The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report. This discussion is designed to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. In addition, the following discussion includes certain forward-looking statements. For a discussion of important factors, including the continuing development of our business and other factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see the discussions under "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" herein and in our Annual Report on Form 10-K for the fiscal year 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 leading healthcare improvement company, uniting an alliance ofU.S. hospitals, health systems and other providers and organizations to transform healthcare. We partner with hospitals, health systems, physicians, employers, product suppliers, service providers, and other healthcare providers and organizations with the 28 -------------------------------------------------------------------------------- common goal of improving and innovating in the clinical, financial and operational areas of their businesses to meet the demands of a rapidly evolving healthcare industry. We deliver value through a comprehensive technology-enabled platform that offers critical supply chain services, clinical, financial, operational and value-based care software-as-a-service ("SaaS") as well as 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 continue to expand our capabilities to more fully address and coordinate care improvement and standardization in 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 thousands):
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 2022 2021
Net revenue $ 359,626 $ 379,215 $ 673,499 $ 744,362
Net income 64,374 77,232 107,333 198,538
Non-GAAP Adjusted EBITDA 140,536 142,016 249,916 263,719
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 provide our members and other customers access to scale efficiencies while focusing on optimization of information resources and cost containment, provide actionable intelligence derived from anonymized data in our data warehouse provided by our members, mitigate the risk of innovation, and disseminate best practices that will help our member organizations and other customers succeed in their transformation to higher quality and more cost-effective 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 endedDecember 31, 2022 and 2021 was as follows (in thousands): Three Months Ended December 31, Change % of Net Revenue Net revenue: 2022 2021 2022 2021 2022 2021 Supply Chain Services$ 235,520 $ 271,495 $ (35,975) (13) % 65 % 72 % Performance Services 124,115 107,729 16,386 15 % 35 % 28 % Segment net revenue$ 359,635 $ 379,224 $ (19,589) (5) % 100 % 100 % Segment net revenue for the six months endedDecember 31, 2022 and 2021 was as follows (in thousands): Six Months Ended December 31, Change % of Net Revenue Net revenue: 2022 2021 2022 2021 2022 2021 Supply Chain Services$ 455,214 $ 548,312 $ (93,098) (17) % 68 % 74 % Performance Services 218,304 196,059 22,245 11 % 32 % 26 % Segment net revenue$ 673,518 $ 744,371 $ (70,853) (10) % 100 % 100 % Our Supply Chain Services segment includes one of the largest healthcare group purchasing organization ("GPO") programs inthe United States , 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 total dollar volume of goods and services purchased by our members and other customers, service fees from supply chain co-management, subscription fees from purchased services and through product sales in connection with our direct sourcing activities. Our Performance Services segment consists of three sub-brands: PINC AI, our technology and services platform with offerings that help optimize performance in three main areas - clinical intelligence, margin improvement and value-based care - using advanced analytics to identify improvement opportunities, consulting and managed services for clinical and operational design, and workflow solutions to hardwire sustainable change in the provider, life sciences and payor markets;Contigo Health , our direct-to-employer business which provides third-party administrator services and management of health benefit programs that 29
-------------------------------------------------------------------------------- allow employers to contract directly with healthcare providers as well as partners with healthcare providers to provide employers access to a specialized care network throughContigo Health's centers of excellence program and cost containment and wrap network; and Remitra, 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 accelerate industry innovation for better, smarter healthcare. Acquisitions and Divestitures
Acquisition of
OnOctober 13, 2022 , we acquired, through our consolidated subsidiary,Contigo Health, LLC ("Contigo Health "), certain assets and assumed certain liabilities ofTRPN Direct Pay, Inc. andDevon Health, Inc. (collectively, "TRPN") for an adjusted purchase price of$177.5 million which was paid at closing with borrowings under our Credit Facility (as defined in Note 8 - Debt and Notes Payable to the accompanying condensed consolidated financial statements) and cash on hand, of which$17.8 million was placed in escrow to satisfy indemnification obligations of TRPN toContigo Health and its affiliates and other parties related thereto under the purchase agreement governing the transaction ("TRPN acquisition"). TRPN is being integrated withinPremier underContigo Health and is reported as part of the Performance Services segment. See Note 3 - Business Acquisitions to the accompanying condensed consolidated financial statements for further information.
Market and Industry Trends and Outlook
We expect that certain trends and economic or industrywide factors will continue to affect our business, in both the short- and long-term. We have based our expectations described below on assumptions made by us and on information currently available to us. To the extent our underlying assumptions about, or interpretation of, available information prove to be incorrect, our actual results may vary materially from our expected results. See "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" herein and in the 2022 Annual Report. Trends in theU.S. healthcare market affect our revenues and costs in the Supply Chain Services and Performance Services segments. The trends we see affecting our current healthcare business include the impact of inflation on the broader economy and the significant increase to input costs in healthcare, including the rising cost of labor, as well as the impact of the implementation of current or future healthcare legislation, particularly any material alterations to the Affordable Care Act ("ACA"). Actions related to the ACA could 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 meet the demands of this environment, there will be increased focus on scale and cost containment and healthcare providers will need to measure and report on and bear financial risk for outcomes. Over the long-term, we believe these trends will result in increased demand for our Supply Chain Services and Performance Services solutions in the areas of cost management, quality and safety, and value-based care; however, there are uncertainties and risks that may affect the actual impact of these anticipated trends, expected demand for our services or related assumptions on our business. See "Cautionary Note Regarding Forward-Looking Statements" for more information.
