management, quality and safety and population health management is recognized over the service period, which is generally
one year.
Professional fees for advisory services are sold under contracts, the terms of which vary based on the nature of the engagement.
Fees are billed as stipulated in the contract, and revenue is recognized on a proportional performance method as services are
performed and deliverables are provided. In situations where the contracts have significant contract performance guarantees or
member acceptance provisions, revenue recognition occurs when the fees are fixed and determinable and all contingencies,
including any refund rights, have been satisfied.
Insurance services management fees are recognized in the period in which such services are provided. Commissions from
group sponsored insurance programs are recognized over the term of the insurance policies, generally one year.
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Certain administrative and/or patient management specialty pharmacy services are provided in situations where prescriptions
are sent back to member health systems for dispensing. Additionally, the Company derives revenue from pharmaceutical
manufacturers for providing patient education and utilization data. Revenue is recognized as these services are provided.
Product Revenue
Specialty pharmacy revenue is recognized when a product is accepted and is recorded net of the estimated contractual
adjustments under agreements with Medicare, Medicaid and other managed care plans. Payments for the products provided under
such agreements are based on defined allowable reimbursements rather than on the basis of standard billing rates. The difference
between the standard billing rate and allowable reimbursement rate results in contractual adjustments which are recorded as
deductions from net revenue.
Direct sourcing revenue is recognized once the title and risk of loss of medical products have been transferred to members.
Multiple Deliverable Arrangements
The Company enters into agreements where the individual deliverables discussed above, such as SaaS subscriptions and
advisory services, are bundled into a single service arrangement. These agreements are generally provided over a time period
ranging from approximately three months to five years after the applicable contract execution date. Revenue is allocated to the
individual elements within the arrangement based on their relative selling price using vendor specific objective evidence ("VSOE"),
third-party evidence ("TPE") or the estimated selling price ("ESP"), provided that the total arrangement consideration is fixed and
determinable at the inception of the arrangement. The Company establishes VSOE, TPE, or ESP for each element of a service
arrangement based on the price charged for a particular element when it is sold separately in a stand-alone arrangement. All
deliverables which are fixed and determinable are recognized according to the revenue recognition methodology described above.
Certain arrangements include performance targets or other contingent fees that are not fixed and determinable at the inception
of the arrangement. If the total arrangement consideration is not fixed and determinable at the inception of the arrangement, the
Company allocates only that portion of the arrangement that is fixed and determinable to each element. As additional consideration
becomes fixed, it is similarly allocated based on VSOE, TPE or ESP to each element in the arrangement and recognized in accordance
with each element's revenue recognition policy.
Performance Guarantees
On limited occasions, the Company enters into agreements which provide for guaranteed performance levels to be achieved
by the member over the term of the agreement. In situations with significant performance guarantees, the Company defers revenue
recognition until the amount is fixed and determinable and all contingencies, including any refund rights, have been satisfied. In
the event that guaranteed savings levels are not achieved, the Company may have to perform additional services at no additional
charge in order to achieve the guaranteed savings or pay the difference between the savings that were guaranteed and the actual
achieved savings.
Deferred Revenue
Deferred revenue consists of unrecognized revenue related to advanced member invoicing or member payments received prior
to fulfillment of the Company's revenue recognition criteria. Substantially all deferred revenue consists of deferred subscription
fees and deferred advisory fees. Subscription fees for company-hosted SaaS applications are deferred until the member's unique
data records have been incorporated into the underlying software database, or until member site-specific software has been
implemented and the member has access to the software. Deferred advisory fees arise when cash is received from members prior
to delivery of service. When the fees are contingent upon meeting a performance target that has not yet been achieved, the advisory
fees are deferred until the performance target is met.
Cost of Revenue and Operating Expenses
Cost of Revenue
Cost of service revenue includes expenses related to employees (including compensation and benefits) and outside consultants
who directly provide services related to revenue-generating activities, including advisory services to members and implementation
services related to SaaS informatics products. Cost of service revenue also includes expenses related to hosting services, related
data center capacity costs, third-party product license expenses and amortization of the cost of internal use software.
Cost of product revenue consists of purchase and shipment costs for specialty pharmaceuticals and direct sourced medical
products.
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Operating Expenses
Selling, general and administrative expenses consist of expenses directly associated with selling and administrative employees
and indirect expenses associated with employees that primarily support revenue generating activities (including compensation and
benefits) and travel-related expenses, as well as occupancy and other indirect expenses, insurance expenses, professional fees, and
other general overhead expenses.
Research and development expenses consist of employee-related compensation and benefits expenses, and third-party
consulting fees of technology professionals, incurred to develop, support and maintain the Company's software-related products
and services.
Amortization of purchased intangible assets includes the amortization of all identified definite-lived intangible assets resulting
from acquisitions.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs are reflected in selling, general and administrative expenses in
the accompanying consolidated statements of income and were $3.3 million, $2.2 million and $1.7 million for the years ended
June 30, 2016, 2015 and 2014, respectively.
Software Development Costs
Costs to develop internal use computer software that are incurred in the preliminary project stage are expensed as incurred.
During the development stage, direct consulting costs and payroll and payroll-related costs for employees that are directly associated
with each project are capitalized and amortized over the estimated useful life of the software, once it is placed into operation.
Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the related software applications of up
to five years and amortization is included in depreciation and amortization expense. Replacements and major improvements are
capitalized, while maintenance and repairs are expensed as incurred. Some of the more significant estimates and assumptions
inherent in this process involve determining the stages of the software development project, the direct costs to capitalize and the
estimated useful life of the capitalized software.
Income Taxes
The Company accounts for income taxes under the asset and liability approach. Deferred tax assets or liabilities are determined
based on the differences between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates
which will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets
when, based upon the available evidence, it is more likely than not that the deferred tax assets will not be realized.
The Company prepares and files tax returns based on interpretations of tax laws and regulations. The Company's tax returns
are subject to examination by various taxing authorities in the normal course of business. Such examinations may result in future
tax and interest assessments by these taxing authorities.
In determining the Company's tax expense for financial reporting purposes, the Company establishes a reserve for uncertain
income tax positions unless it is determined to be "more likely than not" that such tax positions would be sustained upon examination,
based on their technical merits. That is, for financial reporting purposes, the Company only recognizes tax benefits taken on the
tax return if it believes it is "more likely than not" that such tax positions would be sustained. There is considerable judgment
involved in determining whether it is "more likely than not" that positions taken on the tax returns would be sustained.
The Company adjusts its tax reserve estimates periodically because of ongoing examinations by, and settlements with, varying
taxing authorities, as well as changes in tax laws, regulations and interpretations. The consolidated tax expense of any given year
includes adjustments to prior year income tax accruals and related estimated interest charges that are considered appropriate. The
Company's policy is to recognize, when applicable, interest and penalties on uncertain income tax positions as part of income tax
expense.
Comprehensive Income
Comprehensive income includes all changes in stockholders' equity during a period from non-owner sources. Net income and
other comprehensive income, including unrealized gains and losses on investments, are reported, net of their related tax effect, to
arrive at comprehensive income.
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Basic and Diluted Earnings (Loss) per Share
Basic earnings (loss) per share ("EPS") is calculated by dividing net income by the number of weighted average common
shares outstanding during the period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock
equivalents, unless the effect of inclusion would result in the reduction of a loss or the increase in income per share. Diluted EPS
is computed by dividing net income by the number of weighted average common shares increased by the dilutive effects of potential
common shares outstanding during the period. The number of potential common shares outstanding is determined in accordance
with the treasury stock method.
Recently Adopted Accounting Standards
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2015-17, Balance Sheet Classification of Deferred Taxes, as part of their simplification initiatives. The update requires that deferred
tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company early adopted this
standard as allowed as of December 31, 2015. The Company retroactively adjusted deferred tax assets and liabilities as they would
have been reported at June 30, 2015 in accordance with ASU 2015-17 (see Note 20 - Income Taxes).
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting Measurement-Period Adjustments. Under this
standard, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the
reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation or amortization,
or other income effects (if any) as a result of the change to the provisional amounts, calculated as if the accounting had been
completed as of the acquisition date, must be recorded in the reporting period in which the adjustment amounts are determined
rather than retrospectively. This standard also requires that the acquirer present separately on the face of the income statement, or
disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in
previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The Company
early adopted the new standard as allowed effective January 1, 2016. The adoption of ASU 2015-16 did not result in any significant
changes in the Company's results of operations or statement of position. For further information, see Note 10 - Goodwill.
Recently Issued Accounting Standards Not Yet Adopted
In March 2016, the FASB issued 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 standard is effective 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. 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 No. 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 No. 2016-01, 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 financial statements that have not been issued. The Company is currently evaluating
the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
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 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 2015-03 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
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the term of the line-of-credit arrangement.” This standard will be effective retrospectively for financial statements issued for fiscal
years beginning after December 15, 2015, including interim periods within those fiscal years. The new standard will be effective
for the Company for the fiscal year beginning July 1, 2016. The guidance has no impact on the Company’s accounting for debt
issuance costs associated with its line-of-credit.
In July 2015, the FASB issued ASU 2015-11, 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 February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis,
which effectively eliminates the presumption that a general partner should consolidate a limited partnership, modifies the evaluation
of whether limited partnerships and similar legal entities are variable interest entities ("VIE"s) or voting interest entities, and affects
the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and
related party relationships). In some cases, consolidation conclusions will change under the new guidance and, in other cases, a
reporting entity will provide additional disclosures if an entity that currently is not considered a VIE is considered a VIE under
the new guidance. The new standard will be effective for fiscal years beginning after December 15, 2015, including interim periods
within those fiscal years. The new standard allows for either full retrospective or modified retrospective adoption. The new standard
will be effective for the Company for the fiscal year beginning July 1, 2016. The Company has completed its evaluation and has
concluded there is no material impact from the adoption of the new standard on its consolidated financial statements other than
providing additional disclosures regarding its consolidation of Premier LP.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, 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, 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 principals to recognize revenue for the gross amount and agents
to recognize revenue for the amount of any fee or commission it expects to be entitled. The new standard, as amended, will be
effective with ASU 2014-09.
In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which clarifies specific
aspects of ASU 2014-09, Revenue from Contracts with Customers, clarifying how to identify performance obligations and guidance
related to licensing implementation. This new standard 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 new standard, as amended, will be effective with ASU 2014-09.
In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which clarifies specific
aspects of ASU 2014-09, Revenue from Contracts with Customers, 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, as amended, will be effective with ASU 2014-09.
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The new revenue recognition standards, 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.
(4) BUSINESS ACQUISITIONS
Acquisition of InFlowHealth, LLC
On October 1, 2015, PHSI acquired all of the limited liability company membership interests of InFlowHealth, LLC ("InFlow")
for $6.1 million in cash. The Company utilized available funds on hand to complete the acquisition. The acquisition provides
selling members an earn-out opportunity of up to $26.9 million based on InFlow’s future annual contractual subscription revenues
above certain thresholds through December 31, 2019. As of June 30, 2016, the Company valued the earn-out at $4.1 million related
to the contingent purchase price, of which $0.5 million is classified as current and included in other current liabilities and $3.6
million is classified as long-term and included in other non-current liabilities in the consolidated balance sheet. In accordance with
GAAP, the contingent consideration is recorded at fair value based on a probability-weighted approach including multiple earnings
scenarios, although this value is not indicative of a known amount to be paid. The selling members also received restricted stock
units of the Company with an aggregate equity grant value of $2.1 million, which vest over a three-year period with restrictions
tied to continued employment.
