News Column

PREMIER, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 13, 2014

The following discussion should be read in conjunction with our financial statements and the notes thereto included elsewhere in this Quarterly Report and the Prospectus. 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 "Risk Factors" in the Prospectus and "Cautionary Note Regarding Forward-Looking Statements" contained in this Quarterly Report. Business Overview Our Business We are a national healthcare alliance, consisting of approximately 3,000 U.S. hospitals, approximately 110,000 alternate sites and approximately 450,000 physicians, that plays an important role in the U.S. healthcare industry. We unite hospitals, health systems, physicians and other healthcare providers with the common goal of improving and innovating in the clinical, financial and operational areas of their business 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 population health SaaS informatics products, advisory services and performance improvement collaborative programs. As of March 31, 2014, we were controlled by 181 U.S. hospitals, health systems and other healthcare organizations, through the holdings of Class B common stock, which they received upon the consummation of the IPO and Reorganization on October 1, 2013. The Class B common stock represents approximately 78% of the total of our outstanding Class A comon stock and Class B common stock. Our current membership base includes many of the country's most progressive and forward-thinking healthcare organizations and we continually seek to add new members that are at the forefront of innovation in the healthcare industry. Our Class A common stock is held by the public following the IPO. Our Business Segments Our business model and solutions are designed to provide our members access to scale efficiencies, spread the cost of their development, 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 succeed in their transformation to higher quality and more cost-effective healthcare. We deliver our integrated platform of solutions that address the areas of total cost management, quality and safety improvement and population health management through two business segments: supply chain services and performance services. Our supply chain services segment includes one of the largest healthcare GPOs in the United States, serving acute and alternate sites, a specialty pharmacy and our direct sourcing activities. Our performance services segment includes one of the largest informatics and advisory services businesses in the United States focused on healthcare providers. Our SaaS informatics products utilize our comprehensive data set to provide actionable intelligence to our members, enabling them to benchmark, analyze and identify areas of improvement across three main categories: cost management, quality and safety and population health management. This segment also includes our technology-enabled performance improvement collaboratives. Reorganization and IPO On October 1, 2013, we completed our IPO by issuing 32,374,751 shares of our Class A common stock, at a price of $27.00 per share, raising net proceeds of approximately $821.7 million, after underwriting discounts and commissions, but before expenses. In addition, on October 1, 2013, upon the consummation of the IPO, we completed the Reorganization. See Note 2 - Initial Public Offering and Reorganization to the unaudited consolidated financial statements for more information. We incurred strategic and financial restructuring expenses in connection with the Reorganization and IPO of approximately $5.2 million during fiscal year 2013 and an additional $3.6 million during the first nine months of fiscal year 2014. In addition, we anticipate future ongoing incremental expenses associated with being a public company to approximate between $4.0 million and $5.0 million on an annual basis, excluding compensation expense related to the equity incentive plan established in connection with the Reorganization and IPO. Acquisitions On October 31, 2013 we completed the acquisition of Meddius for $8.1 million. Meddius is a data acquisition and integration-as-a-service company that spans multiple hospital transaction systems including enterprise resource planning, materials management, enterprise health records and patient accounting. The Company funded the acquisition with available cash on hand. The primary reason for the acquisition of Meddius is to augment the Company's capabilities for automated data acquisition across 31 -------------------------------------------------------------------------------- the PremierConnect™ platform and associated applications. It will also allow us to explore new offerings in the market. See Note 5 - Business Acquisitions to the unaudited consolidated financial statements for more information. On July 19, 2013, we completed the acquisition of SYMMEDRx for $28.7 million. We funded the acquisition by drawing on our senior secured revolving credit facility (see Note 7 - Lines of Credit to the unaudited consolidated financial statements for more information). The primary reason for the acquisition of SYMMEDRx, a business with a track record of analyzing and reducing costs for health systems through the innovative use of data, is to continue to strengthen our ability to drive improvement in member cost savings. See Note 5 - Business Acquisitions to the unaudited consolidated financial statements for more information. Gain on sale of investment On March 11, 2014, a subsidiary of Thoma Bravo LLC, a private equity firm, acquired all the outstanding membership interests of GHX, in which the Company owned a 13% interest. Upon completion of the sale, the Company received proceeds of approximately $37.9 million, resulting in a gain on sale of investment of an equal amount. The Company may receive additional proceeds, if any, of up to approximately $543,000 subsequent to the close that would result in an additional gain on sale of investment of an equal amount. The Company expects to continue its existing business relationship with GHX. Market and Industry Trends and Outlook We expect that certain trends and economic or industry-wide factors will continue to affect our business, both in the short-term 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." Trends in the U.S. healthcare market affect our revenues in the supply chain services and performance services segments. The trends we see affecting our current healthcare business include the implementation of healthcare reform legislation, expansion of insurance coverage, intense cost pressure, payment reform, provider consolidation, 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. 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, population health management and PremierConnect™ Enterprise, a cloud-based data warehousing, collaboration and content management solution that allows our members to aggregate and share information on one common platform that is both payor and supplier neutral. Key Components of Our Results of Operations Net Revenue Net revenue consists of (i) service revenue, which includes net administrative fees revenue and other services and support revenue and (ii) product revenue. Net administrative fees revenue consists of GPO administrative fees in our supply chain services segment. Other services and support revenue consists primarily of fees generated by our performance services segment in connection with our SaaS informatics products subscriptions, advisory services and performance improvement collaborative subscriptions. Product revenue consists of specialty pharmacy and direct sourcing product sales, which are included in the supply chain services segment. Supply Chain Services Supply chain services revenue consists of GPO net administrative fees (gross administrative fees received from suppliers, reduced by the amount of any revenue share paid to members), specialty pharmacy revenue and direct sourcing revenue. The success of our supply chain services' revenue streams are influenced by the following factors: • Net administrative fee revenue - The number of members that utilize our



GPO supplier contracts and the volume of their purchases.

• Revenue share - The number of members with contractual arrangements that

provide for differing levels of revenue share and their use of our GPO

supplier contracts relative to our member owners' use of our GPO supplier

contracts. • Specialty pharmacy revenue - The number of members that utilize our specialty pharmacy, as well as the impact of changes in the defined allowable reimbursement amounts determined by Medicare, Medicaid and other managed care plans. 32

