NASDAQ: CVET
covetrus.com
Advancing the World
of Veterinary Medicine.
2019 ANNUAL REPORT
Our focus on animal care and
empowering veterinarians remains
an inspiring mission in an exciting
and growing market. Our team has
a deep desire to succeed and the
willingness of everyone to embrace
change has helped us focus the
business and continue making the
needed improvements that we
believe will allow us to successfully
execute our plans moving forward.
Building the
foundation
2019 was a year of many firsts for Covetrus
including, most significantly, completing the carve
out of the Animal Health business from Henry Schein
Our Q4 2019 results were an initial testament to this,
and merging it with Vets First Choice to form our new
company. The amount of hard work put in by the
and I am energized by the actions that we have taken
since I moved from chairman of the board to the CEO
team to accomplish this historic transaction was a
role back in October 2019, including strengthening
significant milestone in and of itself.
our executive team, streamlining our portfolio, and
executing improvements to our core operations, as
There were also a lot of other accomplishments and
we work to set us up for success in the years ahead.
progress made during 2019 as we prioritized the
necessary building blocks to build the foundation,
establish independent operations, governance, and
Driving forward
management and continued along a path to future
As we build on these actions and launch our
success. From a commercial perspective, we also
three-year strategic plan, we entered 2020 with
delivered solid performance in our international
a focused approach on executing against the core
businesses and drove accelerating adoption and
drivers of our business, emphasizing our commitment
growth in our prescription management platform.
to our customers and to innovation, and continuously
building a culture of success. While the novel
However, this first year also highlighted many of
the difficulties and growing pains associated with
Coronavirus (COVID-19) has created a new set of
challenges for our company and the animal health
bringing together this unique collection of assets
under one umbrella within a newly formed public
company. As one would expect from such a historic
transaction, it has been challenging, and I expect
some of these challenges to continue in the
near-term. Still, it is clear to me that we have
the tools needed to thrive.
community at large, our commitment to serving our
customers and their clients has never wavered.
Our approach remains centered on delivering better
experiences and outcomes, which includes ensuring
that our customers succeed, and driving growth
and opportunity for our manufacturing partners
and suppliers, even in these unprecedented times.
100K
SUPPLY CHAIN CUSTOMERS
+22K
PIMS CUSTOMERS
In 2020, our collective actions are focused on:
• Supporting a high-performing, customer-centric
culture that invests in talent and effectively
organizes and provides resources to drive our
global strategy,
• Maximizing effectiveness and efficiency in our
core business to deliver greater stability which
will then form the foundation for sustained
growth moving forward,
Ben Wolin
President and Chief Executive Officer
• Supporting and enhancing our margins through
sales mix and growth of our proprietary products
and products – to drive even greater value for all
and solutions, disciplined expense management,
and sourcing initiatives, and
our stakeholders. As we improve our core business
and deliver innovation, we expect to strengthen our
• Investing in innovation to enhance our value
proposition and more effectively deliver on the
There is still much work to be done to fulfill the
global opportunity we see moving forward.
promise and value that we believe the Covetrus
overall growth profile and balance sheet.
model can and will deliver, but these past few
months have demonstrated that the focused
These areas of focus are in addition to the efforts
approach we are taking can yield positive results
our global organization is making to address the
for all our stakeholders. I am proud of our team and
COVID-19 pandemic. During this unprecedented
how we have collaborated amidst the COVID-19
time, we are working closely with all of our
pandemic to ensure the health and safety of our
stakeholders in an effort to anticipate and
employees, customers and suppliers across the
address potential disruptions while continuing to
globe. By continuing to enhance our culture and
deliver the same great value and service that our
organization and relentlessly executing on our
customers have come to expect from our talented
priorities, we will work collaboratively toward
team. I have witnessed and heard of numerous
growth and success, delivering increased value to
stories from around the globe of our employees
our customers, employees, manufacturing partners
going above and beyond to help one another and
our customers. It’s very heartening to see our
company in action and keeps me ever so energetic
and optimistic about our future.
and shareholders in 2020 and beyond.
I am energized to be on this journey, and we thank
you, our shareholders, for your continued support as
we drive our path and transformation forward.
Longer-term and beyond the COVID-19 pandemic,
we will look to build on our customer successes and
these strategies and further invest in our proprietary
capabilities – prescription management, software
Sincerely,
Ben Wolin
President and Chief Executive Officer
+10K
RX MANAGEMENT PLATFORM CUSTOMERS
+5.5K
GLOBAL TEAM MEMBERS
To provide the best products, services, and technology to animal-health practitioners across the globe so they can deliver exceptional care to their patients when and where it is needed.OUR MISSION UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-K
___________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission file number 001-38794
_________________________
COVETRUS, INC.
(Exact name of registrant as specified in its charter)
___________________________
Delaware
(State or other jurisdiction of incorporation or organization)
83-1448706
(I.R.S. Employer Identification No.)
7 Custom House Street, Portland, Maine
(Address of principal executive offices)
04101
(Zip Code)
(888) 280-2221
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
___________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.01 per share
Ticker Symbol
CVET
Name of Exchange on Which Registered
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
——————————————————————————————
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last business
day of the registrant's most recently completed second fiscal quarter, June 28, 2019, was approximately $2.4 billion.
The registrant had 111,708,121 shares of common stock outstanding as of February 28, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for use in connection with the 2020 Annual Meeting of Shareholders (our “2020 Proxy Statement”), are incorporated
by reference into Part III of this report.
COVETRUS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2019
TABLE OF CONTENTS
PART I
PART II
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
10-K Summary
Page No.
5
15
31
31
31
31
32
34
35
47
48
88
88
89
90
90
90
90
90
91
93
94
3
Explanatory Note
As previously disclosed, effective February 7, 2019, Direct Vet Marketing, Inc. (d/b/a Vets First Choice) (“Vets First Choice”)
became a wholly-owned subsidiary of Covetrus, Inc. (f/k/a HS Spinco, Inc.) (“Covetrus” or the “Company”), a company formed
by Henry Schein, Inc. (“Henry Schein” or “Former Parent”) in connection with the spin-off of the animal-health business of
Henry Schein (the “Animal Health Business”) and combination with Vets First Choice (collectively, the “Transactions”). Covetrus
common stock began regular-way trading under the symbol “CVET” on the Nasdaq Global Select Market on February 8, 2019.
Except as otherwise specifically noted, the combined financial statements and other financial information for the fiscal years
ended December 29, 2018 and December 30, 2017 relate to the Animal Health Business, as these periods predate the February 7,
2019 effective date of the acquisition of Vets First Choice. This Annual Report on Form 10-K (“Form 10-K” or “Report”) does
not include the historical financial results of Vets First Choice for the fiscal years ended December 29, 2018 and December 30,
2017 and does not include any pro forma financial statements of Covetrus.
Beginning with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, Covetrus began reporting on a
consolidated basis, representing the combined operations of the Animal Health Business and Vets First Choice and their respective
subsidiaries. Because the Animal Health Business is deemed the acquirer in this combination for accounting purposes under U.S.
Generally Accepted Accounting Principles (“GAAP”), the Animal Health Business is considered Covetrus’ predecessor, and the
historical combined financial statements of the Animal Health Business prior to February 7, 2019 have been reflected in Covetrus’
quarterly reports and this Form 10-K for the year ended December 31, 2019 as Covetrus’ historical financial statements.
The terms “Covetrus,” “Company,” “we,” “our,” “us,” or “ourselves” included in this Report mean Covetrus, Inc. and its
consolidated subsidiaries, collectively.
Rounding adjustments applied to individual numbers and percentages shown in this Report may result in these figures differing
immaterially from their absolute values, and tables may not foot or cross foot.
Forward-looking Statements
Certain matters discussed in this Report, including the information presented in Part II, Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations, contain statements, estimates, and projections that are
“forward-looking statements” as defined under U.S. federal securities laws. These forward-looking statements, which
include statements regarding our business strategy, our expenses and sufficiency of cash, seasonality, our ability to exit
transition services agreements with our Former Parent, deployment of our platform outside the United States, and the
timing and impact of business transactions, involve substantial risks and uncertainties and include, without limitation,
statements regarding our industry, business strategy, plans, goals, and our expectations concerning our market position,
accounting pronouncements, litigation, seasonality of our business, leases, expenses, interest expense and debt, and
sufficiency of cash. When used in this Report, the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,”
“estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “future,” and the negative
of these or similar terms and phrases are intended to identify forward-looking statements. Except as required by law, we do
not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or
otherwise.
These forward-looking statements reflect our current expectations regarding future events, results, or outcomes. Although we
believe the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that these
expectations will prove to have been correct. These expectations may or may not be realized. Some of these expectations
may be based upon assumptions, data, or judgments that prove to be incorrect. Actual events, results, and outcomes may
differ materially from our expectations due to a variety of known and unknown risks, uncertainties, and other factors.
Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements
include, but are not limited to, those described in this Form 10-K in Part I, Item 1A, Risk Factors.
We operate in a very competitive and rapidly changing market. New risks emerge from time to time, and it is not possible
for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-
looking statements we may make.
4
Item 1. Business
Overview
PART I
We are a global animal-health technology and services company dedicated to supporting the companion, equine, and large-animal
veterinary markets. Our mission is to provide the best products, services, and technology to veterinarians and animal-health
practitioners (“Customers”) across the globe, so they can deliver exceptional care to their patients (“Animal Owners”) when and
where it is needed. In February 2019, we combined the complementary capabilities of the Animal Health Business and Vets First
Choice, bringing together leading practice management software and supply chain and distribution businesses with a technology-
enabled prescription management platform and related pharmacy services. We believe our approach to the market will support the
delivery of improved veterinary care and the health of their practices while driving increased demand for our products and
services.
History and Corporate Information
We were incorporated in Delaware in April 2018 as a wholly-owned subsidiary of our Former Parent under the name HS Spinco,
Inc., and subsequently changed our name to Covetrus, Inc. Prior to the spin-off, affiliates of Covetrus purchased from certain
minority holders their ownership interests in the applicable operating companies of the Animal Health Business. On February 7,
2019, Henry Schein completed the spin-off of its Animal Health Business and transferred the applicable assets, liabilities, and
ownership interests to us (the “Separation”) and distributed all the shares of our common stock that were then owned by Henry
Schein to its stockholders of record as of January 17, 2019 (the “Distribution”). Also, on February 7, 2019 and prior to the
Distribution, we sold $361 million in shares to accredited institutional investors (the “Share Sale”). The proceeds from the Share
Sale were paid to us and distributed to our Former Parent. Concurrent with the Distribution, we paid a cash dividend of $1.2
billion from loan proceeds from our newly established credit facility (see Note 8 - Debt). We then acquired Vets First Choice in an
all-stock transaction (the “Acquisition”) and the following day, our shares began trading on the Nasdaq Global Select Market
under the symbol CVET.
In January 2020, we entered into (i) a definitive agreement to sell our scil animal-care business (“scil”) to Heska Corporation, and
(ii) an agreement to combine our subsidiary operating in Spain and Portugal with Distrivet S.A. Both transactions are expected to
close during the second quarter ended June 30, 2020, subject to customary closing conditions. See Note 3 - Held for Sale and Note
19 - Subsequent Events.
Global Operations
In connection with the Separation, Distribution, and Acquisition, we made significant changes to our organizational management
and reporting structure. As a result, we revised our reportable segments from (i) supply chain and (ii) technology and value-added
services to (i) North America, (ii) Europe, and (iii) APAC & Emerging Markets. While the historical business was focused on
driving growth through specific product and service offerings to our Customers, the Separation, Distribution, and
Acquisition allowed for the integration of the different products and service offerings, along with prescription management, data
analytics, and insights through veterinary practice management software, into one multi-channel veterinary platform. We will
focus on delivering this platform of products and services to our Customers on a geographical basis. We provided recast historical
segment information reflecting these changes in the Form 8-K dated May 7, 2019. See Note 18 - Segment Data.
The table below shows the percentage of net sales by segment for the last three years:
Percent of Net Sales by Segment (a)
North America
Europe
APAC & Emerging Markets
Eliminations
Total
2019
2018
2017
53.1%
38.0
9.3
(0.3)
100.0%
51.3%
38.7
10.2
(0.3)
100.0%
52.4%
38.4
9.7
(0.5)
100.0%
(a) See Note 4 - Revenue from Contracts with Customers for our disaggregated revenue
5
Our Products and Services
Below is a graphic representing our major product categories currently available to the market and certain of our products and
services:
Our Services
Supply Chain Services
Software Solutions
Prescription Management
Distribution & E-Commerce
Practice Management Software
Practice Branded Online Pharmacy
Proprietary & Covetrus Branded Products
Marketing Communications
Business & Financial Services
Integrated Practice Solutions
Inventory Management
Payment Solutions
Extensive Formulary of Veterinary
Compounded Medications
Client Engagement Services
Practice Insights & Reporting
Supply Chain Services
We offer a comprehensive portfolio of products and services and value-added solutions for enhancing practice revenue, operating
efficient practices, and delivering high-quality care. By combining our extensive infrastructure and logistical expertise with robust
software and ordering tools, a broad product offering at competitive prices, a suite of add-on business and financial services, and a
strong commitment to customer service, we strive to be an indispensable and trusted partner for our Customers’ evolving needs.
Software Solutions
We offer technology solutions and services, including practice management software, data-driven applications, client
communications tools, and related services, which are designed to increase staff efficiency and improve business health, allowing
the veterinarian more time to provide patient care. We develop, provide, and support veterinary practices with a wide range of
veterinary software systems. We also offer solutions that integrate with our software platforms, including client communication
services, reminders, data backup services, hardware sales and support, and credit card processing. These integrated veterinary
marketing services leverage practice-level data and consumer insights to deliver highly personal, relevant, and timely
communications, strengthening the veterinary-client patient relationship and improving Animal Owners loyalty. Our payment
solutions also help veterinarians save time and money with credit card processing services, which we build into our veterinary
software systems to streamline workflow.
Prescription Management
Our technology-enabled prescription management platform empowers veterinarians with insights and pharmacy services that are
designed to increase engagement and veterinary practice health. Our prescription management platform, which integrates into
veterinary practice management software and workflow, leverages insight and analytics, client engagement and outreach
communications, and integrated veterinary pharmacy services and is designed to improve medical compliance. We work directly
with veterinary practices to provide client and practice-level insights and identify gaps in medical care. By doing so, we seek to
enable our veterinarian Customers to manage the lifecycle of a prescription to create new revenue opportunities, adapt to
changing animal-owner purchasing behaviors, and strengthen their client relationships through convenience of our e-commerce,
auto-ship services, and access to accredited veterinary pharmacies with more than 20,000 products for standard prescriptions,
preventatives, diets, and custom-compounded medications. These products and services ultimately allow our Customers to
improve the quality of animal care that is provided.
6
Our Customers
Our customer base is comprised principally of animal-health and veterinary practices and clinics in the companion-animal and
equine markets in North America, Europe, and APAC & Emerging Markets:
•
•
•
Supply chain Customers in North America, Europe, and APAC & Emerging Markets,
Software solutions Customers in the U.S., the United Kingdom, Australia, New Zealand, and certain other countries, and
Prescription management and pharmacy services Customers in the U.S.
These veterinary practices consist of both small, privately-owned businesses and an increasing number of corporate-owned
practices. We also serve animal-health providers and producers in the large-animal market, primarily outside of North America.
Sales and Marketing
Our supply chain sales and marketing efforts are designed to establish and solidify Customer relationships through personal visits
by field sales representatives and contact from our inside sales team. Our prescription management and software businesses also
have a direct sales force, which we augment through our channel partners and other marketing initiatives. We have also developed
sales and marketing capabilities aimed at expanding our relationships with strategic accounts and pharmaceutical manufacturers.
Our combined sales and marketing teams include approximately 1,200 employees worldwide who generate new sales through
direct and frequent communication with Customers and when requested, Animal Owners, facilitate order processing, stay abreast
of market developments, and educate practice personnel regarding the hundreds of new products, services, and technologies
introduced each year.
Sales and Marketing Employees by Segment
North America
Europe
APAC & Emerging Markets
Total
Our Strategy
Number
%
625
500
75
1,200
52.1%
41.7%
6.2%
100.0%
As a recently formed and publicly-listed company, we have prioritized what we believe are the necessary building blocks to our
independent operations and future success: (i) establishing reliable worldwide Customer support alongside a continuing and
planned elimination of our reliance on our Transition Service Agreements (“TSAs”) with our Former Parent, (ii) increasing
coordination across our business units and technology capabilities as we phase-in our global integration efforts, and (iii)
strengthening our capabilities so that we will be able to penetrate our Customer base across our various markets to tap into growth
opportunities. We made notable progress in 2019 in addressing these building blocks:
• We made progress establishing a corporate infrastructure, including the people and the technology, necessary to support
finance, human resources, information technology, and legal capabilities, among other functions, across Covetrus,
including exiting 18 TSAs in 2019.
• We made significant investments in our portfolio of software solutions and technology-enabled prescription management
platform that improved customer service and workflow and delivered deeper integration and coordination between our
prescription management and software solutions businesses. We started the process of combining our prescription
management and software services teams as one phase of our integration efforts.
• We had early success in cross-selling and penetrating our existing Supply Chain Services Customer base with our
Prescription Management platform, delivering an increased number of enrollments on this platform, and increasing
growth in our specialty pharmacy and compounded medications businesses.
• We manufacture products and develop solutions for certain of our European businesses, our proprietary products and
services offerings, as well as engage third parties to manufacture products on our behalf that we sell with Covetrus
branding. We experienced further adoption of these proprietary and Covetrus-branded products and solutions inside our
existing customer base as our integration efforts continued.
7
As we continue to expand on our 2019 accomplishments, our priorities entering 2020 continue to be centered on further
strengthening our team and culture, and pursuing the specific strategies that will help us better achieve our mission as an
organization, which is to provide the best products, services, and technologies to animal-health practitioners across the globe, so
they can deliver exceptional care to their patients when and where it is needed. Our strategic goals are customer-centric and are
designed to help animal-health practitioners (primarily veterinarians) deliver improved outcomes for their practices and their
clients. We expect to meet our goals by (i) focusing and streamlining our businesses, (ii) synchronizing our global capabilities,
and (iii) accelerating our growth while expanding our products and services offerings.
Our Priorities to Achieve Our Mission
Team
Create a high-performing,
customer-centric culture
Focus
Maximize effectiveness
and efficiency
Differentiate
Drive proprietary products
and solutions
Globalize
Expand platform and develop
sourcing excellence
Team
We must remain an attractive employer to capitalize on the relationships, relationship building potential, and wealth of knowledge
that our employees possess and ensure these employee attributes can be translated into value creation. We strive to create a high-
performing, Customer-centric culture that is operating as one team that embraces our values. We seek to leverage a passion for
caring for animals that strives for continuous improvement, education, and advancement with competitive wages and benefits for
our staff.
Focus
We will continue to streamline and focus our business by maximizing effectiveness and efficiency to deliver more consistent and
profitable performance. We may also look to divest non-core assets, such as the scil animal care transaction announced in January
2020, and we plan to better manage our infrastructure spending, and complete our separation efforts from Henry Schein as we exit
all TSAs by the end of 2020.
•
•
•
For our supply chain business, we are targeting reduced costs to serve our Customers and making investments in global
sourcing to lay the foundation for potential margin enhancement. We also expect to drive additional growth in our
proprietary and Covetrus-branded offerings that can drive greater value to our Customers and improve margins.
For our software business, we are building our product roadmap and making targeted investments in our capabilities to
potentially improve functionality and workflow for our Customers. We will also continue to invest in customer support
as we continuously look to provide higher service levels to our Customers.
For our prescription management business, we are leveraging the infrastructure investments we have made over the past
two years to scale our business profitability. We plan to prioritize technology investments and drive tighter coordination
with our software businesses while expecting to deliver efficiencies and improved product capabilities.
8
Differentiate
We are investing in our differentiated and higher margin proprietary products and solutions in 2020. We are focused on delivering
better experiences and outcomes, which includes relentlessly seeking to advance our Customer successes, leveraging the power of
our market insights, and investing in technology advancements and enterprise solutions. We are also leveraging technology across
all facets of our business to deliver even greater value back to our Customers and manufacturer partners. Additional investment in
support programs and product capabilities should also put us in a stronger position to differentiate our services and drive deeper
engagement with our large Customer base. Utilizing our channel access to provide specialty pharmacy and compounded
medications to a broader Customer base is also a priority for us. Finally, we will look to bring new products and solutions to
market as we strive to be an indispensable and trusted partner for all our Customers’ evolving needs.
Globalize
In 2020, we will seek to more rapidly identify and better understand the needs of our global Customers and manufacturer partners
to align our collection of capabilities together into a more integrated value proposition. This foundational focus should enable us
to deliver on the global and cross-border opportunities we see moving forward more effectively. This will include building out the
initial technology infrastructure necessary to deploy our prescription management platform outside the U.S. and bring some of our
higher-margin proprietary products and solutions into new geographies. We expect to broaden our enterprise solutions to meet the
needs of corporate groups that continue to acquire practices across geographies. Finally, we expect to capitalize on our global
reach to deliver on the sourcing opportunity we see available to us.
Our Competition
The market for providing products, services, and technology to the global animal-health industry is highly competitive and
fragmented. Competitive factors include price, product offerings, value-added services, service and delivery levels, credit terms,
and customer support. Substantially all of the products we sell are available to Customers from a number of distributors,
manufacturers and suppliers and, increasingly, some are being sold directly to Animal Owners and, as a result, significant price
reductions by our competitors or changes in how products are ultimately procured by Animal Owners could result in competitive
harm.
Our principal competitors include:
• Animal Health Divisions of Traditional Distribution Companies: the MWI Animal Health division of
AmerisourceBergen Corporation and the Patterson Veterinary division of Patterson Companies, Inc.,
• Animal Health-focused Companies: national, regional, and local full-service distributors, online commerce such as
Amazon.com, Inc. and zooplus AG, retail and online pharmacy providers such as Chewy, Inc., PetMed Express, Inc., and
Strategic Pharmaceutical Solutions, Inc. (d/b/a Vetsource), as well as manufacturers of animal-health products that sell
directly to veterinary practices and retailers, thereby eliminating or reducing the role of distribution, and
• Practice Management Service Providers: IDEXX Laboratories, Inc. and several regional and local veterinary software
vendors, including those offering cloud-based solutions.
Additionally, the growth in online and brick-and-mortar retailers offering certain animal-health products and services directly to
Animal Owners continues to impact our Customers and, in turn, our business given our strategic alignment with the veterinary
community. Our operating results may be materially adversely affected should this trend continue.
Our Competitive Strengths
We believe we are well-situated within the markets in which we compete. We expect that our comprehensive and integrated multi-
channel capabilities that are focused on empowering care givers, providing expertise, and delivering global scale will allow us to
maintain and strengthen existing Customer relationships, win new business, and unlock new demand and access additional
revenue opportunities while addressing the evolving needs of our Customers, Animal Owners, and our manufacturing partners.
9
Seasonality
Our quarterly sales and operating results have varied from period-to-period in the past and will likely continue to do so in the
future. In the companion animal market, sales of parasite protection products have historically tended to be stronger during the
spring and summer months, primarily due to an increase in vector-borne diseases during that time, which correlates with our
second and third quarters given that most of our business is in the northern hemisphere. Buying patterns can also be affected by
manufacturers’ and distributors’ marketing programs or price increase announcements, which can cause veterinarians to purchase
animal-health products earlier than when those products are needed. This kind of early purchasing may reduce our sales in the
quarters these purchases would have otherwise been made. The sales of animal products can also vary due to changes in the price
of commodities used in manufacturing the products and weather patterns, which may also affect period-over-period financial
results. We expect our historical seasonality trends to continue in the foreseeable future.
Working Capital
Our principal capital requirements include the funding of working capital needs, debt service, strategic investments, build out of
our infrastructure, and maintenance capital expenditures. We require substantial working capital, which is susceptible to
fluctuations in the level of accounts receivables and inventory purchase patterns, and seasonal demands throughout the year. We
extend credit to many of our customers globally in the ordinary course of business, which increases accounts receivable balances
within our business segments and is dependent, to an extent, on seasonal demand. Our sales terms vary from due immediately for
credit card payments to significantly longer periods generally offered to larger customers. Inventory purchase activity and stock
levels are also dependent on sales activity and seasonal demand, however, on occasion we consider special inventory buy-in
opportunities to achieve better purchase terms and earn larger rebates.
