The next discussion must be read along side our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report. This discussion is designed to offer the reader with information that may assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, and the first aspects that accounted for those changes, in addition to how certain accounting principles affect our condensed consolidated financial statements. As well as, the next discussion includes certain forward-looking statements. For a discussion of vital aspects, including the continuing development of our business and other aspects which could cause actual results to differ materially from the outcomes referred to within the forward-looking statements, see the discussions under "Risk Aspects" and "Cautionary Note Regarding Forward-Looking Statements" herein and in our Annual Report on Form 10-K for the fiscal 12 months endedJune 30, 2022 (the "2022 Annual Report"), filed with theSecurities and Exchange Commission ("SEC").
Business Overview
Our Business
Premier, Inc. ("Premier", the "Company", "we", or "our") is a number one healthcare improvement company, uniting an alliance ofU.S. hospitals, health systems and other providers and organizations to rework healthcare. We partner with hospitals, health systems, physicians, employers, product suppliers, service providers, and other healthcare providers and organizations with the common goal of improving and innovating within the clinical, financial and operational areas of their businesses to satisfy the demands of a rapidly evolving healthcare industry. We deliver value through a comprehensive technology-enabled platform that provides critical supply chain services, clinical, financial, operational and value-based care software-as-a-service ("SaaS") in addition to clinical and enterprise analytics licenses, consulting services, performance improvement collaborative programs, third-party administrator services, access to our centers of excellence program, and digital invoicing and payment processes for healthcare providers and suppliers. We also proceed to expand our capabilities to more fully address and coordinate care improvement and standardization within the employer, payor and life sciences markets. We also provide services to other businesses including food service, schools and universities.
We generated net revenue, net income and Adjusted EBITDA (a financial measure
not determined in accordance with generally accepted accounting principles
(“Non-GAAP”)) for the periods presented as follows (in hundreds):
Three Months Ended September 30,
2022 2021
Net revenue $ 313,873 $ 365,147
Net income 42,959 121,306
Non-GAAP Adjusted EBITDA 109,380 121,703
See "Our Use of Non-GAAP Financial Measures" and "Results of Operations" below
for a discussion of our use of Non-GAAP Adjusted EBITDA and a reconciliation of
net income to Non-GAAP Adjusted EBITDA.
Our Business Segments
Our business model and solutions are designed to offer our members and other
customers access to scale efficiencies while specializing in optimization of
information resources and price containment, provide actionable intelligence
derived from anonymized data in our data warehouse provided by our members,
mitigate the danger of innovation, and disseminate best
24 -------------------------------------------------------------------------------- practices that may help our member organizations and other customers reach their transformation to higher quality and cheaper healthcare. We deliver our integrated platform of solutions that address the areas of clinical intelligence, margin improvement and value-based care through two business segments: Supply Chain Services and Performance Services.
Segment net revenue for the three months ended
as follows (in hundreds):
Three Months Ended September 30, Change % of Net Revenue
Net revenue: 2022 2021 2022 2021 2022 2021
Supply Chain Services $ 219,693 $ 276,816 $ (57,123) (21) % 70 % 76 %
Performance Services 94,189 88,331 5,858 7 % 30 % 24 %
Segment net revenue $ 313,882 $ 365,147 $ (51,265) (14) % 100 % 100 %
Our Supply Chain Services segment includes certainly one of the most important healthcare group
purchasing organization ("GPO") programs in the US , serving acute,
non-acute and non-healthcare sites and providing supply chain co-management,
purchased services and direct sourcing activities. We generate revenue in our
Supply Chain Services segment from administrative fees received from suppliers
based on the overall dollar volume of products and services purchased by our members
and other customers, service fees from supply chain co-management, subscription
fees from purchased services and thru product sales in reference to our
direct sourcing activities.
Our Performance Services segment consists of three sub-brands: PINC AITM, our
technology and services platform with offerings that help optimize performance
in three principal areas - clinical intelligence, margin improvement and value-based
care - using advanced analytics to discover improvement opportunities,
consulting and managed services for clinical and operational design, and
workflow solutions to hardwire sustainable change within the provider, life sciences
and payor markets; Contigo Health®, our direct-to-employer business which
provides third-party administrator services and management of health profit
programs that allow employers to contract directly with healthcare providers as
well as partners with healthcare providers to offer employers access to a
specialized care network through Contigo Health's centers of excellence program;
and RemitraTM, our digital invoicing and payables business which provides
financial support services to healthcare providers and suppliers. Each sub-brand
serves different markets but are all united in our vision to optimize provider
performance and speed up industry innovation for higher, smarter healthcare.
Market and Industry Trends and Outlook
We expect that certain trends and economic or industrywide aspects will proceed to affect our business, in each the short- and long-term. We now 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 Aspects" herein and within the 2022 Annual Report. Trends within theU.S. healthcare market affect our revenues and costs within 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 laws, particularly the potential for the Inexpensive Care Act ("ACA") to be materially altered byCongress , through regulatory motion by government agencies, or within the event of a change of party control inCongress . Actions related to the ACA may very well be disruptive forPremier and our customers, impacting revenue, reporting requirements, payment reforms, shift in care to the alternate site market and increased data availability and transparency. To satisfy the demands of this environment, there can be increased give attention to scale and price containment and healthcare providers might want to measure and report on and bear financial risk for outcomes. Over the long-term, we imagine these trends will end in increased demand for our Supply Chain Services and Performance Services solutions within the areas of cost management, quality and safety, and value-based care; nonetheless, there are uncertainties and risks that will affect the actual impact of those anticipated trends, expected demand for our services or related assumptions on our business. See "Cautionary Note Regarding Forward-Looking Statements" for more information.