--------------------------------------------------------------------------------



• Direct sourcing revenue - The number of members that purchase products

through our direct sourcing activities and the impact of competitive

pricing. Performance Services Performance services revenue consists of SaaS informatics products subscriptions, performance improvement collaborative and other service subscriptions, professional fees for advisory services, and insurance services management fees and commissions from endorsed commercial insurance programs. Our performance services growth will depend upon the expansion of our SaaS informatics products, performance improvement collaboratives and advisory services to new and existing members and the renewal of existing subscriptions to our SaaS informatics products. Cost of Revenue Cost of service revenue includes expenses related to employees (including compensation and benefits) and outside consultants who directly provide services related to revenue-generating activities, including advisory services to members and implementation services related to SaaS informatics products. Cost of service revenue also includes expenses related to hosting services, related data center capacity costs, third-party product license expenses and amortization of the cost of internal use software. Cost of product revenue consists of purchase and shipment costs for specialty pharmaceuticals and direct sourced medical products. Our cost of product revenue will be influenced by the cost and availability of specialty pharmaceuticals and the manufacturing and transportation costs associated with direct sourced medical products. Operating Expenses Selling, general and administrative expenses consist of expenses directly associated with selling and administrative employees and indirect costs associated with employees that primarily support revenue-generating activities (including compensation and benefits) and travel-related expenses, as well as occupancy and other indirect costs, insurance costs, professional fees, and other general overhead expenses. We expect that general and administrative expenses will increase as we incur additional expenses related to being a public company, including stock-based compensation expense related to the equity incentive plan established in connection with the Reorganization and IPO. Research and development expenses consist of employee-related compensation and benefits expenses, and third-party consulting fees of technology professionals, incurred to develop, support and maintain our software-related products and services. Amortization of purchased intangible assets includes the amortization of all identified intangible assets resulting from acquisitions. Other Income, Net Other income, net, consists primarily of equity in net income of unconsolidated affiliates that is generated from our 50% ownership interest in Innovatix. A change in the number of, and use by, members that participate in our GPO programs through Innovatix could have a significant effect on the amounts earned from this investment. Other income, net, also includes interest income, net, and realized gains and losses on our marketable securities as well as gains or losses on disposal of assets. Income Tax Expense Income tax expense includes the income tax expense attributable to Premier, PHSI and PSCI. The low effective tax rate is attributable to the flow through of partnership income which is not subject to federal income taxes. For federal income tax purposes, income realized by Premier LP is taxable to its partners. Net Income Attributable to Noncontrolling Interest As of March 31, 2014, we owned an approximate 22% controlling general partner interest in Premier LP through Premier GP and a 60% voting and economic interest in S2S Global and therefore consolidate our operating results. Net income attributable to noncontrolling interest represents the portion of net income attributable to the limited partners of Premier LP (78%) and the portion of net income or loss attributable to the noncontrolling equity holders of S2S Global (40%). Our noncontrolling interest attributable to limited partners of Premier LP was reduced from 99% to approximately 78% upon the Reorganization. 33 -------------------------------------------------------------------------------- Other Key Business Metrics The other key business metrics we consider are adjusted EBITDA, segment adjusted EBITDA and adjusted fully distributed net income. We define EBITDA as net income before interest and investment income, 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 expenses that have not been incurred within the prior two years and are not expected to recur within the next two years. Such expenses include certain strategic and financial restructuring expenses. Non-operating items include gain or loss on disposal of assets. We define segment adjusted EBITDA as the segment's net revenue less operating expenses directly attributable to the segment excluding depreciation and amortization, amortization of purchased intangible assets, merger and acquisition related expenses and non-recurring or non-cash items, and including equity in net income of unconsolidated affiliates. Operating expenses directly attributable to the segment include expenses associated with sales and marketing, general and administrative and product development activities specific to the operation of each segment. General and administrative corporate expenses that are not specific to a particular segment are not included in the calculation of Segment Adjusted EBITDA. We define adjusted fully distributed net income as net income attributable to Premier (i) excluding income tax expense, (ii) excluding the effect of non-recurring and non-cash items, (iii) assuming the exchange of all the Class B common units into shares of Class A common stock, which results in the elimination of noncontrolling interest in Premier LP and (iv) reflecting an adjustment for income tax expense on pro forma fully distributed net income before income taxes at our estimated effective income tax rate. Adjusted Fully Distributed Net Income is a non-GAAP financial measure because it represents net income attributable to Premier before merger and acquisition related expenses and non-recurring or non-cash items and the effects of noncontrolling interests in Premier LP. Adjusted EBITDA is a supplemental financial measure used by us and by external users of our financial statements. We consider Adjusted EBITDA an indicator of the operational strength and performance of our business. Adjusted EBITDA allows 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. 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 and Adjusted Fully Distributed Net Income 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 than GAAP measures alone. 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 our asset base (primarily depreciation and amortization) and items outside the control of our management team (taxes), as well as other non-cash (impairment of intangible assets, purchase accounting adjustments and stock-based compensation) and non-recurring items (strategic and financial restructuring expenses), from our operations. We believe Adjusted Fully Distributed Net Income assists our board of directors, management and investors in comparing our net income on a consistent basis from period to period because it removes non-cash (impairment of intangible assets, purchase accounting adjustments and stock-based compensation) and non-recurring items (strategic and financial restructuring expenses), and eliminates the variability of noncontrolling interest as a result of member owner exchanges of Class B common units into shares of Class A common stock (which exchanges are a member owner's cumulative right, but not obligation, beginning on October 31, 2014, and each year thereafter, and are limited to one-seventh of the member owner's initial allocation of Class B common units). Despite the importance of these non-GAAP financial measures in analyzing our business, determining compliance with certain financial covenants in our Revolving Facility, measuring and determining incentive compensation and evaluating our operating performance relative to our competitors, Adjusted EBITDA and Adjusted Fully Distributed Net Income are not a measurement of financial performance under GAAP, may have limitations as an analytical tool and should not be considered in isolation from, or as an alternative to, net income or any other measure of our performance derived in accordance with GAAP. Some of the limitations of Adjusted EBITDA and Segment Adjusted EBITDA 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 Revolving Facility; income tax payments we are required to make; and any cash requirements for replacements of assets being depreciated or amortized. In addition, Adjusted EBITDA and Segment Adjusted EBITDA are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flows from continuing operating activities. 34 -------------------------------------------------------------------------------- Some of the limitations of Adjusted Fully Distributed Net Income is that it does not reflect income tax expense or income tax payments we are required to make. In addition, Adjusted Fully Distributed Net Income is not a measure of profitability under GAAP. We also urge you to review the reconciliation of these non-GAAP measures included elsewhere in this Quarterly Report. To properly and prudently evaluate our business, we encourage you to review the unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report and the audited consolidated financial statements and related notes included in the Prospectus, and to not rely on any single financial measure to evaluate our business. In addition, because Adjusted EBITDA, Segment Adjusted EBITDA and Adjusted Fully Distributed Net Income are susceptible to varying calculations, the Adjusted EBITDA, Segment Adjusted EBITDA and Adjusted Fully Distributed Net Income measures, as presented in this Quarterly Report, may differ from, and may therefore not be comparable to, similarly titled measures used by other companies. Results of Operations Our consolidated operating results prior to October 1, 2013 do not reflect (i) the Reorganization, (ii) the IPO and the use of the proceeds from the IPO or (iii) additional expenses we incur as a public company. As a result, our consolidated operating results prior to the IPO and Reorganization are not indicative of what our results of operations are for periods after the IPO and Reorganization. In addition to presenting the historical actual results, we have presented pro forma results reflecting the following for all periods presented, to provide a more indicative comparison between current and prior periods: • The contractual requirement under the GPO participation agreements to pay



each member owner revenue share from Premier LP equal to 30% of all gross

administrative fees collected by Premier LP based upon purchasing by such

member owner's member facilities through Premier LP's GPO supplier

contracts. Historically, Premier LP did not generally have a contractual

requirement to pay revenue share to member owners participating in its GPO

programs, but paid semi-annual distributions of partnership income.



• Additional U.S. federal, state and local income taxes with respect to its

additional allocable share of any taxable income of Premier LP. • A decrease in noncontrolling interest in Premier LP from 99% to approximately 78%. 35

-------------------------------------------------------------------------------- Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013 The following table summarizes our actual results of operations for Premier for the three months ended March 31, 2014 and 2013 and the pro forma consolidated results of operations for Premier for the three months ended March 31, 2013 (in thousands): Three Months Ended March 31, Actual Actual Pro Forma 2014 2013 2014 2013 Amount % of Net Revenue Amount % of Net Revenue Amount % of Net Revenue Amount % of Net Revenue Net revenue: Net administrative fees $ 108,087 48 % $ 134,335 60 % $ 108,087 48 % $ 104,762 54 % Other services and support 58,819 26 % 52,203 23 % 58,819 26 % 52,203 27 % Services 166,906 74 % 186,538 83 % 166,906 74 % 156,965 81 % Products 58,692 26 % 37,160 17 % 58,692 26 % 37,160 19 % Net revenue 225,598 100 % 223,698 100 % 225,598 100 % 194,125 100 % Cost of revenue: Services 28,382 13 % 27,026 12 % 28,382 13 % 27,026 14 % Products 52,742 23 % 34,567 15 % 52,742 23 % 34,567 18 % Cost of revenue 81,124 36 % 61,593 27 % 81,124 36 % 61,593 32 % Gross profit 144,474 64 % 162,105 73 % 144,474 64 % 132,532 68 % Operating expenses: Selling, general and administrative 73,327 33 % 59,965 27 % 73,327 33 % 59,965 31 % Research and development 820 - % 1,789 1 % 820 - % 1,789 1 % Amortization of purchased intangible assets 802 - % 385 - % 802 - % 385 - % Total operating expenses 74,949 33 % 62,139 28 % 74,949 33 % 62,139 32 % Operating income 69,525 31 % 99,966 45 % 69,525 31 % 70,393 36 % Other income, net 41,868 19 % 2,431 1 % 41,868 19 % 2,431 1 % Income before income taxes 111,393 49 % 102,397 46 % 111,393 49 % 72,824 37 % Income tax expense 9,413 4 % 1,255 1 % 9,413 4 % 8,469 4 % Net income 101,980 45 % 101,142 45 % 101,980 45 % 64,355 33 % Net (income) loss attributable to noncontrolling interest in S2S Global (530 ) - % 347 - % (530 ) - % 347 - % Net income attributable to noncontrolling interest in Premier LP (87,925 ) (39 )% (97,260 )



