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EX-32.2 - EXHIBIT 32.2 - Premier, Inc.copy2ofex322-pincx20170331.htm
EX-32.1 - EXHIBIT 32.1 - Premier, Inc.copy2ofex321-pincx20170331.htm
EX-31.2 - EXHIBIT 31.2 - Premier, Inc.copy2ofex312-pincx20170331.htm
EX-31.1 - EXHIBIT 31.1 - Premier, Inc.copy2ofex311-pincx20170331.htm
EX-10.1 - EXHIBIT 10.1 - Premier, Inc.ex101-pincx20170930.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 __________________________________________________________________________________________
FORM 10-Q
 __________________________________________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         
Commission File Number 001-36092
 __________________________________________________________________________________________
Premier, Inc.
(Exact name of registrant as specified in its charter)
 ___________________________________________________________________________________________
Delaware
 
35-2477140
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
13034 Ballantyne Corporate Place
Charlotte, North Carolina
 
28277
(Address of principal executive offices)
 
(Zip Code)
(704) 357-0022
(Registrant's telephone number, including area code)
 __________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
 
Non-accelerated filer
o
Smaller reporting company
o
 
Emerging growth company
o
 
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o No   x
As of November 3, 2017, there were 57,215,258 shares of the registrant's Class A common stock, par value $0.01 per share, and 82,337,595 shares of the registrant's Class B common stock, par value $0.000001 per share, outstanding.





TABLE OF CONTENTS
 
 
Page
Item 1.
 
Condensed Consolidated Balance Sheets as of September 30, 2017 and June 30, 2017 (Unaudited)
 
Condensed Consolidated Statements of Income for the three months ended September 30, 2017 and 2016 (Unaudited)
 
Condensed Consolidated Statements of Comprehensive Income for the three months ended September 30, 2017 and 2016 (Unaudited)
 
Condensed Consolidated Statement of Stockholders' Deficit for the three months ended September 30, 2017 (Unaudited)
 
Condensed Consolidated Statements of Cash Flow for the three months ended September 30, 2017 and 2016 (Unaudited)
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 5.
Other Information
Item 6.
 




CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this Quarterly Report that are not statements of historical or current facts, such as those under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from historical results or from any future results or projections expressed or implied by such forward-looking statements. In addition to statements that explicitly describe such risks and uncertainties, readers are urged to consider statements in conditional or future tenses or that include terms such as "believes," "belief," "expects," "estimates," "intends," "anticipates" or "plans" to be uncertain and forward-looking. Forward-looking statements may include comments as to our beliefs and expectations regarding future events and trends affecting our business and are necessarily subject to uncertainties, many of which are outside our control. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:
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, or the failure of a significant number of members to renew their GPO participation agreements;
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 that we receive from GPO suppliers;
our ability to maintain third-party provider and strategic alliances or enter into new alliances;
our ability to timely offer new and innovative products and services;
the portion of revenues we receive from our largest members;
risks and expenses related to future acquisition opportunities and integration of acquisitions;
financial and operational risks associated with 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, operational and reputational consequences of cyber-attacks or other data security breaches that disrupt our operations or result in the dissemination of proprietary or confidential information about us or our members or other third parties;
our ability to use, disclose, de-identify or license data and to integrate third-party technologies;
our use of "open source" software;
changes in industry pricing benchmarks;
our inability to grow our integrated pharmacy business or maintain current patients due to increases in the safety risk profiles of prescription drugs or the withdrawal of prescription drugs from the market, or our inability to maintain and expand our existing base of drugs in our integrated pharmacies;
our dependency on contract manufacturing facilities located in various parts of the world;
our ability to attract, hire, integrate and retain key personnel;

3



adequate protection of our intellectual property and potential claims against our use of the intellectual property of third parties;
potential sales and use tax liability in certain jurisdictions;
changes in tax laws that materially impact our tax rate, income tax expense, cash flows or tax receivable agreement ("TRA") liabilities;
our indebtedness and our ability to obtain additional financing on favorable terms;
fluctuation of our quarterly cash flows, revenues and results of operations;
changes and uncertainty in the political, economic or regulatory environment affecting healthcare organizations, including with respect to the status of the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act of 2010, collectively referred to as the "ACA";
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 current or future laws, rules or regulations adopted by the Food & Drug Administration ("FDA") applicable to our software applications that are considered medical devices;
compliance with, and potential changes to, extensive federal, state and local laws, regulations and procedures governing our integrated 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 TRAs to Premier LP's limited partners and our ability to realize the expected tax benefits related to the acquisition of Class B common units from Premier LP's limited partners;
changes to Premier LP's allocation methods or examinations or changes in interpretation of applicable tax laws and regulations by various taxing authorities that may increase a tax-exempt limited partner's risk that some allocated income is unrelated business taxable income;
provisions in our certificate of incorporation and bylaws and the Amended and Restated Limited Partnership Agreement of Premier LP (as amended, the "LP Agreement") and provisions of Delaware law that discourage or prevent strategic transactions, including a takeover of us;
failure to maintain an effective system of internal controls;
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;
when or whether we implement our recently announced Class A common stock repurchase program and the number of shares of Class A common stock, if any, purchased under the program;
possible future issuances of common stock, preferred stock, limited partnership units or debt securities and the dilutive effect of such issuances; and

4



the risk factors discussed under the heading "Risk Factors" in Item 1A of Part II herein and under Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2017 (the "2017 Annual Report"), filed with the Securities and Exchange Commission ("SEC").
More information on potential factors that could affect our financial results is included from time to time in the "Cautionary Note Regarding Forward-Looking Statements," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" or similarly captioned sections of this Quarterly Report and our other periodic and current filings made from time to time with the SEC, which are available on our website at http://investors.premierinc.com. You should not place undue reliance on any of our forward-looking statements which speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Furthermore, we cannot guarantee future results, events, levels of activity, performance or achievements.

5



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PREMIER, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
 
September 30, 2017
June 30, 2017
Assets
 
 
Cash and cash equivalents
$
132,120

$
156,735

Accounts receivable (net of $2,007 and $1,812 allowance for doubtful accounts, respectively)
173,869

159,745

Inventory
57,604

50,426

Prepaid expenses and other current assets
29,787

35,164

Due from related parties
487

6,742

Total current assets
393,867

408,812

Property and equipment (net of $252,840 and $236,460 accumulated depreciation, respectively)
186,179

187,365

Intangible assets (net of $113,096 and $99,198 accumulated amortization, respectively)
364,064

377,962

Goodwill
906,545

906,545

Deferred income tax assets
506,166

482,484

Deferred compensation plan assets
40,906

41,518

Investments in unconsolidated affiliates
97,131

92,879

Other assets
9,484

10,271

Total assets
$
2,504,342

$
2,507,836

 
 
 
Liabilities, redeemable limited partners' capital and stockholders' deficit
 
 
Accounts payable
$
47,449

$
42,815

Accrued expenses
56,891

55,857

Revenue share obligations
69,535

72,078

Limited partners' distribution payable
20,752

24,951

Accrued compensation and benefits
37,259

53,506

Deferred revenue
41,102

44,443

Current portion of tax receivable agreements
17,925

17,925

Current portion of long-term debt
173,023

227,993

Other liabilities
26,198

32,019

Total current liabilities
490,134

571,587

Long-term debt, less current portion
6,275

6,279

Tax receivable agreements, less current portion
362,093

321,796

Deferred compensation plan obligations
40,906

41,518

Deferred tax liabilities
51,363

48,227

Other liabilities
42,599

42,099

Total liabilities
993,370

1,031,506

 





6



 
September 30, 2017
June 30, 2017
Redeemable limited partners' capital
2,799,533

3,138,583

Stockholders' deficit:
 
 
Class A common stock, $0.01 par value, 500,000,000 shares authorized; 53,558,451 and 51,943,281 shares issued and outstanding at September 30, 2017 and June 30, 2017, respectively
536

519

Class B common stock, $0.000001 par value, 600,000,000 shares authorized; 86,067,478 and 87,298,888 shares issued and outstanding at September 30, 2017 and June 30, 2017, respectively


Additional paid-in-capital


Accumulated deficit
(1,289,097
)
(1,662,772
)
Accumulated other comprehensive loss


Total stockholders' deficit
(1,288,561
)
(1,662,253
)
Total liabilities, redeemable limited partners' capital and stockholders' deficit
$
2,504,342

$
2,507,836

See accompanying notes to the unaudited condensed consolidated financial statements.

7



PREMIER, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
 
Three Months Ended September 30,
 
2017
2016
Net revenue:
 
 
Net administrative fees
$
150,991

$
125,976

Other services and support
86,911

81,167

Services
237,902

207,143

Products
152,662

106,129

Net revenue
390,564

313,272

Cost of revenue:
 
 
Services
46,936

42,690

Products
144,440

95,813

Cost of revenue
191,376

138,503

Gross profit
199,188

174,769

Operating expenses:
 
 
Selling, general and administrative
114,321

92,238

Research and development
489

806

Amortization of purchased intangible assets
13,898

9,209

Operating expenses
128,708

102,253

Operating income
70,480

72,516

Equity in net income of unconsolidated affiliates
4,252

9,579

Interest and investment loss, net
(1,495
)
(152
)
Loss on disposal of long-lived assets
(1,320
)
(1,518
)
Other income
1,463

1,006

Other income, net
2,900

8,915

Income before income taxes
73,380

81,431

Income tax expense
12,764

23,336

Net income
60,616

58,095

Net income attributable to non-controlling interest in Premier LP
(44,610
)
(49,601
)
Adjustment of redeemable limited partners' capital to redemption amount
320,424

61,808

Net income attributable to stockholders
$
336,430

$
70,302

 
 
 
Weighted average shares outstanding:
 
 
Basic
52,909

47,214

Diluted
140,046

142,962

 
 
 
Earnings per share attributable to stockholders:
 
 
Basic
$
6.36

$
1.49

Diluted
$
0.36

$
0.26

See accompanying notes to the unaudited condensed consolidated financial statements.

8



PREMIER, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
 
Three Months Ended September 30,
 
2017
2016
Net income
$
60,616

$
58,095

Net unrealized gain on marketable securities

128

Total comprehensive income
60,616

58,223

Less: comprehensive income attributable to non-controlling interest
(44,610
)
(49,686
)
Comprehensive income attributable to stockholders
$
16,006

$
8,537

See accompanying notes to the unaudited condensed consolidated financial statements.

9



PREMIER, INC.
Condensed Consolidated Statement of Stockholders' Deficit
Three Months Ended September 30, 2017
(Unaudited)
(In thousands)
 
Class A
Common Stock
Class B
Common Stock
Additional Paid-In Capital
Accumulated Deficit
Total Stockholders' Deficit
 
Shares
Amount
Shares
Amount
Balance at June 30, 2017
51,943

$
519

87,299

$

$

$
(1,662,772
)
$
(1,662,253
)
Exchange of Class B units for Class A common stock by member owners
1,232

13

(1,232
)

42,963


42,976

Decrease in additional paid-in capital related to quarterly exchange by member owners, including associated TRA revaluation




(11,452
)

(11,452
)
Issuance of Class A common stock under equity incentive plan
383

4



2,648


2,652

Stock-based compensation expense




8,815


8,815

Repurchase of vested restricted units for employee tax-withholding




(5,729
)

(5,729
)
Net income





60,616

60,616

Net income attributable to non-controlling interest in Premier LP





(44,610
)
(44,610
)
Adjustment of redeemable limited partners' capital to redemption amount




(37,245
)
357,669

320,424

Balance at September 30, 2017
53,558

$
536

86,067

$

$

$
(1,289,097
)
$
(1,288,561
)
See accompanying notes to the unaudited condensed consolidated financial statements.

