On February 5, 2019 Premier Inc. (NASDAQ: PINC) reported financial results for the fiscal 2019 second quarter ended Dec. 31, 2018 (Press release, Premier, FEB 5, 2019, View Source [SID1234533073]).
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The company adopted new revenue recognition standard ASC 606 on July 1, 2018, in conjunction with the beginning of fiscal 2019, using the modified retrospective approach and did not restate prior periods. Therefore, results of operations under the new revenue standard ASC 606 are not indicative of what results of operations were under the previous standard ASC 605. However, for informational purposes, current period results under the previous standard are included in the tables at the back of this press release.
Q2 2019 Highlights:
GAAP net revenue increased to $421.9 million from $411.4 million a year ago; Supply Chain Services segment revenue of $327.0 million increased from $324.9 million a year ago and Performance Services segment revenue of $94.9 million increased from $86.5 million.
GAAP net income of $104.8 million increased from $19.8 million and diluted net income of $0.69 per share compared with $0.06 per diluted share a year ago.
Non-GAAP adjusted EBITDA* increased to $142.0 million from $133.5 million a year ago.
Non-GAAP adjusted fully distributed net income* increased to $88.4 million, representing $0.66 per diluted share, compared with $70.0 million, or $0.50 per diluted share a year ago.
Management reaffirms full-year fiscal 2019 guidance ranges and underlying assumptions.
* Descriptions of non-GAAP financial measures are provided in "Use and Definition of Non-GAAP Financial Measures," and reconciliations are provided in the tables at the end of this release.
"Premier delivered another successful quarter this fiscal year, characterized by steady revenue and earnings growth across our business segments and for the company as a whole," said Susan DeVore, president and chief executive officer. "We finished the quarter with continued strong liquidity, as year-over-year non-GAAP free cash flow increased 29 percent to $114.8 million. We used our strong balance sheet and cash flow to grow our capabilities with the acquisition of Stanson Health Inc., and to return cash to stockholders through our ongoing $250.0 million stock repurchase program.
"Our financial outlook remains consistent with the full-year guidance ranges we discussed last quarter and we are reaffirming these guidance ranges today," DeVore said. "We plan to continue to move forward as a leader of our industry’s transformation to value-based care, expanding and integrating our capabilities and working closely with our member providers to help ensure ongoing success in this rapidly evolving marketplace."
(b) Earnings per share attributable to stockholders excludes the adjustment of redeemable limited partners’ capital to redemption amount and the net income attributable to non-controlling interest in Premier LP if Class B common stock is determined to be dilutive. Likewise, earnings per share attributable to stockholders includes the adjustment of redeemable limited partners’ capital to redemption amount and the net income attributable to non-controlling interest in Premier LP if Class B common stock is determined to be antidilutive. The company has corrected prior period information within the current period financial statements related to a specific component used in calculating the tax effect on Premier Inc. net income for purposes of diluted earnings (loss) per share. Diluted earnings (loss) per share for the three months ended December 31, 2017 was previously stated at ($1.66) per share and has been corrected to $0.06 per share. Diluted earnings (loss) per share for the six months ended December 31, 2017 was previously stated at ($1.30) per share and has been corrected to $0.36 per share. The company believes the correction is immaterial and the amount had no impact on the company’s overall financial condition, results of operations or cash flows.
(c) See attached supplemental financial information for reconciliation of reported GAAP results to Non-GAAP results.
For the fiscal second-quarter ended Dec. 31, 2018, Premier generated GAAP net revenue of $421.9 million, an increase of $10.5 million from net revenue of $411.4 million for the same period a year ago.
GAAP net income for the fiscal second quarter was $104.8 million, compared with $19.8 million a year ago. Year-ago net income was impacted by a decrease in the effective tax rate due to federal tax reform, resulting in a re-measurement of tax receivable agreement liabilities totaling $177.2 million, offset by an increase in tax expense of $221.2 million attributable to the re-measurement of deferred tax balances. This resulted in income tax expense of $231.5 million in the year-ago quarter, compared with $1.8 million in the current quarter. In accordance with GAAP, fiscal 2019 and 2018 second-quarter net income attributable to stockholders included non-cash adjustments of $651.7 million and $317.9 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 units outstanding 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 net income attributable to stockholders of $693.9 million, compared with $281.2 million for the same period a year ago. Second-quarter net income of $0.69 per diluted share compared with $0.06 for the same period a year ago. See "Calculation of GAAP Earnings per Share" in the income statement section of this press release.
