Diplomat Announces 2nd Quarter Financial Results

FLINT, Mich., Aug. 7, 2017 /PRNewswire/ -- Diplomat Pharmacy, Inc. (NYSE: DPLO), the nation's largest independent specialty pharmacy, announced financial results for the quarter ended June 30, 2017. All comparisons, unless otherwise noted, are to the quarter ended June 30, 2016.

Second Quarter 2017 Highlights include:

    --  Revenue of $1,126 million, compared to $1,089 million, an increase of
        3.5%
    --  Total prescriptions dispensed of 220,000, compared to 241,000
    --  Gross margin of 7.5% versus 7.6%
        --  Gross profit per prescription dispensed of $371, compared to $339
    --  Net income attributable to Diplomat of $3.6 million, compared to $8.5
        million
    --  Adjusted EBITDA of $25.2 million, compared to $29.6 million
        --  Adjusted EBITDA margin of 2.2% versus 2.7%
    --  EPS of $0.05 per diluted common share versus $0.13
        --  Adjusted EPS of $0.25 versus $0.23

Phil Hagerman, CEO and Chairman of Diplomat, commented, "I'm very pleased with our solid second quarter results, which saw continued strength in oncology and infusion, up 25% and 20% year over year, respectively. In the first half of 2017, a transition year for Diplomat, we have made promising strides in our, higher margin, tuck-in acquisition strategy in infusion, as well as with our managed care strategy. In addition, we are seeing customers start to embrace our expanded service division. Finally, I'm thrilled to announce that Joel Saban has joined us as President of Diplomat, bringing years of industry experience, which I believe will be a tremendous asset to our company."

Second Quarter Financial Summary:

Revenue for the second quarter of 2017 was $1,126 million, compared to $1,089 million in the second quarter of 2016, an increase of $38 million or 3.5%. The increase was driven by approximately $83 million of revenue from our acquisitions, approximately $63 million from the impact of manufacturer price increases, and approximately $32 million from drugs that were new in the past year. These increases were partially offset by a decrease due to contracts that were not renewed in 2017 as well as a decrease in the demand for hepatitis C drugs versus the prior year period. Our revenue increase year over year, excluding the impact of the contract losses was approximately $160 million or 15%.

Gross profit in the second quarter of 2017 was $84.8 million and generated a 7.5% gross margin, compared to $83.3 million and 7.6% in the second quarter of 2016. The gross margin decline in the quarter was primarily due to an increase in accrued direct and indirect remuneration ("DIR") fees versus what was accrued in the second quarter of 2016.

Selling, general, and administrative expenses ("SG&A") for the second quarter of 2017 were $80.0 million, an increase of $10.6 million, compared to $69.4 million in the second quarter of 2016. Of this change, $7.2 million related to employee cost, including employee cost for our acquired entities. The increased employee expense was attributable to the growth in our infusion and oncology business which is more clinically and administratively complex. Also contributing to the SG&A expense increase was a $3.1 million increase in amortization expense from definite-lived intangible assets associated with our acquired entities. We also experienced increases in other SG&A; including freight, insurance, and other miscellaneous expenses. As a percentage of revenue, SG&A was 7.1% for the three months ended June 30, 2017, compared to 6.4% in the prior year period. This increase is primarily attributable to the increase in acquisition related amortization and the increased operating complexity associated with both our acquisitions and new drugs.

Net income attributable to Diplomat for the second quarter of 2017 was $3.6 million compared to $8.5 million in the second quarter of 2016. This decrease was primarily driven by the revenue, gross profit, and SG&A explanations above, partially offset by a $4.7 million change in income taxes. Adjusted EBITDA for the second quarter of 2017 was $25.2 million compared to $29.6 million in the second quarter of 2016, a decrease of $4.5 million.

Earnings per share for the second quarter of 2017 was $0.05 per basic/diluted common share, compared to $0.13 per basic/diluted common share for the second quarter of 2016. Diluted non-GAAP adjusted earnings per share ("Adjusted EPS") was $0.25 in the second quarter of this year compared to $0.23 in the second quarter of 2016.