10



PREMIER, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Three Months Ended September 30,
 
2017
2016
Operating activities
 
 
Net income
$
60,616

$
58,095

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
30,405

23,227

Equity in net income of unconsolidated affiliates
(4,252
)
(9,579
)
Deferred income taxes
8,298

17,074

Stock-based compensation
8,815

5,800

Adjustment to tax receivable agreement liability

(5,722
)
Loss on disposal of long-lived assets
1,320

1,518

Changes in operating assets and liabilities:
 
 
Accounts receivable, prepaid expenses and other current assets
(8,748
)
(8,119
)
Other assets
1,379

(1,112
)
Inventories
(7,178
)
(827
)
Accounts payable, accrued expenses and other current liabilities
(21,933
)
(38,463
)
Long-term liabilities
(111
)
322

Other operating activities
6,422

(387
)
Net cash provided by operating activities
75,033

41,827

Investing activities
 
 
Proceeds from sale of marketable securities

48,013

Acquisition of Acro Pharmaceuticals, net of cash acquired

(68,745
)
Investments in unconsolidated affiliates

(65,660
)
Distributions received on equity investments in unconsolidated affiliates

6,550

Purchases of property and equipment
(16,647
)
(16,966
)
Other investing activities
1

5

Net cash used in investing activities
(16,646
)
(96,803
)
Financing activities
 
 
Payments made on notes payable
(4,974
)
(218
)
Payments on credit facility
(50,000
)

Proceeds from exercise of stock options under equity incentive plan
2,652

2,317

Repurchase of vested restricted units for employee tax-withholding
(5,729
)
(17,435
)
Distributions to limited partners of Premier LP
(24,951
)
(22,493
)
Net cash used in financing activities
(83,002
)
(37,829
)
Net decrease in cash and cash equivalents
(24,615
)
(92,805
)
Cash and cash equivalents at beginning of year
156,735

248,817

Cash and cash equivalents at end of period
$
132,120

$
156,012


11



 
Three Months Ended September 30,
 
2017
2016
 
 
 
Supplemental schedule of non cash investing and financing activities:
 
 
Decrease in redeemable limited partners' capital for adjustment to fair value, with offsetting increases in additional paid-in-capital and accumulated deficit
$
320,424

$
61,808

Reduction in redeemable limited partners' capital, with offsetting increases in common stock and additional paid-in capital related to quarterly exchanges by member owners
$
42,976

$
43,072

Reduction in redeemable limited partners' capital for limited partners' distribution payable
$
20,752

$
22,137

Distributions utilized to reduce subscriptions, notes, interest and accounts receivable from member owners
$
492

$
558

Net increase in deferred tax assets related to quarterly exchanges by member owners and other adjustments
$
28,844

$
16,863

Net increase in tax receivable agreement liabilities related to quarterly exchanges by member owners and other adjustments
$
40,296

$
10,286

Net increase (decrease) in additional paid-in capital related to quarterly exchanges by member owners and other adjustments
$
(11,452
)
$
6,577

See accompanying notes to the unaudited condensed consolidated financial statements.

12



PREMIER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Organization
Premier, Inc. ("Premier" or the "Company") is a publicly-held, for-profit Delaware corporation owned by hospitals, health systems and other healthcare organizations (such owners of Premier are referred to herein as "member owners") located in the United States and by public stockholders. The Company, together with its subsidiaries and affiliates, is a leading healthcare performance improvement company that unites hospitals, health systems, physicians and other healthcare providers to improve and innovate in the clinical, financial and operational areas of their businesses to meet the demands of a rapidly evolving healthcare industry.
The Company's business model and solutions are designed to provide its members access to scale efficiencies, spread the cost of their development, provide actionable intelligence derived from anonymized data in the Company's data warehouse, mitigate the risk of innovation and disseminate best practices that will help the Company's member organizations succeed in their transformation to higher quality and more cost-effective healthcare.
The Company, together with its subsidiaries and affiliates, delivers its integrated platform of solutions through two business segments: Supply Chain Services and Performance Services. See Note 16 - Segments for further information related to the Company's reportable business segments. The Supply Chain Services segment includes one of the largest healthcare group purchasing organization ("GPO") programs in the United States, and integrated pharmacy and direct sourcing activities. The Performance Services segment includes one of the largest informatics and advisory services businesses in the United States focused on healthcare providers. The Company's software as a service ("SaaS") informatics products utilize the Company's comprehensive data set to provide actionable intelligence to its members, enabling them to benchmark, analyze and identify areas of improvement across the three main categories of cost management, quality and safety, and population health management. The Performance Services segment also includes the Company's technology-enabled performance improvement collaboratives, advisory services, government services and insurance management services.
The Company, through its wholly-owned subsidiary, Premier Services, LLC ("Premier GP"), held an approximate 38% and 37% general partner interest in our main operating company, Premier Healthcare Alliance, L.P. ("Premier LP"), at September 30, 2017 and June 30, 2017, respectively. In addition to their ownership interest in Premier, our member owners held an approximate 62% and 63% ownership interest in Premier LP at September 30, 2017 and June 30, 2017, respectively.
Basis of Presentation and Consolidation
Basis of Presentation
The member owners' interest in Premier LP is reflected as redeemable limited partners' capital in the Company's accompanying Condensed Consolidated Balance Sheets, and the limited partners' proportionate share of income in Premier LP is reflected within net income attributable to non-controlling interest in Premier LP in the Company's accompanying Condensed Consolidated Statements of Income and within comprehensive income attributable to non-controlling interest in Premier LP in the Company's accompanying Condensed Consolidated Statements of Comprehensive Income.
At September 30, 2017 and June 30, 2017, the member owners owned approximately 62% and 63%, respectively, of the Company's combined Class A and Class B common stock through their ownership of Class B common stock. During the three months ended September 30, 2017, the member owners exchanged 1.2 million Class B common units and associated Class B common shares for an equal number of Class A common shares pursuant to an exchange agreement (the "Exchange Agreement") entered into by the member owners in connection with the completion of our initial public offering on October 1, 2013. The Exchange Agreement provides each member owner the cumulative right to exchange up to one-seventh of its initial allocation of Class B common units, as well as any additional Class B common units purchased by such member owner pursuant to certain rights of first refusal, for shares of Class A common stock (on a one-for-one basis subject to customary adjustments for subdivisions or combinations by split, reverse split, distribution, reclassification, recapitalization or otherwise), cash or a combination of both, the form of consideration to be at the discretion of the Company's independent Audit and Compliance Committee of the Board of Directors (the "Audit and Compliance Committee"). In connection with Class B common units exchanged for Class A common shares during the three months ended September 30, 2017, approximately 1.2 million Class B common units were contributed to Premier LP and converted to Class A common units, which remain outstanding.
Refer to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2017 (the "2017 Annual Report") filed with the Securities and Exchange Commission ("SEC") on August 23, 2017 for further discussion of the Exchange Agreement. At September 30, 2017 and June 30, 2017, the public investors, which may include member owners that have received shares of

13



Class A common stock in connection with previous exchanges of their Class B common units and associated Class B common shares for an equal number of Class A common shares, owned approximately 38% and 37%, respectively, of the Company's outstanding common stock through their ownership of Class A common stock.
Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, certain information and disclosures normally included in annual financial statements have been condensed or omitted. The accompanying condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring adjustments. The Company believes that the disclosures are adequate to make the information presented not misleading and should be read in conjunction with the audited consolidated financial statements and related footnotes contained in the 2017 Annual Report.
Variable Interest Entities
Premier LP is a variable interest entity ("VIE") as the limited partners do not have the ability to exercise a substantive removal right with respect to the general partner. The Company does not hold a majority interest but, through Premier GP, has the exclusive power and authority to manage the business and affairs of Premier LP, to make all decisions with respect to driving the economic performance of Premier LP, and has both an obligation to absorb losses and a right to receive benefits. As such, the Company is the primary beneficiary of the VIE and consolidates the operations of Premier LP under the Variable Interest Model.
The assets and liabilities of Premier LP at September 30, 2017 and June 30, 2017 consisted of the following (in thousands):
 
September 30, 2017
June 30, 2017
Assets
 
 
Current
$
361,578

$
385,477

Noncurrent
1,604,275

1,616,539

Total assets of Premier LP
$
1,965,853

$
2,002,016

 
 
 
Liabilities
 
 
Current
$
479,916

$
560,582

Noncurrent
137,119

134,635

Total liabilities of Premier LP
$
617,035

$
695,217

Net income attributable to Premier LP during the three months ended September 30, 2017 and 2016 was as follows (in thousands):
 
Three Months Ended September 30,
 
2017
2016
Premier LP net income
$
72,291

$
73,915


14



Premier LP's cash flows for the three months ended September 30, 2017 and 2016 consisted of the following (in thousands):
 
Three Months Ended September 30,
 
2017
2016
Net cash provided by (used in):
 
 
Operating activities
$
88,407

$
12,865

Investing activities
(16,613
)
(96,805
)
Financing activities
(100,476
)
(22,168
)
Net decrease in cash and cash equivalents
(28,682
)
(106,108
)
Cash and cash equivalents at beginning of year
133,451

210,048

Cash and cash equivalents at end of period
$
104,769

$
103,940

Use of Estimates in the Preparation of Financial Statements
The preparation of the Company's condensed consolidated financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Significant estimates are evaluated on an ongoing basis, including estimates for allowances for doubtful accounts, useful lives of property and equipment, stock-based compensation, payables under tax receivable agreements ("TRAs"), values of investments not publicly traded, the valuation allowance on deferred tax assets, uncertain income taxes, deferred revenue, future cash flows associated with asset impairments, values of put and call rights, values of earn-out liabilities and the allocation of purchase prices. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
(2) SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company's significant accounting policies as described in the 2017 Annual Report.
Recently Adopted Accounting Standards
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires entities to measure most inventory "at the lower of cost and net realizable value," thereby simplifying the guidance under which an entity must measure inventory at the lower of cost or market. This guidance does not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. The Company adopted this standard effective July 1, 2017 using the prospective approach. The implementation of this ASU did not have a material effect on the Company's condensed consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective prospectively for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. The guidance requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. In addition, the guidance eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2020. Early adoption is permitted for interim and annual goodwill impairment tests performed after January 1, 2017. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.

15



In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which removes the prohibition in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The guidance is intended to reduce the complexity of GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The ASU amendments add or clarify guidance on eight cash flow issues. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations of accounting for leasing arrangements. This guidance establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Entities will be required to recognize and measure leases as of the earliest period presented using a modified retrospective approach. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which is intended to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2018. Early adoption is permitted for certain amendments. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance. The new standard requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new standard allows for either full retrospective or modified retrospective adoption.
The FASB subsequently issued an amendment in ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, in August 2015 to defer the effective date of the new standard for all entities by one year. The new standard, as amended, will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption as of the original effective date for public entities will be permitted.
The FASB issued another amendment in ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, in March 2016 related to a third party providing goods or services to a customer. When another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself or to arrange for the good or service to be provided by a third party. If the entity provides the specific good or service itself, the entity acts as a principal. If an entity arranges for the good or service to be provided by a third party, the entity acts as an agent. The standard requires the principal to recognize revenue for the gross amount and the agent to recognize revenue for the amount of any fee or commission for which it expects to be entitled in exchange for arranging for the specified good or service to be provided. The new standard will be effective with ASU 2014-09.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which amends specific aspects of ASU 2014-09, including how to identify performance obligations and guidance related to licensing implementation. This amendment provides guidance on determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property or a right to access the entity's intellectual property. The amendment will be effective with ASU 2014-09.