Intellectual Property
We own multiple trademarks, service marks and trade names that are important to our business. We believe that our trademarks
are well recognized in the animal-health industry and by veterinarians and, therefore, are valuable assets.
Employees and Executive Officers
We have a knowledgeable team of over 5,500 employees worldwide (2,600 in the U.S.), including 5,100 full-time employees as
of December 31, 2019. We view our employees as a critical factor to our success in strengthening our market position, innovating
and driving the global adoption of our proprietary brands and solutions. We have identified our team as one of our four priorities
in executing our strategy, see Our Strategy above. We believe we maintain positive relations with our employees. In certain
countries, we are bound by union agreements negotiated by the employer's association with the respective union representatives.
We are also party to shop agreements on workplace-related issues, negotiated with works councils at individual facilities that
relate to those facilities.
10
Our executive officers, as of March 3, 2020 are as follows:
Name
Benjamin Wolin
Age
44
49
61
50
62
59
54
50
52
45
Erin Powers Brennan
Michael Ellis
Dustin K. Finer
Stuart B. Gleichenhaus
David Hinton
Timothy Ludlow
Laura J. Phillips
Anthony Providenti
Georgina Wraight
Laws and Regulations
Position
President and Chief
Executive Officer since
March 2020; Acting President
and Chief Executive Officer
since October 2019; Director
since February 2019
Senior Vice President,
General Counsel and
Secretary
Executive Vice President,
President of Europe and
North America
Chief People Officer since
September 2019; Chief
Administrative Officer since
November 2019
Interim Chief Financial
Officer since December 2019
Executive Vice President,
President of APAC &
Emerging Markets
Senior Vice President and
Chief Transformation Officer
Vice President, Global
Controller and Chief
Accounting Officer since
April 2019
Senior Vice President,
Corporate Development
Executive Vice President,
President of Global
Technology Solutions
Qualifying Experience
Former Chief Executive Officer and Co-founder of
Everyday Health, Inc.
General Counsel of Vets First Choice; Partner at
Morgan, Lewis & Bockius LLP.
Chief Financial Officer, General Manager, Vice
President, & President of Europe at Henry Schein
Animal Health.
Chief Administrative & Internal Operations Officer at
TiVo/Rovi; Chief of Operations at MySpace.
Senior Managing Director at FTI Consulting, Inc.;
Co-leader of the Merger Integration & Carve-outs
Practice & a Leader of the Office of the CFO
Solutions Practice; Interim Chief Financial Officer at
ANGUS Chemicals, AgroFresh, ATW, and
Carestream Dental.
Vice President & Managing Director of Australia and
New Zealand at Henry Schein; Vice President &
Managing Director of U.K., Ireland, and France at
Henry Schein Animal Health.
Chief Financial Officer, Chief Integration Officer &
Transformation Officer at Vets First Choice; Chief
Financial Officer at Pine State Trading Company;
Senior Vice President & Treasurer at C&S Wholesale
Grocers.
Director of Finance Compliance at Google; Vice
President, Corporate Controller of Brown-Forman
Corporation; Assistant Corporate Controller of
General Motors; Deputy Chief Auditor for the Public
Company Accounting Oversight Board.
Vice President of Corporate Business Development at
Henry Schein; Vice President of Strategy &
Development at Henry Schein Animal Health.
President & Chief Operating Officer at Vets First
Choice; Chief Operating Officer The Rockport
Group; Chief Operating Office, Chief Financial
Officer Highline Group; and other financial Positions
at Ernst & Young, Walt Disney, and the BBC
.
Our prescription management and pharmacy services business, which is currently conducted only in the U.S., is affected by
federal and state laws and regulations governing, among other things, the purchase, distribution, management, compounding,
dispensing, marketing, and labeling of prescription and non-prescription drugs and related services. In addition, we are subject to
U.S. Food and Drug Administration (“FDA”), U.S. Drug Enforcement Administration (“DEA”), and comparable state regulations
affecting the pharmacy and pharmaceutical industries, including state pharmacy licensure, registration or permit standards, state
and federal controlled substance laws, and statutes and regulations related to FDA approval of the sale and marketing of new
pharmaceuticals and medical devices. State pharmacy laws require pharmacies to be licensed or otherwise authorized to dispense
prescription medications.
Our pharmacies are in Arizona, Maine, Nebraska, and Texas and dispense in all states. Non-resident pharmacies are licensed
similar to resident pharmacies. As such, each prescription for a medication that is fulfilled by one of our pharmacies is generally
11
covered by the laws of the state where the pet owner is located. The laws and regulations relating to the sale and delivery of
prescription medications vary from state to state, but generally require that prescription medications be dispensed with the
authorization from a prescribing veterinarian. We are authorized to dispense prescription medications in all 50 states and the
District of Columbia.
The sale of animal-health products is also governed by the laws and regulations specific to each country in which we sell our
products.
United States
The regulatory body that is responsible for the regulation of animal-health pharmaceuticals in the U.S. is the Center for Veterinary
Medicine (“CVM”) housed within the FDA. Generally, all animal-health pharmaceuticals are subject to pre-market review and
must be shown to be safe, effective, and produced by a consistent method of manufacture as defined under the Federal Food, Drug
and Cosmetic Act. If the drug is for food-producing animals, potential consequences for humans are also considered. The FDA’s
basis for approving a drug application is documented in a Freedom of Information Summary. Post-approval monitoring of
products is required, with reports being provided to the CVM’s Surveillance and Compliance group. Reports of product quality
defects, adverse events or unexpected results are produced in accordance with the law. Animal supplements generally are not
required to obtain premarket approval from the CVM, although they may be treated as a food. Any substance that is added to, or
is expected to become a component of, animal food must be used in accordance with a food additive regulation, unless it is
generally recognized as safe, under the conditions of its intended use. Alternatively, the FDA may consider animal supplements to
be drugs. The FDA has agreed to exercise enforcement discretion for such supplements if each such supplement meets certain
conditions.
The regulatory body in the U.S. for veterinary biologics, such as vaccines, is the U.S. Department of Agriculture (“USDA”). The
USDA’s Center for Veterinary Biologics is responsible for the regulation of animal-health vaccines, including
immunotherapeutics. Marketing of imported veterinary biological products in the U.S. requires a U.S. Veterinary Biological
Product Permit. Veterinary biologics are subject to pre-market review and must be shown to be pure, safe, potent, and efficacious,
as defined under the Virus Serum Toxin Act. Post-licensing monitoring of products is required. Reports of product quality defects,
adverse events, or unexpected results are produced in accordance with USDA requirements.
The main regulatory body in the U.S. for veterinary pesticides is the Environmental Protection Agency (“EPA”). The EPA’s Office
of Pesticide Programs is responsible for the regulation of pesticide products applied to animals. Animal-health pesticides are
subject to pre-market review and must not cause “unreasonable adverse effects to man or the environment” as stated in the
Federal Insecticide, Fungicide, and Rodenticide Act. Within the U.S., pesticide products that are approved by the EPA must also
be approved by individual state pesticide authorities before distribution in that state. Post-approval monitoring of products is
required, with reports provided to the EPA and some state regulatory agencies.
Under the Controlled Substances Act, distributors of controlled substances are required to obtain and renew annually registrations
for their facilities from the DEA. Distributors are also subject to other statutory and regulatory requirements relating to the
storage, sale, marketing, handling, and distribution of such drugs, in accordance with the Controlled Substances Act and its
implementing regulations, and these requirements have been subject to heightened enforcement activity in recent times.
Distributors are subject to inspection by the DEA.
Advertising and promotion of animal-health products that are not subject to approval by the CVM may be challenged by the
Federal Trade Commission (“FTC”), as well as by state attorneys general and by consumers under state consumer protection laws.
The FTC regulates advertising pursuant to its authority to prevent “unfair or deceptive acts or practices in or affecting commerce”
under the Federal Trade Commission Act. The FTC will find an advertisement to be deceptive if it contains a representation or
omission of fact that is likely to mislead consumers acting reasonably under the circumstances, and the representation or omission
is material and if the advertiser does not possess and rely upon a reasonable basis, such as competent and reliable evidence,
substantiating the claim. The FTC may attack unfair or deceptive advertising practices through either an administrative
adjudication or judicial enforcement action, including preliminary or permanent injunction. The FTC may also seek consumer
redress from the advertiser in instances of dishonest or fraudulent conduct.
States may require registration of animal drug distributors and wholesalers. Additional requirements may apply when the product
is also a controlled substance. States work closely with the Association of American Feed Control Officials (“AAFCO”) in their
regulation of animal food. The AAFCO’s annual Official Publication, contains model animal and pet food labeling regulations
that states may adopt. The publication is treated deferentially by the federal and state government agencies that regulate animal
12
food. Many states require registration or licensing of animal food distributors. States may also review and approve animal food
labels prior to sale of the product in their state.
European Union
Veterinary medicines (which includes both prescription and over-the-counter products) must obtain a marketing authorization
(“MA”) before they can be imported, marketed, and sold in any European Union (“EU”) member state. In broad terms, there are
four different routes for obtaining MAs (i) a centralized EU-wide authorization procedure, (ii) national authorization procedures
for each member state, (iii) a mutual recognition procedure involving at least two member states, and (iv) the decentralized
procedure.
The centralized authorization route is used to obtain MAs for marketing and sale of veterinary medicines throughout all the EU
member states as well as those countries in the European Free Trade Area (the “EFTA”). The European Medicines Agency (the
“EMA”) located in London is responsible for assessing applications made under the centralized route. The agency is responsible
for the scientific evaluation of medicines developed by pharmaceutical companies for use in the EU. The agency has a specialized
veterinary review section distinct from the human medical review section. The Committee for Veterinary Medicinal Products is
responsible for scientific review of the submissions for pharmaceuticals and vaccines. The EMA makes the final decision on the
approval of products. Once granted by the European Commission (the “EC”) a centralized marketing authorization is valid in all
EU member states and EFTA states. A series of Regulations, Directives, Guidelines, and EU Pharmacopeia Monographs provide
the requirements for approval in the European Union. In general, these requirements are like those in the U.S., requiring
demonstrated evidence of purity, safety, efficacy, and consistency of manufacturing processes. The EMA works closely with the
competent authorities of each member state in the regulation of veterinary medicines, including with respect to pharmacovigilance
and testing for residues of veterinary medicines or illegal substances in animals and animal products.
Veterinary medicines can also be authorized on a national level through application to the relevant member state’s competent
authority. If a product already has been authorized in at least one EU member state, then the mutual recognition procedure can be
used to gain approval in other member states. Finally, the decentralized procedure may be used if the product is not authorized in
any member state and the applicant would like authorization in several or all member states. This may occur where the centralized
procedure is not mandatory, the product is not eligible for the centralized procedure or where the applicant does not wish to use
the centralized procedure.
The EC must authorize animal feed additives. The European Food Safety Authority (the “EFSA”) assesses applications on behalf
of the EC. The EFSA will analyze a sample of the feed additive and provide an opinion within six months of receiving the
application. The EC will decide whether to grant or deny an authorization of the additive based upon this opinion. When
authorized, all companies can (subject to any relevant third-party intellectual property rights) usually benefit from the
authorization.
An EU regulation on animal medicines, which became effective in November 2018, relates to the advertising of veterinary
products, in addition to various regulation that applies in individual EU member states. Health claims on animal pet food must not
be misleading and claims that a food fulfills a nutritional need must be in line with the list of permitted claims that is published in
an EU directive.
United Kingdom
The Veterinary Medicines Directorate (the “VMD”) is the United Kingdom’s competent national authority responsible for
overseeing the regulation of veterinary medicines in the United Kingdom (“U.K.”). U.K. national applications follow an approach
like centralized EU applications. The VMD is also responsible for post-market surveillance and adverse event reporting.
Australia
The Australian Pesticides and Veterinary Medicines Authority (the “APVMA”) is an Australian government statutory authority
established to centralize the registration of all agricultural and veterinary products in the Australian marketplace. Previously each
state and territory government had its own system of registration. The primary legislation governing the APVMA’s activities is the
Agricultural and Veterinary Chemicals Code, or the AgVet Code. The AgVet Code is in turn given force of law pursuant to the
Agricultural and Veterinary Chemicals Code Act 1994 (Cth).
The APVMA assesses applications from companies and individuals seeking registration so they can import, promote, and supply
their products to the marketplace, and under the AgVet Code the APVMA must be satisfied that any active constituents or
13
chemical products will not have a harmful effect on human health, the environment, occupational health and safety or trade, and
that the product is effective for its intended use. Applications undergo rigorous assessment using the expertise of the APVMA’s
scientific staff and drawing on the technical knowledge of other relevant scientific organizations, commonwealth government
departments, and state agriculture departments. Labeling standards apply and pre-approval is required by the APVMA for
veterinary chemical products. In addition, all advertising and promotion of products is subject to the Australian Consumer Law,
which, like the U.S. and European Union, emphasizes accuracy and transparency in advertising and prohibits any misleading or
deceptive conduct.
If the product works as intended and the scientific data confirms that when used as directed on the product label it will have no
harmful or unintended effects on people, animals, the environment, or international trade, the APVMA will register the product.
As well as registering new agricultural and veterinary products, the APVMA reviews older products that have been on the market
for a substantial period to ensure they are still effective and safe to use. The APVMA also reviews registered products when
concerns are raised about their safety and effectiveness. The review of a product may result in confirmation of its registration or
continuing registration with some changes to the way the product can be used. In some cases, the review may result in the
registration of a product being cancelled and the product taken off the market. The APVMA has the power to order compulsory
product recalls and enforcement powers to ensure compliance with the requirements of the AgVet Code.
New Zealand
All veterinary medicines, agricultural chemicals and vertebrate toxic agents imported into New Zealand must be authorized under
the Agricultural Compounds and Veterinary Medicines (the “ACVM”) Act and regulations. The New Zealand Ministry for
Primary Industries maintains an ACVM Register of products that have been assessed to the ACVM Act registration information
requirements and considered appropriate for registration. Conditions may be applied to such registration. The New Zealand
Environmental Protection Authority (the “NZ EPA”) regulates the supply and use of hazardous substances. The NZ EPA operates
various hazardous substances databases which can be searched to determine what controls have been placed on particular
substances. Veterinary medicines that are hazardous substances require approval under the Hazardous Substances and New
Organisms Act before they can be imported or manufactured in New Zealand. Animal nutritional and animal care products are
covered by a group standard approval.
Rest of world
Country-specific laws have provisions that include requirements for licensing, regulatory approvals, certain labeling, safety,
efficacy, and manufacturers’ quality control procedures (to assure the consistency of the products), as well as company records
and reports. Many other countries’ regulatory agencies will generally refer to the FDA, the USDA, European Union, and other
international animal-health entities, including the World Organization for Animal Health and the Codex Alimentarius
Commission, in establishing standards and regulations for veterinary pharmaceuticals and vaccines.
Where You Can Find Important Information
Our principal executive offices are located at 7 Custom House Street, Portland, ME 04101, and our telephone number is (888)
280-2221. Our website is www.covetrus.com. We may disclose important information through one or more of the following
channels: SEC filings, public conference calls and webcasts, press releases, and the social media channels identified on the
Newsroom page of our website https://covetrus.com/news-room/.
14
Item 1A. Risk Factors
The following discussion describes the most significant risks and uncertainties that could adversely affect our business. If any of
the events described below actually occur, our business, financial condition, results of operations and cash flows could be
materially and adversely affected, and the trading price of our common stock could decline. Our business could also be affected
by additional factors that are not presently known to us or that we currently consider not material. The reader should not consider
this list to be a complete statement of all risks and uncertainties.
Risks Relating to Our Business
We may not successfully implement our business strategies.
We are pursuing, and will continue to pursue, strategic initiatives that management considers critical to our long-term success,
including: leveraging the scale, reach and infrastructure of our supply chain network to accelerate the adoption of our Prescription
Management platform; increasing sales to our Customers; driving category growth; developing advanced insight and analytics
and software; and enhancing Customer and Animal Owners relationships. There are significant risks involved with the execution
of these initiatives, including significant business, economic and competitive uncertainties, many of which are outside of our
control. Accordingly, we cannot predict whether we will succeed in implementing these strategic initiatives. It could take several
years to realize the anticipated benefits from these initiatives, if any benefits are achieved at all. Additionally, our business
strategy may change from time to time, which could delay our ability to implement initiatives that we believe are important to our
business.
Since Customers may be hesitant to migrate or integrate their critical business systems and procedures to those provided by us,
the market and the sales cycle for our technology and services may develop more slowly than we expect.
Our success depends, in part, on the willingness of Customers to adopt new technology and services. Many veterinary practices
have invested substantial effort and financial resources into the information systems and procedures that support their businesses
and may be reluctant or unwilling to migrate or integrate these systems with online or cloud-based, on-demand services. Other
factors that may affect market acceptance of our services include:
•
•
•
•
•
•
•
•
the security capabilities, reliability, and availability of on-demand services,
concerns with entrusting a third party to maintain and manage data, especially confidential or sensitive data,
our ability to minimize the time and resources required to implement our services,
our ability to maintain high levels of Customer satisfaction,
our ability to implement upgrades and other changes to our software without disrupting services we provide,
the level of customization or configuration we offer,
the ability to provide rapid response time during periods of intense activity on Customer websites, and
the price, performance and availability of competing products and services.
The market for these services may develop more slowly than we expect, which would have a material adverse effect on our
business, financial condition, results of operations and cash flows.
The animal-health market is highly competitive, and we may not be able to compete effectively.
The animal-health market is highly competitive and rapidly changing, and we expect competition to intensify in the future. Our
competitors include the animal-health businesses of large pharmaceutical or distribution companies, specialty animal-health
businesses, animal-health focused businesses, practice management service providers, and Internet-based businesses, such as
Chewy, Inc. and PetMed Express, Inc., also known as 1-800-PetMeds, and may, in the future, include new market entrants. Some
of our competitors have access to greater financial, marketing, technical, and other resources than us that could allow them to
compete more effectively.
If any of our competitors are more successful with respect to any key competitive factor such as technological advances or newer
low-cost business models with the ability to operate at higher gross margins, our sales and profitability could be adversely
affected. Additional competitive pressure could arise from, among other things, limited demand growth or a significant number of
additional competitive products or services being introduced into a particular market, price reductions by competitors, or the
ability of competitors to capitalize on their economies of scale.
15
Changes in manufacturer sales channels for companion animal products could negatively impact our market share, margins,
and distribution of our products.
In most markets, companion animal owners typically purchase their animal-health products directly from veterinarians.
Companion animal owners increasingly have the option to purchase animal-health products from sources other than veterinarians,
such as online retailers, “big-box” retail stores or other over-the-counter distribution channels. This trend has been demonstrated,
for example, by the significant shift away from the veterinarian distribution channel in the sale of flea and tick products in recent
years. Companion animal owners also could decrease their reliance on, and visits to, veterinarians as they rely more on online
animal-health information and retailers that now offer basic veterinary services. Because we market our companion animal
prescription products through the veterinarian channel, both in-office and through our online platform, any decrease in reliance on
and visits to veterinarians by companion animal owners could reduce our market share for such products and have a material
adverse effect on our business. In addition, companion animal owners may substitute human health products for animal-health
products if human health products are deemed to be lower-cost alternatives.
Because substantially all the products that we distribute and sell are not manufactured by us, we are dependent on third
parties for the manufacture and supply of substantially all our products.
We obtain substantially all our products from third parties. Generally, we do not have long-term contracts with our suppliers
committing them to supply products to us. Therefore, suppliers may not provide the products we need in the quantities we request
or at all. Additionally, certain key suppliers, in the aggregate, supply a significant portion of the products we sell. In addition, we
currently purchase many products and materials from single sources. Some of the products that we purchase from these sources
are proprietary and, therefore, cannot be readily or easily replaced by alternative sources. These products include branded and
patented products from major pharmaceutical manufacturers, including Boehringer Ingelheim International GmbH, Elanco
Animal Health Incorporated, Merck & Co., Inc., Vedco, Inc., and Zoetis, Inc., among others. These five suppliers accounted for
approximately 50% of our purchases for the year ended December 31, 2019. If we are unable to obtain adequate quantities of
products in the future from single-source suppliers, we may be unable to supply the market, which could have a material adverse
effect on our results of operations.
Additionally, because we generally do not control the actual production of the products we sell, we may be subject to delays
caused by interruption in production based on conditions outside of our control, including interruption due to physical loss of the
manufacturers' or their suppliers facilities and the manufacturers’ failure to comply with applicable government requirements. The
failure of manufacturers of products regulated by the FDA, the DEA, or other governmental agencies to meet these requirements
could result in product recall, cessation of sales or other market disruptions. If any of our third-party suppliers were to become
unable or unwilling to continue to provide the products in our required volumes, we would need to identify and obtain acceptable
replacement sources on a timely basis. There is no guarantee that we would be able to obtain such alternative sources of supply on
a timely basis, if at all. An extended interruption in the supply of our products, especially any high-sales volume product, could
have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our substantial indebtedness could adversely affect our financial condition and impair our ability to operate our business. We
may incur substantial additional indebtedness, which could further exacerbate the risks to our financial condition.
On February 7, 2019, we entered into a $1.5 billion syndicated credit agreement with a group of lenders for a five-year term (the
“Credit Facilities”). The Credit Facilities include a $1.2 billion term loan facility, (the “Term Loan Facility”), which was fully
funded and primarily used to pay a dividend to Henry Schein, and a $300 million revolving line of credit for working capital and
general corporate purposes (the “Revolving Credit Facility”). As of December 31, 2019, there was $1.2 billion outstanding under
the Term Loan Facility and there were no borrowings from the Revolving Credit Facility, although we do utilize the Revolving
Credit Facility from time to time.
We may incur significant additional indebtedness in the future, including secured indebtedness. Although the agreements
governing our Credit Facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a
number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be
substantial.
Our current level of indebtedness, and any additional indebtedness, could have a material adverse effect on our business, financial
condition, results of operations and cash flows, including the following:
•
limiting our ability to obtain additional debt or equity financing for working capital, capital expenditures, debt service
requirements, acquisitions and general corporate or other purposes,
16
•
requiring that a substantial portion of our cash flows from operations be dedicated to payments on our indebtedness
instead of other purposes, including working capital, capital expenditures and future business opportunities,
• making it more difficult for us to make payments on our indebtedness or satisfy other obligations,
•
•
limiting our ability to make the expenditures necessary to transform our business,
limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our
competitors that have less debt, and
increasing our vulnerability to a downturn in general economic conditions or in our business and making us unable to
carry out capital spending that is important to our growth.
•
The agreements governing our Credit Facilities contain restrictive covenants, which restrict our operational flexibility.
The agreements governing our Credit Facilities contain restrictions and limitations on our ability to engage in activities that may
be in our long-term best interests, including financial and other restrictive covenants that will limit our ability to:
incur additional liens,
consolidate, merge, sell, or otherwise dispose of all or substantially all assets,
incur additional indebtedness,
•
• make dividends and other restricted payments,
•
•
• make investments,
•
•
•
•
transfer or sell assets,
enter into restrictive agreements,
change the nature of the business, and
enter certain transactions with affiliates.
The agreements governing our Credit Facilities also contain other restrictions customary for facilities of this nature.
Our ability to borrow additional amounts under these agreements will depend on satisfaction of these covenants, as well as
financial covenants (i) consolidated net total leverage ratio and (ii) consolidated net interest coverage ratio. Events beyond our
control could affect our ability to meet these covenants. Our failure to comply with obligations under these agreements may result
in an event of default under those agreements. A default, if not cured or waived, may permit acceleration of our indebtedness. If
our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated
indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. This
could have a material adverse effect on our business, financial condition, results of operations and cash flows and could cause us
to become bankrupt or insolvent.
We will require a significant amount of cash to service our indebtedness. Our ability to generate cash depends on many
factors, some beyond our control.
Our ability to make payments on and to refinance our indebtedness, and to fund capital expenditures, will depend on our ability to
generate cash. This, to a certain extent, is subject to economic, financial, competitive, legislative, regulatory, and other factors that
are beyond our control. We have substantial indebtedness, and may incur additional indebtedness, which could lead to increased
interest expense and could increase the amount of cash flows required to fund interest expense associated with our indebtedness.
In addition, certain obligations under the Credit Facilities bear interest at variable interest rates. As of December 31, 2019, we
maintained interest rate swap contracts with notional amounts aggregating $500 million, which are intended to fix the future
interest payments associated with our $1.2 billion variable-rate Term Loan Facility. These swap agreements expire July 31, 2021.