(43 )% (87,925 ) (39 )% (55,878 ) (29 )% Net income attributable to noncontrolling interest (88,455 ) (39 )% (96,913 )

(43 )% (88,455 ) (39 )% (55,531 ) (29 )% Net income income attributable to shareholders $ 13,525 6 % $ 4,229 2 % $ 13,525 6 % $ 8,824 5 % Adjusted EBITDA (1) $ 91,305 40 % $ 110,724 49 % $ 91,305 40 % $ 81,151 42 % Adjusted Fully Distributed Net Income (2) $ 47,807 21 % $ 44,014 23 % 36

--------------------------------------------------------------------------------



(1) The table that follows shows the reconciliation of net income to Adjusted

EBITDA and the reconciliation of Segment Adjusted EBITDA to operating income

for the periods presented (in thousands):

Three Months Ended March 31, Actual Actual Pro Forma 2014 2013 2014 2013 Net income $ 101,980$ 101,142$ 101,980$ 64,355 Interest and investment income, net (a) (400 ) (281 ) (400 ) (281 ) Income tax expense 9,413 1,255 9,413 8,469 Depreciation and amortization 9,396 6,789 9,396 6,789 Amortization of purchased intangible assets 802 385 802 385 EBITDA 121,191 109,290 121,191 79,717 Stock-based compensation 6,299 - 6,299 - Acquisition related expenses (b) 984 - 984 - Strategic and financial restructuring expenses (c) 733 1,429 733 1,429 Gain on sale of investment (d) (37,850 ) - (37,850 ) - Other (income) expense, net (52 ) 5 (52 ) 5 Adjusted EBITDA $ 91,305$ 110,724$ 91,305$ 81,151 Segment Adjusted EBITDA: Supply Chain Services $ 91,477$ 112,389$ 91,477$ 82,816 Performance Services 20,307 16,322 20,307 16,322 Corporate (e) (20,479 ) (17,987 ) (20,479 ) (17,987 ) Adjusted EBITDA 91,305 110,724 91,305 81,151 Depreciation and amortization (9,396 ) (6,789 ) (9,396 ) (6,789 ) Amortization of purchased intangible assets (802 ) (385 ) (802 ) (385 ) Stock-based compensation (6,299 ) - (6,299 ) - Acquisition related expenses (b) (984 ) - (984 ) - Strategic and financial restructuring expenses (c) (733 ) (1,429 ) (733 ) (1,429 ) Equity in net income of unconsolidated affiliates (3,566 ) (2,155 ) (3,566 ) (2,155 ) 69,525 99,966 69,525 70,393 Pro forma adjustment for revenue share post-IPO - - - 29,573 Operating income $ 69,525$ 99,966$ 69,525$ 99,966



(a) Represents interest income and realized gains and losses on our marketable

securities.

(b) Represents legal, accounting and other expenses related to acquisition

activities. (c) Represents legal, accounting and other expenses directly related to the Reorganization and IPO.



(d) Represents the gain on sale of GHX.

(e) Corporate consists of general and administrative corporate expenses that are not specific to either of our segments. 37

--------------------------------------------------------------------------------



(2) The table that follows shows the reconciliation of net income attributable to

shareholders to pro forma Adjusted Fully Distributed Net Income for the periods presented (in thousands): Three Months Ended March 31, 2014 2013 Pro Forma Adjusted Fully Distributed Net Income Net income attributable to shareholders $ 13,525$ 4,229 Pro forma adjustment for revenue share post-IPO - (29,573 ) Income tax expense 9,413 1,255 Stock-based compensation 6,299 - Acquisition related expenses (a) 984 - Strategic and financial restructuring expenses (b) 733 1,429 Gain on sale of investment (c) (37,850 ) - Net income attributable to noncontrolling interest in Premier LP (d) 87,925 97,260 Pro forma fully distributed income before income taxes 81,029 74,600 Income tax expense on fully distributed income before income taxes (e) 33,222 30,586 Pro Forma Adjusted Fully Distributed Net Income $ 47,807$ 44,014



(a) Represents legal, accounting and other expenses related to acquisition

activities. (b) Represents legal, accounting and other expenses directly related to the Reorganization and IPO.



(c) Represents the gain on sale of GHX.

(d) Reflects the elimination of the noncontrolling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common units for shares of Class A common stock.



(e) Reflects income tax expense at an estimated effective income tax rate of

41% of income before income taxes assuming the conversion of all Class B

common units into shares of Class A common stock and the tax impact of

excluding strategic and financial restructuring expenses.

Net Revenue The following table summarizes our actual net revenue for the three months ended March 31, 2014 and 2013, respectively, and our pro forma net revenue for the three months ended March 31, 2013, indicated both in dollars (in thousands) and as a percentage of net revenue: Three Months Ended March 31, Actual Actual Pro Forma 2014 2013 2014 2013 % of Net % of Net % of Net % of Net Amount Revenue Amount Revenue



Amount Revenue Amount Revenue Supply Chain Services: Net administrative fees $ 108,087 48 % $ 134,335 60 %

$ 108,087 48 % $ 104,762 54 % Other services and support 197 - %

421 - % 197 - % 421 - % Services 108,284 48 % 134,756 60 % 108,284 48 % 105,183 54 % Products 58,692 26 % 37,160 17 %



58,692 26 % 37,160 19 % Total Supply Chain Services 166,976 74 % 171,916 77 %

166,976 74 % 142,343 73 % Performance Services: Other services and support 58,622 26 % 51,782 23 %