16



In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies specific aspects of ASU 2014-09, clarifying how to identify performance obligations and guidance related to its promise in granting a license of intellectual property. This new standard provides guidance to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised good or service is separately identifiable and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost. The new standard also clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property to help determine whether it recognizes revenue over time or at a point in time and addresses how entities should consider license renewals and restrictions. The new standard will be effective with ASU 2014-09.
In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606: Revenue from Contracts with Customers, which clarifies specific aspects of ASU 2014-09, including allowing entities not to make quantitative disclosures about remaining performance obligations in certain cases and requiring entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. The new standard also makes twelve other technical corrections and modifications to ASU 2014-09. The new standard will be effective with ASU 2014-09.
The new revenue recognition standards related to Topic 606 discussed above, as amended, will be effective for the Company for the fiscal year beginning July 1, 2018, at which time we plan to adopt the standard using the modified retrospective approach. To-date, the Company has identified the following preliminary impacts of adopting the new standards on various revenue streams across its operating segments.
Within the Supply Chain Services segment, the Company is continuing to assess the impacts of adopting the new standards on its various revenue streams. Under the new standard, the Company expects to recognize administrative fee revenue upon the occurrence of a sale by suppliers to the Company’s members. This differs from the current treatment in which the Company recognizes revenue in the period that the respective supplier reports member purchasing data, which is usually a month or a quarter in arrears of the actual member purchase activity. This change is expected to result in the Company recognizing revenue sooner in the revenue cycle than under the Company's current revenue recognition policy and the creation of a contract asset associated with this shift in revenue recognition timing. The Company is continuing to assess the impact of these changes on the financial statements and disclosures.
Within the Performance Services segment, the Company is continuing to assess the impacts of adopting the new standards on its various revenue streams. Under the new standard, the Company will be required to capitalize the incremental costs of obtaining a contract, which the Company has preliminarily identified as sales commissions and costs associated with implementing our SaaS informatics tools, and to amortize these costs in a manner that reflects the transfer of services to the customer. These costs are expensed as incurred under the Company's current revenue recognition policy. The Company is continuing to assess the impact of these changes on the financial statements and disclosures.
Additionally, the Company is evaluating the potential impacts on its business processes, systems and controls necessary to support revenue recognition and disclosure requirements under the new standard.
(3) BUSINESS ACQUISITIONS
Acquisition of Innovatix and Essensa
Innovatix, LLC ("Innovatix") and Essensa Ventures, LLC ("Essensa") are GPOs focused on serving alternate site healthcare providers and other organizations throughout the United States. Prior to December 2, 2016, the Company, through its consolidated subsidiary, Premier Supply Chain Improvement ("PSCI"), held 50% of the membership interests in Innovatix (see Note 4 - Investments). On December 2, 2016, the Company, through PSCI, acquired from GNYHA Holdings, LLC ("GNYHA Holdings") (see Note 14 - Related Party Transactions) the remaining 50% ownership interest of Innovatix and 100% of the ownership interest in Essensa for $325.0 million, of which $227.5 million in cash was paid at closing and $97.5 million in cash was paid on January 10, 2017. As a result of certain purchase price adjustments provided for in the purchase agreement, the adjusted purchase price was $336.0 million.
In connection with the acquisition, the Company utilized its credit facility dated June 24, 2014, as amended on June 4, 2015 (the "Credit Facility") to fund the $325.0 million purchase price (see Note 8 - Debt), the outstanding portion of which is reflected within current portion of long-term debt in the Condensed Consolidated Balance Sheet at September 30, 2017. The Company incurred $1.7 million and $0.4 million of transaction costs related to this acquisition during the three months ended September 30, 2017 and 2016, respectively. These transaction costs were included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.

17



The Company has accounted for the Innovatix and Essensa acquisition as a business combination whereby the purchase price was allocated to tangible and intangible assets acquired (see Note 6 - Intangible Assets, Net) and liabilities assumed based on their preliminary fair values. The purchase price allocation for the Innovatix and Essensa acquisition is preliminary and subject to changes in the fair value of working capital and valuation of the assets acquired and the liabilities assumed. The acquisition resulted in the recognition of approximately $334.7 million of goodwill (see Note 7 - Goodwill) attributable to the anticipated profitability of Innovatix and Essensa. The acquisition was considered an asset acquisition for tax purposes, and accordingly, the Company expects the goodwill to be deductible for tax purposes.
The preliminary fair values assigned to the net assets acquired and the liabilities assumed as of the acquisition date were as follows (in thousands):
 
Acquisition Date Fair Value
Cash paid at closing
$
227,500

Cash paid on January 10, 2017
97,500

Purchase price
325,000

Additional cash paid at closing
10,984

Adjusted purchase price
335,984

Earn-out liability
16,662

Receivable from GNYHA Holdings, LLC
(3,000
)
Total consideration paid
349,646

Cash acquired
(16,267
)
Net consideration
333,379

50% ownership interest in Innovatix
218,356

Payable to Innovatix and Essensa
(5,765
)
Enterprise value
545,970

 
 
Accounts receivable
21,242

Prepaid expenses and other current assets
686

Fixed assets, net
3,476

Intangible assets
241,494

Total assets acquired
266,898

Accrued expenses
5,264

Revenue share obligations
7,011

Other current liabilities
694

Total liabilities assumed
12,969

Deferred tax liability
42,636

Goodwill
$
334,677

The acquisition provides the sellers an earn-out opportunity of up to $43.0 million based on Innovatix's and Essensa's Adjusted EBITDA (as defined in the purchase agreement) for the fiscal year ending June 30, 2017, which is still in the process of being finalized. As of September 30, 2017, the fair value of the earn-out liability was $21.1 million (see Note 5 - Fair Value Measurements).
Certain executive officers of Innovatix and Essensa executed employment agreements that became effective upon the closing of the acquisition. The purchase agreement provides that in the event that Innovatix's and Essensa's Adjusted EBITDA exceeds agreed upon amounts, certain of those executive officers are entitled to receive a retention bonus payment of up to $3.0 million in the aggregate, for which the Company will be reimbursed by GNYHA Holdings, LLC.
The Company's 50% ownership interest in Innovatix prior to the acquisition was accounted for under the equity method and had a carrying value of $13.3 million (see Note 4 - Investments). In connection with the acquisition, the Company's investment was remeasured under business combination accounting rules to a fair value of $218.4 million, resulting in a one-time gain of $205.1 million which was recorded as other income as of the transaction closing date.

18



Pro forma results of operations for the acquisition have not been presented because the effects on revenue and net income were not material to our historic consolidated financial statements. The Company reports Innovatix and Essensa as part of its Supply Chain Services segment.
Acquisition of Acro Pharmaceuticals
Acro Pharmaceutical Services LLC ("Acro") and Community Pharmacy Services, LLC (collectively with Acro, "Acro Pharmaceuticals") are specialty pharmacy businesses that provide customized healthcare management solutions to members. On August 23, 2016, the Company, through its consolidated subsidiary, NS3 Health, LLC, acquired 100% of the membership interests of Acro Pharmaceuticals for $75.0 million in cash. As a result of certain purchase price adjustments provided for in the purchase agreement, the adjusted purchase price was $62.9 million. The acquisition was funded with available cash on hand.
The Company has accounted for the Acro Pharmaceuticals acquisition as a business combination whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their fair values. The Acro Pharmaceuticals acquisition resulted in the recognition of approximately $33.9 million of goodwill (see Note 7 - Goodwill) attributable to the anticipated profitability of Acro Pharmaceuticals. The Acro Pharmaceuticals acquisition was considered an asset acquisition for tax purposes and accordingly, the Company expects the goodwill to be deductible for tax purposes.
Pro forma results of operations for the acquisition have not been presented because the effects on revenue and net income were not material to our historic consolidated financial statements. The Company reports Acro Pharmaceuticals as part of its Supply Chain Services segment.
(4) INVESTMENTS
Investments in Unconsolidated Affiliates
The Company's investments in unconsolidated affiliates consisted of the following (in thousands):
 
Carrying Value
 
Equity in Net Income (Loss)
 
 
 
 
Three Months Ended September 30,
 
September 30, 2017
June 30, 2017
 
2017
2016
FFF
$
89,857

$
85,520

 
$
4,337

$
3,059

Bloodbuy
2,033

2,066

 
(33
)
(19
)
PharmaPoint
4,180

4,232

 
(52
)
(77
)
Innovatix


 

6,616

Other investments
1,061

1,061

 


Total investments
$
97,131

$
92,879

 
$
4,252

$
9,579

On July 26, 2016, the Company, through its consolidated subsidiary, PSCI, acquired 49% of the issued and outstanding stock of FFF Enterprises, Inc. ("FFF") for $65.7 million in cash plus consideration in the form of the FFF put and call rights. The Company recorded the initial investment in FFF in the accompanying Condensed Consolidated Balance Sheets at $81.1 million, of which $65.7 million was in cash and $15.4 million was consideration in the form of the net fair value of the FFF put and call rights (see Note 5 - Fair Value Measurements for additional information related to the fair values of the FFF put and call rights). The Company accounts for its investment in FFF using the equity method of accounting and includes the investment as part of the Supply Chain Services segment.
The Company, through its consolidated subsidiary, PSCI, held a 15% ownership interest in BloodSolutions, LLC ("Bloodbuy") through its 5.3 million units of Class B Membership Interests at September 30, 2017 and June 30, 2017. The Company accounts for its investment in Bloodbuy using the equity method of accounting as the Company has rights to appoint a Board member, and includes the investment as part of the Supply Chain Services segment.
The Company, through its consolidated subsidiary, PSCI, held a 28% ownership interest in PharmaPoint, LLC ("PharmaPoint") through its 5.0 million units of Class B Membership Interests at September 30, 2017 and June 30, 2017. The Company accounts for its investment in PharmaPoint using the equity method of accounting and includes the investment as part of the Supply Chain Services segment.