InFlow is a SaaS-based software developer that specializes in improving the operational, financial and strategic performance
of physician practices. InFlow’s software allows physicians to identify opportunities for improvement and guide physician practice
budgeting and strategic investments by aggregating financial and operational data from physicians in medical groups across the
United States. The software is designed to provide actionable insights into among other things, practice capacity, patient volumes,
productivity and staffing ratios, revenue cycle performance, patient demographics, referral patterns and overall compensation.
The Company has accounted for the InFlow acquisition as a business combination whereby the purchase price was allocated
to tangible and intangible assets (see Note 9 - Intangible Assets, Net) acquired and liabilities assumed based on their fair values.
The InFlow acquisition resulted in the recognition of approximately $5.9 million of goodwill (see Note 10 - Goodwill) attributable
to the anticipated profitability of InFlow. The InFlow acquisition is considered an asset acquisition for tax purposes. Accordingly,
the Company expects the goodwill to be deductible for tax purposes.
The calculation of the earn-out is based on future revenues as defined in the purchase agreement. In accordance with GAAP,
the Company is required to fair-value the earn-out liability at each reporting period with any adjustments to the earn-out recorded
in earnings under other expenses, net. The Company reports InFlow as part of its performance services segment.
Acquisition of CECity.com, Inc.
On August 20, 2015, PHSI acquired 100% of the outstanding shares of capital stock of CECity.com, Inc. (“CECity”), a
Delaware corporation, for $398.3 million. The Company funded the acquisition with $250.0 million of cash and $150.0 million
of borrowings under the Company’s credit facility (see Note 13 - Debt). CECity is a cloud-based healthcare solutions provider,
specializing in performance management and improvement, pay-for-value reporting and professional education. CECity offers
turnkey solutions for clinical data registries, continuing medical education, maintenance of certification, performance improvement,
pay-for-value reporting and life-long professional development.
The Company has accounted for the CECity acquisition as a business combination whereby the purchase price was allocated
to tangible and intangible assets (see Note 9 - Intangible Assets, Net) acquired and liabilities assumed based on their fair values.
The CECity acquisition resulted in the recognition of approximately $274.0 million of goodwill (see Note 10 - Goodwill) which
reflects a premium relative to the fair value of the identified assets due to the strategic importance of the transaction to the Company
and the CECity business model which does not rely extensively on tangible assets as well as the anticipated profitability of CECity.
The CECity acquisition is considered an asset acquisition for tax purposes. Accordingly, the Company expects the goodwill to be
deductible for tax purposes.
103
The following table summarizes the fair values assigned to the net assets acquired and the liabilities assumed as of the CECity
acquisition date of August 20, 2015 (in thousands):
Purchase price
Working capital adjustment
Total purchase price
Less: cash acquired
Total purchase price, net of cash acquired
Accounts receivable
Other current assets
Property and equipment
Intangible assets
Total assets acquired
Other current liabilities
Total liabilities assumed
Goodwill
Acquisition Date
Fair Value
400,000
(28)
399,972
(1,708)
398,264
3,877
295
605
125,400
130,177
5,871
5,871
273,958
$
$
Approximately $4.0 million of pretax transaction-related costs related to the CECity acquisition are recorded in selling, general
and administrative expenses in the accompanying consolidated statement of income for the year ended June 30, 2016, respectively.
The Company reports CECity as part of its performance services segment.
Pro forma results of operations for this acquisition have not been presented because the effects on revenue and net income
were not material to our historic consolidated financial statements.
Acquisition of Healthcare Insights, LLC
On July 31, 2015, PHSI acquired all of the limited liability company membership interests of Healthcare Insights, LLC (“HCI”)
for $64.3 million in cash. The Company utilized available funds on hand to complete the acquisition. The acquisition also provides
selling members with an earn-out opportunity of up to $4.0 million based on HCI’s revenues during the 12 months ending December
31, 2017 as defined in the purchase agreement. As of June 30, 2016, the fair value of the earn-out liability related to the HCI
acquisition is zero. HCI has two primary businesses exclusively serving the healthcare provider market: (i) financial analytics
which includes budgeting, forecasting, and labor productivity applications, and (ii) clinical analytics which includes service line
analytics and direct costing analytics to support value-based care.
The Company has accounted for the HCI acquisition as a business combination whereby the purchase price was allocated to
tangible and intangible assets (see Note 9 - Intangible Assets, Net) acquired and liabilities assumed based on their fair values. The
HCI acquisition resulted in the recognition of approximately $42.4 million of goodwill (see Note 10 - Goodwill) attributable to
the anticipated profitability of HCI. The HCI acquisition is considered an asset acquisition for tax purposes. Accordingly, the
Company expects the goodwill to be deductible for tax purposes.
The calculation of the earn-out is based on future revenues as defined in the purchase agreement. In accordance with GAAP,
the Company is required to fair-value the earn-out liability at each reporting period with any adjustments to the earn-out recorded
in earnings in other expense, net. The Company reports HCI as part of its performance services segment.
Acquisition of Non-Controlling Interest in S2S Global
On February 2, 2015, the Company purchased the remaining 40% of the outstanding limited liability company membership
interests of SVS LLC d/b/a S2S Global ("S2S Global") for approximately $14.5 million. In connection with the purchase, the
Company repaid the $14.2 million balance outstanding under the S2S Global line of credit and terminated the S2S Global line of
credit prior to its maturity date. The Company utilized available funds on hand to complete the acquisition and pay-off the S2S
Global line of credit (see Note 13 - Debt).
104
Acquisition of TheraDoc, Inc.
On September 1, 2014, the Company completed the acquisition of 100% of the outstanding shares of TheraDoc, Inc.
("TheraDoc") for approximately $108.6 million. TheraDoc is a leading provider of clinical surveillance software to healthcare
organizations across the country that brings together disparate data from a hospital's source systems and helps alert clinicians to
potential risks. The Company utilized available funds on hand to complete the acquisition.
Acquisition of Aperek, Inc.
On August 29, 2014, the Company completed the acquisition of 100% of the outstanding shares of Aperek, Inc. ("Aperek"),
(formerly Mediclick), for approximately $47.4 million. Aperek is a SaaS-based supply chain solutions company focused on
purchasing workflow and analytics. The Company utilized available funds on hand to complete the acquisition.
(5) MARKETABLE SECURITIES
The Company invests its excess cash in commercial paper, U.S. government 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. Marketable securities, classified as available-for-sale, consist
of the following (in thousands):
June 30, 2016
Corporate debt securities
Asset-backed securities
June 30, 2015
Commercial paper
U.S. government debt securities
Corporate debt securities
Asset-backed securities
Amortized Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair Market
Value
$
$
$
$
33,267 $
14,755
48,022 $
43,067 $
101,597
211,079
59,692
415,435 $
— $
3
3 $
12 $
66
34
12
124 $
(135) $
(1)
(136) $
— $
(8)
(129)
(10)
(147) $
33,132
14,757
47,889
43,079
101,655
210,984
59,694
415,412
Commercial paper, corporate debt securities, U.S. government debt securities and asset-backed securities are classified as
current and long-term marketable securities in the accompanying consolidated balance sheets.
The decline in the fair market value of corporate debt securities is attributable to changes in interest rates and not credit
quality. The Company does not intend to sell the corporate debt securities in an unrealized loss position and it is not more likely
than not that the Company will be required to sell the corporate debt securities before recovery of their amortized cost bases, which
may be maturity. The Company does not consider the corporate debt securities to be other-than temporarily impaired at June 30,
2016.
At June 30, 2016, the Company had marketable securities with the following maturities (in thousands):
Due in one year or less
Due after one year through five years
Cost
Fair Market
Value
$
$
17,768 $
30,254
48,022 $
17,759
30,130
47,889
See Note 6 - Fair Value Measurements for further discussion related to the Company’s measurement of fair market value for
its marketable securities.
105
(6) FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The Company measures the following assets at fair value on a recurring basis (in thousands):
Description
June 30, 2016
Cash equivalents
Corporate debt securities
Asset-backed securities
Deferred compensation plan assets (a)
Total assets
Earn-out liabilities (b)
Total liabilities
June 30, 2015
Cash equivalents
Commercial paper
U.S. government debt securities
Corporate debt securities
Asset-backed securities
Deferred compensation plan assets (a)
Total assets
$
$
$
$
$
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
83,846 $
83,846 $
33,132
14,757
41,917
173,652 $
4,128
4,128 $
—
—
41,917
125,763 $
—
— $
— $
33,132
14,757
—
47,889 $
—
— $
33,434 $
33,434 $
— $
43,079
101,655
210,984
59,694
40,057
488,903 $
—
34,145
—
—
40,057
107,636 $
43,079
67,510
210,984
59,694
—
381,267 $
—
—
—
—
—
4,128
4,128
—
—
—
—
—
—
—
(a) Deferred compensation plan assets consist of highly liquid mutual fund investments.
(b) Earn-out liabilities incurred in connection with acquisitions of InFlow and HCI, valued at $4.1 million and zero, respectively, at June 30, 2016.
Cash equivalents are included in cash and cash equivalents; commercial paper, corporate debt securities, U.S. government
debt securities and asset-backed securities are included in current and long-term marketable securities (see Note 5 - Marketable
Securities); the current portion of deferred compensation plan assets is included in prepaid expenses and other current assets ($2.0
million and $2.6 million at June 30, 2016 and June 30, 2015, respectively) in the accompanying consolidated balance sheets. The
fair value of the Company's commercial paper, corporate debt securities, U.S. government debt securities and asset-backed
securities, classified as Level 2, are valued using quoted prices for similar securities in active markets or quoted prices for identical
or similar securities in markets that are not active. The Company had no assets or liabilities for which fair value is measured on a
recurring basis at June 30, 2015 that would be classified as Level 3. At June 30, 2016, the Company's earn-out liabilities are
classified as Level 3. The fair value of the earn-out liabilities was determined using the Monte Carlo simulation method.
Non-Recurring Fair Value Measurements
During the year ended June 30, 2016, no non-recurring fair value measurements were required relating to the testing of goodwill
and intangible assets for impairment, however the purchase price allocations required significant non-recurring Level 3 inputs
(see Note 4 - Business Acquisitions). The preliminary fair values of the acquired intangible assets resulting from the acquisitions
of CECity, HCI and InFlow were determined using the income approach.
Other Financial Instruments
The fair value of cash, accounts receivable, accounts payable and accrued liabilities approximates carrying value because of
the short-term nature of these financial instruments. The fair value of non-interest bearing notes payable, classified as Level 2, is
less than their carrying value by approximately $0.7 million and $0.6 million at June 30, 2016 and June 30, 2015, respectively,
based on an assumed market interest rate of 2.1% at June 30, 2016 and 1.6% at June 30, 2015, respectively.
106
(7) ACCOUNTS RECEIVABLE, NET
Trade accounts receivable consist primarily of amounts due from hospital and healthcare system members for services and
products. Managed services receivable consist of amounts receivable from fees for supply chain services for members utilizing
the Company's integrated pharmacy services related to contract negotiation and administration, claims data, rebate processing and
evaluation of current pharmacy formulary and utilization. Other receivables consist primarily of interest receivable on marketable
securities.