Fiscal second-quarter non-GAAP adjusted EBITDA increased to $142.0 million from $133.5 million for the same period the prior year.
Non-GAAP adjusted fully distributed net income for the fiscal second quarter of $88.4 million increased $18.4 million from $70.0 million for the same period a year ago. Non-GAAP adjusted fully distributed earnings per share totaled $0.66, compared with $0.50 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 second quarter ended Dec. 31, 2018, Supply Chain Services segment net revenue of $327.0 million increased $2.1 million from $324.9 million a year ago. Net administrative fees revenue of $165.7 million increased by $6.4 million, or 4%, from the prior year primarily driven by further contract penetration of existing members and, to a lesser degree, the impact of conversion of new members. Net administrative fees in the fiscal 2019 second quarter under the previous revenue recognition standard totaled $169.8 million, an increase of 7% over a year ago, reflecting the impact of timing associated with certain cash collections between quarters.
Products revenue of $157.5 million decreased $4.6 million from $162.1 million a year ago. Growth in oncology and respiratory-related drug revenue was offset primarily by the impact of gross to net revenue recognition changes associated with the adoption of ASC 606, which negatively impacted revenue by $11.9 million, and to a lesser extent by reimbursement compression in the integrated pharmacy business.
Supply Chain Services segment non-GAAP adjusted EBITDA for the fiscal 2019 second quarter increased to $134.1 million from $132.0 million for the same period a year ago. Growth in net administrative fees revenue and decreased selling, general and administrative expenses were partially offset by reimbursement compression in the integrated pharmacy business and by increases in certain product-related costs in the direct sourcing business.
Performance Services
For the fiscal second quarter ended Dec. 31, 2018, Performance Services segment net revenue of $94.9 million increased $8.4 million from $86.5 million for the same quarter last year, driven by growth in applied sciences and analytics services as well as by growth in cost management consulting services. Under the new accounting standard, consulting services revenue is now recognized proportionally to when services are provided, and the company generally no longer is required to defer recognition until certain performance conditions are met.
Performance Services segment non-GAAP adjusted EBITDA totaled $37.1 million for the fiscal 2019 second quarter, a $9.2 million increase from $27.9 million for the same quarter last year. The increase was primarily the result of higher revenue partially offset by increases in selling, general and administrative expenses.
Results of Operations for the Six Months Ended Dec. 31, 2018
For the six months ended Dec. 31, 2018, GAAP net revenue increased to $823.4 million from net revenue of $802.0 million for the same period a year ago.
For the six-month period, GAAP net income totaled $186.8 million, compared with $80.4 million for the same period a year ago. Year-ago net income was impacted by a decrease in the effective tax rate due to federal tax reform, resulting in a re-measurement of tax receivable agreement liabilities totaling $177.2 million, offset by an increase in tax expense of $221.2 million attributable to the re-measurement of deferred tax balances. This resulted in income tax expense of $244.3 million in the year-ago quarter, compared with $12.6 million in the current quarter. Fiscal 2019 and 2018 six-month GAAP net income attributable to stockholders required non-cash adjustments of $(56.5) million and $638.3 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 primarily from changes in the number of Class B common units outstanding 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 net income attributable to stockholders of $12.6 million compared with $617.6 million a year ago. On a diluted per-share basis, net income totaled $0.22 compared with $0.36 for the same period a year ago. See "Calculation of GAAP Earnings per Share" in the income statement section of this press release.
For the six months ended Dec. 31, 2018, non-GAAP adjusted EBITDA of $280.6 million increased from $252.7 million for the same period last year. Non-GAAP adjusted fully distributed net income of $175.3 million increased from $131.7 million for the same period a year ago, while non-GAAP adjusted fully distributed earnings per share increased to $1.31 from $0.94.