2017 Financial Outlook

For the full-year 2017, we are updating our previous financial guidance:

    --  Revenue between $4.3 and $4.6 billion, versus the previous range of $4.3
        and $4.7 billion
    --  Net income attributable to Diplomat between $10 and $16 million, versus
        the previous range of $6.5 and $15.5 million
    --  Adjusted EBITDA between $97 and $103 million, versus the previous range
        of $95 and $103 million
    --  Diluted EPS between $0.15 and $0.23, versus the previous range of $0.09
        and $0.23
    --  Adjusted EPS between $0.71 and $0.79, versus the previous range of $0.54
        and $0.70

Our EPS and Adjusted EPS expectations assume approximately 68,600,000 weighted average common shares outstanding on a diluted basis and a tax rate of 26%, versus the previous tax rate of 35% and 40% for the high and low of the range respectively, for the full year 2017, which could differ materially.

Earnings Conference Call Information

As previously announced, the Company will hold a conference call to discuss its second quarter performance this evening, August 7, 2017, at 5:00 p.m. Eastern Time. Shareholders and interested participants may listen to a live broadcast of the conference call by dialing 877-201-0168 (or 647-788-4901 for international callers) and referencing participant code 51641230 approximately 15 minutes prior to the call. A live webcast and audio file of the conference call will be available on the investor relations section of the Company's website for approximately 90 days at ir.diplomat.is.

About Diplomat

Diplomat (NYSE: DPLO) is the nation's largest independent provider of specialty pharmacy services--helping patients and providers in all 50 states. The company offers medication management programs for people with complex chronic diseases and delivers unique solutions for manufacturers, hospitals, payors, providers, and more. Diplomat opened its doors in 1975 as a neighborhood pharmacy with one essential tenet: "Take good care of patients and the rest falls into place." Today, that tradition continues--always focused on improving patient care and clinical adherence. For more information, visit diplomat.is.

Non-GAAP Information

Adjusted EPS adds back, net of income taxes, the impact of all merger and acquisition related expenses, including amortization of intangible assets, the change in fair value of contingent consideration, as well as transaction-related costs. We exclude merger and acquisition-related expenses from Adjusted EPS because we believe the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and such expenses can vary significantly between periods as a result of new acquisitions, full amortization of previously acquired intangible assets, or ultimate realization of contingent consideration. Investors should note that acquisitions, once consummated, contribute to revenue in the periods presented as well as future periods and should also note that amortization and contingent consideration expenses may recur in future periods. A reconciliation of Adjusted EPS, a non-GAAP measure, to EPS as prepared in accordance with accounting principles generally accepted in the United States ("GAAP") can be found below.

We define Adjusted EBITDA as net income (loss) attributable to Diplomat before interest expense, income taxes, depreciation and amortization, share-based compensation, change in fair value of contingent consideration and other merger and acquisition-related expenses, restructuring and impairment charges, and certain other items that we do not consider indicative of our ongoing operating performance (which are itemized below in the reconciliation to net income (loss) attributable to Diplomat). Adjusted EBITDA is not in accordance with, or an alternative to, GAAP. In addition, this non?GAAP measure is not based on any comprehensive set of accounting rules or principles. You should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in the presentation, and we do not infer that our future results will be unaffected by unusual or non-recurring items.

We consider Adjusted EBITDA and Adjusted EPS to be supplemental measures of our operating performance. We present Adjusted EBITDA and Adjusted EPS because they are used by our Board of Directors and management to evaluate our operating performance. Adjusted EBITDA is also used as a factor in determining incentive compensation, for budgetary planning and forecasting overall financial and operational expectations, for identifying underlying trends, and for evaluating the effectiveness of our business strategies. Further, we believe they assist us, as well as investors, in comparing performance from period-to-period on a consistent basis. Other companies in our industry may calculate Adjusted EBITDA and Adjusted EPS differently than we do and these calculations may not be comparable to our Adjusted EBITDA and Adjusted EPS metrics. A reconciliation of Adjusted EBITDA, a non-GAAP measure, to net income (loss) attributable to Diplomat can be found below.