COVID-19 Pandemic, Variants Thereof, Recurrences or Similar Pandemics
Along with the trends within theU.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 general economy, our sales, operations and provide chains, our members and other customers, workforce and suppliers, and countries. In consequence of the COVID-19 pandemic, variants thereof, and potential future pandemic outbreaks, we face significant risks including, but not limited to: 25 -------------------------------------------------------------------------------- •Overall economic and capital markets decline. The impact of the COVID-19 pandemic and variants thereof and associated supply chain disruptions could end in a protracted recession or depression inthe US or globally that might harm the banking system, limit demand for a lot of services and cause other foreseen and unexpected events and circumstances, all of which could negatively impact us. The continued spread of COVID-19 and variants thereof has led to and will proceed to steer to severe disruption and volatility inthe US and global capital markets, which could increase our cost of capital and adversely affect our ability to access the capital markets in the longer term. As well as, trading prices on the general public stock market, in addition to that of our Class A typical stock, have been highly volatile as a results of the COVID-19 pandemic. •Changes within the demand for our services. We experienced and will proceed to experience demand uncertainty from each material increases and decreases in demand and pricing for our services because of this of the COVID-19 pandemic. There was a cloth increase in demand for private protective equipment ("PPE"), drugs and other supplies directly related to treating and stopping the spread of COVID-19 and variants thereof during fiscal 2020 and 2021. Within the second half of fiscal 2022 through the present period of fiscal 2023, demand and pricing for PPE, drugs and other supplies decreased leading to a decline in revenue relative to the previous two fiscal years. Patients, hospitals and other medical facilities proceed to defer some elective procedures and routine medical visits because of ongoing and continuing uncertainty from COVID-19 outbreaks or variants thereof, or because of this of restrictive government orders or advisories. While demand for a lot of supplies and services not related to COVID-19 may proceed to say no in fiscal 2023, rolling shortages of products and medicines needed for routine procedures, corresponding to contrast media and flush syringes, could have an effect on demand for hospital services and the financial conditions of providers, particularly those forced to obtain such products through resellers. •Increased labor costs. Labor shortages and the resulting increases to the price of labor are an ongoing challenge to the healthcare providers we serve. Limited availability of staff resources and rolling staff shortages may proceed to impair the power of existing staff to administer product and repair procurement. While our non-acute and non-healthcare businesses, corresponding to education and hospitality customers, experienced a rebound in fiscal 2022, the recovery could also be hampered by future COVID-19 outbreaks or variants, that are highly uncertain and can't be accurately predicted. •Limited access to our members' facilities that impacts our ability to meet our contractual requirements. While a few of our hospital customers have allowed increased access to their facilities by non-patients, including our field teams, consultants and other professionals, there are various that also should not permitting onsite access outside of their staff. Hospital imposed travel restrictions are also impacting some customers' ability to take part in face-to-face events with us, corresponding to committee meetings and conferences, which limits our ability to construct on customer relationships. The long-term continuation, or any future reoccurrence of those circumstances, may negatively impact the power of our employees to effectively deliver existing or sell latest services to our members and will negatively affect the performance of our existing contracts. •Materials and personnel shortages and disruptions in supply chain, including manufacturing and shipping. The worldwide supply chain has been materially disrupted because of personnel shortages related to ongoing COVID-19 rates of infection, stay-at-home orders, rapidly escalating shipping costs, raw material availability, material logistical delays because of port congestion and general labor constraints. Stay-at-home orders and other restrictions in response to the COVID-19 pandemic, particularly inChina , have impacted and proceed to affect our access to products for our members. Staffing or personnel shortages because of stay-at-home orders and quarantines, or other public health measures, have impacted and, in the longer term, may impact us and our members, other customers or suppliers. As well as, because of unprecedented demand through the COVID-19 pandemic, there have been widespread shortages in certain product categories. If the provision chain for materials utilized in the products purchased by our members through our GPO or products contract manufactured through our direct sourcing business proceed to be adversely impacted by the COVID-19 pandemic, our supply chain may proceed to be disrupted. Failure of our suppliers, contract manufacturers, distributors, contractors and other business partners to satisfy their obligations to our members, other customers or to us, or material disruptions of their ability to achieve this because of their very own financial or operational difficulties, may adversely impact our operations. •Requests for contract modifications, payment deferrals or exercises of force majeure clauses. We now have and will proceed to receive requests for contract modifications, payment waivers and deferrals, payment reductions or amended payment terms from our contract counterparties. We now have and will proceed to receive requests to delay service or payment on performance service contracts. As well as, we've got and will proceed to receive requests from our suppliers for increases to their contracted prices, and such requests could also be implemented in the longer term. Inflation in such contract prices may impact member utilization of items and services available through our GPO contracts, which could adversely impact our net administrative fees revenue and direct sourcing revenue. In addition, several pharmacy 26 -------------------------------------------------------------------------------- suppliers have exercised force majeure clauses related to failure to provide clauses of their contracts with us because they're unable to acquire raw materials for manufacturing fromIndia andChina . The usual failure to provide language in our contracts accommodates financial penalties to suppliers in the event that they are unable to provide products, which such suppliers may not give you the chance to pay. In addition, we may not give you the chance to source products from alternative suppliers on commercially reasonable terms, or in any respect. •Managing the evolving regulatory environment. In response to the COVID-19 pandemic and variants thereof, federal, state and native governments are issuing latest rules, regulations, orders and advisories and changing reimbursement eligibility rules regularly. These government actions can impact us and our members, other customers and suppliers. The last word impact of COVID-19, variants thereof, recurrences, or similar pandemics on our business, results of operations, financial condition and money flows relies on future developments, including the duration of any pandemic and the related length of its impact onthe US and global economies, that are uncertain and can't be predicted presently. The impact of the COVID-19 pandemic, variants thereof, recurrences, or future similar pandemics may exacerbate lots of the other risks described in Item 1A. "Risk Aspects" section of the 2022 Annual Report. Despite our efforts to administer these impacts, their ultimate impact is dependent upon aspects 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 because of this of the COVID-19 pandemic, variants thereof, recurrences or similar pandemics could end in a material adversarial effect on our business, results of operations, financial condition, money flows, prospects and the trading prices of our securities within the near-term and thru fiscal 2023 and beyond.