58,622 26 % 51,782 27 % Total net revenue

$ 225,598 100 % $ 223,698 100 %



$ 225,598 100 % $ 194,125 100 %

Total net revenue for the three months ended March 31, 2014 was $225.6 million, an increase of $1.9 million, or 1%, from $223.7 million for the three months ended March 31, 2013. Total net revenue was $225.6 million for the three months ended March 31, 2014, an increase of $31.5 million, or 16%, from pro forma net revenue of $194.1 million for the three months ended March 31, 2013. 38 -------------------------------------------------------------------------------- Supply Chain Services Our supply chain services segment net revenue for the three months ended March 31, 2014 was $167.0 million, a decrease of $4.9 million, or 3%, from $171.9 million for the three months ended March 31, 2013. Our supply chain services segment net revenue for the three months ended March 31, 2014 was $167.0 million, an increase of $24.7 million, or 17%, from pro forma supply chain services segment net revenue of $142.3 million for the three months ended March 31, 2013. Net administrative fees revenue in our supply chain services segment for the three months ended March 31, 2014 was $108.1 million, a decrease of $26.2 million, or 20%, from $134.3 million for the three months ended March 31, 2013. Revenue share increased $26.3 million, reflecting $42.8 million of 30% revenue share payable to member owners after the Reorganization on October 1, 2013. This increase was offset by a decrease in revenue share of $15.3 million, as a result of the conversion of certain members with contractual revenue share agreements to member owners during fiscal 2013, and from increased gross administrative fees revenue from member owners with a lower contractual revenue share, on average, compared to non-owner members. Net administrative fees revenue for the three months ended March 31, 2014 was $108.1 million, an increase of $3.3 million, from pro forma net administrative fees revenue of $104.8 million for the three months ended March 31, 2013. The increase in net administrative fees revenue was primarily attributable to a decrease in revenue share as a result of increased gross administrative fees revenue from member owners relative to non-owner members. Product revenue in our supply chain services segment for the three months ended March 31, 2014 was $58.7 million, an increase of $21.5 million, or 58%, from $37.2 million for the three months ended March 31, 2013. Product revenue in our supply chain services segment increased for the three months ended March 31, 2014 due to increased direct sourcing revenue, as a result of growth in our members purchasing our products through our direct sourcing program, and increased specialty pharmacy revenue, as a result of growth of historical patient prescriptions, the expansion of specialty pharmacy product sales to our members and the availability and associated sales of additional limited-distribution drugs available in the portfolio. We expect our direct sourcing and specialty pharmacy program revenue to continue to grow to the extent we are able to expand our product sales to existing members and additional members begin to utilize our products. Performance Services Other services and support revenue in our performance services segment for the three months ended March 31, 2014 was $58.6 million, an increase of $6.8 million, or 13%, from $51.8 million for the three months ended March 31, 2013. The increase was primarily attributable to $4.1 million of new SaaS informatics products, driven by our population health management SaaS informatics products, $1.5 million of advisory services, and revenue generated from performance improvement collaboratives. Pro forma adjustments do not impact financial results for our performance services segment. Cost of Revenue The following table summarizes our cost of revenue for the periods indicated both in dollars (in thousands) and as a percentage of net revenue: Three Months Ended March 31, Actual 2014 2013 Amount % of Net Revenue Amount % of Net Revenue Cost of revenue: Products $ 52,742 23 % $ 34,567 16 % Services 28,382 13 % 27,026 12 % Total cost of revenue $ 81,124 36 % $ 61,593 28 % Cost of revenue by segment: Supply Chain Services $ 53,299 24 % $ 35,596 16 % Performance Services 27,825 12 % 25,997 12 % Total cost of revenue $ 81,124 36 % $ 61,593 28 % Cost of revenue for the three months ended March 31, 2014 was $81.1 million, an increase of $19.5 million, or 32%, from $61.6 million for the three months ended March 31, 2013. Cost of product revenue increased by $18.2 million, which was primarily attributable to the increases in direct sourcing and specialty pharmacy revenue. We expect our cost of product revenue to increase as we sell additional direct-sourced medical products and specialty pharmaceuticals to new and existing members. Cost of service 39 -------------------------------------------------------------------------------- revenue increased by $1.3 million primarily due to an increase in amortization of internally-developed software applications and expenses related to population health management SaaS informatics products under reseller agreements. We expect cost of service revenue to increase to the extent we expand our performance improvement collaboratives and advisory services to members, increase sales of our population health management SaaS informatics products under reseller agreements, and continue to develop new and existing internally-developed software applications. Cost of revenue for the supply chain services segment for the three months ended March 31, 2014 was $53.3 million, an increase of $17.7 million, or 50%, from $35.6 million for the three months ended March 31, 2013. The increase is primarily attributable to the growth in direct sourcing and specialty pharmacy, which have higher associated cost of revenue as compared to group purchasing. As a result, there is a higher increase in cost of revenue relative to net revenue because product revenue is growing at a higher rate than net administrative fees. Cost of revenue for the performance services segment for the three months ended March 31, 2014 was $27.8 million, an increase of $1.8 million, or 7%, from $26.0 million for the three months ended March 31, 2013. The increase is primarily attributable to the increase in amortization of internally-developed software applications and expenses related to population health management SaaS informatics products under reseller agreements. Operating Expenses The following table summarizes our operating expenses for the periods indicated both in dollars (in thousands) and as a percentage of net revenue: Three Months Ended March 31, Actual 2014 2013 Amount % of Net Revenue Amount % of Net Revenue Operating expenses: Selling, general and administrative $ 73,327 33 % $ 59,965 27 % Research and development 820 - % 1,789 1 % Amortization of purchased intangible assets 802 - % 385 - % Total operating expenses 74,949 33 % 62,139 28 % Operating expenses by segment: Supply Chain Services $ 26,185 12 % $ 26,397 12 % Performance Services 20,233 9 % 15,387 7 % Total segment operating expenses 46,418 21 % 41,784 19 % Corporate 28,531 12 % 20,355 9 % Total operating expenses $ 74,949 33 % $ 62,139 28 % Selling, General and Administrative Selling, general and administrative expenses for the three months ended March 31, 2014 were $73.3 million, an increase of $13.3 million, or 22%, from $60.0 million for the three months ended March 31, 2013. The increase was attributable to $6.3 million of stock-based compensation expense and $1.0 million of acquisition-related expenses recognized during the three months ended March 31, 2014, as well as higher employee-related expenses due to increased selling and service personnel headcount and other general and administrative expenses attributable to operating as a public company. We expect our selling, general and administrative expenses will continue to increase as we grow our business and incur additional expenses related to being a newer public company. Research and Development Research and development expenses for the three months ended March 31, 2014 were $0.8 million, a decrease of $1.0 million, or 56%, from $1.8 million for the three months ended March 31, 2013. The decrease was primarily a result of a higher level of capitalized expenses in the current fiscal year from software in the development stages of production and higher non-capitalizable outside contractor expenses in the prior fiscal year related to the development and testing activities associated with PremierConnect™ platform and associated applications. We experience fluctuations in our research and development expenditures across reportable periods due to the timing of our software development lifecycles, with new product features and functionality, new technologies and upgrades to our service offerings. 40 -------------------------------------------------------------------------------- Amortization of Purchased Intangible Assets Amortization of purchased intangible assets for the three months ended March 31, 2014 was $0.8 million, an increase of $0.4 million, or 100%, from $0.4 million for the three months ended March 31, 2013. The increase was as a result of the additional amortization of purchased intangible assets obtained in the acquisition of SYMMEDRx in July 2013 and Meddius in October 2013. As we execute on our growth strategy and deploy capital from our IPO, we expect further increases in amortization of purchased intangible assets in connection with future potential acquisitions. Other Non-operating Income and Expense Other Income, Net Other income, net, for the three months ended March 31, 2014 was $41.9 million, an increase of $39.5 million from $2.4 million for the three months ended March 31, 2013. This increase is primarily attributable to the $37.9 million gain recognized in connection with the sale of our 13% equity interest in GHX, as well as a $1.4 million increase in equity in net income of unconsolidated affiliates that is generated from our 50% ownership interest in Innovatix. Income Tax Expense Income tax expense for the three months ended March 31, 2014 was $9.4 million, an increase of $8.1 million from $1.3 million for the three months ended March 31, 2013, which is primarily attributable to additional taxable income from the increase in net income attributable to shareholders which was approximately 22% for the three months ended March 31, 2014, from 1% for the three months ended March 31, 2013. Our effective tax rate was 8.5% and 1.2% for the three months ended March 31, 2014 and 2013, respectively. The low effective tax rate compared to the statutory rate for both periods is attributable to the flow through of partnership income which is not subject to federal income taxes. On a pro forma basis, income tax expense for the three months ended March 31, 2014 was $9.4 million, an increase of $0.9 million, from $8.5 million of income tax expense on a pro forma basis, which reflects the impact of the Reorganization for the three months ended March 31, 2013. The increase in tax expense is primarily attributable to additional taxable income in the Company, PHSI and PSCI compared to the prior year. The effective tax rate was 8.5% and 11.6% for the three months ended March 31, 2014 and 2013, respectively. The lower effective tax rate is primarily attributable to lower taxable income within PHSI and PSCI. The low effective tax rate for both periods is attributable to the flow through of partnership income which is not subject to federal income taxes. Net Income Attributable to Noncontrolling Interest Net income attributable to noncontrolling interest for the three months ended March 31, 2014 was $88.5 million, a decrease of $8.4 million, or 9%, from $96.9 million for the three months ended March 31, 2013, primarily as a result of the change in ownership of the limited partners from 99% to 78% in connection with the Reorganization. On a pro forma basis, net income attributable to noncontrolling interest was $88.5 million for the three months ended March 31, 2014, an increase of $33.0 million, or 59%, from $55.5 million for the three months ended March 31, 2013. This increase was attributable to higher income of Premier LP, driven by the $37.9 million gain recognized on the sale of our investment in GHX for the three months ended March 31, 2014, of which 78% was allocated to the limited partners of Premier LP. Adjusted EBITDA



Three Months Ended March 31,

Actual Actual Pro Forma 2014 2013 2014 2013 Amount % of Net Revenue Amount % of Net Revenue Amount % of Net Revenue Amount % of Net Revenue Adjusted EBITDA by segment: Supply Chain Services 91,477 41 % 112,389 50 % 91,477 41 % 82,816 43 % Performance Services 20,307 8 % 16,322 7 % 20,307 9 % 16,322 8 % Total Segment Adjusted EBITDA 111,784 50 % 128,711 57 % 111,784 50 % 99,138 51 % Corporate (20,479 ) (9 )% (17,987 ) (8 )% (20,479 ) (9 )% (17,987 ) (9 )% Total Adjusted EBITDA $ 91,305 40 % $ 110,724 49 % $ 91,305 40 % $ 81,151 42 % 41