Forward Looking Statements

This press release contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance, and include Diplomat's expectations regarding revenues, net income (loss) attributable to Diplomat, Adjusted EBITDA, EPS, Adjusted EPS, market share, the performance of acquisitions and growth strategies. The forward-looking statements contained in this press release are based on management's good-faith belief and reasonable judgment based on current information, and these statements are qualified by important risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those forecasted or indicated by such forward-looking statements. These risks and uncertainties include: our ability to adapt to changes or trends within the specialty pharmacy industry; significant and increasing pricing pressure from third-party payors; the amount of direct and indirect remuneration fees, as well as the timing of assessing such fees and the non-transparent methodology used to calculate such fees; the outcome of material legal proceedings related to direct and indirect remuneration fees; our relationships with key pharmaceutical manufacturers; bad publicity about, or market withdrawal of, specialty drugs we dispense; a significant increase in competition from a variety of companies in the health care industry; our ability to expand the number of specialty drugs we dispense and related services; maintaining existing patients; revenue concentration of the top specialty drugs we dispense; our ability to maintain relationships with a specified wholesaler and two pharmaceutical manufacturers or other pharmaceutical manufacturers that become material to our business over time; increasing consolidation in the healthcare industry; managing our growth effectively; our ability to effectively execute our acquisition strategy or successfully integrate acquired businesses; dependence on our senior management and key employees and managing recent turnover among key employees; potential disruption to our workforce and operations due to recent cost savings and restructuring initiatives; and the additional factors set forth in "Risk Factors" in Diplomat's Annual Report on Form 10-K for the year ended December 31, 2016 and in subsequent reports filed with or furnished to the Securities and Exchange Commission. Except as may be required by any applicable laws, Diplomat assumes no obligation to publicly update such forward-looking statements, which are made as of the date hereof or the earlier date specified herein, whether as a result of new information, future developments, or otherwise.

INVESTOR CONTACT:
Bob East, Westwicke Partners
443-213-0500 | Diplomat@westwicke.com


                                                                                                                     DIPLOMAT PHARMACY, INC.

                                                                                                        Condensed Consolidated Balance Sheets (Unaudited)

                                                                                                                      (dollars in thousands)


                                                                                                                                                                                                                  June 30,               December 31,

                                                                                                             ASSETS                                                                                                                 2017                      2016
                                                                                                                                                                                                                                 ----                      ----

    Current assets:

                                                                                                                                                                                                                                 $7,804                    $7,953

       Cash and equivalents

                                                                                                                                                                                                                              279,604                   275,568

       Accounts receivable, net

                                                                                                                                                                                                                              178,131                   215,351

       Inventories

                                                                                                                                                                                                                               10,477                     6,235

       Prepaid expenses and other current assets


                                                                                                                                                                                                                              476,016                   505,107

                        Total current assets

    Property and equipment, net                                                                                                                                                                                                20,963                    20,372

    Capitalized software for internal use, net                                                                                                                                                                                 42,953                    50,247

    Goodwill                                                                                                                                                                                                                  358,178                   316,616

    Definite-lived intangible assets, net                                                                                                                                                                                     195,100                   199,862

    Deferred income taxes                                                                                                                                                                                                       5,031                     6,010

    Other noncurrent assets                                                                                                                                                                                                     1,081                     1,040

                                                                                                                                                                                                                             $1,099,322                $1,099,254

                        Total assets



                                                                                      LIABILITIES AND SHAREHOLDERS' EQUITY

    Current liabilities:

                                                                                                                                                                                                                               $307,718                  $320,684

       Accounts payable

                                                                                                                                                                                                                                2,521                    39,255

       Borrowings on line of credit

                                                                                                                                                                                                                               10,875                     7,500

       Short-term debt, including current portion of long-term debt



       Accrued expenses:

                                                                                                                                                                                                                                6,511                     5,674



            Compensation and benefits

                                                                                                                                                                                                                               12,792                    12,233



            Other


                                                                                                                                                                                                                              340,417                   385,346

                      Total current liabilities

    Long-term debt, less current portion                                                                                                                                                                                      119,006                   100,184

    Contingent consideration                                                                                                                                                                                                    4,365                         -
                                                                                                                                                                                                                                -----                       ---

                                                                                                                                                                                                                              463,788                   485,530



                      Total liabilities

    Commitments and contingencies

    Shareholders' equity:

                                                                                                                                                                                                                           -                         -

       Preferred stock (10,000,000 shares authorized; none issued and outstanding)



       Common stock (no par value, 590,000,000 shares authorized; 68,017,230 and 66,764,999

                                                                                                                                                                                                                              515,820                   503,828



                                                                                                                                      shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively)

                                                                                                                                                                                                                               35,372                    33,268

       Additional paid-in capital

                                                                                                                                                                                                                               84,264                    76,306

       Retained earnings


                                                                                                                                                                                                                              635,456                   613,402

       Total Diplomat Pharmacy shareholders' equity

    Noncontrolling interests                                                                                                                                                                                                       78                       322
                                                                                                                                                                                                                                  ---                       ---

                                                                                                                                                                                                                              635,534                   613,724



                      Total shareholders' equity


                                                                                                                                                                                                                             $1,099,322                $1,099,254



                      Total liabilities and shareholders' equity


                                                                                           DIPLOMAT PHARMACY, INC.

                                                                         Condensed Consolidated Statements of Operations (Unaudited)

                                                                              (dollars in thousands, except per share amounts)




                                                                                              Three Months Ended                                         Six Months Ended

                                                                                                   June 30,                                                June 30,
                                                                                                   --------                                                --------

                                                                                                                  2017                              2016                                     2017                      2016
                                                                                                                  ----                              ----                                     ----                      ----

    Net sales                                                                                           $1,126,464                        $1,088,506                               $2,205,204                $2,084,376

    Cost of goods sold                                                                              (1,041,630)                      (1,005,236)                             (2,035,321)              (1,921,868)

                                                                  84,834      83,270                                                            169,883             162,508

                                      Gross profit

    Selling, general and administrative expenses                                                       (79,991)                         (69,416)                               (156,492)                (123,610)
                                                                                                        -------                           -------                                 --------                  --------

                                                                   4,843      13,854                                                             13,391              38,898

                                      Income from operations


    Other (expense) income:

                                      Interest expense           (1,931)    (1,521)                                                           (3,980)            (2,956)

                                      Other                                        34                                            105                                      66                      213

    Total other expense                                                                                 (1,897)                          (1,416)                                 (3,914)                  (2,743)
                                                                                                         ------                            ------                                   ------                    ------

                                                                   2,946      12,438                                                              9,477              36,155

                                      Income before income taxes

    Income tax benefit (expense)                                                                            544                           (4,145)                                 (1,763)                 (12,679)

                                                                   3,490       8,293                                                              7,714              23,476

                                      Net income

    Less: net loss attributable to noncontrolling interest                                                (101)                            (241)                                   (244)                    (487)
                                                                                                           ----                              ----                                     ----                      ----

    Net income attributable to Diplomat Pharmacy, Inc.                                                    $3,591                            $8,534                                   $7,958                   $23,963



    Net income per common share:
    ----------------------------

    Basic                                                                                                     $0.05                             $0.13                                    $0.12                     $0.37
                                                                                                              =====                             =====                                    =====                     =====

    Diluted                                                                                                   $0.05                             $0.13                                    $0.12                     $0.35
                                                                                                              =====                             =====                                    =====                     =====


    Weighted average common shares outstanding:
    -------------------------------------------

    Basic                                                                                                67,528,151                        66,085,149                               67,209,280                65,312,155

    Diluted                                                                                              68,211,882                        68,034,392                               67,997,929                67,939,665


                                                                                                                                    DIPLOMAT PHARMACY, INC.

                                                                                                                  Condensed Consolidated Statements of Cash Flows (Unaudited)

                                                                                                                                    (dollars in thousands)



                                                                                                                                                                                                      Six Months Ended June 30,
                                                                                                                                                                                                      -------------------------

                                                                                                                                                                                                                             2017         2016
                                                                                                                                                                                                                             ----         ----

    Cash flows from operating activities:

                                                Net income                                                                                                                      $7,714                                   $23,476

                                                 Adjustments to reconcile net income to net cash provided by
                                                 operating activities:

                                                                                                                              31,935                                             22,389



                                                     Depreciation and amortization

                                                                                                                               5,401                                              4,010



                                                     Net provision for doubtful accounts

                                                                                                                               3,798                                              3,152



                                                     Share-based compensation expense

                                                                                                                                 979                                             11,178



                                                     Deferred income tax expense

                                                                                                                                 595                                                581



                                                     Amortization of debt issuance costs

                                                                                                                                   -                                           (8,922)



                                                     Changes in fair values of contingent consideration

                                                                                                                                   -                                             (382)



                                                     Contingent consideration payment

                                                                                                                                   6                                                  1



                                                     Other





                                                     Changes in operating assets and liabilities, net of business
                                                      acquisitions:

                                                                                                                             (3,024)                                          (49,246)

                                                          Accounts receivable

                                                                                                                              37,179                                           (11,358)





                                                          Inventories

                                                                                                                            (14,353)                                            52,878





                                                          Accounts payable

                                                                                                                             (2,977)                                           (1,808)





                                                          Other assets and liabilities


                                                                                                                                                            67,253                         45,949





                                                Net cash provided by operating activities

    Cash flows from investing activities:

                                                Payments to acquire businesses, net of cash acquired                                                      (53,571)                      (69,072)

                                                Expenditures for capitalized software for internal use                                                     (2,459)                       (7,349)

                                                Expenditures for property and equipment                                                                    (2,289)                       (3,705)

                                                Other                                                                                                         (43)                             1


                                                                                                                                                          (58,362)                      (80,125)



                                                Net cash used in investing activities

    Cash flows from financing activities:

                                                Net (payments on) proceeds from line of credit                                                            (36,734)                        17,057

                                                Proceeds from long-term debt                                                                                25,000                              -

                                                Payments on long-term debt                                                                                 (3,313)                       (3,000)

                                                Proceeds from issuance of stock upon stock option exercises                                                      6,007                          1,203

                                                Contingent consideration payment                                                                                 -                         (722)

                                                Payments of debt issuance costs                                                                                  -                          (56)

                                                                                                                                                           (9,040)                        14,482



                                                Net cash (used in) provided by financing activities


                                                                                                                                                             (149)                      (19,694)



                                                Net increase (decrease) in cash and equivalents

    Cash and equivalents at beginning of period                                                                                                                                                                      7,953        27,600
                                                                                                                                                                                                                     -----        ------

    Cash and equivalents at end of period                                                                                                                                                                            $7,804        $7,906


    Supplemental disclosures of cash flow information:

                                                Cash paid for income taxes                                                                                  $4,458                           $401

                                                Cash paid for interest                                                                                       3,386                          2,318

Adjusted EBITDA

The table below presents a reconciliation of net income attributable to Diplomat Pharmacy, Inc. to Adjusted EBITDA for the periods indicated.


                                                                      For the three months ended June 30,                            For the six months ended June 30,
                                                                      -----------------------------------                            ---------------------------------

                                                                                     2017                             2016                             2017                2016
                                                                                     ----                             ----                             ----                ----

                                                                                                  (dollars in thousands) (unaudited)

    Net income attributable to Diplomat Pharmacy, Inc.                             $3,591                           $8,534                           $7,958             $23,963

    Depreciation and amortization                                                  16,538                           12,271                           31,935              22,389

    Interest expense                                                                1,931                            1,521                            3,980               2,956

    Income tax (benefit) expense                                                    (544)                           4,145                            1,763              12,679

    EBITDA                                                                        $21,516                          $26,471                          $45,636             $61,987
                                                                                  -------                          -------                          -------             -------


    Contingent consideration and other merger and acquisition expense                $569                           $1,103                           $1,117            $(7,326)

    Share-based compensation expense                                                2,826                            1,649                            3,798               3,152

    Employer payroll taxes - option repurchases and exercises                         100                               28                              185                  71

    Severance and related fees                                                         40                                -                             702                   -

    Other items                                                                       116                              392                              544                 779

    Adjusted EBITDA                                                               $25,167                          $29,643                          $51,982             $58,663
                                                                                  =======                          =======                          =======             =======

Adjusted EPS (diluted)

Below is a reconciliation of net income attributable to Diplomat Pharmacy, Inc. per diluted share to Adjusted EPS for the periods indicated.