Russia-Ukraine War
InFebruary 2022 ,Russia invadedUkraine which resulted in sanctions, export controls and other measures imposed againstRussia ,Belarus and specific areas insideUkraine . Because the war endures, it continues to affect the worldwide economy and financial markets, in addition to exacerbating ongoing economic challenges, including issues corresponding to rising inflation, energy costs and global supply-chain disruption. We proceed to observe the impacts of theRussia -Ukraine war on macroeconomic conditions and prepare for any implications that the war can have on member demand, our suppliers' ability to deliver products, cybersecurity risks and our liquidity and access to capital. See Item 1A. "Risk Aspects" in our 2022 Annual Report.
Critical Accounting Policies and Estimates
Check with Note 1 - Organization and Note 2 - Significant Accounting Policies to the accompanying condensed consolidated financial statements for more information related to our use of estimates within the preparation of monetary statements in addition to information related to material changes in our significant accounting policies that were included in our 2022 Annual Report.
Latest Accounting Standards
Latest accounting standards that we've got recently adopted in addition to those who 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 net administrative fees revenue, software licenses,
other services and support revenue, and products revenue.
Supply Chain Services
Supply Chain Services revenue is comprised of:
•net administrative fees revenue which consists of gross administrative fees
received from suppliers, reduced by the quantity of revenue share paid to members;
•software licenses, other services and support revenue which consist of supply
chain co-management and purchased services revenue; and
•products revenue which consists of inventory sales.
27 -------------------------------------------------------------------------------- The success of our Supply Chain Services revenue streams is influenced by our ability to barter favorable contracts with suppliers and members, the number of members that utilize our GPO supplier contracts and the amount of their purchases, the impact of changes within the defined allowable reimbursement amounts determined by Medicare, Medicaid and other managed care plans and the variety of members and other customers that purchase products through our direct sourcing activities and the impact of competitive pricing. Check with "Impact of Inflation" inside "Liquidity and Capital Resources" section of Item 2 - Management's Discussion and Evaluation of Financial Condition and Results of Operations for discussion of inflation and its impact on our Supply Chain Services' businesses.
Performance Services
Performance Services revenue is comprised of the next software licenses,
other services and support revenue:
•healthcare information technology license and SaaS-based clinical, margin improvement and value-based care products subscriptions, license fees, skilled fees for consulting services, performance improvement collaborative and other service subscriptions and insurance services management fees and commissions from endorsed business insurance programs under our PINC AI technology and services platform;
•third-party administrator fees and costs from the centers of excellence program
for
•fees from healthcare product suppliers and repair providers for Remitra.
Our Performance Services growth will rely on the expansion of our PINC AI technology and services platform to latest and existing members and other customers, renewal of existing subscriptions to our SaaS and licensed software products, our ability to sell enterprise analytics licenses to latest and existing customers at rates sufficient to offset the lack of recurring SaaS-based revenue because of the conversion to an enterprise analytics license, expansion into latest markets and expansion of ourContigo Health and Remitra businesses to latest and existing members. Cost of Revenue
Cost of revenue consists of cost of services and software licenses revenue and
cost of products revenue.
Cost of services and software licenses revenue includes expenses related to employees, consisting of compensation and advantages, and outdoors consultants who directly provide services related to revenue-generating activities, including consulting services to members and other customers, third-party administrator services and implementation services related to our SaaS and licensed software products together with associated amortization of certain capitalized contract costs. Amortization of contract costs represent amounts which were capitalized and reflect the incremental costs of obtaining and fulfilling a contract including costs related to implementing SaaS informatics tools. Cost of services and software licenses revenue also includes expenses related to hosting services, related data center capability costs, third-party product license expenses and amortization of the price of internally developed software applications. Cost of products revenue consists of purchase and shipment costs for direct sourced medical and commodity products and is influenced by the manufacturing and transportation costs related to direct sourced medical and commodity products. Check with "Impact of Inflation" inside "Liquidity and Capital Resources" section of Item 2 - Management's Discussion and Evaluation of Financial Condition and Results of Operations for discussion of inflation and its impact on our Supply Chain Services' businesses.
Operating Expenses
Operating expenses includes selling, general and administrative (“SG&A”)
expenses, research and development expenses and amortization of purchased
intangible assets.
