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Premier, Inc. - Quarter Report: 2020 March (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 __________________________________________________________________________________________
FORM 10-Q
 __________________________________________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
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)
(704357-0022
(Registrant's telephone number, including area code)
 __________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, $0.01 Par Value
PINC
NASDAQ Global Select Market
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  ☒     No   ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes  ☒ No  ☐
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
 
Accelerated filer
 
Non-accelerated filer
Smaller reporting company
 
Emerging growth company
 
(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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   No   ☒
As of May 1, 2020, there were 71,574,119 shares of the registrant's Class A common stock, par value $0.01 per share, and 50,213,098 shares of the registrant's Class B common stock, par value $0.000001 per share, outstanding.





TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 




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:
the impact of the continuing financial and operational uncertainty due to the coronavirus ("COVID-19") pandemic, including its impact on the overall economy, our sales, operations and supply chains, our members, workforce and suppliers, and countries, and the interpretation and enforcement of current or future government regulations impacting suppliers' ability to bring drugs and devices to market as well as reimbursement to healthcare providers;
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 on substantially similar terms or at all;
the rate at which the markets for our software as a service ("SaaS") informatics products and services 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 loans to businesses that we do not control, particularly early stage companies;
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;
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, including our ability to renew or replace our existing long-term credit facility at maturity;
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 international, 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 may be considered medical devices;
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;
our ability to comply with the NASDAQ corporate governance guidelines triggered by the loss of our "controlled company" status in a timely manner;
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 of Premier LP (the "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 over financial reporting or an inability to remediate any weaknesses identified and the related costs of remediation;
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 lack of cash dividends on our Class A common stock;
the timing and number of shares of Class A common stock re-purchased by the Company, if any, pursuant to our current or any future Class A common stock repurchase program;
possible future issuances of common stock, preferred stock, limited partnership units or debt securities and the dilutive effect of such issuances; and
the risk factors discussed under the heading "Risk Factors" under Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the "2019 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

4



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)
 
March 31, 2020
June 30, 2019
Assets
 
 
Cash and cash equivalents
$
241,734

$
141,055

Accounts receivable (net of $1,125 and $739 allowance for doubtful accounts, respectively)
139,902

168,115

Contract assets
234,467

205,509

Inventory
48,522

51,032

Prepaid expenses and other current assets
87,746

23,765

Current assets of discontinued operations

24,568

Total current assets
752,371

614,044

Property and equipment (net of $431,633 and $359,235 accumulated depreciation, respectively)
203,512

205,108

Intangible assets (net of $233,888 and $197,858 accumulated amortization, respectively)
420,104

270,722

Goodwill
929,615

880,709

Deferred income tax assets
436,047

422,014

Deferred compensation plan assets
42,780

45,466

Investments in unconsolidated affiliates
120,642

99,636

Operating lease right-of-use assets
59,901


Other assets
98,097

31,868

Total assets
$
3,063,069

$
2,569,567

 
 
 
Liabilities, redeemable limited partners' capital and stockholders' equity (deficit)
 
 
Accounts payable
$
62,304

$
54,540

Accrued expenses
67,289

82,476

Revenue share obligations
149,976

137,359

Limited partners' distribution payable
9,314

13,202

Accrued compensation and benefits
56,208

70,799

Deferred revenue
38,042

35,623

Current portion of tax receivable agreements
18,118

17,505

Line of credit and current portion of long-term debt
254,745

27,608

Other liabilities
30,187

7,113

Current liabilities of discontinued operations

11,797

Total current liabilities
686,183

458,022

Long-term debt, less current portion
4,828

6,003

Tax receivable agreements, less current portion
276,739

326,607

Deferred compensation plan obligations
42,780

45,466

Deferred tax liabilities
13,140

4,766

Deferred consideration
112,917


Operating lease liabilities, less current portion
55,336


Other liabilities
71,265

67,683

Total liabilities
1,263,188

908,547

 
 
 
Redeemable limited partners' capital
1,658,419

2,523,270

Stockholders' equity (deficit):
 
 

6



 
March 31, 2020
June 30, 2019
Class A common stock, $0.01 par value, 500,000,000 shares authorized; 71,070,617 shares issued and outstanding at March 31, 2020 and 64,357,305 shares issued and 61,938,157 shares outstanding at June 30, 2019
711

644

Class B common stock, $0.000001 par value, 600,000,000 shares authorized; 50,715,564 and 64,548,044 shares issued and outstanding at March 31, 2020 and June 30, 2019, respectively


Treasury stock, at cost; 0 and 2,419,148 shares at March 31, 2020 and June 30, 2019, respectively

(87,220
)
Additional paid-in-capital
140,751


Accumulated deficit

(775,674
)
Total stockholders' equity (deficit)
141,462

(862,250
)
Total liabilities, redeemable limited partners' capital and stockholders' equity (deficit)
$
3,063,069

$
2,569,567

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
Nine Months Ended
 
March 31,
March 31,
 
2020
2019
2020
2019
Net revenue:
 
 
 
 
Net administrative fees
$
174,049

$
164,534

$
518,566

$
492,229

Other services and support
99,591

95,111

270,929

279,734

Services
273,640

259,645

789,495

771,963

Products
61,183

41,568

167,344

129,441

Net revenue
334,823

301,213

956,839

901,404

Cost of revenue:
 

 
 
Services
49,007

46,545

143,965

133,107

Products
54,121

39,496

150,415

124,024

Cost of revenue
103,128

86,041

294,380

257,131

Gross profit
231,695

215,172

662,459

644,273

Operating expenses:
 
 
 
 
Selling, general and administrative
115,289

113,336

315,311

320,198

Research and development
628

296

1,808

928

Amortization of purchased intangible assets
13,966

13,572

38,948

39,787

Operating expenses
129,883

127,204

356,067

360,913

Operating income
101,812

87,968

306,392

283,360

Equity in net income of unconsolidated affiliates
4,442

553

11,038

4,687

Interest and investment loss, net
(9,966
)
(1,081
)
(9,849
)
(2,628
)
(Loss) gain on FFF put and call rights
(13,906
)
(4,109
)
8,477

3,458

Other (expense) income
(5,005
)
3,671

(1,996
)
1,362

Other (expense) income, net
(24,435
)
(966
)
7,670

6,879

Income before income taxes
77,377

87,002

314,062

290,239

Income tax expense
4,165

11,737

78,336

25,791

Net income from continuing operations
73,212

75,265

235,726

264,448

Income (loss) from discontinued operations, net of tax
5

(1,463
)
1,009

(3,862
)
Net income
73,217

73,802

236,735

260,586

Net income from continuing operations attributable to noncontrolling interest
(35,055
)
(44,135
)
(132,189
)
(163,230
)
Net (income) loss from discontinued operations attributable to noncontrolling interest
(3
)
747

(480
)
2,098

Net income attributable to non-controlling interest in Premier LP
(35,058
)
(43,388
)
(132,669
)
(161,132
)
Adjustment of redeemable limited partners' capital to redemption amount
302,569

235,394

516,725

178,910

Net income attributable to stockholders
$
340,728

$
265,808

$
620,791

$
278,364

 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
Basic
69,451

62,020

65,582

58,346

Diluted
122,470

129,072

124,030

132,249

 
 
 
 
 

8



 
Three Months Ended
Nine Months Ended
 
March 31,
March 31,
 
2020
2019
2020
2019
Earnings per share attributable to stockholders:
 
 
 
 
Basic (loss) earnings per share:
 
 
 
 
Continuing operations
$
4.91

$
4.30

$
9.46

$
4.80

Discontinued operations

(0.01
)
0.01

(0.03
)
Basic earnings per share attributable to stockholders
$
4.91

$
4.29

$
9.47

$
4.77

 
 
 
 
 
Diluted (loss) earnings per share:
 
 
 
 
Continuing operations
$
0.54

$
0.49

$
1.66

$
1.71

Discontinued operations

(0.01
)

(0.03
)
Diluted earnings per share attributable to stockholders
$
0.54

$
0.48

$
1.66

$
1.68

See accompanying notes to the unaudited condensed consolidated financial statements.

9



PREMIER, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
 
Three Months Ended
Nine Months Ended
 
March 31,
March 31,
 
2020
2019
2020
2019
Net income
$
73,217

$
73,802

$
236,735

$
260,586

Less: comprehensive income attributable to non-controlling interest
(35,058
)
(43,388
)
(132,669
)
(161,132
)
Comprehensive income attributable to stockholders
$
38,159

$
30,414

$
104,066

$
99,454

See accompanying notes to the unaudited condensed consolidated financial statements.

10



PREMIER, INC.
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
Nine Months Ended March 31, 2020
(Unaudited)
(In thousands)
 
Class A
Common Stock
Class B
Common Stock
Treasury Stock
Additional Paid-In Capital
Accumulated Deficit
Total Stockholders' Equity (Deficit)
 
Shares
Amount
Shares
Amount
Shares
Amount
Balance at June 30, 2019
61,938

$
644

64,548

$

2,419

$
(87,220
)
$

$
(775,674
)
$
(862,250
)
Balance at July 1, 2019
61,938

644

64,548


2,419

(87,220
)

(775,674
)
(862,250
)
Impact of change in accounting principle







(899
)
(899
)
Adjusted balance at July 1, 2019
61,938

644

64,548


2,419

(87,220
)

(776,573
)
(863,149
)
Exchange of Class B units for Class A common stock by member owners
1,311


(1,311
)

(1,311
)
47,258

3,534


50,792

Redemption of limited partners


(782
)






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






12,272


12,272

Issuance of Class A common stock under equity incentive plan
485

5





1,749


1,754

Treasury stock
(1,055
)



1,055

(35,649
)


(35,649
)
Stock-based compensation expense






3,704


3,704

Repurchase of vested restricted units for employee tax-withholding






(8,311
)

(8,311
)
Net income







71,329

71,329

Net income attributable to non-controlling interest in Premier LP







(41,907
)
(41,907
)
Adjustment of redeemable limited partners' capital to redemption amount






(12,948
)
707,257

694,309

Balance at September 30, 2019
62,679

$
649

62,455

$

2,163

$
(75,611
)
$

$
(39,894
)
$
(114,856
)
Exchange of Class B units for Class A common stock by member owners
6,873

19

(6,873
)

(5,031
)
164,810

59,117


223,946

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






1,103


1,103

Issuance of Class A common stock under equity incentive plan
146

1





4,243


4,244

Issuance of Class A common stock under employee stock purchase plan
40






1,540


1,540

Treasury stock
(3,549
)



3,549

(112,917
)


(112,917
)
Stock-based compensation expense






7,775


7,775

Repurchase of vested restricted units for employee tax-withholding






(47
)

(47
)
Net income







92,189

92,189

Net income attributable to non-controlling interest in Premier LP







(55,704
)
(55,704
)
Adjustment of redeemable limited partner's capital to redemption amount






(73,731
)
(406,422
)
(480,153
)
Balance at December 31, 2019
66,189

$
669

55,582

$

681

$
(23,718
)
$

$
(409,831
)
$
(432,880
)
Exchange of Class B units for Class A common stock by member owners
4,866

41

(4,866
)

(723
)
25,245

143,908


169,194

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






58,193


58,193

Issuance of Class A common stock under equity incentive plan
58

1





308


309

Treasury stock
(42
)



42

(1,527
)


(1,527
)
Stock-based compensation expense






7,568


7,568

Repurchase of vested restricted units for employee tax-withholding






(123
)

(123
)
Net income







73,217

73,217

Net income attributable to non-controlling interest in Premier LP







(35,058
)
(35,058
)
Adjustment of redeemable limited partner's capital to redemption amount






(69,103
)
371,672

302,569

Balance at March 31, 2020
71,071

$
711

50,716

$


$

$
140,751

$

$
141,462

See accompanying notes to the unaudited condensed consolidated financial statements.

11



PREMIER, INC.
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
Nine Months Ended March 31, 2019
(Unaudited)
(In thousands)
 
Class A
Common Stock
Class B
Common Stock
Treasury Stock
Additional Paid-In Capital
Accumulated Deficit
Total Stockholders' Deficit
 
Shares
Amount
Shares
Amount
Shares
Amount
Balance at June 30, 2018
52,761

$
575

80,336

$

4,769

$
(150,058
)
$

$
(1,277,581
)
$
(1,427,064
)
Balance at July 1, 2018
52,761

575

80,336


4,769

(150,058
)

(1,277,581
)
(1,427,064
)
Impact of change in accounting principle







121,945

121,945

Adjusted balance at July 1, 2018
52,761

$
575

80,336

$

4,769

$
(150,058
)
$

$
(1,155,636
)
$
(1,305,119
)
Exchange of Class B units for Class A common stock by member owners
817


(817
)

(817
)
25,974

4,562


30,536

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






373


373

Issuance of Class A common stock under equity incentive plan
547

5





7,467


7,472

Treasury stock
(335
)



335

(12,313
)


(12,313
)
Stock-based compensation expense






6,195


6,195

Repurchase of vested restricted units for employee tax-withholding






(6,948
)

(6,948
)
Net income







81,973

81,973

Net income attributable to non-controlling interest in Premier LP







(55,113
)
(55,113
)
Adjustment of redeemable limited partners' capital to redemption amount






(11,649
)
(696,544
)
(708,193
)
Balance at September 30, 2018
53,790

$
580

79,519

$

4,287

$
(136,397
)
$

$
(1,825,320
)
$
(1,961,136
)
Exchange of Class B units for Class A common stock by member owners
9,807

55

(9,807
)

(4,287
)
136,397

304,892


441,344

Redemption of limited partners


(227
)






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






14,379


14,379

Issuance of Class A common stock under equity incentive plan
187

3





4,648


4,651

Issuance of Class A common stock under employee stock purchase plan
38






1,488


1,488

Treasury stock
(2,535
)



2,535

(97,199
)


(97,199
)
Stock-based compensation expense






7,716


7,716

Repurchase of vested restricted units for employee tax-withholding






(1,082
)

(1,082
)
Net income







104,811

104,811

Net income attributable to non-controlling interest in Premier LP







(62,631
)
(62,631
)
Adjustment of redeemable limited partner's capital to redemption amount






(332,041
)
983,750

651,709

Balance at December 31, 2018
61,287

$
638

69,485

$

2,535

$
(97,199
)
$

$
(799,390
)
$
(895,951
)
Exchange of Class B units for Class A common stock by member owners
3,705

2

(3,705
)

(3,500
)
134,910

12,528


147,440

Redemption of limited partners


(797
)






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






9,730


9,730

Issuance of Class A common stock under equity incentive plan
218

2





5,189


5,191

Treasury stock
(3,819
)



3,819

(140,621
)


(140,621
)
Stock-based compensation expense






6,781


6,781

Repurchase of vested restricted units for employee tax-withholding






(92
)

(92
)
Net income







73,802

73,802

Net income attributable to non-controlling interest in Premier LP







(43,388
)
(43,388
)
Adjustment of redeemable limited partner's capital to redemption amount






(34,136
)
269,530

235,394

Balance at March 31, 2019
61,391

$
642

64,983

$

2,854

$
(102,910
)
$

$
(499,446
)
$
(601,714
)
See accompanying notes to the unaudited condensed consolidated financial statements.

12



PREMIER, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Nine Months Ended March 31,
 
2020
2019
Operating activities
 
 
Net income
$
236,735

$
260,586

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
(Income) loss from discontinued operations, net of tax
(1,009
)
3,862

Depreciation and amortization
114,638

103,316

Equity in net income of unconsolidated affiliates
(11,038
)
(4,687
)
Deferred income taxes
60,394

9,849

Stock-based compensation
19,048

20,354

Remeasurement of tax receivable agreement liabilities
(24,584
)

Impairment of held to maturity investments
8,500


Gain on FFF put and call rights
(8,477
)
(3,458
)
Changes in operating assets and liabilities, net of the effects of acquisitions:
 
 
Accounts receivable, inventories, prepaid expenses and other assets
(95,953
)
(30,268
)
Contract assets
(28,909
)
(28,056
)
Accounts payable, accrued expenses, deferred revenue, revenue share obligations and other liabilities
(23,341
)
24,118

Other operating activities
2,078

1,018

Net cash provided by operating activities from continuing operations
248,082

356,634

Net cash provided by operating activities from discontinued operations
9,338

11,502

Net cash provided by operating activities
257,420

368,136

Investing activities
 
 
Purchases of property and equipment
(69,326
)
(69,906
)
Acquisition of businesses, net of cash acquired
(96,346
)
(50,854
)
Investments in unconsolidated affiliates
(10,165
)

Proceeds from sale of assets
3,632


Other investing activities
251

(11,414
)
Net cash used in investing activities from continuing operations
(171,954
)
(132,174
)
Net cash used in investing activities from discontinued operations

(211
)
Net cash used in investing activities
(171,954
)
(132,385
)
Financing activities
 
 
Payments made on notes payable
(2,046
)

Proceeds from credit facility
375,000

50,000

Payments on credit facility
(150,000
)

Distributions to limited partners of Premier LP
(39,590
)
(44,746
)
Payments to limited partners of Premier LP related to tax receivable agreements
(17,425
)
(17,975
)
Repurchase of Class A common stock (held as treasury stock)
(150,093
)
(248,840
)
Other financing activities
(633
)
10,936

Net cash provided by (used in) financing activities
15,213

(250,625
)
Net increase (decrease) in cash and cash equivalents
100,679

(14,874
)
Cash and cash equivalents at beginning of year
141,055

152,386

Cash and cash equivalents at end of period
$
241,734

$
137,512


13



 
Nine Months Ended March 31,
 
2020
2019
Supplemental schedule of non-cash investing and financing activities:
 
 
Decrease in redeemable limited partners' capital for adjustment to fair value, with offsetting increase in additional paid-in-capital and accumulated deficit
$
516,725

$
178,910

Decrease in redeemable limited partners' capital, with offsetting decrease in common stock and additional paid-in capital related to quarterly exchanges by member owners
443,931

619,321

Decrease in redeemable limited partners' capital for limited partners' distribution payable
35,701

42,426

Distributions utilized to reduce subscriptions, notes, interest and accounts receivable from member owners
209

933

Net increase in deferred tax assets related to departures and quarterly exchanges by member owners and other adjustments
63,958

128,723

Net (decrease) increase in tax receivable agreement liabilities related to departures and quarterly exchanges by member owners and other adjustments
(7,246
)
104,241

Net decrease in notes payable related to departures and quarterly exchanges by member owners and other adjustments
364


Net increase in additional paid-in capital related to departures and quarterly exchanges by member owners and other adjustments
71,568

24,482

Increase in treasury stock related to a payable as a result of applying trade date accounting when recording the repurchase of Class A common stock

1,293

Contingent consideration related to acquisition of business
26,481


Deferred consideration related to acquisition of business
118,320


Non-cash additions to property and equipment
5,000


Payable to member owners incurred upon repurchase of ownership interest
1,372

1,820

See accompanying notes to the unaudited condensed consolidated financial statements.