19



The Company, through its consolidated subsidiary, PSCI, held 50% of the membership interests in Innovatix until December 2, 2016, at which time it acquired the remaining 50% membership interests (see Note 3 - Business Acquisitions and Note 14 - Related Party Transactions). Prior to the acquisition, the Company accounted for its investment in Innovatix using the equity method of accounting and included the investment as part of the Supply Chain Services segment.
Marketable Securities
The Company has historically invested its excess cash in commercial paper, U.S. government debt securities, corporate debt securities and other securities with maturities generally ranging from three months to five years from the date of purchase. The Company uses the specific-identification method to determine the cost of securities sold. At September 30, 2017 and June 30, 2017, the Company had no marketable securities other than those included in deferred compensation plan assets (see Note 5 - Fair Value Measurements).
(5) FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The following table provides a summary of the Company's financial assets and liabilities which are measured at fair value on a recurring basis (in thousands):
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs
(Level 3)
September 30, 2017
 
 
 
 
Cash equivalents
$
9,322

$
9,322

$

$

FFF call right
4,593



4,593

Deferred compensation plan assets
44,567

44,567



Total assets
$
58,482

$
53,889

$

$
4,593

Earn-out liabilities
$
21,675

$

$

$
21,675

FFF put right
24,008



24,008

Total liabilities
$
45,683

$

$

$
45,683

 
 
 
 
 
June 30, 2017
 
 
 
 
Cash equivalents
$
22,218

$
22,218

$

$

FFF call right
4,655



4,655

Deferred compensation plan assets
47,202

47,202



Total assets
$
74,075

$
69,420

$

$
4,655

Earn-out liabilities
$
21,310

$

$

$
21,310

FFF put right
24,050



24,050

Total liabilities
$
45,360

$

$

$
45,360

Cash equivalents were included in cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets (see Note 4 - Investments).
Deferred compensation plan assets consisted of highly liquid mutual fund investments, which were classified as Level 1. The current portion of deferred compensation plan assets was included in prepaid expenses and other current assets ($3.7 million and $5.7 million at September 30, 2017 and June 30, 2017, respectively) in the accompanying Condensed Consolidated Balance Sheets.
Financial Instruments Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
Earn-out liabilities
Earn-out liabilities were incurred in connection with acquisitions of Healthcare Insights, LLC (acquired on July 31, 2015), Inflow Health, LLC (acquired on October 1, 2015) and Innovatix and Essensa (acquired on December 2, 2016) (see Note 3 - Business Acquisitions). At September 30, 2017 and June 30, 2017, the earn-out liabilities were classified within Level 3 of the fair value

20


hierarchy. The fair values of the earn-out liabilities were determined based on estimated future earnings and the probability of achieving them. The current portion of the earn-out liabilities was $21.1 million at both September 30, 2017 and June 30, 2017, and was included in other liabilities, current in the accompanying Condensed Consolidated Balance Sheets. The long-term portion of the earn-out liabilities was $0.6 million and $0.2 million at September 30, 2017 and June 30, 2017, respectively, and was included in other liabilities, non-current in the accompanying Condensed Consolidated Balance Sheets. Changes in the fair values of the earn-out liabilities were recorded within selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.
FFF put and call rights
Pursuant to a shareholders' agreement entered into in connection with the Company's equity investment in FFF (see Note 4 - Investments), the majority shareholder of FFF obtained a put right ("FFF put right") that provides such shareholder the right to sell all or any portion of its interest in FFF to the Company, which is exercisable beginning on the fourth anniversary of the investment closing date, July 26, 2020, at a per share price equal to FFF's earnings before interest, taxes, depreciation and amortization ("EBITDA") over the twelve calendar months prior to the purchase date multiplied by a market adjusted multiple, adjusted for any outstanding debt and cash and cash equivalents ("Equity Value per Share"). In addition, the shareholders' agreement provided the Company with a call right ("FFF call right") to purchase the remaining interest in FFF from the majority shareholder, which is exercisable at any time within 180 calendar days after the date of a Key Man Event (generally defined in the shareholders' agreement as the resignation, termination for cause, death or disability of the majority shareholder). In the event that the FFF put or call rights are exercised, the purchase price for the additional interest in FFF will be at a per share price equal to the Equity Value per Share.
The fair value of the FFF put and call rights were determined based on the Equity Value per Share calculation using unobservable inputs, which included the estimated FFF put and call rights' expiration dates, the forecast of FFF's EBITDA over the option period, forecasted movements in the overall market and the likelihood of a Key Man Event. Significant changes to the Equity Value per Share resulting from changes in the unobservable inputs could have a significant impact on the fair values of the FFF put and call rights.
The Company recorded the FFF put and call rights within long-term other liabilities and long-term other assets, respectively, within the accompanying Condensed Consolidated Balance Sheets. Net changes in the fair value of the FFF put and call rights were recorded within other income in the accompanying Condensed Consolidated Statements of Income.
A reconciliation of the Company's earn-out liabilities and FFF put and call rights is as follows (in thousands):
 
Beginning Balance
Purchases
Gain (Loss)
Ending Balance
Three Months Ended September 30, 2017
 
 
 
 
FFF call right
$
4,655

$

$
(62
)
$
4,593

Total Level 3 assets
$
4,655

$

$
(62
)
$
4,593

Earn-out liabilities
$
21,310

$

$
(365
)
$
21,675

FFF put right
24,050


42

24,008

Total Level 3 liabilities
$
45,360

$

$
(323
)
$
45,683

 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
FFF call right
$

$
10,361

$
(45
)
$
10,316

Total Level 3 assets
$

$
10,361

$
(45
)
$
10,316

Earn-out liabilities
$
4,128

$

$
1,769

$
2,359

FFF put right

25,821

10

25,811

Total Level 3 liabilities
$
4,128

$
25,821

$
1,779

$
28,170

Non-Recurring Fair Value Measurements
During the three months ended September 30, 2017, no non-recurring fair value measurements were required related to the measurement of goodwill and intangible assets for impairment.

21


Financial Instruments For Which Fair Value Only is Disclosed
The fair values of non-interest bearing notes payable, classified as Level 2, were less than their carrying values by approximately $0.5 million and $0.6 million at September 30, 2017 and June 30, 2017, respectively, based on assumed market interest rates of 2.6% for both September 30, 2017 and June 30, 2017.
Other Financial Instruments
The fair values of cash, accounts receivable, accounts payable, accrued liabilities and the Company's Credit Facility approximated carrying value due to the short-term nature of these financial instruments.
(6) INTANGIBLE ASSETS, NET
Intangible assets, net consisted of the following (in thousands):
 
Useful Life
September 30, 2017
June 30, 2017
Member relationships
14.7 years
$
220,100

$
220,100

Technology
5.0 years
143,727

143,727

Customer relationships
8.3 years
48,120

48,120

Trade names
8.3 years
22,710

22,710

Distribution network
10.0 years
22,400

22,400

Favorable lease commitments
10.1 years
11,393

11,393

Non-compete agreements
5.9 years
8,710

8,710

Total intangible assets
 
477,160

477,160

Accumulated amortization
 
(113,096
)
(99,198
)
Intangible assets, net
 
$
364,064

$
377,962

Intangible asset amortization totaled $13.9 million and $9.2 million for the three months ended September 30, 2017 and 2016, respectively.
(7) GOODWILL
Goodwill consisted of the following (in thousands):
 
September 30, 2017
June 30,
2017
Supply Chain Services
$
400,348

$
400,348

Performance Services
506,197

506,197

Total goodwill
$
906,545

$
906,545

(8) DEBT
Long-term debt consisted of the following (in thousands):
 
Commitment Amount
Due Date
September 30, 2017
June 30, 2017
Credit Facility
$
750,000

June 24, 2019
$
170,000

$
220,000

Notes payable

Various
9,298

14,272

Total debt
 
 
179,298

234,272

Less: Current portion
 
 
(173,023
)
(227,993
)
Total long-term debt
 
 
$
6,275

$
6,279


22



Credit Facility
Premier LP, along with its consolidated subsidiaries, PSCI and PHSI, as Co-Borrowers, Premier GP and certain domestic subsidiaries of Premier GP, as guarantors, entered into an unsecured Credit Facility, dated as of June 24, 2014 and amended on June 4, 2015. The Credit Facility has a maturity date of June 24, 2019. The Credit Facility provides for borrowings of up to $750.0 million with (i) a $25.0 million sub-facility for standby letters of credit and (ii) a $75.0 million sub-facility for swingline loans. The Credit Facility may be increased from time to time at the Company's request up to an aggregate additional amount of $250.0 million, subject to lender approval. The Credit Facility includes an unconditional and irrevocable guaranty of all obligations under the Credit Facility by Premier GP, certain domestic subsidiaries of Premier GP and future guarantors, if any. Premier, Inc. is not a guarantor under the Credit Facility.
At the Company's option, committed loans may be in the form of eurodollar rate loans ("Eurodollar Loans") or base rate loans ("Base Rate Loans"). Eurodollar Loans bear interest at the eurodollar rate (defined as the London Interbank Offered Rate, or LIBOR, plus the Applicable Rate (defined as a margin based on the Consolidated Total Leverage Ratio (as defined in the Credit Facility))). Base Rate Loans bear interest at the Base Rate (defined as the highest of the prime rate announced by the administrative agent, the federal funds effective rate plus 0.50% or the one-month LIBOR plus 1.0%) plus the Applicable Rate. The Applicable Rate ranges from 1.125% to 1.750% for Eurodollar Loans and 0.125% to 0.750% for Base Rate Loans. At September 30, 2017, the interest rate for three-month Eurodollar Loans was 2.459% and the interest rate for Base Rate Loans was 4.375%. 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 September 30, 2017, the commitment fee was 0.125%.
The Credit Facility contains customary representations and warranties as well as customary affirmative and negative covenants, including, among others, limitations on liens, indebtedness, fundamental changes, dispositions, restricted payments and investments, of which certain covenant calculations use EBITDA, a Non-GAAP financial measure. Under the terms of the Credit Facility, Premier GP is not permitted to allow its consolidated total leverage ratio (as defined in the Credit Facility) to exceed 3.00 to 1.00 for any period of four consecutive quarters. In addition, Premier GP must maintain a minimum consolidated interest coverage ratio (as defined in the Credit Facility) of 3.00 to 1.00 at the end of every fiscal quarter. Premier GP was in compliance with all such covenants at September 30, 2017.
The Credit Facility also contains customary events of default including, among others, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults of any indebtedness or guarantees in excess of $30.0 million, bankruptcy and other insolvency events, judgment defaults in excess of $30.0 million, and the occurrence of a change of control (as defined in the Credit Facility). If any event of default occurs and is continuing, the administrative agent under the Credit Facility may, with the consent, or shall, at the request of the required lenders, terminate the commitments and declare all of the amounts owed under the Credit Facility to be immediately due and payable. The Company may prepay amounts outstanding under the Credit Facility without premium or penalty provided that Co-Borrowers compensate the lenders for losses and expenses incurred as a result of the prepayment of any Eurodollar Loan, as defined in the Credit Facility.
Proceeds from borrowings under the Credit Facility may generally be used to finance ongoing working capital requirements, including permitted acquisitions, discretionary cash settlements of Class B unit exchanges under the Exchange Agreement, repurchases of Class A common stock pursuant to a stock repurchase program, and other general corporate activities. During the three months ended September 30, 2017, the Company repaid $50.0 million of borrowings under the Credit Facility. The Company had outstanding borrowings under the Credit Facility of $170.0 million at September 30, 2017. Borrowings due within one year of the balance sheet date are classified as current liabilities in the Condensed Consolidated Balance Sheets. They may be renewed or extended at the option of the Company through the maturity date of the Credit Facility.
Notes Payable
At September 30, 2017 and June 30, 2017, the Company had $9.3 million and $14.3 million, respectively, in notes payable consisting primarily of non-interest bearing notes payable outstanding to departed member owners, of which $3.0 million and $8.0 million, respectively, were included in current portion of long-term debt and $6.3 million and $6.3 million, respectively, were included in long-term debt, less current portion, in the accompanying Condensed Consolidated Balance Sheets. Notes payable generally have stated maturities of five years from their date of issuance.
(9) REDEEMABLE LIMITED PARTNERS' CAPITAL
Redeemable limited partners' capital represents the member owners' 62% ownership of Premier LP through their ownership of Class B common units at September 30, 2017. The member owners hold the majority of the votes of the Board of Directors and any redemption or transfer or choice of consideration cannot be assumed to be within the control of the Company. Therefore, redeemable limited partners' capital is recorded at the greater of the book value or redemption amount per the Amended and

23



Restated Limited Partnership Agreement of Premier LP (as amended, the "LP Agreement"), and is calculated as the fair value of all Class B common units as if immediately exchangeable into Class A common shares. For the three months ended September 30, 2017 and 2016, the Company recorded decreases to fair value for the redemption amount to redeemable limited partners' capital of $320.4 million and $61.8 million, respectively.
Redeemable limited partners' capital is classified as temporary equity in the mezzanine section of the accompanying Condensed Consolidated Balance Sheets as, pursuant to the LP Agreement, withdrawal is at the option of each member owner and the conditions of the repurchase are not solely within the Company's control.
The table below provides a summary of the changes in the redeemable limited partners' capital from June 30, 2017 to September 30, 2017 (in thousands):
 