COVID-19 Pandemic, Variants Thereof, Recurrences or Similar Pandemics
In addition to the trends in 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 overall economy, our sales, operations and supply chains, our members and other customers, workforce and suppliers, and countries. As a result of the COVID-19 pandemic, variants thereof, and potential future pandemic outbreaks, we face significant risks including, but not limited to: •Overall economic and capital markets decline. The impact of the COVID-19 pandemic and variants thereof and associated supply chain disruptions could result in a prolonged recession or depression inthe United States or globally that could harm the banking system, limit demand for many products and services and cause other foreseen and unforeseen events and circumstances, all of which could negatively impact us. The continued spread of COVID-19 and variants thereof has led to and could continue to lead to severe disruption and volatility inthe United States and global capital markets, which could increase our cost of capital and adversely affect our ability to access the capital markets in the future. In addition, trading prices on the public stock market, as well as that of our Class A common stock, have been highly volatile as a result of the COVID-19 pandemic. •Changes in the demand for our products and services. We experienced and may continue to experience demand uncertainty from both material increases and decreases in demand and pricing for our products and services as our members continue to recover from the impact of the COVID-19 pandemic. There was a material increase in demand for personal protective equipment ("PPE"), drugs and other supplies directly related to treating and preventing the 30 -------------------------------------------------------------------------------- spread of COVID-19 and variants thereof during fiscal 2020 and 2021. In the second half of fiscal 2022 through the current period of fiscal 2023, demand and pricing for PPE, drugs and other supplies decreased due to members' excess inventory levels resulting in a decline in revenue relative to the previous two fiscal years. Patients, hospitals and other medical facilities may continue to defer some elective procedures and routine medical visits due to ongoing and continuing uncertainty from COVID-19 outbreaks or variants thereof, or as a result of restrictive government orders or advisories. While demand for many supplies and services not related to COVID-19 may continue to decline in fiscal 2023, rolling shortages of products and drugs needed for routine procedures, such as contrast media and flush syringes, could have an impact on demand for hospital services and the financial conditions of providers, particularly those forced to procure such products through resellers. •Increased labor costs. Labor shortages and the resulting increases to the cost of labor are an ongoing challenge to the healthcare providers we serve. Limited availability of staff resources and rolling staff shortages may continue to impair the ability of existing staff to manage product and service procurement. While our non-acute and non-healthcare businesses, such as education and hospitality customers, experienced a rebound in fiscal 2022, the recovery may be hampered by future COVID-19 outbreaks or variants, which are highly uncertain and cannot be accurately predicted. •Limited access to our members' facilities that impacts our ability to fulfill our contractual requirements. While some of our hospital customers have allowed increased access to their facilities by non-patients, including our field teams, consultants and other professionals, there are many that still are not permitting onsite access outside of their staff. Hospital imposed travel restrictions are also impacting some customers' ability to participate in face-to-face events with us, such as committee meetings and conferences, which limits our ability to build on customer relationships. The long-term continuation, or any future recurrence of these circumstances, may negatively impact the ability of our employees to effectively deliver existing or sell new products and services to our members and could negatively affect the performance of our existing contracts. •Materials and personnel shortages and disruptions in supply chain, including manufacturing and shipping. The global supply chain has been materially disrupted due to personnel shortages associated with ongoing COVID-19 rates of infection, stay-at-home orders, rapidly escalating shipping costs, raw material availability, material logistical delays due to 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 continue to impact our access to products for our members. Staffing or personnel shortages due to stay-at-home orders and quarantines, or other public health measures, have impacted and, in the future, may impact us and our members, other customers or suppliers. In addition, due to unprecedented demand during the COVID-19 pandemic, there have been widespread shortages in certain product categories. If the supply chain for materials used in the products purchased by our members through our GPO or products contract manufactured through our direct sourcing business continue to be adversely impacted by the COVID-19 pandemic, our supply chain may continue to be disrupted. Failure of our suppliers, contract manufacturers, distributors, contractors and other business partners to meet their obligations to our members, other customers or to us, or material disruptions in their ability to do so due to their own financial or operational difficulties, may adversely impact our operations. •Requests for contract modifications, payment deferrals or exercises of force majeure clauses. We have and may continue to receive requests for contract modifications, payment waivers and deferrals, payment reductions or amended payment terms from our contract counterparties. We have and may continue to receive requests to delay service or payment on performance service contracts. In addition, we have and may continue to receive requests from our suppliers for increases to their contracted prices, and such requests may be implemented in the future. 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 suppliers have exercised force majeure clauses related to failure to supply clauses in their contracts with us because they are unable to obtain raw materials for manufacturing fromIndia andChina . The standard failure to supply language in our contracts contains financial penalties to suppliers if they are unable to supply products, which such suppliers may not be able to pay. In addition, we may not be able to source products from alternative suppliers on commercially reasonable terms, or at all. •Managing the evolving regulatory environment. In response to the COVID-19 pandemic and variants thereof, federal, state and local governments are issuing new rules, regulations, orders and advisories and changing reimbursement eligibility rules on a regular basis. These government actions can impact us and our members, other customers and suppliers. 31 -------------------------------------------------------------------------------- The ultimate impact of COVID-19, variants thereof, recurrences, or similar pandemics on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of any pandemic and the related length of its impact onthe United States and global economies, which are uncertain and cannot be predicted at this time. The impact of the COVID-19 pandemic, variants thereof, recurrences, or future similar pandemics may also exacerbate many of the other risks described in Item 1A. "Risk Factors" section of the 2022 Annual Report. Despite our efforts to manage these impacts, their ultimate impact depends on factors beyond our knowledge or control, including the duration and severity of any outbreak and actions taken to contain its spread and mitigate its public health effects. The foregoing and other continued disruptions in our business as a result of the COVID-19 pandemic, variants thereof, recurrences or similar pandemics could result in a material adverse effect on our business, results of operations, financial condition, cash flows, prospects and the trading prices of our securities in the near-term and through 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 withinUkraine . As the war endures, it continues to affect the global economy and financial markets, as well as exacerbating ongoing economic challenges, including issues such as rising inflation, energy costs and global supply-chain disruption. We continue to monitor the impacts of theRussia -Ukraine war on macroeconomic conditions and prepare for any implications that the war may have on member demand, our suppliers' ability to deliver products, cybersecurity risks and our liquidity and access to capital. See Item 1A. "Risk Factors" in our 2022 Annual Report. Impact of Inflation TheU.S. economy is experiencing the highest rates of inflation since the 1980s. ThroughDecember 31, 2022 , we have continued to limit the impact of inflation on our members, and maintain significantly lower inflation impact across our diverse product portfolio than national levels. However, there is still some level of risk and uncertainty for our members and other customers in 2023 as labor costs, raw material cost and availability, rising interest rates and inflation continue to pressure supplier pricing as well as apply significant pressure on our margin. We continue to measure the contributing factors, specifically transportation and freight, raw materials, and labor, that led to temporary adjustments to selling prices. We have begun to see logistics costs normalize to pre-pandemic levels as well as some reductions in specific raw materials; however, the cost of labor remains high. We are continuously working to lower these price increases as market conditions change. The impact of inflation to our aggregated product portfolio is partially mitigated by contract term price protection for a large portion of our portfolio, as well as continued price reductions in certain product categories such as pharmaceuticals. Furthermore, as theFederal Reserve seeks to curb rising inflation, market interest rates have steadily risen, and may continue to rise, increasing the cost of borrowing under our Credit Facility (as defined in Note 8 - Debt and Notes Payable to the accompanying condensed consolidated financial statements) as well as impacting our results of operations, financial condition and cash flows.