-------------------------------------------------------------------------------- Adjusted EBITDA for the three months ended March 31, 2014 was $91.3 million, a decrease of $19.4 million, or 18%, from $110.7 million for the three months ended March 31, 2013. Adjusted EBITDA for the three months ended March 31, 2014 was $91.3 million an increase of $10.1 million, or 12%, from pro forma Adjusted EBITDA of $81.2 million for the three months ended March 31, 2013. Segment Adjusted EBITDA for the supply chain services segment of $91.5 million for the three months ended March 31, 2014 reflects a decrease of $20.9 million, or 19%, compared to $112.4 million for the three months ended March 31, 2013, primarily driven by the 30% revenue share payable to member owners after the Reorganization on October 1, 2013. Segment Adjusted EBITDA for the supply chain services segment of $91.5 million for the three months ended March 31, 2014 reflects an increase of $8.7 million, or 11%, compared to pro forma Segment Adjusted EBITDA of $82.8 million for the three months ended March 31, 2013, primarily as a result of the growth in direct sourcing, increased net administrative fees revenue and decreased operating expenses. Segment Adjusted EBITDA for the performance services segment of $20.3 million for the three months ended March 31, 2014 reflects an increase of $4.0 million, or 25%, compared to $16.3 million for the three months ended March 31, 2013, as a result of growth from advisory services engagements, the sale of new SaaS informatics products and performance improvement collaboratives. 42 -------------------------------------------------------------------------------- Nine Months Ended March 31, 2014 Compared to the Nine Months Ended March 31, 2013 The following table summarizes our actual results of operations for Premier for the nine months ended March 31, 2014 and 2013 and the pro forma consolidated results of operations for Premier for the nine months ended March 31, 2014 and 2013 (in thousands): Nine Months Ended March 31, Actual Pro Forma 2014 2013 2014 2013 Amount % of Net Revenue Amount % of Net Revenue Amount % of Net Revenue Amount % of Net Revenue Net revenue: Net administrative fees $ 353,793 52 % $ 372,454 59 % $ 312,530 49 % $ 307,105 54 % Other services and support 170,268 25 % 150,985 24 % 170,268 27 % 150,985 27 % Services 524,061 78 % 523,439 83 % 482,798 76 % 458,090 81 % Products 151,022 22 % 105,250 17 % 151,022 24 % 105,250 19 % Net revenue 675,083 100 % 628,689 100 % 633,820 100 % 563,340 100 % Cost of revenue: Services 84,887 12 % 76,696 12 % 84,887 13 % 76,696 14 % Products 136,500 20 % 97,305 16 % 136,500 21 % 97,305 17 % Cost of revenue 221,387 33 % 174,001 28 % 221,387 35 % 174,001 31 % Gross profit 453,696 67 % 454,688 72 % 412,433 65 % 389,339 69 % Operating expenses: Selling, general and administrative 209,096 31 % 177,133 28 % 209,096 33 % 177,133 32 % Research and development 2,714 - % 7,799 1 % 2,714 1 % 7,799 1 % Amortization of purchased intangible assets 2,158 - % 1,154 - % 2,158 - % 1,154 - % Total operating expenses 213,968 32 % 186,086 29 % 213,968 34 % 186,086 33 % Operating income 239,728 36 % 268,602 43 % 198,465 31 % 203,253 36 % Other income, net 50,718 8 % 8,926 1 % 50,718 8 % 8,926 2 % Income before income taxes 290,446 43 % 277,528 44 % 249,183 39 % 212,179 38 % Income tax expense 24,461 4 % 5,938 1 % 21,349 3 % 24,675 5 % Net income 265,985 39 % 271,590 43 % 227,834 36 % 187,504 33 % Net loss attributable to noncontrolling interest in S2S Global (477 ) - % 1,046 - % (477 ) - % 1,046 - % Net income attributable to noncontrolling interest in Premier LP (246,055 ) (36 )% (264,463 )



(43 )% (188,365 ) (30 )% (161,059 ) (29 )% Net income attributable to noncontrolling interest (246,532 ) (37 )% (263,417 )

(43 )% (188,842 ) (30 )% (160,013 ) (28 )% Net income attributable to shareholders

$ 19,453 3 % $ 8,173 1 % $ 38,992 6 % $ 27,491 5 % Adjusted EBITDA (1) $ 299,044 44 % $ 301,233 48 % $ 257,781 41 % $ 235,884 42 % Adjusted Fully Distributed Net Income (2) $ 135,046 21 % $ 127,777 23 % 43

--------------------------------------------------------------------------------



(1) The table that follows shows the reconciliation of net income to Adjusted

EBITDA and the reconciliation of Segment Adjusted EBITDA to operating income

for the periods presented (in thousands):

Nine Months Ended March 31, Actual Pro Forma 2014 2013 2014 2013 Net income $ 265,985$ 271,590$ 227,834$ 187,504 Interest and investment income, net (a) (641 ) (599 ) (641 ) (599 ) Income tax expense 24,461 5,938 21,349 24,675 Depreciation and amortization 26,952 19,798 26,952 19,798 Amortization of purchased intangible assets 2,158 1,154 2,158 1,154 EBITDA 318,915 297,881 277,652 232,532 Stock-based compensation 13,118 - 13,118 - Acquisition related expenses (b) 1,303 - 1,303 - Strategic and financial restructuring expenses (c) 3,614 3,347 3,614 3,347 Gain on sale of investment (d) (37,850 ) - (37,850 ) - Other (income) expense, net (56 ) 5 (56 ) 5 Adjusted EBITDA $ 299,044$ 301,233$ 257,781$ 235,884 Segment Adjusted EBITDA: Supply Chain Services $ 302,076$ 309,745$ 260,813$ 244,396 Performance Services 54,367 42,055 54,367 42,055 Corporate (e) (57,399 ) (50,567 ) (57,399 ) (50,567 ) Adjusted EBITDA 299,044 301,233 257,781 235,884 Depreciation and amortization (26,952 ) (19,798 ) (26,952 ) (19,798 ) Amortization of purchased intangible assets (2,158 ) (1,154 ) (2,158 ) (1,154 ) Stock-based compensation (13,118 ) - (13,118 ) - Acquisition related expenses (b) (1,303 ) - (1,303 ) - Strategic and financial restructuring expenses (c) (3,614 ) (3,347 ) (3,614 ) (3,347 ) Equity in net income of unconsolidated affiliates (12,171 ) (8,332 ) (12,171 ) (8,332 ) 239,728 268,602 198,465 203,253 Pro forma adjustment for revenue share post-IPO - - 41,263 65,349 Operating income $ 239,728$ 268,602$ 239,728$ 268,602



(a) Represents interest income and realized gains and losses on our marketable

securities.

(b) Represents legal, accounting and other expenses related to acquisition

activities. (c) Represents legal, accounting and other expenses directly related to the Reorganization and IPO.



(d) Represents the gain on sale of GHX.

(e) Corporate consists of general and administrative corporate expenses that are not specific to either of our segments. 44

--------------------------------------------------------------------------------



(2) The table that follows shows the reconciliation of net income attributable to

shareholders to pro forma Adjusted Fully Distributed Net Income for the periods presented (in thousands): Nine Months Ended March 31, 2014 2013 Pro Forma Adjusted Fully Distributed Net Income Net income attributable to shareholders $ 19,453$ 8,173 Pro forma adjustment for revenue share post-IPO (41,263 ) (65,349 ) Income tax expense 24,461 5,938 Stock-based compensation 13,118 - Acquisition related expenses (a) 1,303 - Strategic and financial restructuring expenses (b) 3,614 3,347 Gain on sale of investment (c) (37,850 ) - Net income attributable to noncontrolling interest in Premier LP (d) 246,055 264,463 Pro forma fully distributed income before income taxes 228,891 216,572 Income tax expense on fully distributed income before income taxes (e) 93,845 88,795 Pro Forma Adjusted Fully Distributed Net Income $ 135,046$ 127,777



(a) Represents legal, accounting and other expenses related to acquisition

activities. (b) Represents legal, accounting and other expenses directly related to the Reorganization and IPO.



(c) Represents the gain on sale of GHX.

(d) Reflects the elimination of the noncontrolling interest in Premier LP as if all member owners of Premier LP had fully exchanged their Class B common units for shares of Class A common stock.



(e) Reflects income tax expense at an estimated effective income tax rate of

41% of income before income taxes assuming the conversion of all Class B

common units into shares of Class A common stock and the tax impact of

excluding strategic and financial restructuring expenses.