Accounts receivable, net consists of the following (in thousands):
Accounts receivable
Managed services receivable
Other
Allowance for doubtful accounts
Accounts receivable, net
June 30,
2016
2015
112,443 $
33,728
234
146,405
(1,981)
144,424 $
88,078
10,941
1,254
100,273
(1,153)
99,120
$
$
(8) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following (in thousands):
Capitalized software
Computer hardware
Furniture and other equipment
Leasehold improvements
Accumulated depreciation and amortization
Property and equipment, net
Useful life
3-5 years
3-5 years
5 years
Lesser of estimated useful
life or term of lease
June 30,
2016
2015
361,864 $
53,547
8,102
16,318
439,831
(265,751)
174,080 $
298,106
46,806
7,630
15,768
368,310
(220,685)
147,625
$
$
Depreciation and amortization expense related to property and equipment for the years ended June 30, 2016, 2015 and 2014
was $51.1 million, $45.2 million and $36.8 million, respectively. Unamortized capitalized software costs at June 30, 2016 and
2015 were $146.0 million and $120.4 million, respectively.
During the year ended June 30, 2015, the Company recognized a loss on disposal of long-lived assets of approximately $15.2
million primarily comprised of $13.3 million in capitalized software costs, which were included in the performance services
segment. The Company specifically identified these capitalized software assets as having no future economic benefit in conjunction
with the on-going integration of the TheraDoc acquisition during its annual inventory process in May 2015. See Note 4 - Business
Acquisitions. The Company did not incur a material loss on disposal of long-lived assets during the years ended June 30, 2016
and 2014.
107
(9) INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following (in thousands):
Technology
Customer relationships
Trade names
Non-compete agreements
Total intangible assets
Accumulated amortization
Total intangible assets, net
Useful Life
2016
2015
June 30,
5.0 years
8.3 years
7.0 years
5.0 years
$
$
143,727 $
48,120
13,160
4,080
209,087
(50,870)
158,217 $
34,524
16,120
5,760
80
56,484
(17,815)
38,669
The increase in intangible assets, net was due to the CECity, HCI and InFlow acquisitions completed during the year ended
June 30, 2016 (see Note 4 - Business Acquisitions). Amortization expense of intangible assets was $33.1 million, $9.1 million and
$3.1 million for the years ended June 30, 2016, 2015 and 2014, respectively. Amortization expense related to technology was
$25.2 million, $6.1 million and $1.5 million for the years ended June 30, 2016, 2015 and 2014, respectively. During the year ended
June 30, 2015, the Company wrote-off approximately $11.6 million in fully amortized intangible assets.
The estimated aggregate amortization expense for each of the next five fiscal years and thereafter is as follows (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total amortization expense (a)
$
$
35,855
35,332
33,776
28,975
7,864
13,015
154,817
(a) Estimated aggregate amortization expense for the next five fiscal years and thereafter excludes amortization on technology under
development, which is classified as technology in the total intangible assets table, of $3.4 million, as these assets have not yet been
completed.
The net carrying value of intangible assets by segment is as follows (in thousands):
Supply Chain Services
Performance Services
June 30,
2016
2015
$
$
— $
158,217
158,217 $
347
38,322
38,669
108
(10) GOODWILL
Goodwill consists of the following (in thousands):
Supply Chain
Services
Performance
Services
31,765 $
183,880 $
—
—
—
31,765 $
273,713
41,905
5,827
505,325 $
$
$
Acquisition
adjustments
during the
measurement
period
— $
245
534
93
872 $
Total
215,645
273,958
42,439
5,920
537,962
Balance at June 30, 2015
CECity acquisition (a)
HCI acquisition (a)
InFlow acquisition (a)
Balance at June 30, 2016
(a) See Note 4 - Business Acquisitions.
(11) OTHER LONG-TERM ASSETS
Other long-term assets consist of the following (in thousands):
Investments
Deferred loan costs, net
Other
Total other long-term assets
June 30,
2016
2015
$
$
16,800 $
1,595
10,895
29,290 $
14,283
2,095
759
17,137
The Company recorded $0.5 million, $0.3 million and $0.2 million in amortization expense on deferred loan costs during the
years ended June 30, 2016, 2015 and 2014, respectively. Amortization expense on deferred loan costs is recognized based on the
straight-line method, which approximates the effective interest method, and is included in interest and investment income, net in
the consolidated statements of income.
Included in Other at June 30, 2016 is a $10.0 million net prepayment to a distributor, which was funded in order to receive
additional discounts on product purchases.
(12) INVESTMENTS
Innovatix, LLC ("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 PSCI, held 50% of the membership units in Innovatix at June
30, 2016 and 2015. The Company accounts for its investment in Innovatix using the equity method of accounting. The carrying
value of the Company's investment in Innovatix was $9.0 million and $9.3 million at June 30, 2016 and 2015, respectively, and
is classified as long-term and included in other assets in the accompanying consolidated balance sheets. The Company's 50%
ownership share of Innovatix's net income included in equity in net income of unconsolidated affiliates in the accompanying
consolidated statements of income was $21.8 million, $21.3 million and $17.0 million for the years ended June 30, 2016, 2015
and 2014, respectively, all of which is included in the supply chain services segment.
On May 1, 2015, the Company, through its consolidated subsidiary, PSCI, purchased 5,000,000 units of Class B Membership
Interests in PharmaPoint, LLC ("PharmaPoint") for $5.0 million, which represented a 28% ownership interest in PharmaPoint.
The remaining 72% ownership interest is held by Nations Pharmaceuticals, LLC through its 13,000,000 units of Class A Membership
Interests. The Company accounts for its investment in PharmaPoint using the equity method of accounting. The carrying value of
the Company's investment in PharmaPoint was $4.6 million and $5.0 million at June 30, 2016 and 2015, respectively, and is
classified as long-term and included in other assets in the accompanying consolidated balance sheets. The Company's share of
PharmaPoint's net loss was $0.4 million and $0.1 million for the years ended June 30, 2016 and 2015, respectively. The PharmaPoint
109
net loss is included in equity in net income from unconsolidated affiliates in the accompanying consolidated statements of income
and is included in the supply chain services segment.
The Company obtained a 49% ownership interest in Pharmacy Quality Solutions, Inc. (“PQS”) through its acquisition of
CECity in August 2015 (see Note 4 - Business Acquisitions). PQS provides medication use quality assessment services through
its EquiPP platform which is utilized by U.S. pharmacies, including major retail chains with monthly medication data for
approximately 40 million individuals. The Company recorded zero net income from unconsolidated affiliates for the year ended
June 30, 2016. The Company accounts for its investment in PQS under the equity method. The carrying value of the Company's
investment in PQS was zero at June 30, 2016.
On January 28, 2016, the Company, through its consolidated subsidiary, PSCI, purchased 5,250,000 Class B Membership
Units in BloodSolutions, LLC ("Bloodbuy") for $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. The carrying value of the Company's investment in Bloodbuy was $2.2 million at June 30, 2016, and is classified
as long-term and included in other assets in the accompanying consolidated balance sheets. The Company's share of Bloodbuy's
net loss was $0.1 million for the year ended June 30, 2016. The Bloodbuy net loss is included in equity in net income from
unconsolidated affiliates in the accompanying consolidated statements of income and is included in the supply chain services
segment.
(13) DEBT
Long-term debt consists of the following (in thousands):
Commitment
Amount
June 30, 2016
June 30, 2015
Due Date
Balance Outstanding Balance Outstanding
Credit Facility
Notes Payable
$
750,000 June 24, 2019 $
—
Various
Less: current portion
Total long-term debt
Credit Facility
$
— $
19,342
19,342
(5,484)
13,858 $
—
17,935
17,935
(2,256)
15,679
On June 24, 2014, 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"). 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 1.75% for Eurodollar Rate Loans and 0.125% to 0.75% for Base Rate Loans. To fund the CECity
acquisition the Company utilized $150.0 million of the Credit Facility (see Note 4 - Business Acquisitions), of which $50.0 million
was repaid in each of November 2015, February 2016 and May 2016. At June 30, 2016, the interest rate for three-month Eurodollar
Rate Loans was 1.779% and the interest rate for Base Rate Loans was 3.625%. 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
June 30, 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 measure. Under the terms of the Credit Facility, Premier GP is
110
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 June 30, 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 and other general corporate purposes. As of June 30, 2016 and 2015, there were no outstanding
borrowings under the Credit Facility. As of June 30, 2016, the Company had approximately $25.0 million available under the letter
of credit commitments.
Interest expense incurred during the year ended June 30, 2016 was $2.7 million and cash paid for interest during the year
ended June 30, 2016 was $2.1 million.
S2S Global Line of Credit
On February 2, 2015, the Company purchased the remaining 40% of the outstanding limited liability company membership
interests of S2S Global. In connection with the purchase, the Company repaid the $14.2 million balance outstanding under the
S2S Global line of credit and terminated the S2S Global line of credit prior to its maturity date.
Notes Payable
At June 30, 2016 and 2015, the Company had $19.3 million and $17.9 million, respectively, in notes payable consisting
primarily of non-interest bearing notes payable outstanding to departed member owners, of which $5.5 million and $2.2 million,
respectively, are included in current portion of long-term debt and $13.9 million and $15.7 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.
Future minimum principal payments as of June 30, 2016 are as follows (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total principal payments
$
$
5,484
7,995
260
2,420
3,183
—
19,342
111
(14) OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following (in thousands):
Deferred rent
Reserve for uncertain tax positions
Earn-out liability, less current portion
Accrued compensation
Total other long-term liabilities
June 30,
2016
2015
$
$
16,049 $
3,815
3,659
455
23,978 $
15,996
3,436
—
1,482
20,914
(15) REDEEMABLE LIMITED PARTNERS' CAPITAL
At June 30, 2013, redeemable limited partners' capital represents the limited partners' 99% ownership of Premier LP. Pursuant
to the terms of the historical limited partnership agreement, 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 existing limited partnership
agreement of Premier LP. As a result, the redeemable limited partners' capital is classified as temporary equity in the mezzanine
section of the consolidated balance sheets since (i) the withdrawal is at the option of each limited partner and (ii) 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 committee
of the board of directors.
Redeemable limited partners' capital represents the member owners' 68% ownership of Premier LP at June 30, 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. As such, classification outside of permanent equity is still required
and the redeemable limited partners' capital is recorded at the redemption amount, which represents the greater of the book value
or redemption amount per the LP Agreement, and is classified as temporary equity in the mezzanine section of the consolidated
balance sheet at June 30, 2016. As previously discussed, the Company records redeemable limited partners' capital at the greater
of the book value or redemption amount per the LP Agreement that the Company calculates as the fair value of all Class B common
units, as if immediately exchangeable into Class A common shares. For the years ended June 30, 2016, 2015 and 2014 the Company
recorded an adjustment to fair value for the redemption amount to redeemable limited partners' capital of $(776.8) million, $904.0
million and $2,741.6 million respectively.