Critical Accounting Policies and Estimates
Refer to 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 in the preparation of financial statements as well as information related to material changes in our significant accounting policies that were included in our 2022 Annual Report.
New Accounting Standards
New accounting standards that we have recently adopted 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:
32 --------------------------------------------------------------------------------
•net administrative fees revenue which consists of gross administrative fees
received from suppliers, reduced by the amount 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.
The success of our Supply Chain Services revenue streams is influenced by our ability to negotiate favorable contracts with suppliers and members, the number of members that utilize our GPO supplier contracts and the volume of their purchases, the impact of changes in the defined allowable reimbursement amounts determined by Medicare, Medicaid and other managed care plans and the number of members and other customers that purchase products through our direct sourcing activities and the impact of competitive pricing. Refer to "Impact of Inflation" within "Liquidity and Capital Resources" section of Item 2 - Management's Discussion and Analysis 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 following 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, professional fees for consulting services, performance improvement collaborative and other service subscriptions and insurance services management fees and commissions from endorsed commercial insurance programs under our PINC AI technology and services platform; •third-party administrator fees, fees from the centers of excellence program, and cost containment and wrap network fees pursuant to the TRPN acquisition forContigo Health ; and
•fees from healthcare product suppliers and service providers for Remitra.
Our Performance Services growth will depend upon the expansion of our PINC AI technology and services platform to new 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 new and existing customers at rates sufficient to offset the loss of recurring SaaS-based revenue due to the conversion to an enterprise analytics license, expansion into new markets and expansion of ourContigo Health and Remitra businesses to new 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 benefits, and outside 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 along with associated amortization of certain capitalized contract costs. Amortization of contract costs represent amounts that have been capitalized and reflect the incremental costs of obtaining and fulfilling a contract 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 capacity costs, third-party product license expenses and amortization of the cost 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 associated with direct sourced medical and commodity products. Refer to "Impact of Inflation" within "Liquidity and Capital Resources" section of Item 2 - Management's Discussion and Analysis 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 associated with selling and administrative functions
and support of revenue-generating activities including expenses to support and
maintain our software-related products and 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 such as insurance, professional
fees and other general overhead expenses, and amortization of certain contract
costs. Amortization of
33
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contract costs represent amounts, including sales commissions, that have been
capitalized and reflect the incremental costs of obtaining and fulfilling a
contract.
Research and development expenses consist of employee-related compensation and benefit expenses and third-party consulting fees of technology professionals, net of capitalized labor, incurred to develop our software-related products and services prior to reaching technological feasibility.
Amortization of purchased intangible assets includes the amortization of all
identified intangible assets.
Other Income, Net Other income, net, includes equity in net income of unconsolidated affiliates that is generated from our equity method investments. Our equity method investments primarily consist of our interests inFFF Enterprises, Inc. ("FFF"),Exela Holdings, Inc. ("Exela"), andPrestige Ameritech Ltd. ("Prestige") (see Note 4 - Investments). Other income, net, also includes the fiscal year 2022 gain recognized due to the termination of the FFF Put Right and derecognition of the associated liability (see Note 5 - 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 12 – 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. AtDecember 31, 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 part of our long-term supply chain resiliency program to promote domestic and geographically diverse manufacturing and to help ensure a robust and resilient supply chain for essential medical products. As ofDecember 31, 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 other key business metrics we consider are EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Net Income, Adjusted Earnings per Share and Free Cash Flow, which are all Non-GAAP financial measures. We define EBITDA as net income before income or loss from discontinued operations, net of tax, interest and investment income 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 that have not been earned or incurred within the prior two years and are not expected to recur within the next two years. Such items include certain strategic 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 as the segment's net revenue less cost of revenue and operating expenses directly attributable to the segment excluding depreciation and amortization, amortization of purchased intangible assets, merger and acquisition-related expenses and non-recurring or non-cash items and including equity in net income of unconsolidated affiliates. Operating expenses directly attributable to the segment include expenses associated with sales and marketing, general and administrative, and product development activities specific to the operation of each segment. General and administrative corporate expenses that are not specific to a particular segment are not included in the calculation of Segment Adjusted EBITDA. Segment Adjusted EBITDA also excludes any income and expense that has been classified as discontinued operations. We define Adjusted 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 the Class B common units for shares of Class A common stock, which results in the elimination of non-controlling interest 34 -------------------------------------------------------------------------------- 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 10 - Earnings Per Share). We define Free Cash Flow as net cash 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 connection with ourAugust 2020 Restructuring and (ii) purchases of property and equipment. Free Cash Flow does not represent discretionary cash available for spending as it excludes certain contractual obligations such as debt repayments. Adjusted EBITDA and Free Cash Flow are supplemental financial measures used by us and by external users of our financial statements and are considered to be indicators of the operational strength and performance of our business. Adjusted EBITDA and Free Cash Flow measures allow us to assess our performance without regard to financing methods and capital structure and without the impact of other matters that we do not consider indicative of the operating performance of our business. More specifically, Segment Adjusted EBITDA is the primary earnings measure we use to evaluate the performance of our business segments. We use Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted 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 factors and trends affecting our business. We believe Adjusted EBITDA and Segment