Net Revenue The following table summarizes our actual net revenue for the nine months ended March 31, 2014 and 2013 and pro forma net revenue for the nine months ended March 31, 2014 and 2013 indicated both in dollars (in thousands) and as a percentage of net revenue: Nine Months Ended March 31, Actual Pro Forma 2014 2013 2014 2013 % of Net % of Net % of Net % of Net Amount Revenue Amount Revenue



Amount Revenue Amount Revenue Supply Chain Services: Net administrative fees $ 353,793 52 % $ 372,454 59 %

$ 312,530 49 % $ 307,105 55 % Other services and support 504 - %

515 - % 504 - % 515 - % Services 354,297 52 % 372,969 59 % 313,034 49 % 307,620 55 % Products 151,022 22 % 105,250 17 %



151,022 24 % 105,250 18 % Total Supply Chain Services 505,319 75 % 478,219 76 %

464,056 73 % 412,870 73 % Performance Services: Other services and support 169,764 25 % 150,470 24 %

169,764 27 % 150,470 27 % Total net revenue

$ 675,083 100 % $ 628,689 100 %



$ 633,820 100 % $ 563,340 100 %

Total net revenue for the nine months ended March 31, 2014 was $675.1 million, an increase of $46.4 million, or 7%, from $628.7 million for the nine months ended March 31, 2013. On a pro forma basis, total net revenue for the nine months ended March 31, 2014 was $633.8 million, an increase of $70.5 million, or 13%, from $563.3 million for the nine months ended March 31, 2013. 45 -------------------------------------------------------------------------------- Supply Chain Services Our supply chain services segment net revenue for the nine months ended March 31, 2014 was $505.3 million, an increase of $27.1 million, or 6%, from $478.2 million for the nine months ended March 31, 2013. On a pro forma basis, our supply chain services segment net revenue for the nine months ended March 31, 2014 was $464.1 million, an increase of $51.2 million, or 12%, from $412.9 million for the nine months ended March 31, 2013. Net administrative fees revenue in our supply chain services segment for the nine months ended March 31, 2014 was $353.8 million, a decrease of $18.7 million, or 5%, from $372.5 million for the nine months ended March 31, 2013. Gross administrative fees increased $4.5 million. Revenue share increased $23.2 million as a result of $82.6 million of revenue share payable to member owners at 30% after the Reorganization on October 1, 2013 and by higher revenue share on increased gross administrative fees revenue, offset by the benefit of approximately $54.3 million from the conversion of certain members with contractual revenue share arrangements to member owners during fiscal 2013. On a pro forma basis, which reflects revenue share to member owners at 30% for both periods, net administrative fees revenue was $312.5 million, an increase of $5.4 million, or 2%, from $307.1 million. Gross administrative fees increased $4.5 million and pro forma revenue share decreased by $0.9 million. Pro forma revenue share decreased as a result of increased gross administrative fees revenue from member owners with a lower contractual revenue share, on average, compared to non-owner members. While we expect increases in our member purchases under our GPO contracts to occur for the remainder of the fiscal year, net administrative fees revenue has been impacted as a result of an expected timing lag of contract conversions among member owners that joined during fiscal year 2013. Product revenue in our supply chain services segment for the nine months ended March 31, 2014 was $151.0 million, an increase of $45.7 million, or 43%, from $105.3 million for the nine months ended March 31, 2013, due to increased direct sourcing revenue, as a result of growth in our members purchasing our products through our direct sourcing program, and increased specialty pharmacy revenue, as a result of growth of historical patient prescriptions, the expansion of specialty pharmacy product sales to our members and the availability and associated sales of additional limited-distribution drugs available in the portfolio. We expect our direct sourcing and specialty pharmacy program revenue to continue to grow to the extent we are able to expand our product sales to existing members and additional members begin to utilize our products. Performance Services Other services and support revenue in our performance services segment for the nine months ended March 31, 2014 was $169.8 million, an increase of $19.3 million, or 13%, from $150.5 million for the nine months ended March 31, 2013. The increase was primarily attributable to $10.4 million of new SaaS informatics products, $5.9 million of advisory services and revenue generated from performance improvement collaboratives. Pro forma adjustments do not impact financial results for our performance services segment. Cost of Revenue The following table summarizes our cost of revenue for the periods indicated both in dollars (in thousands) and as a percentage of net revenue: Nine Months Ended March 31, Actual 2014 2013 Amount % of Net Revenue Amount % of Net Revenue Cost of revenue: Products $ 136,500 20 % $ 97,305 16 % Services 84,887 12 % 76,696 12 % Total cost of revenue $ 221,387 33 % $ 174,001 28 % Cost of revenue by segment: Supply Chain Services $ 138,716 21 % $ 101,021 16 % Performance Services 82,671 12 % 72,980 12 % Total cost of revenue $ 221,387 33 % $ 174,001 28 % Cost of revenue for the nine months ended March 31, 2014 was $221.4 million, an increase of $47.4 million, or 27%, from $174.0 million for the nine months ended March 31, 2013. Cost of product revenue increased by $39.2 million, which was primarily 46 -------------------------------------------------------------------------------- attributable to the increases in direct sourcing and specialty pharmacy revenue. We expect our cost of product revenue to increase as we sell additional direct-sourced medical products and specialty pharmaceuticals to new and existing members. Cost of service revenue increased by $8.2 million primarily due to an increase in amortization of internally-developed software applications, expenses related to population health management SaaS informatics products under reseller agreements and labor associated with advisory services engagements. We expect cost of service revenue to increase to the extent we expand our performance improvement collaboratives and advisory services to members, increase sales of our population health management SaaS informatics products under reseller agreements, and continue to develop new and existing internally-developed software applications. Cost of revenue for the supply chain services segment for the nine months ended March 31, 2014 was $138.7 million, an increase of $37.7 million, or 37%, from $101.0 million for the nine months ended March 31, 2013. The increase is primarily attributable to the growth in direct sourcing and specialty pharmacy, which have a higher associated cost of revenue as compared to group purchasing. As a result, there is a higher increase in cost of revenue relative to net revenue because net administrative fees represents the majority of supply chain services net revenue and product revenue from direct sourcing and specialty pharmacy is growing at a higher rate than net administrative fees. Cost of revenue for the performance services segment for the nine months ended March 31, 2014 was $82.7 million, an increase of $9.7 million, or 13%, from $73.0 million for the nine months ended March 31, 2013. The increase is primarily attributable to the increase in amortization of internally-developed software applications, expenses related to population health management SaaS informatics products under reseller agreements and labor associated with advisory services engagements. Operating Expenses The following table summarizes our operating expenses for the periods indicated both in dollars (in thousands) and as a percentage of net revenue: Nine Months Ended March 31, Actual 2014 2013 Amount % of Net Revenue Amount % of Net Revenue Operating expenses: Selling, general and administrative $ 209,096 32 % $ 177,133 28 % Research and development 2,714 - % 7,799 2 % Amortization of purchased intangible assets 2,158 - % 1,154 - % Total operating expenses 213,968 32 % 186,086 30 % Operating expenses by segment: Supply Chain Services 77,825 11 % 76,714 13 % Performance Services 58,262 9 % 52,580 8 % Total segment operating expenses 136,087 20 % 129,294 21 % Corporate 77,881 12 % 56,792 9 % Total operating expenses $ 213,968 32 % $ 186,086 30 % Selling, General and Administrative Selling, general and administrative expenses for the nine months ended March 31, 2014 were $209.1 million, an increase of $32.0 million, or 18%, from $177.1 million for the nine months ended March 31, 2013. The increase was attributable to $13.1 million of stock-based compensation expense for the nine months ended March 31, 2014, $10.0 million of higher employee-related expenses, primarily related to increased selling and service personnel headcount, $1.3 million of higher travel-related expenses, $1.3 million of increased acquisition-related expenses and other general and administrative expenses related to operating as a public company. We expect our selling, general and administrative expenses will continue to increase as we grow our business and incur additional expenses related to being a newer public company, including stock-based compensation expense related to the equity incentive plan established in connection with the Reorganization. Research and Development Research and development expenses for the nine months ended March 31, 2014 were $2.7 million, a decrease of $5.1 million, or 65%, from $7.8 million for the nine months ended March 31, 2013. The decrease was primarily a result of a higher level of 47 -------------------------------------------------------------------------------- capitalized expenses in the current fiscal year from software in the development stages of production and higher non-capitalizable outside contractor expenses in the prior fiscal year related to the development and testing activities associated with PremierConnect™ platform and associated applications. Total research and development expenditures, which include capitalized software development costs, increased $2.8 million, or 10%, during the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013. We experience fluctuations in our research and development expenditures across reportable periods due to the timing of our software development lifecycles, with new product features and functionality, new technologies and upgrades to our service offerings. Amortization of Purchased Intangible Assets Amortization of purchased intangible assets for the nine months ended March 31, 2014 was $2.2 million, an increase of $1.0 million, or 83%, from $1.2 million for the nine months ended March 31, 2013. The increase was as a result of the additional amortization of purchased intangible assets obtained in the acquisitions of SYMMEDRx in July 2013 and Meddius in October 2013. As we execute on our growth strategy and deploy capital from our IPO, we expect further increases in amortization of purchased intangible assets in connection with future potential acquisitions. Other Non-operating Income and Expense Other Income, Net Other income, net, for the nine months ended March 31, 2014 was $50.7 million, an increase of $41.8 million, or 470%, from $8.9 million for the nine months ended March 31, 2013. This increase is primarily attributable to the $37.9 million gain recognized in connection with the sale of our 13% equity interest in GHX, as well as a $2.8 million increase in equity in net income of unconsolidated affiliates that is generated from our 50% ownership interest in Innovatix. Income Tax Expense Income tax expense for the nine months ended March 31, 2014 was $24.5 million, an increase of $18.6 million from $5.9 million for the nine months ended March 31, 2013, which is primarily attributable to taxes recorded on the gain recognized by PHSI on the sale of its 1% general partner interest in Premier LP in connection with the Reorganization, and additional taxable income from the increase in net income attributable to shareholders which became approximately 22% for the six months ended March 31, 2014 and 1% for the three months ended September 31, 2013, compared to 1% for the nine months ended March 31, 2013. Our effective tax rate was 8.4% and 2.1% for the nine months ended March 31, 2014 and 2013, respectively. The low effective tax rate compared to the statutory rate for both periods is attributable to the flow through of partnership income which is not subject to federal income taxes. On a pro forma basis, income tax expense for the nine months ended March 31, 2014 was $21.3 million, a decrease of $3.4 million, or 14%, from $24.7 million of income tax expense on a pro forma basis for the nine months ended March 31, 2013, which reflects the impact of the Reorganization for the three months ended September 30, 2013 and the nine months ended March 31, 2013. Since pro forma financial results give effect to the Reorganization for all periods presented, there is no tax expense attributable to the gain recognized by PHSI in connection with the sale of its 1% general partner interest in Premier LP. The decrease in tax expense is primarily attributable to lower taxable income in PHSI and PSCI compared to the prior year. The effective tax rate was 8.6% and 11.6% for the nine months ended March 31, 2014 and 2013, respectively. The low effective tax rate for both periods is attributable to the flow through of partnership income which is not subject to federal income taxes. Net Income Attributable to Noncontrolling Interest Net income attributable to noncontrolling interest for the nine months ended March 31, 2014 was $246.5 million, a decrease of $16.9 million, or 6%, from $263.4 million for the nine months ended March 31, 2013, primarily as a result of the change in ownership of the limited partners from 99% to 78%, as a result of the Reorganization. On a pro forma basis, net income attributable to noncontrolling interest for the nine months ended March 31, 2014 was $188.8 million, an increase of $28.8 million, or 18%, from $160.0 million for the nine months ended March 31, 2013. This increase was attributable to higher income of Premier LP, primarily driven by the $37.9 million gain recognized on the sale of our investment in GHX for the three months ended March 31, 2014, of which 78% was allocated to the limited partners of Premier LP. 48 --------------------------------------------------------------------------------