SG&A expenses are directly related to selling and administrative functions and support of revenue-generating activities including expenses to support and maintain our software-related services. SG&A expenses primarily consist of compensation- and benefits-related costs; travel-related expenses; business development expenses, including costs for business acquisition opportunities; non-recurring strategic initiative and financial restructuring-related expenses, indirect costs corresponding to insurance, skilled fees and other general overhead expenses, and amortization of certain contract costs. Amortization of contract costs represent amounts, including sales commissions, which were capitalized and reflect the incremental costs of obtaining and fulfilling a contract. Research and development expenses consist of employee-related compensation and profit expenses and third-party consulting fees of technology professionals, net of capitalized labor, incurred to develop our software-related products and services prior to reaching technological feasibility.
Amortization of purchased intangible assets includes the amortization of all
identified intangible assets.
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Other Income, Net
Other income, net, includes equity in net income of unconsolidated affiliates that's generated from our equity method investments. Our equity method investments primarily consist of our interests inFFF Enterprises, Inc. ("FFF"),Exela Holdings, Inc. ("Exela"), andPrestige Ameritech Ltd. ("Prestige") (see Note 3 - Investments). Other income, net, also includes the fiscal 12 months 2022 gain recognized because of the termination of the FFF Put Right and derecognition of the associated liability (see Note 4 - Fair Value Measurements), 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 assets or held-to-maturity investments.
Income Tax Expense
See Note 11 – Income Taxes for discussion of income tax expense.
Net Income Attributable to Non-Controlling Interest
We recognize net income attributable to non-controlling interest for non-Premier ownership in our consolidated subsidiaries which hold interest in our equity method investments. AtSeptember 30, 2022 , we recognized net income attributable to non-controlling interest for the 74%, 79% and 85% interest held inPRAM Holdings, LLC ("PRAM"),DePre Holdings, LLC ("DePre") andExPre Holdings, LLC ("ExPre"), respectively, by member health systems or their affiliates. PRAM, DePre and ExPre are investments we made as a part of our long-term supply chain resiliency program to advertise domestic and geographically diverse manufacturing and to assist ensure a strong and resilient supply chain for essential medical products. As ofSeptember 30, 2022 , we owned 93% of the equity interest inContigo Health and recognized net income attributable to non-controlling interest for the 7% of equity held by certain customers ofContigo Health .
Our Use of Non-GAAP Financial Measures
The opposite key business metrics we consider are EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Net Income, Adjusted Earnings per Share and Free Money Flow, that 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 or expense, 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 which have not been earned or incurred inside the prior two years and should not expected to recur inside the subsequent two years. Such items include certain strategic initiative and financial restructuring-related 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 because 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 related to sales and marketing, general and administrative, and product development activities specific to the operation of every segment. General and administrative corporate expenses that should not specific to a specific segment should not included within 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 Net Income as net income attributable toPremier (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 or non-cash items, including certain strategic initiative and financial restructuring-related expenses, (v) assuming, for periods prior to ourAugust 2020 Restructuring, the exchange of all of the Class B common units for shares of Class A typical stock, which leads to the elimination of non-controlling interest inPremier LP and (vi) reflecting an adjustment for income tax expense on Non-GAAP net income before income taxes at our estimated annual effective income tax rate, adjusted for unusual or infrequent items. We define Adjusted Earnings per Share as Adjusted Net Income divided by diluted weighted average shares (see Note 9 - Earnings Per Share). We define Free Money Flow as net money provided by operating activities from continuing operations less (i) early termination payments to certain former limited partners that elected to execute a Unit Exchange and Tax Receivable Acceleration Agreement ("Unit Exchange Agreement") in reference to ourAugust 2020 Restructuring and (ii) purchases of property and equipment. Free Money Flow doesn't represent discretionary money available for spending because it excludes certain contractual obligations corresponding to debt repayments. 29 -------------------------------------------------------------------------------- Adjusted EBITDA and Free Money Flow are supplemental financial measures utilized 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 Money Flow measures allow us to evaluate our performance without regard to financing methods and capital structure and without the impact of other matters that we don't consider indicative of the operating performance of our business. More specifically, Segment Adjusted EBITDA is the first earnings measure we use to guage the performance of our business segments. We use Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Net Income and Adjusted 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 things and trends affecting our business. We imagine 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 (corresponding to impairment of intangible assets, purchase accounting adjustments and stock-based compensation), non-recurring items (corresponding to strategic initiative and financial restructuring-related expenses) and income and expense that has been classified as discontinued operations from our operating results. We imagine Adjusted Net Income and Adjusted 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 (corresponding to impairment of intangible assets, purchase accounting adjustments and stock-based compensation) and non-recurring items (corresponding to strategic initiative and financial restructuring-related expenses), and eliminate the variability of non-controlling interest that primarily resulted from member owner exchanges of Class B common units for shares of Class A typical stock. We imagine Free Money Flow is a crucial measure since it represents the money that we generate after payments to certain former limited partners that elected to execute a Unit Exchange Agreement in reference to ourAugust 2020 Restructuring and capital investment to keep up existing services and ongoing business operations, in addition to development of recent