During the year ended June 30, 2016, the Company recorded a reduction of $267.7 million to redeemable limited partners'
capital to reflect the exchange of Class B common units and associated shares of Class B common stock by the member owners
for a like number of shares of the Company's Class A common stock pursuant to the terms of the Exchange Agreement. The
following table summarizes the number of Class B common units and associated shares of Class B common stock exchanged by
member owners for a like number of shares of the Company's Class A common stock during the year ended June 30, 2016 (in
thousands, except share amounts):
Date of Quarterly Exchange
July 31, 2015
November 2, 2015
February 1, 2016
May 2, 2016
Number of Class B
Common Units
Exchanged
Reduction in
Redeemable Limited
Partners' Capital
91,374 $
5,830,458
1,591,807
209,359
7,722,998 $
3,268
206,281
51,049
7,083
267,681
112
The table below shows the changes in redeemable limited partners' capital classified as temporary equity from June 30,
2013 to June 30, 2016 (in thousands):
June 30, 2013
$
(56,571) $
364,219 $
(13) $
307,635
Receivables
From Limited
Partners
Redeemable
Limited
Partners'
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Total
Redeemable
Limited
Partners'
Capital
Issuance of redeemable limited partnership interest for
notes receivable
Receipts on receivables from limited partners
Distributions and reductions applied to receivables from
limited partners
Redemption of limited partners
Net income attributable to Premier LP
Distributions to limited partners
Contribution of PHSI common stock in connection with
the IPO
Purchase of Class A common units from Premier LP
Purchase of Class B common units from PHSI
Acquisition of non-controlling interest from members
Net unrealized gain on marketable securities
Adjustment to redemption amount
June 30, 2014
Distributions applied to receivables from limited
partners
Redemption of limited partners
Net income attributable to Premier LP
Distributions to limited partners
Net unrealized loss on marketable securities
Exchange of Class B common units for Class A common
stock by member owners
Adjustment to redemption amount
June 30, 2015
Distributions and notes payable applied to receivables
from limited partners
Redemption of limited partners
Net income attributable to Premier LP
Distributions to limited partners
Net unrealized loss on marketable securities
Exchange of Class B common units for Class A common
stock by member owners
Adjustment to redemption amount
June 30, 2016
$
$
$
(7,860)
12,706
33,586
—
—
—
—
—
—
—
—
—
(18,139) $
6,506
—
—
—
—
—
—
(11,633) $
5,407
—
—
—
—
—
—
(6,226) $
7,860
—
(28,009)
(1,781)
303,336
(348,277)
76,916
247,742
30,072
(131,000)
—
2,741,588
3,262,666 $
—
(2,046)
194,206
(92,273)
—
(175,115)
904,035
4,091,473 $
—
(4,281)
193,547
(92,767)
—
(267,681)
(776,750)
3,143,541 $
—
—
—
—
—
—
—
—
—
(3)
163
—
147 $
—
—
—
—
(155)
—
12,706
5,577
(1,781)
303,336
(348,277)
76,916
247,742
30,072
(131,003)
163
2,741,588
3,244,674
6,506
(2,046)
194,206
(92,273)
(155)
—
—
(8) $
(175,115)
904,035
4,079,832
—
—
—
—
(77)
5,407
(4,281)
193,547
(92,767)
(77)
—
—
(85) $
(267,681)
(776,750)
3,137,230
Receivables from limited partners represent amounts due from limited partners for their required capital in Premier LP. These
receivables are either interest bearing notes issued to new limited partners or non-interest bearing loans (contribution loans) provided
to existing limited partners and are reflected as a reduction in 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 years ended June 30, 2016 and 2015.
During the year ended June 30, 2016, six limited partners withdrew from Premier LP. The limited partnership agreement
provides for the redemption of the former limited partner's Class B common units that are not eligible for exchange in the form
113
of a five-year, unsecured, non-interest bearing term promissory note, a cash payment equal to the present value of the redemption
amount, or other mutually agreed upon terms. Partnership interest obligations to the former limited partners are reflected in notes
payable in the accompanying consolidated balance sheets.
Prior to the consummation of the Reorganization and IPO, Premier LP maintained a discretionary distribution policy in which
semi-annual cash distributions were made each February attributable to the recently completed six months ended December 31
and each September attributable to the recently completed six months ended June 30. As provided in the then existing limited
partnership agreement, the amount of actual cash distributed may have been reduced by the amount of such distributions used by
limited partners to offset contribution loans or other amounts payable to the Company.
Upon the consummation of the Reorganization and IPO, Premier LP amended its distribution policy in which cash distributions
will be required, 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 instead of a semi-annual basis. 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 limited partnership
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.
Premier LP made a quarterly distribution on August 27, 2015 to its limited partners of $22.4 million, which is equal to Premier
LP's total taxable income for the three months ended June 30, 2015 multiplied by the Company's standalone effective combined
federal, state and local income tax rate.
Premier LP made a quarterly distribution on November 25, 2015 to its limited partners of $23.1 million, which is equal to
Premier LP's total taxable income for the three months ended September 30, 2015 multiplied by the Company's standalone effective
combined federal, state and local income tax rate.
Premier LP made a quarterly distribution on February 25, 2016 to its limited partners of $22.5 million, which is equal to
Premier LP's total taxable income for the three months ended December 31, 2015 multiplied by the Company's standalone effective
combined federal, state and local income tax rate.
Premier LP made a quarterly distribution on May 26, 2016 to its limited partners of $24.7 million, which is equal to Premier
LP's total taxable income for the three months ended March 31, 2016 multiplied by the Company's standalone effective combined
federal, state and local income tax rate.
Premier LP made a quarterly distribution on August 25, 2016 to its limited partners of $22.5 million, which is equal to Premier
LP's total taxable income for the three months ended June 30, 2016 multiplied by the Company's stand-alone effective combined
federal, state and local income tax rate. The distribution is reflected in limited partners' distribution payable in the accompanying
consolidated balance sheet at June 30, 2016.
(16) STOCKHOLDERS' DEFICIT
As of June 30, 2016, there were 45,995,528 shares of the Company's Class A common stock, par value $0.01 per share, and
96,132,723 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 therefore,
subject to any statutory or contractual restrictions on the payment of dividends and 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 (i) entitled to one vote for each share held of record on all matters submitted to a vote
of stockholders and (ii) 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 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
114
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.
(17) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share of Premier is computed by dividing net income (loss) attributable to stockholders by the
weighted average number of shares of common stock outstanding for the period. Net income (loss) attributable to stockholders
reflects the adjustment recorded in the period to reflect redeemable limited partners' capital at the redemption amount, as a result
of the 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, 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 common shares used for basic earnings (loss) per share and diluted earnings
(loss) per share (in thousands, except per share amounts):
Year Ended June 30,
2015 (d)
2014 (e)
2016 (d)
Numerator for basic earnings (loss) per share:
Net income (loss) attributable to stockholders
Numerator for diluted earnings (loss) per share:
Net income attributable to stockholders
Adjustment of redeemable limited partners' capital to redemption amount
Net income attributable to non-controlling interest in Premier LP
Net income
Tax effect on Premier Inc. net income (a)
Adjusted net income
$
818,364 $
(865,292) $ (2,713,256)
$
$
818,364 $
(776,750)
193,547
235,161
(41,497)
193,664 $
— $
—
—
—
—
— $
—
—
—
—
—
—
Denominator for basic earnings (loss) weighted average shares (b)
42,368
35,681
25,633
Denominator for diluted earnings (loss) per share:
Effect of dilutive securities: (c)
Stock options
Restricted stock
Performance share awards
Class B shares outstanding
348
589
1,429
100,574
—
—
—
—
—
—
—
—
Denominator for diluted earnings (loss) per share-adjusted:
Weighted average shares and assumed conversions
145,308
35,681
25,633
Basic earnings (loss) per share
Diluted earnings (loss) per share
$
$
19.32 $
1.33 $
(24.25) $
(24.25) $
(105.85)
(105.85)
(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 (loss) per share excludes weighted average shares of non-vested stock options, non-
vested restricted stock, non-vested performance share awards and Class B shares outstanding for the years ended June 30, 2016, 2015 and 2014, respectively.
(c) For the year ended June 30, 2016, the effect of 1,292 stock options were excluded from the diluted weighted average shares outstanding as they have an anti-
dilutive effect on the weighted average shares outstanding. For the year ended June 30, 2015, the effect of 60, 354 and 634 stock options, restricted stock
units and performance share awards, respectively, were excluded from the diluted weighted average shares outstanding due to the net loss sustained for the
respective period. Further, 106,383 Class B common units exchangeable for Class A common shares was excluded from the dilutive weighted average shares
outstanding because to do so would have been anti-dilutive for the period presented. For the year ended June 30, 2014, the effect of 124 restricted stock units
115
were excluded from the diluted weighted average shares outstanding due to the net loss sustained for the respective period. Further, 112,511 Class B common
units exchangeable for Class A common shares was excluded from the dilutive weighted average shares outstanding because to do so would have been anti-
dilutive for the period presented.
(d) The weighted average shares calculation is based on Premier, Inc. common shares outstanding for the years ended June 30, 2016 and 2015.
(e) The weighted average shares calculation is based on a combination of the PHSI historical common shares outstanding for the three months ended September
30, 2013 and the Premier, Inc. common shares outstanding for the period from September 25, 2013 to June 30, 2014.
Pursuant to the terms of the Exchange Agreement, Premier has issued, on a quarterly basis, shares of Class A common stock
to member owners in exchange for a like number of Class B common units of Premier LP. In connection with the exchange of
Class B common units by member owners, shares of Premier's Class B common stock are surrendered by member owners and
retired. 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 in connection with the quarterly exchanges pursuant to the terms of the
Exchange Agreement:
Number of
Class B
Common
Units
Exchanged
Number of
Class B
Common
Shares Retired
Upon
Exchange
Number of
Class B
Common
Units
Outstanding
After
Exchange
Number of
Class B
Common
Shares
Outstanding
After
Exchange
Number of
Class A
Common
Shares
Outstanding
After
Exchange
Percentage of
Combined
Voting Power
Class B/Class
A Common
Stock
91,374
5,830,458
1,591,807
209,359
1,323,654
91,374
106,078,063
106,078,063
37,762,544
74%/26%
5,830,458
100,150,698
100,150,698
43,600,976
70%/30%
1,591,807
209,359
1,323,654
96,802,070
96,132,723
94,809,069
96,802,070
96,132,723
94,809,069
45,239,204
68%/32%
45,554,075
68%/32%
47,365,528
67%/33%
Date of Quarterly
Exchange
July 31, 2015
November 2, 2015
February 1, 2016
May 2, 2016
August 1, 2016 (a)
(a) As the quarterly exchange occurred on August 1, 2016, the impact of the exchange is not reflected in the consolidated financial statements for the year ended
June 30, 2016.
(18) 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 $48.7 million, $28.5 million and $19.5 million for the years ended June
30, 2016, 2015 and 2014, respectively, with a resulting deferred tax benefit of $18.5 million, $10.8 million and $7.4 million,
respectively, calculated at a rate of 38%, which represents the expected effective income tax rate at the time of the compensation
expense deduction and differs from the Company's current effective income tax rate due to enacted state income tax rate changes.
At June 30, 2016, there was $31.0 million of unrecognized stock-based compensation expense related to non-vested awards
that will be amortized over 1.88 years.