Despite these derivative contracts, interest rate increases still could result in larger debt service requirements. Such an increase in
our debt service obligations would adversely affect our cash flows. In addition, we may not be able to take advantage of interest
rate decreases where we have fixed rates utilizing swap agreements. We cannot guarantee that our business will generate
sufficient cash flows from operations or that future borrowings will be available to us under our Credit Facilities or any
subsequent credit agreement, or that we can obtain alternative financing proceeds in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness at or before
maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at
all.
The debt service obligations under our Credit Facilities could also reduce funds available for working capital, capital expenditures
and other general corporate purposes and may create competitive disadvantages relative to other companies with lower debt
levels.
17
We may require financing to fund our ongoing operations and capital expenditures, the availability of which is highly
uncertain.
The capital and credit markets can experience volatility and disruption. Such markets can exert extreme downward pressure on
stock prices and upward pressure on the cost of new debt capital and can severely restrict credit availability for most issuers. Our
business will require expenditures to develop enhancements to our platforms, expand capacity, and add new businesses
complementary to our product lines. In the future we may engage in transactions that depend on our ability to obtain financing.
We may also seek financing to fund our ongoing operations.
Depending on conditions in the financial markets and/or our financial performance, we may not be able to raise additional capital
on favorable terms, or at all. If we are unable to pursue our current and future spending programs, we may be forced to cancel or
scale back those programs. Failure to successfully pursue our capital expenditure and other spending plans could negatively affect
our ability to compete effectively and have a material negative effect on our business and results of operations.
Many of our Customers and Animal Owners are price sensitive, and if the prices for our products and services are
unacceptable to them, it could have a material adverse effect on our business, financial condition, results of operations and
cash flows.
Many of our Customers and Animal Owners are price sensitive. As the market for our services matures, or as new competitors
introduce new products or services that compete with us, we may be unable to retain our existing Customers or attract new
customers based on the same price pricing model as previously used. As a result, it is possible that competitive dynamics in our
market may require us to change our pricing model or reduce our prices, which could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
We may lose Customers and have difficulty attracting new customers if we have defects, disruptions, or poor service in our
technology product offerings.
Because we deliver online and cloud-based applications as a service, errors or defects in the software applications underlying the
service, or a failure of our hosting infrastructure, may render the service unavailable to Customers. Since our Customers will use
our platform to manage critical aspects of their businesses, any errors, defects, disruptions in service or other performance
problems with the platform, whether in connection with the day-to-day operation of the platform, upgrades or otherwise, could
damage the Customers’ businesses. If we experience any errors, defects, disruptions in service or other performance problems
with our online and cloud-based services, Customers could delay or withhold payment or stop doing business with us, and our
business, results of operations and reputation could be harmed.
Consolidation of our customers and distributors could negatively affect the pricing of our products.
Veterinarians are our primary customers. In recent years, there has been a trend towards the concentration of veterinarians in large
clinics and hospitals. In addition, our distributors have seen consolidation in their industries. Furthermore, we have seen the
expansion of corporate customers, including larger cross-border ones, and an increase in the consolidation of buying groups
(cooperatives of veterinary practices that leverage volume to pursue discounts from manufacturers). The pace of consolidation
and structure of markets varies greatly across geographies. If these trends towards consolidation continue, these customers and
distributors could attempt to improve their profitability by leveraging their buying power to obtain favorable pricing. The
resulting decrease in our prices could have a material adverse effect on our operating results and financial condition.
If our information systems (or third-party systems we rely on) are interrupted, damaged by unforeseen events, are subject to
cyberattacks or fail for any extended period of time or unauthorized access is obtained to a Customer’s or their Client’s data,
we may incur significant liabilities, our service may be perceived as not being secure, Customers may curtail or stop using our
products or services and our results of operations could be materially adversely affected.
The services we offer involve the maintenance of our Customers’ and Animal Owners sensitive information. In addition, we rely
on information systems (“IS”) in our business to obtain, rapidly process, analyze, manage, and store data to, among other things:
• maintain and manage systems to facilitate the purchase and distribution of thousands of inventory items from numerous
distribution centers,
receive, process and ship orders on a timely basis,
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process payments to suppliers.
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Information security risks have generally increased in recent years, and a third-party action, employee error, malfeasance or other
event that bypasses our IS security systems causing an IS security breach may lead to a material disruption of our IS business
systems and/or the loss of business, customer or client information resulting in a material adverse effect on our business. Because
techniques used to obtain unauthorized access to, or to sabotage, IS security systems change frequently and generally are not
recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive
measures.
In addition, we develop products and provide services to our Customers that are technology-based, and a cyberattack that
bypasses the IS security systems of our products or services causing a security breach and/or perceived security vulnerabilities in
our products or services could also cause significant reputational harm, and actual or perceived vulnerabilities may lead to claims
against us by our Customers, their clients and/or governmental agencies. Perceived or actual security vulnerabilities in our
products or services, or the perceived or actual failure by us or our Customers who use our products to comply with applicable
legal requirements, may not only cause us significant reputational harm, but may also lead to claims against us by our Customers,
their clients and/or governmental agencies and involve fines and penalties, costs for remediation, and substantial defense and
settlement expenses.
Additionally, changes in the legislative or regulatory action related to cybersecurity may increase our costs to develop or
implement new technology-based products and services. In addition, changes in the regulatory environment could increase our
compliance related costs.
Risks associated with these and other actual or perceived IS security breaches may include, among other things:
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the theft, destruction, loss, misappropriation or release of confidential data or intellectual property,
operational or business delays resulting from the disruption of information systems and subsequent clean-up and
mitigation activities,
the need to continually evolve procedures and safeguards to meet new IS challenges, and enhancing protections, and
conducting investigations and remediation, may impose additional costs on us,
claims, fines and penalties, and costs for remediation, or substantial defense and settlement expenses, and
negative publicity resulting in reputation or brand damage with our Customers or Animal Owners, suppliers or industry
peers or the loss of sales or Customers.
We store, process and use information collected from or about our Customers and Animal Owners that subjects us to
legislative and regulatory burdens and may expose us to liability and/or potential objections from such Customers and Animal
Owners, and our actual or perceived failure to adequately protect or appropriately use data could harm our brand, our
reputation in the marketplace and our business.
Because we collect, store, process and use data, some of which contain personal information, we are subject to complex and
evolving laws and regulations relating to privacy, data protection and other matters related to personal information. Failure to
abide by these laws, regulations and standards could expose us to breach of contract claims, investigations, substantial fines,
penalties and other liabilities and expenses, costs for remediation and harm to our reputation. Our Customers and Animal Owners
may also object to or opt out of the collection and use of their data, which may harm our business.
Certain states in which we operate, including California, and countries outside of the United States have adopted or may in the
future adopt new regulations governing handling, storage, use and protection of personal information. The California Consumer
Privacy Act (“CCPA”) is a state statute intended to enhance privacy rights and consumer protection for residents of California,
U.S. Both in the United States and abroad, these laws and regulations continue to evolve and remain subject to significant change.
In addition, the application and interpretation of these laws and regulations are often uncertain. If we fail to comply with such
laws and regulations, we could be required to make significant changes to our products or services, or incur substantial fines,
penalties, or other liabilities. For example, if legislation or regulations are adopted, interpreted or implemented in a manner that is
inconsistent with our current business practices and that require changes to these practices, the design of our products and services
or privacy practices, it could have a material adverse effect on our business, financial condition, results of operations and cash
flows. The costs of compliance with, and the other burdens imposed by, new or existing laws or regulatory actions may prevent us
from selling our products or services, or increase the costs of doing so, and may affect our ability to invest in or develop products
or services. In addition, a determination by a court or government agency that any of our practices do not meet these standards
could result in liability or negative publicity and could have a material adverse effect on our business, financial condition, results
of operations and cash flows.
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In addition, the European Parliament and the Council of the European Union have adopted the EU General Data Protection
Regulation (“GDPR”) effective from May 25, 2018, which increases privacy rights for individuals in Europe, extends the scope or
responsibilities for data controllers and data processors and imposes increased requirements and potential penalties on companies
offering goods or services to individuals who are located in Europe, or Data Subjects, or monitoring the behavior of such
individuals (including by companies based outside of Europe). Noncompliance can result in penalties of up to the greater of EUR
20 million, or 4% of total company revenues. Individual member states may impose additional requirements and penalties as they
relate to certain things such as employee personal data. Among other things, the GDPR requires, with respect to personal data
concerning Data Subjects, company accountability, consents from Data Subjects or other acceptable legal basis needed to process
the personal data, prompt breach notifications within 72 hours, fairness and transparency in how the personal data is stored, used
or otherwise processed, and data integrity and security, and provides rights to Data Subjects relating to modification, erasure and
transporting of the personal data. Our efforts to implement programs and controls that comply with the GDPR are likely to impose
additional costs on us, and we cannot predict whether the interpretations of the requirements, or changes in our products or
services in response to new requirements or interpretations of the requirements, will be accepted as compliant by applicable
regulatory authorities.
Successful claims for misappropriation or release of confidential or personal data brought against us or fines or other penalties
assessed or any claim that results in significant adverse publicity against us could have a material adverse effect on our business
and reputation.
We may launch branding or rebranding initiatives that may involve substantial costs and may not be favorably received by
Customers.
We now operate under the name “Covetrus, Inc.” In connection with this name change, we have incurred substantial costs, and
may in the future incur substantial additional costs, in rebranding our products and services, and we may not be able to achieve or
maintain brand name recognition or status under the new brand that is comparable to the recognition and status previously
enjoyed by the Animal Health Business and Vets First Choice separately. The failure of any such rebranding initiative could
adversely affect our ability to attract and retain customers, which could cause us not to realize some or all the benefits
contemplated by us to result from our acquisition of Vets First Choice in an all-stock transaction ("Merger").
Many of our Customers are small and medium-sized businesses, which can be challenging to cost-effectively reach, acquire,
and retain.
We market and sell many of our services to veterinary practices and clinics, which are typically small or medium-sized business
(“SMBs”). To grow our business, we must develop new customers, sell additional services to existing Customers, and encourage
existing Customers to remain on our platform. However, selling to and retaining SMBs can be more difficult than selling to and
retaining large enterprises because SMB customers:
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are more price sensitive,
are more difficult to reach with broad marketing campaigns, and
often require higher sales, marketing and support expenditures by vendors that sell to them per revenue dollar generated
for those vendors.
If we are unable to cost-effectively market and sell our services to our target customers, our ability to grow our business will be
harmed.
Our business is subject to risk based on global economic conditions.
Macroeconomic, business, and financial disruptions could have a material adverse effect on our business, financial condition,
results of operations and cash flows. Certain of our Customers, Animal Owners and our suppliers could be affected directly by an
economic downturn and could face credit issues or cash flow problems that could give rise to payment delays, increased credit
risk, bankruptcies and other financial hardships that could decrease the demand for our products or hinder our ability to collect
amounts due from Customers. If one or more of our large Customers discontinue their relationship with us because of economic
conditions or otherwise, our operating results and financial condition may be materially adversely affected. Furthermore, our
exposure to credit and collectability risk is higher in certain international markets and our ability to mitigate such risks may be
limited. While we have procedures to monitor and limit exposure to credit and collectability risk, there can be no assurances such
procedures will effectively limit such risk and avoid losses. In addition, since Animal Owners typically utilize discretionary
income to purchase services or products for their pets, economic concerns may cause some Animal Owners to forgo or defer visits
to veterinary practices or could reduce their willingness to treat pet health conditions or even to continue to own a pet.
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A significant portion of our operations is conducted in foreign jurisdictions and is subject to the economic, political, legal,
regulatory, and business environments of the countries in which we do business. Risks associated with such international
operations could negatively affect our business, financial condition, results of operations and cash flows.
We have significant operations outside of the United States. We expect that we will continue to expand our international
operations in the future. International operations inherently subject us to several risks and uncertainties, including:
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compliance with governmental controls, trade restrictions, restrictions on direct investments, quotas, embargoes, import
and export restrictions, tariffs, duties, and regulatory and licensing requirements by domestic or foreign entities,
including restrictions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury, the
U.K. Office of Financial Sanctions Implementation, United Nations Security Council, and Australia's Department of
Foreign Affairs and Trade,
difficulties in building, staffing, and managing foreign operations (including a geographically dispersed workforce) and
maintaining compliance with foreign labor laws,
burdens to comply with, and different levels of protection offered by, multiple and potentially conflicting foreign laws
and regulations, including those relating to environmental, health and safety requirements and intellectual property,
changes in laws, regulations, government controls or enforcement practices with respect to our business and the
businesses of our Customers,
political and social instability, including crime, civil disturbance, terrorist activities, armed conflicts, outbreak of disease,
and natural and other disasters,
ongoing instability or changes in a country’s or region’s regulatory, economic, or political conditions, including as a
result of the United Kingdom’s leaving the European Union, or Brexit, and any other similar referenda or actions by
other European Union member countries,
local business and cultural factors that differ from our normal standards and practices, including business practices
prohibited by the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act, and other anti-corruption laws and regulations,
longer payment cycles and increased exposure to counterparty risk,
disruptions in transportation of our products or our supply chain, and
the differing product and service needs of foreign Customers.
The multinational nature of our business subjects us to potential risks that various taxing authorities may challenge the pricing of
our cross-border arrangements and subject us to additional tax, adversely impacting our effective tax rate and our tax liability. In
addition, international transactions may involve increased financial and legal risks due to differing legal systems and customs.
Compliance with these requirements may prohibit the import or export of certain products and technologies or may require us to
obtain a license before importing or exporting certain products or technology. A failure to comply with any of these laws,
regulations or requirements could result in civil or criminal legal proceedings, monetary or non-monetary penalties, or both,
disruptions to our business, limitations on our ability to import and export products and services, and damage to our reputation.
While the impact of these factors is difficult to predict, any of them could have a material adverse effect on our business, financial
condition, results of operations and cash flows. Changes in any of these laws, regulations or requirements, or the political
environment in a particular country, may affect our ability to engage in business transactions in certain markets, including
investment, procurement, and repatriation of earnings.
Brexit may have a negative effect on our business.
The uncertainty regarding new or modified arrangements between the United Kingdom and other countries following Brexit may
have a material adverse effect on the movement of products between the United Kingdom and members of the European Union
and the United States, including the interruption of or delays in imports into the United Kingdom of products originating within
the European Union and exports from the United Kingdom of products originating there. Such a situation could have an adverse
effect on our business.
Our business is exposed to domestic and foreign currency fluctuations that could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
Approximately 47% of our net sales for our business in fiscal 2019 was to Customers outside the United States. Changes in non-
U.S. currencies relative to the U.S. dollar impact our sales, profits, assets, and liabilities. In addition, the weakening or
strengthening of the U.S. dollar may result in significant favorable or unfavorable translation effects when the operating results of
our non-U.S. business activity are translated into U.S. dollars and could cause our results of operations to differ from our
expectations and the expectations of our investors. For our international sales denominated in U.S. dollars, an increase in the
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value of the U.S. dollar relative to foreign currencies could make our products and services less competitive in international
markets. Alternately, a weakening of the currencies in which sales are generated relative to the currencies in which costs are
denominated would decrease operating profits and cash flow. Changes in currency exchange rates may also affect the relative
prices at which we purchase materials and services in foreign markets. In addition, the impact of currency devaluations in
countries experiencing high inflation rates or significant currency exchange fluctuations could negatively impact our operating
results. While we may use financial instruments to mitigate the impact of fluctuations in currency exchange rates on our cash
flows, unhedged exposures would continue to be subject to currency fluctuations.
The future growth of our business depends in significant part on increasing our international sales. Our recent and
continuing international expansion efforts subject us to additional risks.
Net sales outside of the U.S. represented approximately 48% of our total Net sales in 2017, 49% in 2018, and 47% in 2019. Our
international expansion efforts may be slow or unsuccessful to the extent we experience difficulties in recruiting, training, managing
and retaining qualified personnel with international experience, language skills and cultural competencies in the geographic markets
we target, which could negatively impact our bookings and operating results. Conducting and expanding international operations
subjects us to risks we generally do not face in the U.S., including:
• management, communication, and integration problems resulting from language barriers, cultural differences and
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geographic dispersion of our customers and personnel,
language translation of, and associated Customer Care support for, our products,
compliance with foreign laws, including laws regarding online disclaimers, advertising, liability of online service
providers for activities of customers especially with respect to hosted content, and more stringent laws in foreign
jurisdictions relating to consumer privacy and protection of data collected from individuals and other third parties,
accreditation and other regulatory requirements to do business and to provide domain name registration, web-hosting and
other products in foreign jurisdictions,
greater difficulty in enforcing contracts, including our universal terms of service and other agreements,
increased expenses incurred in establishing and maintaining office space and equipment for our international operations,
greater costs and expenses associated with international marketing and operations,
greater risk of unexpected changes in regulatory practices, tariffs, trade disputes and tax laws and treaties,
different or lesser degrees of protection for our or our customers' intellectual property and free speech rights in certain
markets,
increased exposure to foreign currency risks,
increased risk of a failure of employees to comply with both U.S. and foreign laws, including export and antitrust
regulations, anti-bribery regulations and any trade regulations ensuring fair trade practices,
heightened risk of unfair or corrupt business practices in certain geographies, and
the potential for political, social, or economic unrest, terrorism, hostilities or war, and multiple and possibly overlapping
tax regimes.
The Coronavirus could materially adversely affect our results
The Novel Coronavirus Disease 2019 (COVID-19) (“Coronavirus”) is impacting worldwide economic activity, and activity in China
in particular. Estimates for Chinese gross domestic product and economic growth have been reduced as a result of the Coronavirus.
In addition, with the spread of the Coronavirus to other countries, it is unclear how economic activity might be impacted on a
worldwide basis. We also might be unable to obtain products from our suppliers due to the competing demand for such products
created by the virus, and by the potential constraints on the movement of goods. The impact of the virus on Chinese and other
economic activity, and its effect on the global supply chain are uncertain at this time and could have a material adverse effect on our
results.
Our business is subject to substantial regulation.
Our pharmacy and supply chain businesses are impacted by federal and state laws and regulations governing, among other things:
the purchase, distribution, management, compounding, dispensing, marketing and labeling of prescription drugs and related
services; DEA and/or state regulation affecting the sale and distribution of controlled substances; and statutes and regulations
related to the sale and marketing of animal drugs, pet food, insecticides and devices. Our failure to comply with any of these laws
and regulations could severely limit or curtail our pharmacy and supply chain operations, which would materially harm our
business and prospects. Further, our business could be affected by changes in these or any newly enacted laws and regulations, as
well as federal and state agency interpretations of such statutes and regulations. Such statutory or regulatory changes could
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require that we make changes to our business model and operations and/or could require that we incur significantly increased
costs to comply with such regulations.
The status of compounded animal drugs is uncertain. The FDA issued proposed guidance titled Guidance for Industry #256:
Compounding Animal Drugs from Bulk Drug Substances (“GFI #256”) on November 18, 2019. The comment period for this
proposed guidance will end on June 21, 2020. If adopted, GFI #256 would strictly limit the circumstances under which the FDA
would permit compounding of veterinary drug products. It is uncertain whether GFI #256 will be adopted in the form proposed,
or at all. The proposed guidance is similar to guidance proposed by the FDA in 2015 and ultimately withdrawn in November
2017. These and other restrictions that may be imposed on the activities of compounding pharmacies may limit the available
market for compounded formulations from bulk substances for animal use, as compared to the market available for the FDA-
approved animal drugs.
The marketing and sale of compounded formulations is subject to and must comply with state statutes and regulations governing
compounding pharmacies. These statutes and regulations include, among other things, restrictions on compounding in advance of
receiving an animal-specific prescription, restrictions on compounding drugs that are essentially copies of FDA-approved drugs,
restrictions on compounding drug products for office use, and restrictions on wholesaling. These and other restrictions on the
activities of compounding pharmacies may significantly limit the market available for compounded formulations, as compared to
the market available for FDA-approved drugs.
Legislation may be proposed in the United States or other jurisdictions in the future that could impact the distribution channels for
our companion animal products. For example, such legislation may require veterinarians to provide Animal Owners with written
prescriptions and disclosure that the Animal Owner may fill prescriptions through a third party, which may further reduce the
number of Animal Owners who purchase their animal-health products directly from veterinarians. Such requirements may lead to
increased use of generic alternatives to our products or the increased substitution of our products with other animal-health
products or human health products if such other products are deemed to be lower-cost alternatives. Any of these events could have
a material adverse effect on our business, financial condition, results of operations and cash flows.
The sale and distribution of our products is also regulated in most or all jurisdictions outside the United States where our business
operates. Local regulations on sale and distribution may be tightened, for example regarding labeling, quality, or transportation,
which may increase our costs of doing business. In the European Union, a revision of the current legislation on veterinary
medicinal products is under way, establishing a new EU regulation on veterinary medicinal products will become effective
January 28, 2022 throughout the European Union and will limit the use of antibiotics, tighten importation rules, and impose
stricter pharmacovigilance standards. This regulation must still be implemented at the member state level and as such, additional
requirements may be adopted by individual member states which would have the effect of increasing the compliance requirements
for our business in the European Union with resulting costs.
If a compounded drug formulation provided through our compounding pharmacy services leads to injury or death or results
in a product recall, we may be exposed to liabilities or reputational harm.
The success of our compounding pharmacy services is dependent on perceptions of us and the safety and quality of our products
and services. We could be adversely affected if we or any other compounding pharmacies or our formulations and technologies
are subject to negative publicity. We could also be adversely affected if any of our formulations or technologies, any similar
products sold by other companies, or any products sold by other veterinary compounding pharmacies prove to be, or are asserted
to be, harmful. For instance, to the extent any of the components of approved drugs or other ingredients used to produce our
compounded formulations have quality or other problems that adversely affect the finished compounded preparations, our
business could be adversely affected. Also, because of our dependence on veterinarian and client perceptions, any adverse
publicity associated with illness or other adverse effects resulting from the use or misuse of our products, any similar products
sold by other companies or any products sold by veterinary compounding pharmacies could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
Assertions by a third party that we are infringing its intellectual property, whether successful or not, could subject us to costly
and time-consuming litigation or expensive licenses.
The software and technology industries are characterized by the existence of many patents, copyrights, trademarks, and trade
secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. The
preparation or sale of our products may infringe on the patent rights of others. As we face increasing competition, the possibility
of intellectual property rights claims against us may grow. Our technology may not be able to withstand any third-party claims or
rights against their use. Additionally, although we have licensed from other party's proprietary technology covered by patents, it
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cannot be certain that any such patents will not be challenged, invalidated, or circumvented. These types of claims could harm our
relationships with our Customers, may deter future Customers from using our services or could expose us to litigation for such
claims.
Any intellectual property rights claim against us, with or without merit, could be time-consuming, expensive to litigate or settle
and could divert management attention and financial resources. An adverse determination also could prevent us from offering our
services to Customers and may require the procurement or development of substitute services that do not infringe. As a result of
intellectual property rights claims against us, we may have to pay damages or stop using technology or formulation found to be in
violation of a third party’s rights. We may have to seek a license for the intellectual property, which may not be available on
reasonable terms, if at all, and may significantly increase our operating expenses or may require us to restrict our business
activities in one or more respects. As a result, we may also be required to develop alternative non-infringing technology, which
could require significant effort and expense.
In addition, we use open source software in our platform and will use open source software in the future. From time to time, we
may face claims from companies that incorporate open source software into their products, claiming ownership of, or demanding
release of, the source code, the open source software, or derivative works that were developed using such software, or otherwise
seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to
purchase a costly license or require us to devote additional product, technology, and development resources to change our
platform or services, any of which would have a material adverse effect on our business, financial condition, results of operations
and cash flows.
Turnover of key personnel, including executive officers, could disrupt our operations and our inability to attract and retain
qualified personnel could harm our business.
Our success depends on the efforts of our executive officers and certain key personnel. Any unplanned turnover or our failure to
develop an adequate succession plan for one or more of our executive officers or other key positions could deplete our
institutional knowledge base and erode our competitive advantage. The loss or limited availability of the services of one or more
of our executive officers or other key personnel, or our inability to recruit and retain qualified executive officers or other key
personnel in the future, could, at least temporarily, have a material adverse effect on our business, financial condition, results of
operations and cash flows. Our future success also depends on our ability to attract, retain, and motivate talented technical,
managerial, sales, marketing, and service and support personnel. Competition for sales, marketing, and technology development
personnel is particularly intense in the software and technology industries. As a result, we may be unable to successfully attract or
retain qualified personnel, which could have a material adverse effect on our business, financial condition, results of operations
and cash flows.