14



PREMIER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Organization
Premier, Inc. ("Premier" or the "Company") is a publicly-held, for-profit Delaware corporation owned by public stockholders and by hospitals, health systems and other healthcare organizations (such owners of Premier are referred to herein as "member owners") located in the United States. The Company is a holding company with no material business operations of its own. The Company's primary asset is its equity interest in its wholly-owned subsidiary Premier Services, LLC, a Delaware limited liability company ("Premier GP"). Premier GP is the sole general partner of Premier Healthcare Alliance, L.P. ("Premier LP"), a California limited partnership. The Company conducts substantially all of its business operations through Premier LP and its other consolidated subsidiaries. The Company, together with its subsidiaries and affiliates, is a leading healthcare performance improvement company that unites hospitals, health systems, physicians and other healthcare providers to improve and innovate in the clinical, financial and operational areas of their businesses to meet the demands of a rapidly evolving healthcare industry.
The Company's business model and solutions are designed to provide its members access to scale efficiencies, spread the cost of their development, provide actionable intelligence derived from anonymized data in the Company's data warehouse, mitigate the risk of innovation and disseminate best practices to help the Company's member organizations succeed in their transformation to higher quality and more cost-effective healthcare.
The Company, together with its subsidiaries and affiliates, delivers its integrated platform of solutions through two business segments: Supply Chain Services and Performance Services. See Note 17 - Segments for further information related to the Company's reportable business segments. The Supply Chain Services segment includes one of the largest healthcare group purchasing organization ("GPO") programs in the United States and direct sourcing activities. The Performance Services segment, through its development, integration and delivery of technology with wrap-around service offerings, includes one of the largest informatics and consulting services businesses in the United States focused on healthcare providers. 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 value-based care. While leveraging these tools, the Company also combines its consulting services and technology-enabled performance improvement collaboratives to provide a more comprehensive and holistic customer value proposition and overall experience. The Performance Services segment also includes the Company's insurance management services.
Acquisitions and Divestitures
Acquisition of Acurity and Nexera Assets
On February 28, 2020, the Company, through two newly formed consolidated subsidiaries, Prince A Purchaser, LLC ("PAP") and Prince N Purchaser, LLC ("PNP"), acquired substantially all of the assets and certain liabilities of Acurity, Inc. and Nexera, Inc., both indirect wholly-owned subsidiaries of Greater New York Hospital Association ("GNYHA"), for an aggregate amount of $291.5 million, of which $166.1 million was paid at closing with borrowings under the Company's Credit Facility (as defined in Note 9 - Debt). Pursuant to the terms of the asset purchase agreement (as amended, the "Purchase Agreement"), an additional $120.0 million will be paid to the sellers in four equal annual installments of $30.0 million on or about June 30, 2021, 2022, 2023 and 2024. An additional $5.4 million is expected to be paid during the Company’s second fiscal quarter of 2021. In addition to the aggregate amount of $291.5 million, the Purchase Agreement provides a graduated earn-out opportunity to Acurity, Inc. of up to $30.0 million based upon the Company’s achievement of a range of member renewals on terms to be agreed to by the Company and GNYHA based on prevailing market conditions in December 2023.
After the closing of the transaction, PAP and PNP changed their names to Acurity, LLC ("Acurity") and Nexera, LLC ("Nexera"), respectively. Acurity is a regional group purchasing organization and has been a customer and strategic partner of the Company for more than 24 years. Nexera is a hospital financial improvement consulting firm which partners with healthcare organizations to improve hospital and health system performance, with a significant focus on supply chain enhancement and transformation. The Company reports the operations of Acurity and Nexera as part of its Supply Chain Services segment. See Note 3 - Business Acquisitions for further information.
Acquisition of Medpricer
On October 28, 2019, the Company, through its consolidated subsidiary, Premier Supply Chain Improvement, Inc. ("PSCI"), acquired all of the outstanding capital stock in Medpricer.com, Inc. ("Medpricer") for an adjusted purchase price of $38.5 million

15



with borrowings under the Credit Facility. Medpricer is a SaaS-based provider of technology solutions that enable hospitals and other organizations to analyze, benchmark and source purchased services contracts independent of any existing GPO affiliation. Medpricer is reported as part of the Supply Chain Services segment. See Note 3 - Business Acquisitions for further information.
Acquisition of Stanson
On November 9, 2018, the Company, through its consolidated subsidiary Premier Healthcare Solutions, Inc. ("PHSI"), acquired all of the outstanding capital stock in Stanson Health, Inc. ("Stanson") through a reverse subsidiary merger transaction for an adjusted purchase price of $55.4 million in cash. Stanson is a SaaS-based provider of clinical decision support tools that are integrated directly into the electronic health record workflow to help provide real-time, patient-specific best practices at the point of care. Stanson is reported as part of the Performance Services segment. See Note 3 - Business Acquisitions for further information.
Divestiture of Specialty Pharmacy Business - Discontinued Operations
On June 7, 2019, the Company and its consolidated subsidiaries, NS3 Health, LLC, Commcare Pharmacy - FTL, LLC, and Acro Pharmaceutical Services LLC completed the sale of prescription files and records and certain other assets used in the Company's specialty pharmacy business to ProCare Pharmacy, L.L.C., an affiliate of CVS Health Corporation, for $22.3 million. The Company also received $7.6 million related to the sale of a portion of its pharmaceutical inventory on June 10, 2019, and an additional $3.6 million on July 24, 2019 primarily in connection with the sale of its remaining pharmaceutical inventory. In addition, during the nine months ended March 31, 2020, the Company substantially completed its wind down and exit from the specialty pharmacy business. See Note 4 - Discontinued Operations and Exit Activities for further information.
The Company met the criteria for classifying certain assets and liabilities of the specialty pharmacy business as a discontinued operation as of June 30, 2019. Accordingly, unless otherwise indicated, information in the notes to the condensed consolidated financial statements has been retrospectively adjusted to reflect continuing operations for all periods presented.
Company Structure
The Company, through Premier GP, held an approximate 58% and 49% sole general partner interest in Premier LP at March 31, 2020 and June 30, 2019, respectively. In addition to their equity ownership interest in the Company, the member owners held an approximate 42% and 51% limited partner interest in Premier LP at March 31, 2020 and June 30, 2019, respectively. As a result of exchanges under an exchange agreement entered into by the member owners in connection with the completion of the Company's initial public offering on October 1, 2013 (the "Exchange Agreement"), as of July 31, 2019, the Class A common stock and Class B common stock represented approximately 50.2% and 49.8% respectively, of the Company's combined Class A and Class B common stock and accordingly, the Class B common stock held by member owners no longer represented the majority of the Company's outstanding common stock. On July 31, 2019, as a result of the Class B common unit exchange process, the Company no longer qualified for the "controlled company" exemption under NASDAQ rules and must comply with all general NASDAQ rules regarding board and committee composition by July 31, 2020. The Company expects to comply with all NASDAQ rules in a timely manner, including having a majority of independent directors on the Board of Directors by July 31, 2020.
Basis of Presentation and Consolidation
Basis of Presentation
The member owners' interest in Premier LP is reflected as redeemable limited partners' capital in the Company's accompanying Condensed Consolidated Balance Sheets, and the limited partners' proportionate share of income in Premier LP is reflected within net income attributable to non-controlling interest in Premier LP in the Company's accompanying Condensed Consolidated Statements of Income and within comprehensive income attributable to non-controlling interest in Premier LP in the Company's accompanying Condensed Consolidated Statements of Comprehensive Income.
At March 31, 2020 and June 30, 2019, the member owners owned 42% and 51%, respectively, of the Company's combined Class A and Class B common stock through their ownership of Class B common stock. During the nine months ended March 31, 2020, the member owners exchanged 13.1 million Class B common units and associated Class B common shares for an equal number of Class A common shares pursuant to the Exchange Agreement. The Exchange Agreement provides each member owner the cumulative right to exchange up to one-seventh of its initial allocation of Class B common units, as well as any additional Class B common units purchased by such member owner pursuant to certain rights of first refusal, for shares of Class A common stock (on a one-for-one basis subject to customary adjustments for subdivisions or combinations by split, reverse split, distribution, reclassification, recapitalization or otherwise), cash or a combination of both, the form of consideration to be at the discretion of the Company's independent Audit and Compliance Committee of the Board of Directors (the "Audit and Compliance Committee"). During the nine months ended March 31, 2020, 13.1 million Class B common units were contributed to Premier LP, converted to Class A common units and remain outstanding. Correspondingly, 13.1 million Class B common shares were retired during the same period. For further information, see Note 12 - Earnings Per Share.

16



At March 31, 2020 and June 30, 2019, the public investors, which may include member owners that have received shares of Class A common stock in connection with previous exchanges of their Class B common units and associated Class B common shares, owned 58% and 49%, 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 pursuant to the rules and regulations of the SEC and in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the Company exercised control and when applicable, entities for which the Company had a controlling financial interest or was the primary beneficiary. All intercompany transactions have been eliminated upon consolidation. Accordingly, certain information and disclosures normally included in annual financial statements have been condensed or omitted. The accompanying condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring adjustments. The Company believes that the disclosures are adequate to make the information presented not misleading and should be read in conjunction with the audited consolidated financial statements and related footnotes contained in the 2019 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, through Premier GP, has the exclusive power and authority to manage the business and affairs of Premier LP, to make all decisions with respect to driving the economic performance of Premier LP, and has both an obligation to absorb losses and a right to receive benefits. As such, the Company is the primary beneficiary of the VIE and consolidates the operations of Premier LP under the Variable Interest Model.
The assets and liabilities of Premier LP at March 31, 2020 and June 30, 2019, including assets and liabilities of discontinued operations, consisted of the following (in thousands):
 
March 31, 2020
June 30, 2019
Assets
 
 
Current
$
742,525

$
603,390

Noncurrent
1,874,662

1,536,685

Total assets of Premier LP
$
2,617,187

$
2,140,075

 
 
 
Liabilities
 
 
Current
$
753,763

$
517,616

Noncurrent
290,163

118,032

Total liabilities of Premier LP
$
1,043,926

$
635,648


Net income attributable to Premier LP, including income and expense that has been classified as discontinued operations, during the three and nine months ended March 31, 2020 and 2019 was as follows (in thousands):
 
Three Months Ended
Nine Months Ended
 
March 31,
March 31,
 
2020
2019
2020
2019
Premier LP net income
$
84,185

$
84,883

$
290,430

$
295,928


17



Premier LP's cash flows, including cash flows attributable to discontinued operations, for the nine months ended March 31, 2020 and 2019 consisted of the following (in thousands):
 
Nine Months Ended March 31,
 
2020
2019
Net cash provided by (used in):
 
 
Operating activities
$
252,566

$
391,508

Investing activities
(171,954
)
(132,385
)
Financing activities
24,790

(251,440
)
Net increase in cash and cash equivalents
105,402

7,683

Cash and cash equivalents at beginning of year
131,210

117,741

Cash and cash equivalents at end of period
$
236,612

$
125,424


Use of Estimates in the Preparation of Financial Statements
The preparation of the Company's condensed consolidated financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Significant estimates are evaluated on an ongoing basis, including estimates for net administrative fees revenue, other services and support revenue, contract assets, deferred revenue, contract costs, allowances for doubtful accounts, useful lives of property and equipment, stock-based compensation, payables under tax receivable agreements ("TRA"), deferred tax balances including valuation allowances on deferred tax assets, uncertain tax positions, values of investments not publicly traded, projected future cash flows used in the evaluation of asset 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. The impact of the coronavirus ("COVID-19") pandemic on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the United States and global economies, which are uncertain and cannot be predicted at this time.
(2) SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company's significant accounting policies as described in the 2019 Annual Report, except as described below.
Recently Adopted Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), ("ASU 2016-12"), which increases transparency and comparability by requiring the recognition of lease assets and lease liabilities on the balance sheet, as well as requiring the disclosure of key information about leasing arrangements. The Company adopted ASU 2016-02 on July 1, 2019 on a modified retrospective basis under the optional transition method; therefore, comparative periods are presented in accordance with Accounting Standards Codification ("ASC") Topic 840. Additionally, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to carry forward (1) historical lease classification and assessments for expired and existing leases, and (2) historical accounting for initial direct costs for existing leases. The Company elected not to recognize any operating lease right-of-use assets or operating lease liabilities for any lease whose term is 12 months or less and does not include a purchase option that the Company is reasonably certain to exercise. The Company also elected to account for the non-lease components within its leases as part of the single lease component to which they are related. Refer to "Adoption of ASC Topic 842" for additional information on the impact of the adoption of ASC Topic 842.
Recently Issued Accounting Standards Not Yet Adopted
In August 2018, the FASB issued ASU 2018-15, Intangibles- Goodwill and Other- Internal Use Software (Topic 350): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, ("ASU 2018-15"), which requires customers in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal use software guidance in ASC 350-40 to determine which implementation costs to capitalize or expense. ASU 2018-15 will be effective for the Company for the fiscal year beginning July 1, 2020. Early adoption is permitted including adoption in

18



interim periods. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement, ("ASU 2018-13"), which improves the effectiveness of fair value measurement disclosures by eliminating, adding and modifying certain disclosure requirements for fair value measurements as part of its disclosure framework project. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 will be effective for the Company for the fiscal year beginning July 1, 2020. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, (“ASU 2016-13”), which modifies the measurement of expected credit losses on certain financial instruments and the timing of when such losses are recorded. ASU 2016-13, will be effective for the Company for the fiscal year beginning July 1, 2020. The Company has performed an initial analysis on the impact of the adoption of the new standard, and does not expect the adoption to have a material impact on its consolidated financial statements and disclosures; however, we will continue to evaluate through July 1, 2020.
Adoption of ASC Topic 842
As a result of adopting ASC Topic 842, the Company's accounting policies and condensed consolidated financial statements were updated as follows:
The Company enters into lease contracts in which the Company is the lessee, substantially all of which are related to office space leased in various buildings used for general corporate purposes. The terms of these non-cancelable operating leases typically require the Company to pay rent and a share of operating expenses and real estate taxes, generally with an inflation-based rent increase included. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term beginning at the commencement date. Operating lease right-of-use assets are adjusted for lease incentives, deferred rent and initial direct costs, if incurred. The Company's leases generally do not include an implicit rate; therefore, the Company determined the present value of future minimum lease payments using an incremental borrowing rate based on information available as of July 1, 2019, the transition date. The related lease expense is recognized on a straight-line basis over the lease term.
The following tables summarize the impacts of adopting ASC Topic 842 on the Condensed Consolidated Balance Sheets (in thousands). See Note 16 - Commitments and Contingencies for further information.
 
June 30, 2019
As presented
Impact of ASC Topic 842
July 1, 2019
Adjusted
Intangible assets, net (a)
$
270,722

$
(8,474
)
$
262,248

Deferred income tax assets
422,014

302

422,316

Operating lease right-of-use assets

62,642

62,642

Total assets
$
2,569,567

$
54,470

$
2,624,037

 
 
 

Other current liabilities
$
7,113

$
7,661

$
14,774

Current liabilities of discontinued operations
11,797

1,200

12,997

Operating lease liabilities

58,596

58,596

Other long-term liabilities
67,683

(12,088
)
55,595

Total liabilities
$
908,547

$
55,369

$
963,916

 
 
 

Accumulated deficit (b)
$
(775,674
)
$
(899
)
$
(776,573
)
Total liabilities and equity
$
2,569,567

$
54,470

$
2,624,037

(a)
The Company reclassified a favorable lease commitment, which was recorded within intangible assets, net in the Consolidated Balance Sheets as of June 30, 2019, to operating lease right-of-use assets as part of the adoption of ASC Topic 842.

19



(b)
The Company recognized a non-cash impairment charge of $1.2 million ($0.9 million net of deferred tax impact), which was recorded as an adjustment to the opening balance of equity at July 1, 2019. The impairment charge was related to operating lease right-of-use assets of the specialty pharmacy business, which is classified as a discontinued operation.
(3) BUSINESS ACQUISITIONS
Acquisition of Acurity and Nexera Assets
On February 28, 2020, the Company completed the Acurity and Nexera asset acquisition (the "Acurity and Nexera asset acquisition"). Pursuant to the terms of the Purchase Agreement, the Company agreed to pay an aggregate amount of $291.5 million, of which $166.1 million was paid at closing with borrowings under the Credit Facility. An additional $120.0 million will be paid in four equal annual installments of $30.0 million on or about June 30, 2021, 2022, 2023 and 2024. An additional $5.4 million is expected to be paid to an affiliate of GNYHA during the Company’s second fiscal quarter of 2021.
The Purchase Agreement provides an earn-out opportunity for Acurity, Inc. of up to $30.0 million based upon the Company’s achievement of a range of member renewals on terms to be agreed to by the Company and GNYHA based on prevailing market conditions in December 2023. As of March 31, 2020, the fair value of the earn-out liability was $22.7 million (see Note 6 - Fair Value Measurements).
Prior to entering into the Purchase Agreement, Acurity, Inc. agreed to provide one-time rebates to certain of its then members based on their pre-closing purchasing volume. The Company has concluded that these one-time rebates of $93.8 million will be excluded from the purchase price and capitalized as prepaid contract administrative fee share at closing. The prepaid contract administrative fee share will be treated as a reduction in the determination of net administrative fee revenue over the remaining life of the acquired contracts on the Company’s financial statements. As a result, the total fair value of consideration paid as part of the acquisition totaled $202.6 million. The current and noncurrent components of the prepaid contract administrative fee share were recorded to the "Prepaid expenses and other current assets" and "Other assets" line items, respectively, on the Condensed Consolidated Balance Sheets.
At the closing of the transaction, GNYHA Purchasing Alliance, LLC unilaterally terminated its participation in the TRA, and will cease to be a limited partner of Premier LP on November 2, 2020.
The Company has accounted for the Acurity and Nexera asset acquisition as a business combination whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on fair values. Total fair value assigned to the intangible assets was $187.7 million, consisting primarily of acquired member relationships of $166.0 million. The initial purchase price allocation for the Acurity and Nexera asset acquisition is preliminary and subject to changes in the valuation of the assets acquired and liabilities assumed. The acquisition resulted in the recognition of $22.7 million of goodwill (see Note 8 - Goodwill and Intangible Assets) attributable to the anticipated profitability of the acquired assets of Acurity, Inc. and Nexera, Inc. The acquisition was considered an asset acquisition for tax purposes, and accordingly, the Company expects the goodwill to be deductible for tax purposes. The initial purchase price allocation for the Acurity and Nexera asset acquisition is preliminary and subject to changes in fair value valuation of the assets acquired and the liabilities assumed.
Pro forma results of operations for the acquisition have not been presented because the effects on revenue and net income were not material to the Company's historic consolidated financial statements. After closing of the transaction, PAP and PNP changed their names to Acurity and Nexera, respectively, and the Company reports their operations as part of its Supply Chain Services segment.
Acquisition of Medpricer
On October 28, 2019, the Company, through its consolidated subsidiary PSCI, acquired all of the outstanding capital stock in Medpricer for an adjusted purchase price of $38.5 million. The acquisition was funded with borrowings under the Credit Facility.
The acquisition provides the sellers an earn-out opportunity of up to $5.0 million based on Medpricer's achievement of a revenue target for the calendar year ended December 31, 2020. As of March 31, 2020, the fair value of the earn-out liability was $1.9 million (see Note 6 - Fair Value Measurements).
The Company has accounted for the Medpricer acquisition as a business combination whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their fair values. Total fair value assigned to intangible assets acquired was $12.1 million, primarily comprised of developed software technology.
The Medpricer acquisition resulted in the recognition of $26.2 million of goodwill attributable to the anticipated profitability of Medpricer. The Medpricer acquisition was considered a stock purchase for tax purposes and accordingly, the goodwill is not deductible for tax purposes.