Receivables From Limited Partners
Redeemable Limited Partners' Capital
Total Redeemable Limited Partners' Capital
June 30, 2017
$
(4,177
)
$
3,142,760

$
3,138,583

Distributions applied to receivables from limited partners
492


492

Net income attributable to non-controlling interest in Premier LP

44,610

44,610

Distributions to limited partners

(20,752
)
(20,752
)
Exchange of Class B common units for Class A common stock by member owners

(42,976
)
(42,976
)
Adjustment to redemption amount

(320,424
)
(320,424
)
September 30, 2017
$
(3,685
)
$
2,803,218

$
2,799,533

Receivables from limited partners represent amounts due from limited partners for their required capital in Premier LP. These receivables are either interest bearing notes that were issued to new limited partners or non-interest bearing loans (contribution loans) provided to existing limited partners. These receivables are reflected as a reduction to redeemable limited partners' capital so that amounts due from limited partners for capital are not reflected as redeemable limited partnership capital until paid. No interest bearing notes receivable were executed by limited partners of Premier LP during the three months ended September 30, 2017.
During the three months ended September 30, 2017, no limited partners withdrew from Premier LP. The limited partnership agreement provides for the redemption of former limited partners' Class B common units that are not eligible for exchange in the form of a five-year, unsecured, non-interest bearing term promissory note, a cash payment equal to the present value of the redemption amount, or other mutually agreed upon terms. Partnership interest obligations to former limited partners are reflected in notes payable in the accompanying Condensed Consolidated Balance Sheets. Under the Exchange Agreement, Class B common units that are eligible for exchange by withdrawing limited partners must be exchanged in the subsequent exchange process.
Premier LP's distribution policy requires cash distributions as long as taxable income is generated and cash is available to distribute, on a quarterly basis prior to the 60th day after the end of each calendar quarter. The Company makes quarterly distributions to its limited partners in the form of a legal partnership income distribution governed by the terms of the LP Agreement. These partner distributions are based on the limited partner's ownership in Premier LP and relative participation across Premier service offerings. While these distributions are based on relative participation across Premier service offerings, they are not based directly on revenue generated from an individual partner's participation as the distributions are based on the net income (loss) of the partnership which encompasses the operating expenses of the partnership as well as participation by non-owner members in Premier's service offerings. To the extent Premier LP incurred a net loss, the limited partners would not receive a quarterly distribution. As provided in the LP Agreement, the amount of actual cash distributed may be reduced by the amount of such distributions used by limited partners to offset contribution loans or other amounts payable to the Company.

24



Quarterly distributions made to limited partners during the current fiscal year are as follows (in thousands):
Date
Distribution (a)
August 24, 2017
$
24,951

(a)
Distributions are equal to Premier LP’s total taxable income from the preceding fiscal quarter-to-date period for each respective distribution date multiplied by the Company's standalone effective combined federal, state and local income tax rate. Premier LP expects to make a $20.8 million quarterly distribution on or before November 22, 2017. The distribution is reflected in limited partners' distribution payable in the accompanying Condensed Consolidated Balance Sheets at September 30, 2017.

Pursuant to the Exchange Agreement (see Note 1 - Organization and Basis of Presentation for more information), each limited partner has the cumulative right to exchange up to one-seventh of its initial allocation of Class B common units for shares of Class A common stock, cash or a combination of both, the form of consideration to be at the discretion of the Company's independent Audit and Compliance Committee. During the three months ended September 30, 2017, the Company recorded total reductions of $43.0 million to redeemable limited partners' capital to reflect the exchange of approximately 1.2 million Class B common units and surrender of associated shares of Class B common stock by member owners for a like number of shares of the Company's Class A common stock (see Note 11 - Earnings Per Share for more information). Quarterly exchanges during the current fiscal year were as follows (in thousands, except Class B common units).
Date of Quarterly Exchange
Number of Class B Common Units Exchanged
Reduction in Redeemable Limited Partners' Capital
July 31, 2017
1,231,410

$
42,976

Total
1,231,410

$
42,976

(10) STOCKHOLDERS' DEFICIT
As of September 30, 2017, there were 53,558,451 shares of the Company's Class A common stock, par value $0.01 per share, and 86,067,478 shares of the Company's Class B common stock, par value $0.000001 per share, outstanding.
Holders of Class A common stock are entitled to (i) one vote for each share held of record on all matters submitted to a vote of stockholders, (ii) receive dividends, when and if declared by the Board of Directors out of funds legally available, subject to any statutory or contractual restrictions on the payment of dividends and subject to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock or any class of series of stock having a preference over or the right to participate with the Class A common stock with respect to the payment of dividends or other distributions and (iii) receive pro rata, based on the number of shares of Class A common stock held, the remaining assets available for distribution upon the dissolution or liquidation of Premier, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any.
Holders of Class B common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders, but are not entitled to receive dividends, other than dividends payable in shares of Premier's common stock, or to receive a distribution upon the dissolution or a liquidation of Premier. Pursuant to the Voting Trust Agreement, the trustee will vote all of the Class B common stock as a block in the manner determined by the plurality of the votes received by the trustee from the member owners for the election of directors to serve on the Board of Directors, and by a majority of the votes received by the trustee from the member owners for all other matters. Class B common stock will not be listed on any stock exchange and, except in connection with any permitted sale or transfer of Class B common units, cannot be sold or transferred.
(11) EARNINGS PER SHARE
Basic earnings per share of Premier is computed by dividing net income attributable to stockholders by the weighted average number of shares of common stock outstanding for the period. Net income attributable to stockholders includes the adjustment recorded in the period to reflect redeemable limited partners' capital at the redemption amount, as a result of the exchange benefit obtained by limited partners through the ownership of Class B common units. Except when the effect would be anti-dilutive, the diluted earnings per share calculation, which is calculated using the treasury stock method, includes the impact of shares that could be issued under the outstanding stock options, non-vested restricted stock units and awards, shares of non-vested performance share awards and the effect of the assumed redemption of Class B common units through the issuance of Class A common shares.

25



The following table provides a reconciliation of the numerator and denominator used for basic and diluted earnings per share (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
2017
2016
Numerator for basic earnings per share:
 
 
Net income attributable to stockholders
$
336,430

$
70,302

 
 
 
Numerator for diluted earnings per share:
 
 
Net income attributable to stockholders
$
336,430

$
70,302

Adjustment of redeemable limited partners' capital to redemption amount
(320,424
)
(61,808
)
Net income attributable to non-controlling interest in Premier LP
44,610

49,601

Net income
60,616

58,095

Tax effect on Premier, Inc. net income (a)
(10,551
)
(20,951
)
Adjusted net income
$
50,065

$
37,144

 
 
 
Denominator for basic earnings per share:
 
 
Weighted average shares (b)
52,909

47,214

 
 
 
Denominator for diluted earnings per share:
 
 
Weighted average shares (b)
52,909

47,214

Effect of dilutive securities: (c)
 
 
Stock options
351

302

Restricted stock
304

171

Performance share awards

466

Class B shares outstanding
86,482

94,809

Weighted average shares and assumed conversions
140,046

142,962

 
 
 
Basic earnings per share
$
6.36

$
1.49

Diluted earnings per share
$
0.36

$
0.26

(a)
Represents income tax expense related to Premier, Inc. retaining the portion of net income attributable to income from non-controlling interest in Premier, LP for the purpose of diluted earnings per share.
(b)
Weighted average number of common shares used for basic earnings per share excludes weighted average shares of non-vested stock options, non-vested restricted stock, non-vested performance share awards and Class B shares outstanding for the three months ended September 30, 2017 and 2016.
(c)
For the three months ended September 30, 2017, the effect of 1.4 million stock options was excluded from diluted weighted average shares outstanding as they had an anti-dilutive effect, and the effect of 0.6 million performance share awards was excluded from diluted weighted average shares outstanding as they had not satisfied the applicable performance criteria at the end of the period.
For the three months ended September 30, 2016, the effect of 1.6 million stock options was excluded from diluted weighted average shares outstanding as they had an anti-dilutive effect.

26



Pursuant to the terms of the Exchange Agreement, on a quarterly basis, the Company has the option, as determined by the independent Audit and Compliance Committee, to settle the exchange of Class B common units of Premier LP by member owners for cash, an equal number of Class A common shares of Premier, Inc. or a combination of cash and shares of Class A common stock. In connection with the exchange of Class B common units by member owners, regardless of the consideration used to settle the exchange, an equal number of shares of Premier's Class B common stock are surrendered by member owners and retired (see Note 9 - Redeemable Limited Partners' Capital). The following table presents certain information regarding the exchange of Class B common units and associated Class B common stock for Premier's Class A common stock and/or cash in connection with the quarterly exchanges pursuant to the terms of the Exchange Agreement, including activity related to the Class A and Class B common units and Class A and Class B common stock through the date of the applicable quarterly exchange:
Quarterly Exchange by Member Owners
Class B Common Shares Retired Upon Exchange (a)
Class B Common Shares Outstanding After Exchange (a)
Class A Common Shares Outstanding After Exchange
Percentage of Combined Voting Power Class B/Class A Common Stock
July 31, 2017
1,231,410

86,067,478

53,212,057

62%/38%
October 31, 2017 (b)
3,651,294

82,416,184

57,215,143

59%/41%
(a)
The number of Class B common shares retired or outstanding is equivalent to the number of Class B common units retired upon exchange or outstanding after the exchange, as applicable.
(b)
As the quarterly exchange occurred on October 31, 2017, the impact of the exchange is not reflected in the condensed consolidated financial statements for the quarter ended September 30, 2017.
(12) STOCK-BASED COMPENSATION
Stock-based compensation expense is recognized over the requisite service period, which generally equals the stated vesting period. Pre-tax stock-based compensation expense was $8.8 million and $5.8 million for the three months ended September 30, 2017 and 2016, respectively, with a resulting deferred tax benefit of $3.3 million and $2.2 million, respectively. The deferred tax benefit was calculated at a rate of 38%, which represents the expected effective income tax rate at the time of the compensation expense deduction primarily at PHSI, and differs from the Company's current effective income tax rate which includes the impact of partnership income not subject to federal and state income taxes.
Premier 2013 Equity Incentive Plan
The Premier 2013 Equity Incentive Plan, as amended and restated (and including any further amendments thereto, the "2013 Equity Incentive Plan") provides for grants of up to 11.3 million shares of Class A common stock, all of which are eligible to be issued as non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units or performance share awards. As of September 30, 2017, there were 3.5 million shares available for grant under the 2013 Equity Incentive Plan.
The following table includes information related to restricted stock, performance share awards and stock options for the three months ended September 30, 2017:
 
Restricted Stock
 
Performance Share Awards
 
Stock Options

Number of Awards
Weighted Average Fair Value at Grant Date
 
Number of Awards
Weighted Average Fair Value at Grant Date
 
Number of Options
Weighted Average Exercise Price
Outstanding at June 30, 2017
576,988

$
32.92

 
1,085,872

$
32.79

 
3,372,499

$
30.31

Granted
202,532

$
32.90

 
678,340

$
32.70

 
538,413

$
32.90

Vested/exercised
(107,764
)
$
31.64

 
(352,867
)
$
31.73

 
(96,137
)
$
28.12

Forfeited
(15,930
)
$
32.37

 
(37,131
)
$
32.35

 
(71,191
)
$
34.24

Outstanding at September 30, 2017
655,826

$
33.14

 
1,374,214

$
33.02

 
3,743,584

$
30.66

 
 