Premier 2013 Equity Incentive Plan
The Premier 2013 Equity Incentive Plan (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 June 30, 2016, there were 5,493,425 shares
available for grant under the 2013 Equity Incentive Plan.
116
Restricted Stock
Restricted stock units ("RSU") and restricted stock awards ("RSA") issued and outstanding generally vest over a three-year
period for employees and a one-year period for directors. The following table includes information related to restricted stock unit
awards for the year ended June 30, 2016:
Outstanding at June 30, 2015
Granted
Vested
Forfeited
Outstanding at June 30, 2016
Number of Shares
Weighted Average
Fair Value at
Grant Date
819,091 $
255,780 $
(630,818) $
(40,936) $
403,117 $
28.15
35.10
27.17
30.33
33.86
At June 30, 2016, there was $8.1 million of unrecognized stock-based compensation expense related to non-vested awards
that will be amortized over 1.93 years.
Performance Share Awards
Performance share awards issued and outstanding generally vest over three years if performance targets are met. The following
table includes information related to performance share awards for the year ended June 30, 2016:
Outstanding at June 30, 2015
Granted
Vested (a)
Forfeited
Outstanding at June 30, 2016
Number of Shares
Weighted Average
Fair Value at
Grant Date
1,091,868 $
380,349 $
— $
(28,509) $
1,443,708 $
28.19
35.50
—
32.93
30.02
(a) As of June 30, 2016, 815,016 performance shares vested but were subject to approval by the Compensation Committee of the Company's Board of Directors.
These shares were included in the number of awards outstanding at June 30, 2016. The distribution of vested shares was approved on August 10, 2016 and
distributed on August 23, 2016, on which date the classification of the shares was changed from outstanding to vested.
At June 30, 2016, there was $12.2 million of unrecognized stock-based compensation expense related to performance share
awards that will be amortized over 1.84 years.
Stock Options
Stock options have a term of 10 years from the date of grant. Vested stock options will expire either after 12 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. The following table includes information
related to stock options for the year ended June 30, 2016:
Outstanding at June 30, 2015
Granted
Exercised
Forfeited
Outstanding at June 30, 2016
Outstanding and exercisable at June 30, 2016
117
Number of
Options
Weighted Average
Exercise Price
2,643,078 $
863,717 $
(129,458) $
(62,676) $
3,314,661 $
2,074,973 $
28.24
35.47
27.44
34.16
30.04
27.51
The aggregate intrinsic value of stock options outstanding at June 30, 2016 and 2015 was $11.3 million and $27.0 million,
respectively. The aggregate intrinsic value of stock options outstanding and exercisable at June 30, 2016 and 2015 was $10.8
million and $15.0 million, respectively. At June 30, 2016 and 2015, the aggregate intrinsic value of stock options expected to vest
was $0.5 million and $12.0 million, respectively. The intrinsic value of stock options exercised during the year ended June 30,
2016 and 2015 was $0.8 million and $0.5 million, respectively. There were no stock options exercised during the year ended
June 30, 2014.
At June 30, 2016, there was $10.7 million of unrecognized stock-based compensation expense related to stock options that
will be amortized over 1.91 years.
The Company estimates the fair value of each stock option on the date of grant using a Black-Scholes option pricing model,
applying the following assumptions, and amortizes expense over the option's vesting period using the straight-line attribution
approach:
Expected life (a)
Expected dividend (b)
Expected volatility (c)
Risk-free interest rate (d)
Weighted average option grant date fair value
2016
6 years
—
June 30,
2015
6 years
—
32.7% - 33.5%
34.8% - 39.5%
1.15% - 1.82%
1.66% - 1.89%
$11.11 - $12.40
$12.82 - $14.15
2014
6 years
—
42.0%
1.71%
$11.46
(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 United States Treasury constant maturity market yield as of the date of the
grant.
(19) PENSIONS AND OTHER POST-RETIREMENT BENEFITS
The Company has a defined contribution 401(k) retirement savings plan ("the 401(k) plan") which covers employees who
meet certain age and service requirements.
The Company had a defined contribution pension plan that was terminated in December 2014 and subsequently incorporated
into the Company's defined contribution 401(k) plan. The pension plan provided for monthly contributions of 5% of the participant's
compensation, not to exceed certain limits. Pension expense, included in selling, general and administrative expenses in the
accompanying consolidated statements of income, was $3.9 million and $8.2 million for the years ended June 30, 2015 and 2014,
respectively.
The 401(k) plan provides for monthly employee contributions of up to 20% and matching monthly employer contributions
up to 4% of the participant's compensation, not to exceed certain limits. The 401(k) expense, included in selling, general and
administrative expenses in the accompanying consolidated statements of income, was $8.5 million, $6.6 million and $6.8 million
for the years ended June 30, 2016, 2015 and 2014, respectively.
The Company maintains a non-qualified deferred compensation plan for the benefit of eligible employees. This plan is designed
to permit employee deferrals in excess of certain tax limits and provides for discretionary employer contributions, in excess of the
tax limits applicable to the pension, which terminated on December 31, 2014, and 401(k) plans. See Note 3 - Significant Accounting
Policies.
(20) 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. Under the provisions of federal and state statutes, Premier LP is not subject to federal and state income
taxes. For federal and state income tax purposes, income realized by Premier LP is taxable to its partners. The Company, PHSI
and PSCI are subject to U.S. federal and state income taxes.
118
Significant components of the consolidated expense for income taxes are as follows, (in thousands):
Current:
Federal
State
Total current expense
Deferred:
Federal
State
Total deferred expense
Provision for income taxes
2016
June 30,
2015
2014
$
19,765 $
15,240 $
4,242
24,007
2,808
18,048
15,703
10,011
25,714
49,721 $
15,770
2,524
18,294
36,342 $
$
14,331
3,558
17,889
8,832
988
9,820
27,709
The Company's effective income tax rate differs from income taxes recorded at the statutory rate primarily due to partnership
income not subject to federal income taxes. A reconciliation of the amount at the statutory federal income tax rate to the actual tax
expense is as follows, (in thousands):
Computed tax expense
Partnership income (federal) not subject to tax to the Company
State taxes (net of federal benefit)
Meals and entertainment and other permanent items
Research and development credits
Benefit on subsidiaries treated separately for income tax purposes
Gain on intercompany sale of Premier Plans, LLC
Change in valuation allowance
Deferred tax revaluation
Other
Provision for income taxes
Effective income tax rate
2016
June 30,
2015
2014
$
99,709
$
94,895
$ 126,115
(85,063)
(82,751)
(109,445)
664
1,051
(1,562)
(7,497)
—
36,279
8,080
(1,940)
49,721
$
1,961
1,840
(2,160)
(6,323)
—
28,210
—
670
36,342
$
2,136
972
(639)
—
11,908
(3,150)
—
(188)
27,709
17.5%
13.4%
7.7%
$
The effective tax rate has increased from the prior years as a result of the increase in valuation allowance recorded against
deferred tax assets and PHSI and tax expense associated with revaluing the deferred tax assets at Premier associated with a reduction
in the North Carolina state income tax rate for years 2016 and beyond that was not present in the prior year.
119
Deferred Income Taxes
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
as of June 30, 2016 and 2015 are presented below (in thousands):
Deferred tax asset
Partnership basis differences in Premier LP
$
413,408 $
337,889
June 30,
2016
2015
Stock compensation
Accrued expenses
Net operating losses and credits
Other
Total deferred tax assets
Valuation allowance for deferred tax assets
Net deferred tax assets
Deferred tax liability
Purchased intangible assets and depreciation
Net deferred tax asset
36,884
33,438
24,753
5,073
513,556
(64,958)
448,598
18,079
34,281
8,791
7,301
406,341
(28,679)
377,662
(25,749)
422,849 $
(23,939)
353,723
$
At June 30, 2016, the Company had federal and state net operating loss carryforwards of $49.6 million and $52.5 million,
respectively, primarily attributable to PHSI. The resulting federal and state deferred tax assets are approximately $17.4 million
and $2.3 million, respectively. The federal and state net operating loss carryforwards expire between the years ended June 30,
2018 through June 30, 2036, unless utilized. We believe it is more likely than not that a portion of these net operating loss will be
carried back to offset tax liabilities in the prior years. However, there are federal and state loss carryforwards for which a valuation
allowance was established as these losses are not expected to be utilized prior to their expiration.
At June 30, 2016, the Company had federal research and development credit carryforwards of $5.1 million and nominal state
credit carryforwards. The federal credit carryforwards expire at various times between the years ended June 30, 2020 through June
30, 2036, unless utilized. A valuation allowance was established as the Company believes it is more likely than not that a significant
portion of the federal and state credit carryforwards will not be realized in the near future.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Annually, the Company assesses the future realization
of the tax benefit of its existing deferred tax assets and determines whether a valuation allowance is needed. Based on the Company's
assessment, we have concluded that it is more likely than not that some of the deferred tax assets will not be realized in the future.
As a result, the Company recorded a valuation allowance of $65.0 million against its deferred tax assets at June 30, 2016, an
increase of $36.3 million from the $28.7 million valuation allowance recorded as of June 30, 2015.
As of June 30, 2016 and 2015, the Company had recognized net deferred tax assets of $422.8 million and $353.7 million,
respectively. The increase of $69.1 million in deferred tax assets was primarily attributable to (i) the increase of $99.8 million in
connection with the exchange of member owner Class B common units pursuant to the Exchange Agreement that occurred during
fiscal year 2016 and (ii) $18.6 million recorded in the ordinary course of business, partially offset by (i) reductions in deferred tax
assets of $8.0 million recorded in connection with adjusting the basis in assets related to the North Carolina state income tax rate
reduction, (ii) a $5.0 million decrease in deferred tax asset attributable to tax receivable payments that are no longer due to departed
member owners and (iii) a valuation allowance recorded against deferred tax assets of $36.3 million at PHSI. The deferred tax
benefits of $94.8 million associated with the exchanges of member owner Class B shares and departed member owners are directly
reported to contributed capital, resulting in a deferred income tax expense of $25.7 million in the year ended June 30, 2016.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires companies
to classify all deferred tax assets and liabilities as non-current on the balance sheet instead of separating into current and non-
current. As noted in Note 3 - Significant Accounting Policies, the Company elected to early adopt the provisions of this guidance
on a retrospective basis, the result of which was to reclassify approximately $8.0 million of deferred tax assets classified as current
to non-current at June 30, 2015.