In September 2019, David Shaw resigned as Chairman of our Board of Directors and Benjamin Wolin was appointed as Chairman
of our Board of Directors; in October 2019, Benjamin Shaw resigned as our Chief Executive Officer and President, Mr. Wolin
resigned as Chairman of our Board of Directors and was appointed Acting Chief Executive Officer and President, and Philip
Laskawy was appointed Chairman of our Board of Directors; in December 2019, Christine Komola resigned as our Chief
Financial Officer and Stuart Gleichenhaus was appointed as our Interim Chief Financial Officer; and on March 3, 2020, Mr. Wolin
was appointed as our Chief Executive Officer and President. We may face risks related to these and other transitions in our
leadership team.
Tax legislation could materially adversely affect our financial results.
We are subject to the tax laws and regulations of the United States federal, state, and local governments, as well as foreign
jurisdictions. From time to time, various legislative initiatives may be proposed that could materially adversely affect our tax
positions. There can be no assurance that our effective tax rate will not be materially adversely affected by legislation resulting
from these initiatives.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 was enacted in the United States, which among other things,
reduced the corporate tax rate from a top marginal rate of 35% to a flat rate of 21% and limited the ability to deduct net interest
expense to 30% of adjusted earnings, in addition to making other significant changes to corporate and international tax provisions.
Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and our
business and financial condition could be materially adversely affected. In addition, it is uncertain how various states will respond
to the newly enacted federal tax law.
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Risks Relating to the Transactions
We may not realize the anticipated revenue growth opportunities and operational synergies from the Transactions.
The benefits that we expect to achieve because of the Transactions will depend, in part, on our ability to realize anticipated
revenue growth opportunities and operational synergies. Our success in realizing these revenue growth opportunities and
operational synergies, and the timing of their realization, depends on the successful integration of the Animal Health Business and
the business of Vets First Choice. Even if we can integrate the businesses successfully, this integration may not result in the
realization of the revenue growth and operational synergies that we currently expect within the anticipated time frame or at all.
For example, we may not be able to accelerate the adoption of the Vets First Choice platform by the Animal Health Business’
customers. Moreover, we may incur substantial expenses in connection with the integration of the two businesses. Such expenses
are difficult to estimate accurately and may exceed current estimates. Accordingly, the benefits from the Transactions may be
offset by costs or delays incurred in integrating the businesses.
The on-going integration of the Animal Health Business and Vets First Choice presents significant challenges that may lead to
unforeseen business interruptions or substantial costs.
There is a significant degree of difficulty and management distraction inherent in the process of integrating the Animal Health
Business and the Vets First Choice business. These difficulties include, among others:
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the challenge of integrating the businesses while carrying on the ongoing operations of each business,
the challenge of integrating the cultures of each business,
the challenge of integrating the information technology systems of each business, and
the potential difficulty in attracting and retaining key employees and sales personnel of each business.
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of the
businesses and may require us to incur substantial costs. Members of our senior management may be required to devote
considerable time and attention to this integration process, which will decrease the time and attention they will have to manage
our operations, service existing Customers, attract new Customers and develop new products, services or strategies. If senior
management is not able to effectively manage the integration process, or if any significant business activities are interrupted
because of the integration process, our business could suffer. We cannot guarantee that we will successfully or cost-effectively
integrate the Animal Health Business and Vets First Choice businesses. Failure to do so could have a material adverse effect on
our business, financial condition, results of operations and cash flows.
We expect that we will incur significant costs associated with the Transactions that could affect our period-to-period operating
results.
We anticipate that we will incur significant one-time non-recurring costs over the next several years as a result of the
Transactions. We may not be able to quantify the exact amount of these costs or the period in which they will be incurred. Some
of the factors affecting the costs associated with the Transactions include the resources required in integrating the Animal Health
Business and the Vets First Choice businesses and the length of time during which transition services are provided to us by Henry
Schein. The amount and timing of these charges, including those related to information technology infrastructure and systems
integration and planning, could adversely affect our period-to-period operating results, which could result in a reduction in the
market price of shares of our common stock. Moreover, delays in completing the integration may reduce the growth opportunities
and operational synergies and other benefits expected from the Transactions and such reduction may be material.
We may be unable to access equivalent benefits and services that historically have been provided by Henry Schein to the
Animal Health Business.
The Animal Health Business previously received benefits and services from Henry Schein and benefitted from Henry Schein’s
financial strength and extensive business relationships. We no longer benefit from Henry Schein’s resources, other than pursuant
to the Transition Services Agreement, dated as of February 7, 2019, by and between Henry Schein and Covetrus, or the Transition
Services Agreement, while that agreement is in effect. While Henry Schein will provide certain services to us for a specified
period of time under the Transition Services Agreement, those services are transitional in nature and it cannot be assured that we
will be able to adequately replace all of the resources provided by Henry Schein to the Animal Health Business or replace them at
the same cost. If we are not able to replace the resources provided by Henry Schein, are unable to replace them at the same cost or
are delayed in replacing the resources historically provided by Henry Schein, there could be a material adverse effect on our
business, financial condition, results of operations and cash flows.
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We may be affected by significant restrictions imposed on us to avoid significant tax-related liabilities and related
indemnification obligations.
The Tax Matters Agreement, dated as of January 7, 2019, by and among Henry Schein, Covetrus, Vets First Choice and the Vets
First Choice Stockholders’ Representative (as it may be amended and/or restated from time to time), (the “Tax Matters
Agreement”), generally prohibits us from taking certain actions that could cause the Distribution and the Merger to fail to qualify
as tax-free transactions. For a two-year period following the date of the Distribution, we may not (among other limitations):
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cease, or permit certain of our wholly-owned subsidiaries to cease, the active conduct of a business that was conducted
immediately prior to the Distribution or from holding certain assets held at the time of the Distribution,
dissolve, liquidate, take any action that is a liquidation for federal income tax purposes, merge or consolidate with any
other person, or permit certain of our wholly-owned subsidiaries to do any of the foregoing,
approve or allow an extraordinary contribution to us by our stockholders in exchange for stock, redeem or otherwise
repurchase (directly or indirectly) any of our stock, or amend our certificate of incorporation or other organizational
documents, or take any other action, if such amendment or other action would affect the relative voting rights of our
capital stock or would be inconsistent with the representations and statements made by us and Henry Schein in
connection with the Opinion of Cleary Gottlieb Steen & Hamilton LLP, to the effect that the contribution of the Animal
Health Business, the Distribution and certain related transactions will qualify as tax free to Henry Schein and Henry
Schein stockholders for U.S. federal income tax purposes (the “Spin-off Tax Opinion”), or
enter into any transaction or series of transactions as a result of which one or more persons would acquire (directly or
indirectly) an amount of stock of Covetrus (taking into account the stock of Covetrus acquired pursuant to the Merger
and Share Sale (as defined below)) that would reasonably be expected to cause the failure of the tax-free status of the
Distribution, the Merger and certain related transactions.
In addition, we may not amend our certificate of incorporation or take any other action that would render ineffective the
application of the Ownership Limitation (as defined below), and in certain circumstances this restriction may prevent us from
taking certain actions even following the second anniversary of the Distribution. The Tax Matters Agreement also imposes
additional obligations and restrictions on us related to the Ownership Limitation, including a requirement that we diligently
enforce the provisions of the Ownership Limitation against any purported transfers in violation of its terms, and we may have an
obligation to indemnify Henry Schein if we breach or otherwise fail to comply with these restrictions. Due to these and other
restrictions and indemnification obligations under the Tax Matters Agreement, we may be limited in our ability to pursue strategic
transactions, equity or convertible debt financings or other transactions that may otherwise be in our best interests. Also, our
potential indemnity obligations to Henry Schein might discourage, delay, or prevent a change of control during this two-year
period that our stockholders may consider favorable.
If the Distribution does not qualify as a tax-free spin-off under Section 355 of the Internal Revenue Code, including as a
result of subsequent acquisitions of our stock, then we may have certain indemnification obligations which could have a
material adverse effect on our business.
The Transactions were conditioned on Henry Schein’s and our receipt of the Spin-off Tax Opinion. The parties did not obtain a
private letter ruling from the Internal Revenue Service (“IRS”) with respect to the Transactions, and instead intend to rely solely
on the Spin-off Tax Opinion for comfort that the spin-off and certain related transactions qualify for tax-free treatment for U.S.
federal income tax purposes under the U.S. Internal Revenue Code of 1986, as amended (the “Code”). The Spin-off Tax Opinion
is based on, among other things, certain representations, and assumptions as to factual matters, as well as certain undertakings,
made by us. The failure of any factual representation or assumption to be true, correct, and complete in all material respects, or
any undertakings to be fully complied with, could affect the validity of the Spin-off Tax Opinion. An opinion of counsel
represents counsel’s best legal judgment, is not binding on the IRS or the courts, and the IRS or the courts may not agree with the
conclusions set forth in the Spin-off Tax Opinion. In addition, the Spin-off Tax Opinion was based on current law, and cannot be
relied on if current law changes with retroactive effect.
If the Transactions do not qualify for their intended tax-free treatment, including as a result of our failure to comply with the
restrictions in the Tax Matters Agreement or subsequent acquisitions of our stock, we may have an obligation under the Tax
Matters Agreement to indemnify Henry Schein for the resulting tax liability (which may be significant). In the event we are
required to indemnify Henry Schein for taxes incurred in connection with the Transactions, the indemnification obligation could
have a material adverse effect on our business, financial condition, results of operations and cash flows.
26
Our amended and restated certificate of incorporation includes a share ownership limitation that, for a two-year period
following the Distribution, may prevent certain transfers of our shares.
In order to minimize the likelihood that an acquisition of our capital stock by one or more persons (or coordinating groups of
persons) after the Distribution could be part of a plan or series of related transactions that includes the Distribution, our amended
and restated certificate of incorporation generally prohibits, for the two-year period following the Distribution, direct or indirect
beneficial ownership (taking into account applicable ownership provisions of the Code) and any agreement, understanding, or
substantial negotiations to acquire beneficial ownership, by any person or persons of more than 9.8% of our outstanding common
stock (or any other class or series of outstanding stock) or, in the case of certain grandfathered holders of more than the requisite
percentage of such stock held by such investor, or collectively, the Ownership Limitation. Any attempted transfer of our stock
which, if effective, would result in a violation of the relevant Ownership Limitation will be null and void ab initio, and will cause
the shares in excess of such Ownership Limitation (rounded up to the nearest whole share) to be automatically transferred to a
trust for the exclusive benefit of one or more charitable beneficiaries, and the proposed transferee would not acquire any rights in
the shares. A transfer for this purpose will include not only direct transfers, but also other direct and indirect changes in beneficial
ownership. The trustee of the trust will receive all distributions on, and will exercise all voting rights in respect of, the shares in
trust for the exclusive benefit of the charitable beneficiary. In addition, the trustee would be empowered to sell the shares in trust
to a qualified person selected by the trustee, under procedures set out in our amended and restated certificate of incorporation,
with all of the net profit being received by the trustee for the exclusive benefit of the charitable beneficiary. In the event that the
shares-in-trust shall have been sold by the purported transferee in an open market transaction, such sale would be deemed to have
been made on behalf of the trustee and all of the net profit, if any, from such sale shall be paid by the purported transferee to the
trustee for the exclusive benefit of the charitable beneficiary. The purported transferee of the shares in trust would have no right to
share in any profit that may be realized in respect of such shares.
Our Board has the power to waive the relevant Ownership Limitation for specific transfers after following procedures set out in
our amended and restated certificate of incorporation. However, other than in respect of certain transfers that meet certain
requirements described in our amended and restated certificate of incorporation, our Board is not obligated to grant a waiver. In
addition, our ability to modify the relevant restrictions set forth in our amended and restated certificate of incorporation is limited
by the Tax Matters Agreement.
The Ownership Limitation is intended to help preserve the tax-free treatment of the Distribution under Section 355 of the Code,
but it is possible the restriction could depress the price of shares of our common stock, and, in certain circumstances while the
Ownership Limitation is in effect, could inhibit proxy contests to change our Board or delay, defer or prevent a transaction or a
change in control of us that might involve a premium price for holders of our common stock or that might otherwise be in the best
interest of our stockholders.
Due to the Merger, our ability to use net operating losses to offset future taxable income may be restricted and these net
operating losses could expire or otherwise be unavailable.
Due to the Merger, our ability to use net operating losses to offset future taxable income will be further restricted and these net
operating losses (“NOLs”) could expire or otherwise be unavailable. In general, under Section 382 of the Code and corresponding
provisions of state law, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-
change NOLs to offset future taxable income. For these purposes, an ownership change generally occurs where the aggregate
stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its
ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Prior to the
Merger, some of Vets First Choice’s existing NOLs were subject to limitations. Following the Merger, Vets First Choice’s existing
NOLs may be subject to further limitations and we may not be able to fully use these NOLs to offset future taxable income. In
addition, if we undergo any subsequent ownership change, our ability to utilize NOLs could be further limited. There is also a risk
that, due to regulatory changes or for other unforeseen reasons, existing NOLs could expire or otherwise be unavailable to offset
future income tax liabilities.
Additionally, the Tax Act (as defined below) resulted in a reduction in the economic benefit of the NOLs and other deferred tax
assets available to us. Under the Tax Act, U.S. federal NOLs generated after December 31, 2017 will not be subject to expiration.
27
Risks Relating to Our Common Stock
The market price of our common stock is likely to be highly volatile and subject to wide fluctuations, and you may be unable to
resell your shares at or above the price at which you acquired them, or at all.
Prior to the Distribution date, there was no public market for our common stock. A limited market, commonly known as a “when-
issued” trading market, for our common stock developed on February 4, 2019 and “regular-way” trading of our common stock
(Nasdaq: CVET) began on February 8, 2019. The market price of our common stock is likely to be highly volatile and could be
subject to wide fluctuations in response to many factors that are beyond our control, including, but not limited to:
•
•
•
•
•
•
•
•
quarterly variations in our revenues and operating expenses,
developments in the financial markets and worldwide or regional economies,
announcements of innovations or new products or services by us or our competitors,
announcements by the government relating to regulations that govern our industry,
significant sales of our common stock or other securities in the open market,
variations in interest rates,
changes in the market valuations of other comparable companies, and
changes in accounting principles.
If securities or industry analysts publish unfavorable research about us or cease to provide coverage of us, our stock price and
trading volume could decline.
The trading market for our common stock will depend in part on the research reports that securities or industry analysts publish
about us and our business. If one or more of the securities and industry analysts who cover our stock downgrades the stock or
publishes unfavorable research about us, the stock price would likely decline. If one or more of these analysts ceases coverage of
us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause the stock price or trading
volume to decline.
Fluctuations in our quarterly or annual operating results may cause our stock price to decline.
Our quarterly and annual operating results may fluctuate significantly in the future, due to a number of factors, including:
seasonality of certain product lines; changes in foreign currency exchange rates; changes in our accounting estimates; timing of
operating expenditures; and timing of regulatory approvals and licenses, which could adversely impact the value of our common
stock. Furthermore, our results may fluctuate due to a variety of other factors, many of which are outside of our control and may
be difficult to predict.
The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating
results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely
on past results as an indication of our future performance. This variability and unpredictability could also result in our failure to
meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below
the expectations of analysts or investors or below any forecasts we may provide to the market, or if any forecasts we provide to
the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a
stock price decline could occur even when we have met any previously publicly stated revenue and/or earnings guidance we may
provide.
Our business could be materially adversely affected by a negative outcome in significant litigation or other legal proceedings.
We are currently involved in a shareholder securities litigation, and may be subject to future litigation matters, claims, and
demands. These matters may divert financial and management resources that would otherwise be used to benefit our operations.
No assurances can be given that the results of these matters will be favorable to us. An adverse resolution or outcome of any of
these lawsuits, claims, demands or investigations could have a negative impact on our results of operations, financial condition,
and liquidity.
28
Failure to establish and maintain effective internal controls could have a material adverse effect on our ability to report our
financial condition, results of operations, or cash flows accurately and on a timely basis and could harm our reputation.
As a publicly traded company, we are subject to the Securities Exchange Act of 1934 (the “Exchange Act”) and the Sarbanes-
Oxley Act of 2002 (“Sarbanes-Oxley Act”). The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and
procedures and internal control over financial reporting.
To comply with these requirements, we have and will need to continue to upgrade and implement additional internal controls,
reporting systems, information technology systems and procedures, and hire additional accounting, legal, compliance, and finance
staff. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting that results in
a more than reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or
detected on a timely basis.
During the quarter ended September 30, 2019, management identified a material weakness in our internal control related to
ineffective information technology general controls (ITGC’s) in the areas of logical security and change management in certain of
our business units within North America, APAC, and Europe. As a result of this material weakness, management concluded that
our internal controls over financial reporting were not effective as of September 30, 2019 and through December 31, 2019.
During the quarter ended December 31, 2019, management identified a material weakness in our internal controls over financial
reporting relating to our accounting for income taxes. Management's assessment identified control deficiencies associated with the
transition to establishing expanded in-house tax capabilities and utilizing new tax consultants. As a result of these issues, our
controls to review and analyze the Company's income tax provision and deferred income tax balances did not operate effectively.
That led management to conclude that the control deficiencies that existed at December 31, 2019 represented a material weakness
in internal controls.
We are implementing remedial measures to address the material weaknesses prior to the end of fiscal 2020, however we cannot
assure that our efforts will be successful or on this timeline, or that we have identified all material weaknesses. Our remedial
measures may result in additional technology and other expenses. Any failure to implement these remedial measures and to
achieve and maintain effective internal controls and disclosure controls and procedures could have a material adverse effect on the
market for our common stock.
For a discussion of our internal controls over financial reporting and a description of the identified material weakness, see Part II,
Item 9A Controls and Procedures of this Report.
Sales of our common stock may negatively affect its market price.
It is likely that some stockholders have sold or may sell our common stock received in the Transactions for various reasons such
as if our business profile or market capitalization as a combined company does not fit their investment objectives. The sales of
significant amounts of our common stock or the perception in the market that this will occur may result in a decrease in the
market price of our common stock. Certain former stockholders of Vets First Choice holding approximately 17.3% of our
common stock were subject to a six-month lock-up period following February 7, 2019, or the Closing Date, with respect to the
shares of our common stock they received in the Merger pursuant to a voting and support agreement. These shares were not
restricted securities within the meaning of Rule 144 under the Securities Act after the expiration of the lock-up period and, unless
held by our affiliates, may subsequently be sold into the public market without restriction. If some or all these shares are sold, or
if it is perceived that they will be sold, in the public market, the price of our common stock could decline substantially.
We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment
will depend on appreciation in the price of our common stock.
We do not intend to declare and pay dividends on our common stock for the foreseeable future. We currently intend to invest our
future earnings, if any, to fund our growth, to develop our business, for working capital needs and for general corporate purposes.
Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an
investment in shares of our common stock will depend on any future appreciation in their value. There is no guarantee that shares
of our common stock will appreciate or even maintain the value of shares received in connection with the Transactions. In
addition, Delaware law or the agreements governing our indebtedness may impose requirements that may restrict our ability to
pay dividends to holders of our common stock.
29
Under our amended and restated certificate of incorporation, our non-employee directors generally have no obligation to offer
us corporate opportunities.
Our amended and restated certificate of incorporation addresses potential conflicts of interest with respect to corporate
opportunities and transactions that are presented to, or which otherwise come into the possession of, any of our directors who is
not also one of our employees or an employee of any of our subsidiaries. Under our amended and restated certificate of
incorporation, we renounce any interest or expectancy in such corporate opportunities unless they were presented to a non-
employee director expressly and solely in such person’s capacity as one of our directors.
Anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated by-laws could
discourage, delay, or prevent a change of control and may affect the trading price of our common stock.
Our amended and restated certificate of incorporation and amended and restated by-laws include a number of provisions that may
discourage, delay, or prevent a change in our management or control over us that stockholders may consider favorable. For
example, the amended and restated certificate of incorporation and amended and restated by-laws, collectively:
•
•
•
•
•
•
•
•
•
authorize the issuance of “blank check” preferred stock that could be issued by our Board without approval of
stockholders,
for the first three years following the Merger until the 2022 annual meeting of stockholders, divide our Board into three
classes, serving staggered terms of one, two and three years, respectively,
limit the ability of stockholders to remove directors by requiring the affirmative vote of holders of at least two-thirds of
the outstanding shares of our capital stock then entitled to vote for removal and, until the 2022 annual meeting of
stockholders, permitting directors to be removed only with cause,
provide that vacancies on our Board may be filled only by a majority vote of directors then in office,
prohibit stockholders from calling special meetings of stockholders,
prohibit stockholder action by written consent,
establish advance notice requirements for stockholder nominations of candidates for election as directors before an
annual or special meeting of our stockholders or to bring other business before an annual meeting of our stockholders,
subject us to Section 203 of the DGCL, which will prohibit us from engaging in business combinations with certain
“interested stockholders” for three years following the date such stockholder became interested unless certain criteria are
met, and
require the approval of holders of at least two-thirds of the outstanding shares of our capital stock then entitled to vote to
amend the amended and restated certificate of incorporation and the amended and restated by-laws.
These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of the common
stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may
adversely affect the prevailing market price of the common stock if the provisions are viewed as discouraging takeover attempts
in the future. The amended and restated by-laws also make it difficult for stockholders to replace or remove management by
giving our Board the sole ability to elect and remove officers. These provisions may facilitate management entrenchment that may
delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of the stockholders.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware, or if the Court
of Chancery does not have jurisdiction, the federal district court for the District of Delaware or other state courts of the State of
Delaware (each such court, as applicable, the “Selected Forum”), as the exclusive forum for certain litigation that may be initiated
by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our amended and restated certificate of incorporation provides that the Selected Forum will be the sole and exclusive forum for
(i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed
to us or our stockholders by any of our current or former directors, officers, employees or stockholders, (iii) any action asserting a
claim against us arising under the DGCL, our amended and restated certificate of incorporation or our amended and restated by-
laws or as to which the DGCL confers jurisdiction on a Selected Forum, (iv) any action asserting a claim against us that is
governed by the internal affairs doctrine, (v) any action to interpret, apply, enforce or determine the validity of our amended and
restated certificate of incorporation or our amended and restated by-laws, or (vi) any other action asserting an “internal corporate
claim” under Section 115 of the DGCL. If a stockholder files any of the preceding actions in a court other than a court located
within the State of Delaware (a “Foreign Action”), such stockholder shall be deemed to have consented to (x) the personal
jurisdiction of the Selected Forum in connection with any action brought in such court to enforce the choice of forum provision
and (y) having service of process made on such stockholder in any such enforcement action by service on the stockholder’s
counsel (as such stockholder’s agent) in the foreign action. By becoming a holder of our common stock, a person will be deemed
to have notice of and have consented to the provisions of our amended and restated certificate of incorporation related to choice of
30
forum. The choice of forum provision in our amended and restated certificate of incorporation may limit our stockholders’ ability
to obtain a favorable judicial forum for disputes with us.
Item 1B. Unresolved Staff Comments
None
Item 2.
Properties
Our corporate headquarters consists of three facilities located in Portland, Maine. The first facility encompasses approximately
25,000 square feet of leased office space, which expires in July 2026. The second facility encompasses approximately 10,000
square feet of leased office space, which expires in December 2020. The third facility encompasses approximately 10,000 square
feet of leased office space, which expires in April 2022. We also utilize approximately 50 distribution centers and approximately
75 offices throughout the world.
In August 2018, we signed two new leases for additional office and laboratory space in Portland, Maine. The first is for
approximately 117,000 square feet of office space and the second is for approximately 46,000 square feet of laboratory space and
will house certain compounding pharmacy operations. The lease terms will commence at the earlier of (i) when we begin our
operations in these facilities, or (ii) the date the landlord obtains a permanent certificate of occupancy. The initial lease terms are
for 20 years and include four optional five-year extensions.
In June 2018, we signed a lease for office space and pharmacy operations in Phoenix, Arizona which commenced in November
2019 with an initial lease term of 13 years. The facility is approximately 100,000 square feet; however, we have determined that it
is not suitable for its intended purpose, and are actively pursuing sub-lease opportunities.
In July 2019, we signed a lease for alternate space in Phoenix, Arizona. The facility includes approximately 100,000 square feet of
office space and will house certain compounding pharmacy operations. The lease term commenced in January 2020 and the initial
lease term is 14 years.
