Premier Inc. Reports Fiscal 2018 Third-Quarter Results

Premier Inc. PINC today reported financial results for the fiscal 2018 third quarter ended March 31, 2018.

Q3 2018 Highlights:

• Net revenue increased 12% to $425.3 million from the same period last year; Supply Chain Services segment revenue rose 16% to $330.7 million and Performance Services segment revenue was unchanged at $94.6 million.

• Net income rose 7% to $76.5 million from the same period a year ago. After non-cash adjustments to reflect the change in the redemption value of limited partners' Class B common unit ownership at the end of each period, diluted earnings per share reflected a loss of $1.93 compared with a loss of $1.60 the prior year.
• Non-GAAP adjusted EBITDA* of $142.2 million increased 4% from the same period last year.
• Non-GAAP adjusted fully distributed net income* increased 24% to $90.6 million, representing $0.67 per diluted share, an increase of 29% over $0.52 per diluted share from a year ago.
• Fiscal 2018 guidance has been updated to reflect expectations of increased consolidated net revenue, increased Supply Chain Services revenue, a decrease in the Performance Services revenue range and tightening of the previous ranges for consolidated non-GAAP adjusted EBITDA and non-GAAP adjusted fully distributed earnings per share.
• On May 4, 2018, Premier's board of directors approved the repurchase of up to $250 million of the company's Class A common stock during fiscal 2019.

* Descriptions of non-GAAP adjusted EBITDA, adjusted fully distributed net income and other non-GAAP financial measures are provided in "Use and Definition of Non-GAAP Financial Measures," and reconciliations to GAAP financial measures are provided in the tables at the end of this release.

"Our fiscal third-quarter performance reflects continuing consolidated revenue and profitability growth, as well as strong cash flow generation, with non-GAAP free cash flow approximating 82% of non-GAAP adjusted EBITDA for the quarter," said Susan DeVore, president and chief executive officer. "Revenue growth was driven by our Supply Chain Services segment, where our products revenue exceeded management expectations and net administrative fees revenue performed in line with expectations. Our Performance Services segment results reflect the continuation of a challenging market environment in addition to slower-than-anticipated growth in our seasonal ambulatory regulatory reporting business.

"Looking forward to the fourth quarter, in Supply Chain Services we continue to anticipate steady net administrative fees revenue growth and stronger-than-previously-expected revenue growth in our products business," DeVore said. "In Performance Services, we believe lingering regulatory uncertainty continues to impact health system decision making processes and is impacting us more than previously anticipated, delaying some buying decisions and projects across our technology and consulting services businesses. We continue to believe Premier remains uniquely well positioned to help our nation's health systems reduce cost and improve quality and safety while continuing their journey to value-based care in this dynamically evolving healthcare environment.

"As part of our ongoing effort to deliver value to stockholders, I am pleased to report that our board of directors has approved the repurchase of $250 million of Class A common stock during fiscal 2019, following our previous $200 million Class A common stock repurchase program, which we completed in the third quarter," DeVore said. "Going forward, we will continue to focus on long-term stockholder value as we consider the most appropriate approaches for use of capital to optimize the performance of our existing businesses, explore new growth opportunities within our evolving strategy and generate return for stockholders."

Results of Operations for the Third Quarter of Fiscal 2018

For the fiscal third-quarter ended March 31, 2018, Premier generated net revenue of $425.3 million, an increase of 12% from net revenue of $379.8 million for the same period a year ago.

Net income for the fiscal third-quarter increased 7% to $76.5 million from $71.3 million for the same period a year ago. In accordance with GAAP, fiscal 2018 and 2017 third-quarter net income attributable to stockholders included non-cash adjustments of $(127.0) million and $(100.5) million, respectively, to reflect the change in the redemption value of limited partners' Class B common unit ownership at the end of each period. These non-cash adjustments result primarily from changes in the number of Class B common shares and the company's stock price between periods and do not reflect results of the company's business operations. After these non-cash adjustments, the company reported a net loss attributable to stockholders of $103.5 million, compared with net loss of $80.6 million for the same period a year ago. The third-quarter net loss per diluted share of $1.93 compared with a net loss of $1.60 for the same period a year ago. See "Calculation of GAAP Earnings per Share" in the income statement section of this press release.

Fiscal third-quarter non-GAAP adjusted EBITDA of $142.2 million increased 4% from $136.7 million for the same period the prior year. The growth was driven by an increase in net administrative fees revenue primarily resulting from the Innovatix and Essensa businesses, partially offset by $5.1 million in severance costs related to the personnel adjustments that included a reduction in force that occurred in February.