Adjusted EBITDA assist our Board of Directors, management and investors in comparing our operating performance on a consistent basis from period to period because they remove the impact of earnings elements attributable to our asset base (primarily depreciation and amortization), certain items outside the control of our management team, e.g. taxes, other non-cash items (such as impairment of intangible assets, purchase accounting adjustments and stock-based compensation), non-recurring items (such as strategic initiative and financial restructuring-related expenses) and income and expense that has been classified as discontinued operations from our operating results. We believe 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 (such as impairment of intangible assets, purchase accounting adjustments and stock-based compensation) and non-recurring items (such as 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 common stock. We believe Free Cash Flow is an important measure because it represents the cash that we generate after payments to certain former limited partners that elected to execute a Unit Exchange Agreement in connection with ourAugust 2020 Restructuring and capital investment to maintain existing products and services and ongoing business operations, as well as development of new and upgraded products and services to support future growth. Our Free Cash Flow allows us to enhance stockholder value through acquisitions, partnerships, joint ventures, investments in related businesses and debt reduction. Despite the importance of these Non-GAAP financial measures in analyzing our business, determining compliance with certain financial covenants in our Credit Facility, measuring and determining incentive compensation and evaluating our operating performance relative to our competitors, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Net Income, Adjusted Earnings per Share and Free Cash Flow are not measurements of financial performance under GAAP, may have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, net income, net cash provided by operating activities, or any other measure of our performance derived in accordance with GAAP. Some of the limitations of the EBITDA, Adjusted EBITDA and Segment Adjusted EBITDA measures include that they do not reflect: our capital expenditures or our future requirements for capital expenditures or contractual commitments; changes in, or cash requirements for, our working capital needs; the interest expense or the cash requirements to service interest or principal payments under our Credit Facility; income tax payments we are required to make; and any cash requirements for replacements of assets being depreciated or amortized. In addition, EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA and Free Cash Flow are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flows from operating activities. Some of the limitations of the Adjusted Net Income and Adjusted Earnings per Share measures are that they do not reflect income tax expense or income tax payments we are required to make. In addition, Adjusted Net Income and Adjusted Earnings per Share are not measures of profitability under GAAP. We also urge you to review the reconciliation of these Non-GAAP financial measures included elsewhere in this Quarterly Report. To properly and prudently evaluate our business, we encourage you to review the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report and to not rely on any single financial measure to evaluate our business. In addition, because the EBITDA, Adjusted EBITDA, Segment Adjusted EBITDA, Adjusted Net Income, Adjusted Earnings per Share and Free Cash Flow measures are susceptible to varying calculations, such Non-GAAP financial measures may differ from, and may therefore not be comparable to, similarly titled measures used by other companies. 35
-------------------------------------------------------------------------------- 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 information about certain of the more significant items follows below.
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 are 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% for the three and six months endedDecember 31, 2022 and 25% for the three and six months endedDecember 31, 2021 , respectively. The 25% tax rate in fiscal year 2022 was primarily due to the benefit from the release of$32.3 million of valuation allowance of our deferred tax asset as a result of the Subsidiary Reorganization. Of the$32.3 million valuation allowance released in fiscal year 2022,$6.5 million was included in the estimated annual effective tax rate calculation to the extent such carryforwards were projected to offset fiscal year 2022 ordinary income. The remaining$25.8 million of valuation allowance released was included as a discrete item in the six months endedDecember 31, 2021 .
Stock-based compensation
In addition to non-cash employee stock-based compensation expense, this item includes non-cash stock purchase plan expense of$0.1 million for both the three months endedDecember 31, 2022 and 2021 and$0.3 million for both the six months endedDecember 31, 2022 and 2021 (see Note 11 - Stock-Based Compensation to the accompanying condensed consolidated financial statements).
Acquisition- and disposition-related expenses
Acquisition-related expenses include legal, accounting and other expenses related to acquisition activities and gains and losses on the change in fair value of earn-out liabilities. Disposition-related expenses include severance and retention benefits and financial advisor fees and legal fees related to disposition activities.
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 5 – Fair Value Measurements to the accompanying condensed consolidated
financial statements.
Other reconciling items
Other reconciling items include, but are not limited to, gains and losses on
disposal of long-lived assets and imputed interest on notes payable to former
limited partners.
36
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Results of Operations
The following table presents our results of operations for the periods presented
(in thousands, except per share data):
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 2022 2021
Amount % of Net Revenue Amount % of Net Revenue Amount % of Net Revenue Amount % of Net Revenue
Net revenue:
Net administrative fees $ 154,423 43% $ 150,403 40% $ 304,429 45% $ 299,865 40%
Software licenses, other
services and support 138,210 38% 117,046 31% 243,216 36% 214,301 29%
Services and software licenses 292,633 81% 267,449 71% 547,645 81% 514,166 69%
Products 66,993 19% 111,766 29% 125,854 19% 230,196 31%
Net revenue 359,626 100% 379,215 100% 673,499 100% 744,362 100%
Cost of revenue:
Services and software licenses 55,265 15% 45,782 12% 109,279 16% 89,591 12%
Products 61,620 17% 96,933 26% 119,494 18% 206,295 28%
Cost of revenue 116,885 33% 142,715 38% 228,773 34% 295,886 40%
Gross profit 242,741 67% 236,500 62% 444,726 66% 448,476 60%
Operating expenses 154,575 43% 158,536 42% 298,052 44% 298,233 40%
Operating income 88,166 25% 77,964 21% 146,674 22% 150,243 20%
Other (expense) income, net (27) -% 5,635 1% 3,193 -% 73,695 10%
Income before income taxes 88,139 25% 83,599 22% 149,867 22% 223,938 30%
Income tax expense 23,765 7% 6,367 2% 42,534 6% 25,400 3%
Net income 64,374 18% 77,232 20% 107,333 16% 198,538 27%
Net income attributable to non-controlling interest (328) -% (1,687) -% (571) -% (989) -% Net income attributable to stockholders$ 64,046 18%$ 75,545 20%$ 106,762 16%$ 197,549 27% Earnings per share attributable to stockholders: Basic$ 0.54 $ 0.62 $ 0.90$ 1.62 Diluted$ 0.54 $ 0.62 $ 0.89$ 1.61 For the following Non-GAAP financial measures and reconciliations of our performance derived in accordance with GAAP to the Non-GAAP financial measures, refer to "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 following table provides certain Non-GAAP financial measures for the periods
presented (in thousands, except per share data).
