Premier, Inc. Reports Fiscal 2016 Second-Quarter Results

Premier, Inc. (NASDAQ: PINC) today reported financial results for the fiscal 2016 second quarter ended December 31, 2015.

Second-Quarter Highlights:

• Net revenue increased 17% to $291.7 million from the same period last year; Supply Chain Services segment revenue rose 13% and Performance Services segment revenue increased 27%.
• Adjusted EBITDA* increased 17% to $116.1 million from the same period last year.
• Adjusted fully distributed net income* increased 18% to $61.7 million, or $0.42 on a fully diluted per-share basis, from the same period a year ago. GAAP net income totaled $61.0 million, compared with $65.8 million in the prior year.

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

“Our second-quarter financial performance demonstrates the growing power of Premier’s integrated business model as our multiple growth drivers unite to provide comprehensive solutions to the many cost, quality, safety and population health challenges facing our healthcare providers,” said Susan DeVore, president and chief executive officer. “The businesses within Supply Chain Services and Performance Services delivered significant year-over-year growth in the quarter, driving a 17% increase in both consolidated net revenue and adjusted EBITDA. Based on this performance and our current outlook and assumptions for the remainder of the fiscal year, we are raising fiscal 2016 full-year revenue and earnings guidance.”

“Longer term, we remain well positioned to continue to lead the transformation of healthcare delivery in this country through co-innovation with our member health systems across the continuum of care,” DeVore said. “We believe our comprehensive, cloud-based, provider-centric technology platform, coupled with industry leading advisory services across the areas of cost, quality, safety and population health, provide solutions unmatched in the marketplace.”

Results of Operations for the Second Quarter of Fiscal 2016

For the fiscal second quarter ended December 31, 2015, Premier generated net revenue of $291.7 million, an increase of 17% from net revenue of $249.4 million for the same period a year ago.

Adjusted EBITDA of $116.1 million increased 17% from $98.8 million for the same period last year. The increase was driven by revenue growth in both of the company’s business segments, contributions from recent acquisitions in the current year and effective management of operating expenses.

Adjusted fully distributed net income for the fiscal second quarter rose 18% to $61.7 million, or $0.42 per fully diluted share, from $52.1 million, or $0.36 per fully diluted share, 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 exchange their Class B common units and associated Class B common shares for Class A common shares, and reflects income taxes at an estimated effective rate of 40% on 100% of pretax income.

GAAP net income for the fiscal second quarter totaled $61.0 million, compared with $65.8 million for the same quarter a year ago. The decline is primarily attributable to higher income tax expense resulting from the recording of a valuation allowance against a portion of the company’s deferred tax assets. Fiscal 2016 and 2015 second-quarter net income attributable to stockholders required non-cash adjustments of $(65.6) million and $(42.3) million, respectively, to reflect the change 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 changes in stock price, the company reported a GAAP net loss attributable to stockholders of $1.31 per share, compared with a GAAP net loss attributable to stockholders of $0.93 per share a year ago. (See income statement in the tables section of this press release.)

Segment Results

Supply Chain Services

For the fiscal second quarter ended December 31, 2015, the Supply Chain Services segment generated net revenue of $203.1 million, an increase of 13% from $179.6 million a year ago. Revenue growth was driven by strong performance of both the company’s group purchasing organization (GPO) and products businesses. GPO net administrative fees revenue of $120.7 million increased 7% from a year ago, resulting from increased contract penetration of existing members, continued recruitment and conversion of members and positive utilization trends, although at a more normalized level. Product sales of $81.3 million increased 22% from a year ago due to the ongoing growth in member utilization of the company’s direct sourcing and specialty pharmacy businesses.

Supply Chain Services segment adjusted EBITDA of $108.0 million for the fiscal 2016 second quarter increased 11% from $97.3 million for the same period a year ago. The increase primarily reflects growth in net administrative fees revenue and the effective management of operating expenses.