20



Pro forma results of operations for the acquisition have not been presented because the effects on revenue and net income were not material to the Company's historic consolidated financial statements. The Company reports Medpricer as part of its Supply Chain Services segment.
Acquisition of Stanson
On November 9, 2018, the Company, through its consolidated subsidiary PHSI, acquired all of the outstanding capital stock in Stanson through a reverse subsidiary merger transaction for an adjusted purchase price of $55.4 million. The acquisition was funded with cash on hand.
The acquisition provides the sellers and certain employees an earn-out opportunity of up to $15.0 million based on Stanson's successful commercial delivery of a SaaS tool on or prior to March 31, 2020, achievement of certain development milestones on or prior to December 31, 2020 and achievement of a revenue target for the calendar year ended December 31, 2020. As of March 31, 2020, the fair value of the earn-out liability was $10.3 million (see Note 6 - Fair Value Measurements).
The Company has accounted for the Stanson acquisition as a business combination whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their fair values. Total fair value assigned to the intangible assets acquired was $23.6 million, primarily comprised of developed software technology.
The Stanson acquisition resulted in the recognition of $37.5 million of goodwill (see Note 8 - Goodwill and Intangible Assets) attributable to the anticipated profitability of Stanson. The Stanson acquisition was considered a stock purchase for tax purposes and accordingly, the goodwill is not 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 the Company's historic consolidated financial statements. The Company reports Stanson as part of its Performance Services segment.
(4) DISCONTINUED OPERATIONS AND EXIT ACTIVITIES
In connection with the sale of certain assets and wind down and exit from the specialty pharmacy business (see Note 1 - Organization and Basis of Presentation), the Company met the criteria for classifying certain assets and liabilities of its specialty pharmacy business as a discontinued operation as of June 30, 2019. Prior to its classification as a discontinued operation, the specialty pharmacy business was included as part of the Supply Chain Services segment.
The Company incurred $0.9 million of severance and retention expenses directly associated with the specialty pharmacy business within discontinued operations during the nine months ended March 31, 2020.
The following table summarizes the major classes of assets and liabilities classified as discontinued operations at March 31, 2020 and June 30, 2019 (in thousands):
 
March 31, 2020
June 30, 2019
Assets
 
 
Accounts receivable
$

$
21,183

Inventory

3,385

Assets of discontinued operations
$

$
24,568

 
 
 
Liabilities
 
 
Accounts payable
$

$
2,255

Accrued expenses

6,630

Accrued compensation and benefits

2,373

Other current liabilities

539

Liabilities of discontinued operations
$

$
11,797


21



The following table summarizes the major components of net income (loss) from discontinued operations (in thousands):
 
Three Months Ended March 31,
Nine Months Ended March 31,
 
2020
2019
2020
2019
Net revenue
$

$
121,662

$

$
344,873

Cost of revenue

117,942


334,567

Gross profit

3,720


10,306

Selling, general and administrative expense

5,167


14,286

Amortization of purchased intangible assets

661


1,984

Operating expenses

5,828


16,270

Operating loss from discontinued operations

(2,108
)

(5,964
)
Net gain on disposal of assets
24


1,399


Income (loss) from discontinued operations before income taxes
24

(2,108
)
1,399

(5,964
)
Income tax expense (benefit)
19

(645
)
390

(2,102
)
Income (loss) from discontinued operations, net of tax
5

(1,463
)
1,009

(3,862
)
Net (income) loss from discontinued operations attributable to non-controlling interest in Premier LP
(3
)
747

(480
)
2,098

Net income (loss) from discontinued operations attributable to stockholders
$
2

$
(716
)
$
529

$
(1,764
)

(5) INVESTMENTS
Investments in Unconsolidated Affiliates
The Company's investments in unconsolidated affiliates consisted of the following (in thousands):
 
Carrying Value
 
Equity in Net Income
 
 
 
 
Three Months Ended
Nine Months Ended
 
 
 
 
March 31,
March 31,
 
March 31, 2020
June 30, 2019
 
2020
2019
2020
2019
FFF
$
107,735

$
96,905

 
$
4,340

$
444

$
10,830

$
4,430

Other investments
12,907

2,731

 
102

109

208

257

Total investments
$
120,642

$
99,636

 
$
4,442

$
553

$
11,038

$
4,687


The Company, through PSCI, held a 49% interest in FFF Enterprises, Inc. ("FFF") through its ownership of stock of FFF at March 31, 2020 and June 30, 2019. The Company records the fair value of the FFF put and call rights in the accompanying Condensed Consolidated Balance Sheets (see Note 6 - Fair Value Measurements for additional information). The Company accounts for its investment in FFF using the equity method of accounting and includes the investment as part of the Supply Chain Services segment.

22


(6) FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The following table provides a summary of the Company's financial assets and liabilities measured at fair value on a recurring basis at March 31, 2020 (in thousands):
 
Fair Value of Financial Assets and Liabilities
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs
(Level 3)
Cash equivalents
$
188,101

$
188,101

$

$

Deferred compensation plan assets
45,697

45,697



Total assets
$
233,798

$
233,798

$

$

Earn-out liabilities
$
34,887

$

$

$
34,887

FFF put right
32,971



32,971

Total liabilities
$
67,858

$

$

$
67,858


The following table provides a summary of the Company's financial assets and liabilities measured at fair value on a recurring basis at June 30, 2019 (in thousands):
 
Fair Value of Financial Assets and Liabilities
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs
(Level 3)
Cash equivalents
$
57,607

$
57,607

$

$

FFF call right
204



204

Deferred compensation plan assets
50,229

50,229



Total assets
$
108,040

$
107,836

$

$
204

Earn-out liability
$
6,816

$

$

$
6,816

FFF put right
41,652



41,652

Total liabilities
$
48,468

$

$

$
48,468


Deferred compensation plan assets consisted of highly liquid mutual fund investments, which were classified as Level 1. The current portion of deferred compensation plan assets ($2.9 million and $4.8 million at March 31, 2020 and June 30, 2019, respectively) was included in the "Prepaid expenses and other current assets" line item in the accompanying Condensed Consolidated Balance Sheets.
Financial Instruments Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
FFF put and call rights
In connection with the Company's equity investment in FFF, the Company entered into a shareholders' agreement on July 26, 2016, which was amended and restated on November 22, 2017. On July 29, 2019, the parties entered into a second amended and restated shareholders' agreement that provides, among other things, that the majority shareholder of FFF holds a put right that requires the Company to purchase the majority shareholder's interest in FFF, on an all or nothing basis, on or after April 15, 2023. Any required purchase by the Company upon exercise of the put right by FFF's majority shareholder must be made at a per share price equal to FFF's earnings before interest, taxes, depreciation and amortization ("EBITDA") over the twelve calendar months prior to the purchase date multiplied by a market adjusted multiple, adjusted for any outstanding debt and cash and cash equivalents ("Equity Value per Share"). In addition, under the second amended and restated shareholders' agreement, the Company has a call right that requires the majority shareholder to sell its remaining interest in FFF to the Company, and is exercisable at any time within the later of 180 calendar days after the date of a Key Man Event (generally defined in the second amended and restated shareholders' agreement as the resignation, termination for cause, death or disability of the majority shareholder) or after January 30, 2021. As of March 31, 2020, the call right had zero value. In the event that either of these rights are exercised, the purchase price for the additional interest in FFF will be at a per share price equal to the Equity Value per Share.
The fair values of the FFF put and call rights were determined based on the Equity Value per Share calculation using unobservable inputs, which included the estimated FFF put and call rights' expiration dates, the forecast of FFF's EBITDA over the option period,

23


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 values of the FFF put and call rights were recorded within other expense in the accompanying Condensed Consolidated Statements of Income.
Earn-out liabilities
Earn-out liabilities were established in connection with the Acurity and Nexera asset acquisition as well as the Medpricer and Stanson acquisitions. The earn-out liabilities were classified as Level 3 of the fair value hierarchy. The earn-out liability value for the Acurity and Nexera asset acquisition is based upon the Company’s estimated achievement of a range of member renewals on terms to be agreed to by the Company and GNYHA based on prevailing market conditions in December 2023. The earn-out liability values for the Medpricer and Stanson acquisitions were determined based on estimated future earnings and the probability of achieving them. Changes in the fair values of the earn-out liabilities were recorded within selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.
A reconciliation of the Company's FFF put and call rights and earn-out liabilities is as follows (in thousands):
 
Beginning Balance
Purchases (Settlements)
Gain (Loss)
Ending Balance
Three Months Ended March 31, 2020
 
 
 
 
FFF call right
$

$

$

$

Total Level 3 assets
$

$

$

$

Earn-out liability
$
13,420

$
22,700

$
1,233

$
34,887

FFF put right
19,065


(13,906
)
32,971

Total Level 3 liabilities
$
32,485

$
22,700

$
(12,673
)
$
67,858

 
 
 
 
 
Three Months Ended March 31, 2019
 
 
 
 
FFF call right
$
431

$

$
(103
)
$
328

Total Level 3 assets
$
431

$

$
(103
)
$
328

Earn-out liabilities
$
4,548

$

$
(1,695
)
$
6,243

FFF put right
34,295


(4,004
)
38,299

Total Level 3 liabilities
$
38,843

$

$
(5,699
)
$
44,542

 
 
 
 
 
Nine Months Ended March 31, 2020
 
 
 
 
FFF call right
$
204

$

$
(204
)
$

Total Level 3 assets
$
204

$

$
(204
)
$

Earn-out liabilities
$
6,816

$
26,481

$
(1,590
)
$
34,887

FFF put right
41,652


8,681

32,971

Total Level 3 liabilities
$
48,468

$
26,481

$
7,091

$
67,858

 
 
 
 
 
Nine Months Ended March 31, 2019
 
 
 
 
FFF call right
$
610

$

$
(282
)
$
328

Total Level 3 assets
$
610

$

$
(282
)
$
328

Earn-out liabilities
$

$
4,548

$
(1,695
)
$
6,243

FFF put right
42,041


3,742

38,299

Total Level 3 liabilities
$
42,041

$
4,548

$
2,047

$
44,542



24


Non-Recurring Fair Value Measurements
During the nine months ended March 31, 2020, no non-recurring fair value measurements were required relating to the measurement of goodwill and intangible assets for impairment. However, purchase price allocations required significant non-recurring Level 3 inputs. The preliminary fair values of the acquired intangible assets resulting from the Acurity and Nexera asset acquisition as well as the acquisition of Medpricer were determined using the income approach (see Note 3 - Business Acquisitions).
Financial Instruments For Which Fair Value Only is Disclosed
The fair values of non-interest bearing notes payable, classified as Level 2, were less than their carrying value by $0.3 million and $0.5 million at March 31, 2020 and June 30, 2019, respectively, based on assumed market interest rates of 2.1% and 3.4%, respectively.
Other Financial Instruments
The fair values of cash, accounts receivable, accounts payable, accrued liabilities, and the Credit Facility (as defined in Note 9 - Debt) approximated carrying value due to the short-term nature of these financial instruments.
(7) CONTRACT BALANCES
Deferred Revenue
Revenue recognized during the nine months ended March 31, 2020 that was included in the opening balance of deferred revenue at June 30, 2019 was $27.9 million, which is a result of satisfying performance obligations within the Performance Services segment.
Performance Obligations
A performance obligation is a promise to transfer a distinct good or service to a customer. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Contracts may have a single performance obligation as the promise to transfer individual goods or services is not separately identifiable from other promises and, therefore, not distinct, while other contracts may have multiple performance obligations, most commonly due to the contract covering multiple phases or deliverable arrangements (licensing fees, implementation fees, maintenance and support fees, professional fees for consulting services), including certain performance guarantees.
Reduction in net revenue recognized during the three and nine months ended March 31, 2020 from performance obligations that were satisfied or partially satisfied in prior periods was $0.1 million and $1.4 million, respectively. The reduction was driven by $3.8 million and $6.9 million, respectively, associated with revised forecasts from underlying contracts that include variable consideration components as well as additional fluctuations due to input method contracts which occur in the normal course of business. This was offset by $3.7 million and $5.5 million, respectively, of net administrative fees revenue related to under-forecasted cash receipts received in the current period.
Net revenue recognized during the three and nine months ended March 31, 2019 from performance obligations that were satisfied or partially satisfied in prior periods was $3.6 million and $9.6 million, respectively. The net revenue recognized during the three and nine months ended March 31, 2019 was driven primarily by $3.8 million and $5.4 million, respectively, of net administrative fees revenue related to under-forecasted cash receipts received in the current period as well as a reduction of $0.2 million and an increase of $4.2 million, respectively, associated with revised forecasts from underlying contracts that include variable consideration components as well as additional fluctuations due to input method contracts which occur in the normal course of business.
Remaining performance obligations represent the portion of the transaction price that has not yet been satisfied or achieved. As of March 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $572.7 million. The Company expects to recognize approximately 41% of the remaining performance obligations over the next 12 months and an additional 28% over the following 12 months, with the remainder recognized thereafter.

25


(8) GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill consisted of the following (in thousands):
 
Supply Chain Services
Performance Services
Total
June 30, 2019
$
336,973

$
543,736

$
880,709

Acquisition of businesses and assets
48,906


48,906

March 31, 2020
$
385,879

$
543,736

$
929,615


The initial purchase price allocations for the Company's Acurity and Nexera asset acquisition and the acquisition of Medpricer are preliminary and subject to changes in fair value of working capital and valuation of the assets acquired and the liabilities assumed. See Note 3 - Business Acquisitions for more information.
Intangible Assets, Net
Intangible assets, net consisted of the following (in thousands):
 
Weighted Average Useful Life as of March 31, 2020
March 31, 2020
June 30, 2019
Member relationships
14.8 years
$
386,100

$
220,100

Technology
5.6 years
169,217

164,217

Customer relationships
9.0 years
63,230

48,010

Trade names
7.6 years
23,870

16,060

Non-compete agreements
5.3 years
11,315

8,800

Favorable lease commitments
n/a

11,393

Other
6.0 years
260


Total intangible assets
 
653,992

468,580

Accumulated amortization
 
(233,888
)
(197,858
)
Total intangible assets, net
 
$
420,104

$
270,722


Total intangible assets increased due to the Acurity and Nexera asset acquisition and the acquisition of Medpricer (see Note 3 - Business Acquisitions). Intangible asset amortization was $14.0 million and $13.6 million for the three months ended March 31, 2020 and 2019, respectively, and $38.9 million and $39.8 million for the nine months ended March 31, 2020 and 2019, respectively.
(9) DEBT
Long-term debt consisted of the following (in thousands):
 
March 31, 2020
June 30, 2019
Credit Facility
$
250,000

$
25,000

Notes payable
9,573

8,611

Total debt
259,573

33,611

Less: current portion
(254,745
)
(27,608
)
Total long-term debt
$
4,828

$
6,003


Credit Facility
Premier LP, along with its consolidated subsidiaries, PSCI and PHSI, as Co-Borrowers, Premier GP and certain domestic subsidiaries of Premier GP, as guarantors, entered into an unsecured Credit Facility, dated as of November 9, 2018 (the "Credit Facility"). The Credit Facility has a maturity date of November 9, 2023, subject to up to two one-year extensions at the request of the Co-Borrowers

26



and approval of a majority of the lenders under the Credit Facility. The Credit Facility provides for borrowings of up to $1.0 billion with (i) a $50.0 million sub-facility for standby letters of credit and (ii) a $100.0 million sub-facility for swingline loans. The Credit Facility also provides that Co-Borrowers may from time to time (i) incur incremental term loans and (ii) request an increase in the revolving commitments under the Credit Facility, together up to an aggregate of $350.0 million, subject to the approval of the lenders providing such term loans or revolving commitment increases. The Credit Facility includes an unconditional and irrevocable guaranty of all obligations under the Credit Facility by Premier GP, certain domestic subsidiaries of Premier GP and future guarantors, if any. Premier, Inc. is not a guarantor under the Credit Facility.
Outstanding borrowings under the Credit Facility bear interest on a variable rate structure with borrowings bearing interest at either London Interbank Offered Rate ("LIBOR") plus an applicable margin ranging from 1.000% to 1.500% or the prime lending rate plus an applicable margin ranging from 0.000% to 0.500%. At March 31, 2020, the interest rate on outstanding borrowings under the Credit Facility was 1.96%. The Credit Facility contains customary representations and warranties as well as customary affirmative and negative covenants. Premier GP was in compliance with all such covenants at March 31, 2020. The Credit Facility also contains customary events of default, including a cross-default of any indebtedness or guarantees in excess of $75.0 million. If any event of default occurs and is continuing, the administrative agent under the Credit Facility may, with the consent, or shall, at the request of a majority of the lenders under the Credit Facility, terminate the commitments and declare all of the amounts owed under the Credit Facility to be immediately due and payable.
Proceeds from borrowings under the Credit Facility may generally be used to finance ongoing working capital requirements, including permitted acquisitions, discretionary cash settlements of Class B unit exchanges under the Exchange Agreement, repurchases of Class A common stock pursuant to stock repurchase programs, and other general corporate activities. During the nine months ended March 31, 2020, the Company borrowed $375.0 million and repaid $150.0 million of borrowings under the Credit Facility. The Company had $250.0 million in outstanding borrowings under the Credit Facility at March 31, 2020 with $750.0 million of available borrowing capacity after reductions for outstanding borrowings and outstanding letters of credit. On April 27, 2020, the Company repaid $150.0 million of outstanding borrowings under the Credit Facility.
Notes Payable
At March 31, 2020 and June 30, 2019, the Company had $9.6 million and $8.6 million in notes payable, respectively, of which $4.8 million and $2.6 million, respectively, were included in current portion of long-term debt in the accompanying Condensed Consolidated Balance Sheets. Notes payable do not bear interest and generally have stated maturities of five years from their date of issuance.
(10) REDEEMABLE LIMITED PARTNERS' CAPITAL
Redeemable limited partners' capital represents the member owners' 42% ownership of Premier LP through their ownership of Class B common units at March 31, 2020. The member owners hold the majority of the votes of the Board of Directors and any redemption or transfer or choice of consideration cannot be assumed to be within the control of the Company. Therefore, redeemable limited partners' capital is recorded at the greater of the book value or redemption amount per the Amended and Restated Limited Partnership Agreement of Premier LP (as amended, the "LP Agreement"), and is calculated as the fair value of all Class B common units as if immediately exchangeable into Class A common shares. For the nine months ended March 31, 2020 and 2019, the Company recorded adjustments to the fair value of redeemable limited partners' capital as an adjustment of redeemable limited partners' capital to redemption amount in the accompanying Condensed Consolidated Statements of Income in the amounts of $516.7 million and $178.9 million, respectively.
Redeemable limited partners' capital is classified as temporary equity in the mezzanine section of the accompanying Condensed Consolidated Balance Sheets as, pursuant to the LP Agreement, withdrawal is at the option of each member owner and the conditions of the repurchase are not solely within the Company's control.

27



The tables below provide a summary of the changes in the redeemable limited partners' capital from June 30, 2019 to March 31, 2020 and June 30, 2018 to March 31, 2019 (in thousands):
 
Receivables From Limited Partners
Redeemable Limited Partners' Capital
Total Redeemable Limited Partners' Capital
Balance at June 30, 2019
$
(1,204
)
$
2,524,474

$
2,523,270

Distributions applied to receivables from limited partners
69


69

Redemption of limited partners

(1,371
)
(1,371
)
Net income attributable to non-controlling interest in Premier LP

41,907

41,907

Distributions to limited partners

(13,699
)
(13,699
)
Exchange of Class B common units for Class A common stock by member owners

(50,792
)
(50,792
)
Adjustment of redeemable limited partners' capital to redemption amount

(694,309
)
(694,309
)
Balance at September 30, 2019
$
(1,135
)
$
1,806,210

$
1,805,075

Distributions applied to receivables from limited partners
70


70

Net income attributable to non-controlling interest in Premier LP

55,704

55,704

Distributions to limited partners

(12,689
)
(12,689
)
Exchange of Class B common units for Class A common stock by member owners

(223,946
)
(223,946
)
Adjustment of redeemable limited partners' capital to redemption amount

480,153

480,153

Balance at December 31, 2019
$
(1,065
)
$
2,105,432

$
2,104,367

Distributions applied to receivables from limited partners
71


71

Net income attributable to non-controlling interest in Premier LP

35,058

35,058

Distributions to limited partners

(9,314
)
(9,314
)
Exchange of Class B common units for Class A common stock by member owners

(169,194
)
(169,194
)
Adjustment of redeemable limited partners' capital to redemption amount

(302,569
)
(302,569
)
Balance at March 31, 2020
$
(994
)
$
1,659,413

$
1,658,419



28



 
Receivables From Limited Partners
Redeemable Limited Partners' Capital
Total Redeemable Limited Partners' Capital
Balance at June 30, 2018
$
(2,205
)
$
2,922,615

$
2,920,410

Distributions applied to receivables from limited partners
437


437

Net income attributable to non-controlling interest in Premier LP

55,113

55,113

Distributions to limited partners

(14,993
)
(14,993
)
Exchange of Class B common units for Class A common stock by member owners

(30,536
)
(30,536
)
Adjustment of redeemable limited partners' capital to redemption amount

708,193

708,193

Balance at September 30, 2018
$
(1,768
)
$
3,640,392

$
3,638,624

Distributions applied to receivables from limited partners
416


416

Redemption of limited partners

(448
)
(448
)
Net income attributable to non-controlling interest in Premier LP

62,631

62,631

Distributions to limited partners

(14,288
)
(14,288
)
Exchange of Class B common units for Class A common stock by member owners

(441,344
)
(441,344
)
Adjustment of redeemable limited partners' capital to redemption amount

(651,709
)
(651,709
)
Balance at December 31, 2018
$
(1,352
)
$
2,595,234

$
2,593,882

Distributions applied to receivables from limited partners
80


80

Redemption of limited partners

(1,372
)
(1,372
)
Net income attributable to non-controlling interest in Premier LP

43,388

43,388

Distributions to limited partners

(13,145
)
(13,145
)
Exchange of Class B common units for Class A common stock by member owners

(147,441
)
(147,441
)
Adjustment of redeemable limited partners' capital to redemption amount

(235,394
)
(235,394
)
Balance at March 31, 2019
$
(1,272
)
$
2,241,270

$
2,239,998


Receivables from limited partners represent amounts due from limited partners for their required capital in Premier LP. These receivables are interest bearing notes and are reflected as a reduction to redeemable limited partners' capital so that amounts due from limited partners for capital are not reflected as redeemable limited partnership capital until paid. No interest bearing notes receivable were executed by limited partners of Premier LP during the nine months ended March 31, 2020.
During the nine months ended March 31, 2020, three limited partners withdrew from Premier LP. The limited partnership agreement provides for the redemption of former limited partners' Class B common units that are not eligible for exchange, in the form of a five-year, unsecured, non-interest bearing term promissory note, a cash payment equal to the present value of the redemption amount, or other mutually agreed upon terms. Partnership interest obligations to former limited partners are reflected in notes payable in the accompanying Condensed Consolidated Balance Sheets. Under the Exchange Agreement, Class B common units that are eligible for exchange by withdrawing limited partners must be exchanged in the subsequent quarter's exchange process.
Premier LP's distribution policy requires cash distributions as long as taxable income is generated and cash is available to distribute on a quarterly basis prior to the 60th day after the end of each calendar quarter. The Company makes quarterly distributions to its limited partners in the form of a legal partnership income distribution governed by the terms of the LP Agreement. These partner distributions are based on the limited partner's ownership in Premier LP and relative participation across Premier service offerings. While these distributions are based on relative participation across Premier service offerings, they are not based directly on revenue generated from an individual partner's participation as the distributions are based on the net income or loss of the partnership which encompasses the operating expenses of the partnership as well as participation by non-owner members in Premier's service offerings. To the extent Premier LP incurred a net loss, the limited partners would not receive a quarterly distribution. As provided in the LP Agreement, the amount of actual cash distributed may be reduced by the amount of such distributions used by limited partners to offset contribution loans or other amounts payable to the Company.