                                                                      For the three months ended June 30,                            For the six months ended June 30,
                                                                      -----------------------------------                            ---------------------------------

                                                                                     2017                             2016                             2017                  2016
                                                                                     ----                             ----                             ----                  ----

                                                                                     (dollars in thousands, except per share amounts) (unaudited)

    Net income attributable to Diplomat Pharmacy, Inc.                             $3,591                           $8,534                           $7,958               $23,963

    Amortization of acquisition-related intangible assets                          12,944                            9,818                           25,265                18,502

    Contingent consideration and other merger and acquisition expense                 569                            1,103                            1,117               (7,326)

    Income tax impact of adjustments                                                (362)                         (3,639)                         (4,909)              (3,731)

    Adjusted non-GAAP net income                                                  $16,742                          $15,816                          $29,431               $31,408
                                                                                  =======                          =======                          =======               =======


    Net income attributable to Diplomat Pharmacy, Inc.                              $0.05                            $0.13                            $0.12                 $0.35

    Amortization of acquisition-related intangible assets                            0.19                             0.14                             0.37                  0.27

    Contingent consideration and other merger and acquisition expense                0.01                             0.02                             0.02                (0.11)

    Income tax impact of adjustments                                               (0.01)                          (0.06)                          (0.08)               (0.06)

    Adjusted EPS                                                                    $0.25                            $0.23                            $0.43                 $0.46
                                                                                    =====                            =====                            =====                 =====



    Weighted average common shares outstanding:
    -------------------------------------------

    Diluted                                                                    68,211,882                       68,034,392                       67,997,929            67,939,665

2017 Full Year Guidance: GAAP to Non-GAAP Reconciliation

The tables below present a reconciliation of net income attributable to Diplomat Pharmacy, Inc. to Adjusted EBITDA and net income attributable to Diplomat Pharmacy, Inc. per diluted share to Adjusted EPS for the year ended December 31, 2017.


                               Reconciliation of GAAP to Adjusted EBITDA

                                   (dollars in thousands) (unaudited)

                                                   Range
                                                  -----

                                                   Low                            High
                                                   ---                            ----

    Net income
     attributable
     to
     Diplomat
     Pharmacy,
     Inc.                                                $10,000                         $16,000

     Depreciation
     and
     amortization                                         64,660                          64,352

    Interest
     expense                                               7,299                           6,999

    Income tax
     expense                                               3,398                           5,506

    EBITDA                                               $85,357                         $92,857
                                                         -------                         -------


    Contingent
     consideration
     and other
     merger and
     acquisition
     expense                                              $2,517                          $2,017

    Share-
     based
     compensation
     expense                                               7,242                           6,642

    Employer
     payroll
     taxes -
     option
     repurchases
     and
     exercises                                               338                             238

    Severance
     and
     related
     fees                                                  1,002                             702

    Other
     items                                                   544                             544

    Adjusted
     EBITDA                                              $97,000                        $103,000
                                                         =======                        ========




                   Reconciliation of GAAP to Adjusted Net Income and Adjusted EPS

                    (dollars in thousands, except per share amounts) (unaudited)

                                                   Range
                                                  -----

                                                   Low                            High
                                                   ---                            ----

    Net income
     attributable
     to
     Diplomat
     Pharmacy,
     Inc.                                                $10,000                         $16,000

     Amortization
     of
     acquisition-
     related
     intangible
     assets                                               49,813                          49,813

    Contingent
     consideration
     and other
     merger and
     acquisition
     expense                                               2,517                           2,017

    Income tax
     impact of
     adjustments                                        (13,606)                       (13,476)

    Adjusted
     non-GAAP
     net
     income                                              $48,724                         $54,354
                                                         =======                         =======


    Net income
     attributable
     to
     Diplomat
     Pharmacy,
     Inc.                                                   0.15                            0.23

     Amortization
     of
     acquisition-
     related
     intangible
     assets                                                 0.73                            0.73

    Contingent
     consideration
     and other
     merger and
     acquisition
     expense                                                0.04                            0.03

    Income tax
     impact of
     adjustments                                          (0.21)                         (0.20)

    Adjusted
     EPS                                                   $0.71                           $0.79
                                                           =====                           =====

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SOURCE Diplomat Pharmacy, Inc.