 
 
 
 
 
 
 
Stock options outstanding and exercisable at September 30, 2017
 
 
 
 
 
 
2,628,081

$
29.66


27



Restricted stock units and restricted stock awards issued and outstanding generally vest over a three-year period for employees and a one-year period for directors. Performance share awards issued and outstanding generally vest over three years if performance targets are met. Stock options have a term of ten years from the date of grant. Vested stock options will expire either after twelve months of an employee's termination with Premier or immediately upon an employee's termination with Premier, depending on the termination circumstances. Stock options generally vest in equal annual installments over three years.
Unrecognized stock-based compensation expense at September 30, 2017 was as follows (in thousands):
 
Unrecognized Stock-Based Compensation Expense
Weighted Average Amortization Period
Restricted stock
$
13,180

2.19 years
Performance share awards
31,492

2.20 years
Stock options
11,920

2.21 years
Total unrecognized stock-based compensation expense
$
56,592

2.20 years
The aggregate intrinsic value of stock options at September 30, 2017 was as follows (in thousands):
 
Intrinsic Value of Stock Options
Outstanding and exercisable
$
9,107

Expected to vest
349

Total outstanding
$
9,456

 
 
Exercised during the three months ended September 30, 2017
$
566

The Company estimated the fair value of each stock option on the date of grant using a Black-Scholes option-pricing model, applying the following assumptions, and amortized expense over each option's vesting period using the straight-line attribution approach:

Three Months Ended September 30,
 
2017
2016
Expected life (a)
6 years

6 years

Expected dividend (b)


Expected volatility (c)
32.26%

33.00%

Risk-free interest rate (d)
1.89%

1.31%

Weighted average option grant date fair value
$
11.42

$
10.80

(a)
The six-year expected life (estimated period of time outstanding) of stock options granted was estimated using the "Simplified Method" which utilizes the midpoint between the vesting date and the end of the contractual term. This method was utilized for the stock options due to the lack of historical exercise behavior of Premier's employees.
(b)
No dividends are expected to be paid over the contractual term of the stock options granted, resulting in the use of a zero expected dividend rate.
(c)
The expected volatility rate is based on the observed historical volatilities of comparable companies.
(d)
The risk-free interest rate was interpolated from the five-year and seven-year Constant Maturity Treasury rate published by the United States Treasury as of the date of the grant.
(13) INCOME TAXES
The Company's income tax expense is attributable to the activities of the Company, PHSI and PSCI, all of which are subchapter C corporations. Under the provision of federal and state laws, 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.

28



Income tax expense decreased $10.5 million, or 45%, to $12.8 million for the three months ended September 30, 2017 from $23.3 million for the three months ended September 30, 2016, while our effective tax rate decreased to 17% for the three months ended September 30, 2017 from 29% for the three months ended September 30, 2016. The decrease is primarily attributable to higher income tax expense in the prior year as a result of an increase in deferred tax expense for the three months ended September 30, 2016 attributed to the revaluation of deferred tax assets related to a 1% reduction in the North Carolina state tax rate. The Company's effective tax rate differs from income taxes recorded at the statutory rate primarily due to partnership income not subject to federal, state and local income taxes and valuation allowances against deferred tax assets at PHSI.
The Company had net deferred tax assets of $454.8 million and $434.3 million as of September 30, 2017 and June 30, 2017, respectively. The current period balance was comprised of $506.2 million in deferred tax assets at Premier, Inc. offset by $51.4 million in deferred tax liabilities at PHSI and PSCI. The increase of $20.5 million was primarily attributable to $17.7 million of deferred tax assets recorded in connection with the quarterly member owner exchanges that occurred during the three months ended September 30, 2017, and $7.5 million associated with the revaluation of the TRA liabilities due to the change in the allocation and realization of future contingent payments. The increase is partially offset by $5.3 million in allowance recorded against deferred tax assets at PHSI.
The Company had TRA liabilities of $380.0 million and $339.7 million at September 30, 2017 and June 30, 2017, respectively, representing 85% of the tax savings payable to limited partners that the Company expects to receive in connection with the Section 754 election. The election results in adjustments to the tax bases of the assets of Premier LP upon member owner exchanges of Class B common units of Premier LP for Class A common stock of Premier, Inc. or cash. The $40.3 million increase was primarily attributable to $20.9 million associated with the revaluation of the TRA liabilities due to a change in the allocation and realization of future contingent payments and a $16.8 million increase in connection with the quarterly member owner exchanges that occurred during the three months ended September 30, 2017.
(14) RELATED PARTY TRANSACTIONS
GNYHA
GNYHA Purchasing Alliance, LLC and its member organizations ("GNYHA PA") owned approximately 9.5% of the outstanding partnership interests in Premier LP as of September 30, 2017. Although we no longer consider GNYHA PA a related party under U.S. GAAP, prior period information is included below.
Net administrative fees revenue based on purchases by GNYHA Services, Inc. ("GNYHA") (an affiliate of GNYHA PA) and its member organizations was $17.7 million for the three months ended September 30, 2016. The Company has a contractual requirement under the GPO participation agreement to pay each member owner revenue share from Premier LP equal to 30% of all gross administrative fees collected by Premier LP based upon purchasing by such member owner's facilities through Premier LP's GPO supplier contracts. As GNYHA also remits to Premier LP all gross administrative fees collected by GNYHA based on purchases by its member organizations through GNYHA's own GPO supplier contracts, it also receives revenue share from Premier LP equal to 30% of such gross administrative fees remitted to the Company. Approximately $7.8 million of revenue share obligations in the accompanying Condensed Consolidated Balance Sheets related to revenue share obligations to GNYHA and its member organizations at June 30, 2017.
In addition, of the $25.0 million limited partners' distribution payable in the accompanying Condensed Consolidated Balance Sheets at June 30, 2017, $2.7 million were payable to GNYHA and its member organizations. Services and support revenue earned from GNYHA and its member organizations was $3.6 million during the three months ended September 30, 2016. Product revenue earned from, or attributable to services provided to, GNYHA and its member organizations was $3.8 million during the three months ended September 30, 2016. Receivables from GNYHA and its member organizations, included in due from related parties in the accompanying Condensed Consolidated Balance sheets, were $5.4 million at June 30, 2017.
Innovatix and Essensa
The Company held 50% of the membership interests in Innovatix until December 2, 2016, at which time it acquired the remaining 50% of the membership interests from GNYHA Holdings (see Note 3 - Business Acquisitions). The Company's share of Innovatix's net income included in equity in net income of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income prior to the acquisition was $6.5 million during the three months ended September 30, 2016. The Company maintained a group purchasing agreement with Innovatix under which Innovatix members were permitted to utilize Premier LP's GPO supplier contracts. Gross administrative fees revenue and a corresponding revenue share recorded under the arrangement prior to the acquisition were $11.4 million for the three months ended September 30, 2016.

29



The Company historically maintained a group purchasing agreement with Essensa, under which Essensa utilized the Company's GPO supplier contracts. On December 2, 2016, the Company acquired 100% of the membership interests in Essensa from GNYHA Holdings (see Note 3 - Business Acquisitions). Net administrative fees revenue recorded from Essensa prior to the acquisition was $0.7 million for the three months ended September 30, 2016.
FFF
The Company's 49% ownership share of net income of FFF, which was acquired on July 26, 2016, included in equity in net income of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income was $4.3 million and $3.0 million for the three months ended September 30, 2017 and 2016, respectively. The Company maintains group purchasing agreements with FFF and receives administrative fees for purchases made by the Company's members pursuant to those agreements. Net administrative fees revenue recorded from purchases under those agreements was $1.7 million and $1.5 million (of which $0.1 million was recorded after July 26, 2016) during the three months ended September 30, 2017 and 2016, respectively.
AEIX
The Company conducts all operational activities for American Excess Insurance Exchange Risk Retention Group ("AEIX"), a reciprocal risk retention group that provides excess and umbrella healthcare professional and general liability insurance to certain hospital and healthcare system members. The Company is reimbursed by AEIX for actual costs, plus an annual incentive management fee not to exceed $0.5 million per calendar year. The Company received cost reimbursement of $1.5 million and $1.1 million during the three months ended September 30, 2017 and 2016, respectively. As of September 30, 2017 and June 30, 2017, $0.5 million and $0.6 million, respectively, in amounts receivable from AEIX are included in due from related parties in the accompanying Condensed Consolidated Balance Sheets.
(15) COMMITMENTS AND CONTINGENCIES
The Company is not currently involved in any litigation it believes to be significant. The Company is periodically involved in litigation, arising in the ordinary course of business or otherwise, which from time to time may include claims relating to commercial, product liability, tort and personal injury, employment, antitrust, intellectual property, or other regulatory matters. If current or future government regulations, specifically, those with respect to antitrust or healthcare laws, are interpreted or enforced in a manner adverse to the Company or its business, the Company may be subject to enforcement actions, penalties and other material limitations which could have a material adverse effect on the Company's business, financial condition and results of operations.


30



(16) SEGMENTS
The Company delivers its solutions and manages its business through two reportable business segments, the Supply Chain Services segment and the Performance Services segment. The Supply Chain Services segment includes the Company's GPO, integrated pharmacy offerings and direct sourcing activities. The Performance Services segment includes the Company's informatics, collaborative, advisory services, government services and insurance services businesses.
Segment information was as follows (in thousands):
 
Three Months Ended September 30,
 
2017
2016
Net revenue:
 
 
Supply Chain Services
 
 
Net administrative fees
$
150,991

$
125,976

Other services and support
2,149

1,645

Services
153,140

127,621

Products
152,662

106,129

Total Supply Chain Services
305,802

233,750

Performance Services
84,762

79,522

Net revenue
$
390,564

$
313,272

 
 
 
Depreciation and amortization expense (a):
 
 
Supply Chain Services
$
5,495

$
466

Performance Services
22,918

20,875

Corporate
1,992

1,886

Total depreciation and amortization expense
$
30,405

$
23,227

 
 
 
Capital expenditures:
 
 
Supply Chain Services
$
307

$

Performance Services
13,549

16,851

Corporate
2,791

115

Total capital expenditures
$
16,647

$
16,966

 
 
 
Total assets:
September 30,
2017
June 30,
2017
Supply Chain Services
$
991,569

$
1,017,023

Performance Services
879,564

888,862

Corporate
633,209

601,951

Total assets
$
2,504,342

$
2,507,836

(a)
Includes amortization of purchased intangible assets.
The Company uses Segment Adjusted EBITDA (a financial measure not determined in accordance with generally accepted accounting principles ("Non-GAAP")) as its primary measure of profit or loss to assess segment performance and to determine the allocation of resources. The Company also uses Segment Adjusted EBITDA to facilitate the comparison of the segment operating performance on a consistent basis from period to period. The Company defines Segment Adjusted EBITDA as the segment's net revenue and equity in net income of unconsolidated affiliates less operating expenses directly attributable to the segment excluding depreciation and amortization, amortization of purchased intangible assets, merger and acquisition related expenses and non-recurring or non-cash items. Operating expenses directly attributable to the segment include expenses associated with sales and marketing, general and administrative and product development activities specific to the operation of each segment. Non-recurring items are income or expenses and other items that have not been earned or incurred within the prior two years and are not expected

31



to recur within the next two years. General and administrative corporate expenses that are not specific to a particular segment are not included in the calculation of Segment Adjusted EBITDA.
For more information on Segment Adjusted EBITDA and the use of Non-GAAP financial measures, see "Our Use of Non-GAAP Financial Measures" within Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
A reconciliation of income before income taxes to Segment Adjusted EBITDA is as follows (in thousands):
 