29



Quarterly distributions made to limited partners during the current fiscal year are as follows (in thousands):
Date
Distribution (a)
August 22, 2019
$
13,202

November 27, 2019
$
13,699

February 20, 2020
$
12,689

(a)
Distributions are equal to Premier LP's total taxable income from the preceding fiscal quarter-to-date period for each respective distribution date multiplied by the Company's standalone effective combined federal, state and local income tax rate for each respective distribution date. Premier LP expects to make a $9.3 million quarterly distribution on or before May 29, 2020. The distribution is reflected in limited partners' distribution payable in the accompanying Condensed Consolidated Balance Sheets at March 31, 2020.
Pursuant to the Exchange Agreement (see Note 1 - Organization and Basis of Presentation for more information), each limited partner has the cumulative right to exchange up to one-seventh of its initial allocation of Class B common units for shares of Class A common stock, cash or a combination of both, the form of consideration to be at the discretion of the Company's independent Audit and Compliance Committee of the Board of Directors. During the nine months ended March 31, 2020, the Company recorded total reductions of $443.9 million to redeemable limited partners' capital to reflect the exchange of 13.1 million Class B common units and surrender and retirement of a corresponding number of shares of Class B common stock by member owners for a like number of shares of the Company's Class A common stock (see Note 12 - Earnings Per Share for more information). Quarterly exchanges during the current fiscal year were as follows (in thousands, except Class B common units):
Date of Quarterly Exchange
Number of Class B Common Units Exchanged
Reduction in Redeemable Limited Partners' Capital
July 31, 2019
1,310,771

$
50,792

October 31, 2019
6,873,699

223,946

January 31, 2020
4,866,082

169,194

Total
13,050,552

$
443,932


(11) STOCKHOLDERS' EQUITY (DEFICIT)
As of March 31, 2020, there were 71,070,617 shares of the Company's Class A common stock, par value $0.01 per share, and 50,715,564 shares of the Company's Class B common stock, par value $0.000001 per share, outstanding.
On May 7, 2019, the Company announced that its Board of Directors authorized the repurchase of up to $300.0 million of the Company's Class A common stock during fiscal year 2020. As of March 31, 2020, the Company had purchased 4.6 million shares of Class A common stock at an average price of $32.28 per share for a total purchase price of $150.0 million. The repurchase authorization may be suspended, delayed, or discontinued at any time at the discretion of the Company's Board of Directors. Repurchases are subject to compliance with applicable federal securities laws and the Company's management may, at its discretion, suspend, delay, or discontinue repurchases at any time, based on market conditions, alternate uses of capital, or other factors. The Company does not currently expect to make additional purchases of its Class A common stock under the repurchase program during the remainder of fiscal year 2020.
Holders of Class A common stock are entitled to (i) one vote for each share held of record on all matters submitted to a vote of stockholders, (ii) receive dividends, when and if declared by the Board of Directors out of funds legally available, subject to any statutory or contractual restrictions on the payment of dividends and subject to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock or any class of series of stock having a preference over or the right to participate with the Class A common stock with respect to the payment of dividends or other distributions and (iii) receive pro rata, based on the number of shares of Class A common stock held, the remaining assets available for distribution upon the dissolution or liquidation of Premier, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any.
Holders of Class B common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders, but are not entitled to receive dividends, other than dividends payable in shares of Premier's common stock, or to receive a distribution upon the dissolution or a liquidation of Premier. Pursuant to the terms of a voting trust agreement by and among the Company, Premier LP, the holders of Class B common stock and Wells Fargo Delaware Trust Company, N.A., as the trustee, the trustee will vote all of the Class B common stock as a block in the manner determined by the plurality of the votes received by the trustee from the member owners for the election of directors to serve on the Board of Directors, and by a majority

30



of the votes received by the trustee from the member owners for all other matters. Class B common stock will not be listed on any stock exchange and, except in connection with any permitted sale or transfer of Class B common units, cannot be sold or transferred.
(12) EARNINGS PER SHARE
Basic earnings per share 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, which is due to the exchange benefit obtained by limited partners through the ownership of Class B common units. Except when the effect would be anti-dilutive, the diluted earnings (loss) per share calculation, which is calculated using the treasury stock method, includes the impact of shares that could be issued under the outstanding stock options, non-vested restricted stock units and awards, shares of non-vested performance share awards and the effect of the assumed redemption of Class B common units through the issuance of Class A common shares.
The following table provides a reconciliation of the numerator and denominator used for basic and diluted (loss) earnings per share (in thousands, except per share amounts):
 
Three Months Ended March 31,
Nine Months Ended March 31,
 
2020
2019
2020
2019
Numerator for basic earnings per share:
 
 
 
 
Net income from continuing operations attributable to stockholders (a)
$
340,726

$
266,524

$
620,262

$
280,128

Net income (loss) from discontinued operations attributable to stockholders
2

(716
)
529

(1,764
)
Net income attributable to stockholders
$
340,728

$
265,808

$
620,791

$
278,364

 
 

 

Numerator for diluted earnings per share:
 

 

Net income from continuing operations attributable to stockholders (a)
$
340,726

$
266,524

$
620,262

$
280,128

Adjustment of redeemable limited partners' capital to redemption amount
(302,569
)
(235,394
)
(516,725
)
(178,910
)
Net income from continuing operations attributable to non-controlling interest in Premier LP
35,055

44,135

132,189

163,230

Net income from continuing operations
73,212

75,265

235,726

264,448

Tax effect on Premier, Inc. net income (b)
(7,067
)
(11,762
)
(30,007
)
(38,503
)
Adjusted net income from continuing operations
$
66,145

$
63,503

$
205,719

$
225,945

 
 

 

Net income (loss) from discontinued operations attributable to stockholders
$
2

$
(716
)
$
529

$
(1,764
)
Net income (loss) from discontinued operations attributable to non-controlling interest in Premier LP
3

(747
)
480

(2,098
)
Adjusted net income (loss) from discontinued operations
$
5

$
(1,463
)
$
1,009

$
(3,862
)
 
 

 

Adjusted net income
$
66,150

$
62,040

$
206,728

$
222,083

 
 

 

Denominator for earnings per share:
 



Basic weighted average shares outstanding
69,451

62,020

65,582

58,346

Effect of dilutive securities: (d)
 

 

Stock options
232

474

357

630

Restricted stock
216

256

239

304

Performance share awards
197


66


Class B shares outstanding
52,374

66,322

57,786

72,969

Diluted weighted average shares and assumed conversions
122,470

129,072

124,030

132,249


31



 
Three Months Ended March 31,
Nine Months Ended March 31,
 
2020
2019
2020
2019
 
 
 
 
 
Basic earnings per share:
 
 
 
 
Basic earnings per share from continuing operations
$
4.91

$
4.30

$
9.46

$
4.80

Basic earnings (loss) per share from discontinued operations

(0.01
)
0.01

(0.03
)
Basic earnings per share attributable to stockholders
$
4.91

$
4.29

$
9.47

$
4.77

 
 
 
 
 
Diluted earnings per share:
 
 
 
 
Diluted earnings per share from continuing operations
$
0.54

$
0.49

$
1.66

$
1.71

Diluted earnings (loss) per share from discontinued operations

(0.01
)

(0.03
)
Diluted earnings per share attributable to stockholders
$
0.54

$
0.48

$
1.66

$
1.68

(a)
Net income from continuing operations attributable to stockholders was calculated as follows (in thousands):
 
Three Months Ended March 31,
Nine Months Ended March 31,
 
2020
2019
2019
2018
Net income from continuing operations
$
73,212

$
75,265

$
235,726

$
264,448

Net income from continuing operations attributable to non-controlling interest in Premier LP
(35,055
)
(44,135
)
(132,189
)
(163,230
)
Adjustment of redeemable limited partners' capital to redemption amount
302,569

235,394

516,725

178,910

Net income from continuing operations attributable to stockholders
$
340,726

$
266,524

$
620,262

$
280,128

(b)
Represents income tax expense related to Premier, Inc. retaining the portion of net income from continuing operations attributable to income from non-controlling interest in Premier, LP for the purpose of diluted earnings per share.
(c)
Weighted average number of common shares used for basic earnings per share excludes weighted average shares of non-vested stock options, non-vested restricted stock, non-vested performance share awards and Class B shares outstanding for the three and nine months ended March 31, 2020 and 2019.
(d)
For three and nine months ended March 31, 2020, the effect of 0.8 million stock options and restricted stock units was excluded from diluted weighted average shares outstanding as they had an anti-dilutive effect. Additionally, the effect of less than $0.1 million performance share awards was excluded from diluted weighted average shares outstanding as the awards had not satisfied the applicable performance criteria at the end of the period.
For the three and nine months ended March 31, 2019, the effect of 0.6 million stock options and restricted stock units was excluded from diluted weighted average shares outstanding as they had an anti-dilutive effect. Additionally, the effect of 0.7 million performance share awards was excluded from diluted weighted average shares outstanding as they had not satisfied the applicable performance criteria at the end of the period.
Pursuant to the terms of the Exchange Agreement, on a quarterly basis, the Company has the option, as determined by the independent Audit and Compliance Committee, to settle the exchange of Class B common units of Premier LP by member owners for cash, an equal number of Class A common shares of Premier, Inc. or a combination of cash and shares of Class A common stock. In connection with the exchange of Class B common units by member owners, regardless of the consideration used to settle the exchange, an equal number of shares of Premier's Class B common stock are surrendered by member owners and retired (see Note 10 - Redeemable Limited Partners' Capital). The following table presents certain information regarding the exchange of Class B common units and associated Class B common stock for Premier's Class A common stock and/or cash in connection with the quarterly exchanges pursuant to the terms of the Exchange Agreement, including activity related to the Class A and Class B common units and Class A and Class B common stock through the date of the applicable quarterly exchange:
Quarterly Exchange by Member Owners
Class B Common Shares Retired Upon Exchange (a)
Class B Common Shares Outstanding After Exchange (a)
Class A Common Shares Outstanding After Exchange (b)
Percentage of Combined Voting Power Class B/Class A Common Stock
July 31, 2019
1,310,771

62,767,860

63,274,182

49.8%/50.2%
October 31, 2019
6,873,699

55,581,646

66,522,023

46%/54%
January 31, 2020
4,866,082

50,715,564

71,066,141

42%/58%
April 30, 2020 (c)
502,466

50,213,098

71,574,119

41%/59%
(a)
The number of Class B common shares retired or outstanding is equivalent to the number of Class B common units retired upon exchange or outstanding after the exchange, as applicable.
(b)
The number of Class A common shares outstanding after exchange also includes activity related to the Company's share repurchase program (see Note 11 - Stockholders' Equity (Deficit)) and equity incentive plan (see Note 13 - Stock-Based Compensation).

32



(c)
As the quarterly exchange occurred on April 30, 2020, the impact of the exchange is not reflected in the condensed consolidated financial statements for the quarter ended March 31, 2020.
(13) STOCK-BASED COMPENSATION
Stock-based compensation expense is recognized over the requisite service period, which generally equals the stated vesting period. The associated deferred tax benefit was calculated at a rate of 25% for the three and nine months ended March 31, 2020 and 2019, which represents the expected effective income tax rate at the time of the compensation expense deduction primarily at PHSI, and differs from the Company's current effective income tax rate which includes the impact of partnership income not subject to federal and state income taxes. See Note 14 - Income Taxes for further information.
Stock-based compensation expense and the resulting deferred tax benefits were as follows (in thousands):
 
Three Months Ended March 31,
Nine Months Ended March 31,
 
2020
2019
2020
2019
Pre-tax stock-based compensation expense (a)
$
7,568

$
6,666

$
19,048

$
20,354

Deferred tax benefit
1,915

1,647

4,819

5,027

Total stock-based compensation expense, net of tax
$
5,653

$
5,019

$
14,229

$
15,327


(a)
Pre-tax stock based compensation expense attributable to discontinued operations of $0.1 million and $0.3 million, respectively, for the three and nine months ended March 31, 2019 is not included in the above table.
Premier 2013 Equity Incentive Plan
The Premier 2013 Equity Incentive Plan, as amended and restated (and including any further amendments thereto, the "2013 Equity Incentive Plan") provides for grants of up to 14.8 million shares of Class A common stock, all of which are eligible to be issued as non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units or performance share awards. As of March 31, 2020, there were 5.9 million shares available for grant under the 2013 Equity Incentive Plan.
The following table includes information related to restricted stock, performance share awards and stock options for the nine months ended March 31, 2020:
 
Restricted Stock
 
Performance Share Awards
 
Stock Options

Number of Awards
Weighted Average Fair Value at Grant Date
 
Number of Awards
Weighted Average Fair Value at Grant Date
 
Number of Options
Weighted Average Exercise Price
Outstanding at June 30, 2019
589,550

$
37.06

 
1,439,815

$
36.38

 
2,798,673

$
30.22

Granted
350,700

$
36.73

 
738,118

$
36.06

 

$

Vested/exercised
(217,356
)
$
33.55

 
(493,759
)
$
31.58

 
(221,147
)
$
30.49

Forfeited
(32,989
)
$
38.65

 
(71,444
)
$
38.82

 
(18,121
)
$
32.90

Outstanding at March 31, 2020
689,905

$
37.92

 
1,612,730

$
37.59

 
2,559,405

$
30.18

 
 
 
 
 
 
 
 
 
Stock options outstanding and exercisable at March 31, 2020
 
 
 
 
 
 
2,428,055

$
30.04


Restricted stock units and restricted stock awards issued and outstanding generally vest over a three-year period for employees and a one-year period for directors. Performance share awards issued and outstanding generally vest over a three-year period if performance targets are met. Stock options have a term of ten years from the date of grant. Vested stock options will expire either twelve months after 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.

33



Unrecognized stock-based compensation expense at March 31, 2020 was as follows (in thousands):
 
Unrecognized Stock-Based Compensation Expense
Weighted Average Amortization Period
Restricted stock
$
14,745

1.9 years
Performance share awards
29,777

1.9 years
Stock options
617

0.5 years
Total unrecognized stock-based compensation expense
$
45,139

1.9 years

The aggregate intrinsic value of stock options at March 31, 2020 was as follows (in thousands):
 
Intrinsic Value of Stock Options
Outstanding and exercisable
$
7,762

Expected to vest
12

Total outstanding
$
7,774

 
 
Exercised during the nine months ended March 31, 2020
$
1,541


(14) INCOME TAXES
The Company's income tax expense is attributable to the activities of the Company, PHSI, PSCI and Premier Marketplace, LLC ("PMLLC"), all of which are subchapter C corporations and are subject to U.S. federal and state income taxes. In contrast, under the provisions of federal and state statutes, Premier LP is not subject to federal and state income taxes, as the income realized by Premier LP is taxable to its partners.
On November 8, 2019, the State of North Carolina made significant changes to its income tax law, effective for tax years beginning on or after January 1, 2020. As a result, the Company remeasured its deferred tax assets and liabilities as of the enactment date and recorded an income tax expense of $38.6 million as a discrete item in the Company's income tax provision during the quarter ended December 31, 2019.
On March 27, 2020, in response to COVID-19, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The CARES Act is an emergency economic stimulus package which contains, among other things, changes to income tax law including a modification to the net operating loss ("NOL") carryback period. The NOL carryback provision will allow the Company to carry back $21.1 million of NOLs to offset taxable income in prior years. As a result of the NOL carryback provision, the Company expects an income tax refund of $7.3 million with a corresponding income tax benefit of $2.9 million for the rate differential between the cash benefit at 35% and the deferred tax valued at 21%.
Income tax expense for the three months ended March 31, 2020 and 2019 was $4.2 million and $11.7 million, respectively, which reflects effective tax rates of 5% and 13%, respectively. Income tax expense for the nine months ended March 31, 2020 and 2019 was $78.3 million and $25.8 million, respectively, which reflects effective tax rates of 25% and 9%, respectively. The decrease in the effective tax rate for the three months ended March 31, 2020 is primarily driven by the income tax benefit associated with the NOL carryback provisions under the CARES Act and the release of the valuation allowance. The increase in the effective tax rate for the nine months ended March 31, 2020 is largely attributable to the aforementioned remeasurement of deferred tax balances related to the change in North Carolina state income tax law. Excluding the deferred tax remeasurement, the effective tax rate is 13% for the nine months ended March 31, 2020.
The Company's effective tax rates differ from income taxes recorded using a statutory rate largely due to Premier LP income, which is not subject to federal, state or local income taxes.

34



Net deferred tax assets increased by $5.7 million to $422.9 million at March 31, 2020 from $417.2 million at June 30, 2019. The increase in net deferred tax assets was largely driven by increase of $64.0 million in deferred tax assets related to departures and quarterly exchanges of Class B common units of Premier LP by the member owners during the nine months ended March 31, 2020, partially offset by a decrease of $38.6 million from remeasurement of deferred tax balances related to the change in North Carolina state income tax law and $19.7 million attributable to the deferred tax impact of tax-deductible goodwill and the NOL carryback provision taken as a result of the CARES Act.
The Company's TRA liabilities represent a payable to the limited partners for 85% of the tax savings the Company expects to receive, if any, in U.S. federal, foreign, state and local income and franchise tax that may be realized (or deemed to realize, in the case of payments required to be made upon certain occurrences under such TRAs) in connection with the Section 754 election by Premier LP. Tax savings are generated as a result of the increase in tax basis resulting from the initial sale of Class B common units, subsequent exchanges (pursuant to the Exchange Agreement) and payments under the TRA. The election results in adjustments to the tax basis of the assets of Premier LP upon member owner exchanges of Class B common units of Premier LP for Class A common stock of Premier, Inc. or cash. TRA liabilities decreased by $49.3 million to $294.9 million at March 31, 2020 from $344.1 million at June 30, 2019. The change in TRA liabilities was driven by $86.3 million attributable to member departures, $24.6 million in TRA remeasurements primarily due to the change in North Carolina state income tax law and $17.4 million in TRA payments during the nine months ended March 31, 2020. These decreases were partially offset by an increase of $79.0 million in connection with the quarterly member owner exchanges that occurred during the nine months ended March 31, 2020.
(15) RELATED PARTY TRANSACTIONS
FFF
The Company's 49% ownership share of net income of FFF, which was acquired on July 26, 2016, included in equity in net income of unconsolidated affiliates in the accompanying Condensed Consolidated Statements of Income was $4.3 million and $0.5 million for the three months ended March 31, 2020 and 2019, respectively, and $10.8 million and $4.4 million for the nine months ended March 31, 2020 and 2019, respectively. The Company maintains group purchasing agreements with FFF and receives administrative fees for purchases made by the Company's members pursuant to those agreements. Net administrative fees revenue recorded from purchases under those agreements was $1.2 million and $1.9 million during the three months ended March 31, 2020 and 2019, respectively, and $5.8 million and $6.1 million for the nine months ended March 31, 2020 and 2019, respectively.
(16) COMMITMENTS AND CONTINGENCIES
Operating Leases
Operating lease expense for the three and nine months ended March 31, 2020 was $2.7 million and $8.2 million, respectively. As of March 31, 2020, the weighted average remaining lease term was 6.0 years and the weighted average discount rate was 3.9%.
Future minimum lease payments under noncancelable operating leases with initial lease terms in excess of one year were as follows (in thousands):
 
March 31, 2020
June 30, 2019 (a)
2020 (b)
$
3,091

$
12,130

2021
11,806

11,539

2022
11,735

11,468

2023
12,012

11,533

2024
12,145

11,510

Thereafter
22,348

20,645

Total future minimum lease payments
73,137

78,825

Less: imputed interest
8,114


Total operating lease liabilities (c)
$
65,023

$

(a)
Presented in accordance with ASC Topic 840.
(b)
As of March 31, 2020, future minimum lease payments are for the period from April 1, 2020 to June 30, 2020.
(c)
As of March 31, 2020, total operating lease liabilities included $9.7 million within other liabilities, current in the Condensed Consolidated Balance Sheets.