We believe that our existing facilities are adequate for our near-term needs, but we may need additional space as we grow and
expand our operations. We believe that suitable additional or alternative office space would be available as required in the future
on commercially reasonable terms.
See Note 6 - Leases under Item 8, Financial Statements and Supplementary Data.
We believe that our properties are in good condition, are well maintained, and are suitable and adequate to carry on our business,
apart from the space noted above. We have additional operating capacity at certain distribution center facilities.
Item 3. Legal Proceedings
Refer to Note 11 - Commitments and Contingencies included in Part II, Item 8, Financial Statements and Supplementary Data in
this Report for information on legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable
31
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities
Our common stock has been listed on the Nasdaq Global Select Market under the symbol “CVET” since February 8, 2019. Prior
to that date, there was no public trading market for our common stock. A “when-issued” trading market for our common stock
existed between February 4, 2019 and February 7, 2019 under the symbol “CVETV”.
Holders of Common Stock
As of February 28, 2020, there were 429 holders of record of our common stock. This number does not reflect beneficial owners
whose shares are held in street name.
Securities Authorized for Issuance Under Equity Compensation Plans
Information regarding our equity compensation plans and the securities authorized for issuance thereunder is set forth herein
under Part III, Item 12 below.
Dividend Policy
We have never declared or paid any cash dividends on our common stock or any other securities. We anticipate that we will retain
all available funds and any future earnings, if any, for use in the operation of our business and do not anticipate paying cash
dividends in the foreseeable future. In addition, our debt instruments materially restrict our ability to pay dividends on our
common stock. Payment of future cash dividends, if any, will be at the discretion of the board of directors after taking into
account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements
of current or then-existing debt instruments and other factors the board of directors deems relevant.
Stock Performance Graph
The graph below compares the cumulative total shareholder return of our common stock for the last four quarters with the Nasdaq
Global Market Composite Index and the S&P 600 Health Care Index. The information presented assumes an initial investment of
$100 on February 7, 2019, the effective date of the registration of our common stock, and that all dividends were reinvested. The
graph shows the value that each of these investments would have had at the end of each quarter.
32
Four-Quarter Cumulative Total Shareholder Return(a)
$130.00
$120.00
$110.00
$100.00
$90.00
$80.00
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
7-Feb-19
31-Mar-19
30-Jun-19
30-Sep-19
31-Dec-19
Covetrus, Inc.
Nasdaq Global Market Composite
S&P 600 Health Care
Covetrus, Inc.
Nasdaq Global Market Composite
S&P 600 Health Care
February 7,
2019
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
$
$
$
100.00
100.00
100.00
$
$
$
73.98
109.58
98.98
$
$
$
56.82
113.62
101.12
$
$
$
27.62
107.04
97.32
$
$
$
30.66
118.65
110.99
(a) $100 invested on February 7, 2019 in stock or index, including reinvestment of dividends, as of December 31, 2019
Recent Sales of Unregistered Securities
Not applicable
Issuer Purchases of Equity Securities
Not applicable
33
Item 6.
Selected Financial Data
You should read the following consolidated and combined financial data in conjunction with Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data. The
results shown below are not necessarily indicative of the results to be expected for any future periods.
(In millions, except per share data)
Statement of Operations Data:
December 31,
2019 (a)
December 29,
2018
December 31,
2017
December 26,
2016
December 26,
2015
Fiscal Years Ended
Net sales
$
3,976
$
3,778
$
3,580
$
3,353
$
2,978
Gross profit
Selling, general and administrative
Goodwill impairment (b)
Operating (loss) income
Other income (expense), net
(Loss) income before taxes and equity in
earnings of affiliates
Income tax benefit (expense) (c)
Equity in earnings of affiliates
Net (loss) income
Net loss (income) attributable to redeemable
non-controlling interests
749
808
938
(997)
(32)
(1,029)
7
—
(1,022)
3
Net (loss) income attributable to Covetrus
$
(1,019) $
684
547
—
137
6
143
(37)
1
107
(6)
101
(Loss) earnings per share attributable to Covetrus:
Basic (d)
Diluted (d)
Balance Sheet Data:
Total assets
Long-term debt and other borrowings, net (e)
Redeemable non-controlling interests (f)
Total shareholders' equity
$
$
$
(9.50) $
(9.50) $
1.41
1.40
3,361
$
2,233
1,125
10
1,256
24
92
1,494
$
$
$
$
652
517
—
135
4
139
(48)
1
92
(28)
64
0.90
0.89
2,217
24
367
1,257
$
$
$
$
620
496
—
124
3
127
(28)
1
100
(30)
70
0.98
0.98
1,991
26
322
1,120
$
$
$
$
530
426
—
104
4
108
(24)
1
85
(25)
60
0.84
0.84
1,862
24
276
1,057
(a) Includes the Acquisition on February 7, 2019
(b) See Note 7 - Goodwill and Other Intangible Assets, Net
(c) See Note 14 - Income Taxes
(d) On February 7, 2019, Henry Schein, Inc. distributed approximately 71 million shares of Covetrus common stock to its shareholders. The computation of basic
earnings per common share (“EPS”) for all periods disclosed was calculated using the shares distributed by Henry Schein on February 7, 2019 totaling
71 million. The weighted-average number of shares outstanding for diluted EPS for periods prior to the Distribution included 0.5 million of diluted common
share equivalents for restricted stock and restricted stock units as these share-based awards were previously issued by Henry Schein and outstanding at the
time of Distribution and were replaced with Covetrus awards following the Distribution
(e) See Note 8 - Debt
(f) See Note 12 - Redeemable Non-controlling Interests
34
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our financial information is summarized in this Management's Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) and is intended to help the reader better understand Covetrus, our operations, financial results, and current
business environment. This MD&A should be read in conjunction with our consolidated and combined financial statements and
accompanying notes in Item 8. Financial Statements and Supplementary Data of this Report.
Overview
See Item 1. Business for a detailed discussion of our corporate mission and strategy that should be read in conjunction with our
discussion and analysis of financial condition and results of operations.
Segments
We are organized based upon geographic region and focus on delivering our platform of products and services to our customers
on a geographical basis. Effective during the first quarter of 2019, in connection with the Distribution and the Acquisition, we
revised our reportable segments to (i) North America, (ii) Europe, and (iii) APAC & Emerging Markets. For additional
information on the changes in reportable segments, see Note 18 - Segment Data. The periods presented in this Form 10-K are
reported on a comparable basis.
Key Factors and Trends Affecting our Results
Goodwill Impairment
Goodwill is not amortized but is subject to impairment analysis at least once annually. We performed an interim impairment test
in August 2019, due to certain triggering events, and determined that it was impaired. Impairment analysis requires a comparison
of the fair value to the carrying value of the reporting units. We regard our reporting units to be the same as our revised reportable
segments, (i) North America, (ii) Europe, and (iii) APAC & Emerging Markets, and our Goodwill was reallocated to our new
reporting segments in the first quarter of 2019. Based on our analysis, a goodwill impairment charge of $938 million was included
within the consolidated statement of operations for the year ended December 31, 2019. There is no remaining net goodwill for our
Europe and APAC & Emerging Markets reporting units. See Note 7 - Goodwill and Other Intangible Assets, Net.
Our annual impairment test is performed at the beginning of the fourth quarter, and for the year ended December 31, 2019, we
utilized the qualitative approach that allows the assessment of qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying value. Based on the results of our annual impairment review during
the fourth quarter of 2019, we concluded there was no additional goodwill impairment. However, the potential for impairment
exists in the future should actual results deteriorate versus our current expectations. To the extent that future impairment charges
occur, it could have a material impact on our financial results. At December 31, 2019, the carrying value of our goodwill was $1.2
billion.
For the years ended December 29, 2018 and December 30, 2017, we tested goodwill for impairment using a quantitative analysis,
and no goodwill impairment was recorded. See Critical Accounting Policies and Estimates below.
Covetrus is an Independent, Publicly Traded Company Following the Distribution and the Acquisition of Vets First Choice
Since the Distribution, we have been responsible for the costs associated with being an independent, publicly traded company,
including costs related to corporate governance, investor and public relations, and public reporting. In our first year of combined
operations, we incurred substantial costs to phase-in the ongoing integration of our businesses globally as well as take steps
toward identifying our target processes and structure for operations. We expect that our selling, general and administrative
expenses will likely increase through 2020, which includes building out our infrastructure, expanding our global sales and
marketing efforts, and increasing our pharmaceutical operations capacity.
Terms with Key Suppliers
Each year, suppliers in the veterinary channel engage in negotiations with us regarding pricing terms, including performance
rebates and other growth incentives. Our Supply Chain Services is dependent upon third-party suppliers and the results of these
negotiations can have a material impact on the financial performance of our business on an annual basis. Five suppliers accounted
for approximately 50% of our purchases for the year ended December 31, 2019. Globally, we are subject to a concentration of risk
35
with these suppliers as the loss of one of our five major manufacturing relationships could have a material impact on our financial
performance.
Core to Agency Revenue
In certain of our customer relationships, largely attributable to our North American Supply Chain Services, the adoption of ASC
606 and the terms of selected supplier contracts resulted in us recognizing agency revenue on a net basis. See Note 1 - Business
Overview and Significant Accounting Policies as well as Note 4 - Revenue from Contracts with Customers.
Veterinary Visits and Animal Owner Willingness to Spend
The health of the business of in-office veterinary care is a critical determinant in our financial performance, both with respect to
the number of visits by Animal Owners as well as their desire and ability to spend on preventative and therapeutic treatments and
procedures. Because we market companion-animal prescription products through the veterinarian channel, both in-office and
through our online platform, any decrease in reliance on and visits to veterinarians by companion-animal owners could reduce our
market share for such products and have a material adverse effect on our business, financial condition, results of operations, and
cash flows.
Definition of Non-GAAP Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)
Adjusted EBITDA is among the primary metrics by which management evaluates the performance of the business. See Note 18 -
Segment Data. We use Adjusted EBITDA to (i) aid management and investors with year-over-year comparability, (ii) determine
management performance under our compensation plans, (iii) plan and forecast, (iv) communicate our financial performance to
our board of directors, shareholders, and investment analysts, and (v) understand our operating performance without regard to
items we do not consider a component of our core ongoing operating performance. Adjusted EBITDA has certain limitations in
that it does not consider the impact of certain expenses to our consolidated and combined statements of operations. Adjusted
EBITDA excludes share-based compensation, transaction costs, formation of Covetrus expenses, separation programs and
executive severance, carve-out operating expenses, IT infrastructure, goodwill impairment charges, and other (income) expense
items, net. We do not allocate expenses managed at the corporate level, such as corporate wages and related benefits, corporate
occupancy costs, professional services utilized at the corporate level, and non-recurring expenses to our operating segments.
Other companies may not define or calculate Adjusted EBITDA in the same way. We provide Adjusted EBITDA by segment as a
supplemental measure to GAAP. See below for our Adjusted EBITDA explanations on a segment basis as well as on a
consolidated, non-GAAP basis. Non-GAAP Adjusted EBITDA on a total segment basis is reconciled in Note 18 - Segment Data,
as required by ASC 280.
Results of Operations
(In millions)
Net sales
Cost of sales
Gross profit
Gross margin %
Operating expenses:
Selling, general and administrative
Goodwill impairment (Note 7)
Operating (loss) income
Net (loss) income
Net (loss) income attributable to Covetrus
December 31,
2019
Years Ended
December 29,
2018
December 30,
2017
$
$
$
$
$
3,976
3,227
749
$
3,778
3,094
684
3,580
2,928
652
18.8%
18.1%
18.2%
808
938
(997)
(1,022)
(1,019)
$
$
$
547
—
137
107
101
$
$
$
517
—
135
92
64
Our year ended December 31, 2019 results were largely driven by the acquisition of Vets First Choice (see Note 2 - Business
Acquisitions), organic growth in Europe and APAC & Emerging Markets, foreign currency headwinds due to the strengthening
U.S. dollar, increased Selling, general and administrative expenses to drive our transformation as a wholly independent, newly
formed, public company, as well as the effect of our goodwill impairment charge.
36
Year Ended December 31, 2019 Compared to Year Ended December 29, 2018
Net Sales
(In millions)
North America
Europe
APAC & Emerging Markets
Eliminations
Total net sales
Year Ended
December 31,
2019
% of
Total
Year Ended
December 29,
2018
% of
Total
$
$
2,111
1,509
368
(12)
3,976
53.1% $
38.0
9.3
(0.3)
100.0% $
1,939
1,463
387
(11)
3,778
51.3% $
38.7
10.2
(0.3)
100.0% $
$ Change
% Change
172
46
(19)
(1)
198
8.9%
3.1
(4.9)
9.1
5.2%
Net sales for the year ended December 31, 2019 increased compared to the year ended December 29, 2018 due to the contribution
of $313 million in net sales from acquisitions (primarily Vets First Choice), partially offset by $104 million in unfavorable foreign
exchange, and the effect of certain distribution products moving from core to agency basis in North America. The drivers by
segment are detailed below:
• North America increased due to the contribution of $246 million in net sales from the acquisition of Vets First Choice
from February 8, 2019 forward (see Note 2 - Business Acquisitions), partially offset by the loss of a large customer, and
the negative effect of certain distribution products moving from core to agency basis which amounted to $51 million.
• Europe increased primarily due to the contribution of $67 million in net sales from acquisitions in France and Romania
and organic growth in most of our markets in the region, largely offset by unfavorable foreign exchange of $79 million
driven primarily by the U.S. dollar further strengthening against the British pound and Euro.
• APAC & Emerging Markets decreased primarily due to unfavorable foreign exchange of $26 million driven largely by
the U.S. dollar further strengthening against the Australian dollar and the negative effect to sales from the loss of a local
manufacturer relationship, partially offset by organic growth.
Gross Profit and Gross Margin
(In millions)
North America
Europe
APAC & Emerging Markets
Total gross profit
Year Ended
December 31,
2019
Gross
Margin %
Year Ended
December 29,
2018
Gross
Margin %
$ Change
Gross Profit
% Change
$
$
452
227
70
749
21.4% $
15.0
19.0
18.8% $
389
223
72
684
20.1% $
15.2
18.6
18.1% $
63
4
(2)
65
16.2%
1.8
(2.8)
9.5%
During the year ended December 31, 2019, gross profit increased compared to the year ended December 29, 2018 largely driven
by an $83 million contribution from acquisitions (primarily Vets First Choice) and the successful execution of our strategy to
grow our higher-margin proprietary brands and solutions, which were partially offset by margin pressure from industry
consolidation in certain of our markets and unfavorable foreign exchange of $17 million. The drivers by segment are detailed
below:
• North America increased due to the contribution of $74 million from the acquisition of Vets First Choice, partially offset
by a modest decline in our supply chain business.
• Europe increased primarily due to the contribution of $9 million from acquisitions in France and Romania, organic
growth, and sales development in our higher-margin proprietary brands, largely offset by unfavorable foreign exchange
of $12 million.
• APAC & Emerging Markets decreased due to unfavorable foreign exchange of $5 million and the negative effect from
the loss of a local manufacturer relationship, partially offset by organic growth.
37
Selling, General and Administrative (“SG&A”)
(In millions)
North America
Europe
APAC & Emerging Markets
Corporate
Total SG&A
Year Ended
December 31,
2019
% of
Respective
Net Sales
Year Ended
December 29,
2018
% of
Respective
Net Sales
$ Change
% Change
$
$
467
186
58
97
808
22.1% $
12.3
15.8
—
20.3% $
275
175
58
39
547
14.2% $
12.0
15.0
—
14.5% $
192
11
—
58
261
69.8%
6.3
—
148.7
47.7%
SG&A expenses for the year ended December 31, 2019 increased compared to the year ended December 29, 2018, primarily due
to the contribution of $169 million in SG&A from acquisitions (primarily Vets First Choice), $38 million due to an increase in
share-based compensation expense, $34 million in expense related to the formation of Covetrus, and $11 million related to
separation programs and executive severance, partially offset by $14 million favorable foreign exchange. The drivers by segment
and at Corporate are detailed below:
• North America increased primarily due to Vets First Choice expenses of $160 million (including $77 million of
intangibles amortization expense) and $29 million due to an increase in share-based compensation expense.
• Europe increased primarily due to the impact from acquisitions of $9 million in France and Romania, as well as $5
million related to separation programs and executive severance, $2 million related to the formation of Covetrus, partially
offset by favorable foreign exchange.
• Corporate increased primarily due to $31 million in expenses related to the formation of Covetrus, $6 million due to an
increase in share-based compensation expense, $4 million related to separation programs and executive severance, and
increased costs related to various corporate functions as we establish ourselves as an independent, globally present
company. We expect that Selling, general and administrative will likely increase through 2020 as we continue our
transformation.
During the year ended December 29, 2018, SG&A included expense allocations for (i) certain corporate functions historically
provided by Henry Schein, including accounting, legal, information services, planning, compliance, investor relations,
administration and communication, and similar costs, (ii) employee benefits and incentives, and (iii) share-based compensation.
The allocations may not reflect the actual expenses that the Animal Health Business would have incurred as a standalone
company for this period. During the year ended December 29, 2018, we were allocated $55 million of general corporate expenses
which were included within Selling, general and administrative.
Goodwill Impairment
As further described in Note 7 - Goodwill and Other Intangible Assets, Net, we recorded a non-tax-deductible goodwill
impairment charge totaling $938 million included within the consolidated statement of operations for the year ended
December 31, 2019. There were no goodwill impairment charges during 2018.
Other (Expense) Income, Net
(In millions)
Interest income
Interest expense
Other, net
Other (expense) income, net
Year Ended
December 31,
2019
Year Ended
December 29,
2018
$ Change
% Change
$
$
$
7
(56)
17
(32) $
6
(3)
3
6
$
$
1
(53)
14
(38)
16.7 %
1,766.7
466.7
(633.3)%
Other (expense) income, net for the year ended December 31, 2019 decreased compared to the year ended December 29, 2018
primarily due to an increase in interest expense associated with our debt, partially offset by a non-cash gains recorded in
connection with our acquisitions in Europe recorded in Other, net.
38
Income Taxes
For the year ended December 31, 2019, our effective tax rate was 0.7% compared to 25.9% for the prior year period. The decrease
in the effective tax rate is primarily related to the goodwill impairment recorded in 2019.
On December 22, 2017, the U.S. government passed the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act
included provisions for tax on global intangible low-taxed income (“GILTI”).
The valuation allowance was $49 million as of December 31, 2019 and $1 million as of December 29, 2018. In assessing the
realizability of deferred tax assets, management considers whether it is more likely than not that some or all the deferred tax
assets will be realized. The ultimate realization of deferred taxes assets is dependent upon generation of future taxable income
during the period in which those temporary differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and taxable income in carryback years and tax-planning strategies when
making this assessment. The change in valuation allowance for the year ended December 31, 2019 was $48 million and was
attributable primarily to uncertainty regarding the realization of future tax benefits from certain U.S. deferred tax assets. See Note
14 - Income Taxes.
We elected to recognize the tax on GILTI as a period expense in the period the tax is incurred and estimated the impact of each
provision of the Tax Act on the effective tax and recorded tax expense for the GILTI provision of $10 million and an interest
limitation of $7 million for the year ended December 31, 2019. We recorded a tax expense for the GILTI provision of $2 million
for the year ended December 29, 2018. We have concluded that the base erosion and anti-abuse tax (“BEAT”) and foreign derived
intangible income (“FDII”) provisions of the Tax Act will not apply or will not have a material impact on our consolidated and
combined financial statements, therefore, we have not recorded an estimate in the effective tax rate for the years ended
December 31, 2019 and December 29, 2018.
For the year ended December 29, 2018, we recorded a net $4 million additional expense for the one-time transition tax. The
change was a result of additional analysis, changes in interpretation and assumptions, as well as additional regulatory guidance
that was issued. As of December 29, 2018, we completed our analysis of the impact of the Tax Act and the amounts are now
considered final. The effective tax rate in 2018 was primarily impacted by an increase in the estimate of transition tax associated
with the Tax Act, the impact of GILTI, and state and foreign income taxes, partially offset by non-controlling interests in our
partnership investments and the impact of windfall tax benefits from share-based payments.
Due to the one-time transition tax and the imposition of the GILTI provisions, all previously unremitted earnings will no longer be
subject to U.S. federal income tax, however, there could be U.S. state and/or foreign withholding taxes upon distribution of such
unremitted earnings. Determination of the amount of unrecognized deferred tax liability with respect to such earnings is not
practicable.
Adjusted EBITDA
(In millions)
North America
Europe
APAC & Emerging Markets
Corporate
Total adjusted EBITDA
Year Ended
December 31,
2019
% of
Respective Net
Sales
Year Ended
December 29,
2018
% of
Respective Net
Sales
$ Change
% Change
$
$
154
68
19
(39)
202
7.3% $
4.5
5.2
NA
5.1% $
157
75
20
(32)
220
8.1% $
5.1
5.2
NA
5.8% $
(3)
(7)
(1)
(7)
(18)
(1.9)%
(9.3)
(5.0)
NA
(8.2)%
Total non-GAAP Adjusted EBITDA decreased year over year as a result of a decline in our supply chain profitability, increasing
costs incurred as we transform into a wholly independent public company, and unfavorable foreign exchange as the U.S. dollar
strengthens against certain local currencies.
Adjusted EBITDA is our primary segment operating metric. We do not allocate expenses managed at the corporate level to our
segments. See Note 18 - Segment Data for additional information on corporate allocations and for a reconciliation of total
adjusted EBITDA to net income (loss) in accordance with ASC 280. The changes by segment and at Corporate are detailed below:
• North America decreased primarily due to a decline in our supply chain business, which more than offset an increase
from the contribution of the Vets First Choice acquisition and growth in our software services business.
39
• Europe decreased primarily due to the unfavorable impact of foreign exchange of $4 million and increased SG&A
expenses, which more than offset the positive impact from organic growth and the contribution from acquisitions.
• APAC & Emerging Markets was relatively comparable to the prior year as the unfavorable effect from foreign exchange
and the loss of a local manufacturer relationship offset the positive impact from organic growth.
• Corporate contributed to a reduction in Adjusted EBITDA due to incremental costs associated with various corporate
functions.
Year Ended December 29, 2018 Compared to Year Ended December 30, 2017
The fiscal year ended December 29, 2018 consisted of 52 weeks as compared to the fiscal year ended December 30, 2017 which
consisted of 53 weeks.
Net Sales
(In millions)
North America
Europe
APAC & Emerging Markets
Eliminations
Total net sales
Year Ended
December 29,
2018
% of
Total
Year Ended
December 30,
2017
% of
Total
$
$
1,939
1,463
387
(11)
3,778
51.3% $
38.7
10.2
(0.3)
100.0% $
1,876
1,373
349
(18)
3,580
52.4% $
38.4
9.7
(0.5)
100.0% $
$ Change
% Change
63
90
38
7
198
3.4%
6.6
10.9
(38.9)
5.5%
Net sales for the year ended December 29, 2018 increased compared to the year ended December 30, 2017 due to the contribution
of $90 million in net sales from acquisitions, $63 million increase in organic growth, and $45 million in favorable foreign
exchange. The drivers by segment are detailed below:
• North America increased due to the contribution of $51 million in net sales from acquisitions as well as organic growth
of $12 million which was negatively affected by year-over-year changes to certain distribution products moving from
core to agency basis in 2018.
• Europe increased primarily due to favorable foreign exchange of $61 million driven largely by the Euro and British
pound strengthening against the U.S. dollar, $24 million in organic growth, and $5 million from acquisitions.
• APAC & Emerging Markets increased primarily due to the contribution of $34 million in net sales from acquisitions as
well as organic growth of $20 million, partially offset by $16 million related to unfavorable foreign exchange.
Gross Profit and Gross Margin
(In millions)
North America
Europe
APAC & Emerging Markets
Total gross profit
Year Ended
December 29,
2018
Gross
Margin %
Year Ended
December 30,
2017
Gross
Margin %
$ Change
Gross Profit
% Change
$
$
389
223
72
684
20.1% $
15.2
18.6
18.1% $
383
205
64
652
20.4% $
14.9
18.3
18.2% $
6
18
8
32
1.6%
8.8
12.5
4.9%
The increase in gross profit for the year ended December 29, 2018 compared to the year ended December 30, 2017 was largely
driven by the contribution of $19 million in gross profit from acquisitions, $7 million in organic growth, and $6 million due to
favorable foreign exchange. The drivers by segment are detailed below:
• North America increased due to the contribution of $10 million in gross profit from acquisitions which was offset by
lower gross profit margins.