Three Months Ended September 30,
 
2017
2016
Income before income taxes
$
73,380

$
81,431

Equity in net income of unconsolidated affiliates (a)
(4,252
)
(9,579
)
Interest and investment loss, net (b)
1,495

152

Loss on disposal of long-lived assets
1,320

1,518

Other income
(1,463
)
(1,006
)
Operating income
70,480

72,516

Depreciation and amortization
16,507

14,018

Amortization of purchased intangible assets
13,898

9,209

Stock-based compensation (c)
8,957

5,896

Acquisition related expenses
3,099

2,937

Adjustment to tax receivable agreement liabilities (d)

(5,722
)
ERP implementation expenses (e)
335

1,094

Acquisition related adjustment - revenue
105

151

Equity in net income of unconsolidated affiliates (a)
4,252

9,579

Deferred compensation plan income (f)
1,539

1,095

Other expense
(1
)

Adjusted EBITDA
$
119,171

$
110,773

 
 
 
Segment Adjusted EBITDA:
 
 
Supply Chain Services
$
125,620

$
117,304

Performance Services
21,221

22,311

Corporate
(27,670
)
(28,842
)
Adjusted EBITDA
$
119,171

$
110,773

(a)
Refer to Note 4 - Investments for further information regarding equity in net income of unconsolidated affiliates.
(b)
Represents interest expense, net and realized gains and losses on our marketable securities.
(c)
Represents non-cash employee stock-based compensation expense and $0.1 million of stock purchase plan expense during both of the three months ended September 30, 2017 and 2016.
(d)
Represents adjustment to TRA liabilities for a 1% decrease in the North Carolina state income tax rate during the three months ended September 30, 2016.
(e)
Represents implementation and other costs associated with the implementation of our enterprise resource planning ("ERP") system.
(f)
Represents realized and unrealized gains and losses and dividend income on deferred compensation plan assets.

32



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report. This discussion is designed to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. In addition, the following discussion includes certain forward-looking statements. For a discussion of important factors, including the continuing development of our business and other factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see the discussions under "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" herein and in the Company's Form 10-K for the fiscal year ended June 30, 2017 (the "2017 Annual Report"), filed with the Securities and Exchange Commission ("SEC").
Business Overview
Our Business
Premier, Inc. ("Premier", the "Company", "We", or "Our") is a leading healthcare performance improvement company, uniting an alliance of approximately 3,900 U.S. hospitals and health systems and approximately 150,000 other providers and organizations to transform healthcare. We partner with hospitals, health systems, physicians and other healthcare providers with the common goal of improving and innovating in the clinical, financial and operational areas of their businesses to meet the demands of a rapidly evolving healthcare industry. We deliver value through a comprehensive technology-enabled platform that offers critical supply chain services, clinical, financial, operational and population health software-as-a-service ("SaaS") informatics products, advisory services and performance improvement collaborative programs.
As of September 30, 2017, we were controlled by 167 U.S. hospitals, health systems and other healthcare organizations, which represented 1,425 owned, leased and managed acute care facilities and other non-acute care organizations, through their ownership of Class B common stock. As of September 30, 2017, the Class A common stock and Class B common stock represented approximately 38% and 62%, respectively, of our combined Class A and Class B common stock. All of our Class B common stock was held beneficially by our member owners and all of our Class A common stock was held by public investors, which may include member owners that have received shares of our Class A common stock in connection with previous quarterly exchanges pursuant to an exchange agreement (the "Exchange Agreement") entered into by the member owners in connection with the completion of our initial public offering on October 1, 2013 (see Note 1 - Organization and Basis of Presentation to the accompanying condensed consolidated financial statements for more information).
We generated net revenue, net income and Adjusted EBITDA (a financial measure not determined in accordance with generally accepted accounting principles ("Non-GAAP")) as follows (in thousands):
 
Three Months Ended September 30,
 
2017
2016
Net revenue
$
390,564

$
313,272

Net income
$
60,616

$
58,095

Non-GAAP Adjusted EBITDA
$
119,171

$
110,773

See “Our Use of Non-GAAP Financial Measures” and “Results of Operations” below for a discussion of our use of Non-GAAP Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA.
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 organization ("GPO") programs in the United States, serving acute, non-acute, non-healthcare and alternate sites, and includes integrated pharmacy and direct sourcing activities. Supply Chain Services net revenue grew from $233.8 million for the three months ended September 30, 2016 to $305.8

33



million for the three months ended September 30, 2017, representing net revenue growth of 31%, and accounted for 78% of our overall net revenue for the three months ended September 30, 2017. We generate revenue in our Supply Chain Services segment from administrative fees received from suppliers based on the total dollar volume of supplies purchased by our members and through product sales in connection with our integrated 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 increased from $79.5 million for the three months ended September 30, 2016 to $84.8 million for the three months ended September 30, 2017, representing a 7% increase, and accounted for 22% of our overall net revenue for the three months ended September 30, 2017. Our SaaS informatics products utilize our comprehensive data set to provide actionable intelligence to our members, enabling them to benchmark, analyze and identify areas of improvement across three main categories: cost management, quality and safety and population health management. The Performance Services segment also includes our technology-enabled performance improvement collaboratives, advisory services, government services and insurance management services.
Acquisitions
Acquisition of Innovatix and Essensa
Prior to December 2, 2016, the Company, through its consolidated subsidiary, Premier Supply Chain Improvement ("PSCI"), held 50% of the membership interests in Innovatix, LLC ("Innovatix"). On December 2, 2016, the Company, through PSCI, acquired the remaining 50% ownership interests of Innovatix and 100% of the ownership interest in Essensa Ventures, LLC ("Essensa") The purchase price, after adjustments pursuant to the purchase agreement, was $336.0 million. The acquisition was funded with borrowings under the Company's credit facility dated June 24, 2014, as amended on June 4, 2015 (the "Credit Facility"). Innovatix and Essensa are GPOs focused on serving alternate site healthcare providers and other non-healthcare organizations throughout the United States. The Company reports Innovatix and Essensa as part of its Supply Chain Services segment. See Note 3 - Business Acquisitions for more information.
Acquisition of Acro Pharmaceuticals
On August 23, 2016, the Company, through its consolidated subsidiary, NS3 Health, LLC, acquired 100% of the membership interests of Acro Pharmaceutical Services LLC ("Acro") and Community Pharmacy Services, LLC (collectively with Acro, "Acro Pharmaceuticals"). The aggregate purchase price, after adjustments pursuant to the purchase agreement, was $62.9 million. The acquisition was funded with available cash on hand. Acro Pharmaceuticals is a specialty pharmacy business that provides customized healthcare management solutions to members. The Company reports Acro Pharmaceuticals as part of its Supply Chain Services segment. See Note 3 - Business Acquisitions for more information.
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.
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 impact of the implementation of current or future healthcare legislation, particularly the uncertainty regarding the status of the ACA, its repeal, replacement, or other modification, the 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, however, there are uncertainties and risks that may affect the actual impact of these anticipated trends or related assumptions on our business. See "Cautionary Note Regarding Forward-Looking Statements" for more information.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations is primarily based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Significant estimates, including estimates for

34



allowances for doubtful accounts, useful lives of property and equipment, stock-based compensation, payables under tax receivable agreements ("TRA"), values of investments not publicly traded, the valuation allowance on deferred tax assets, uncertain income taxes, deferred revenue, future cash flows associated with asset impairments, values of put and call rights and the allocation of purchase prices are evaluated on an ongoing basis. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
There have been no material changes to the Company's significant accounting policies as described in the Company's 2017 Annual Report.
New Accounting Standards
New accounting standards that we have recently adopted as well as those that have been recently issued but not yet adopted by the Company are included in Note 2 - Significant Accounting Policies to the accompanying condensed consolidated financial statements, which is incorporated herein by reference.
Key Components of Our Results of Operations
Net Revenue
Net revenue consists of service revenue, which includes net administrative fees revenue and other services and support revenue and 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 integrated 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 our ability to negotiate favorable contracts with suppliers, the number of members that utilize our GPO supplier contracts and the volume of their purchases, the number of members that utilize our integrated pharmacy, as well as the impact of changes in the defined allowable reimbursement amounts determined by Medicare, Medicaid and other managed care plans and the number of members that purchase products through our direct sourcing activities and the impact of competitive pricing. Our managed services line of business is a fee for service model created to perform supply chain related services for members, including pharmacy benefit management ("PBM") services in partnership with a national PBM company.
Performance Services
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.

35



Cost of product revenue consists of purchase and shipment costs for specialty pharmaceuticals and direct sourced medical products. Our cost of product revenue is 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 are directly associated with selling and administrative functions and support of revenue-generating activities including expenses to support and maintain our software-related products and services. Selling, general and administrative expenses primarily consist of compensation and benefits related costs, travel-related expenses, business development expenses, including costs for business acquisition opportunities, indirect costs such as insurance, professional fees and other general overhead expenses, and adjustments to TRA liabilities.
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, includes equity in net income of unconsolidated affiliates that is generated from our equity method investments. Our equity method investments primarily consist of our 49% ownership in FFF Enterprises, Inc. ("FFF"), and prior to the acquisition of Innovatix and Essensa, included our 50% ownership interest in Innovatix. Other income, net, also includes interest income and expense, realized and unrealized gains or losses on deferred compensation plan assets and gains or losses on the disposal of assets.
Income Tax Expense
The Company’s income tax expense is attributable to the activities of the Company, Premier Healthcare Solutions, Inc. ("PHSI") and PSCI, all of which are subchapter C Corporations subject to U.S. federal and state income taxes. In contrast, Premier Healthcare Alliance, L.P. ("Premier LP") is not subject to U.S. federal and state income taxes as its income is taxable to its partners. The Company’s overall effective tax rate differs from the U.S statutory tax rate primarily due to the aforementioned ownership structure as well as other items noted in Note 13 - Income Taxes.
Given the Company’s ownership and capital structure, we calculate various effective tax rates for specific tax items. For example, the deferred tax benefit related to stock-based compensation expense (see Note 12 - Stock-Based Compensation) is calculated based on the effective tax rate of PHSI, the legal entity where the majority of stock-based compensation expense is recorded. The Company’s effective tax rate, as discussed in Note 13 - Income Taxes, represents the effective tax rate computed in accordance with generally accepted accounting principles ("GAAP") based on total income tax expense (reflected in income tax expense in the Condensed Consolidated Statements of Income) of the Company, PHSI and PSCI, divided by consolidated pre-tax book income. Non-GAAP Adjusted Fully Distributed Net Income is calculated net of taxes based on the Company’s fully distributed tax rate for expected federal and state income tax for the Company as a whole as if it were one taxable entity with all of its subsidiaries' activities included.
Net Income Attributable to Non-Controlling Interest
As of September 30, 2017, we owned an approximate 38% 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, which was reduced from approximately 63% as of June 30, 2017 to approximately 62% as of September 30, 2017, as a result of completed quarterly exchanges pursuant to the Exchange Agreement (see Note 9 - Redeemable Limited Partners' Capital).
Our Use of Non-GAAP Financial Measures
The other key business metrics we consider are EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow, which are Non-GAAP financial measures.
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 Non-GAAP financial measures, we consider non-recurring items to be income or expenses and other items that have not been earned or incurred within the prior two years and are not expected to recur within the next two years. Such items include certain strategic and financial restructuring expenses. Non-operating items include gain or loss on the disposal of assets and interest and investment income or expense.