35



Other Matters
The Company is not currently involved in any litigation it believes to be material. The Company is periodically involved in litigation, arising in the ordinary course of business or otherwise, which from time to time may include claims relating to commercial, product liability, tort and personal injury, employment, antitrust, intellectual property, or other regulatory matters. If current or future government regulations, specifically, those with respect to antitrust or healthcare laws, are interpreted or enforced in a manner adverse to the Company or its business, the Company may be subject to enforcement actions, penalties and other material limitations which could have a material adverse effect on the Company's business, financial condition and results of operations.
(17) SEGMENTS
The Company delivers its solutions and manages its business through two reportable business segments, the Supply Chain Services segment and the Performance Services segment. The Supply Chain Services segment includes the Company's GPO, and direct sourcing activities. The Performance Services segment includes the Company's informatics, collaborative, consulting services and insurance services businesses.
The following table presents disaggregated revenue by business segment and underlying source (in thousands):
 
Three Months Ended March 31,
Nine Months Ended March 31,
 
2020
2019
2020
2019
Net revenue:
 
 
 
 
Supply Chain Services
 
 
 
 
Net administrative fees
$
174,049

$
164,534

$
518,566

$
492,229

Other services and support
3,396

2,484

8,439

6,520

Services
177,445

167,018

527,005

498,749

Products
61,183

41,568

167,344

129,441

Total Supply Chain Services (a)
238,628

208,586

694,349

628,190

Performance Services (a)
96,195

92,627

262,490

273,214

Net revenue
$
334,823

$
301,213

$
956,839

$
901,404

(a)
Includes intersegment revenue that is eliminated in consolidation. Intersegment revenue is not separately identified in Segments as the amounts are not material.
Additional segment information related to depreciation and amortization expense, capital expenditures and total assets was as follows (in thousands):
 
Three Months Ended March 31,
Nine Months Ended March 31,
 
2020
2019
2020
2019
Depreciation and amortization expense (a):
 
 
 
 
Supply Chain Services
$
6,896

$
4,616

$
16,592

$
13,905

Performance Services
30,950

27,977

91,862

81,208

Corporate
1,897

2,776

6,184

8,203

Total depreciation and amortization expense
$
39,743

$
35,369

$
114,638

$
103,316

 
 
 
 
 
Capital expenditures:
 
 
 
 
Supply Chain Services
$
2,485

$
469

$
4,571

$
1,305

Performance Services
20,840

20,437

57,956

59,267

Corporate
1,233

1,891

6,799

9,334

Total capital expenditures
$
24,558

$
22,797

$
69,326

$
69,906


36



 
March 31, 2020
June 30, 2019
Total assets (b):
 
 
Supply Chain Services
$
1,611,886

$
1,111,934

Performance Services
919,874

941,183

Corporate
532,743

516,450

Total assets
$
3,064,503

$
2,569,567

Eliminations (c)
(1,434
)

Total assets, net
$
3,063,069

$
2,569,567


(a)
Includes amortization of purchased intangible assets.
(b)
Total assets in Supply Chain Services includes $24.6 million as of June 30, 2019 for discontinued operations related to the specialty pharmacy business. There are no assets for discontinued operations related to the specialty pharmacy business as of March 31, 2020.
(c)
Includes eliminations of intersegment transactions which occur during the ordinary course of business.
The Company uses Segment Adjusted EBITDA (a financial measure not determined in accordance with generally accepted accounting principles ("Non-GAAP")) as its primary measure of profit or loss to assess segment performance and to determine the allocation of resources. The Company also uses Segment Adjusted EBITDA to facilitate the comparison of the segment operating performance on a consistent basis from period to period. The Company defines Segment Adjusted EBITDA as the segment's net revenue and equity in net income of unconsolidated affiliates less operating expenses directly attributable to the segment excluding depreciation and amortization, amortization of purchased intangible assets, merger and acquisition related expenses and non-recurring or non-cash items. Operating expenses directly attributable to the segment include expenses associated with sales and marketing, general and administrative and product development activities specific to the operation of each segment. Non-recurring items are income or expenses and other items that have not been earned or incurred within the prior two years and are not expected to recur within the next two years. General and administrative corporate expenses that are not specific to a particular segment are not included in the calculation of Segment Adjusted EBITDA. Segment Adjusted EBITDA also excludes any income and expense that has been classified as discontinued operations.
For more information on Segment Adjusted EBITDA and the use of Non-GAAP financial measures, see "Our Use of Non-GAAP Financial Measures" within Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.

37



A reconciliation of income before income taxes to Segment Adjusted EBITDA is as follows (in thousands):
 
Three Months Ended March 31,
Nine Months Ended March 31,
 
2020
2019
2020
2019
Income before income taxes
$
77,377

$
87,002

$
314,062

$
290,239

Equity in net income of unconsolidated affiliates (a)
(4,442
)
(553
)
(11,038
)
(4,687
)
Interest and investment loss, net
9,966

1,081

9,849

2,628

Gain on FFF put and call rights (b)
13,906

4,109

(8,477
)
(3,458
)
Other expense (income)
5,005

(3,671
)
1,996

(1,362
)
Operating income
101,812

87,968

306,392

283,360

Depreciation and amortization
25,777

21,797

75,690

63,529

Amortization of purchased intangible assets
13,966

13,572

38,948

39,787

Stock-based compensation (c)
7,668

6,737

19,358

20,650

Acquisition and disposition related expenses
7,287

3,856

16,263

6,789

Remeasurement of tax receivable agreement liabilities (d)
(902
)

(24,584
)

Equity in net income of unconsolidated affiliates (a)
4,442

553

11,038

4,687

Deferred compensation plan (expense) income (e)
(5,476
)
3,975

(2,484
)
1,076

Other expense, net
1,315

259

3,929

1,309

Non-GAAP Adjusted EBITDA
$
155,889

$
138,717

$
444,550

$
421,187

 
 
 
 
 
Segment Non-GAAP Adjusted EBITDA:
 
 
 
 
Supply Chain Services (f)
$
149,212

$
134,805

$
447,081

$
406,139

Performance Services (f)
34,634

33,235

84,977

100,910

Corporate
(27,957
)
(29,323
)
(87,508
)
(85,862
)
Non-GAAP Adjusted EBITDA
$
155,889

$
138,717

$
444,550

$
421,187

(a)
Refer to Note 5 - Investments for more information.
(b)
Refer to Note 6 - Fair Value Measurements for more information.
(c)
Represents non-cash employee stock-based compensation expense and stock purchase plan expense of $0.1 million during both of the three months ended March 31, 2020 and 2019 and $0.3 million during both of the nine months ended March 31, 2020 and 2019.
(d)
The adjustments to TRA liabilities for the three and nine months ended March 31, 2020 is primarily attributable to decreases in the Premier, Inc. effective tax rate related to state tax liabilities.
(e)
Represents realized and unrealized gains and losses and dividend income on deferred compensation plan assets.
(f)
Includes intersegment revenue which is eliminated in consolidation.
(18) SUBSEQUENT EVENTS
On May 4, 2020, the Company, through its consolidated subsidiary PHSI, entered into a unit purchase agreement (the "Unit Purchase Agreement"), and acquired 97% of the equity of Health Design Plus, LLC (“HDP”). Pursuant to the terms of the Unit Purchase Agreement, the Company agreed to pay an aggregate amount of $24.7 million, subject to certain purchase price adjustments. The amount paid at closing was $23.2 million and was funded with borrowings under the Credit Facility.
After closing, PHSI’s subsidiary, Contigo Health, LLC, was merged into HDP, with HDP as the surviving entity. HDP was then renamed Contigo Health, LLC.  The seller, University Hospitals Holdings, Inc., will retain 3% of the equity in Contigo Health, LLC. 
HDP is a third-party administrator and arranges care for employees through its Centers of Excellence program.
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

38



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 our Form 10-K for the fiscal year ended June 30, 2019 (the "2019 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 improvement company, uniting an alliance of more than 4,000 U.S. hospitals and health systems and approximately 175,000 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, consulting services and performance improvement collaborative programs.
As of March 31, 2020, we were owned, in part, by 155 U.S. hospitals, health systems and other healthcare organizations, which represented approximately 1,450 owned, leased and managed acute care facilities and other non-acute care organizations, through their ownership of Class B common stock. As of March 31, 2020, the outstanding Class A common stock and Class B common stock represented 58% and 42%, respectively, of our combined outstanding Class A and Class B common stock and accordingly, the Class B common stock held by member owners no longer represents the majority of our outstanding common stock. On July 31, 2019, as a result of the Class B common unit exchange process, we no longer qualified for the "controlled company" exemption under NASDAQ rules, and we must comply with all general NASDAQ rules regarding board and committee composition by July 31, 2020. We expect to comply with all NASDAQ rules in a timely manner, including having a majority of independent directors on the Board of Directors by July 31, 2020.
As of March 31, 2020, 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 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 from continuing operations and Adjusted EBITDA (a financial measure not determined in accordance with generally accepted accounting principles ("Non-GAAP")) for the periods presented as follows (in thousands):
 
Three Months Ended March 31,
Nine Months Ended March 31,
 
2020
2019
2020
2019
Net revenue
$
334,823

$
301,213

$
956,839

$
901,404

Net income from continuing operations
$
73,212

$
75,265

$
235,726

$
264,448

Non-GAAP Adjusted EBITDA
$
155,889

$
138,717

$
444,550

$
421,187

See "Our Use of Non-GAAP Financial Measures" and "Results of Operations" below for a discussion of our use of Non-GAAP Adjusted EBITDA and a reconciliation of net income from continuing operations to Non-GAAP Adjusted EBITDA.
Our Business Segments
Our business model and solutions are designed to provide our members access to scale efficiencies while focusing on optimization of information resources and cost containment, provide actionable intelligence derived from anonymized data in our data warehouse provided by our members, mitigate the risk of innovation and disseminate best practices that will help our member organizations succeed in their transformation to higher quality and more cost-effective healthcare. We deliver our integrated platform of solutions that address the areas of total cost management, quality and safety improvement and population health management through two business segments: Supply Chain Services and Performance Services.

39



Segment net revenue for the three months ended March 31, 2020 and 2019 was as follows (in thousands):
 
Three Months Ended
 
 
 
 
 
 
 
March 31,
 
Change
 
% of Net Revenue
Net revenue:
2020
2019
 
2020
2019
 
2020
2019
Supply Chain Services
$
238,628

$
208,586

 
$
30,042

14
%
 
71
%
69
%
Performance Services
96,195

92,627

 
3,568

4
%
 
29
%
31
%
Net revenue
$
334,823

$
301,213

 
$
33,610

11
%
 
100
%
100
%
Segment net revenue for the nine months ended March 31, 2020 and 2019 was as follows (in thousands):
 
Nine Months Ended
 
 
 
 
 
 
 
March 31,
 
Change
 
% of Net Revenue
Net revenue:
2020
2019
 
2020
2019
 
2020
2019
Supply Chain Services
$
694,349

$
628,190

 
$
66,159

11
 %
 
73
%
70
%
Performance Services
262,490

273,214

 
(10,724
)
(4
)%
 
27
%
30
%
Net revenue
$
956,839

$
901,404

 
$
55,435

6
 %
 
100
%
100
%
Our Supply Chain Services segment includes one of the largest healthcare group purchasing organization programs ("GPO") in the United States, serving acute, non-acute, non-healthcare and alternate sites, and our direct sourcing activities. 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 direct sourcing activities.
Our Performance Services segment includes one of the largest informatics and consulting services businesses in the United States focused on healthcare providers. Our software as a service ("SaaS") informatics products and technology licenses 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, consulting services and insurance management services.
Acquisitions and Divestitures
Acquisition of Acurity and Nexera Assets
On February 28, 2020, we, through two newly formed consolidated subsidiaries, Prince A Purchaser, LLC ("PAP") and Prince N Purchaser, LLC ("PNP"), acquired substantially all of the assets and certain liabilities of Acurity, Inc. and Nexera, Inc., for an aggregate amount of $291.5 million, of which $166.1 million was paid at closing with borrowings under our Credit Facility (as defined in Note 9 - Debt) (the "Acurity and Nexera asset acquisition"). An additional $120.0 million will be paid in four equal annual installments of $30.0 million on or about June 30, 2021, 2022, 2023 and 2024. An additional $5.4 million is expected to be paid during our second fiscal quarter of 2021. In addition to the aggregate amount of $291.5 million, the Purchase Agreement provides a graduated earn-out opportunity to Acurity, Inc. of up to $30.0 million based upon our achievement of a range of member renewals on terms to be agreed to by us and GNYHA based on prevailing market conditions in December 2023.
After closing of the transaction, PAP and PNP changed their names to Acurity, LLC ("Acurity") and Nexera, LLC ("Nexera"), respectively. Acurity is a regional group purchasing organization and has been a customer and strategic partner of ours for more than 24 years. Nexera is a hospital financial improvement consulting firm which partners with healthcare organizations to improve hospital and health system performance, with a significant focus on supply chain enhancement and transformation. We report the operations of Acurity and Nexera as part of the Supply Chain Services segment. See Note 3 - Business Acquisitions for further information.

40



Acquisition of Medpricer
On October 28, 2019, we acquired all of the outstanding capital stock in Medpricer.com, Inc. ("Medpricer") for an adjusted purchase price of $38.5 million with borrowings under the Credit Facility. Medpricer is a SaaS-based provider of technology solutions that enable hospitals and other organizations to analyze, benchmark and source purchased services contracts independent of any existing GPO affiliation. Medpricer is reported as part of the Supply Chain Services segment. See Note 3 - Business Acquisitions to the accompanying condensed consolidated financial statements for further information.
Acquisition of Stanson
On November 9, 2018, we acquired all of the outstanding capital stock in Stanson Health, Inc. ("Stanson") for an adjusted purchase price of $55.4 million. Stanson is a SaaS-based provider of clinical decision support tools that are integrated directly into the electronic health record workflow, to help provide real-time, patient-specific best practices at the point of care. Stanson is reported as part of the Performance Services segment. See Note 3 - Business Acquisitions to the accompanying condensed consolidated financial statements for further information.
Divestiture of Specialty Pharmacy Business - Discontinued Operations
On June 7, 2019, we completed the sale of prescription files and records and certain other assets used in our specialty pharmacy business for $22.3 million. On June 10, 2019, we received $7.6 million for the sale of a portion of our pharmaceutical inventory and on July 24, 2019, an additional $3.6 million primarily in connection with the sale of our remaining pharmaceutical inventory. As of December 31, 2019, we had substantially completed the wind down and exit from the specialty pharmacy business.
We met the criteria for classifying certain assets and liabilities of the specialty pharmacy business as a discontinued operation as of June 30, 2019. Accordingly, unless otherwise indicated, information in this Quarterly Report has been retrospectively adjusted to reflect continuing operations for all periods presented. See Note 4 - Discontinued Operations and Exit Activities to the accompanying condensed consolidated financial statements for further 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. See "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" in the 2019 Annual Report.
Trends in the U.S. healthcare market affect our revenues and costs in the Supply Chain Services and Performance Services segments. The trends we see affecting our current healthcare business include the impact of the implementation of current or future healthcare legislation, particularly the uncertainty regarding the status of the Affordable Care Act, its repeal, replacement, or other modification, the enactment of new regulatory and reporting requirements, expansion and contraction of insurance coverage and associated costs that may impact subscriber elections, 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. Over the long-term, 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, expected demand for our services or related assumptions on our business. See "Cautionary Note Regarding Forward-Looking Statements" for more information.
In addition to the trends in the U.S. healthcare market discussed above, we face known and unknown uncertainties arising from the outbreak of the novel coronavirus ("COVID-19") and the resulting global pandemic and financial and operational uncertainty, including its impact on the overall economy, our sales, operations and supply chains, our members, workforce and suppliers, and countries.
Critical Accounting Policies and Estimates
Refer to Note 1 - Organization and Basis of Presentation and Note 2 - Significant Accounting Policies to the accompanying condensed consolidated financial statements for more information related to our use of estimates in the preparation of financial statements as well as information related to material changes in our significant accounting policies that were included in our 2019 Annual Report.

41



New Accounting Standards
New accounting standards that we have recently adopted as well as those that have been recently issued but not yet adopted by us are included in Note 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 net administrative fees in our Supply Chain Services segment. Other services and support revenue consists primarily of fees generated by our Performance Services segment in connection with our SaaS informatics products subscriptions, license fees, and consulting services and performance improvement collaborative subscriptions. Product revenue consists of 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 revenue share paid to members) and direct sourcing revenue.
The success of our Supply Chain Services revenue streams are influenced by our ability to negotiate favorable contracts with suppliers and members, the number of members that utilize our GPO supplier contracts and the volume of their purchases, 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.
Performance Services
Performance Services revenue consists of SaaS informatics products subscriptions, license fees, performance improvement collaborative and other service subscriptions, professional fees for consulting services, insurance services management fees and commissions from endorsed commercial insurance programs.
Our Performance Services growth will depend upon the expansion of our SaaS informatics products, performance improvement collaboratives and consulting services to new and existing members, renewal of existing subscriptions to our SaaS and licensed informatics products, and our ability to generate additional applied sciences engagements and expand into new markets.
Cost of Revenue
Cost of revenue consists of cost of service revenue and cost of product 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 consulting services to members and implementation services related to SaaS informatics along with associated amortization of certain capitalized contract costs. Amortization of contract costs represent amounts that have been capitalized and reflect the incremental costs of obtaining and fulfilling a contract. Amortization of contract costs included within cost of service revenue include costs related to implementing SaaS informatics tools. Cost of service revenue also includes expenses related to hosting services, related data center capacity costs, third-party product license expenses and amortization of the cost of internally-developed software applications.
Cost of product revenue consists of purchase and shipment costs for direct sourced medical products. Our cost of product revenue is influenced by 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, business disposition related expenses, indirect costs such as insurance, professional fees and other general overhead expenses, and amortization of certain contract costs. Amortization of contract costs represent amounts that have been capitalized and reflect the incremental costs of obtaining and fulfilling a contract. Amortization of contract costs included within selling, general and administrative expenses include sales commissions.