Three Months Ended December 31 ,
Six Months Ended
2022 2021 2022 2021
Certain Non-GAAP Financial
Data: Amount % of Net Revenue Amount % of Net Revenue Amount % of Net Revenue Amount % of Net Revenue
Adjusted EBITDA $ 140,536 39% $ 142,016 37% $ 249,916 37% $ 263,719 35%
Non-GAAP Adjusted Net Income 85,650 24% 90,011 24% 148,162 22% 165,145 22%
Non-GAAP Adjusted Earnings
Per Share 0.72 nm 0.73 nm 1.24 nm 1.34 nm
nm = Not meaningful
37
--------------------------------------------------------------------------------
The following tables provide the reconciliation of net income to Adjusted EBITDA
and the reconciliation of income before income taxes to Segment Adjusted EBITDA
(in thousands).
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 2022 2021
Net income $ 64,374 $ 77,232 $ 107,333 $ 198,538
Interest expense, net 4,631 2,873 7,490 5,661
Income tax expense 23,765 6,367 42,534 25,400
Depreciation and amortization 21,439 20,870 44,878 41,466
Amortization of purchased intangible assets 13,047 10,850 23,499 21,739
EBITDA 127,256 118,192 225,734 292,804
Stock-based compensation 2,801 16,330 10,150 24,081
Acquisition- and disposition-related expenses 3,138 3,746 5,298 7,167
Strategic initiative and financial
restructuring-related expenses 7,527 3,749 9,046 3,774
Gain on FFF Put and Call Rights - - - (64,110)
Other reconciling items, net (a) (186) (1) (312) 3
Adjusted EBITDA $ 140,536 $
142,016
Income before income taxes$ 88,139 $
83,599
Equity in net income of unconsolidated
affiliates
(1,674) (6,116) (9,917) (13,174) Interest expense, net 4,631 2,873 7,490 5,661 Gain on FFF Put and Call Rights - - - (64,110) Other expense, net (2,930) (2,392) (766) (2,072) Operating income 88,166 77,964 146,674 150,243 Depreciation and amortization 21,439 20,870 44,878 41,466 Amortization of purchased intangible assets 13,047 10,850 23,499 21,739 Stock-based compensation 2,801 16,330 10,150 24,081 Acquisition- and disposition-related expenses 3,138 3,746 5,298 7,167 Strategic initiative and financial restructuring-related expenses 7,527 3,749 9,046 3,774 Equity in net income of unconsolidated affiliates 1,674 6,116 9,917 13,174 Deferred compensation plan income 2,659 2,389 289 2,071 Other reconciling items, net (b) 85 2 165 4 Adjusted EBITDA$ 140,536 $ 142,016 $ 249,916 $ 263,719 Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 Segment Adjusted EBITDA: Supply Chain Services$ 127,991 $ 134,280 $ 249,188 $ 263,549 Performance Services 43,203 39,010 62,569 62,725 Corporate (30,658) (31,274) (61,841) (62,555) Adjusted EBITDA$ 140,536 $ 142,016 $ 249,916 $ 263,719
_________________________________
(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.
38
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The following 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 thousands).
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 2022 2021
Net income attributable to stockholders
Net income attributable to non-controlling
interest
328 1,687 571 989 Income tax expense 23,765 6,367 42,534 25,400 Amortization of purchased intangible assets 13,047 10,850 23,499 21,739 Stock-based compensation 2,801 16,330 10,150 24,081 Acquisition- and disposition-related expenses 3,138 3,746 5,298 7,167 Strategic initiative and financial restructuring-related expenses 7,527 3,749 9,046 3,774 Gain on FFF Put and Call Rights - - - (64,110) Other reconciling items, net (a) 1,091 1,741 2,359 3,604 Non-GAAP adjusted income before income taxes 115,743 120,015 200,219 220,193 Income tax expense on adjusted income before income taxes (b) 30,093 30,004 52,057 55,048 Non-GAAP Adjusted Net Income$ 85,650 $
90,011
Reconciliation of denominator for earnings per share attributable to stockholders to Non-GAAP Adjusted Earnings per Share Weighted Average: Basic weighted average shares outstanding 118,787 121,181 118,569 122,063 Dilutive securities 865 1,292 1,273 1,460 Weighted average shares outstanding - diluted 119,652 122,473 119,842 123,523
_________________________________
(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% of non-GAAP adjusted net income before income taxes for the three and six months endedDecember 31, 2022 and 25% of non-GAAP adjusted net income before income taxes for the three and six months endedDecember 31, 2021 . The following 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 December 31, Six Months Ended December 31, 2022 2021 2022 2021 Basic earnings per share attributable to stockholders $ 0.54$ 0.62 $ 0.90$ 1.62 Net income attributable to non-controlling interest - 0.01 - 0.01 Income tax expense 0.20 0.05 0.36 0.21 Amortization of purchased intangible assets 0.11 0.09 0.20 0.18 Stock-based compensation 0.02 0.13 0.09 0.20 Acquisition- and disposition-related expenses 0.03 0.03 0.04 0.06 Strategic initiative and financial restructuring-related expenses 0.06 0.03 0.08 0.03 Gain on FFF Put and Call Rights - - - (0.53) Other reconciling items, net (a) 0.01 0.03 0.02 0.03 Impact of corporation taxes (b) (0.25) (0.25) (0.44) (0.45) Impact of dilutive shares - (0.01) (0.01) (0.02) Non-GAAP Adjusted Earnings Per Share $ 0.72$ 0.73 $ 1.24$ 1.34
_________________________________
(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% of non-GAAP adjusted net income before income taxes for the three and six months endedDecember 31, 2022 and 25% of non-GAAP adjusted net income before income taxes for the three and six months endedDecember 31, 2021 . 39 --------------------------------------------------------------------------------
Consolidated Results – Comparison of the Three Months Ended
2021
The variances in the material factors contributing to the changes in the
consolidated results are discussed further in “Segment Results” below.