• Europe increased primarily due to $10 million from favorable foreign exchange, organic growth, and higher margin
rates.
40
• APAC & Emerging Markets increased primarily due to the contribution of $8 million from acquisitions, organic growth,
and higher margin rates, offset by $4 million due to unfavorable foreign exchange.
Selling, General and Administrative
(In millions)
North America
Europe
APAC & Emerging Markets
Corporate
Total SG&A
Year Ended
December 29,
2018
% of
Respective
Net Sales
Year Ended
December 30,
2017
% of
Respective
Net Sales
$ Change
% Change
$
$
275
175
58
39
547
14.2% $
12.0
15.0
—
14.5% $
262
162
51
42
517
14.0% $
11.8
14.6
—
14.4% $
13
13
7
(3)
30
5.0%
8.0
13.7
(7.1)
5.8%
SG&A expenses increased for the year ended December 29, 2018 compared to the year ended December 30, 2017 due to
additional expenses of $18 million from acquisitions and $5 million of unfavorable foreign exchange. The drivers by segment are
detailed below:
• North America increased primarily due to $10 million in additional costs from acquired companies.
• Europe increased primarily due to $8 million unfavorable foreign exchange.
• APAC & Emerging Markets increased primarily due to additional expenses of $7 million from acquisitions, partially
offset by favorable foreign exchange.
As previously indicated, SG&A expenses include expense allocations from Henry Schein and the allocations may not reflect the
actual expenses that Covetrus would have incurred as a standalone company for the periods presented. General corporate
expenses allocated to us was $55 million in 2018 and $59 million in 2017 which were included within Selling, general and
administrative.
Other Income, Net
(In millions)
Interest income
Interest expense
Other, net
Other income, net
Year Ended
December 29,
2018
Year Ended
December 30,
2017
$ Change
% Change
$
$
6
(3)
3
6
$
$
5
(2)
1
4
$
$
1
(1)
2
2
20.0%
50.0
200.0
50.0%
Other income, net increased in 2018 primarily due to investment proceeds, the impact of foreign currency exchange rates, and
losses from property and equipment disposals that occurred in 2017.
Income Taxes
For the year ended December 29, 2018, our effective tax rate was 25.9% compared to 34.6% for the prior year period. In 2018,
the effective tax rate was primarily impacted by an increase in the estimate of transition tax associated with the Tax Act, the
impact of GILTI, and state and foreign income taxes, partially offset by non-controlling interests in our partnership investments
and the impact of windfall tax benefits from share-based payments. In 2017, the effective tax rate was primarily impacted by the
Tax Act and the adoption of Accounting Standards Update Compensation - Stock Compensation (Topic 718) (“ASU 2016-09”).
In the fourth quarter of 2017, we recorded provisional amounts related to the Tax Act for any items that could be reasonably
estimated at the time. This included the one-time transition tax that we estimated to be $13 million and a net deferred tax expense
of $7 million attributable to the revaluation of deferred tax assets and liabilities due to the lower-enacted federal income tax rate
of 21%. In the aggregate, for the quarter ended December 30, 2017, these Tax Act modifications resulted in a one-time tax
expense of $20 million. Absent the effects of the transition tax, the revaluation of deferred tax assets and liabilities and the
adoption of ASU 2016-09. Our effective tax rate for the year ended December 30, 2017 would have been 22.8% as compared to
41
our actual effective tax rate of 34.6%. In 2017, the effective tax rate was primarily impacted by the Tax Act and the adoption of
ASU 2016-09.
Adjusted EBITDA
(In millions)
North America
Europe
APAC & Emerging Markets
Corporate
Total adjusted EBITDA
Year Ended
December 29,
2018
% of
Respective Net
Sales
Year Ended
December 30,
2017
% of
Respective Net
Sales
$ Change
% Change
$
$
157
75
20
(32)
220
8.1% $
5.1
5.2
NA
5.8% $
136
62
16
(37)
177
7.2% $
4.5
4.6
NA
4.9% $
21
13
4
5
43
15.4%
21.0
25.0
NA
24.3%
Total non-GAAP Adjusted EBITDA increased year over year largely due to the purchase of minority interest within our supply
chain business to successfully implement the spin-off. The changes by segment and at Corporate are detailed below:
• North America increased primarily due to incremental Adjusted EBITDA attributable to Covetrus due to the purchase of
minority interests within the supply chain business.
• Europe increased primarily due to $10 million growth in our supply chain business and the favorable impact of foreign
exchange.
• APAC & Emerging Markets increased primarily due to the contribution of $3 million from acquisitions as well as $2
million from growth in our supply chain business and software services, partially offset by unfavorable foreign
exchange.
• Corporate contributed to a $5 million increase in adjusted EBITDA due to a reduction in various Corporate expenses.
Liquidity and Capital Resources
Overview
On February 7, 2019, we entered into a $1.5 billion syndicated credit agreement with a group of lenders for a five-year term (the
“Credit Facilities”). The Credit Facilities include a $1.2 billion term loan facility (the “Term Loan Facility”) which was fully
funded and primarily used to pay a dividend to Henry Schein and a $300 million revolving line of credit for working capital and
general corporate purposes (the “Revolving Credit Facility”). There were no borrowings from the Revolving Credit Facility as of
December 31, 2019. See Note 8 - Debt for more information on our Credit Facilities.
Our primary sources of liquidity are cash and cash equivalents, cash flows from the operations of our business, available
borrowing capacity under the Revolving Credit Facility, and cash proceeds received from divestitures. Longer term, if we desire
to access alternative sources of funding through the capital and credit markets, challenging global economic conditions could
adversely impact our ability to do so. Our principal uses of cash include working capital-related items, capital expenditures, debt
service, and strategic investments.
Working capital requirements, which can be substantial and susceptible to fluctuations during the year due to seasonal demands,
generally result from sales growth, inventory purchase patterns driven by sales activity and buy-in opportunities, our desired level
of inventory, and payment terms for receivables and payables. In addition, we expect that our selling, general and administrative
expenses will likely increase through 2020 as we continue to transform our business.
42
We expect to incur additional disbursements in connection with the following activities:
Increase of our pharmaceutical operations capacity,
International development,
• Expansion of global sales and marketing efforts,
•
•
• Equity investments and business acquisitions that we may fund from time to time,
• Term Loan Facility amortization payments that begin in 2020,
• Capital investment in current and future facilities, and
•
Pursuit and maintenance of appropriate regulatory clearances, approvals for existing products, and any new products that
may be developed.
Similarly, we anticipate that we will continue to incur significant interest expense related to debt service on the Term Loan
Facility.
Selected Measures of Liquidity and Capital Resources
(In millions)
Cash and cash equivalents
Working capital
December 31,
2019
December 29,
2018
December 30,
2017
$
$
130
511
$
$
23
514
$
$
16
565
We regularly monitor and assess our ability to meet funding requirements. We expect to meet our foreseeable liquidity needs over
the next 12 months using our unrestricted cash and cash equivalents of $130 million, cash flow from operations, access to
borrowing capacity available under our Revolving Credit Facility, and net cash proceeds to be received from divestitures of non-
core business operations.
Cash Flows
The following table summarizes our cash flows from operating, investing, and financing activities:
(In millions)
Net cash provided by operating activities
Net cash used for investing activities
Net cash provided by (used for) financing activities
Cash inflows and outflows from changes in operating activities
December 31,
2019
Years Ended
December 29,
2018
December 30,
2017
$
$
$
103
$
(65) $
$
66
158
$
(29) $
(120) $
108
(129)
16
We have generated significant cash flows from operations in each of the last three years. The decrease in 2019 from 2018 is
primarily due to the additional expenses related to the formation of Covetrus and lower operating earnings.
The increase in net cash provided by operating activities in 2018 over 2017 was driven primarily by growth in the results of
operations due to an increase in organic growth, acquisitions, and the development of our working capital.
Cash inflows and outflows from changes in investing activities
The increase in net cash used for investing activities in 2019 was primarily due to a $17 million increase in capital spending for
property and equipment and an $18 million increase for business acquisitions.
The decrease in net cash used for investing activities in 2018 over 2017 was driven primarily due to fewer acquisitions occurring
in the year ended December 29, 2018.
Cash inflows and outflows from changes in financing activities
Net cash provided by financing activities increased in 2019 from 2018 primarily from debt issuance proceeds of $1.2 billion, net
of $24 million debt issuance costs, and a $308 million decrease in acquisitions of non-controlling interest, partially offset by $1.2
billion paid as a dividend to Henry Schein, a reduction in Net former parent investment of $109 million that included the $361
43
million Share Sale and subsequent distribution of proceeds to Henry Schein, and an increase of $41 million in debt repayments
primarily related to the Animal Health Business debt.
Net cash used for financing activities in 2018, compared to net cash provided by financing activities in 2017, was driven primarily
by the purchase of additional equity interest of Butler Animal Health Holding Company, LLC in the year ended December 29,
2018. In connection with the Separation, Henry Schein purchased additional equity interests in certain consolidated subsidiaries
of the Animal Health Business.
Long-term Obligations
We have long-term obligations related to borrowing arrangements and leases that we enter into in the normal course of business
(see below and Notes 6 - Leases, 8 - Debt and 11 - Commitments and Contingencies). The following table summarizes our long-
term obligations related to fixed and variable rate long-term debt, operating and capital lease obligations, as well as purchase
obligations as of December 31, 2019:
(In millions)
Long-term debt
Interest on long-term debt
Operating leases (a)
Finance leases, including interest
Purchase obligations (b)
Total
2020
2021-2022
Payments Due by Period
2023-2024
After 2024
Total
$
$
61
45
24
1
22
153
$
$
120
82
42
—
16
260
$
$
1,025
41
31
—
14
1,111
$
$
— $
—
132
—
6
138
$
1,206
168
229
1
58
1,662
(a) Includes interest and amounts related to leases executed and expected to commence in future years
(b) Purchase obligations include agreements to purchase goods or services that we are committed to: (i) fixed or minimum quantities to be purchased, or (ii)
the amount of the termination fee during the requisite notice period. Certain of our contracts contain a variable component aligned with future performance
goals which cannot be reasonably estimated at this time
Long-term Debt and other borrowings, net
(In millions)
December 31,
2019
December 29,
2018
Term loan payable in quarterly installments of $15 million beginning March 31, 2020 at an
interest rate of approximately 4% at December 31, 2019 (Note 8)
$
1,200
$
Various collateralized and uncollateralized loans payable in varying installments through 2023
at an interest rate of 4% at December 31, 2019 and ranging from 2.61% to 5.01% at
December 29, 2018
Finance lease obligations (Note 6)
Total
Less current maturities
Total long-term debt and other borrowings
Less unamortized debt discount
Total long-term debt and other borrowings, net
Unrecognized Tax Benefits
6
1
1,207
(62)
1,145
(20)
1,125
$
$
—
24
1
25
(1)
24
—
24
We cannot reasonably estimate the timing of future cash flows related to the unrecognized tax benefits, including accrued interest
and penalties, of $6 million as of December 31, 2019. See Note 14 - Income Taxes.
Off-balance Sheet Arrangements
As of December 31, 2019, we had $19 million outstanding in standby letters of credit that primarily guarantee our performance
under a business acquisition transaction, which expire in April 2020, as well as support our obligations related to our insurance
programs (see Note 8 - Debt), and $3 million in surety bonds outstanding in support of various U.S. state registrations for
pharmaceutical operations and distributions.
44
Critical Accounting Policies and Estimates
Preparing financial statements in accordance with GAAP involves us making estimates and assumptions that affect reported
amounts of assets and liabilities, net sales and expenses, and related disclosures in the accompanying notes at the date of our
financial statements. We base our estimates on historical experience, industry and market trends, and on various other
assumptions that we believe to be reasonable under the circumstances. However, by their nature, estimates are subject to various
assumptions and uncertainties, and changes in circumstances could cause actual results to differ from these estimates, sometimes
materially.
We believe that our policies and estimates that require our most significant judgments are considered our critical accounting
policies and are discussed below. In addition, refer to Note 1 - Business Overview and Significant Accounting Policies for further
details.
Business Acquisitions, Acquired Goodwill, and Intangible Assets
The net assets of businesses acquired are recorded at their fair value and the accounting is based on critical estimates, judgments
and assumptions derived from analysis of market conditions, discount rate, discounted cash flows, customer retention rates, and
estimated useful lives. We generally allocate purchase price to identifiable intangible assets, accounts receivable, inventory,
property and equipment, deferred taxes, and other current and long-term assets and liabilities. Any excess of acquisition
consideration over the fair value of identifiable net assets acquired is recorded as goodwill.
In August 2019, as described in Note 7 - Goodwill and Other Intangible Assets, Net, we tested our goodwill for impairment due to
certain triggering events. Fair values were estimated using both the income approach, discounting projected future cash flows
based on budget projections and growth rates that consider estimated inflation rates, and the market approach, applying a multiple
of earnings based on comparable publicly traded companies. The calculation of the impairment charge includes fact-based
determinations as well as estimates. Key estimates include weighted-average cost of capital, future levels of gross and operating
profits, and projected capital expenditures. The rates used to discount projected future cash flows under the income approach
reflect a weighted-average cost of capital in the range of 9.0% to 9.5%, depending on the reporting unit, which considered capital
structure and risk premiums, including those reflected in our current market capitalization. We corroborated the reasonableness of
the estimated reporting unit fair values by reconciling to our enterprise value and market capitalization.
Based on our analysis, we determined that the carrying value of our reporting units exceeded their fair values. We recorded a non-
tax-deductible goodwill impairment charge totaling $938 million in a separate line item, Goodwill impairment, included within
the consolidated statement of operations for the year ended December 31, 2019. See Note 7 - Goodwill and Other Intangible
Assets, Net for changes in goodwill by reporting unit.
We consider our North America reporting unit's goodwill to be at risk and changes in our forecast of future operating or financial
results, cash flows, share price, market capitalization, or discount rate used when conducting future goodwill impairment tests
could affect the estimated fair values of this reporting unit and may result in a goodwill impairment charge in the future. For
example, we estimate that a 25-basis point increase in the discount rate would result in an additional goodwill impairment charge
of approximately $70 million.
Intangible assets other than goodwill, are evaluated for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows to be derived from
such assets.
Definite-lived intangible assets primarily consist of non-compete agreements, trademarks, trade names, customer lists, customer
relationships, and intellectual property, and impairment losses are only recorded if the asset’s carrying amount is not recoverable
through our undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference
between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair
value. Other than the goodwill impairment noted above, we did not record any intangible asset impairments during the years
ended December 31, 2019, December 29, 2018, and December 30, 2017.
45
Loss Contingencies
We are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages,
investigations relating to governmental laws and regulations, and other matters arising out of the normal course of our business.
Certain of these matters include speculative claims for substantial or indeterminate amounts of damages. We record a liability
when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. If we determine that
a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the possible loss in the notes to our
financial statements.
We regularly evaluate developments in our legal matters that could affect whether the amount of the liability can be reasonably
estimated and therefore accrued. We adjust our accruals and make changes to our disclosures as appropriate.
Significant judgment is required to determine both probability and the estimated amounts of loss contingencies. Such claims,
suits, and proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control.
If any of these estimates and assumptions change, it could have a material impact on our results of operations, financial position,
and cash flows.
Income Taxes
We are subject to income taxes in the U.S. and 25 foreign jurisdictions. Significant judgment is required in determining income
tax expense, deferred tax assets and liabilities and uncertain tax positions. The underlying assumptions are also highly susceptible
to change from period to period.
We accrue for the estimated additional tax and interest that may result from tax authorities disputing uncertain tax positions. We
believe we have made adequate provisions for income taxes for all years that are subject to audit based upon the latest information
available. We operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can
involve complex issues and may require an extended period of time to resolve. We recognize tax benefits from uncertain tax
positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing
authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain
tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We adjust
these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the
extent that the final tax outcome of these matters is different than the amounts recorded, such differences may affect the provision
for income taxes in the period in which such determination is made and could have an impact on our results of operations.
On a quarterly basis, we assess our current and projected earnings by jurisdiction to determine whether or not our earnings during
the periods when the temporary differences become deductible will be sufficient to realize the related future tax benefits. Should
we determine that we would not be able to realize all or part of our net deferred tax asset in a particular jurisdiction in the future, a
valuation allowance to the deferred tax asset would be charged to income in the period such determination was made.
This valuation allowance is maintained for deferred tax assets that we estimate are more likely than not to be unrealizable based
on available evidence at the time the estimate is made. The determination of whether a valuation allowance for deferred tax assets
is appropriate is subject to considerable judgment and requires an evaluation of all positive and negative evidence, including our
historical financial results, the source and consistency of those results, whether they should be adjusted for certain one-time or
nonrecurring items, whether losses cumulatively exceed income over a reasonable period of time, the availability of tax planning
strategies, availability of carryback and carryforward periods, and other factors, including our expectations of future taxable
income. Adjustments to income tax expense to the extent we establish a valuation allowance or adjust this allowance in a period
could have a material impact on our financial condition and results of operations. See Note 14 - Income Taxes.
Accounting Standards Update
For information on updated accounting standards that we have recently adopted or will adopt in future periods, see Note 1 -
Business Overview and Significant Accounting Policies included under Item 8, Financial Statements and Supplementary Data.
46
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to market risks related to changes in foreign currency exchange rates and interest rates as follows:
Foreign Currency Risk
The value of certain foreign currencies as compared to the U.S. dollar and the value of certain of our underlying functional
currencies, including our foreign subsidiaries, may affect our financial results. Fluctuations in exchange rates, for which we
currently conduct our operations in multiple currencies, may positively or negatively affect revenues, gross margins, and
operating expenses, all of which are presented in U.S. dollars. We attempt to offset foreign currency assets and liabilities where
and when possible, but have not, as of December 31, 2019, entered into hedging arrangements. In the future, we may evaluate and
decide, to the extent reasonable and practical, to enter into foreign currency forward exchange contracts with financial
institutions. If we were to enter into such hedging transactions, the market risk resulting from foreign currency fluctuations is
unlikely to be entirely eliminated. We do not plan to enter into derivative financial instruments for trading or speculative purposes.
We have exposure to Brexit as approximately 13% of our annual revenue and 4% of our annual net income is generated by our
operations located within the UK, which adds incremental GBP/USD foreign exchange risk to our operating results. The primary
Brexit risk we face is supply chain-related, specifically for our replenishment of certain inventory stock sourced from UK vendors
who may manufacture such goods in their subsidiaries outside the UK and thus need to import those goods into the UK. As a
result of uncertainty created by Brexit, we have increased, and may continue to increase, our inventory of such vendor-imported
goods by an additional 10% - 20% to satisfy potential customer demand, which will expose us to incremental foreign exchange
risk.
As of December 31, 2019, a hypothetical 5% increase in foreign exchange rates where we conduct our business vis-à-vis the U.S.
dollar would have resulted in an improvement of $8 million in annualized operating income.
Conversely, a hypothetical 5% decrease in foreign exchange rates would have resulted in a decrease of $9 million in annualized
operating income.
Interest Rate Risk
At December 31, 2019, we had variable-rate borrowings outstanding of $1.2 billion under the Credit Facility. Increases in the
underlying interest rate elections we make will negatively affect interest expense, while decreases to the underlying interest rates
will have a positive influence on our interest expense. We regularly review the projected borrowings under the Credit Facility and
the current interest rate environment.
In July and August 2019, we executed interest rate swap contracts with notional amounts aggregating $500 million that are
designated as cash flow hedges. See Note 9 - Derivatives and Financial Instruments. Our earnings are affected by changes in
interest rates, however, due to our interest rate swap contracts, the effects are mitigated to an extent.
If market interest rates increase 1% over the next 12 months, our net interest expense, after considering the effects of our interest
rate swap contracts, would increase by $7 million.
Conversely, if market interest rates decrease 1% over the next 12 months, our net interest expense, after considering the effects of
our interest rate swap contracts, would decrease by $7 million.
The market risk resulting from interest rate fluctuations will not be entirely eliminated through our interest rate swap contracts.
Short-term Investments
We limit our credit risk with respect to our cash equivalents and short-term investments by monitoring the credit worthiness of the
counterparties to such financial instruments. As a risk management policy, we limit credit exposure by diversifying such
investments among investment grade counterparties.
47
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated and Combined Financial Statements:
Balance Sheets as of December 31, 2019 and December 29, 2018
Statements of Operations for the years ended December 31, 2019, December 29, 2018, and December 30, 2017
Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, December 29, 2018, and
December 30, 2017
Statements of Shareholders' Equity for the years ended December 31, 2019, December 29, 2018, and December 30,
2017
Statements of Cash Flows for the years ended December 31, 2019, December 29, 2018, and December 30, 2017
Notes to Consolidated and Combined Financial Statements
Page
49
50
51
52
53
54
55
48
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Covetrus, Inc.
Portland, ME
Opinion on the Consolidated and Combined Financial Statements
We have audited the accompanying consolidated and combined balance sheets of Covetrus, Inc. (the “Company”) as of December
31, 2019 and December 29, 2018, the related consolidated and combined statements of operations, comprehensive income (loss),
shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes
(collectively referred to as the “consolidated and combined financial statements”). In our opinion, the consolidated and combined
financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and
December 29, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on the Company’s consolidated and combined financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated and combined financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control
over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated and combined
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated and combined financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2019, the Company adopted Accounting
Standards Codification Topic 842, Leases (Topic 842).
Emphasis of Matter
As described in Note 1, the financial statements of the Animal Health Business are not those of a standalone entity. The combined
financial statements of the Animal Health Business as of December 29, 2018 and for the two years in the period ended December
29, 2018 reflect the assets, liabilities, revenues, and expenses directly attributable to the Animal Health Business, as well as
allocations deemed reasonable by management, to present the financial position, results of operations, changes in equity, and cash
flows of the Animal Health Business on a standalone basis and do not necessarily reflect the financial position, results of
operations, changes in equity, and cash flows of the Animal Health Business in the future or what they would have been had the
Animal Health Business been a separate, standalone entity during the periods presented.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2018.
Boston, MA
March 3, 2020
49
COVETRUS, INC.
CONSOLIDATED AND COMBINED BALANCE SHEETS
(In millions, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance of $8 and $7 (Note 4)
Inventories, net
Other receivables
Prepaid expenses and other
Assets held for sale (Note 3)
Total current assets
Non-current assets:
Property and equipment, net (Note 5)
Operating lease right-of-use assets, net (Note 6)
Goodwill (Note 7)
Other intangibles, net (Note 7)
Investments and other
Total assets
December 31,
2019
December 29,
2018
$
$
130
426
636
67
30
51
1,340
93
84
1,154
643
47
23
431
564
49
19
—
1,086
69
—
750
208
120
$
3,361
$
2,233
LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
Current maturities of long-term debt and other borrowings (Note 8)
Accrued payroll and related liabilities
Accrued taxes
Other current liabilities
Liabilities held for sale (Note 3)
Total current liabilities
Non-current liabilities:
Long-term debt and other borrowings, net (Note 8)
Deferred income taxes
Other liabilities
Total liabilities
Commitments and contingencies (Note 11)
Redeemable non-controlling interests (Note 12)
Shareholders' equity:
Common stock, $0.01 par value per share, 675,000,000 shares authorized as of December 31, 2019;
111,620,507 shares issued and outstanding as of December 31, 2019
Net former parent investment
Accumulated other comprehensive loss (Note 13)
Additional paid-in capital
Accumulated deficit
Total shareholders’ equity
$
520
$
440
62
44
18
164
21
829
1,125
47
94
2,095
10
1
—
(86)
2,381
(1,040)
1,256
1
37
17
77
—
572
24
16
35
647
92
—
1,576
(82)
—
—
1,494
2,233
Total liabilities, redeemable non-controlling interests, and shareholders’ equity
$
3,361
$
See notes to consolidated and combined financial statements.
50
COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Net sales (Note 4)
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Goodwill impairment (Note 7)
Operating (loss) income
Other income (expense):
Interest income
Interest expense
Other, net
(Loss) income before taxes and equity in earnings of affiliates
Income tax benefit (expense) (Note 14)
Equity in earnings of affiliates
Net (loss) income
Less: net loss (income) attributable to redeemable non-controlling interests
Net (loss) income attributable to Covetrus
(Loss) earnings per share attributable to Covetrus: (Note 15)
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
December 31,
2019
Years Ended
December 29,
2018
December 30,
2017
$
$
$
$
$
3,976
3,227
749
$
3,778
3,094
684
3,580
2,928
652
808
938
(997)
7
(56)
17
(1,029)
7
—
(1,022)
3
(1,019) $
547
—
137
6
(3)
3
143
(37)
1
107
(6)
101
$
(9.50) $
(9.50) $
1.41
1.40
$
$
107
107
71
72
517
—
135
5
(2)
1
139
(48)
1
92
(28)
64
0.90
0.89
71
72
See notes to consolidated and combined financial statements.