42



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.
Other (Expense) Income, Net
Other (expense) 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"). Other income, net, also includes the change in fair value of our FFF put and call rights (see Note 6 - Fair Value Measurements to the accompanying condensed consolidated financial statements), interest income and expense, realized and unrealized gains or losses on deferred compensation plan assets, gains or losses on the disposal of assets, and any impairment on our held-to-maturity investments.
Income Tax Expense
Our income tax expense is attributable to the activities of Premier, Inc., Premier Healthcare Solutions, Inc. ("PHSI"),Premier Supply Chain Improvement, Inc. ("PSCI") and Premier Marketplace, LLC ("PMLLC"), all of which are subchapter C corporations and are subject to U.S. federal and state income taxes. In contrast, under the provisions of federal and state laws, Premier LP is not subject to federal and state income taxes as the income realized by Premier LP is taxable to its partners. Our overall effective tax rate differs from the U.S. statutory tax rate primarily due to the aforementioned ownership structure as well as other items noted in Note 14 - Income Taxes to the accompanying condensed consolidated financial statements.
Given our ownership and capital structure, various effective tax rates are calculated for specific tax items. For example, the deferred tax benefit related to stock-based compensation expense (see Note 13 - Stock-Based Compensation to the accompanying condensed consolidated financial statements) is calculated based on the effective tax rate of PHSI, the legal entity where the majority of stock-based compensation expense is recorded. Our effective tax rate, as discussed in Note 14 - Income Taxes to the accompanying condensed consolidated financial statements, represents the effective tax rate computed in accordance with GAAP based on total income tax expense (reflected in income tax expense in the Condensed Consolidated Statements of Income) of Premier, Inc., PHSI and PSCI, divided by consolidated pre-tax income.
Non-GAAP Adjusted Fully Distributed Net Income is calculated net of taxes based on our fully distributed tax rate for federal and state income tax for us as a whole as if we were one taxable entity with all of our subsidiaries' activities included. The rate used to compute Non-GAAP Adjusted Fully Distributed Net Income was 26% for the three and nine months ended March 31, 2020 and 2019.
Income (Loss) from Discontinued Operations, Net of Tax
Income (loss) from discontinued operations, net of tax represents the net income or loss associated with the sale of certain assets and wind down and exit of the specialty pharmacy business. See Note 4 - Discontinued Operations and Exit Activities to the accompanying condensed consolidated financial statements for further information.
Net Income Attributable to Non-Controlling Interest
As of March 31, 2020, we owned a 58% controlling general partner interest in Premier LP through our wholly-owned subsidiary, Premier Services, LLC ("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 42% and 51% as of March 31, 2020 and June 30, 2019, respectively (see Note 10 - Redeemable Limited Partners' Capital to the accompanying condensed consolidated financial statements).
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 all Non-GAAP financial measures.
We define EBITDA as net income before income or loss from discontinued operations, net of tax, 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

43



to recur within the next two years. Such items include certain strategic and financial restructuring expenses. Non-operating items include gains or losses on the disposal of assets and interest and investment income or expense.
We define Segment Adjusted EBITDA as the segment's net revenue less cost of revenue and operating expenses directly attributable to the segment excluding depreciation and amortization, amortization of purchased intangible assets, merger and acquisition related expenses and non-recurring or non-cash items and including equity in net income of unconsolidated affiliates. Operating expenses directly attributable to the segment include expenses associated with sales and marketing, general and administrative, and product development activities specific to the operation of each segment. General and administrative corporate expenses that are not specific to a particular segment are not included in the calculation of Segment Adjusted EBITDA. Segment Adjusted EBITDA also excludes any income and expense that has been classified as discontinued operations.
We define Adjusted Fully Distributed Net Income as net income attributable to Premier (i) excluding income or loss from discontinued operations, net, (ii) excluding income tax expense, (iii) excluding the impact of adjustment of redeemable limited partners' capital to redemption amount, (iv) excluding the effect of non-recurring and non-cash items, (v) assuming the exchange of all the Class B common units for shares of Class A common stock, which results in the elimination of non-controlling interest in Premier LP and (vi) reflecting an adjustment for income tax expense on Non-GAAP fully distributed net income before income taxes at our estimated effective income tax rate. We define Adjusted Fully Distributed Earnings per Share as Adjusted Fully Distributed Net Income divided by diluted weighted average shares (see Note 12 - Earnings Per Share).
We define Free Cash Flow as net cash provided by operating activities from continuing operations 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), certain items outside the control of our management team, e.g. taxes, other non-cash items (such as impairment of intangible assets, purchase accounting adjustments and stock-based compensation), and non-recurring items (such as strategic and financial restructuring expenses) and income and expense that has been classified as discontinued operations from our operating results. We believe Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share assist our Board of Directors, management and investors in comparing our net income and earnings per share on a consistent basis from period to period because these measures remove non-cash (such as impairment of intangible assets, purchase accounting adjustments and stock-based compensation) and non-recurring items (such as strategic and financial restructuring expenses), and eliminate the variability of non-controlling interest that results from member owner exchanges of Class B common units for shares of Class A common stock. We believe Free Cash Flow is an important measure because it represents the cash that we generate after payment of tax distributions to limited partners and capital investment to maintain existing products and services and ongoing business operations, as well as development of new and upgraded products and services to support future growth. Our Free Cash Flow allows us to enhance stockholder value through acquisitions, partnerships, joint ventures, investments in related businesses and debt reduction.
Despite the importance of these Non-GAAP financial measures in analyzing our business, determining compliance with certain financial covenants in our Credit Facility, measuring and determining incentive compensation and evaluating our operating performance relative to our competitors, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow are not measurements of financial performance under GAAP, may have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, net income, net cash provided by operating activities, or any other measure of our performance derived in accordance with GAAP.
Some of the limitations of the EBITDA, Adjusted EBITDA and Segment Adjusted EBITDA measures include that they do not reflect: our capital expenditures or our future requirements for capital expenditures or contractual commitments; changes in, or cash requirements for, our working capital needs; the interest expense or the cash requirements to service interest or principal payments under our Credit Facility; income tax payments we are required to make; and any cash requirements for replacements of assets being depreciated or amortized. In addition, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA and Free Cash Flow are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flows from operating activities.

44



Some of the limitations of the Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share measures are that they do not reflect income tax expense or income tax payments we are required to make. In addition, Adjusted Fully Distributed Net Income and Adjusted Fully Distributed Earnings per Share are not measures of profitability under GAAP.
We also urge you to review the reconciliation of these Non-GAAP financial measures included elsewhere in this Quarterly Report. To properly and prudently evaluate our business, we encourage you to review the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report and to not rely on any single financial measure to evaluate our business. In addition, because the EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Fully Distributed Net Income, Adjusted Fully Distributed Earnings per Share and Free Cash Flow measures are susceptible to varying calculations, such Non-GAAP financial measures may differ from, and may therefore not be comparable to, similarly titled measures used by other companies.
Non-recurring and non-cash items excluded in our calculation of Adjusted EBITDA, Segment Adjusted EBITDA and Adjusted Fully Distributed Net Income consist of stock-based compensation, acquisition and disposition related expenses, remeasurement of TRA liabilities, gain on FFF put and call rights, income and expense that has been classified as discontinued operations and other expense. More information about certain of the more significant items follows below.
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 both the three months ended March 31, 2020 and 2019 and $0.3 million for both the nine months ended March 31, 2020 and 2019 (see Note 13 - Stock-Based Compensation to the accompanying condensed consolidated financial statements).
Acquisition and disposition related expenses
Acquisition related expenses include legal, accounting and other expenses related to acquisition activities and gains and losses on the change in fair value of earn-out liabilities. Disposition related expenses include severance and retention benefits and financial advisor fees and legal fees related to disposition activities.
Remeasurement of TRA liabilities
We record TRA liabilities based on 85% of the estimated amount of tax savings we expect to receive, generally over a 15-year period, which are attributable to the initial purchase of Class B common units from the member owners made concurrently with the IPO and subsequent exchanges by member owners of Class B common units into Class A common stock or cash. Tax payments made under the TRA will be made to the member owners as we realize tax benefits. Determining the estimated amount of tax savings we expect to receive requires judgment as deductibility of goodwill amortization expense is not assured and the estimate of tax savings is dependent upon the actual realization of the tax benefit and the tax rates in effect at that time.
Changes in estimated TRA liabilities that are the result of a change in tax accounting method are recorded as a component of selling, general and administrative expenses in the Condensed Consolidated Statements of Income. Changes in estimated TRA liabilities that are related to new basis changes as a result of the exchange of Class B common units for a like number of shares of Class A common stock or as a result of departed member owners are recorded as an increase to additional paid-in capital in the Condensed Consolidated Statements of Stockholders' Equity (Deficit).
The adjustments to TRA liabilities for the three months ended March 31, 2020 and the nine months ended March 31, 2020 are primarily attributable to increases in the Premier, Inc. effective tax rate related to state tax liabilities (see Note 14 - Income Taxes to the accompanying condensed consolidated financial statements).
Gain or loss on FFF put and call rights
See Note 6 - Fair Value Measurements to the accompanying condensed consolidated financial statements.

45



Results of Operations
Results of operations for all periods presented have been retrospectively adjusted to reflect continuing operations unless otherwise indicated.
The following table presents our results of operations for the periods presented (in thousands, except per share data):
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2020
2019
 
2020
2019
 
Amount
% of Net Revenue
Amount
% of Net Revenue
 
Amount
% of Net Revenue
Amount
% of Net Revenue
Net revenue:
 
 
 
 
 
 
 
 
 
Net administrative fees
$
174,049

52%
$
164,534

55%
 
$
518,566

54%
$
492,229

54%
Other services and support
99,591

30%
95,111

32%
 
270,929

28%
279,734

31%
Services
273,640

82%
259,645

86%
 
789,495

83%
771,963

86%
Products
61,183

18%
41,568

14%
 
167,344

17%
129,441

14%
Net revenue
334,823

100%
301,213

100%
 
956,839

100%
901,404

100%
Cost of revenue:
 
 
 

 
 
 
 
 
Services
49,007

15%
46,545

16%
 
143,965

15%
133,107

14%
Products
54,121

16%
39,496

13%
 
150,415

16%
124,024

14%
Cost of revenue
103,128

31%
86,041

30%
 
294,380

31%
257,131

28%
Gross profit
231,695

69%
215,172

70%
 
662,459

69%
644,273

72%
Operating expenses:
 

 

 
 
 
 
 
Selling, general and administrative
115,289

34%
113,336

38%
 
315,311

33%
320,198

36%
Research and development
628

—%
296

—%
 
1,808

—%
928

—%
Amortization of purchased intangible assets
13,966

4%
13,572

5%
 
38,948

4%
39,787

4%
Operating expenses
129,883

39%
127,204

42%
 
356,067

37%
360,913

40%
Operating income
101,812

30%
87,968

29%
 
306,392

32%
283,360

31%
Other income, net
(24,435
)
(7)%
(966
)
—%
 
7,670

1%
6,879

1%
Income before income taxes
77,377

23%
87,002

29%
 
314,062

33%
290,239

32%
Income tax expense
4,165

1%
11,737

4%
 
78,336

8%
25,791

3%
Net income from continuing operations
73,212

22%
75,265

25%
 
235,726

25%
264,448

29%
Income (loss) from discontinued operations, net of tax
5

—%
(1,463
)
—%
 
1,009

—%
(3,862
)
(1)%
Net income
73,217

22%
73,802

25%
 
236,735

25%
260,586

29%
Net income from continuing operations attributable to non-controlling interest in Premier LP
(35,055
)
(10)%
(44,135
)
(15)%
 
(132,189
)
(14)%
(163,230
)
(18)%
Net (income) loss from discontinued operations attributable to non-controlling interest in Premier LP
(3
)
—%
747

—%
 
(480
)
—%
2,098

—%
Net income attributable to non-controlling interest in Premier LP
(35,058
)
(10)%
(43,388
)
(14)%
 
(132,669
)
(14)%
(161,132
)
(18)%
Adjustment of redeemable limited partners' capital to redemption amount
302,569

nm
235,394

nm
 
516,725

nm
178,910

nm
Net income attributable to stockholders
$
340,728

nm
$
265,808

nm
 
$
620,791

nm
$
278,364

nm
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
69,451

 
62,020

 
 
65,582

 
58,346

 
Diluted
122,470

 
129,072

 
 
124,030

 
132,249

 
 
 
 
 
 
 
 
 
 
 
Earnings per share attributable to stockholders:
 
 
 
 
 
 
 
 
Basic earnings per share
 
 
 
 
 
 
 
 
 

46



 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2020
2019
 
2020
2019
 
Amount
% of Net Revenue
Amount
% of Net Revenue
 
Amount
% of Net Revenue
Amount
% of Net Revenue
Continuing operations
$
4.91

 
$
4.30

 
 
$
9.46

 
$
4.80

 
Discontinued operations

 
(0.01
)
 
 
0.01

 
(0.03
)
 
Basic earnings per share attributable to stockholders
$
4.91

 
$
4.29

 
 
$
9.47

 
$
4.77

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
 
 
 
 
 
 
 
 
Continuing operations
$
0.54

 
$
0.49

 
 
$
1.66

 
$
1.71

 
Discontinued operations

 
(0.01
)
 
 

 
(0.03
)
 
Diluted earnings per share attributable to stockholders
$
0.54

 
$
0.48

 
 
$
1.66

 
$
1.68

 
nm = Not meaningful
The following table provides certain Non-GAAP financial measures for the periods presented (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 March 31,
 
Nine Months Ended March 31,
 
2020
2019
 
2020
2019
Certain Non-GAAP Financial Data:
Amount
% of Net Revenue
Amount
% of Net Revenue
 
Amount
% of Net Revenue
Amount
% of Net Revenue
Adjusted EBITDA
$
155,889

47%
$
138,717

46%
 
$
444,550

46%
$
421,187

47%
Non-GAAP Adjusted Fully Distributed Net Income
$
88,908

27%
$
85,722

28%
 
$
265,668

28%
$
262,722

29%
Non-GAAP Adjusted Fully Distributed Earnings Per Share
$
0.73

nm
$
0.66

nm
 
$
2.14

nm
$
1.99

nm
The following tables provide the reconciliation of net income from continuing operations 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 March 31,
Nine Months Ended March 31,
 
2020
2019
2020
2019
Net income from continuing operations
$
73,212

$
75,265

$
235,726

$
264,448

Interest and investment loss, net
9,966

1,081

9,849

2,628

Income tax expense
4,165

11,737

78,336

25,791

Depreciation and amortization
25,777

21,797

75,690

63,529

Amortization of purchased intangible assets
13,966

13,572

38,948

39,787

EBITDA
127,086

123,452

438,549

396,183

Stock-based compensation
7,668

6,737

19,358

20,650

Acquisition and disposition related expenses
7,287

3,856

16,263

6,789

Remeasurement of tax receivable agreement liabilities
(902
)

(24,584
)

Loss (gain) on FFF put and call rights
13,906

4,109

(8,477
)
(3,458
)
Other expense
844

563

3,441

1,023

Adjusted EBITDA
$
155,889

$
138,717

$
444,550

$
421,187

 
 
 
 
 
Income before income taxes
$
77,377

$
87,002

$
314,062

$
290,239

Equity in net income of unconsolidated affiliates
(4,442
)
(553
)
(11,038
)
(4,687
)
Interest and investment loss, net
9,966

1,081

9,849

2,628

Loss (gain) on FFF put and call rights
13,906

4,109

(8,477
)
(3,458
)

47



 
Three Months Ended March 31,
Nine Months Ended March 31,
 
2020
2019
2020
2019
Other expense (income)
5,005

(3,671
)
1,996

(1,362
)
Operating income
101,812

87,968

306,392

283,360

Depreciation and amortization
25,777

21,797

75,690

63,529

Amortization of purchased intangible assets
13,966

13,572

38,948

39,787

Stock-based compensation
7,668

6,737

19,358

20,650

Acquisition and disposition related expenses
7,287

3,856

16,263

6,789

Remeasurement of tax receivable agreement liabilities
(902
)

(24,584
)

Equity in net income of unconsolidated affiliates
4,442

553

11,038

4,687

Deferred compensation plan (expense) income
(5,476
)
3,975

(2,484
)
1,076

Other expense, net
1,315

259

3,929

1,309

Adjusted EBITDA
$
155,889

$
138,717

$
444,550

$
421,187

 
Three Months Ended March 31,
Nine Months Ended March 31,
 
2020
2019
2020
2019
Segment Adjusted EBITDA:
 
 
 
 
Supply Chain Services
$
149,212

$
134,805

$
447,081

$
406,139

Performance Services
34,634

33,235

84,977

100,910

Corporate
(27,957
)
(29,323
)
(87,508
)
(85,862
)
Adjusted EBITDA
$
155,889

$
138,717

$
444,550

$
421,187

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.

48



 
Three Months Ended March 31,
Nine Months Ended March 31,
 
2020
2019
2020
2019
Net income attributable to stockholders
$
340,728

$
265,808

$
620,791

$
278,364

Adjustment of redeemable limited partners' capital to redemption amount
(302,569
)
(235,394
)
(516,725
)
(178,910
)
Net income attributable to non-controlling interest in Premier LP
35,058

43,388

132,669

161,132

(Income) loss from discontinued operations, net of tax
(5
)
1,463

(1,009
)
3,862

Income tax expense
4,165

11,737

78,336

25,791

Amortization of purchased intangible assets
13,966

13,572

38,948

39,787

Stock-based compensation
7,668

6,737

19,358

20,650

Acquisition and disposition related expenses
7,287

3,856

16,263

6,789

Remeasurement of tax receivable agreement liabilities
(902
)

(24,584
)

Loss (gain) on FFF put and call rights
13,906

4,109

(8,477
)
(3,458
)
Other expense
844

563

3,441

1,023

Non-GAAP adjusted fully distributed income before income taxes
120,146

115,839

359,011

355,030

Income tax expense on fully distributed income before income taxes (a)
31,238

30,117

93,343

92,308

Non-GAAP Adjusted Fully Distributed Net Income
$
88,908

$
85,722

$
265,668

$
262,722

 
 
 
 
 
Reconciliation of denominator for earnings per share attributable to stockholders to Non-GAAP Adjusted Fully Distributed Earnings per Share
 
 
Weighted Average:
 
 
 
 
Basic weighted average shares outstanding
69,451

62,020

65,582

58,346

Dilutive securities
645

730

662

934

Class B shares outstanding
52,374

66,322

57,786

72,969

Weighted average fully distributed shares outstanding - diluted
122,470

129,072

124,030

132,249

(a)
Reflects income tax expense at an estimated effective income tax rate of 26% of Non-GAAP adjusted fully distributed income before income taxes.

49



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.
 
Three Months Ended March 31,
Nine Months Ended March 31,
 
2020
2019
2020
2019
Earnings per share attributable to stockholders
$
4.91

$
4.29

$
9.47

$
4.77

Adjustment of redeemable limited partners' capital to redemption amount
(4.36
)
(3.80
)
(7.88
)
(3.07
)
Net income attributable to non-controlling interest in Premier LP
0.50

0.70

2.02

2.76

(Income) loss from discontinued operations, net of tax

0.02

(0.02
)
0.07

Income tax expense
0.06

0.19

1.19

0.44

Amortization of purchased intangible assets
0.20

0.22

0.59

0.68

Stock-based compensation
0.11

0.11

0.30

0.35

Acquisition and disposition related expenses
0.10

0.06

0.25

0.12

Remeasurement of tax receivable agreement liabilities
(0.01
)

(0.37
)

Loss (gain) on FFF put and call rights
0.20

0.07

(0.13
)
(0.06
)
Other expense
0.01

0.01

0.05

0.02

Impact of corporation taxes (a)
(0.45
)
(0.50
)
(1.42
)
(1.58
)
Impact of dilutive shares (b)
(0.54
)
(0.71
)
(1.91
)
(2.51
)
Non-GAAP Adjusted Fully Distributed Earnings Per Share
$
0.73

$
0.66

$
2.14

$
1.99

(a)
Reflects income tax expense at an estimated effective income tax rate of 26% of Non-GAAP adjusted fully distributed income before income taxes.
(b)
Reflects impact of dilutive shares, primarily attributable to the assumed conversion of all Class B common units for Class A common stock.
Consolidated Results - Comparison of the Three Months Ended March 31, 2020 to 2019
Net Revenue
Net revenue increased by $33.6 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to an increase of $19.6 million in product revenue, an increase of $9.5 million in net administrative fees revenue and an increase of $4.5 million in other services and support revenue. The variances in the material factors contributing to the changes in consolidated net revenue are discussed further in "Segment Results" below.
Cost of Revenue
Cost of revenue increased by $17.1 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to an increase of $14.6 million in cost of product revenue and an increase of $2.5 million in cost of services revenue. The variances in the material factors contributing to the changes in consolidated cost of revenue are discussed further in "Segment Results" below.
Operating Expenses
Operating expenses increased by $2.7 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to an increase of $2.0 million in selling, general and administrative expenses primarily due to an increase in expenses associated with certain strategic initiatives, including the Acurity and Nexera asset acquisition as well as an increase in technology expenses driven by software subscriptions associated with our newly acquired businesses. These increases were partially offset by a decrease in North Carolina franchise taxes. The variances in the material factors contributing to the changes in consolidated operating expenses are discussed further in "Segment Results" below.
Other Income, Net
Other income, net decreased by $23.4 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to increase in the loss on FFF put and call rights in the current period (see Note 6 - Fair Value Measurements to the accompanying condensed consolidated financial statements for further information) and other than temporary impairment charges associated with our held-to-maturity investments.