Adjusted EBITDA

Nine Months Ended March 31, Actual Pro Forma 2014 2013 2014 2013 Amount % of Net Revenue Amount % of Net Revenue Amount % of Net Revenue Amount % of Net Revenue Adjusted EBITDA by segment: Supply Chain Services 302,076 45 % 309,745 49 % 260,813 41 % 244,396 43 % Performance Services 54,367 7 % 42,055 7 % 54,367 9 % 42,055 8 % Total Segment Adjusted EBITDA 356,443 53 % 351,800 56 % 315,180 50 % 286,451 51 % Corporate (57,399 ) (9 )% (50,567 ) (8 )% (57,399 ) (9 )% (50,567 ) (9 )%



Total Adjusted EBITDA $ 299,044 44 % $ 301,233

48 % $ 257,781 41 % $ 235,884 42 %

Adjusted EBITDA for the nine months ended March 31, 2014 was $299.0 million, a decrease of $2.2 million, or 1%, from $301.2 million for the nine months ended March 31, 2013. On a pro forma basis, Adjusted EBITDA for the nine months ended March 31, 2014 was $257.8 million, an increase of $21.9 million, or 9%, from $235.9 million for the nine months ended March 31, 2013. Segment Adjusted EBITDA for the supply chain services segment of $302.1 million for the nine months ended March 31, 2014 reflects a decrease of $7.6 million, or 2%, compared to $309.7 million for the nine months ended March 31, 2013, primarily driven by the 30% revenue share payable to member owners after the Reorganization on October 1, 2013. On a pro forma basis, Segment Adjusted EBITDA for the supply chain services segment was $260.8 million for the nine months ended March 31, 2014, an increase of $16.4 million, or 7%, compared to $244.4 million for the nine months ended March 31, 2013, primarily as a result of growth in net administrative fees revenue and direct sourcing revenue, as well as a decrease in operating expenses. Segment Adjusted EBITDA for the performance services segment of $54.4 million for the nine months ended March 31, 2014 reflects an increase of $12.3 million, or 29%, compared to $42.1 million for the nine months ended March 31, 2013, as a result of recent acquisitions and revenue growth from the sale of new SaaS informatics subscriptions, advisory services engagements and performance improvement collaboratives. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Emerging Growth Company We are an "emerging growth company" as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). As such, we are eligible and intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, delayed application of newly adopted or revised accounting standards, exemption from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We have elected to take advantage of these benefits until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of this exemption. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting and regulatory standards. We will continue to be an emerging growth company until the earliest to occur of (i) the last day of the fiscal year during which we had total annual gross revenues of at least $1 billion (as indexed for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of Class A common stock under the Prospectus, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt or (iv) the date on which we are deemed to be a "large accelerated filer," as defined under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly, we could remain an "emerging growth company" until as late as June 30, 2019. Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements 49 -------------------------------------------------------------------------------- requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Estimates are evaluated on an ongoing basis, including those related to reserves for bad debts, useful lives of property and equipment, value of investments not publicly traded, the valuation allowance on deferred tax assets and the fair value of purchased intangible assets and goodwill. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The LP agreement includes a provision that provides for redemption of a limited partner's interest upon termination as follows: For Class B common units not yet eligible for exchange, those will be redeemed at a purchase price which is the lower of the limited partner's capital account balance in Premier LP immediately prior to the IPO and the fair market value of the Class A common stock of the Company on the date of the termination at either a) a five-year, unsecured, non-interest bearing term promissory note, (b) a cashier's check or wire transfer of immediately available funds in an amount equal to the present value of the Class B unit redemption amount, or (c) payment on such other terms mutually agreed upon with Premier GP. For Class B common units that are eligible for exchange, the limited partner is also required to exchange all eligible Class B common units on the next exchange date following the date of the termination. A limited partner cannot redeem all or any part of its interest in Premier LP without the approval of Premier GP, which is controlled by the board of directors. Given the limited partners hold the majority of the votes of the board of directors, limited partners' capital has a redemption feature that is not solely within the control of the Company. As a result, the Company reflects limited partners' capital on the consolidated balance sheets as redeemable limited partners' capital in temporary equity. In addition, the limited partners have the ability to exchange their Class B common units for cash or Class A common shares on a one-for-one basis. Accordingly, the Company records redeemable limited partners' capital at the greater of the book value or redemption amount per the LP Agreement at the reporting date, with the corresponding offset to additional paid-in-capital and retained earnings (accumulated deficit). There have been no material changes to the Company's significant accounting policies as described in the Prospectus, other than the addition of the significant accounting policy related to redeemable limited partners' capital above. New Accounting Standards There are no recently issued accounting standards that impact the Company. Liquidity and Capital Resources Our principal source of cash has historically been cash provided by operating activities. From time-to-time we have used, and expect to use in the future, borrowings under our lines of credit as a source of liquidity. Our primary cash requirements involve operating expenses, working capital fluctuations, capital expenditures and acquisitions. Our capital expenditures typically consist of internally-developed software costs, software purchases and computer hardware purchases. Historically, the vast majority of our excess cash has been distributed to our member owners. As of March 31, 2014 and June 30, 2013, we had cash and cash equivalents totaling $152.0 million and $198.3 million, respectively, and marketable securities with maturities ranging from three to 24 months totaling $355.3 million and $57.3 million, respectively. For the nine months ended March 31, 2014, we financed our operations primarily through internally generated cash flows. As of March 31, 2014, there were no outstanding borrowings under the Revolving Facility. On July 18, 2013, we made a $30.0 million draw on the Revolving Facility and on September 16, 2013 we made an additional $30.0 million draw on the Revolving Facility (see Note 7 - Lines of Credit to the unaudited consolidated financial statements for more information). On October 11, 2013, we repaid $30.0 million of the balance outstanding on the Revolving Facility and repaid the remaining balance of $30.0 million on October 18, 2013. For the nine months ended March 31, 2013, we financed our operations primarily through internally generated cash flows. It is our intent to retain a significantly greater portion of our earnings following the Reorganization to provide additional liquidity to fund operations and future growth, including through acquisitions. We expect earnings, the proceeds from the IPO and occasional credit line borrowings to provide us with liquidity to fund our working capital requirements, revenue share obligations, tax payments, capital expenditures and growth for the foreseeable future. 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 currently 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 50 -------------------------------------------------------------------------------- service requirements; however, strategic growth initiatives will likely require the use of a portion of the proceeds from the IPO, as well as proceeds from the issuance of additional equity or debt securities. Discussion of Cash Flow A summary of net cash flows follows (in thousands): Nine Months Ended March 31, 2014 2013 Net cash provided by (used in): Operating activities $ 285,869$ 262,745 Investing activities (325,432 ) 32,361 Financing activities (6,693 ) (318,678 )