Performance Services

For the fiscal second quarter ended December 31, 2015, the Performance Services segment generated net revenue of $88.6 million, an increase of 27% from $69.8 million for the same quarter last year. Revenue growth was driven by PremierConnect SaaS-based (software-as-a-service) subscriptions and renewals and the company’s advisory services as well as contributions from the recent acquisitions of CECity.Com, Inc., Healthcare Insights, LLC and InflowHealth LLC.

Performance Services segment adjusted EBITDA was $34.5 million for the fiscal 2016 second quarter, an increase of 49% from $23.2 million for the same quarter last year. The growth in adjusted EBITDA reflects increased revenue from PremierConnect SaaS-based subscriptions and licenses, advisory services, contributions from recent acquisitions and effective management of operating expenses.

Results of Operations for the Six Months Ended December 31, 2015

For the six months ended December 31, 2015, Premier generated net revenue of $562.5 million, an increase of 17%, from net revenue of $478.8 million for the same period a year ago. Adjusted EBITDA of $221.1 million increased 17% from $189.3 million for the same period last year. Adjusted fully distributed net income for the six months rose 18% to $117.8 million, or $0.81 per fully diluted share, from $99.9 million, or $0.69 per fully diluted share, for the same period a year ago.

GAAP Net income for the six-month period totaled $113.2 million, compared with $130.7 million for the same period a year ago. Fiscal 2016 and 2015 six-month net income attributable to stockholders required non-cash adjustments of $401.2 million and $(424.9) 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, the company reported GAAP net income attributable to stockholders of $0.60 per fully diluted share, compared with a GAAP net loss attributable to stockholders of $11.96 per share a year ago. (See income statement in the tables section of this press release.)

Supply Chain Services segment net revenue for the first six months of fiscal 2016 increased 14% to $399.6 million from $349.9 million a year earlier. Supply Chain Services segment adjusted EBITDA increased 12%, to $210.9 million from $188.6 million for the prior year.

Performance Services segment net revenue for the first six months of fiscal 2016 increased 26% to $162.9 million from $128.8 million a year earlier, while segment adjusted EBITDA increased 43% to $59.4 million from $41.6 million.

Cash Flows and Liquidity

Cash provided by operating activities was $138.8 million for the six-month period ended December 31, 2015, compared with $153.7 million for the same period a year ago. At December 31, 2015, the company’s cash, cash equivalents and short- and long-term marketable securities totaled $251.6 million, compared with $469.5 million at December 31, 2014, and consisted of $157.4 million in cash and cash equivalents and $94.2 million in marketable securities with maturities ranging from three months to five years. The reduction in cash, cash equivalents and short- and long-term marketable securities, as compared to last year, was due to the company’s acquisitions of CECity.Com, Inc., Healthcare Insights, LLC and InflowHealth LLC during the first half of fiscal 2016. Through the first six months of fiscal 2016, the company had capital expenditures of $38.9 million.

Free cash flow for the quarter ended December 31, 2015 was $71.3 million, compared with $67.1 million for the same period last year. The company continues to expect that 40% to 50% of adjusted EBITDA will convert to free cash flow for the full fiscal year. The company does expect variability in free cash flow in certain quarters as a result of the timing of certain payments. The company defines free cash flow as cash provided by operating activities less distributions to limited partners, purchases of property and equipment, and payments to limited partners under tax receivable agreements (see free cash flow reconciliation to net cash provided by operating activities in the tables section of this press release).

At December 31, 2015, the company had an outstanding balance of $100.0 million on its five-year $750.0 million revolving credit facility. During the fiscal first quarter, the company borrowed $150.0 million to partially fund the acquisition of CECity.Com, Inc. which closed on August 20, 2015, and repaid $50.0 million in the fiscal second quarter.

Fiscal 2016 Outlook and Guidance

Based on fiscal second-quarter results and management’s current expectations and assumptions for the remainder of fiscal 2016, the company is raising full fiscal-year 2016 financial guidance as set forth below.

The company’s updated fiscal full-year 2016 outlook is based on stronger-than-anticipated Supply Chain Services revenue and stronger-than-expected adjusted EBITDA performance in both Supply Chain Services and Performance Services segments in the first half of the fiscal year. Key assumptions include: expectations of continued stable growth in the Supply Chain Services segment through the continued (but more normalized) growth of the company’s direct sourcing and specialty pharmacy businesses; the addition and contract conversion ramp-up of new GPO members; deeper penetration of existing members’ supply spend; increased product and services sales in the Performance Services segment, including sales and use of SaaS-based products; increased member participation in performance improvement collaboratives and increased demand for advisory services; the contribution from the Centers for Medicare & Medicaid Services one-year contract award related to the Partnership for Patients initiative that began in October 2015; and the continuation of historically high retention and renewal rates of Premier’s GPO and SaaS informatics products.

Guidance assumptions also include the integration and realization of anticipated financial and operational contributions from the CECity, Healthcare Insights and InflowHealth acquisitions previously announced but do not contemplate the impact of any potential future acquisitions. Premier expects fiscal 2016 capital expenditures of approximately $83 million and a consolidated EBITDA margin approximating 38%, as a result of our intentional business mix shift related to our growth strategy and the impact of the recent acquisitions.

The statements in this “Outlook and Guidance” discussion are “forward-looking statements.” For additional information regarding the use and limitations of such statements, see “Forward-Looking Statements” below and the “Risk Factors” section of the company’s Form 10-K for the fiscal year ended June 30, 2015.

Conference Call

Premier management will host a conference call and live audio webcast on Monday, February 8, 2016, 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. To expedite access, participants should preregister at this website, at which time the participant will be sent a confirmation email including dial-in numbers and a unique PIN for those who wish to participate by phone. A replay of the conference call will be available on the investor relations page of Premier’s website.

About Premier, Inc.

Premier, Inc. (NASDAQ: PINC) is a leading healthcare improvement company, uniting an alliance of approximately 3,600 U.S. hospitals and 120,000 other providers to transform healthcare. With integrated data and analytics, collaboratives, supply chain solutions, and advisory and other services, Premier enables better care and outcomes at a lower cost. Premier, a Malcolm Baldrige National Quality Award recipient, 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, Foursquare and Premier’s blog for more information about the company.

Use and Definition of Non-GAAP 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.

In addition, adjusted fully distributed net income eliminates 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 (which exchanges are a member owner’s cumulative right, but not obligation, which began on October 31, 2014, and occur each quarter thereafter, and are limited to one-seventh of the member owner’s initial allocation of Class B common units) 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 PHSI (i) excluding income tax expense, (ii) excluding the effect of non-recurring and non-cash items, (iii) 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 (iv) reflecting an adjustment for income tax expense on non-GAAP pro forma fully distributed net income before income taxes at the company’s estimated effective income tax rate.

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 disposal of assets. Segment adjusted EBITDA is defined as the segment's net revenue less operating expenses directly attributable to the segment, excluding depreciation and amortization, amortization of purchased intangible assets, merger and acquisition related expenses and non-recurring or non-cash items, and including equity in net income of unconsolidated affiliates. Operating expenses directly attributable to the segment include expenses associated with sales and marketing, general and administrative and product development activities specific to the operation of each segment. General and administrative corporate expenses that are not specific to a particular segment are not included in the calculation of segment adjusted EBITDA. 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 cash provided by operating activities less distributions to limited partners and purchases of property and equipment and payments to limited partners under tax receivable agreements. 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 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, investments in related or complimentary businesses and debt reduction.

Forward-Looking Statements

Statements made in this release that are not statements of historical or current facts, such as those under the heading “Fiscal 2016 Outlook and Guidance” 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” sections of Premier’s Form 10-K for the fiscal year ended June 30, 2015 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, including as a result of new information or future events that occur after that date.

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