Net Revenue
Net revenue decreased by$19.6 million during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 , due to a decrease of$44.8 million in products revenue, partially offset by increases of$21.2 million in software licenses and other services and support revenue and$4.0 million in net administrative fees.
Cost of Revenue
Cost of revenue decreased by$25.8 million during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 , due to a decrease of$35.3 million in cost of products revenue, partially offset by an increase of$9.5 million in cost of services and software licenses.
Operating Expenses
Operating expenses decreased by
primarily due to a decrease of
an increase of
Other Income, Net
Other income, net decreased by
primarily due to a decrease of
unconsolidated affiliates and an increase of
net.
Income Tax Expense For the three months endedDecember 31, 2022 and 2021, we recorded tax expense of$23.8 million and$6.4 million , respectively. The tax expense recorded during the three months endedDecember 31, 2022 and 2021 resulted in effective tax rates of 27% and 8%, respectively. The change in the effective tax rate is primarily attributable to the impact of the Subsidiary Reorganization on the prior year effective tax rate. (See Note 12 - 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 decreased by$1.4 million during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 , primarily due to a decrease in 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$1.5 million during the three months endedDecember 31, 2022 , compared to the three months endedDecember 31, 2021 , primarily driven by an increase of$4.2 million in Performance Services partially offset by a decrease of$6.3 million in Supply Chain Services. Corporate Adjusted EBITDA was flat compared to prior year.
Consolidated Results – Comparison of the Six Months Ended
2021
The variances in the material factors contributing to the changes in the
consolidated results are discussed further in “Segment Results” below.
Net Revenue
Net revenue decreased by$70.9 million during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 , due to a decrease of$104.3 million in products revenue, partially offset by increases of$28.9 million in software licenses, other services and support revenue and$4.5 million in net administrative fees. 40 --------------------------------------------------------------------------------
Cost of Revenue
Cost of revenue decreased by$67.1 million during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 , due to a decrease of$86.8 million in cost of products revenue, partially offset by an increase of$19.7 million in cost of services and software licenses.
Operating Expenses
Operating expenses were flat compared to prior year.
Other Income, Net
Other income, net decreased by$70.5 million during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 , primarily due to the prior year gain of$64.1 million on the FFF Put Right as a result of the termination and corresponding derecognition of the FFF Put Right liability in fiscal year 2022 as well as an increase of$1.8 million in interest expense.
Income Tax Expense
For the six months endedDecember 31, 2022 and 2021, we recorded tax expense of$42.5 million and$25.4 million , respectively. The tax expense recorded during the six months endedDecember 31, 2022 and 2021 resulted in effective tax rates of 28% and 11%, respectively. The change in the effective tax rate is primarily attributable to the impact of the Subsidiary Reorganization on the prior year effective tax rate. (See Note 12 - 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 was flat compared to the
prior year.
Adjusted EBITDA Adjusted EBITDA, a Non-GAAP financial measure as defined in "Our Use of Non-GAAP Financial Measures", decreased by$13.8 million during the six months endedDecember 31, 2022 , compared to the six months endedDecember 31, 2021 , primarily driven by a decrease of$14.3 million in Supply Chain Services. Performance Services and Corporate Adjusted EBITDA were flat compared to the prior year. 41 --------------------------------------------------------------------------------
Segment Results
Supply Chain Services
The following table presents our results of operations and Adjusted EBITDA, a
Non-GAAP financial measure, in the Supply Chain Services segment for the periods
presented (in thousands):
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 Change 2022 2021 Change
Net revenue:
Net administrative fees $ 154,423 $ 150,403 $ 4,020 3% $ 304,429 $ 299,865 $ 4,564 2%
Software licenses, other services
and support 14,104 9,326 4,778 51% 24,931 18,251 6,680 37%
Services and software licenses 168,527 159,729 8,798 6% 329,360 318,116 11,244 4%
Products 66,993 111,766 (44,773) (40)% 125,854 230,196 (104,342) (45)%
Net revenue 235,520 271,495 (35,975) (13)% 455,214 548,312 (93,098) (17)%
Cost of revenue:
Services and software licenses 4,389 3,267 1,122 34% 9,597 6,638 2,959 45%
Products 61,620 96,933 (35,313) (36)% 119,494 206,295 (86,801) (42)%
Cost of revenue 66,009 100,200 (34,191) (34)% 129,091 212,933 (83,842) (39)%
Gross profit 169,511 171,295 (1,784) (1)% 326,123 335,379 (9,256) (3)%
Operating expenses:
Selling, general and
administrative 49,792 48,454 1,338 3% 99,815 96,498 3,317 3%
Research and development 116 72 44 61% 245 236 9 4%
Amortization of purchased
intangible assets 7,956 8,116 (160) (2)% 16,039 16,252 (213) (1)%
Operating expenses 57,864 56,642 1,222 2% 116,099 112,986 3,113 3%
Operating income 111,647 114,653 (3,006) (3)% 210,024 222,393 (12,369) (6)%
Depreciation and amortization 5,654 5,336 11,821 10,344
Amortization of purchased
intangible assets 7,956 8,116 16,039 16,252
Acquisition- and
disposition-related expenses 1,001 56 1,510 1,608
Equity in net income of
unconsolidated affiliates 1,676 6,116 9,684 12,946
Other reconciling items, net 57 3 110 6
Segment Adjusted EBITDA $ 127,991 $ 134,280 $ (6,289) (5)% $ 249,188 $ 263,549 $ (14,361) (5)%
Comparison of the Three Months Ended
Net Revenue
Supply Chain Services segment net revenue decreased by$36.0 million , or 13%, during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 driven by a decrease of$44.8 million in products revenue, partially offset by increases of$4.8 million in software licenses, other services and support revenue and$4.0 million in net administrative fees.
Net Administrative Fees
Net administrative fees increased by
months ended
2021
contracts by existing members.