Supply Chain Services segment net revenue for the first six months of fiscal 2019 increased to $642.8 million from $630.7 million a year earlier. Supply Chain Services segment adjusted EBITDA increased to $269.5 million from $257.7 million for the prior year.
Performance Services segment net revenue for the six months of fiscal 2019 increased to $180.6 million from $171.3 million a year earlier. Segment adjusted EBITDA increased to $67.7 million from $49.2 million.
Cash Flows and Liquidity
Net cash provided by operating activities was $212.3 million for the six-month period ended Dec. 31, 2018, compared with $206.5 million for the same period last year. The increase in cash flow from operations was primarily driven by increased net administrative fees and other services and support revenue and decreased cost of services revenue and selling, general and administrative expenses in the current period, partially offset by increased working capital needs. At Dec. 31, 2018, the company’s cash and cash equivalents totaled $110.6 million, compared with $152.4 million at June 30, 2018. At Dec. 31, 2018, the company had an outstanding balance of $100.0 million on its five-year, $1.0 billion revolving credit facility.
Non-GAAP free cash flow for the six-month period ended Dec. 31, 2018 was $116.6 million, compared with $122.2 million for the same period a year ago and was impacted by the $18.0 million TRA payment made to member owners in the current period. Timing of the payment shifted to July in the current year from June in previous years due to a change in the company’s federal tax filing deadline. The company expects free cash flow to exceed 50% of non-GAAP adjusted EBITDA for the full fiscal year. The company defines free cash flow as cash provided by operating activities less quarterly tax distributions and annual TRA payments to limited partners and purchases of property and equipment (see free cash flow reconciliation to net cash provided by operating activities in the tables section of this press release).
Through the close of trading on Dec. 31, 2018, the company repurchased approximately 2.9 million shares of Class A common stock for $109.5 million. The repurchases took place under the company’s ongoing $250.0 million stock repurchase program for fiscal 2019, and had the impact of adding approximately $0.01 to diluted per-share results for the period. The repurchase authorization may be expanded, suspended, delayed or discontinued at any time at the discretion of the Board of Directors.
Fiscal 2019 Outlook and Guidance
Based on results for the six months ended Dec. 31, 2018, management’s current expectations for the remainder of fiscal 2019 and the realization of previously disclosed underlying assumptions, the company reaffirms its full fiscal-year 2019 guidance ranges for consolidated net revenue, non-GAAP Supply Chain Services and Performance Services segment revenue, non-GAAP adjusted EBITDA and non-GAAP adjusted fully distributed earnings per share. Underlying assumptions have not changed with the exception of stock-based compensation expense, which is now estimated in a range of $29 million to $31 million.
* The company does not meaningfully reconcile guidance for non-GAAP adjusted EBITDA and non-GAAP adjusted fully distributed earnings per share to net income attributable to stockholders or earnings per share attributable to stockholders because the company cannot provide guidance for more significant reconciling items between net income attributable to stockholders and adjusted EBITDA and between earnings per share attributable to stockholders and non-GAAP adjusted fully distributed earnings per share without unreasonable effort. This is due to two primary reasons:
• Reasonable guidance cannot be provided for reconciling the adjustment of redeemable limited partners’ capital to redemption amount – historically the largest adjustment in the reconciliation from non-GAAP to GAAP amounts – due to the fact that the increase or decrease in this item is based on the change in the number of Class B common units outstanding and change in stock price between quarters, which the company cannot predict, control or reasonably estimate.
• Reasonable guidance cannot be provided for earnings per share attributable to stockholders because the ongoing quarterly member-owner exchange of Class B common units and corresponding Class B common stock into shares of Class A common stock impacts the number of shares of Class A common stock outstanding each quarter, which the company cannot predict, control or reasonably estimate. Member owners have the right, but not the obligation, to exchange class B common units on a quarterly basis, and the company has the discretion to settle any exchanged units for Class A common stock, cash, or a combination thereof, neither of which can be predicted, controlled or reasonably estimated at this time.
Conference Call
Premier management will host a conference call and live audio webcast on Tuesday, Feb. 5, 2019, at 8:00 a.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: 6890785. 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.