Net (decrease) increase in cash $ (46,256 )$ (23,572 )

Discussion of cash flows for the nine months ended March 31, 2014 and 2013 Net cash provided by operating activities was $285.9 million for the nine months ended March 31, 2014, an increase of $23.1 million compared to $262.7 million for the nine months ended March 31, 2013. Operating cash flows increased primarily due to working capital changes. Net cash used in investing activities was $325.4 million for the nine months ended March 31, 2014 compared to net cash provided by investing activities of $32.4 million for the nine months ended March 31, 2013. Our investing activities for the nine months ended March 31, 2014 primarily consisted of (i) the net purchases of marketable securities of $297.7 million due to a decision to invest the proceeds from the IPO in longer term marketable securities, (ii) the acquisitions of SYMMEDRx and Meddius, net of cash acquired, for a total of $36.4 million and (iii) capital expenditures of $39.8 million for property and equipment, partially offset by proceeds from the sale of our investment in GHX of $37.9 million and distributions from Innovatix of $10.7 million. Our investing activities for the nine months ended March 31, 2013 primarily consisted of net proceeds from the sale of marketable securities of $51.4 million and distributions from Innovatix of $9.9 million, partially offset by capital expenditures of $27.9 million for property and equipment. Net cash used in financing activities was $6.7 million for the nine months ended March 31, 2014 compared to $318.7 million for the nine months ended March 31, 2013. Our financing activities for the nine months ended March 31, 2014 primarily included (i) net proceeds of $277.8 million in connection with the IPO, (ii) proceeds of $65.2 million from withdrawals on our lines of credit and (iii) proceeds from notes receivable from partners of $12.7 million, offset by (i) net cash payments to Premier LP limited partners of $298.4 million, (ii) payments on the line of credit of $60.0 million and (iii) payments made on notes payable of $5.1 million. Our financing activities for the nine months ended March 31, 2013 were primarily comprised of (i) net cash payments to Premier LP limited partners of $314.9 million, (ii) payments on the line of credit of $10.0 million and (iii) payments made on notes payable of $8.0 million, partially offset by proceeds of $14.3 million from withdrawals on our lines of credit. Contractual Obligations At March 31, 2014, we had material commitments for obligations under notes payable, a portion of which represented obligations to departed member owners, and our non-cancelable office space lease agreements. We have a Revolving Facility with Wells Fargo Bank, National Association, which includes an accordion feature granting us the ability to increase the size of the facility by an additional $100.0 million on terms and conditions mutually acceptable to the parties. Borrowings under the Revolving Facility generally bear interest at the lower of LIBOR, the Prime Rate or the Federal Funds Effective Rate, plus a margin ranging from 0.25% to 1.25% per annum, depending on the nature of the loan. At March 31, 2014, no balance was outstanding on the Revolving Facility. The Revolving Facility, which expires on December 16, 2014, includes restrictive covenants requiring the maintenance of certain financial and nonfinancial indicators, including a ratio of total liabilities to tangible net worth of less than or equal to 1.00 to 1.00, a minimum EBITDA coverage ratio of 3.00 to 1.00 and a maximum total leverage ratio of 1.50 to 1.00. The Revolving Facility also includes customary negative covenants, including restrictions on other indebtedness, liens, conduct of business, consolidations, mergers or dissolutions, asset dispositions, investments, restricted payments, prepayment of indebtedness, transactions with insiders, restricted actions, ownership of subsidiaries, sale-leaseback transactions and negative pledges. The Company was in compliance with such financial and negative covenants at March 31, 2014. Commitment fees on the Revolving Facility's unused commitments are 0.22% per annum. The Revolving Facility is guaranteed by substantially all of our subsidiaries and secured by substantially all of the assets of such subsidiaries. 51 -------------------------------------------------------------------------------- On August 17, 2012, S2S Global obtained a revolving line of credit with a one-year term for up to $10.0 million with an interest rate which is generally the prime rate plus 0.25% or LIBOR plus 1.25%, as elected by S2S Global, which replaced its revolving line of credit from the prior year. This revolving line of credit is guaranteed by Premier LP and PSCI and is secured by substantially all of the assets of S2S Global. On August 2, 2013, S2S Global renewed and amended its revolving line of credit to include a $15.0 million credit limit and a $5.0 million accordion feature. On January 30, 2014, S2S Global further and amended its revolving line of credit to increase the credit limit to $20.0 million. The S2S Global revolving line of credit has customary covenants, which include, but are not limited to those regarding: the use of proceeds, provision of financial information, restriction on other debts and liens, maintenance of assets, investments, taxes, nature of business, mergers, transactions with affiliates, restricted payments, insurance and compliance with laws. S2S Global was in compliance with all such covenants at March 31, 2014. The amended revolving line of credit has a maturity date of December 16, 2014. The unused commitment fee on the revolving line of credit is 0.225% per annum. At March 31, 2014 and June 30, 2013, S2S Global had $13.7 million and $7.7 million, respectively, outstanding on the revolving line of credit. In connection with the Reorganization and IPO, we entered into a tax receivable agreement with the member owners, pursuant to which we agreed to pay to the member owners, generally over a 15-year period (under current law), 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income and franchise tax that we actually realize (or are deemed to realize, in the case of payments required to be made upon certain occurrences under such tax receivable agreement) as a result of the increases in tax basis resulting from the initial sale of Class B common units by the member owners in connection with the Reorganization, as well as subsequent exchanges by such member owners pursuant to the exchange agreement, and of certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. Item 3. Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio and on the increase or decrease in the amount of any interest expense we must pay with respect to outstanding debt instruments. We invest our excess cash in a portfolio of individual cash equivalents and marketable securities. We do not currently hold, and we have never held, any derivative financial instruments. As a result, we do not expect changes in interest rates to have a material impact on our results of operations or financial position. We plan to ensure the safety and preservation of our invested principal funds by limiting default, market and investment risks. We plan to mitigate default risk by investing in low-risk securities. Substantially all of our financial transactions are conducted in U.S. dollars. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. As of the end of the period covered by this Quarterly Report, we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon our evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of March 31, 2014. Changes in Internal Control Over Financial Reporting Management has remediated the material weakness identified in the prior quarter and there were no other changes in our internal control over financial reporting during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 52



--------------------------------------------------------------------------------


For more stories covering the world of technology, please see HispanicBusiness' Tech Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters