PORTLAND, Maine, May 15, 2019 (GLOBE NEWSWIRE) -- Covetrus?(Nasdaq: CVET),?a global?leader in?animal-health technology and services, today announced financial results for the first quarter of 2019, which ended March 31, 2019. On February 7, 2019, Covetrus became an independent company through the consummation of the spin-off by Henry Schein of its Animal Health business and the completion of its merger with Vets First Choice. On February 8, 2019, Covetrus began trading on the Nasdaq Stock Market under the ticker symbol “CVET.”
"We had a strong launch of Covetrus during the first quarter, accomplishing a significant amount of work in just three months since our formation," said Benjamin Shaw, Covetrus’ president and chief executive officer. "At Covetrus, we put the veterinarian at the center of everything we do, offering a compelling value proposition for our more than 100,000 veterinary practice customers across the globe. While we are early in our journey, we are excited about our platform of capabilities, strong global market position, passionate and complementary teams and the progress we have made on delivering on our core long-term strategic growth drivers."
Results provided in accordance with Generally Accepted Accounting Principles in the United States of America (US GAAP) reflect the operations of Animal Health from January 1, 2019 to March 31, 2019 and Vets First Choice for the period from February 8, 2019 to March 31, 2019. To aid investors and analysts with year-over-year comparability for the combined businesses of Animal Health and Vets First Choice, Covetrus is including certain non-GAAP pro forma financial information that combines the stand-alone Animal Health and Vets First Choice financial information as if the acquisition had taken place on December 31, 2017. Non-GAAP adjusted results exclude costs directly associated with the spin-off and mergers, the ongoing integration process and other one-time charges. Prior year non-GAAP adjusted results include allocations for direct costs and indirect costs which were attributed to the Animal Health business of Henry Schein whereas 2019 non-GAAP adjusted results are based on a direct cost associated with our standalone operations and not allocations. The tables in Reconciliation of Non-GAAP Financial Measures at the end of this press release provide reconciliations from GAAP to Non-GAAP pro forma and Non-GAAP adjusted results.
Revenue for the first quarter of 2019 was $941 million, down 1% compared to the first quarter of 2018, with the contribution from Vets First Choice offset by negative foreign exchange fluctuations year-over-year. Non-GAAP pro forma revenue, which includes full quarter results from Vets First Choice in both periods, was $965 million, down 3% from the first quarter of 2018. Non-GAAP pro forma organic revenue growth was up 3%, which excludes the impact of foreign exchange fluctuations and normalizes for revenue recognition adjustments for manufacturer switches from direct to agency sales in the United States.
Non-GAAP pro forma organic revenue growth in the first quarter of 2019 was driven by strength in prescription management in North America and strong performance across Europe, offset by slightly lower North American market growth, including the negative impact of weather earlier in the quarter, and a modest decline in APAC and Emerging Markets. Our organic growth includes two known headwinds prior to the merger closing – the previously announced loss of a large customer in North America and the loss of a manufacturer relationship in the fourth quarter of 2018 in APAC. These two events are included in our GAAP results and negatively impacted non-GAAP pro forma organic revenue growth by more than 1% in the first quarter of 2019.
Loss before taxes for the first quarter of 2019 was $(18) million versus income before taxes of $34 million in the prior period. Net loss attributable to Covetrus was $(13) million or $(0.14) per diluted share, which compared to net income of $23 million in the first quarter of 2018. The primary driver of the decline in net income year-over-year was a result of the impact from the spin-off and merger, including incremental amortization of intangibles assets, stock-based compensation and interest expense associated with our debt financing in February.
Non-GAAP adjusted EBITDA was $52 million for the first quarter of 2019 versus $54 million in the prior year quarter. A decline in North America, including the impact of Vets First Choice, and a $2 million FX headwind negatively impacted year-over-year results during Q1. Normalizing for a full-quarter ownership of Vets First Choice in both periods, Non-GAAP pro forma adjusted EBITDA was $50 million in the first quarter of 2019 vs. $52 million in the prior year. Excluding the impact from foreign exchange fluctuations, non-GAAP pro forma adjusted EBITDA was relatively flat year-over-year in Q1 off a difficult comparison from the prior year, particularly in North America.
Non-GAAP pro forma adjusted net income was $13 million, which includes Vets First Choice in both periods and normalizes for certain one-time items as seen in the non-GAAP reconciliation, compared to $13 million in the prior year period, impacted by the same items above.
Segment Operating Results (Unaudited)
The Company’s operations are organized and reported by geography, including North America, Europe and APAC & Emerging Markets.
For the three months ended March 31, 2019, North America segment revenue increased 4% to $497 million, driven by the inclusion of Vets First Choice. Normalizing for Vets First Choice in both periods and revenue recognition adjustments for manufacturer switches from direct to agency sales in the United States, non-GAAP pro forma organic revenue increased 2% year-over-year. A reclassification of rebate revenue negatively impacted organic growth by 1% and has not been adjusted for in Q1. The major driver of the year-over-year Non-GAAP pro forma organic increase was strength in our Vets First Choice business, which ended 1Q19 with more than 8,000 practices on its prescription management technology and experienced 51% prescription management revenue growth during Q1 when normalized for business day variances. This strength offset lower market growth, including the impact from weather, and the headwind from a previously announced customer loss. Enrollments on the Vets First Choice prescription management technology increased 18% year-over-year in Q1.