and upgraded services to support future growth. Our Free Money Flow allows us to boost stockholder value through acquisitions, partnerships, joint ventures, investments in related businesses and debt reduction. Despite the importance of those 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 Net Income, Adjusted Earnings per Share and Free Money Flow should not measurements of monetary performance under GAAP, may have limitations as analytical tools and shouldn't be considered in isolation from, or as an alternative choice to, net income, net money provided by operating activities, or another measure of our performance derived in accordance with GAAP. A few of the limitations of the EBITDA, Adjusted EBITDA and Segment Adjusted EBITDA measures include that they don't reflect: our capital expenditures or our future requirements for capital expenditures or contractual commitments; changes in, or money requirements for, our working capital needs; the interest expense or the money requirements to service interest or principal payments under our Credit Facility; income tax payments we're required to make; and any money requirements for replacements of assets being depreciated or amortized. In addition, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA and Free Money Flow should not measures of liquidity under GAAP, or otherwise, and should not alternatives to money flows from operating activities. A few of the limitations of the Adjusted Net Income and Adjusted Earnings per Share measures are that they don't reflect income tax expense or income tax payments we're required to make. As well as, Adjusted Net Income and Adjusted Earnings per Share should not measures of profitability under GAAP. We also urge you to review the reconciliation of those Non-GAAP financial measures included elsewhere on 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 on this Quarterly Report and to not depend on any single financial measure to guage our business. As well as, since the EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Net Income, Adjusted Earnings per Share and Free Money Flow measures are vulnerable to various calculations, such Non-GAAP financial measures may differ from, and will due to this fact not be comparable to, similarly titled measures utilized by other corporations. Non-recurring and non-cash items excluded in our calculation of Adjusted EBITDA, Segment Adjusted EBITDA and Adjusted Net Income consist of stock-based compensation, acquisition- and disposition-related expenses, strategic initiative and financial restructuring-related expenses, gain or loss on FFF Put and Call Rights, income and expense that has been classified as discontinued operations and other reconciling items. More details about certain of the more significant items follows below. 30 --------------------------------------------------------------------------------
Income tax expense on adjusted income
Adjusted Net Income, a Non-GAAP financial measure as defined below in "Our Use of Non-GAAP Financial Measures", is calculated net of taxes based on our estimated annual effective tax rate for federal and state income tax, adjusted for unusual or infrequent items, as we're a consolidated group for tax purposes with all of our subsidiaries' activities included. The tax rate used to compute the Adjusted Net Income was 26% and 21% for the three months endedSeptember 30, 2022 and 2021, respectively. The 21% tax rate in fiscal 12 months 2022 was primarily because of the profit from the discharge of$32.9 million of valuation allowance of our deferred tax asset because of this of the Subsidiary Reorganization. Of the$32.9 million valuation allowance released in fiscal 12 months 2022,$17.6 million was included within the estimated annual effective tax rate calculation to the extent such carryforwards were projected to offset fiscal 12 months 2022 odd income. The remaining$15.3 million of valuation allowance released was included as a discrete item within the three months endedSeptember 30, 2021 .
Stock-based compensation
Along with non-cash worker stock-based compensation expense, this item includes non-cash stock purchase plan expense of$0.2 million for each the three months endedSeptember 30, 2022 and 2021 (see Note 10 - 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 advantages and financial advisor fees and legal fees related to disposition activities.
Strategic initiative and financial restructuring-related expenses
Strategic initiative and financial restructuring-related expenses include legal,
accounting and other expenses related to strategic initiative and financial
restructuring-related activities.
Gain on FFF Put and Call Rights
See Note 4 – Fair Value Measurements to the accompanying condensed consolidated
financial statements.
Other reconciling items
Other reconciling items include, but should not limited to, gains and losses on
disposal of long-lived assets and imputed interest on notes payable to former
limited partners.
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Results of Operations
The next table presents our results of operations for the periods presented
(in hundreds, except per share data):
Three Months Ended September 30,
2022 2021
Amount % of Net Revenue Amount % of Net Revenue
Net revenue:
Net administrative fees $ 150,006 48% $ 149,462 41%
Software licenses, other services and support 105,006 33% 97,255 27%
Services and software licenses 255,012 81% 246,717 68%
Products 58,861 19% 118,430 32%
Net revenue 313,873 100% 365,147 100%
Cost of revenue:
Services and software licenses 54,014 17% 43,809 12%
Products 57,874 18% 109,362 30%
Cost of revenue 111,888 36% 153,171 42%
Gross profit 201,985 64% 211,976 58%
Operating expenses 143,477 46% 139,697 38%
Operating income 58,508 19% 72,279 20%
Other income, net 3,220 1% 68,060 19%
Income before income taxes 61,728 20% 140,339 38%
Income tax expense 18,769 6% 19,033 5%
Net income 42,959 14% 121,306 33%
Net (income) loss attributable to non-controlling
interest (243) -% 698 -%
Net income attributable to stockholders $ 42,716 14% $ 122,004 33%
Earnings per share attributable to stockholders:
Basic $ 0.36 $ 0.99
Diluted $ 0.36 $ 0.97
For the next Non-GAAP financial measures and reconciliations of our
performance derived in accordance with GAAP to the Non-GAAP financial measures,
confer with "Our Use of Non-GAAP Financial Measures" for further information
regarding items excluded in our calculation of Adjusted EBITDA, Segment Adjusted
EBITDA, Non-GAAP Adjusted Net Income and Non-GAAP Adjusted Earnings Per Share.
The next table provides certain Non-GAAP financial measures for the periods
presented (in hundreds, except per share data).
Three Months Ended
2022 2021
Certain Non-GAAP Financial Data: Amount % of Net Revenue Amount % of Net Revenue
Adjusted EBITDA $ 109,380 35% $ 121,703 33%
Non-GAAP Adjusted Net Income 62,512 20% 79,141 22%
Non-GAAP Adjusted Earnings Per Share 0.52 nm 0.64 nm
nm = Not meaningful
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The next tables provide the reconciliation of net income to Adjusted EBITDA
and the reconciliation of income before income taxes to Segment Adjusted EBITDA
(in hundreds).