51
COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
Years Ended
December 31,
2019
December 29,
2018
December 30,
2017
$
(1,022) $
107
$
92
62
1
—
—
63
155
(28)
(3)
(31)
124
(43)
(1)
—
2
(42)
65
(6)
2
(4)
61
$
Net (loss) income
Other comprehensive (loss) income, net of tax:
Foreign currency translation (loss) gain
Unrealized (loss) gain from foreign currency hedging activities
Unrealized loss on derivative instruments
Pension adjustment gain
Total other comprehensive (loss) income
Comprehensive (loss) income
Comprehensive loss (income) attributable to redeemable non-controlling interests:
Net loss (income)
Foreign currency translation (gain) loss
(3)
—
(1)
—
(4)
(1,026)
3
(1)
Less: comprehensive loss (income) attributable to redeemable non-
controlling interests
Comprehensive (loss) income attributable to Covetrus
2
(1,024) $
$
See notes to consolidated and combined financial statements.
52
COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions, except share amounts)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Net Former
Parent
Investment
Total
Shareholders'
Equity
December 31, 2016
— $ — $
— $
— $
(102) $
1,222
$
1,120
Net income attributable to
Covetrus
Other comprehensive income
Net increase in former parent
investment
December 30, 2017
Net income attributable to
Covetrus
Cumulative impact of adopting
ASC 606
Net increase in former parent
investment
Other comprehensive loss
December 29, 2018
Net (loss) income attributable to
Covetrus (a)
Dividend to former parent
Issuance of shares at Separation
(including Share Sale investors)
Issuance of shares in connection
with the Acquisition (b)
Shares canceled (b)
Net increase in former parent
investment
Issuance of shares in connection
with share-based compensation
plans
Share-based compensation
Deferred tax impact of
acquisition of non-controlling
interest
Other
Other comprehensive loss
—
—
—
—
—
—
—
—
—
—
—
71,693,426
39,742,089
(700,400)
—
885,392
—
—
—
—
December 31, 2019
111,620,507
$
—
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
(21)
608
1,772
(30)
—
5
46
—
1
—
—
—
—
—
—
—
—
—
—
(1,040)
—
—
—
—
—
—
—
—
—
—
—
60
—
64
—
13
64
60
13
(42)
1,299
1,257
—
—
—
(40)
(82)
—
—
—
—
—
—
—
—
—
—
(4)
101
2
174
—
1,576
21
(1,153)
(609)
—
—
172
—
—
(7)
—
—
101
2
174
(40)
1,494
(1,019)
(1,174)
—
1,772
(30)
172
5
46
(7)
1
(4)
$
2,381
$
(1,040) $
(86) $
— $
1,256
(a) Net income earned from January 1, 2019 through February 7, 2019 is attributed to the former parent as it was the sole shareholder prior to February 7,
2019
(b) See Note 2 - Business Acquisitions
See notes to consolidated and combined financial statements.
53
COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In millions)
Years Ended
December 31,
2019
December 29,
2018
December 30,
2017
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
$
(1,022) $
107
$
Depreciation and amortization
Amortization of right-of-use assets
Goodwill impairment
Share-based compensation expense
(Benefit) provision for deferred income taxes
Equity in earnings of affiliates
Amortization of debt issuance costs
Other
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net
Inventories, net
Other assets and liabilities
Accounts payable and accrued expenses
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Payments related to equity investments and business acquisitions, net of cash acquired
Proceeds from sale of property and equipment
Net cash used for investing activities
Cash flows from financing activities:
Proceeds from the issuance of debt
Principal payments of debt
Debt issuance costs
Dividend paid to former parent
Issuance of common shares in connection with share-based compensation plans
Net transfers from former parent
Distributions to non-controlling shareholders
Acquisition payment
Acquisitions of non-controlling interests in subsidiaries
Net cash provided by (used for) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental cash flow disclosures:
Interest
Income taxes
155
21
938
46
(25)
—
5
(10)
13
(58)
(53)
93
103
(39)
(26)
—
(65)
1,220
(43)
(24)
(1,174)
5
165
—
(9)
(74)
66
3
107
23
130
47
18
$
$
$
$
$
$
64
—
—
7
(5)
(1)
—
—
(13)
(42)
(34)
75
158
(22)
(8)
1
(29)
—
(2)
—
—
—
274
(10)
—
(382)
(120)
(2)
7
16
23
$
— $
12
$
92
59
—
—
7
6
(1)
—
—
(33)
(23)
(5)
6
108
(21)
(109)
1
(129)
—
—
—
—
—
62
(20)
—
(26)
16
2
(3)
19
16
—
8
See notes to consolidated and combined financial statements.
54
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(In millions, except per share amounts)
1. Business Overview and Significant Accounting Policies
Business
Covetrus is a global animal-health technology and services company dedicated to supporting the companion, equine, and large-
animal veterinary markets.
On February 7, 2019, Henry Schein completed the spin-off of its Animal Health Business and transferred the applicable assets,
liabilities, and ownership interests to us (the “Separation”) and distributed all the shares of our common stock that were then
owned by Henry Schein to its stockholders of record as of January 17, 2019 (the “Distribution”). Also, on February 7, 2019 and
prior to the Distribution, we sold $361 million in shares to accredited institutional investors (the “Share Sale”). The proceeds from
the Share Sale were paid to us and distributed to Henry Schein. Concurrent with the Distribution, we paid a cash dividend of $1.2
billion from loan proceeds from our newly established credit facility (see Note 8 - Debt). We then acquired Vets First Choice in an
all-stock transaction (the “Acquisition”).
Immediately following the Share Sale, Distribution, and Acquisition, on a fully diluted basis, (i) approximately 63% of our
outstanding common stock was owned by (a) shareholders of Henry Schein and the Share Sale investors, and (b) specific
employees of the Animal Health Business who held certain equity awards, and (ii) approximately 37% was owned by (a)
shareholders of Vets First Choice, and (b) certain employees of Vets First Choice who held certain equity awards. On February 8,
2019, our common stock began regular-way trading under the symbol “CVET” on the Nasdaq Global Select Market.
Basis of Presentation and Principles of Consolidation
We prepared the accompanying consolidated and combined financial statements in accordance with GAAP.
Except as otherwise specifically noted, the combined financial statements and other financial information for the fiscal years
ended December 29, 2018 and December 30, 2017 relate to the Animal Health Business, as these periods predate the February 7,
2019 effective date of the Acquisition. This Form 10-K does not include the historical financial results of Vets First Choice for the
fiscal years ended December 29, 2018 and December 30, 2017 and does not include any pro forma financial statements of
Covetrus.
Beginning with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, Covetrus began reporting on a
consolidated basis, representing the combined operations of the Animal Health Business and Vets First Choice and their respective
subsidiaries. The Animal Health Business is deemed the acquirer in this combination for accounting purposes under GAAP,
therefore, the Animal Health Business is considered Covetrus’ predecessor and the historical combined financial statements of the
Animal Health Business prior to February 7, 2019 are reflected in Covetrus’ quarterly and annual reports as Covetrus’ historical
financial statements.
The accompanying consolidated and combined financial statements include the operations of the Company as well as those of our
wholly-owned and majority-owned subsidiaries from their respective dates of inception or acquisition. All significant
intercompany transactions and balances are eliminated in consolidation. All intracompany transactions have been eliminated and
all intercompany transactions between the Animal Health Business and Henry Schein have been eliminated in these combined
financial statements as such transactions were deemed to not have occurred between us and Henry Schein. Investments in
unconsolidated affiliates, which are 20% to 50% owned, or investments of less than 20% in which we could influence the
operating or financial decisions, are accounted for under the equity method.
The combined financial statements include expense allocations for (i) certain corporate functions historically provided by Henry
Schein, including accounting, legal, information services, planning, compliance, investor relations, administration and
communication, and similar costs, (ii) employee benefits and incentives, and (iii) share-based compensation. These expenses have
been allocated to the Animal Health Business based on direct usage when identifiable, with the remainder allocated on a pro rata
basis of net sales, headcount, or other measures of the Animal Health Business and Henry Schein. The Animal Health Business
believes the bases on which the expenses have been allocated are a reasonable reflection of the utilization of services provided to,
or the benefit received by, the Animal Health Business during the periods presented. The allocations may not, however, reflect the
actual expenses that the Animal Health Business would have incurred as a stand-alone company for the periods presented. Actual
costs that may have been incurred if the Animal Health Business had been a stand-alone company would depend on a number of
55
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
factors, including the chosen organizational structure, what functions were outsourced or performed by employees, and strategic
decisions made in areas such as information technology and infrastructure. Following the Separation, these functions have been
performed using our own resources or third-party service providers. Some of these functions may continue to be provided by
Henry Schein under transition services agreements through February 2021.
Certain prior period amounts were reclassified to conform to the current presentation.
During the fourth quarter ended December 31, 2019, we recorded a revision to our deferred tax adjustment due to our
reassessment of our judgment in the third quarter ended September 30, 2019 on the realizability of deferred tax assets. In the
aggregate, the revisions to our tax valuation allowance, including a revision for a deferred tax calculation error that pre-dates the
Separation, Distribution and Acquisition, were $53 million. We have concluded that this adjustment was not material to any
previously issued financial statements or to our full fiscal year 2019 results. See Note 14 - Income Taxes.
Use of Estimates
Preparing financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts
reported and disclosed in the financial statements and accompanying notes. Changes in circumstances could cause actual results
to differ materially from these estimates. The most significant estimates include our evaluation of goodwill impairment, intangible
assets acquired, fair value of our derivatives, share-based compensation, self-insurance reserves, and supplier rebates.
Fiscal Year
During fiscal years 2017 and 2018, we operated on a 52-53-week basis ending on the last Saturday of December. For fiscal year
2019, we adopted a last day of the calendar year accounting and operating cycle. We made this change on a prospective basis and
did not adjust operating results for periods prior to 2019 as the result was not material.
Revenue Recognition
We recognize revenue when a customer obtains control of promised goods or services in an amount that reflects the consideration
that we expect to receive for those goods or services. To recognize revenue, we do the following:
Identify the contract(s) with a customer,
Identify the performance obligations in the contract,
•
•
• Determine the transaction price,
• Allocate the transaction price to the performance obligations in the contract, and
• Recognize revenue when, or as, the entity satisfies a performance obligation.
Our revenue is generated from the following major product categories:
•
•
Supply Chain Services - primarily includes the sale of animal-health consumable products, including our own proprietary
and Covetrus branded products, small equipment, laboratory products, large equipment, equipment repair services,
branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, and
vitamins and supplements to wholesale and retail customers. Our value-added practice solutions include financial
services, equipment repair, inventory management, e-commerce, as well as continuing education services for
practitioners.
Software Solutions - includes practice management software systems for veterinary practitioners and animal-health
clinics, client communication services, reminders, data backup services, and hardware sales and support.
• Prescription Management - includes the distribution of finished goods pharmacy products, specialty pharmaceutical
compounding, e-commerce, shipping, manufacturer incentives, service fees, and data integration and support services.
We estimate the transaction price at contract inception, including any variable consideration, and update the estimate each
reporting period for any changes in circumstances. Variable consideration, including provisions for discounts, rebates to
customers, customer returns, and other contra revenue adjustments is included in the transaction price at contract inception by
estimating the most likely amount based upon historical data and estimates and are provided for in the period in which the related
sales are recognized.
56
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Many of our contracts with customers require us to take possession of the inventory, provide the goods or services, and establish
the price for the goods or services. Revenue and cost of sales from this type of contract are recognized on a gross basis. From time
to time, certain contracts require us to arrange for the procurement of goods or services on behalf of our customer, but we do not
purchase or take title of the product from the supplier before they are transferred to our customer. In this type of contract, we are
acting as an agent and revenue is recognized on a net basis (revenue less cost of sales is included in Net sales) (“Net Agency
Revenue”), as the supplier is the primary obligor, bears the inventory and credit risk, establishes the price, picks, packs, and ships
the product, determines the product specifications, and the amount is fixed. Payment terms differ by customer and jurisdiction, but
generally range from 30 to 60 days.
Supply Chain Services
Revenue derived from the sale of consumable products is recognized at a point in time when control transfers to the customer.
Such sales typically entail high-volume, low-dollar orders shipped using third-party common carriers. We believe that the
shipment date is the most appropriate point in time indicating control has transferred to the customer because we have no post-
shipment obligations, and this is when legal title and risks and rewards of ownership transfer to the customer and we have an
enforceable right to payment.
Revenue derived from the sale of equipment is recognized when control transfers to the customer. This generally occurs when the
equipment is delivered. Such sales typically entail scheduled deliveries of large equipment primarily by equipment service
technicians. Some equipment sales require minimal installation which is typically completed at the time of delivery. Our products
generally carry standard warranty terms provided by the manufacturer, however, in instances where we provide warranty labor
services, the warranty costs are accrued in the period the related revenue is recognized.
Software Solutions
Revenue derived from the sale of software products is recognized when products are shipped to customers or made available
electronically. Such software is generally installed by customers and does not require extensive training due to the nature of its
design. Revenue derived from post-contract customer support for software, including annual support, is generally recognized over
the life of the support period while revenue from training services is recognized over the period the services are provided.
Prescription Management
Revenue under this category is primarily generated from two sources: (i) prescription management and pharmacy services
(including the distribution of finished goods products, specialty pharmaceutical compounding, shipping, manufacturer incentives,
and service fees), which is recognized when control transfers to the customer, typically upon shipment or delivery, and (ii) data
integration and support services (including software as a service, initial setup to connect customers to hosted software
applications, data conversions, custom software developments, upgrades and enhancements, training, software configuration, and
technical support), which is recognized over the period the services are provided.
Other Revenue
Revenue derived from other sources, including freight charges and equipment repairs, is recognized when the related product
revenue is recognized or when the services are provided. We applied the practical expedient to treat shipping and handling
activities performed after the customer obtains control as fulfillment activities, rather than a separate performance obligation in
the contract.
Certain of our revenue is derived from bundled arrangements that include multiple distinct performance obligations that are
accounted for separately. When we sell software products together with related services (e.g., training and technical support), we
allocate revenue to software using the residual method, utilizing an estimate of our standalone selling price to estimate the fair
value of the undelivered elements. There have not been any cases where revenue is deferred due to a lack of a standalone selling
price. Bundled arrangements that include elements that are not considered software consist primarily of equipment and the related
installation service. We allocate revenue for such arrangements based on the relative selling prices of the goods or services. If an
observable selling price is not available because we do not sell the goods or services separately, we use one of the following
techniques to estimate the standalone selling price: (i) adjusted market approach, (ii) cost-plus approach, or (iii) the residual
method. There is no specific hierarchy for the use of these methods, but the relative selling price reflects our best estimate of what
57
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
the selling prices of each deliverable would be if it were sold regularly on a standalone basis, taking into consideration the cost
structure of the business, technical skill required, customer location, and other market conditions.
Sales, value-add, and other taxes we collect concurrently with revenue-producing activities are excluded from revenue, but rather
are recorded as liabilities and included in Accrued taxes. See Note 4 - Revenue from Contracts with Customers and Note 18 -
Segment Data for additional disclosures.
Contract Balances
Contract balances represent amounts presented in the consolidated and combined balance sheets when we have either transferred
goods or services to the customer or the customer has paid consideration to us under the contract. These contract balances include
accounts receivable, contract assets, and contract liabilities.
Accounts Receivable
The carrying amount of accounts receivable is reduced by an allowance that reflects our best estimate of the amounts that will not
be collected. In addition to reviewing delinquent accounts receivable, we consider many factors in estimating our allowance for
doubtful accounts including historical data, experience, customer types, creditworthiness, and economic trends. From time to
time, we adjust our assumptions for anticipated changes in any of these or other factors expected to affect collectability. Accounts
receivable are written-off when it is probable that all contractual payments due will not be collected.
Contract Assets
Contract assets include amounts related to any conditional right to consideration for work completed as of the reporting date and
generally represent amounts owed to us by customers, but not yet billed. Contract assets are transferred to Accounts receivable
when the right becomes unconditional. Current contract assets are included in Prepaid expenses and other and non-current
contract assets are included in Investments and other within the consolidated and combined balance sheets. The contract assets
primarily relate to the bundled arrangements for the sale of equipment and consumables and sales of term software licenses.
Contract Liabilities
Contract liabilities are comprised of advance payments and deferred revenue amounts. Contract liabilities are transferred to
revenue once the performance obligation has been satisfied. Current contract liabilities are included in Other current liabilities and
non-current contract liabilities are included in Other liabilities within the consolidated and combined balance sheets. The contract
liabilities primarily relate to advance payments from customers and upfront payments for service arrangements provided over
time.
Sales Returns
Sales returns are recognized as a reduction of revenue by the amount of expected returns and are recorded as a refund liability
within Other current liabilities. We estimate the amount of revenue expected to be reversed to calculate the sales return liability
based on historical data for specific products, adjusted as necessary for new products. The allowance for returns is presented gross
as a refund liability, and we record an inventory asset (and a corresponding adjustment to Cost of sales) for any goods or services
that we expect to be returned.
Prior to the Adoption of Topic 606
Results for reporting periods beginning after December 30, 2017 are presented under “Revenue from Contracts with Customers
(Topic 606)”, while prior period amounts continue to be reported under “Revenue Recognition (Topic 605)”, the accounting
standard in effect for those periods.
Cash and Cash Equivalents
We maintain cash depository accounts with banks throughout the world and invest in high quality, short-term, liquid instruments.
Such investments are made only in instruments issued by high-quality institutions. These investments mature within three months,
and we have not incurred any related losses for the years ended December 31, 2019, December 29, 2018, and December 30, 2017.
58
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Inventories
Inventories consist primarily of finished goods and are valued at the lower of cost or net realizable value. When inventory is
adjusted to net realizable value, the corresponding adjustment is included in Cost of sales. Cost is determined by the first-in, first-
out method for merchandise or actual cost for large equipment and high-tech equipment. In accordance with our policy for
inventory valuation, we consider many factors, including the condition and salability of the inventory, historical sales, forecasted
sales, and market and economic trends. From time to time, we adjust our assumptions for anticipated changes in any of these or
other factors expected to affect the value of inventory. In addition, we record a liability for unconditional purchase commitments
with contract suppliers for quantities greater than future demand forecasts consistent with excess and obsolete inventory
valuations. As of December 31, 2019 and December 29, 2018, we did not record any liability related to excess unconditional
purchase commitments.
Assets and Liabilities Held for Sale
Assets and liabilities are considered held for sale when certain criteria are met, including when management has committed to a
plan to sell the asset, the asset is available for sale in its immediate condition, and the sale is probable within one year of the
reporting date. Assets and liabilities held for sale are reported at the lower of cost or fair value less costs to sell. See Note 3 - Held
for Sale.
Shipping and Handling Costs
Freight and other direct shipping costs are included in Cost of sales. Direct handling costs, which represent primarily direct
compensation costs of employees who pick, pack, and otherwise prepare, if necessary, merchandise for shipment to customers, are
reflected in Selling, general and administrative.
Advertising
Advertising costs are charged to operations when incurred as part of Selling, general and administrative. We receive
reimbursements from certain vendors for advertising costs. Reimbursements for advertising costs are reported on a net basis
within Selling, general and administrative. When reimbursements received are more than the cost of advertising, the net amount is
reported within Cost of sales. Advertising expense was $17 million in 2019, $16 million in 2018, and $15 million in 2017.
Additionally, advertising and promotional costs incurred in connection with direct marketing, including product catalogs and
printed materials, are deferred and amortized on a straight-line basis over the period that is benefited, typically one year. Deferred
direct marketing expenses included in Prepaid expenses and other were not material in 2019 and 2018.
Supplier Rebates
We receive quarterly and annual performance rebates from suppliers based upon attainment of certain sales and/or purchase goals.
Supplier rebates are included as a reduction of Cost of sales and are recognized over the period they are earned. The factors
considered in estimating supplier rebate accruals include forecasted inventory purchases and sales in conjunction with supplier
rebate contract terms, which generally provide for increasing rebates based on either increased purchase or sales volume.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed primarily
under the straight-line method. Amortization of leasehold improvements is computed using the straight-line method over the
lesser of the useful life of the assets or the lease term. See Note 5 - Property and Equipment, Net.
Capitalized software costs consist of costs to purchase and develop software. Costs incurred during the application development
stage for software bought and further customized by outside suppliers for use, software developed by a supplier for proprietary
use, and costs incurred for our own personnel who are directly associated with software development are capitalized.
59
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Income Taxes
We account for income taxes under an asset and liability approach that requires the recognition of deferred income tax assets and
liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns.
In estimating future tax consequences, we generally consider all expected future events other than enactments of changes in tax
laws or rates. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized as income or expense
in the period of the enactment date. See Note 14 - Income Taxes.
Our tax provision for fiscal years 2018 and 2017 were prepared utilizing the separate return methodology as if we had not been
included in a consolidated or group income tax return with Henry Schein. Current income tax liabilities are presented based on
current amounts owed for the current tax year for entities that file separate returns. Current taxes payable for entities that joined in
a consolidated or group filing with Henry Schein were settled in Net former parent investment consistent with other intercompany
obligations.
Share-based Compensation
Share-based compensation represents the cost related to share-based awards granted to employees and non-employee directors.
We determine the fair value of share-based payment awards using the Black-Scholes model which is affected by the stock price
and several assumptions, including expected volatility, expected life, risk-free interest rate, and expected dividends. We recognize
share-based compensation expense, net of estimated expected forfeitures, on a straight-line basis over the requisite service period
of the award, which is included in Selling, general and administrative in our consolidated and combined statements of operations.
Foreign Currency Translation and Transactions
The financial position and results of operations of our foreign subsidiaries are determined using local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year-end. Statement of
operations accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from
the use of differing exchange rates from period-to-period are included in Accumulated other comprehensive loss in equity. Gains
and losses resulting from foreign currency transactions are included in earnings.
Derivatives and Financial Instruments
Our global business exposes us to risks related to changes in foreign currency exchange rates and interest rates. Our financial risk
management program is designed to manage the exposure arising from cash flow variability and uses derivative financial
instruments to minimize this risk. We do not enter into derivative financial instruments for trading or speculative purposes.
For agreements not designated as hedges, changes in the value of the derivative, along with the transaction gain or loss on the
hedged item, are recorded in earnings. For cash flow hedges, the effective portion of the changes in the fair value of the
derivative, along with any gain or loss on the hedged item, are recorded as a component of accumulated other comprehensive
income and subsequently reclassified into earnings in the period(s) during which the hedged transaction affects earnings.
We classified the cash flows related to hedging activities in the same category on the consolidated and combined statements of
cash flows as the cash flows related to the hedged item. See Note 9 - Derivatives and Financial Instruments.
Business Acquisitions
The net assets of businesses acquired are recorded at their fair value at the acquisition date and the consolidated and combined
financial statements include their results of operations from that date. Any excess of acquisition consideration over the fair value
of identifiable net assets acquired is recorded as goodwill. The major classes of assets and liabilities that we generally allocate
purchase price to, excluding goodwill, include identifiable intangible assets (e.g., trademarks and trade names, customer
relationships and lists, and non-compete agreements), accounts receivable, inventory, property and equipment, deferred taxes, and
other current and long-term assets and liabilities. The estimated fair value of identifiable intangible assets is based on critical
estimates, judgments, and assumptions derived from analysis of market conditions, discount rate, discounted cash flows, customer
retention rates, and estimated useful lives. See Note 2 - Business Acquisitions.
60
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Goodwill
As noted in Business Acquisitions above, our Goodwill is derived when we acquire another company. Goodwill is not amortized,
but the potential impairment of goodwill is assessed at least annually (at the beginning of the fourth quarter) and on an interim
basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment analysis
for goodwill requires a comparison of the fair value to the carrying value of a reporting unit.
Some important factors that could trigger an interim impairment review include:
•
•
•
•
Significant underperformance relative to expected historical or projected future operating results,
Significant changes in the manner of the use of acquired assets or our overall business strategy (e.g., decision to divest a
business),
Sustained decline in our share price and a resulting decrease in our market capitalization, or
Significant negative industry or economic trends.