Non-GAAP adjusted fully distributed net income for the fiscal third quarter increased to $90.6 million from $73.0 million for the same period a year ago. Adjusted fully distributed earnings per share increased 29% to $0.67 from $0.52 for the same period a year ago. Adjusted fully distributed earnings per share is a non-GAAP financial measure that represents net income, adjusted for non-recurring and non-cash items, attributable to all stockholders as if all Class B stockholders exchanged their Class B common units and associated Class B common shares for Class A common shares.

Segment Results

Supply Chain Services
For the fiscal third-quarter ended March 31, 2018, the Supply Chain Services segment generated net revenue of $330.7 million, an increase of 16% from $285.2 million a year ago. The revenue increase was driven by growth in the company's group purchasing organization (GPO) and products businesses. GPO net administrative fees revenue of $161.6 million increased 12% from a year ago, driven by contributions from the Innovatix and Essensa businesses and further contract penetration of our existing members. Innovatix and Essensa were acquired in December 2016, however, during the fiscal 2017 third-quarter the businesses contributed $11.6 million in net administrative fees revenue related to cash received post-acquisition for member purchases that occurred prior to acquisition. As a result, these cash collections were unable to be recognized as GAAP revenue under purchase accounting rules. Legacy year-over-year net administrative fees revenue increased 5% in the third quarter from a year ago, supported by improved patient utilization trends. Product revenues of $166.2 million increased 20% from $138.1 million a year ago, attributable to growth from both the integrated pharmacy and direct sourcing businesses.

Supply Chain Services segment non-GAAP adjusted EBITDA of $135.3 million for the fiscal 2018 third-quarter increased 6% from $127.9 million for the same period a year ago. The increase primarily reflects net administrative fees revenue growth.

Performance Services
For the fiscal third-quarter ended March 31, 2018, the Performance Services segment generated net revenue of $94.6 million, unchanged from the same quarter last year. The technology services business experienced growth in the areas of applied sciences and cost management solutions. These were primarily offset by a decrease in ambulatory regulatory reporting revenue resulting from a larger-than-expected reduction in participation of smaller physician groups that were exempted from reporting requirements this year. Consulting services revenue was relatively flat when compared to the same period a year ago, due to lower-than-expected revenue based partly on timing of revenue recognition related to performance-based engagements and to delayed health system decision making, which management believes is related to continuing regulatory uncertainty impacting the marketplace.

Performance Services segment non-GAAP adjusted EBITDA of $36.7 million for the fiscal 2018 third-quarter increased slightly from $36.5 million for the same quarter last year, reflecting the impact of severance costs related to the personnel adjustments that included a reduction in force that occurred in February.

Results of Operations for the Nine Months Ended March 31, 2018

For the nine months ended March 31, 2018, Premier generated net revenue of $1.23 billion, a 17% increase from net revenue of $1.05 billion for the same period a year ago.

Net income for the nine-month period totaled $156.9 million, compared with $375.6 million for the same period a year ago. Fiscal 2018 and 2017 nine-month net income attributable to stockholders required non-cash adjustments of $511.3 million and $296.6 million, respectively, to reflect changes in redemption value of the limited partners' Class B common unit ownership at the end of each period. These non-cash adjustments result from changes in the company's stock price between periods and do not reflect results of the company's business operations. After these non-cash adjustments based on the changes in stock price, and after a one-time re-measurement of deferred taxes resulting from the Tax Cuts and Jobs Act, which negatively impacted net income, the company reported a net loss attributable to stockholders of $0.84 per diluted share, compared with a net income attributable to stockholders of $2.22 per diluted share a year ago. (See income statement in the tables section of this press release.)

For the nine months ended March 31, 2018, non-GAAP adjusted EBITDA of $395.0 million increased 7% from $369.5 million for the same period last year. Non-GAAP adjusted fully distributed net income for the nine months rose 13% to $222.3 million from $197.1 million a year ago, representing $1.61 per diluted share, a 16% increase from $1.39.

Supply Chain Services segment net revenue for the nine months ended March 31, 2018 increased 21% to $961.4 million from $791.6 million a year earlier. Supply Chain Services segment adjusted EBITDA increased 8% to $392.9 million from $364.2 million for the prior year.

Performance Services segment net revenue for the nine months ended March 31, 2018 increased 2% to $265.9 million from $260.0 million a year earlier, while segment adjusted EBITDA decreased 2% to $85.9 million from $87.4 million.

Cash Flows and Liquidity

Cash provided by operating activities was $369.7 million for the nine-month period ended March 31, 2018, compared with $274.2 million for the same period last year. The increase in cash flow from operations primarily results from the increase in net administrative fees revenue and decreased working capital needs. At March 31, 2018, the company's cash and cash equivalents totaled $149.4 million, compared with $156.7 million at June 30, 2017. At March 31, 2018, the company had an outstanding balance of $200.0 million on its five-year $750.0 million revolving credit facility.