Products Revenue
Products revenue decreased by$44.8 million , or 40%, during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 . The decrease was primarily driven by the state of the COVID-19 pandemic and members' excess inventory levels which contributed to lower demand for commodity products under our PREMIERPRO® brand and other previously high-demand supplies as well as fluctuations in pricing of commodity products. 42 --------------------------------------------------------------------------------
Software Licenses, Other Services and Support Revenue
Software licenses, other services and support revenue increased by$4.8 million , or 51%, during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 , primarily due to an increase in supply chain co-management fees and purchased services revenue.
Cost of Revenue
Supply Chain Services segment cost of revenue decreased by$34.2 million , or 34%, during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 . The decrease was primarily attributable to the decrease in products revenue and the corresponding decrease in cost of products revenue of$35.3 million due to the prior year increase in demand partially offset by fluctuations in product costs and higher logistics costs in the current year.
Operating Expenses
Supply Chain Services segment operating expenses increased by$1.2 million , or 2%, during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 primarily due to an increase in acquisition- and disposition-related expenses.
Segment Adjusted EBITDA
Supply Chain Services Segment Adjusted EBITDA decreased by$6.3 million during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 , primarily due to lower equity earnings from our investments in unconsolidated affiliates as well as the aforementioned decrease in products revenue and corresponding decrease in cost of products revenue.
Comparison of the Six Months Ended
Net Revenue
Supply Chain Services segment net revenue decreased by$93.1 million , or 17%, during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 driven by a decrease of$104.3 million in products revenue, partially offset by increases of$6.7 million in software licenses, other services and support revenue and$4.6 million in net administrative fees.
Net Administrative Fees
Net administrative fees increased by$4.6 million , or 2%, during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 . The net increase was primarily driven by increased utilization of our contracts by existing members. Products Revenue Products revenue decreased by$104.3 million , or 45%, during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 . The decrease was primarily due to the state of the COVID-19 pandemic and members' excess inventory levels which contributed to lower demand for commodity products under our PREMIERPRO® brand and other previously high-demand supplies as well as fluctuations in pricing of commodity products.
Software Licenses, Other Services and Support Revenue
Software licenses, other services and support revenue increased by$6.7 million , or 37%, during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 , primarily due to an increase in supply chain co-management fees and purchased services revenue.
Cost of Revenue
Supply Chain Services segment cost of revenue decreased by$83.8 million , or 39%, during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 . The decrease was primarily attributable to the decrease in products revenue and the corresponding decrease in cost of products revenue of$86.8 million due to the prior year increase in demand partially offset by fluctuations in product costs and higher logistics costs in the current year. 43 --------------------------------------------------------------------------------
Operating Expenses
Supply Chain Services segment operating expenses increased by$3.1 million , or 3%, during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 primarily due to an increase in SG&A expenses driven by increases in personnel costs and employee travel and meeting expenses as a result of the easing of pandemic-related travel restrictions during the current year. Segment Adjusted EBITDA Supply Chain Services Segment Adjusted EBITDA decreased by$14.4 million during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 , primarily due to the aforementioned decrease in products revenue and corresponding decrease in cost of products revenue and lower equity earnings from our investments in unconsolidated affiliates as well as higher employee travel and meeting expenses as COVID-19 travel restrictions were lifted.
Performance Services
The following table presents our results of operations and Adjusted EBITDA in
the Performance Services segment for the periods presented (in thousands):
Three Months Ended December
31, Six Months Ended December 31,
2022 2021 Change 2022 2021 Change
Net revenue:
Software licenses, other services
and support
SaaS-based products subscriptions $ 49,664 $ 48,317 $ 1,347 3% 97,412 95,010 $ 2,402 3%
Consulting services 18,514 15,105 3,409 23% 35,876 30,098 5,778 19%
Software licenses 30,804 23,464 7,340 31% 36,797 31,864 4,933 15%
Other 25,133 20,843 4,290 21% 48,219 39,087 9,132 23%
Net revenue 124,115 107,729 16,386 15% 218,304 196,059 22,245 11%
Cost of revenue:
Services and software licenses 50,876 42,515 8,361 20% 99,682 82,953 16,729 20%
Cost of revenue 50,876 42,515 8,361 20% 99,682 82,953 16,729 20%
Gross profit 73,239 65,214 8,025 12% 118,622 113,106 5,516 5%
Operating expenses:
Selling, general and
administrative 45,026 42,462 2,564 6% 87,157 81,263 5,894 7%
Research and development 884 774 110 14% 1,730 1,604 126 8%
Amortization of purchased
intangible assets 5,091 2,734 2,357 86% 7,460 5,487 1,973 36%
Operating expenses 51,001 45,970 5,031 11% 96,347 88,354 7,993 9%
Operating income 22,238 19,244 2,994 16% 22,275 24,752 (2,477) (10)%
Depreciation and amortization 13,711 13,342 28,758 26,699
Amortization of purchased
intangible assets 5,091 2,734 7,460 5,487
Acquisition- and
disposition-related expenses 2,137 3,690 3,788 5,559
Equity in net (loss) income of
unconsolidated affiliates (2) - 233 228
Other reconciling items, net 28 - 55 -
Segment Adjusted EBITDA $ 43,203 $ 39,010 $ 4,193 11% $ 62,569 $ 62,725 $ (156) -%
Comparison of the Three Months Ended
Net Revenue
Net revenue in our Performance Services segment increased by$16.4 million , or 15%, during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 . The increase was primarily attributable to growth of$7.3 million in software licenses driven by an increased number of enterprise analytics license agreements entered into during the current year period, an increase of$4.3 million in other revenue driven by growth inContigo Health as well as incremental revenue from the TRPN acquisition and growth of$3.4 million in consulting services under our PINC AI platform. 44 --------------------------------------------------------------------------------
Cost of Revenue
Performance Services segment cost of revenue increased by$8.4 million , or 20%, during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 , primarily due to an increase in consulting services expenses as well as higher personnel costs associated with increased headcount to support revenue growth. Operating Expenses Performance Services segment operating expenses increased by$5.0 million , or 11%, during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 . The increase was driven by an increase of$2.6 million in SG&A expenses primarily due to higher personnel costs associated with increased headcount primarily in our PINC AI and Remitra businesses offset by a decrease in acquisition- and disposition-related expenses. In addition, operating expenses increased by$2.4 million due to amortization of purchased intangible assets primarily associated with the TRPN acquisition.