120
In accordance with the prescribed guidance, the Company’s consolidated balance sheet at June 30, 2015 has been
retrospectively adjusted to apply the new guidance as summarized in the table below (in thousands):
Deferred income tax asset - current
Deferred income tax asset
Total
Unrecognized Tax Benefits
June 30, 2015
June 30, 2015
As Reported
Adjustment
As Adjusted
$
$
8,005 $
345,718
353,723 $
(8,005) $
8,005
— $
—
353,723
353,723
The Company recognizes income tax benefits for those income tax positions determined more likely than not to be sustained
upon examination, based on the technical merits of the positions. The reserve for uncertain income tax positions is included in
other liabilities in the consolidated balance sheet. A reconciliation of the beginning and ending gross amounts of the Company's
uncertain tax position reserves for the years ended June 30, 2016, 2015 and 2014 are as follows:
Beginning of year balance
Increases in prior period tax positions
Decreases in prior period tax positions
Decreases due to lapse in statute of limitations
Increases in current period tax positions
End of year balance
2016
June 30,
2015
2014
$
$
3,436 $
318
(201)
(721)
1,549
4,381 $
1,438 $
1,185
—
(225)
1,038
3,436 $
759
353
—
(253)
579
1,438
If the Company were to recognize the benefits of these uncertain tax positions, the income tax provision and effective tax rate
would be impacted by $3.4 million, $3.2 million and $1.4 million, including interest and penalties and net of the federal and state
benefit for income taxes, for the years ended June 30, 2016, 2015 and 2014, respectively. The Company recognizes interest and
penalties accrued on uncertain income tax positions as part of the income tax provision. The amount of accrued interest and penalties
was $0.4 million and $0.2 million at June 30, 2016 and 2015.
The Company has determined that it is reasonably possible that its existing reserve for uncertain income tax positions at
June 30, 2016 will change in the next twelve months; however, the Company does not expected the changes to have a material
impact on its consolidated financial statements.
In the second quarter of fiscal year 2016, the IRS examination of PHSI’s income tax return for tax year ended June 30, 2013
was settled with no adjustment. Federal tax returns for tax years ended June 30, 2014 and 2015 remain open as of June 30, 2016.
Furthermore, the Company is subject to ongoing state and local examinations for various periods. Activity related to these state
and local examinations did not have a material impact on the Company’s financial position or results of operations, nor does the
company anticipate a material impact in the future.
The Company made cash tax payments of $24.9 million during the year ended June 30, 2016.
(21) RELATED PARTY TRANSACTIONS
GNYHA Services, Inc. ("GNYHA") and its member organizations owned approximately 11% of the outstanding partnership
interests in Premier LP as of June 30, 2016. Net administrative fees revenue based on purchases by GNYHA and its member
organizations was $66.8 million, $60.9 million and $62.0 million for the years ended June 30, 2016, 2015 and 2014, 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 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 $7.6 million and
$7.1 million of revenue share obligations in the accompanying consolidated balance sheets relate to revenue share obligations to
GNYHA and its member organizations at June 30, 2016 and 2015, respectively. The Company also maintains a group purchasing
121
agreement with GNYHA Alternate Care Purchasing Corporation, d/b/a Essensa, under which Essensa utilizes the Company's GPO
supplier contracts. Net administrative fees revenue recorded with Essensa was $2.8 million, $2.4 million and $2.0 million for the
years ended June 30, 2016, 2015 and 2014, respectively. At June 30, 2016 and 2015, the Company had revenue share obligations
to Essensa of $0.2 million.
In addition, of the $22.5 million and $22.4 million limited partners' distribution payable in the accompanying consolidated
balance sheets at June 30, 2016 and 2015, respectively, $2.9 million and $3.0 million, respectively, are payable to GNYHA and
its member organizations at June 30, 2016 and 2015, respectively. In addition, $32.1 million, $32.6 million and $14.1 million were
recorded during the years ended June 30, 2016, 2015 and 2014, respectively, for services and support revenue earned from GNYHA
and its member organizations. Services and support revenue increased from the year ended June 30, 2014 to the year ended June
30, 2015 primarily due to the increased participation by GNYHA and its member organizations in the Company's specialty pharmacy
program. Receivables from GNYHA and its member organizations, included in due from related parties in the accompanying
consolidated balance sheets, were $2.6 million and $3.0 million at June 30, 2016 and 2015, respectively.
The Company's 50% ownership share of Innovatix's net income included in equity in net income of unconsolidated affiliates
in the accompanying consolidated statements of income is $21.8 million, $21.3 million and $17.0 million for the years ended June
30, 2016, 2015 and 2014, respectively. The Company maintains a group purchasing agreement with Innovatix under which Innovatix
members are permitted to utilize Premier LP's GPO supplier contracts. Gross administrative fees revenue and a corresponding
revenue share recorded under the arrangement were $44.3 million, $38.7 million and $35.0 million for the years ended June 30,
2016, 2015 and 2014, respectively. At June 30, 2016 and 2015, the Company had revenue share obligations to Innovatix of $4.2
million and $3.7 million, respectively, in the accompanying consolidated balance sheets.
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 $4.3 million, $4.7
million and $4.9 million for the years ended June 30, 2016, 2015 and 2014, respectively, and annual incentive management fees
of $0.2 million, $0.5 million and $0.4 million for the years ended June 30, 2016, 2015 and 2014, respectively. As of June 30, 2016
and 2015, $0.5 million and $0.4 million, respectively, in amounts receivable from AEIX are included in due from related parties
in the accompanying consolidated balance sheets.
(22) COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases. The office space leases provide for escalating rent payments during
the lease terms. The Company recognizes rent expense on a straight-line basis over the lease term. Rent and associated operating
expenses totaled $10.1 million, $11.4 million and $9.1 million for the years ended June 30, 2016, 2015 and 2014, respectively.
Future minimum lease payments under noncancelable operating leases (with initial lease terms in excess of one year) are as
follows (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total minimum lease payments
$
$
9,620
8,915
8,722
8,011
7,546
33,235
76,049
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.
122
(23) 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 and insurance services businesses.
The Company uses Segment Adjusted EBITDA (as defined herein) as its primary measure of profit or loss to assess segment
performance and to determine the allocation of resources. The Company also uses Segment Adjusted EBITDA to facilitate the
comparison of the segment operating performance on a consistent basis from period to period. The Company defines Segment
Adjusted EBITDA as the segment's net revenue and equity in net income of unconsolidated affiliates less operating expenses
directly attributable to the segment excluding depreciation and amortization, amortization of purchased intangible assets, merger
and acquisition related expenses and non-recurring or non-cash items. Non-recurring items are expenses that have not been incurred
within the prior two years and are not expected to recur within the next two years. Operating expenses directly attributable to the
segment include expenses associated with sales and marketing, general and administrative and product development activities
specific to the operation of each segment. General and administrative corporate expenses that are not specific to a particular segment
are not included in the calculation of Segment Adjusted EBITDA.
All reportable segment revenues are presented net of inter-segment eliminations and represent revenues from external
customers.
The following tables present net revenue and Segment Adjusted EBITDA (in thousands):
Net Revenue
Supply Chain Services
Net administrative fees
Other services and support
Services
Products
Total Supply Chain Services
Performance Services
Total
Segment Adjusted EBITDA
Supply Chain Services
Performance Services
Corporate
Total
Year Ended June 30,
2015
2014
2016
$
498,394 $
457,020 $
464,837
4,385
502,779
326,646
829,425
333,169
1,977
458,997
279,261
738,258
268,771
$ 1,162,594 $ 1,007,029 $
778
465,615
212,526
678,141
232,408
910,549
Year Ended June 30,
2015
2014
2016
$
439,013 $
391,180 $
396,470
110,787
(108,825)
440,975 $
90,235
(88,240)
393,175 $
73,898
(78,080)
392,288
$
123
A reconciliation of Segment Adjusted EBITDA to income before income taxes is as follows (in thousands):
Segment Adjusted EBITDA
Depreciation and amortization
Amortization of purchased intangible assets
Stock-based compensation (a)
Acquisition related expenses (b)
Strategic and financial restructuring expenses (c)
Adjustment to tax receivable agreement liability (d)
ERP implementation expenses (e)
Acquisition related adjustment - deferred revenue (f)
Equity in net income of unconsolidated affiliates (g)
Deferred compensation plan income (expense)
Operating income
Equity in net income of unconsolidated affiliates (g)
Interest and investment income (loss), net (h)
(Loss) gain on investment (i)
Loss on disposal of long-lived assets
Other (expense) income, net (j)
Income before income taxes
Year Ended June 30,
2015
2014
2016
$
440,975 $
(51,102)
(33,054)
(49,081)
(15,804)
(268)
4,818
(4,870)
(5,624)
(21,647)
1,605
265,948
21,647
(1,021)
—
—
(1,692)
284,882 $
$
393,175 $
(45,186)
(9,136)
(28,498)
(9,037)
(1,373)
—
—
(13,371)
(21,285)
753
266,042
21,285
866
(1,000)
(15,243)
(823)
271,127 $
392,288
(36,761)
(3,062)
(19,476)
(2,014)
(3,760)
(6,215)
—
—
(16,976)
(1,972)
302,052
16,976
1,019
38,372
—
1,907
360,326
(a) Represents non-cash employee stock-based compensation expense and $0.4 million stock purchase plan expense in the year ended June 30, 2016.
(b) Represents legal, accounting and other expenses related to acquisition activities.
(c) Represents legal, accounting and other expenses directly related to strategic and financial restructuring activities. During the years ended June 30, 2016 and
2015, strategic and financial restructuring expenses were incurred in connection with the company-directed offerings conducted pursuant to the Registration
Rights Agreement. During the year ended June 30, 2014, strategic and financial restructuring expenses were incurred in connection with the Reorganization
and IPO.
(d) Represents adjustment to tax receivable agreement liability for a 1% decrease in the North Carolina state income tax rate during the year ended June 30,
2016 and adjustment to tax receivable agreement liability for the Premier LP change in tax accounting method approved by the Internal Revenue Service
subsequent to the original recording of the tax receivable agreement liability during the year ended June 30, 2014.
(e) Represents implementation and other costs associated with the implementation of a new enterprise resource planning ("ERP") system.
(f) Represents non-cash adjustment to deferred revenue of acquired entities. Business combination accounting rules require the Company to record a deferred
revenue liability at its fair value only if the acquired deferred revenue represents a legal performance obligation assumed by the acquirer. The fair value is
based on direct and indirect incremental costs of providing the services plus a normal profit margin. Generally, this results in a reduction to the purchased
deferred revenue balance, which was based on upfront fees associated with software license updates and product support contracts assumed in connection
with acquisitions. Because these support contracts are typically one year in duration, our GAAP revenues for the one year period subsequent to the acquisition
of a business do not reflect the full amount of support revenues on these assumed support contracts that would have otherwise been recorded by the acquired
entity. The Non-GAAP adjustment to software license updates and product support revenues is intended to include, and thus reflect, the full amount of such
revenues.
(g) Represents equity in net income of unconsolidated affiliates primarily generated by the Company's 50% ownership interest in Innovatix, all of which is
included in the supply chain services segment.
(h) Represents interest expense (income), net and realized gains and losses on our marketable securities.
(i) Represents the loss on investment for the year ended June 30, 2015 and the gain on the sale of our investment in GHX for the year ended June 30, 2014.
(j) Represents loss on sale of assets and unrealized gain (loss) on deferred compensation plan assets.
124
The following tables present capital expenditures, total assets and depreciation and amortization expense (in thousands):
Capital Expenditures
Supply Chain Services
Performance Services
Corporate
Total
Total Assets
Supply Chain Services
Performance Services
Corporate
Total
Depreciation and Amortization Expense (a)
Supply Chain Services
Performance Services
Corporate
Total
(a)
Includes amortization of purchased intangible assets.
