Business Overview
Covetrus, Inc. (NASDAQ:CVET) is a global animal-health technology and services company dedicated to supporting the companion, equine, and large-animal veterinary markets. The company has navigated the evolving industry landscape with strategic initiatives aimed at streamlining operations, synchronizing capabilities, and accelerating growth.
Covetrus operates through three reportable segments: North America, Europe, and Asia-Pacific & Emerging Markets. The company's product offerings span supply chain services, prescription management, and software solutions, catering to the diverse needs of its veterinary customers and animal-owner clients.
In the North America segment, Covetrus boasts an expansive collection of products, services, and technologies, including its prescription management platform, compounding services, and the recently acquired Great Pet Care platform. The Europe segment focuses on supply chain services and software solutions, while the Asia-Pacific & Emerging Markets segment offers similar capabilities.
Across these segments, Covetrus has prioritized value creation by strengthening the relationship between veterinary customers and animal-owners, enabling proactive healthcare options and enhancing the overall customer experience.
Financial Performance
Covetrus' financial performance in the latest fiscal year showcased both resilience and growth potential. The company reported annual revenue of $4,575 million, a testament to its ability to navigate industry dynamics. However, the company faced challenges, resulting in an annual net loss of $86 million.
On a quarterly basis, Covetrus' Q2 2022 revenue stood at $1,217 million, a 2% increase compared to the same period in the prior year. This growth was driven by strong performance in the North America segment, where revenue increased by 10% year-over-year, primarily due to organic growth in supply chain services and prescription management.
The Europe segment, however, experienced an 11% decline in revenue, largely attributable to unfavorable foreign exchange rate impacts and softening demand in certain markets. The Asia-Pacific & Emerging Markets segment also saw a 4% decrease in revenue, primarily due to unfavorable foreign exchange rate impacts.
Gross profit for the quarter reached $229 million, representing a 4% increase from the prior-year period. This improvement was driven by the North America segment, where gross profit increased by 10%, offsetting declines in the Europe and Asia-Pacific & Emerging Markets segments.
Adjusted EBITDA, a key metric for the company, remained flat at $66 million in Q2 2022 compared to the same period in the prior year. The North America segment reported a 7% increase in Adjusted EBITDA, while the Europe and Asia-Pacific & Emerging Markets segments experienced declines of 15% and 11%, respectively.
For the full fiscal year 2022, Covetrus reported annual net income of -$86 million, annual revenue of $4,575 million, annual operating cash flow of $102 million, and annual free cash flow of $42 million.
Liquidity
Covetrus maintains a strong liquidity position, with cash and cash equivalents of $87 million as of June 30, 2022. The company has access to a $300 million revolving credit facility, which provides additional financial flexibility.
In the first half of 2022, Covetrus used $39 million in net cash for operating activities, primarily due to changes in working capital and other assets. The company invested $44 million in capital expenditures and business acquisitions, while using $6 million in net cash for financing activities.
Covetrus' long-term liquidity strategy is aligned with its strategic development, focusing on investments to fund growth, including global sales and marketing efforts, new product and service launches, and strategic acquisitions.
Proposed Merger
On May 24, 2022, Covetrus announced that it had entered into a definitive agreement to be acquired by Corgi Bidco, Inc., a subsidiary of investment funds managed by Clayton Dubilier & Rice, LLC and TPG Global, LLC. Under the terms of the agreement, Covetrus shareholders will receive $21.00 per share in cash, representing a premium of approximately 39% over the company's closing stock price on May 23, 2022.
The transaction is expected to close in the second half of 2022, subject to the satisfaction of customary closing conditions, including the approval of Covetrus shareholders and regulatory approvals. The proposed merger aims to further strengthen Covetrus' position in the animal-health market and provide additional resources to support the company's strategic initiatives.
Segment Performance
North America Segment
The North America segment is Covetrus' largest, accounting for 62% of total revenue in Q2 2022. This segment experienced a 10% year-over-year increase in revenue, driven by strong growth in supply chain services and prescription management. The company's acquisition of Great Pet Care in the first quarter of 2022 also contributed to the segment's performance.
Gross profit in the North America segment increased by 10% compared to the prior-year period, primarily due to the growth in prescription management and supply chain services. Adjusted EBITDA for the segment rose by 7%, reflecting the segment's operational efficiency and the company's ability to manage costs.
Europe Segment
The Europe segment contributed 27% of Covetrus' total revenue in Q2 2022. Revenue in this segment declined by 11% year-over-year, largely due to unfavorable foreign exchange rate impacts, softening demand in certain markets, and the loss of a key customer relationship.
Gross profit in the Europe segment decreased by 6%, and Adjusted EBITDA declined by 15%, primarily due to the revenue decline and the impact of a stronger U.S. dollar on the segment's operations.
Asia-Pacific & Emerging Markets Segment
The Asia-Pacific & Emerging Markets segment accounted for 9% of Covetrus' total revenue in Q2 2022. Revenue in this segment decreased by 4% year-over-year, primarily driven by unfavorable foreign exchange rate impacts, which offset the segment's underlying organic growth in supply chain services.
Gross profit in the Asia-Pacific & Emerging Markets segment declined by 9%, and Adjusted EBITDA decreased by 11%, largely due to the unfavorable foreign exchange rate impacts.
Risks and Challenges
Covetrus faces several risks and challenges that could impact its future performance. The company operates in a highly competitive animal-health market, where it must navigate evolving customer preferences, supplier relationships, and regulatory environments.
The company's financial performance is also susceptible to macroeconomic factors, such as inflation, supply chain disruptions, and foreign currency exchange rate fluctuations. Covetrus must continue to invest in innovation and technology to maintain its competitive edge and meet the evolving needs of its customers.
Additionally, the proposed merger with Corgi Bidco, Inc. introduces integration and execution risks that the company must carefully manage to ensure a smooth transition and continued operational excellence.
Outlook
Covetrus has not provided specific financial guidance for the upcoming fiscal year. However, the company's strategic initiatives, including the expansion of its prescription management platform, the integration of recent acquisitions, and the ongoing optimization of its distribution network, are expected to contribute to the company's long-term growth and profitability.
The proposed merger with Corgi Bidco, Inc. also presents an opportunity for Covetrus to leverage additional resources and expertise to further strengthen its position in the animal-health market.
Conclusion
Covetrus has navigated the evolving animal-health landscape with a focus on strategic initiatives that aim to streamline operations, synchronize capabilities, and accelerate growth. While the company faced some challenges in the latest fiscal year, resulting in a net loss, its quarterly performance and liquidity position suggest a resilient business model.
The proposed merger with Corgi Bidco, Inc. presents a potential catalyst for Covetrus to enhance its competitive position and drive long-term value creation. As the company continues to execute on its strategic priorities, investors will closely monitor its ability to capitalize on emerging trends and deliver sustainable financial performance.