PORTLAND, Maine , Aug. 13, 2019 (GLOBE NEWSWIRE) -- Covetrus?(Nasdaq: CVET),?a global?leader in?animal-health technology and services, today announced financial results for the second quarter of 2019, which ended June 30, 2019.

“We have made significant progress over the last six months in creating a new global platform to better support the evolving needs of our veterinary community and to unlock new health and financial outcomes,” said Benjamin Shaw, Covetrus president and CEO. “Our momentum in our technology platform is robust, and we are encouraged by the accelerating pace of engagement in these early innings of our transformation journey. While end-market factors and the timing of certain infrastructure investments are creating delays to our timeline, my conviction in our ability to drive accelerated growth remains unchanged due to our market opportunity and our differentiated global value proposition.”

On February 7, 2019, Covetrus became an independent company through the consummation of the spin-off by Henry Schein of its Animal Health business (Animal Health) and the completion of its merger with Vets First Choice. On February 8, 2019, Covetrus began trading on the Nasdaq Stock Market. Accordingly, results provided in accordance with generally accepted accounting principles in the United States of America (GAAP) reflect the operations of Animal Health from January 1, 2019 to June 30, 2019 and Vets First Choice for the period from February 8, 2019 to June 30, 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. Also, non-GAAP adjusted results exclude costs directly associated with the spin-off and merger, the ongoing integration process and other special items. 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.

Net sales for the second quarter of 2019 were $1,009 million, relatively flat compared to the second quarter of 2018. On a pro forma basis, which includes Vets First Choice in the prior year period, net sales declined 4% in the second quarter of 2019 of which foreign exchange effects were a 3% headwind. Non-GAAP pro forma organic net sales declined 1% normalizing for foreign exchange, mergers and acquisition activity and net sales adjustments for manufacturer switches from direct to agency sales in the United States.

Pro forma organic net sales in the second quarter of 2019 were driven by ongoing strength in our prescription management platform in North America, which increased by 46% year-over-year and helped offset weaker-than-expected market growth in North America and Brexit disruption in the United Kingdom. Our technology platform, which includes Vets First Choice and our practice management software portfolio, represented more than 9% of net sales in the second quarter of 2019 versus 7% of pro forma net sales in the second quarter of 2018. Results also include the impacts from the previously announced customer loss in North America prior to the formation of Covetrus, and a manufacturer moving to a direct sales model in APAC in the fourth quarter of 2018. Normalizing for these previously announced events, non-GAAP pro forma organic net sales growth would have been 2% in the second quarter of 2019 as compared to the second quarter of 2018.

Net loss in the second quarter of 2019 was $10 million, or ($0.09) per diluted share, which compared to net income of $29 million, or $0.40 per diluted share, in the second quarter of 2018. Loss before taxes for the second quarter of 2019 was $5 million versus income before taxes of $38 million in the prior period. 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, share-based compensation and interest expense associated with our debt financing in February 2019, lower operating earnings in North America, new infrastructure investments and the impact from unfavorable foreign exchange.

Non-GAAP adjusted EBITDA was $53 million for the second quarter of 2019 versus $62 million in the prior year quarter on a pro forma basis. Slower market growth, increased infrastructure investments, including $2 million in recurring expenses that were previously not included in our adjusted EBITDA outlook, a $2 million foreign exchange headwind and the planned step up in research and development expense negatively impacted year-over-year results and offset the initial benefit from our value capture activities during the second quarter of 2019.

Non-GAAP adjusted net income was $14 million, compared to $20 million in the prior year period on a pro forma basis, which includes Vets First Choice in both periods and normalizes for certain items as seen in the non-GAAP reconciliation, impacted by the same items.

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 June 30, 2019, North America segment net sales increased 6% from the prior year period to $552 million, due to the addition of, and strong growth from, Vets First Choice in 2019; normalizing for Vets First Choice in both periods and net sales adjustments for manufacturer switches from direct to agency sales, non-GAAP pro forma organic net sales were relatively flat year-over-year. As expected, the previously announced loss of a large customer prior to the formation of Covetrus also impacted organic net sales growth by 3% in the second quarter.