(24) SUBSEQUENT EVENTS
Year Ended June 30,
2015
2014
2016
914 $
1,815 $
62,337
63,435
13,739
76,990 $
5,484
70,734 $
2,719
50,655
2,366
55,740
June 30,
2016
2015
$
345,219 $
466,537
934,588
457,963
575,576
605,691
$ 1,855,383 $ 1,530,191
Year Ended June 30,
2016
2015
2014
1,401 $
1,964 $
76,500
47,131
6,255
84,156 $
5,227
54,322 $
1,482
33,467
4,874
39,823
$
$
$
$
On July 26, 2016, the Company through its consolidated subsidiary, PSCI, acquired 49% of the issued and outstanding stock
of FFF Enterprises, Inc. ("FFF") for $65.7 million in cash. FFF is a distributor of plasma products, vaccines, biosimilars and other
specialty pharmaceuticals and biopharmaceuticals, of which Premier, through its group purchasing agreement, and its members
are a large existing customer. We will account for the investment in FFF under the equity method of accounting and report it as
part of our supply chain services segment.
On August 4, 2016, the North Carolina Department of Revenue notified taxpayers that the state corporate tax rate has been
reduced from 4% to 3% for the tax year beginning on or after January 1, 2017. The Company is evaluating the impact and will
record adjustments to reflect the effects of the change in the first quarter of the fiscal year 2017.
On August 23, 2016, we closed our previously announced acquisition of Acro Pharmaceutical Services LLC ("Acro") and
Community Pharmacy Services, LLC ("Community Pharmacy"). Through our consolidated subsidiary, PSCI, we acquired 100%
of the membership interests of Acro and Community Pharmacy for $68.7 million in cash, subject to adjustment based on Acro's
and Community Pharmacy's (i) cash on hand, (ii) outstanding indebtedness and (iii) net working capital at closing. The acquisition
was funded with available cash on hand. Acro and Community Pharmacy are specialty pharmacy businesses which provide
customized healthcare management solutions to their clients. We will report both Acro and Community Pharmacy as part of our
supply chain services segment.
125
(25) QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for the years ended June 30, 2016 and 2015 (in thousands, except per share
data):
Fiscal 2016
Net revenue
Gross profit
Net income
Net income attributable to non-controlling interest
Adjustment of redeemable limited partners' capital to redemption
amount
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
270,835 $
291,669 $
298,669
161,712
52,253
(47,900)
466,801
179,072
60,995
(49,817)
186,576
71,557
(56,018)
301,421
178,178
50,356
(39,812)
(65,561)
(54,383) $
284,409
91,101
299,948 $
101,645
Net income (loss) attributable to stockholders
$
471,154 $
Weighted average shares outstanding:
Basic
Diluted
Net income (loss) per share attributable to stockholders:
Basic
Diluted
Fiscal 2015
Net revenue
Gross profit
Net income
Net income attributable to non-controlling interest
Adjustment of redeemable limited partners' capital to redemption
amount
Net loss attributable to stockholders
Weighted average shares outstanding:
Basic
Diluted
Net loss per share attributable to stockholders:
Basic
Diluted
37,735
145,560
41,575
41,575
44,716
145,018
45,506
144,621
$
$
12.49 $
0.24 $
(1.31) $
(1.31) $
6.71 $
0.43 $
2.23
0.30
$
229,308 $
249,445 $
261,723 $
266,553
139,287
64,887
(55,614)
154,913
65,808
(56,537)
158,908
72,029
(59,820)
157,011
32,061
(24,071)
(382,657)
$ (373,384) $
(42,250)
(32,979) $
(387,062)
(374,853) $
(92,066)
(84,076)
32,376
32,376
35,589
35,589
37,316
37,316
37,576
37,576
$
$
(11.53) $
(11.53) $
(0.93) $
(0.93) $
(10.05) $
(10.05) $
(2.24)
(2.24)
126
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure
that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding
required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.
As of the end of the period covered by this Annual Report, we carried out an evaluation under the supervision and with the
participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our
disclosure controls and procedures. Based upon our evaluation, our chief executive officer and chief financial officer have concluded
that our disclosure controls and procedures were effective as of June 30, 2016.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures
of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on its financial statements. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial
officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of June 30, 2016. In
making this assessment, management used the criteria set forth in Internal Control-Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission, the COSO framework. Based on our evaluation, our chief
executive officer and chief financial officer concluded that, as of June 30, 2016, our internal control over financial reporting was
effective.
Management’s annual evaluation of internal controls over financial reporting did not include an assessment of and conclusion
on the effectiveness of internal controls over financial reporting of CECity.com, Inc., Healthcare Insights, LLC or InFlowHealth,
LLC which were acquired during the year ended June 30, 2016 and are included in our consolidated financial statements as of
June 30, 2016 and for the period from their respective acquisition dates through June 30, 2016. The assets of CECity.com, Inc.,
Healthcare Insights, LLC and InFlowHealth, LLC represented approximately 22%, 4% and 1%, respectively, of our total assets
as of June 30, 2016. CECity.com, Inc. represented approximately 2%, and Healthcare Insights, LLC and InFlowHealth, LLC each
represented less than 1%, of our net revenue for the year ended June 30, 2016.
The effectiveness of the Company’s internal control over financial reporting as of June 30, 2016 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
We are in the process of implementing a new comprehensive enterprise resource planning (“ERP”) system. As previously
reported, we completed the implementation of certain ERP modules including human resources, payroll and expense reimbursement
effective January 1, 2016. In connection with the implementation of these components of the overall ERP system, we updated the
processes that constitute our internal control over financial reporting, as necessary, to accommodate related changes to our
127
accounting procedures and business processes. We have continued to work on the implementation of additional ERP modules
including core general ledger and related financial reporting components in a phased approach.
Although the processes that constitute our internal control over financial reporting have been materially affected by the
implementation of certain ERP modules, these changes were tested for effectiveness and future changes will require testing.
Accordingly, we do not believe that the implementation of the ERP system has had or will have a material adverse effect on our
internal control over financial reporting.
Except as otherwise described above, there have been no other changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2016, that has materially affected, or is
reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other Information
On August 23, 2016, we closed our previously announced acquisition of Acro Pharmaceutical Services LLC ("Acro") and
Community Pharmacy Services, LLC ("Community Pharmacy"). Through our consolidated subsidiary, PSCI, we acquired 100%
of the membership interests of Acro and Community Pharmacy for $68.7 million in cash, subject to adjustment based on Acro's
and Community Pharmacy's (i) cash on hand, (ii) outstanding indebtedness and (iii) net working capital at closing. The acquisition
was funded with available cash on hand. Acro and Community Pharmacy are specialty pharmacy businesses which provide
customized healthcare management solutions to their clients. We will report both Acro and Community Pharmacy as part of our
supply chain services segment.
128
PART III
We expect to file a definitive proxy statement relating to our 2016 Annual Meeting of Stockholders with the SEC pursuant to
Regulation 14A, not later than 120 days after the end of our most recent fiscal year. Accordingly, certain information required by
Part III of this Annual Report has been omitted under General Instruction G(3) to Form 10-K. Only the information from the
definitive proxy statement that specifically addresses disclosure requirements of Items 10-14 below is incorporated by reference.
Item 10. Directors, Executive Officers and Corporate Governance
We will provide information that is responsive to this Item 10 in our definitive proxy statement for our 2016 Annual Meeting
of Stockholders or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this
Annual Report, in either case under the captions “Item 1 - Election of Directors,” “Corporate Governance and Board Structure,”
“Section 16(a) Beneficial Ownership Reporting Compliance” and "Executive Officers," and possibly elsewhere therein. That
information is incorporated in this Item 10 by reference.
Item 11. Executive Compensation
We will provide information that is responsive to this Item 11 in our definitive proxy statement for our 2016 Annual Meeting
of Stockholders or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this
Annual Report, in either case under the captions “Executive Compensation” and “Corporate Governance and Board Structure,”
and possibly elsewhere therein. That information is incorporated in this Item 11 by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
We will provide information that is responsive to this Item 12 in our definitive proxy statement for our 2016 Annual Meeting
of Stockholders or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this
Annual Report, in either case under the captions “Security Ownership of Certain Beneficial Owners and Management,” and “Equity
Compensation Plan Information,” and possibly elsewhere therein. That information is incorporated in this Item 12 by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
We will provide information that is responsive to this Item 13 in our definitive proxy statement for our 2016 Annual Meeting
of Stockholders or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this
Annual Report, in either case under the captions “Related Person Transactions,” and “Corporate Governance and Board Structure,”
and possibly elsewhere therein. That information is incorporated in this Item 13 by reference.
Item 14. Principal Accounting Fees and Services
We will provide information that is responsive to this Item 14 in our definitive proxy statement for our 2016 Annual Meeting
of Stockholders or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this
Annual Report, in either case under the caption “Item 2 - Ratification of Appointment of Independent Registered Public Accounting
Firm,” and possibly elsewhere therein. That information is incorporated in this Item 14 by reference.
129
Item 15. Exhibits and Financial Statement Schedules
Documents as part of this Report:
PART IV
(a) (1) The following consolidated financial statements are filed herewith in Item 8 of Part II above.
(i) Report of Independent Registered Public Accounting Firm
(ii) Consolidated Balance Sheets
(iii) Consolidated Statements of Income
(iv) Consolidated Statements of Comprehensive Income
(v) Consolidated Statements of Stockholders’ (Deficit) Equity
(vi) Consolidated Statements of Cash Flows
(vii) Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
Years Ended June 30, 2016, 2015 and 2014
(in thousands)
Beginning
Balance
Additions/
(Reductions) to
Expense or
Other Accounts
Deductions
Ending
Balance
Year ended June 30, 2016
Allowance for doubtful accounts
$
Deferred tax assets valuation allowance $
1,153
28,679
Year ended June 30, 2015
Allowance for doubtful accounts
$
Deferred tax assets valuation allowance $
Year ended June 30, 2014
Allowance for doubtful accounts
$
Deferred tax assets valuation allowance $
1,054
470
671
3,719
1,655
36,279
144
28,396
827 $
— $
1,981
64,958
45 $
187 $
1,153
28,679
499
(3,249)
116 $
— $
1,054
470
All other supplemental schedules are omitted because of the absence of conditions under which they are required.
(3) Exhibits
The exhibits listed in the accompanying Exhibit Index are filed as a part of this report.
(b) Exhibits
See Exhibit Index.
(c) Separate Financial Statements and Schedule
None.
130
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
PREMIER, INC.