As of March 31, 2018, the company had completed the $200.0 million Class A common stock repurchase plan announced on Oct. 31, 2017, which authorized shares to be repurchased through June 30, 2018. This resulted in the aggregate repurchase of approximately 6.4 million shares of Class A common stock at an average price of $31.16 per share. The stock repurchase plan is expected to impact non-GAAP adjusted fully distributed earnings per share by approximately $0.05 per share for the full fiscal year.

Non-GAAP free cash flow for the nine months ended March 31, 2018 was $238.4 million compared with $155.0 million for the same period a year ago. The increase was primarily driven by the same factors driving the growth in cash flow from operations. (See free cash flow definition in "Use and Definitions of Non-GAAP Financial Measures," and reconciliation to net cash provided by operating activities is provided in the tables section of this press release).

Fiscal 2018 Outlook and Guidance

Based on results for the nine months ended March 31, 2018 and management's current expectations for the remainder of fiscal 2018, and the realization of previously disclosed underlying assumptions, the company has narrowed and adjusted guidance as follows.

• The company is raising its consolidated revenue range to $1.612 billion-to-$1.649 billion, with the anticipated increase in Supply Chain Services revenue expected to offset the downward revision in Performance Services revenue.
• The guidance range for Supply Chain Services revenue has been increased to $1.259 billion-to-$1.289 billion, driven by raised expectations of 18% to 22% growth in products revenue, and reaffirmed expectations of 13% to 17% growth in net administrative fees revenue, comprised of mid-single digit growth in the company's legacy GPO business augmented by contributions from Innovatix and Essensa.
• The Performance Services revenue guidance range has been reduced to $353.0 million-to-$360.0 million, due to lack of growth in the ambulatory regulatory reporting business in the fiscal-third quarter, and the ongoing slow-growth environment and regulatory uncertainty impacting the current fiscal year. The new range projects expected year-over-year growth of 0% to 2%.
• The Non-GAAP adjusted EBITDA range has been narrowed to a range of $532.0 million to $537.0 million, reflecting projected year-over-year growth of 6% to 7%.
• The guidance range for non-GAAP adjusted fully distributed earnings per share has been narrowed to a range of $2.24 to $2.28, indicating year-over-year growth expectations of 19% to 21%.

Fiscal 2019 Stock Repurchase Program Authorization

On May 4, 2018, the company's board of directors approved the repurchase of up to $250 million of the company's Class A common stock during fiscal 2019 through open market purchases or privately negotiated transactions. In order to initiate the repurchase program, Premier expects to execute the necessary agreements and documentation with one or more financial institutions during the next open trading window under the company's insider trading policy, scheduled to occur shortly after the fiscal 2018 third-quarter earnings call on May 7, 2018. There can be no assurance as to when or whether the repurchase program will be ultimately initiated or regarding number of shares of Class A common stock, if any, purchased under the program. The company will provide additional details regarding the repurchase program, if adopted and initiated, in future filings with the SEC.

Conference Call

Premier management will host a conference call and live audio webcast on Monday, May 7, 2018, at 5:00 p.m. ET, to discuss the company's financial results. The conference call can be accessed through a link provided on the investor relations page on Premier's website at investors.premierinc.com. Those wanting to participate by phone may do so by dialing 844.296.7719 and providing the operator with conference ID number: 3477807. International callers should dial 574.990.1041 and provide the same passcode. The company encourages callers to dial in at least five minutes before the start of the call to register. The archived webcast will be accessible on Premier's investor relations page for at least 90 days following the webcast.

About Premier Inc.

Premier Inc. PINC is a leading healthcare improvement company, uniting an alliance of approximately 3,900 U.S. hospitals and health systems and approximately 150,000 other providers and organizations to transform healthcare. With integrated data and analytics, collaboratives, supply chain solutions, and consulting and other services, Premier enables better care and outcomes at a lower cost. Premier plays a critical role in the rapidly evolving healthcare industry, collaborating with members to co-develop long-term innovations that reinvent and improve the way care is delivered to patients nationwide. Headquartered in Charlotte, N.C., Premier is passionate about transforming American healthcare. Please visit Premier's news and investor sites on www.premierinc.com; as well as Twitter, Facebook, LinkedIn, YouTube, Instagram and Premier's blog for more information about the company.