The major driver of the year-over-year non-GAAP pro forma organic performance was strength in our prescription management platform, which ended the second quarter of 2019 with more than 8,700 practices on the platform and experienced 46% year-over-year net sales growth in the quarter. Enrollments on the Vets First Choice prescription management platform in the second quarter of 2019 increased by nearly 20% sequentially. This strength offset a decline in our in-office supply chain net sales, which was impacted by moderating veterinary visit trends, declining sales growth of products purchased through distribution and re-sold by veterinarians to their clients and the previously announced customer loss.

Europe segment net sales of $370 million decreased by 5% compared to net sales from the same period of the prior year. Normalizing for foreign exchange fluctuations and mergers and acquisitions, non-GAAP pro forma organic net sales decreased 1% compared to the same period of the prior year. The year-over-year non-GAAP pro-forma organic decrease was largely driven by weakness in our U.K. business, which declined 4% year-over-year on Brexit-related disruption, and offset positive performance in Ireland, Belgium and the Czech Republic, as well as good momentum in several of our specialty businesses.

APAC & Emerging Markets segment net sales of $90 million decreased by 8% compared to net sales from the same period of the prior year. Normalizing for foreign exchange fluctuations, non-GAAP pro forma organic net sales decreased 1% compared to the same period of the prior year. The primary driver of the year-over-year decrease in non-GAAP pro forma organic net sales was the impact from the loss of a manufacturer relationship in the fourth quarter of 2018, which reduced net sales growth by nearly 8%. Excluding this impact, underlying organic net sales growth in the second quarter accelerated versus last quarter and reflects momentum in new account wins and cross-selling of practice management software.

Balance Sheet and Cash Flow

Covetrus generated $3 million of net cash from operating activities during the six months ended June 30, 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 $18 million during the six months ended June 30, 2019 as compared to $35 million in the prior year period. The year-over-year decline in free cash flow reflects the change in capital structure associated with the formation of Covetrus, increased transaction and transition expenses and lower operating earnings.

At quarter end, the Company had $55 million in cash and cash equivalents, no outstanding borrowings on our $300 million revolving credit facility and $1.2 billion in total debt. Management believes Covetrus’ cash flows and access to ample liquidity provide substantial flexibility to manage the business, deleverage the balance sheet over time and invest in further innovation.

2019 Guidance

Covetrus’ fiscal year 2019 financial guidance range is now as follows:

• Pro forma organic net sales growth, a non-GAAP financial metric, of low single-digits versus 3% to 5% previously to reflect changes in market growth in North America and Brexit-disruption in the U.K. Pro forma organic net sales growth includes Vets First Choice in both periods, excludes the impact of foreign exchange fluctuations, mergers and acquisitions and normalizes for net sales adjustments for manufacturer switches from direct to agency sales in the U.S. The previously announced customer loss in North America and loss of a manufacturer relationship in APAC is still expected to negatively impact organic growth by more than 2% in 2019.
• Enrollments on the Vets First Choice prescription management platform of more than 3,000 in North America, unchanged versus the prior outlook. We expect to end 2019 with more than 10,000 practices on our prescription management platform in North America.
• Pro forma adjusted EBITDA, a non-GAAP financial metric, of at least $200 million versus the range of $235 million to $250 million previously. We now expect to spend $40 million of the planned approximately $100 million in infrastructure investments in 2019, of which $10 million to $15 million are recurring expenses and now included in our presentation of adjusted EBITDA. The balance of the reduction is tied to the impact of certain end-market softness.

“While we are disappointed in the revision to our 2019 outlook, we remain encouraged by the increased demand for our technology platform, which remains our strategic long-term driver of accelerated net sales growth and margin expansion,” said Christine T. Komola, executive vice president and chief financial officer. “Longer-term, we are focused on driving additional efficiencies in our organization, executing against our stated value capture priorities, improving free cash flow and deleveraging the balance sheet.”

The Company has not reconciled its non-GAAP pro forma adjusted EBITDA guidance to GAAP net income because the reconciling items between such GAAP and non-GAAP financial measures, including share-based compensation expense, restructuring costs and other special items tied to the formation of Covetrus, cannot be reasonably predicted due to the uncertainty and inherent difficulty 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.

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 are 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 5,500 employees, serving over 100,000 customers around the globe. For more information about?Covetrus?visit https://www.covetrus.com/.