Segment Adjusted EBITDA
Performance Services Segment Adjusted EBITDA increased by$4.2 million , or 11%, during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 primarily due to revenue growth inPINC AI and Contigo Health , primarily as a result a result of the TRPN acquisition, partially offset by higher cost of revenue and operating expenses driven by increases in consulting services expenses and personnel costs to support revenue growth.
Comparison of the Six Months Ended
Net Revenue
Net revenue in our Performance Services segment increased by$22.2 million , or 11%, during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 . The increase was primarily attributable to growth of$9.1 million in other revenue driven by growth inContigo Health as well as incremental revenue from the TRPN acquisition, growth of$5.8 million in consulting services under our PINC AI platform and growth of$4.9 million in software licenses driven by an increased number of enterprise analytics license agreements entered into during the current year period.
Cost of Revenue
Performance Services segment cost of revenue increased by$16.7 million , or 20%, during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 , primarily due to an increase in consulting services expenses as well as higher personnel costs associated with increased headcount to support revenue growth. Operating Expenses Performance Services segment operating expenses increased by$8.0 million , or 9%, during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 . The increase was driven by an increase of$5.9 million in SG&A expenses due to higher personnel costs associated with increased headcount primarily in our PINC AI and Remitra businesses, as well as an increase of$2.0 million in amortization of purchased intangible assets primarily due to the TRPN acquisition.
Segment Adjusted EBITDA
Performance Services Segment Adjusted EBITDA was flat for the six months ended
45 --------------------------------------------------------------------------------
Corporate
The following table presents corporate expenses and Adjusted EBITDA for the
periods presented (in thousands):
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 Change 2022 2021 Change
Operating expenses:
Selling, general and administrative $ 45,719 $ 55,933 $ (10,214) (18)% $ 85,625 $ 96,902 $ (11,277) (12)%
Operating expenses 45,719 55,933 (10,214) (18)% 85,625 96,902 (11,277) (12)%
Operating loss (45,719) (55,933) 10,214 (18)% (85,625) (96,902) 11,277 (12)%
Depreciation and amortization 2,074 2,192 4,299 4,423
Stock-based compensation 2,801 16,330 10,150 24,081
Strategic initiative and financial
restructuring-related expenses 7,527 3,749 9,046 3,774
Deferred compensation plan income 2,659 2,389 289 2,071
Other reconciling items, net - (1) - (2)
Adjusted EBITDA $ (30,658) $ (31,274) $ 616 2% $ (61,841) $ (62,555) $ 714 1%
Comparison of the Three Months Ended
Operating Expenses
Corporate operating expenses decreased by$10.2 million , or 18%, during the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 , primarily due to a decrease in stock-based compensation expense due to lower forecasted achievement of performance share awards, offset by an increase in professional fees related to strategic initiative and financial restructuring-related activities.
Adjusted EBITDA
Corporate adjusted EBITDA was flat for the three months ended
compared to the three months ended
Comparison of the Six Months Ended
Operating Expenses
Corporate operating expenses decreased by$11.3 million , or 12%, during the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 , primarily due to a decrease in stock-based compensation expense due to lower forecasted achievement of performance share awards as compared to prior year as well as a decrease in deferred compensation plan expense as a result of market changes. These decreases were partially offset by an increase in professional fees related to strategic initiatives and financial restructuring-related activities.
Adjusted EBITDA
Corporate adjusted EBITDA was flat for the six months ended
compared to the six months ended
Off-Balance Sheet Arrangements
As of
Liquidity and Capital Resources
Liquidity and Capital Resources
Our principal source of cash has been primarily cash provided by operating
activities. From time to time we have used, and expect to use in the future,
borrowings under our Credit Facility (as defined in Note 8 - Debt and Notes
Payable to the accompanying condensed consolidated financial statements) as a
source of liquidity. Our primary cash requirements include operating expenses,
working capital fluctuations, revenue share obligations, tax payments, capital
expenditures, dividend payments on our Class A common stock, if and when
declared, repurchases of Class A common stock pursuant to stock repurchase
programs in place from time to time, acquisitions and related business
investments, and general corporate activities.
46
--------------------------------------------------------------------------------
Our capital expenditures typically consist of internally developed software
costs, software purchases and computer hardware purchases.
As ofDecember 31, 2022 andJune 30, 2022 , we had cash and cash equivalents of$94.6 million and$86.1 million , respectively. As ofDecember 31, 2022 andJune 30, 2022 , there was$300.0 million and$150.0 million , respectively, of outstanding borrowings under our Credit Facility. During the six months endedDecember 31, 2022 , we borrowed$285.0 million and repaid$135.0 million under our Prior Loan Agreement (as defined in Note 8 - Debt and Notes Payable to the accompanying condensed consolidated financial statements), which was used for other general corporate purposes and to partially fund the TRPN acquisition (see Note 3 - Business Acquisitions for further information). For the six months endedDecember 31, 2022 , there were no borrowings or repayments under the Credit Facility. InJanuary 2023 , we repaid$30.0 million of outstanding borrowings under the Credit Facility. We expect cash generated from operations and borrowings under our Credit Facility to provide us with adequate liquidity to fund our anticipated working capital requirements, revenue share obligations, tax payments, capital expenditures, dividend payments on our Class A common stock, if and when declared, repurchases of Class A common stock pursuant to stock repurchase programs in place from time to time and to fund business acquisitions. Our capital requirements depend on numerous factors, including funding requirements for our product and service development and commercialization efforts, our information technology requirements, and the amount of cash generated by our operations. We believe that we have adequate capital resources at our disposal to fund currently anticipated capital expenditures, business growth and expansion, and current and projected debt service requirements. However, strategic growth initiatives will likely require the use of one or a combination of various forms of capital resources including available cash on hand, cash generated from operations, borrowings under our Credit Facility and other long-term debt and, potentially, proceeds from the issuance of additional equity or debt securities.
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