Use and Definitions of Non-GAAP Financial Measures

Premier uses EBITDA, adjusted EBITDA, segment adjusted EBITDA, adjusted fully distributed net income, adjusted fully distributed earnings per share, and free cash flow to facilitate a comparison of the company's operating performance on a consistent basis from period to period and to provide measures that, when viewed in combination with its results prepared in accordance with GAAP, allow for a more complete understanding of factors and trends affecting the company's business than GAAP measures alone. The company believes adjusted EBITDA and segment adjusted EBITDA assist its board of directors, management and investors in comparing the company's operating performance on a consistent basis from period to period by removing the impact of the company's asset base (primarily depreciation and amortization) and items outside the control of management (taxes), as well as other non-cash (impairment of intangible assets and purchase accounting adjustments) and non-recurring items, from operating results. Non-recurring items are income or expenses or other items that have not been earned or incurred within the prior two years and are not expected to recur within the next two years. Such items include certain strategic and financial restructuring expenses.

In addition, adjusted fully distributed net income and adjusted fully distributed earnings per share eliminate the variability of non-controlling interest as a result of member owner exchanges of Class B common stock and corresponding Class B units into shares of Class A common stock and other potentially dilutive equity transactions which are outside of management's control. Adjusted fully distributed net income is defined as net income attributable to Premier (i) excluding income tax expense, (ii) excluding the impact of adjustment of redeemable limited partners' capital to redemption amount, (iii) excluding the effect of non-recurring and non-cash items, (iv) assuming the exchange of all the Class B common units for shares of Class A common stock, which results in the elimination of non-controlling interest in Premier LP, and (v) reflecting an adjustment for income tax expense on non-GAAP fully distributed net income before income taxes at the company's 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. These measures 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 and non-recurring items, and eliminate the variability of non-controlling interest that results from member owner exchanges of Class B common units into shares of Class A common stock.

EBITDA is defined as net income before interest and investment income, net, income tax expense, depreciation and amortization and amortization of purchased intangible assets. Adjusted EBITDA is defined 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. Non-recurring items include certain strategic and financial restructuring expenses. Non-operating items include gain or loss on the disposal of assets. Segment adjusted EBITDA is defined 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. Adjusted EBITDA is a supplemental financial measure used by the company and by external users of the company's financial statements.

Management considers adjusted EBITDA an indicator of the operational strength and performance of the company's business. Adjusted EBITDA allows management to assess performance without regard to financing methods and capital structure and without the impact of other matters that management does not consider indicative of the operating performance of the business. Segment adjusted EBITDA is the primary earnings measure used by management to evaluate the performance of the company's business segments.

Free cash flow is defined as net cash provided by operating activities less distributions and tax receivable agreement payments to limited partners and purchases of property and equipment. Free cash flow does not represent discretionary cash available for spending as it excludes certain contractual obligations such as debt repayments. Management believes free cash flow is an important measure because it represents the cash that the company generates 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. Free cash flow is important because it allows the company to enhance stockholder value through acquisitions, partnerships, joint ventures, investments in related or complimentary businesses and/or debt reduction.

Readers are urged to review the reconciliation of these non-GAAP financial measures included at the end of this release. To properly and prudently evaluate our business, readers are encouraged to review the financial tables included at the end of this release. Readers should not rely on any single financial measure to evaluate the company's business. In addition, the non-GAAP financial measures used in this release are susceptible to varying calculations and may differ from, and may therefore not be comparable to, similarly titled measures used by other companies.

Forward-Looking Statements

Statements made in this release that are not statements of historical or current facts, such as those related to expected financial performance, growth trends and market uncertainty in our Supply Chain and Performance Services business segments and their respective business units, the impact and length of the lower utilization and patient volume trends and regulatory uncertainty and our ability to manage through these issues, expected financial contributions from our acquired businesses, the statements related to fiscal 2018 outlook and guidance and the assumptions underlying such guidance, and Premier's plans with respect to the repurchase program, including the possibility that the repurchase program is not adopted, the expected size of the repurchase program, or the possible suspension of or discontinuance of the repurchase program once adopted 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 the actual results, performance or achievements of Premier to be materially different from historical results or from any future results or projections expressed or implied by such forward-looking statements. Accordingly, readers should not place undue reliance on any forward looking statements. In addition to statements that explicitly describe such risks and uncertainties, readers are urged to consider statements in the 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 Premier's beliefs and expectations as to future events and trends affecting its business and are necessarily subject to uncertainties, many of which are outside Premier's control. More information on potential factors that could affect Premier's financial results is included from time to time in the "Cautionary Note Regarding Forward-Looking Statements," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of Premier's periodic and current filings with the SEC, including those discussed under the "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" section of Premier's Form 10-K for the year ended June 30, 2017, as well as the Form 10-Q for the quarter ended March 31, 2018, expected to be filed with the SEC shortly after the date of this release, and also made available on Premier's website at investors.premierinc.com. Forward-looking statements speak only as of the date they are made, and Premier undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events that occur after that date, or otherwise.

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