Europe segment revenue of $361 million decreased by 2% compared to revenue from the same period of the prior year. Normalizing for foreign exchange fluctuations, non-GAAP pro forma organic revenue increased 5% compared to the same period of the prior year. The year-over-year non-GAAP pro forma organic growth was driven by growth in our specialty businesses, Kruuse and Vi, as well as solid overall performance across multiple geographies, including the Czech Republic, Spain, and Poland. We experienced broad-based success across our Pan-European portfolio during the first quarter of 2019, reversing the more modest trend line experienced throughout 2018.
APAC & Emerging Markets segment revenue of $86 million decreased by 12% compared to revenue from the same period of the prior year. Normalizing for foreign exchange fluctuations, non-GAAP pro forma organic revenue decreased 3% compared to the same period of the prior year. The primary driver of the year-over-year decrease in non-GAAP organic growth was the impact from the loss of a manufacturer relationship in the fourth quarter of 2018 in APAC, which impacted revenue growth by nearly 10%. Excluding this previously known headwind, underlying performance in these markets was strong and reflect momentum across key accounts.
Balance Sheet and Cash Flow
The first quarter 2019 cash flow statement reflects the foundation of Covetrus’ capital structure. On the date of the spin-off and merger, Covetrus received $1.2 billion of net proceeds from new term loan debt financing and used it to distribute $1.11 billion in cash to Henry Schein, Inc. as a special dividend and to pay other transaction-related expenses tied to the spin-off and merger.
Covetrus used $39 million of net cash for operating activities in the first quarter of 2019. Free cash flow, a non-GAAP financial measure that is defined as cash flow from operating activities less purchases of fixed assets, was negative $42 million. Our cash flow performance in the first quarter was consistent with seasonality and compared to the negative $36 million in prior year.
At quarter end, the Company had $73 million in cash and cash equivalents, an untapped $300 million revolving credit facility and $1.2 billion in total debt. Management believes Covetrus’ steady cash flows and ample liquidity provide substantial flexibility to manage the business, de-leverage the balance sheet over time and invest in further innovation.
2019 Guidance
Covetrus’ fiscal year 2019 financial guidance range is as follows:
- Pro forma organic revenue growth, a non-GAAP financial metric, of 3% to 5%; or in-line with market growth and consistent with our prior commentary at our Capital Markets Day in early February. Pro forma organic revenue growth includes a full quarter of Vets First Choice in both periods, excludes the impact of foreign exchange fluctuations and normalizes for revenue recognition adjustments for manufacturer switches from direct to agency sales in the United States. The previously announced customer loss in North America and loss of a manufacturer relationship in the fourth quarter of 2018 in APAC is expected to impact organic growth by more than 2% in 2019.
- Enrollments on our Vets First Choice prescription management technology of more than 3,000 in North America, supported by the strong start to the year in 2019.
- Pro forma adjusted EBITDA, a non-GAAP financial metric, of $235 to $250 million. This compares to the $223 million of pro forma adjusted EBITDA in 2018 when normalizing for the difference in cost allocation of corporate overhead in 2018 ($33 million) versus the planned corporate overhead investment for Covetrus in 2019 ($25 million). The range reflects 6% to 12% growth in 2019, as seen in the reconciliation at the end of the press release. The range incorporates funding new investments in innovation to support long-term growth initiatives, including a year-over-year increase of $5M in software and prescription management R&D investments, many of which are a one-time increase in expenditures, and recent foreign exchange fluctuations.
“Our fiscal 2019 guidance reflects our early integration efforts and additional investments in innovation to accelerate our strategic priorities and capitalize on the momentum we have across our business,” said Christine T. Komola, executive vice president and chief financial officer. “We have made notable progress across multiple fronts since the merger closed and have been pleased by the pace of growth following our commercial launch as one integrated global team in March, reinforcing our conviction in our differentiated value proposition we bring to market and our ability to deliver double digit adjusted EBITDA growth long-term.”
The Company has not reconciled its non-GAAP pro forma adjusted EBITDA guidance to GAAP net income, because stock-based compensation expense, restructuring costs and other one-time items tied to formation of Covetrus, the reconciling items between such GAAP and non-GAAP financial measures, cannot be reasonably predicted due to the uncertainty and inherent difficultly predicting the occurrence, the financial impact, and the periods in which the non-GAAP adjustments may be recognized and therefore is not available without unreasonable effort. For more information regarding the non-GAAP financial measures discussed in this release, please see the reconciliations of GAAP financial measures to non-GAAP financial measures and the section titled “Non-GAAP Financial Measures and Other Business Metrics” below.
Upcoming Investor Events
Covetrus management will be attending the following conference during the month of May:
- Stifel 2019 Dental & Vet Conference, May 29th, New York City.
Audio webcasts will be available live and archived on the company’s Investor Relations website at https://www.covetrus.com/investors/events-and-presentations. A complete listing of upcoming events for the investment community is available on the company’s Investor Relations website.
About Covetrus
Covetrus?is a global animal-health technology and services company dedicated to empowering veterinary practice partners to drive improved health and financial outcomes. We’re bringing together products, services, and technology into a single platform that connects our customers to the solutions and insights they need to work best. Our passion for the well-being of animals and those who care for them drives us to advance the world of veterinary medicine.?Covetrus?is headquartered in?Portland,?Maine, with more than 5,000 employees, serving over 100,000 customers around the globe.?For more information about?Covetrus?visit?https://www.covetrus.com/.