Three Months Ended
2022 2021 Net income $ 42,959$ 121,306 Interest expense, net 2,859 2,788 Income tax expense 18,769 19,033 Depreciation and amortization 23,439 20,596 Amortization of purchased intangible assets 10,452 10,889 EBITDA 98,478 174,612 Stock-based compensation 7,349 7,751 Acquisition- and disposition-related expenses 2,160 3,421
Strategic initiative and financial restructuring-related expenses
1,520 25 Gain on FFF Put and Call Rights - (64,110) Other reconciling items, net (a) (127) 4 Adjusted EBITDA $ 109,380$ 121,703 Income before income taxes $ 61,728$ 140,339 Equity in net income of unconsolidated affiliates (8,243) (7,058) Interest expense, net 2,859 2,788 Gain on FFF Put and Call Rights - (64,110) Other expense, net 2,164 320 Operating income 58,508 72,279 Depreciation and amortization 23,439 20,596 Amortization of purchased intangible assets 10,452 10,889 Stock-based compensation 7,349 7,751 Acquisition- and disposition-related expenses 2,160 3,421
Strategic initiative and financial restructuring-related expenses
1,520 25 Equity in net income of unconsolidated affiliates 8,243 7,058 Deferred compensation plan expense (2,370) (318) Other reconciling items, net (b) 79 2 Adjusted EBITDA $ 109,380$ 121,703 Three Months Ended September 30, 2022 2021 Segment Adjusted EBITDA: Supply Chain Services $ 121,194$ 129,269 Performance Services 19,368 23,715 Corporate (31,182) (31,281) Adjusted EBITDA $ 109,380$ 121,703
_________________________________
(a)Other reconciling items, net is primarily attributable to loss on disposal of
long-lived assets.
(b)Other reconciling items, net is attributable to other miscellaneous expenses.
33
--------------------------------------------------------------------------------
The next table provides the reconciliation of net income attributable to
stockholders to Non-GAAP Adjusted Net Income and the reconciliation of the
numerator and denominator for earnings per share attributable to stockholders to
Non-GAAP Adjusted Earnings per Share for the periods presented (in hundreds).
Three Months Ended September 30,
2022 2021
Net income attributable to stockholders $ 42,716 $ 122,004
Net income (loss) attributable to non-controlling interest 243 (698)
Income tax expense 18,769 19,033
Amortization of purchased intangible assets 10,452 10,889
Stock-based compensation 7,349 7,751
Acquisition- and disposition-related expenses 2,160 3,421
Strategic initiative and financial restructuring-related expenses 1,520
25 Gain on FFF Put and Call Rights - (64,110) Other reconciling items, net (a) 1,267 1,863 Non-GAAP adjusted income before income taxes 84,476 100,178 Income tax expense on adjusted income before income taxes (b) 21,964 21,037 Non-GAAP Adjusted Net Income $
62,512
Reconciliation of denominator for earnings per share attributable to stockholders to Non-GAAP Adjusted Earnings per Share Weighted Average: Basic weighted average shares outstanding 118,351 122,945 Dilutive securities 1,682 1,628 Weighted average shares outstanding - diluted 120,033 124,573
_________________________________
(a)Other reconciling items, net is primarily attributable to loss on disposal of
long-lived assets and imputed interest on notes payable to former limited
partners.
(b)Reflects income tax expense at an estimated effective income tax rate of 26% and 21% of non-GAAP adjusted net income before income taxes for the three months endedSeptember 30, 2022 and 2021, respectively.
The next table provides the reconciliation of earnings per share
attributable to stockholders to Non-GAAP Adjusted Earnings per Share for the
periods presented.
Three Months Ended
2022 2021
Earnings per share attributable to stockholders $ 0.36 $ 0.99
Net income (loss) attributable to non-controlling interest - (0.01)
Income tax expense 0.16 0.15
Amortization of purchased intangible assets 0.09 0.09
Stock-based compensation 0.06 0.06
Acquisition- and disposition-related expenses 0.02 0.03
Strategic initiative and financial restructuring-related expenses
0.01 - Gain on FFF Put and Call Rights - (0.52) Other reconciling items, net (a) 0.01 0.02 Impact of corporation taxes (b) (0.19) (0.17) Non-GAAP Adjusted Earnings Per Share $
0.52
_________________________________
(a)Other reconciling items, net is primarily attributable to loss on disposal of
long-lived assets and imputed interest on notes payable to former limited
partners.
(b)Reflects income tax expense at an estimated effective income tax rate of 26% and 21% of non-GAAP adjusted net income before income taxes for the three months endedSeptember 30, 2022 and 2021, respectively. 34 --------------------------------------------------------------------------------
Consolidated Results – Comparison of the Three Months Ended
to 2021
The variances in the fabric aspects contributing to the changes within the
consolidated results are discussed further in “Segment Results” below.
Net Revenue
Net revenue decreased by$51.3 million through the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 , because of decrease of$59.6 million in products revenue, partially offset by a rise of$7.8 million in software licenses, other services and support revenue.
Cost of Revenue
Cost of revenue decreased by$41.3 million through the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 , because of a decrease of$51.5 million in cost of products revenue, partially offset by an increase of$10.2 million in cost of services and software licenses revenue.
Operating Expenses
Operating expenses increased by
primarily because of a rise of
Other Income, Net
Other income, net decreased by$64.8 million through the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 , primarily because of the prior 12 months gain on the FFF Put Right because of this of the termination and corresponding derecognition of the FFF Put Right liability in fiscal 12 months 2022 in addition to a rise of$1.9 million in other expense, net. These changes were partially offset by a rise of$1.2 million in equity in net income of unconsolidated affiliates.
Income Tax Expense
For the three months endedSeptember 30, 2022 and 2021, we recorded tax expense of$18.8 million and$19.0 million , respectively. The tax expense recorded through the three months endedSeptember 30, 2022 and 2021 resulted in effective tax rates of 30% and 14%, respectively. The change within the effective tax rate is primarily attributable to the impact of the Subsidiary Reorganization on the prior 12 months effective tax rate. (See Note 11 - Income Taxes to the accompanying condensed consolidated financial statements for more information.)
Net Income Attributable to Non-Controlling Interest
Net income attributable to non-controlling interest increased by$0.9 million through the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 , primarily because of an decrease within the portion of net income attributable to non-controlling interests in PRAM, DePre,ExPre and Contigo Health .
Adjusted EBITDA
Adjusted EBITDA, a Non-GAAP financial measure as defined in "Our Use of Non-GAAP Financial Measures", decreased by$12.3 million through the three months endedSeptember 30, 2022 , in comparison with the three months endedSeptember 30, 2021 , primarily driven by decreases of$8.1 million and$4.3 million in Supply Chain Services and Performance Services, respectively. 35 --------------------------------------------------------------------------------
Segment Results
Supply Chain Services
The next table presents our results of operations and Adjusted EBITDA, a
Non-GAAP financial measure, within the Supply Chain Services segment for the periods
presented (in hundreds):
Three Months Ended September 30,
2022 2021 Change
Net revenue:
Net administrative fees $ 150,006 $ 149,462 $ 544 -%
Software licenses, other services and support 10,826 8,924 1,902 21%
Services and software licenses 160,832 158,386 2,446 2%
Products 58,861 118,430 (59,569) (50)%
Net revenue 219,693 276,816 (57,123) (21)%
Cost of revenue:
Services and software licenses 5,208 3,370 1,838 55%
Products 57,874 109,362 (51,488) (47)%
Cost of revenue 63,082 112,732 (49,650) (44)%
Gross profit 156,611 164,084 (7,473) (5)%
Operating expenses:
Selling, general and administrative 50,023 48,044 1,979 4%
Research and development 128 164 (36) (22)%
Amortization of purchased intangible assets 8,083 8,137 (54) (1)%
Operating expenses 58,234 56,345 1,889 3%
Operating income 98,377 107,739 (9,362) (9)%
Depreciation and amortization 6,167 5,007
Amortization of purchased intangible assets 8,083
8,137
Acquisition- and disposition-related expenses 509
1,553
Equity in net income of unconsolidated affiliates 8,007 6,830 Other reconciling items, net 51 3 Segment Adjusted EBITDA$ 121,194 $ 129,269 $ (8,075) (6)%
Comparison of the Three Months Ended
Net Revenue
Supply Chain Services segment net revenue decreased by$57.1 million , or 21%, through the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 driven by a decrease of$59.6 million in products revenue, partially offset by a rise of$1.9 million in software licenses, other services and support revenue.
Net Administrative Fees
Net administrative fees were flat in comparison with prior 12 months.
Products Revenue
Products revenue decreased by$59.6 million , or 50%, through the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 . The decrease was primarily driven by lower demand for and pricing of non-public protective equipment ("PPE") and other high-demand supplies because of this of the state of the COVID-19 pandemic. Because the COVID-19 pandemic continues to subside and becomes more manageable, we expect further stabilization of the marketplace for a few of these products and, accordingly, a decrease in period-over-period products revenue.
Software Licenses, Other Services and Support Revenue
Software licenses, other services and support revenue increased by$1.9 million , or 21%, through the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 , primarily because of a rise in supply chain co-management fees and SaaS-based purchased services revenue. 36 --------------------------------------------------------------------------------
Cost of Revenue
Supply Chain Services segment cost of revenue decreased by$49.7 million , or 44%, through the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 . The decrease was primarily attributable to the decrease in products revenue and the corresponding decrease in cost of products revenue of$51.5 million because of the prior 12 months increase in demand partially offset by fluctuations in product costs and better logistics costs within the current 12 months. Because the COVID-19 pandemic continues to subside and grow to be more manageable, we expect further stabilization of the marketplace for a few of these products and, accordingly, a decrease in period-over-period cost of products revenue. Operating Expenses Supply Chain Services segment operating expenses increased by$1.9 million , or 3%, through the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 primarily because of a rise of$2.0 million in SG&A expenses driven by increases in personnel costs and depreciation and amortization expense partially offset by a decrease in acquisition- and disposition-related expenses.
Segment Adjusted EBITDA
Supply Chain Services Segment Adjusted EBITDA decreased by$8.1 million during the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 , primarily because of unfavorable product sales mix driven by higher products costs on corresponding revenues in addition to higher logistics costs in our direct sourcing business.
Performance Services
The next table presents our results of operations and Adjusted EBITDA in
the Performance Services segment for the periods presented (in hundreds):
Three Months Ended September
30,
2022 2021 Change
Net revenue:
Software licenses, other services and support
SaaS-based products subscriptions $ 47,767 $ 46,704 $ 1,063 2%
Consulting services 17,615 15,060 2,555 17%
Software licenses 5,992 8,401 (2,409) (29)%
Other 22,815 18,166 4,649 26%
Net revenue 94,189 88,331 5,858 7%
Cost of revenue:
Services and software licenses 48,806 40,439 8,367 21%
Cost of revenue 48,806 40,439 8,367 21%
Gross profit 45,383 47,892 (2,509) (5)%
Operating expenses:
Selling, general and administrative 42,131 38,800 3,331 9%
Research and development 846 830 16 2%
Amortization of purchased intangible assets 2,369 2,752 (383) (14)%
Operating expenses 45,346 42,382 2,964 7%
Operating income 37 5,510 (5,473) (99)%
Depreciation and amortization 15,047 13,357
Amortization of purchased intangible assets 2,369
2,752
Acquisition- and disposition-related expenses 1,651
1,868
Equity in net income of unconsolidated affiliates 236 228 Other reconciling items, net 28 - Segment Adjusted EBITDA$ 19,368 $ 23,715 $ (4,347) (18)%
Comparison of the Three Months Ended
Net Revenue
Net revenue in our Performance Services segment increased by
7%, through the three months ended
months ended
growth of
37 -------------------------------------------------------------------------------- million in other revenue which incorporates the expansion inContigo Health and Remitra in addition to growth of$2.6 million in consulting services under our PINC AI platform. These increases were partially offset by a decrease of$2.4 million in software licenses driven by timing of enterprise analytics license agreements.
Cost of Revenue
Performance Services segment cost of revenue increased by$8.4 million , or 21%, through the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 , primarily because of a rise in consulting services expenses in addition to higher personnel costs related to increased headcount to support revenue growth. Operating Expenses Performance Services segment operating expenses increased by$3.0 million , or 7%, through the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 . The rise was driven by a rise of$3.3 million in SG&A expenses because of higher personnel costs related to increased headcount primarily in ourRemitra and Contigo Health businesses.
Segment Adjusted EBITDA
Performance Services Segment Adjusted EBITDA decreased by$4.3 million , or 18%, through the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 primarily because of higher cost of revenue and operating expenses driven by increases in consulting services expenses and personnel costs to support revenue growth partially offset by revenue growth.
Corporate
The next table presents corporate expenses and Adjusted EBITDA for the
periods presented (in hundreds):
Three Months Ended September 30,
2022 2021 Change
Operating expenses:
Selling, general and administrative $ 39,906 $ 40,970 $ (1,064) (3)%
Operating expenses 39,906 40,970 (1,064) (3)%
Operating loss (39,906) (40,970) 1,064 (3)%
Depreciation and amortization 2,225 2,232
Stock-based compensation 7,349 7,750
Strategic initiative and financial
restructuring-related expenses 1,520
25
Deferred compensation plan expense (2,370) (318) Other reconciling items, net - - Adjusted EBITDA$ (31,182) $ (31,281) $ 99 -%
Comparison of the Three Months Ended
Operating Expenses
Corporate operating expenses decreased by$1.1 million , or 3%, through the three months endedSeptember 30, 2022 in comparison with the three months endedSeptember 30, 2021 , primarily because of a decrease in deferred compensation plan expense as a results of market changes. Adjusted EBITDA
Corporate adjusted EBITDA was flat for the three months ended
in comparison with the three months ended
Off-Balance Sheet Arrangements
As of
38 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Liquidity and Capital Resources
Our principal source of money has been primarily money provided by operating activities. Every so often we've got used, and expect to make use of in the longer term, borrowings under our Credit Facility (as defined in Note 7 - Debt and Notes Payable to the accompanying condensed consolidated financial statements) as a source of liquidity. Our primary money requirements include operating expenses, working capital fluctuations, revenue share obligations, tax payments, capital expenditures, dividend payments on our Class A typical stock, if and when declared, repurchases of Class A typical stock pursuant to stock repurchase programs in place sometimes, acquisitions and related business investments, and general corporate activities. Our capital expenditures typically consist of internally developed software costs, software purchases and computer hardware purchases. As ofSeptember 30, 2022 andJune 30, 2022 , we had money and money equivalents of$176.6 million and$86.1 million , respectively. As ofSeptember 30, 2022 andJune 30, 2022 , there was$250.0 million and$150.0 million , respectively, of outstanding borrowings under our Credit Facility. Throughout the three months endedSeptember 30, 2022 , we borrowed$100.0 million under our Credit Facility, which was used for other general corporate purposes. Throughout the three months endedSeptember 30, 2022 , we didn't make any payments on outstanding borrowings under our Credit Facility. InOctober 2022 , the Company borrowed$125.0 million under the Credit Facility to partially fund the asset acquisition ofTRPN Direct Pay, Inc. andDevon Health, Inc. (collectively, "TRPN") (see Note 14 - Subsequent Events for further information). We expect money generated from operations and borrowings under our Credit Facility to offer us with adequate liquidity to fund our anticipated working capital requirements, revenue share obligations, tax payments, capital expenditures, dividend payments on our Class A typical stock, if and when declared, repurchases of Class A typical stock pursuant to stock repurchase programs in place sometimes and to fund business acquisitions. Our capital requirements depend upon quite a few aspects, including funding requirements for our product and repair development and commercialization efforts, our information technology requirements, and the amount of money generated by our operations. We imagine that we've got adequate capital resources at our disposal to fund currently anticipated capital expenditures, business growth and expansion, and current and projected debt service requirements. Nonetheless, strategic growth initiatives will likely require using one or a mix of varied types of capital resources including available money readily available, money 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.
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