By: /s/ SUSAN D. DEVORE
Name: Susan D. DeVore
Title: President, Chief Executive Officer and Director
Date: August 25, 2016
POWER OF ATTORNEY
Each person whose signature appears below hereby severally constitutes and appoints each of Craig S. McKasson and David
L. Klatsky his/her true and lawful attorney-in-fact and agent with full power of substitution and re-substitution, for him/her in his/
her name, place and stead, in any and all capacities, to sign any and all amendments to this report and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants
to each such attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming
all that each said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/s/ SUSAN D. DEVORE
Susan D. DeVore
President, Chief Executive Officer and Director
(principal executive officer)
August 25, 2016
/s/ CRAIG S. MCKASSON
Craig S. McKasson
Chief Financial Officer and Senior Vice President
(principal financial and accounting officer)
August 25, 2016
/s/ BARCLAY E. BERDAN
Barclay E. Berdan
/s/ ERIC J. BIEBER, MD
Eric J. Bieber, MD
/s/ STEPHEN R. D’ARCY
Stephen R. D’Arcy
/s/ JODY R. DAVIDS
Jody R. Davids
/s/ WILLIAM B. DOWNEY
William B. Downey
Director
August 25, 2016
Director
August 25, 2016
Director
August 25, 2016
Director
August 25, 2016
Director
August 25, 2016
131
/s/ PETER S. FINE
Peter S. Fine
/s/ PHILIP A. INCARNATI
Philip A. Incarnati
/s/ WILLIAM E. MAYER
William E. Mayer
/s/ MARC D. MILLER
Marc D. Miller
/s/ MARVIN R. O'QUINN
Marvin R. O'Quinn
/s/ SCOTT REINER
Scott Reiner
/s/ TERRY D. SHAW
Terry D. Shaw
/s/ RICHARD J. STATUTO
Richard J. Statuto
/s/ ELLEN C. WOLF
Ellen C. Wolf
Director
August 25, 2016
Director
August 25, 2016
Director
August 25, 2016
Director
August 25, 2016
Director
August 25, 2016
Director
August 25, 2016
Director
August 25, 2016
Director
August 25, 2016
Director
August 25, 2016
132
Exhibit
No.
2.1
2.2
3.1
3.2
4.1
9.1
10.1
10.1.1
10.2
10.3
10.4
10.5
10.6
10.6.1
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
EXHIBIT INDEX
Description
Stock Purchase Agreement dated August 4, 2014, by and between Hospira, Inc. and Premier Healthcare Solutions,
Inc. (Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on August 5, 2014)
Stock Purchase Agreement, dated July 31, 2015, by and among Premier Healthcare Solutions, Inc., Premier, Inc.,
CECity.com, Inc., the shareholders thereof, certain related guarantors, and representative of the shareholders of
CECity.com, Inc. (Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on August 4,
2015)
Certificate of Incorporation of Premier, Inc. (Incorporated by reference to Exhibit 3.1 to our Registration Statement
on Form S-1 filed on August 26, 2013)
Amended and Restated Bylaws of Premier, Inc., effective as of December 4, 2015 (Incorporated by reference to
Exhibit 3.2 to our Current Report on Form 8-K filed on December 4, 2015)
Form of Class A common stock certificate (Incorporated by reference to Exhibit 4.1 to our Registration Statement
on Form S-1, Amendment No. 1, filed on September 16, 2013)
Voting Trust Agreement Relating to Shares of Class B common stock of Premier, Inc. entered into as of October
1, 2013 by and among Premier, Inc., Premier Purchasing Partners, L.P., the holders of Class B common stock of
Premier, Inc. and Wells Fargo Delaware Trust Company, N.A. (Incorporated by reference to Exhibit 9.1 to our
Current Report on Form 8-K filed on October 7, 2013)
Amended and Restated Limited Partnership Agreement of Premier Healthcare Alliance, L.P. entered into as of
September 25, 2013 and effective as of October 1, 2013 (Incorporated by reference to Exhibit 10.1 to our Current
Report on Form 8-K filed on October 7, 2013)
First Amendment to Amended and Restated Limited Partnership Agreement of Premier Healthcare Alliance, L.P.
entered into as of January 27, 2014 (Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form
10-Q filed on November 12, 2014)
Exchange Agreement entered into as of September 25, 2013 and effective as of October 1, 2013 by and among
Premier, Inc., Premier Purchasing Partners, L.P. and its limited partners (Incorporated by reference to Exhibit 10.2
to our Current Report on Form 8-K filed on October 7, 2013)
Tax Receivable Agreement entered into as of September 25, 2013 and effective as of October 1, 2013 by and among
Premier, Inc. and the limited partners of Premier Healthcare Alliance, L.P. (Incorporated by reference to Exhibit
10.3 to our Current Report on Form 8-K filed on October 7, 2013)
Registration Rights Agreement entered into as of September 25, 2013 and effective as of October 1, 2013 by and
among Premier, Inc. and the limited partners of Premier Healthcare Alliance, L.P. (Incorporated by reference to
Exhibit 10.4 to our Current Report on Form 8-K filed on October 7, 2013)
Form of GPO Participation Agreement by and among Premier Purchasing Partners, L.P. and its limited partners
(Incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-1 filed on August 26, 2013)
Premier, Inc. 2013 Equity Incentive Plan, as amended and restated (effective December 4, 2015)*+
First Amendment to the Premier, Inc. 2013 Equity Incentive Plan, as amended and restated (effective August 11,
2016)*+
Form of Performance Share Award Agreement under the Premier, Inc. 2013 Equity Incentive Plan (Incorporated
by reference to Exhibit 10.10 to our Annual Report on Form 10-K filed on August 26, 2015)+
Form of Stock Option Agreement under the Premier, Inc. 2013 Equity Incentive Plan (Incorporated by reference
to Exhibit 10.11 to our Annual Report on Form 10-K filed on August 26, 2015)+
Form of Stock Option Agreement under the Premier, Inc. 2013 Equity Incentive Plan*+
Form of Restricted Stock Unit Agreement under the Premier, Inc. 2013 Equity Incentive Plan (Incorporated by
reference to Exhibit 10.12 to our Annual Report on Form 10-K filed on August 26, 2015)+
Form of Performance-Based Restricted Stock Award Agreement under the Premier, Inc. 2013 Equity Incentive Plan
(Incorporated by reference to Exhibit 10.13 to our Annual Report on Form 10-K filed on August 26, 2015)+
Form of Time-Based Restricted Stock Award Agreement under the Premier, Inc. 2013 Equity Incentive Plan
(Incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K filed on August 26, 2015)+
Form of Restricted Stock Unit Agreement for Non-Employee Directors under the Premier, Inc. 2013 Equity Incentive
Plan (Incorporated by reference to Exhibit 10.10 to our Registration Statement on Form S-1 filed on August 26,
2013)+
Premier, Inc. Annual Incentive Compensation Plan, amended and restated effective August 11, 2016*+
Senior Executive Employment Agreement dated as of September 13, 2013, by and between Susan D. DeVore and
Premier Healthcare Solutions, Inc. (Incorporated by reference to Exhibit 10.22 to our Registration Statement on
Form S-1, Amendment No. 1, filed on September 16, 2013)+
133
Exhibit
No.
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.28.1
21
23
24
31.1
31.2
32.1
32.2
Description
Senior Executive Employment Agreement dated as of September 13, 2013, by and between Craig S. McKasson
and Premier Healthcare Solutions, Inc. (Incorporated by reference to Exhibit 10.23 to our Registration Statement
on Form S-1, Amendment No. 1, filed on September 16, 2013)+
Senior Executive Employment Agreement dated as of September 13, 2013 by and between Michael J. Alkire and
Premier Healthcare Solutions, Inc. (Incorporated by reference to Exhibit 10.24 to our Registration Statement on
Form S-1, Amendment No. 1, filed on September 16, 2013)+
Executive Employment Agreement dated as of September 18, 2013, by and between Wes Champion and Premier
Healthcare Solutions, Inc. (Incorporated by reference to Exhibit 10.35 to our Registration Statement on Form S-1,
Amendment No. 2, filed on September 25, 2013)+
Executive Employment Agreement dated as of September 16, 2013, by and between Durral Gilbert and Premier
Healthcare Solutions, Inc. (Incorporated by reference to Exhibit 10.37 to our Registration Statement on Form S-1,
Amendment No. 2, filed on September 25, 2013)+
Executive Employment Agreement dated as of September 11, 2013, by and between Kelli Price and Premier
Healthcare Solutions, Inc. (Incorporated by reference to Exhibit 10.39 to our Registration Statement on Form S-1,
Amendment No. 2, filed on September 25, 2013)+
Executive Employment Agreement dated as of July 1, 2016, by and between Leigh Anderson and Premier Healthcare
Solutions, Inc.*+
Executive Employment Agreement effective as of July 1, 2016, by and between David Klatsky and Premier
Healthcare Solutions, Inc.*+
Premier, Inc. Directors' Compensation Policy, adopted 2016 (Incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K filed on August 11, 2016)+
Premier, Inc. Form of Director Cash Award Agreement under the Premier, Inc. Directors' Compensation Policy
(Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on August 11, 2016)+
Form of Indemnification Agreement by and between each director and executive officer and Premier, Inc.
(Incorporated by reference to Exhibit 10.29 to our Registration Statement on Form S-1, Amendment No. 1, filed
on September 16, 2013)+
Premier, Inc. 2015 Employee Stock Purchase Plan (as amended and restated effective September 25, 2015)*+
Premier Healthcare Solutions, Inc. Deferred Compensation Plan, effective January 1, 2015 (Incorporated by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 12, 2014)+
Credit Agreement, dated as of June 24, 2014, by and among Premier Healthcare Alliance, L.P., Premier Supply
Chain Improvement, Inc. and Premier Healthcare Solutions, Inc., as Co-Borrowers, Premier Services, LLC and
certain domestic subsidiaries of Premier Services, LLC, as Guarantors, Wells Fargo Bank, National Association,
as Administrative Agent, Swing Line Lender and L/C Issuer, other lenders from time to time party thereto, and
Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Joint Lead Arrangers and
Joint Book Managers (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed June 25,
2014)
First Amendment to Credit Agreement, dated as of June 4, 2015, by and among Premier Healthcare Alliance, L.P.,
Premier Supply Chain Improvement, Inc. and Premier Healthcare Solutions, Inc., as Co-Borrowers, Premier
Services, LLC and certain domestic subsidiaries of Premier Services, LLC, as Guarantors, Wells Fargo Bank,
National Association, as Administrative Agent, Swing Line Lender and L/C Issuer, other lenders from time to time
party thereto, and Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Joint
Lead Arrangers and Joint Book Managers (Incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K filed June 4, 2015)
Subsidiaries of the Company*
Consent of Ernst &Young LLP Independent Registered Public Accounting Firm*
Power of Attorney (included on the signature page hereof)*
Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002‡
Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002‡
XBRL Instance Document*
101.INS
101.SCH XBRL Taxonomy Extension Schema Document*
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF XBRL Taxonomy Extension Definition Linkbase Document*
134
Exhibit
No.
Description
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
*
+
‡
Filed herewith
Indicates a management contract or compensatory plan or arrangement
Furnished herewith
(1) Our SEC file number for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is
001-36092. The SEC file number for our Registration Statement on Form S-1 is 333-190828.
135
Certain statements made in the letter on the inside front cover of this report are “forward-looking statements” and may
involve known and unknown risks, uncertainties and other factors that may cause the actual results of Premier to be
materially different from historical results or from any future results or projections expressed or implied by such for-
ward-looking statements. Accordingly, readers should not place undue reliance on any forward-looking statements.
More information on potential risks and other factors that could affect Premier’s financial results is included in the
accompanying 2016 Annual Report on Form 10-K. Forward-looking statements speak only as of the date they are made.
Premier undertakes no obligation to publicly update or revise any forward-looking statements.
The letter on the inside front cover of this report refers to certain “non-GAAP financial measures” used by Premier Inc.
Premier’s 2016 Annual Report on Form 10-K provides further explanation and disclosure regarding Premier’s use of non-
GAAP financial measures and should be closely read.
T 704.357.0022 | PREMIERINC.COM
@PremierHA