50



Income Tax Expense
For the three months ended March 31, 2020 and 2019, we recorded tax expense of $4.2 million and $11.7 million, respectively, which equates to effective tax rates of 5% and 13%, effectively. The decrease in the effective tax rate is primarily attributable to the income tax benefit associated with the NOL carryback provisions under the CARES Act and the release of the valuation allowance. Our effective tax rates differ from income taxes recorded at the statutory income tax rate primarily due to partnership income not subject to federal, state and local income taxes. See Note 14 - Income Taxes to the accompanying condensed consolidated financial statements for more information.
Income (Loss) from Discontinued Operations, Net of Tax
Income (loss) from discontinued operations, net of tax increased by $1.5 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to the substantial completion of the wind down of the specialty pharmacy business in the current period.
Net Income Attributable to Non-Controlling Interest
Net income attributable to non-controlling interest decreased by $8.3 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to a decrease in non-controlling ownership percentage in Premier LP to 42% from 53%, respectively.
Non-GAAP Adjusted EBITDA
Non-GAAP Adjusted EBITDA increased by $17.2 million during the three months ended March 31, 2020, compared to the three months ended March 31, 2019. The variances in the material factors contributing to the changes in consolidated Non-GAAP Adjusted EBITDA are discussed further in "Segment Results" below.
Consolidated Results - Comparison of the Nine Months Ended March 31, 2020 to 2019
Net Revenue
Net revenue increased by $55.4 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019, primarily due to an increase of $37.9 million in product revenue and an increase of $26.4 million in net administrative fees revenue, partially offset by a decrease of $8.8 million in other services and support revenue. The variances in the material factors contributing to the changes in consolidated net revenue are discussed further in "Segment Results" below.
Cost of Revenue
Cost of revenue increased by $37.3 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019, primarily due to increase of $26.4 million in cost of product revenue and an increase of $10.9 million in cost of services revenue. The variances in the material factors contributing to the changes in consolidated cost of revenue are discussed further in "Segment Results" below.
Operating Expenses
Operating expenses decreased by $4.8 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019, primarily due to a decrease of $4.9 million in selling, general and administrative expenses largely due to a decrease of $24.6 million due to the remeasurement of the TRA liability as a result of the change in North Carolina state income tax law partially offset by an increase in acquisition costs primarily associated with the Acurity and Nexera asset acquisition and the Medpricer acquisition in the nine months ended March 31, 2020. The variances in the material factors contributing to the changes in consolidated operating expenses are discussed further in "Segment Results" below.
Other Income, Net
Other income, net increased by $0.8 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019, primarily due to an increase in equity in net income of unconsolidated affiliates primarily due to our investment in FFF (see Note 5 - Investments to the accompanying condensed consolidated financial statements for further information) and an increase in the gain on FFF put and call rights in the current period (see Note 6 - Fair Value Measurements to the accompanying condensed consolidated financial statements for further information). The increases were partially offset by other than temporary impairment charges associated with our held-to-maturity investments.

51



Income Tax Expense
For the nine months ended March 31, 2020 and 2019, we recorded tax expense of $78.3 million and $25.8 million, respectively, which equates to effective tax rates of 25% and 9%, respectively. The increase in effective tax rate is primarily attributable to the remeasurement of deferred tax balances related to the change in North Carolina state income tax law. Our effective tax rates differ from income taxes recorded at the statutory income tax rate primarily due to partnership income not subject to federal, state, and local income taxes. See Note 14 - Income Taxes to the accompanying condensed consolidated financial statements for more information.
Income (Loss) from Discontinued Operations, Net of Tax
Income (loss) from discontinued operations, net of tax increased by $4.9 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019, primarily due to the substantial completion of the wind down of the specialty pharmacy business in the current period.
Net Income Attributable to Non-Controlling Interest
Net income attributable to non-controlling interest decreased by $28.4 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019, primarily due to a decrease in non-controlling ownership percentage in Premier LP to 42% from 53%, respectively, as well as a decrease in income of Premier LP.
Non-GAAP Adjusted EBITDA
Non-GAAP Adjusted EBITDA increased by $23.4 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. The variances in the material factors contributing to the changes in consolidated Non-GAAP Adjusted EBITDA are discussed further in "Segment Results" below.

52



Segment Results
Supply Chain Services
The following table presents our results of operations and Non-GAAP Segment Adjusted EBITDA in the Supply Chain Services segment for the periods presented (in thousands):
 
Three Months Ended March 31,
 
 
 
Nine Months Ended March 31,
 
 
Supply Chain Services
2020
2019
Change
 
2020
2019
Change
Net revenue:
 
 
 
 
 
 
 
 
 
Net administrative fees
$
174,049

$
164,534

$
9,515

6%
 
$
518,566

$
492,229

$
26,337

5
%
Other services and support
3,396

2,484

912

37%
 
8,439

6,520

1,919

29
%
Services
177,445

167,018

10,427

6%
 
527,005

498,749

28,256

6
%
Products
61,183

41,568

19,615

47%
 
167,344

129,441

37,903

29
%
Net revenue
238,628

208,586

30,042

14%
 
694,349

628,190

66,159

11
%
Cost of revenue:
 
 



 
 
 
 
 
Services
123

21

102

nm
 
278

144

134

93
%
Products
54,121

39,496

14,625

37%
 
150,415

124,024

26,391

21
%
Cost of revenue
54,244

39,517

14,727

37%
 
150,693

124,168

26,525

21
%
Gross profit
184,384

169,069

15,315

9%
 
543,656

504,022

39,634

8
%
Operating expenses:
 
 



 
 
 
 
 
Selling, general and administrative
45,512

36,066

9,446

26%
 
119,179

106,315

12,864

12
%
Research and development



—%
 
6


6

%
Amortization of purchased intangible assets
6,125

4,379

1,746

40%
 
14,318

13,137

1,181

9
%
Operating expenses
51,637

40,445

11,192

28%
 
133,503

119,452

14,051

12
%
Operating income
$
132,747

$
128,624

$
4,123

3%
 
$
410,153

$
384,570

$
25,583

7
%
Depreciation and amortization
771

237




 
2,274

767

 
 
Amortization of purchased intangible assets
6,125

4,379




 
14,318

13,137

 
 
Acquisition and disposition related expenses
4,871

1,180




 
9,204

3,352

 
 
Equity in net income of unconsolidated affiliates
4,431

385




 
10,865

4,307

 
 
Other expense
267





 
267

6

 
 
Non-GAAP Segment Adjusted EBITDA
$
149,212

$
134,805

$
14,407

11%
 
$
447,081

$
406,139

$
40,942

10
%
Comparison of the Three Months Ended March 31, 2020 to 2019
Net Revenue
Supply Chain Services segment net revenue increased by $30.0 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.
Net administrative fees revenue increased by $9.5 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Growth in net administrative fees revenue was primarily due to continuing contract penetration driven largely by the company’s high-compliance portfolio programs and the addition of new contract categories and suppliers. We expect our net administrative fees revenue to continue to grow to the extent our existing members increase the utilization of our contracts and additional members convert to our contract portfolio. Due to competitive market trends, we have experienced, and expect to continue to experience, requests to provide existing and prospective members increases in revenue share on incremental or overall purchasing volume that could, if materially increased, adversely impact our revenues and overall financial performance.
Product revenue increased by $19.6 million during the three months ended March 31, 2019 compared to the three months ended March 31, 2019, primarily due to growth in commodity products and aggregated purchasing of certain products.

53



Cost of Revenue
Supply Chain Services segment cost of revenue increased by $14.7 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to an increase in cost of product revenue due to the growth in direct sourcing sales revenue partially offset by a reduction in cost of sales as a result of initiatives to reduce costs. We expect our cost of product revenue to increase to the extent we are able to sell additional direct-sourced medical products to new and existing members. Depending on the underlying product sales mix, increases in product revenues could reduce our gross profit as a percentage of our net revenues.
Operating Expenses
Supply Chain Services segment operating expenses increased by $11.2 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase was primarily due to an increase in selling, general and administrative expenses of $9.4 million largely driven by expenses associated with certain strategic initiatives, including the Acurity and Nexera asset acquisition and the Medpricer acquisition, as well as an increase of $1.7 million in amortization of purchased intangible assets.
Segment Adjusted EBITDA
Supply Chain Services Segment Adjusted EBITDA increased by $14.4 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to growth in net administrative fees and product revenues.
Comparison of the Nine Months Ended March 31, 2020 to 2019
Net Revenue
Supply Chain Services segment net revenue increased by $66.2 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019.
Net administrative fees revenue increased by $26.3 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. Growth in net administrative fees revenue was primarily due to continuing contract penetration driven largely by the company’s high-compliance portfolio programs and the addition of new contract categories and suppliers. We expect our net administrative fees revenue to continue to grow to the extent our existing members increase the utilization of our contracts and additional members convert to our contract portfolio. Due to competitive market trends, we have experienced, and expect to continue to experience, requests to provide existing and prospective members an increase in revenue share on incremental or overall purchasing volume that could, if materially increased, adversely impact our revenues and overall financial performance.
Product revenue increased by $37.9 million during the nine months ended March 31, 2019 compared to the nine months ended March 31, 2019, primarily due to growth in commodity products and aggregated purchasing of certain products.
Cost of Revenue
Supply Chain Services segment cost of revenue increased by $26.5 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019 primarily due to an increase in cost of product revenue due to growth in direct sourcing sales revenue partially offset by a reduction in cost of sales as a result of initiatives to reduce costs. We expect our cost of product revenue to increase to the extent we are able to sell additional direct-sourced medical products to new and existing members. Depending on the underlying product sales mix, increases in product revenues could reduce our gross profit as a percentage of our net revenues.
Operating Expenses
Supply Chain Services segment operating expenses increased by $14.1 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. The increase was primarily due to an increase in selling, general and administrative expenses of $12.9 million largely due to increased acquisition and disposition related expenses and expenses associated with certain strategic initiatives, including the Acurity and Nexera asset acquisition and the Medpricer acquisition, as well as an increase of $1.2 million in amortization of purchased intangible assets.
Segment Adjusted EBITDA
Supply Chain Services Segment Adjusted EBITDA increased by $40.9 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019, primarily due to growth in net administrative fees and product revenues.

54



Performance Services
The following table summarizes our results of operations and Non-GAAP Segment Adjusted EBITDA in the Performance Services segment for the periods presented (in thousands):
 
Three Months Ended March 31,
 
 
 
Nine Months Ended March 31,
 
 
Performance Services
2020
2019
Change
 
2020
2019
Change
Net revenue:
 
 
 
 
 
 
 
 
 
Other services and support
$
96,195

$
92,627

$
3,568

4%
 
$
262,490

$
273,214

$
(10,724
)
(4)%
Net revenue
96,195

92,627

3,568

4%
 
262,490

273,214

(10,724
)
(4)%
Cost of revenue:
 
 



 
 
 
 
 
Services
48,884

46,525

2,359

5%
 
143,687

132,963

10,724

8%
Cost of revenue
48,884

46,525

2,359

5%
 
143,687

132,963

10,724

8%
Gross profit
47,311

46,102

1,209

3%
 
118,803

140,251

(21,448
)
(15)%
Operating expenses:
 
 



 
 
 
 
 
Selling, general and administrative
37,586

34,232

3,354

10%
 
106,522

96,900

9,622

10%
Research and development
628

296

332

112%
 
1,797

924

873

94%
Amortization of purchased intangible assets
7,841

9,193

(1,352
)
(15)%
 
24,630

26,649

(2,019
)
(8)%
Operating expenses
46,055

43,721

2,334

5%
 
132,949

124,473

8,476

7%
Operating income (loss)
$
1,256

$
2,381

$
(1,125
)
(47)%
 
$
(14,146
)
$
15,778

$
(29,924
)
(190)%
Depreciation and amortization
23,109

18,784




 
67,232

54,559

 
 
Amortization of purchased intangible assets
7,841

9,193




 
24,630

26,649

 
 
Acquisition related expenses
2,416

2,676




 
7,059

3,437

 
 
Equity in net income of unconsolidated affiliates
11

167




 
173

380

 
 
Other expense
1

34




 
29

107

 
 
Non-GAAP Segment Adjusted EBITDA
$
34,634

$
33,235

$
1,399

4%
 
$
84,977

$
100,910

$
(15,933
)
(16)%
Comparison of the Three Months Ended March 31, 2020 to 2019
Net Revenue
Other services and support revenue in our Performance Services segment increased by $3.6 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase was primarily due to growth in technology license contracts as a result of a new enterprise license agreement and increased revenue incurred in the current year attributable to clinical decision support services. These increases were partially offset by the timing of certain consulting services and SaaS informatics contracts and lower revenue associated with our Hospital Improvement Innovation Network contract, which terminated on March 31, 2020. We expect our other services and support revenue to grow over the long-term to the extent we are able to expand our sales to existing members and additional members begin to utilize our integrated platform of products and services.
Cost of Revenue
Performance Services segment cost of revenue increased by $2.4 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to increased amortization of internally-developed software applications and higher salaries and benefits expense incurred in the current year attributable to an increase in expenses in clinical decision support services.
Operating Expenses
Performance Services segment operating expenses increased by $2.3 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase was primarily due to an increase in selling, general and administrative expenses of $3.4 million largely driven by an increase in expenses in clinical decision support services. The increase in operating expenses was partially offset by a decrease of $1.4 million in amortization of purchased intangible assets.

55



Segment Adjusted EBITDA
Performance Services Segment Adjusted EBITDA increased by $1.4 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to the aforementioned increase in revenue partially offset by an increase in expenses incurred in clinical decision support services in the current year.
Comparison of the Nine Months Ended March 31, 2020 to 2019
Net Revenue
Other services and support revenue in our Performance Services segment decreased by $10.7 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. The decrease was primarily due to the timing of certain contracts in supply chain and enterprise value and applied sciences and lower revenue associated with our Hospital Improvement Innovation Network contract. These decreases were partially offset by growth in technology license contracts as a result of a new enterprise license agreement and increased revenue incurred in the current year attributable to clinical decision support services. We expect our other services and support revenue to grow over the long-term to the extent we are able to expand our sales to existing members and additional members begin to utilize our integrated platform of products and services.
Cost of Revenue
Performance Services segment cost of revenue increased by $10.7 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019, primarily due to increased amortization of internally-developed software applications and higher salaries and benefits expense incurred in the current year attributable to an increase in expenses in clinical decision support services.
Operating Expenses
Performance Services segment operating expenses increased by $8.5 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. The increase was primarily due to an increase in selling, general and administrative expenses of $9.6 million largely due to expenses incurred in the current year attributable to clinical decision support services as well as expenses attributable to ongoing strategic investments. These increases were partially offset by decreased bad debt expense due to a hospital bankruptcy in the prior year. This increase was partially offset by a decrease of $2.0 million in amortization of purchased intangibles.
Segment Adjusted EBITDA
Performance Services Segment Adjusted EBITDA decreased by $15.9 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019, primarily due to the aforementioned decrease in revenue, an increase in expenses incurred in the current year attributable to clinical decision support services as well as expenses attributable to ongoing strategic investments partially offset by decreased bad debt expense.

56



Corporate
The following table summarizes corporate expenses and Non-GAAP Adjusted EBITDA for the periods presented (in thousands):
 
Three Months Ended March 31,
 
 
 
Nine Months Ended March 31,
 
 
Corporate
2020
2019
Change
 
2020
2019
Change
Operating expenses:
 
 
 
 
 
 
 
 
 
Selling, general and administrative
$
32,191

$
43,036

$
(10,845
)
(25)%
 
$
89,610

$
116,983

$
(27,373
)
(23)%
Research and development



nm
 
5

4

1

nm
Operating expenses
32,191

43,036

(10,845
)
(25)%
 
89,615

116,987

(27,372
)
(23)%
Operating loss
$
(32,191
)
$
(43,036
)
$
10,845

(25)%
 
$
(89,615
)
$
(116,987
)
$
27,372

(23)%
Depreciation and amortization
1,897

2,776




 
6,184

8,203

 
 
Stock-based compensation
7,668

6,737




 
19,358

20,650

 
 
Remeasurement of tax receivable agreement liabilities
(902
)




 
(24,584
)

 
 
Deferred compensation plan income (expense)
(5,476
)
3,974




 
(2,484
)
1,076

 
 
Other income
1,047

225




 
3,633

1,196

 
 
Non-GAAP Adjusted EBITDA
$
(27,957
)
$
(29,324
)
$
1,367

(5)%
 
$
(87,508
)
$
(85,862
)
$
(1,646
)
2%
Comparison of the Three Months Ended March 31, 2020 to 2019
Operating Expenses
Corporate operating expenses decreased by $10.8 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to a decrease in deferred compensation plan expense and a decrease in North Carolina franchise taxes.
Non-GAAP Adjusted EBITDA
Non-GAAP Adjusted EBITDA increased by $1.4 million from during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to a decrease in North Carolina franchise taxes.
Comparison of the Nine Months Ended March 31, 2020 to 2019
Operating Expenses
Corporate operating expenses decreased by $27.4 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019, primarily due to the remeasurement of the TRA in the current period, a decrease in stock-based compensation expense due to anticipated lower achievement of certain performance targets relative to the prior year and a decrease in deferred compensation plan expense.
Non-GAAP Adjusted EBITDA
Non-GAAP Adjusted EBITDA decreased by $1.6 million during the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019, primarily related to an increase in technology expenses driven by software subscriptions associated with newly acquired businesses.
Off-Balance Sheet Arrangements
As of March 31, 2020, we did not have any off-balance sheet arrangements.
Liquidity and Capital Resources
Our principal source of cash has historically been cash provided by operating activities. From time to time we have used, and expect to use in the future, borrowings under our Credit Facility as a source of liquidity. Our primary cash requirements involve operating expenses, working capital fluctuations, revenue share obligations, tax payments, capital expenditures, discretionary cash settlement of Class B common unit exchanges under the Exchange Agreement, repurchases of Class A common stock pursuant to

57



stock repurchase programs in place from time to time, acquisitions and related business investments, and other general corporate activities. Our capital expenditures typically consist of internally-developed software costs, software purchases, and computer hardware purchases.
As of March 31, 2020 and June 30, 2019, we had cash and cash equivalents totaling $241.7 million and $141.1 million, respectively. As of March 31, 2020 and June 30, 2019, there were $250.0 million and $25.0 million of outstanding borrowings under the Credit Facility, respectively. During the nine months ended March 31, 2020, the Company borrowed $375.0 million and repaid $150.0 million of borrowings under the Credit Facility, which was used to fund the Acurity and Nexera asset acquisition as well as the Medpricer acquisition, share repurchases under our current stock repurchase program, and for other general corporate purposes. On April 27, 2020, the Company repaid $150.0 million of outstanding borrowings under the Credit Facility.
We expect cash generated from operations and borrowings under our Credit Facility to provide us with adequate liquidity to fund our anticipated working capital requirements, revenue share obligations, tax payments, capital expenditures, discretionary cash settlement of Class B common unit exchanges under the Exchange Agreement, and repurchases of Class A common stock pursuant to stock repurchase programs in place from time to time. Our capital requirements depend on numerous factors, including funding requirements for our product and service development and commercialization efforts, our information technology requirements, and the amount of cash generated by our operations. We believe that we have adequate capital resources at our disposal to fund currently anticipated capital expenditures, business growth and expansion, and current and projected debt service requirements. However, strategic growth initiatives will likely require the use of one or a combination of various forms of capital resources including available cash on hand, cash generated from operations, borrowings under our Credit Facility, and other long-term debt and, potentially, proceeds from the issuance of additional equity or debt securities.
Discussion of Cash Flows for the Nine Months Ended March 31, 2020 and 2019
A summary of net cash flows follows (in thousands):
 
Nine Months Ended March 31,
 
2020
2019
Net cash provided by (used in):
 