36



We define Segment Adjusted EBITDA as the segment's net revenue less cost of revenue and operating expenses directly attributable to the segment excluding depreciation and amortization, amortization of purchased intangible assets, merger and acquisition related expenses and non-recurring or non-cash items and including equity in net income of unconsolidated affiliates. Operating expenses directly attributable to the segment include expenses associated with sales and marketing, general and administrative and product development activities specific to the operation of each segment. General and administrative corporate expenses that are not specific to a particular segment are not included in the calculation of Segment Adjusted EBITDA.
We define Adjusted Fully Distributed Net Income as net income attributable to Premier (i) excluding income 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 for 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. We define Adjusted Fully Distributed Earnings per Share as Adjusted Fully Distributed Net Income divided by diluted weighted average shares (see Note 11 - Earnings Per Share).
We define Free Cash Flow as net cash provided by operating activities less distributions and TRA payments to limited partners and purchases of property and equipment. Free Cash Flow does not represent discretionary cash available for spending as it excludes certain contractual obligations such as debt repayments.
Adjusted EBITDA and Free Cash Flow are supplemental financial measures used by us and by external users of our financial statements and are considered to be indicators of the operational strength and performance of our business. Adjusted EBITDA and Free Cash Flow measures allow us to assess our performance without regard to financing methods and capital structure and without the impact of other matters that we do not consider indicative of the operating performance of our business. More specifically, Segment Adjusted EBITDA is the primary earnings measure we use to evaluate the performance of our business segments.
We use Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results prepared in accordance with GAAP, provides a more complete understanding of factors and trends affecting our business. We believe Adjusted EBITDA and Segment Adjusted EBITDA assist our Board of Directors, management and investors in comparing our operating performance on a consistent basis from period to period because they remove the impact of earnings elements attributable to our asset base (primarily depreciation and amortization) and certain items outside the control of our management team, e.g. taxes, as well as other non-cash (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 operating results. We believe Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share assist our Board of Directors, management and investors in comparing our net income and earnings per share on a consistent basis from period to period because these measures remove non-cash (such as impairment of intangible assets, purchase accounting adjustments and stock-based compensation) and non-recurring items (such as strategic and financial restructuring expenses), and eliminate the variability of non-controlling interest that results from member owner exchanges of Class B common units for shares of Class A common stock. We believe Free Cash Flow is an important measure because it represents the cash that we generate after payment of tax distributions to limited partners and capital investment to maintain existing products and services and ongoing business operations, as well as development of new and upgraded products and services to support future growth. Our Free Cash Flow allows us to enhance stockholder value through acquisitions, partnerships, joint ventures, investments in related businesses and debt reduction.
Despite the importance of these Non-GAAP financial measures in analyzing our business, determining compliance with certain financial covenants in our Credit Facility, measuring and determining incentive compensation and evaluating our operating performance relative to our competitors, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow are not measurements of financial performance under GAAP, may have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, net income, net cash provided by operating activities or any other measure of our performance derived in accordance with GAAP.
Some of the limitations of the EBITDA, Adjusted EBITDA and Segment Adjusted EBITDA measures include that they do not reflect: our capital expenditures or our future requirements for capital expenditures or contractual commitments; changes in, or cash requirements for, our working capital needs; the interest expense or the cash requirements to service interest or principal payments under our Credit Facility; income tax payments we are required to make; and any cash requirements for replacements of assets being depreciated or amortized. In addition, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA and Free Cash Flow are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flows from operating activities.
Some of the limitations of the Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share measures are that they do not reflect income tax expense or income tax payments we are required to make. In addition, Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share are not measures of profitability under GAAP.

37



We also urge you to review the reconciliation of these Non-GAAP financial measures included elsewhere in this Quarterly Report. To properly and prudently evaluate our business, we encourage you to review the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report and to not rely on any single financial measure to evaluate our business. In addition, because the EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow measures are susceptible to varying calculations, such Non-GAAP financial measures may differ from, and may therefore not be comparable to, similarly titled measures used by other companies.
Non-recurring and non-cash items excluded in our calculation of Adjusted EBITDA, Segment Adjusted EBITDA and Adjusted Fully Distributed Net Income consist of stock-based compensation, strategic and financial restructuring expenses, adjustments to TRA liabilities, enterprise resource planning ("ERP") implementation expenses and acquisition related adjustment - revenue. These items include the following:
Stock-based compensation
In addition to non-cash employee stock-based compensation expense, this item includes non-cash stock purchase plan expense of $0.1 million for each of the three months ended September 30, 2017 and 2016.
Adjustment to TRA liabilities
This item represents adjustments to TRA liabilities for a 1% decrease in the North Carolina state income tax rate during the three months ended September 30, 2016.
ERP implementation expenses
This item includes costs related to the implementation of a new ERP system.


38



Results of Operations
The following table summarizes our results of operations for the three months ended September 30, 2017 and 2016 (in thousands, except per share data):
 
Three Months Ended September 30,
 
2017
2016
 
Amount
% of Net Revenue
Amount
% of Net Revenue
Net revenue:
 
 
 
 
Net administrative fees
$
150,991

39%
$
125,976

40%
Other services and support
86,911

22%
81,167

26%
Services
237,902

61%
207,143

66%
Products
152,662

39%
106,129

34%
Net revenue
390,564

100%
313,272

100%
Cost of revenue:
 
 
 
 
Services
46,936

13%
42,690

14%
Products
144,440

37%
95,813

31%
Cost of revenue
191,376

49%
138,503

44%
Gross profit
199,188

51%
174,769

56%
Operating expenses:
 
 
 
 
Selling, general and administrative
114,321

28%
92,238

29%
Research and development
489

—%
806

—%
Amortization of purchased intangible assets
13,898

4%
9,209

3%
Operating expenses
128,708

32%
102,253

33%
Operating income
70,480

18%
72,516

23%
Other income, net
2,900

1%
8,915

3%
Income before income taxes
73,380

19%
81,431

26%
Income tax expense
12,764

3%
23,336

7%
Net income
60,616

16%
58,095

19%
Net income attributable to non-controlling interest in Premier LP
(44,610
)
(11)%
(49,601
)
(16)%
Adjustment of redeemable limited partners' capital to redemption amount
320,424

nm
61,808

nm
Net income attributable to stockholders
$
336,430

nm
$
70,302

nm
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
Basic
52,909

 
47,214

 
Diluted
140,046

 
142,962

 
 
 
 
 
 
Earnings per share attributable to stockholders:
 
 
 
Basic
$
6.36

 
$
1.49

 
Diluted
$
0.36

 
$
0.26

 
nm = Not meaningful






39



The following table provides certain Non-GAAP financial measures for the three months ended September 30, 2017 and 2016 (in thousands, except per share data). Refer to "Our Use of Non-GAAP Financial Measures" for further information regarding items excluded in our calculation of Adjusted EBITDA and Segment Adjusted EBITDA.
 
Three Months Ended September 30,
 
2017
2016
 
Amount
% of Net Revenue
Amount
% of Net Revenue
Certain Non-GAAP Financial Data:
 
 
 
 
Adjusted EBITDA
$
119,171

31%
$
110,773

35%
Non-GAAP Adjusted Fully Distributed Net Income
$
61,713

16%
$
58,928

19%
Non-GAAP Adjusted Fully Distributed Earnings Per Share
$
0.44

n/a
$
0.41

n/a

























40



The following table provides the reconciliation of net income to Adjusted EBITDA and the reconciliation of income before income taxes to Segment Adjusted EBITDA (in thousands). Refer to "Our Use of Non-GAAP Financial Measures" for further information regarding items excluded in our calculation of Adjusted EBITDA and Segment Adjusted EBITDA.
 
Three Months Ended September 30,
 
2017
2016
Net income
$
60,616

$
58,095

Interest and investment loss, net
1,495

152

Income tax expense
12,764

23,336

Depreciation and amortization
16,507

14,018

Amortization of purchased intangible assets
13,898

9,209

EBITDA
105,280

104,810

Stock-based compensation
8,957

5,896

Acquisition related expenses
3,099

2,937

Adjustment to tax receivable agreement liabilities

(5,722
)
ERP implementation expenses
335

1,094

Acquisition related adjustment - revenue
105

151

Loss on disposal of long-lived assets
1,320

1,518

Loss on FFF put and call rights
20


Other expense
55

89

Adjusted EBITDA
$
119,171

$
110,773

 
 
 
Income before income taxes
$
73,380

$
81,431

Equity in net income of unconsolidated affiliates
(4,252
)
(9,579
)
Interest and investment loss, net
1,495

152

Loss on disposal of long-lived assets
1,320

1,518

Other income
(1,463
)
(1,006
)
Operating income
70,480

72,516

Depreciation and amortization
16,507

14,018

Amortization of purchased intangible assets
13,898

9,209

Stock-based compensation
8,957

5,896

Acquisition related expenses
3,099

2,937

Adjustment to tax receivable agreement liabilities

(5,722
)
ERP implementation expenses
335

1,094

Acquisition related adjustment - revenue
105

151

Equity in net income of unconsolidated affiliates
4,252

9,579

Deferred compensation plan income
1,539

1,095

Other expense
(1
)

Adjusted EBITDA
$
119,171

$
110,773

 
 
 
Segment Adjusted EBITDA:
 
 
Supply Chain Services
$
125,620

$
117,304

Performance Services
21,221

22,311

Corporate
(27,670
)
(28,842
)
Adjusted EBITDA
$
119,171

$
110,773


41



The following table provides the reconciliation of net income attributable to stockholders to Non-GAAP Adjusted Fully Distributed Net Income and the reconciliation of the numerator and denominator for earnings per share attributable to stockholders to Non-GAAP Adjusted Fully Distributed Earnings per Share for the periods presented (in thousands). Refer to "Our Use of Non-GAAP Financial Measures" for further information regarding items excluded in our calculation of Non-GAAP Adjusted Fully Distributed Net Income and Non-GAAP Adjusted Fully Distributed Earnings per Share.
 
Three Months Ended September 30,
 
2017
2016
Net income attributable to stockholders
$
336,430

$
70,302

Adjustment of redeemable limited partners' capital to redemption amount
(320,424
)
(61,808
)
Net income attributable to non-controlling interest in Premier LP
44,610

49,601

Income tax expense
12,764

23,336

Amortization of purchased intangible assets
13,898

9,209

Stock-based compensation
8,957

5,896

Acquisition related expenses
3,099

2,937

Adjustment to tax receivable agreement liabilities

(5,722
)
ERP implementation expenses
335

1,094

Acquisition related adjustment - revenue
105

151

Loss on disposal of long-lived assets
1,320

1,518

Loss on FFF put and call rights
20


Other expense
55

89

Non-GAAP adjusted fully distributed income before income taxes
101,169

96,603

Income tax expense on fully distributed income before income taxes (a)
39,456

37,675

Non-GAAP Adjusted Fully Distributed Net Income
$
61,713

$
58,928

 
 
 
Reconciliation of denominator for earnings per share attributable to stockholders to Non-GAAP Adjusted Fully Distributed Earnings per Share
Weighted Average:
 
 
Common shares used for basic and diluted earnings per share
52,909

47,214

Potentially dilutive shares
655

939

Conversion of Class B common units
86,482

94,809

Weighted average fully distributed shares outstanding - diluted
140,046

142,962

(a)
Reflects income tax expense at an estimated effective income tax rate of 39% of Non-GAAP adjusted fully distributed income before income taxes for the three months ended September 30, 2017 and 2016.

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The following table provides the reconciliation of earnings per share attributable to stockholders to Non-GAAP Adjusted Fully Distributed Earnings per Share for the periods presented. Refer to "Our Use of Non-GAAP Financial Measures" for further information regarding items excluded in our calculation of Non-GAAP Adjusted Fully Distributed Earnings per Share.