 
Operating activities
$
248,082

$
356,634

Investing activities
(171,954
)
(132,174
)
Financing activities
15,213

(250,625
)
Operating activities from discontinued operations
9,338

11,502

Investing activities from discontinued operations

(211
)
Net increase (decrease) in cash and cash equivalents
$
100,679

$
(14,874
)
Net cash provided by operating activities decreased by $108.6 million for the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. The decrease in cash provided by operating activities was primarily due to the prepaid contract administrative fee share of $92.1 million for one-time rebates paid by Acurity, Inc. to certain of its then members, as agreed to by Acurity, Inc. prior to entering into the Purchase Agreement. These payments were excluded from the purchase price of the Acurity and Nexera asset acquisition and capitalized on our Condensed Consolidated Balance Sheets. In addition, the decrease in cash provided by operating activities was due to changes in our working capital primarily driven by prepayments for commodity products, in response to increased demand due to COVID-19, an increase in acquisition and disposition related expenses associated with certain strategic initiatives and lower profitability in our Performance Services segment. These decreases were partially offset by growth in net administrative fees revenue in our Supply Chain Services segment and a decrease in operating expenses primarily due to the remeasurement of the TRA in the current period.
Net cash used in investing activities increased by $39.6 million for the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. The increase in cash used in investing activities was primarily due to an increase of $45.5 million in cash paid for business acquisitions in the current year compared to cash paid for business acquisitions in the prior year. This increase was partially offset by cash received of $3.6 million from the liquidation of property and equipment in connection with our exit from specialty pharmacy operations during the current year.
Net cash used in financing activities changed by $265.8 million for the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019. The change in net cash used in financing activities was primarily due to an increase of $175.0 million in net borrowings under the Credit Facility and a decrease of $98.7 million in repurchases of Class A common stock under the stock repurchase program in the current year. These changes were partially offset by an increase in payments of the non-interest bearing notes payable to our departed member owners

58



Net cash provided by operating activities attributable to discontinued operations decreased by $2.2 million for the nine months ended March 31, 2020, compared to the nine months ended March 31, 2019 primarily due to payments on liabilities that were outstanding as of June 30, 2019.
Discussion of Non-GAAP Free Cash Flow for the Nine Months Ended March 31, 2020 and 2019
We define Non-GAAP Free Cash Flow as net cash provided by operating activities from continuing operations 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. A summary of Non-GAAP Free Cash Flow and reconciliation to net cash provided by operating activities for the periods presented follows (in thousands):
 
Nine Months Ended March 31,
 
2020
2019
Net cash provided by operating activities from continuing operations (a)
$
340,228

$
356,634

Purchases of property and equipment
(69,326
)
(69,906
)
Distributions to limited partners of Premier LP
(39,590
)
(44,746
)
Payments to limited partners of Premier LP related to tax receivable agreements
(17,425
)
(17,975
)
Non-GAAP Free Cash Flow
$
213,887

$
224,007

(a)
Net cash provided by operating activities from continuing operations excludes the impact of the prepaid contract administrative fee share for one-time rebates to certain Acurity, Inc. members, as agreed to by Acurity, Inc. prior to entering into the Purchase Agreement, which was excluded from the purchase price of the Acurity and Nexera asset acquisition.
Non-GAAP Free Cash Flow decreased by $10.1 million for the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019, primarily due to a decrease of $16.4 million in net cash provided by operating activities from continuing operations, partially offset by a decrease of $5.2 million in distributions to limited partners of Premier LP.
See "Our Use of Non-GAAP Financial Measures" above for additional information regarding our use of Non-GAAP Free Cash Flow.
Contractual Obligations
Notes Payable
At March 31, 2020, we had commitments of $9.6 million for obligations under notes payable which represented obligations to departed member owners. Notes payable to departed member owners generally have stated maturities of five years from the date of issuance and are non-interest bearing. See Note 9 - Debt to the accompanying condensed consolidated financial statements for more information.
Credit Facility
Premier LP, along with its consolidated subsidiaries, PSCI and PHSI, as Co-Borrowers, Premier GP and certain domestic subsidiaries of Premier GP, as guarantors, entered into an unsecured Credit Facility, dated as of November 9, 2018. The Credit Facility has a maturity date of November 9, 2023, subject to up to two one-year extensions at the request of the Co-Borrowers and approval of a majority of the lenders under the Credit Facility. The Credit Facility provides for borrowings of up to $1.0 billion with (i) a $50.0 million sub-facility for standby letters of credit and (ii) a $100.0 million sub-facility for swingline loans. The Credit Facility also provides that Co-Borrowers may from time to time (i) incur incremental term loans and (ii) request an increase in the revolving commitments under the Credit Facility, together up to an aggregate of $350.0 million, subject to the approval of the lenders providing such term loans or revolving commitment increase. The Credit Facility includes an unconditional and irrevocable guaranty of all obligations under the Credit Facility by Premier GP, certain domestic subsidiaries of Premier GP and future guarantors, if any. Premier, Inc. is not a guarantor under the Credit Facility.
At our 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 Net Leverage Ratio (as defined in the Credit Facility))). Base Rate Loans bear interest at the Base Rate (defined as the highest of the prime rate announced by the administrative agent, the federal funds effective rate plus 0.50%, the one-month LIBOR plus 1.0% and 0.0%) plus the Applicable Rate. The Applicable Rate ranges from 1.000% to 1.500% for Eurodollar Loans and 0.000% to 0.500% for Base Rate Loans. In the event that LIBOR is no longer available, the Credit Facility states that interest will be calculated based upon rates offered to leading banks for comparable loans by leading banks in the London interbank market. At March 31, 2020, the interest rate for one-month Eurodollar

59



Loans was 1.993% and the interest rate for Base Rate Loans was 3.250%. The Co-Borrowers are required to pay a commitment fee ranging from 0.100% to 0.200% per annum on the actual daily unused amount of commitments under the Credit Facility. At March 31, 2020, the commitment fee was 0.100%.
The Credit Facility contains customary representations and warranties as well as customary affirmative and negative covenants, including, among others, limitations on liens, indebtedness, fundamental changes, dispositions, restricted payments and investments. Under the terms of the Credit Facility, Premier GP's consolidated total net leverage ratio (as defined in the Credit Facility) may not exceed 3.75 to 1.00 for four consecutive quarters, provided that, in connection with any acquisition for which the aggregate consideration exceeds $250.0 million, the maximum consolidated total net leverage ratio may increase to 4.25 to 1.00 for the four consecutive fiscal quarters beginning with the quarter in which such acquisition is completed. In addition, Premier GP must maintain a minimum consolidated interest coverage ratio (as defined in the Credit Facility) of 2.50 to 1.00 at the end of every fiscal quarter. Premier GP was in compliance with all such covenants at March 31, 2020.
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 $75.0 million, bankruptcy and other insolvency events, ERISA-related liabilities and judgment defaults in excess of $50.0 million, and the occurrence of a change of control (as defined in the Credit Facility). If any event of default occurs and is continuing, the administrative agent under the Credit Facility may, with the consent, or shall, at the request of a majority of the lenders under the Credit Facility, terminate the commitments and declare all of the amounts owed under the Credit Facility to be immediately due and payable. The Company may prepay amounts outstanding under the Credit Facility without premium or penalty provided that Co-Borrowers compensate the lenders for losses and expenses incurred as a result of the prepayment of any Eurodollar Loan, as defined in the Credit Facility.
Proceeds from borrowings under the Credit Facility may generally be used to finance ongoing working capital requirements, including permitted acquisitions, discretionary cash settlements of Class B unit exchanges under the Exchange Agreement, repurchases of Class A common stock pursuant to stock repurchase programs, and other general corporate activities. The Company had $250.0 million outstanding borrowings under the Credit Facility at March 31, 2020 with $750.0 million of available borrowing capacity after reductions for outstanding borrowings and outstanding letters of credit. On April 27, 2020, the Company repaid $150.0 million of outstanding borrowings under the Credit Facility.
The above summary does not purport to be complete, and is subject to, and qualified in its entirety by reference to, the complete text of the Credit Facility, which is filed as Exhibit 10.24 to the 2019 Annual Report. See also Note 9 - Debt to the accompanying condensed consolidated financial statements.
Member-Owner TRA
Pursuant to the TRAs entered into with each of our member owners, we will pay member owners 85% of the tax savings, if any, in U.S. federal, foreign, state, and local income and franchise tax that we actually realize (or are deemed to realize, in the case of payments required to be made upon certain occurrences under such TRAs) in connection with the Section 754 election. The election results in adjustments to the tax basis of the assets of Premier LP upon member owner exchanges of Class B common units of Premier LP for Class A common stock of Premier, Inc., cash, or a combination of both. Tax savings are generated as a result of the increases in tax basis resulting from the initial sale of Class B common units, subsequent exchanges (pursuant to the Exchange Agreement), and payments under the TRA.
We had TRA liabilities of $294.9 million and $344.1 million at March 31, 2020 and June 30, 2019, respectively. The change in TRA liabilities was driven by $86.3 million attributable to member departures, $24.6 million in TRA remeasurements primarily due to the change in North Carolina state income tax law and $17.4 million in TRA payments during the nine months ended March 31, 2020. These decreases were partially offset by an increase of $79.0 million in connection with the quarterly member owner exchanges that occurred during the nine months ended March 31, 2020.
Stock Repurchase Program
On May 7, 2019, we announced that our Board of Directors authorized the repurchase of up to $300.0 million of our outstanding Class A common stock during fiscal year 2020 as a continuation of our balanced capital deployment strategy. As of March 31, 2020, we had purchased approximately 4.6 million shares of Class A common stock at an average price of $32.28 per share for a total purchase price of $150.0 million. The purchase authorization may be suspended, delayed, or discontinued at any time at the discretion of our Board of Directors. Repurchases are subject to compliance with applicable federal securities laws and our management may, at its discretion, suspend, delay, or discontinue repurchases at any time, based on market conditions, alternate uses of capital, or other factors. We do not currently expect to make additional purchases of our Class A common stock under the repurchase program during the remainder of fiscal year 2020.

60



Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market risk related primarily to the increase or decrease in the amount of any interest expense we must pay with respect to outstanding debt instruments. At March 31, 2020, we had $250.0 million outstanding borrowings under our Credit Facility. Committed loans may be in the form of Eurodollar Rate Loans or Base Rate Loans (as defined in the Credit Facility) at our option. Eurodollar Loans bear interest at the Eurodollar Rate (defined as the London Interbank Offer Rate, or LIBOR), plus the Applicable Rate (defined as a margin based on the Consolidated Total Net Leverage Ratio (as defined in the Credit Facility)). Base Rate Loans bear interest at the Base Rate (defined as the highest of the prime rate announced by the administrative agent, the federal funds effective rate plus 0.50%, the one-month LIBOR plus 1.0% and 0.0%) plus the Applicable Rate. The Applicable Rate ranges from 1.000% to 1.500% for Eurodollar Loans and 0.000% to 0.500% for Base Rate Loans. In the event that LIBOR is no longer available, the Credit Facility states that interest will be calculated based upon rates offered to leading banks for comparable loans by leading banks in the London interbank market using an alternative interest rate. At March 31, 2020, the interest rate for one-month Eurodollar Rate Loans was 1.993% and the interest rate for Base Rate Loans was 3.250%.
We invest our excess cash in a portfolio of individual cash equivalents. We do not currently hold, and have never held, any derivative financial instruments. We do not expect changes in interest rates to have a material impact on our results of operations or financial position. We plan to ensure the safety and preservation of our invested funds by limiting default, market, and investment risks. We plan to mitigate default risk by investing in low-risk securities.
Foreign Currency Risk
Substantially all of our financial transactions are conducted in U.S. dollars. We do not have significant foreign operations and, accordingly, do not believe we have market risk associated with foreign currencies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this Quarterly Report, we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2020.
Management's quarterly evaluation of disclosure controls and procedures did not include an assessment of and conclusion on the effectiveness of disclosure controls and procedures for Medpricer.com, Inc., and certain assets of each of Acurity, Inc. and Nexera, Inc., as each was acquired during the nine months ended March 31, 2020 and included in our condensed consolidated financial statements as of March 31, 2020 and for the period from the acquisition date through March 31, 2020. These acquisitions accounted for combined total assets and total net revenues of 8% and 1%, respectively, of the condensed consolidated financial statements as of and for the nine months ended March 31, 2020
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

61



PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We participate in businesses that are subject to substantial litigation from time to time. We are periodically involved in litigation, arising in the ordinary course of business or otherwise, which from time to time may include claims relating to contractual disputes, product liability, tort or personal injury, employment, antitrust, intellectual property or other commercial or regulatory matters. If current or future government regulations are interpreted or enforced in a manner adverse to us or our business, including without limitation those with respect to antitrust or healthcare laws, we may be subject to enforcement actions, penalties, damages and material limitations on our business.
Furthermore, as a public company, we may become subject to stockholder derivative or other similar litigation.
From time to time we have been named as a defendant in class action or other antitrust lawsuits brought by suppliers or purchasers of medical products. Typically, these lawsuits have alleged the existence of a conspiracy among manufacturers of competing products, distributors and/or operators of GPOs, including us, to deny the plaintiff access to a market for certain products to raise the prices for products and/or limit the plaintiff's choice of products to buy. We believe that we have at all times conducted our business affairs in an ethical and legally compliant manner and have successfully resolved all such actions. No assurance can be given that we will not be subjected to similar actions in the future or that any such existing or future matters will be resolved in a manner satisfactory to us or which will not harm our business, financial condition or results of operations.
Additional information relating to certain legal proceedings in which we are involved is included in Note 16 - Commitments and Contingencies to the accompanying condensed consolidated financial statements, which information is incorporated herein by reference.
Item 1A. Risk Factors
Except as noted below, there were no material changes to the risk factors disclosed in Item 1A. "Risk Factors" in the 2019 Annual Report.
Our financial condition and results of operations for fiscal year 2020 and beyond may be materially adversely affected by the ongoing coronavirus ("COVID-19") pandemic or other widespread public health epidemics
The outbreak of COVID-19 has evolved into a global pandemic. COVID-19 has spread throughout the world, including the United States, Europe and Asia. In addition to those who have been directly affected, millions more have been affected by government and voluntary efforts around the world to slow the spread of the pandemic through quarantines, travel restrictions, heightened border scrutiny and other measures. The full extent to which the COVID-19 pandemic will impact our business and operating results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the actions to contain it or treat its impact.
As a result of the COVID-19 pandemic and potential future pandemic outbreaks, we face significant risks including, but not limited to:
Changes in the demand for our products and services. We have experienced and may continue to experience demand uncertainty from both significant increases and decreases in demand as a result of COVID-19. There has been a significant increase in demand for personal protective equipment, drugs and other supplies directly related to treating and preventing the spread of COVID-19. However, either voluntarily or due to government orders or advisories, patients, hospitals and other medical facilities have deferred elective procedures and routine medical visits during the crisis which has created a significant decline in the demand for supplies and services not related to COVID-19. In addition, as a result of our members’ focus on managing COVID-19 and its impacts, we have experienced a decrease in demand for our consulting and other performance service engagements. Furthermore, many of our members' non-acute or non-healthcare facilities, such as education and hospitality businesses, are not currently operational and we may see a material reduction in product sales to those facilities.
Limited access to our member’s facilities impacting our ability to fulfill our contractual requirements. Our member hospitals have reduced or limited hospital access for non-patients, including our field team, consultants and other professionals, and travel restrictions have impacted our employees’ ability to travel to our member’s facilities. While we are able to offer support to members via phone, video conference and internet, a long-term continuation of these circumstances may negatively impact the ability of our employees to more effectively deliver existing or sell new products and services to our members and could affect our performance on our existing contracts.

62



Materials and personnel shortages and disruptions in supply chain, including manufacturing and shipping. The global supply chain has been significantly disrupted due to stay at home orders, border closings and rapidly escalating shipping costs. Borders closings and restrictions in response to COVID-19, particularly China and India, have impacted our access to products for our members. Staffing or personnel shortages due to shelter in place orders and quarantines have impacted and in the future may impact us and our members or suppliers. In addition, due to unprecedented demand during the COVID-19 pandemic, there are widespread shortages in certain product categories. As of mid-April 2020, we were tracking over 9,000 products in shortage and related closures of manufacturing facilities. In the food service line, COVID-19 related illnesses have impacted food processing suppliers and led to plant closures. If the supply chain for materials used in the products purchased by our members through our GPO or products contract manufactured through our direct sourcing business is adversely impacted by restrictions resulting from COVID-19, our supply chain may be disrupted. Failure of our suppliers, contract manufacturers, distributors, contractors and other business partners to meet their obligations to us, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties, may adversely impact our operations.
Requests for contract modifications, payment deferrals or exercises of force majeure clauses. We have and may continue to receive requests for contract modifications, payment waivers and deferrals, payment reductions or amended payment terms from our contract counterparties. We have and may continue to receive requests to delay service or payment on performance service contracts. In addition, we may receive requests from our suppliers requesting increases to their contracted prices. To date, we have declined price increase requests not allowed by contract terms and conditions, but there is no assurance such increases will not ultimately be implemented. In addition, several pharmacy suppliers have exercised force majeure clauses related to failure to supply clauses in their contracts with us because they are unable to obtain raw materials for manufacturing from India and China. The standard failure to supply language in our contracts contains financial penalties to suppliers if they are unable to supply products, which such suppliers may not be able to pay. In addition, we may not be able to source products from alternative suppliers on commercially reasonable terms, or at all.
Overall economic and capital markets decline. The impact of the COVID-19 pandemic could result in a prolonged recession or depression in the United States or globally that could harm the banking system, limit demand for all products and services and cause other seen and unforeseen events and circumstances, all of which could negatively impact us. The continued spread of COVID-19 has led to and could continue to lead to severe disruption and volatility in the United States and global capital markets, which could increase our cost of capital and adversely affect our ability to access the capital markets in the future. In addition, trading prices on the public stock market, including our Class A common stock, have been highly volatile as a result of the COVID-19 pandemic.
Managing the evolving regulatory environment. In response to COVID-19, federal, state and local governments are issuing new rules, regulations, orders and advisories on a regular basis. These government actions can impact us, our members and our suppliers.
The ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the United States and global economies, which are uncertain and cannot be predicted at this time. To the extent the COVID-19 pandemic adversely affects our business, results of operations, financial condition and cash flows, it may also heighten many of the other risks described in this section and in the "Risk Factors" section of our most recent Annual Report on Form 10-K. Despite our efforts to manage these impacts, their ultimate impact depends on factors beyond our knowledge or control, including the duration and severity of any outbreak and actions taken to contain its spread and mitigate its public health effects. The foregoing and other continued disruptions in our business as a result of COVID-19 could result in a material adverse effect on our business, results of operations, financial condition, prospects and the trading prices of our securities in the near-term and beyond 2020.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities
On May 7, 2019, we announced that our Board of Directors authorized the repurchase of up to $300.0 million of our outstanding Class A common stock during fiscal 2020 as a continuation of our balanced capital deployment strategy. Subject to compliance with applicable federal securities laws, repurchases were authorized to be made from time to time in open market transactions, privately negotiated transactions, or other transactions, including trades under a plan established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. All repurchases of our Class A common stock were recorded as treasury shares. The following table summarizes information relating to repurchases of our Class A common stock for the quarter ended March 31, 2020.
Period
Total Number of Shares Purchased
Average Price Paid per Share ($) (1)
Total Number of Shares Purchased as Part of Publicly Announced Program
Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (in millions)(2)
January 1 through January 31, 2020
42,516

$
35.89

42,516

$
150

February 1 through February 29, 2020



150

March 1 through March 31, 2020



150

Total
42,516


42,516

$
150

(1)
Average price paid per share excludes fees and commissions.
(2)
From the stock repurchase program's inception through March 31, 2020, we purchased 4.6 million shares of Class A common stock at an average price of $32.28 per share for a total of $150.0 million.
We do not currently expect to make additional purchases of our Class A common stock under the repurchase program during the remainder of fiscal year 2020.



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Item 6. Exhibits
Exhibit No.
 
Description
2.1
 
2.1.1
 
10.1
 
31.1
 
31.2
 
32.1
 
32.2
 
101
 
Sections of the Premier, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language), submitted in the following files:
101.SCH
 
Inline XBRL Taxonomy Extension Schema Document.*
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document.*
104
 
The cover page from the Premier, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL (included in Exhibit 101).*
*    Filed herewith.
‡    Furnished herewith.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
PREMIER, INC.
 
 
 
 
 
Date:
May 5, 2020
 
By:
 
/s/ Craig S. McKasson
 
 
 
Name:
 
Craig S. McKasson
 
 
 
Title:
 
Chief Administrative and Financial Officer and Senior Vice President
 
 
 
 
 
Signing on behalf of the registrant and as principal financial officer and principal accounting officer

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