See Note 7 - Goodwill and Other Intangible Assets, Net and Note 10 - Fair Value for information about our interim impairment
test performed in August 2019 and our annual impairment test results.
Long-lived Assets
Long-lived assets, other than goodwill, are evaluated for impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such
assets.
Definite-lived intangible assets consist primarily of non-compete agreements, trademarks, patents, customer relationships, and
product development. For long-lived assets used in operations, impairment losses are only recorded if the asset’s carrying amount
is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the
difference between the carrying amount and the estimated fair value. When impairment exists, the related assets are written down
to fair value. See Note 7 - Goodwill and Other Intangible Assets, Net.
Cost of Sales
The primary components of Cost of sales include the cost of the product (net of purchase discounts, supplier chargebacks, and
rebates) and inbound and outbound freight charges. Our distribution network costs, such as purchasing, receiving, inspections,
warehousing, internal inventory transfers, and other related costs are included in Selling, general and administrative along with
other operating costs. Total distribution network costs were $18 million in 2019, $18 million in 2018, and $16 million in 2017.
Cost of sales also includes costs directly related to the design and production of software, distribution of licenses, hardware and
costs related to services provided, and amortization of the capitalized costs for internally generated software for resale.
Comprehensive Income
Comprehensive income (loss) includes certain gains and losses that, under GAAP, are excluded from net income as such amounts
are recorded directly as an adjustment to equity. Comprehensive income (loss) is primarily comprised of net income, foreign
currency translation gain (loss), unrealized gain (loss) from hedging activities, and pension adjustment gain (loss).
Accounting Pronouncements Adopted
As of January 1, 2019, we adopted the following ASUs:
• ASU 2016-02, “Leases (Topic 842),” introduces the balance sheet recognition of lease assets and lease liabilities by
lessees for those leases classified as operating leases under previous guidance. We adopted the new lease standard using
the transition option issued under the amendments in ASU 2018-11, “Leases (Topic 842): Targeted Improvements,”
which allowed us to continue to apply the legacy guidance in Accounting Standards Codification (“ASC”) 840, “Leases,”
in the comparative periods presented in the year of adoption. We elected the package of practical expedients permitted
under the transition guidance within the new standard, which among other things, allowed us to carry forward the
61
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
historical lease classification. We have lease agreements with both lease and non-lease components, which are generally
accounted for together as a single lease component. We made an accounting policy election to keep leases with an initial
term of 12 months or less off the balance sheet. We recognize those lease payments in the consolidated statement of
operations on a straight-line basis over the lease term. The impact of the adoption was an increase to our operating lease
assets and liabilities on January 1, 2019 of $65 million. The initial recognition of the right-of-use asset and lease liability
represented a non-cash activity. See Note 6 - Leases.
• ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” eliminates
step two from the quantitative goodwill impairment test. Under this guidance, annual or interim goodwill impairment
testing is performed by comparing the fair value of the reporting units to the carrying value of those units. If the carrying
value exceeds the fair value, an impairment charge is recognized, not to exceed the amount of goodwill allocated to each
reporting unit.
• ASU 2018-02, “Treatment of Stranded Tax Effects in Accumulated Other Comprehensive Income Resulting from the Tax
Cuts and Jobs Act of 2017,” allows the reclassification of the income tax effects resulting from the Tax Cuts and Jobs Act
of 2017 ("Tax Act") from accumulated comprehensive income to retained earnings. The adoption did not have a material
impact on our consolidated financial statements and related disclosures.
• ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting,” expands the scope of Topic 718 to include share-based payment transactions for acquiring goods
and services from nonemployees. ASU 2018-07 simplifies the accounting for share-based payments to nonemployees by
aligning it with the accounting for share-based payments to employees. ASU 2019-08 amended 2018-07 to require that
an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718.
The adoption did not have a material impact on our consolidated financial statements and related disclosures.
• ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,”
which simplifies the requirements for hedge accounting, more closely aligns hedge accounting with risk management
activities and increases transparency of the scope and results of hedging activities. This ASU amends the presentation
and disclosure requirements and provides options for new hedging strategies and methods of assessing hedge
effectiveness in certain circumstances. ASU 2017-12 is required to be implemented for fiscal years beginning after
December 15, 2018. The adoption did not have a material impact on the consolidated financial statements and related
disclosures.
As of July 1, 2019, we early adopted the following ASUs:
• ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” aligns
the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with
the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting
arrangements that include an internal use software license). We adopted prospectively and the adoption did not have a
material impact on our consolidated financial statements and related disclosures.
• ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement,” removed, modified, and added disclosure requirements for fair value assets
and liabilities. The adoption did not have a material impact on our consolidated financial statements and related
disclosures.
Accounting pronouncement to be adopted:
• ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments,” requires the measurement and recognition of expected credit losses for financial assets held at amortized
cost. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. This ASU is
required to be adopted using the modified retrospective basis, with a cumulative-effect adjustment to Retained earnings
(Accumulated deficit) as of the beginning of the first reporting period in which the guidance of this ASU is effective. We
do not expect that this ASU will have a material impact on the results of our consolidated financial statements.
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COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
• ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” removes specific technical
exceptions to general principles found in Topic 740, items that often produce information investors have a hard time
understanding and simplifies the accounting for income taxes. The standard is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are evaluating
the anticipated impact of this standard on our financial statements as well as timing of adoption.
2. Business Acquisitions
Vets First Choice
On February 7, 2019, we acquired Vets First Choice. See Note 1 - Business Overview and Significant Accounting Policies. During
the third quarter ended September 30, 2019, we recorded a measurement period adjustment, which was made to reflect the facts
and circumstances in existence as of the acquisition date. This adjustment reflects a reduction to the purchase price of $30 million,
offset by a corresponding decrease to goodwill. This measurement period adjustment related to the cancellation of 700,400
Covetrus shares issued to Vets First Choice shareholders that were held in escrow. During the fourth quarter ended December 31,
2019, we recorded a final measurement period adjustment of $4 million which increased the deferred tax liability with a
corresponding decrease to goodwill. The estimated consideration and fair value in the tables below have been updated to reflect
this measurement period adjustment.
The acquisition date fair value of the consideration transferred consisted of the following:
Total Covetrus shares issued to Vets First Choice shareholders
Per share price (in actuals) (a)
Total fair value of shares issued to Vets First Choice shareholders
Fair value of Vets First Choice replacement stock option awards attributable to pre-acquisition service
Vets First Choice debt repaid at close
Vets First Choice expenses paid at close
Less: Vets First Choice cash used to fund transaction
Total consideration
Estimated
Consideration
39,041,689
$
$
43.05
1,681
62
24
18
(9)
$
1,776
(a) Closing price on February 7, 2019, Covetrus shares trading on a when-issued basis (Nasdaq: CVETV)
The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values
at the date of acquisition. The following table summarizes the allocation of the purchase price to the assets acquired and liabilities
assumed:
Fair value of net assets acquired
Goodwill
Intangible assets
Deferred tax liabilities
Total acquisition cost
Estimated Fair
Value
$
$
14
1,324
545
(107)
1,776
We determined the estimated fair value of the identifiable intangible assets after review and consideration of relevant information
including discounted cash flow analysis, market data, and management’s estimates. We engaged an independent valuation firm to
assist in determining the fair value of the acquired intangible assets. The value attributed to the other identifiable intangible assets
included $20 million in trademarks and trade names, $50 million in product formulas, $125 million in customer relationships, and
$350 million in developed technologies. These intangible assets are being amortized over a weighted-average period of seven
years.
63
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The goodwill from this transaction arose because of our expected ability to leverage existing and new marketing opportunities across
a larger revenue base. The goodwill from this transaction is not deductible for tax purposes.
The results of operations of Vets First Choice are included in our consolidated results of operations since February 7, 2019, during
which period Vets First Choice contributed revenue of $246 million and net loss of $525 million.
The following unaudited pro forma financial information presents the results of operations for the years ended December 31, 2019
and December 29, 2018 as if the Acquisition had occurred as of December 31, 2017. The unaudited pro forma results reflect
certain adjustments for items that are not expected to have a continuing impact, such as adjustments for transaction costs incurred,
management fees, and purchase accounting.
The information presented below has been prepared for comparative purposes only and does not purport to be indicative of either
future results of operations or the results of operations that would have occurred had the Acquisition been consummated on
December 31, 2017:
Net sales
Goodwill impairment
Net loss
Net loss attributable to Covetrus
Other
Years Ended
December 31,
2019
December 29,
2018
$
$
$
$
4,000
$
3,981
938
$
(1,032) $
(1,029) $
—
(63)
(63)
We completed certain other acquisitions during the year ended December 31, 2019 which were not material to our consolidated
financial statements individually or in the aggregate.
3. Held for Sale
In 2019, in accordance with our strategy to streamline our organizational focus, we engaged a third party to facilitate the
marketing and eventual sale of our scil animal-care business. In January 2020, we entered into a definitive agreement to sell scil
to Heska Corporation for a purchase price of $125 million in cash, subject to customary closing adjustments. Gains are not
recognized until the date of sale, which is expected to close during the second quarter ended June 30, 2020, subject to customary
closing conditions. scil is primarily included within our Europe segment.
scil's major classes of assets and liabilities were as follows:
Current assets
Property and equipment, net
Goodwill
Other intangibles, net
Investments and other
Assets held for sale
Current liabilities
Other non-current liabilities
Liabilities held for sale
December 31, 2019
24
$
15
2
4
$
$
$
3
48
18
3
21
We also have a building for sale in our APAC & Emerging Markets segment which is leased to a long-term tenant. As of
December 31, 2019, the building was included in Assets held for sale at $3 million, net, along with scil's assets held for sale.
64
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
4. Revenue from Contracts with Customers
Disaggregation of Revenue
The table below presents our revenue disaggregated by major product category and reportable segment for the year ended
December 31, 2019:
North America
Europe
APAC & Emerging Markets
Eliminations
Total net sales
Supply
Chain
Services
Software
Solutions
$
1,816
$
1,513
361
(12)
3,678
$
$
82
10
7
—
99
Prescription
Management
246
$
—
—
—
246
$
Eliminations
$
(33) $
(14)
—
—
(47) $
$
Total
2,111
1,509
368
(12)
3,976
The table below presents our revenue disaggregated by major product category and reportable segment for the year ended
December 29, 2018:
North America
Europe
APAC & Emerging Markets
Eliminations
Total net sales
North America
Europe
APAC & Emerging Markets
Eliminations
Total net sales
Prescription
Management
$
— $
Eliminations
Total
(2) $
(10)
—
—
(12) $
1,939
1,463
387
(11)
3,778
$
101
$
— $
Supply
Chain
Services
Software
Solutions
$
1,858
$
1,462
380
(11)
3,689
$
Supply
Chain
Services
Software
Solutions
$
1,795
$
1,359
342
(18)
3,478
$
83
11
7
—
83
11
7
—
—
—
—
—
—
—
Prescription
Management
$
— $
Eliminations
Total
1,876
1,373
349
(18)
(2) $
3
—
—
1
$
101
$
— $
$
3,580
The table below presents our revenue recognized under ASC 605 disaggregated by major product category and reportable
segment for the year ended December 30, 2017:
The following table presents our revenue and gross billings associated with our Net Agency Revenue:
Net Agency Revenue
Gross billings from Net Agency Revenue
Years Ended
December 31, 2019
18
$
447
$
December 29, 2018
26
$
454
$
December 30, 2017
16
$
402
$
65
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Contract Balances
The following table presents information about our receivables, contract assets, and contract liabilities from contracts with
customers:
Accounts receivable:
Accounts receivable, net
Contract liabilities:
Deferred revenue, current
Balance Sheet Location
December 31, 2019
December 29, 2018
Other current liabilities
$
$
426
37
$
$
431
18
For the year ended December 31, 2019, deferred revenue recognized from performance obligations completed this period
approximates the balance outstanding as of December 29, 2018. The increase in Deferred revenue for the year ended
December 31, 2019 compared to the prior year was primarily attributable to increased customer orders in the U.K. due to
uncertainty created by Brexit.
Performance Obligations
Estimated future revenues expected to be generated from long-term contracts with unsatisfied performance obligations as of
December 31, 2019, was not material.
5. Property and Equipment, Net
Property and equipment, net consisted of the following as of:
Land
Buildings and permanent improvements
Leasehold improvements
Machinery and warehouse equipment
Furniture, fixtures, and other
Computer equipment and software
Total property and equipment, gross
Less: accumulated depreciation and amortization
Total property and equipment, net
Estimated Useful
Life
N/A
10-40 years
1-20 years
3-10 years
2-10 years
2-10 years
The following table sets forth our depreciation and amortization expense for the years ended:
Location
Cost of sales
Selling, general and administrative
Total depreciation and amortization expense
6. Leases
December 31,
2019
$
$
3
25
28
December 31,
2019
December 29,
2018
$
$
$
$
1
9
23
44
36
64
177
(84)
93
December 29,
2018
2
13
15
$
$
$
$
2
17
12
43
32
36
142
(73)
69
December 30,
2017
2
11
13
We evaluate whether an arrangement is or contains a lease at contract inception. For all our leases, we determine the classification
as either operating or financing. We have office space, warehouse facilities, vehicles, and equipment under non-cancelable
operating leases with third parties. The leases have remaining lease terms of one to 20 years. Leases with an initial term of 12
months or less are not recognized on the balance sheet. We recognize lease expense for these leases on a straight-line basis over
the lease term. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or
terminate the lease when it is reasonably certain that we will exercise that option.
66
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease
payments over the lease term. As most of our leases do not provide an implicit rate, we use the incremental borrowing rate based
on the information available at commencement date in determining the present value of future lease payments. We use the implicit
rate when readily determinable.
Rent expense charged to operations under operating leases during the year ended December 31, 2019 was $25 million. Common
Area Maintenance and taxes for the year ended December 31, 2019 was $2 million. Short-term lease expense and variable rent
expense during the year ended December 31, 2019 was not material. Rent expense, under ASC 840, was $20 million for the year
ended December 29, 2018 and $17 million for the year ended December 30, 2017.
The following table presents the lease balances within the consolidated balance sheet and other supplemental information related
to our leases as of December 31, 2019:
Operating Leases:
Operating lease right-of-use assets, net
Accrued expenses, other
Other liabilities
Total operating lease liabilities
Finance Leases:
Property and equipment, net
Current maturities of long-term debt and other borrowings
Long-term debt and other borrowings, net
Total finance lease liabilities
Weighted-average remaining lease term:
Operating leases
Finance leases
Weighted-average discount rate:
Operating leases
Finance leases
Supplemental cash flow information related to leases for the year ended was as follows:
Cash paid for amounts included in the measurement of operating lease liabilities
Right-of-use assets obtained in exchange for new operating lease liabilities
Right-of-use assets obtained in exchange for new finance lease liabilities
$
$
$
$
$
$
84
19
67
86
2
1
—
1
6.8 years
2.4 years
3.5%
8.1%
December 31,
2019
$
$
$
25
104
1
67
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The following table presents the maturity of our lease liabilities as of December 31, 2019:
2020
2021
2022
2023
2024
Thereafter
Total minimum lease payments
Less: amount representing interest
Present value of net minimum lease payments
Less: current portion of lease obligations
Long-term lease obligations
Operating Leases
22
$
18
$
13
9
8
28
98
(12)
86
(19)
67
$
$
Finance Leases
1
—
—
—
—
—
1
—
1
(1)
—
As of December 31, 2019, we had additional operating leases that have not yet commenced which included the following:
Description
Compounding pharmacy and offices
Compounding pharmacy
New corporate headquarters
Total
7. Goodwill and Other Intangible Assets, Net
Goodwill
Commencing
January 2020
November 2020
October 2021
Lease Term
14 years
20 years
20 years
Total Future Lease
Payments
$
$
25
28
78
131
During the first quarter of 2019, in connection with the Separation, Distribution, and Acquisition, we made changes to our
organizational and reporting structure. With these changes, we revised our reportable segments and goodwill was reallocated to
the new reporting segments. See Note 18 - Segment Data.
In August 2019, we released our results for the three and six months ended June 30, 2019 which failed to meet expectations and
included a downward revision to our previously provided full-year guidance for the year ended December 31, 2019. We
experienced a sustained decline in our share price and a resulting decrease in our market capitalization. These events triggered an
interim impairment review as of August 31, 2019. We tested for goodwill impairment by quantitatively comparing the fair values
of our reporting units to their carrying amounts. See Note 10 - Fair Value for further information.
Based on our analysis, we determined that the carrying value of our reporting units exceeded their fair values, and we recorded a
non-tax-deductible goodwill impairment charge totaling $938 million for the year ended December 31, 2019. Our annual
impairment review was performed during the fourth quarter of 2019 using a qualitative approach, and we determined that there
was no additional goodwill impairment as of December 31, 2019.
68
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The changes in the Goodwill balances by segment for the years ended December 31, 2019 and December 29, 2018 were as
follows:
Balance at December 31, 2017 (a)
Foreign currency translation
Goodwill additions
Balance at December 29, 2018 (a)
Foreign currency translation
Goodwill additions (b)
Goodwill impairment
Divestitures and related adjustments (c)
Balance at December 31, 2019
(a) Recast to conform to 2019 presentation
North
America
Europe
APAC &
Emerging
Markets
Total
$
$
528
(1)
2
529
—
1,280
(653)
(2)
1,154
$
$
182
(11)
1
172
(8)
57
(221)
—
$
50
(1)
—
49
(1)
16
(64)
—
760
(13)
3
750
(9)
1,353
(938)
(2)
$
— $
— $
1,154
(b) Includes goodwill adjustments of $34 million related to Vets First Choice; see Note 2 - Business Acquisitions
(c) Attributable to scil; see Note 3 - Held for Sale
Accumulated impairment at December 29, 2018
Accumulated impairment at December 31, 2019
Other Intangible Assets, Net
North
America
Europe
APAC &
Emerging
Markets
Total
$
$
— $
(653) $
— $
(221) $
— $
(64) $
—
(938)
We periodically review our long-lived assets for indications of impairment to determine if the carrying value is recoverable and
exceeds fair value. The carrying amount of long-lived assets is not recoverable if it exceeds the sum of undiscounted cash flows
expected as a result from use and eventual disposition of the asset.
Because an interim goodwill assessment was completed, we also performed an interim assessment of long-lived assets as of
August 31, 2019. The results of our analysis indicated that the long-lived assets were recoverable as of the assessment date and
did not require further impairment review.
Definite-lived intangible assets consisted of the following as of:
December 31, 2019
Customer relationships
Trademarks
Patents
Product development
Non-compete agreements
Total
Cost
503
60
30
406
2
1,001
$
$
69
Accumulated
Amortization
$
(234) $
(28)
(24)
(71)
(1)
(358) $
Net
269
32
6
335
1
643
$
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
December 29, 2018
Customer relationships
Trademarks
Patents
Product development
Non-compete agreements
Total
Cost
368
41
30
6
4
449
$
$
$
Accumulated
Amortization
$
(193) $
(23)
(20)
(3)
(2)
(241) $
Net
175
18
10
3
2
208
Other intangible assets were established through business acquisitions. We amortize intangible assets on a straight-line basis over
their estimated useful lives. Non-compete agreements represent amounts paid primarily to key employees and prior owners of
acquired businesses, as well as certain salespersons, in exchange for placing restrictions on their ability to pose a competitive risk
to us. Such amounts are amortized on a straight-line basis over the respective non-compete period which generally commences
upon termination of employment or separation from Covetrus.
The table below sets forth amortization of intangible assets for the years ended:
Location
Cost of sales
Selling, general and administrative
Total amortization
The estimated future amortization of intangible assets is as follows:
2020
2021
2022
2023
2024
Thereafter
Total
8. Debt
December 31,
2019
December 29,
2018
December 30,
2017
$
$
4
123
127
$
$
— $
49
49
$
$
$
—
46
46
134
130
126
112
59
82
643
On February 7, 2019, we entered into a $1.5 billion syndicated credit agreement with a five-year term (the “Credit Facility”)
primarily to pay a dividend to Henry Schein, as well as provide funding for working capital and general corporate purposes. The
Credit Facility is comprised of the following:
Term loan
Revolving line of credit (a)
Total Credit Facility (b)
Total Amount
Amount Available as of
December 31, 2019
$
$
1,200
300
1,500
$
$
—
281
281
(a) Letters of credit reduce our borrowing capacity under the revolving line of credit. At December 31, 2019, we had $19 million for letters of credit outstanding
against the total $35 million sub-limit available.
(b) We paid $24 million of debt issuance costs related to the Credit Facilities which we deferred and amortize on an effective yield basis to interest expense. The
unamortized portion at December 31, 2019 was $20 million.
In February 2020, the Credit Facility was amended, and the revised terms are reflected below.
70
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The term loan and revolving line of credit bear interest on a floating rate basis at our option and incur fees as follows:
• LIBOR (ranging from one month to 12 months) subject to a floor of 0.00%
plus, an applicable margin ranging from 1.25% to 2.50% annually based on our leverage ratio at the end of the prior
quarter.
• Alternative base rate subject to a floor of 1.00%
plus, an applicable margin ranging from 0.25% to 1.50% annually based on our leverage ratio at the end of the prior
quarter.
• Unused capacity under the revolving line of credit loan incurs a fee ranging from 0.175% to 0.400% per annum based on
our leverage ratio at the end of the prior quarter.
• Additionally, customary letter of credit fees, as well as fronting fees, are incurred for letters of credit outstanding.
The applicable margins on LIBOR and alternative base rate borrowings fluctuated over the course of 2019. As of December 31,
2019, the applicable margins on LIBOR and alternative base rate borrowings were 2.25% and 1.25%, respectively, for both the
term loan and revolving line of credit. The commitment fee for the revolving line of credit as of December 31, 2019 was 0.35%.
Starting March 31, 2020, the term loan amortizes in quarterly installments equal to 5.00% per annum of the initial borrowed
amount and requires full payment at maturity of all remaining amounts owed. No amortizing payments are required for the
revolving line of credit, however all amounts owed are due at maturity. We have the option to prepay both the term loan and
revolving line of credit without penalty, subject to certain conditions. If the aggregate balance of loans outstanding exceeds the
lender's commitments made to the revolving line of credit at any time, then the amount of such excess is required to be prepaid.
Mandatory prepayments of the term loan are required in an amount equal to the net cash proceeds of, subject to specific
conditions, (i) certain assets sales, (ii) certain debt offerings, and (iii) certain insurance recovery and condemnation events. We
plan to use a portion of the expected net cash proceeds from the sale of our scil animal-care business in an amount up to $60
million to prepay the 2020 quarterly term loan amortization payments.
Additionally, the Credit Facility limits or restricts our ability, subject to certain exceptions, to:
incur additional liens,
consolidate, merge, sell, or otherwise dispose of all or substantially all assets,
incur additional indebtedness,
•
• make dividends and other restricted payments,
•
•
• make investments,
•
•
•
•
transfer or sell assets,
enter into restrictive agreements,
change the nature of the business, and
enter certain transactions with affiliates.
Starting April 1, 2019, we were required to maintain a leverage ratio of less than 5.50:1.00. The leverage ratio covenant decreases
annually, starting with a reduction to 5.00:1.00 in 2021 and decreasing down to 3.75:1.00 in 2022. We must also maintain a net
interest coverage ratio of no less than 3.00:1.00 at the end of each quarter. We were in compliance with all financial covenants as
of and for the year ended December 31, 2019.
We continuously monitor our compliance with the terms and conditions of our Credit Facility and take such actions as are
necessary to attain and ensure compliance.
The Credit Facility is guaranteed by Covetrus, the subsidiary borrower, and its subsidiary guarantors. We have pledged
substantially all tangible and intangible assets, as well as our ownership interests in certain subsidiary companies, in support of
the Credit Facility.
Long-term debt as of December 29, 2018 consisted primarily of a $23 million term loan. Prior to the separation and distribution
date of February 7, 2019, the Animal Health Business’ long-term debt of $23 million was repaid by the Former Parent.
71
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The following table presents the maturities of our Long-term debt and other borrowings as of December 31, 2019:
2020
2021
2022
2023
2024
Total debt maturities
Less: current maturities
Less: unamortized debt issuance costs
Long-term maturities
9. Derivatives and Financial Instruments
Credit Facility
60
$
$
60
60
60
960
1,200
(60)
(20)
1,120
$
$
Other Debt
Total
Repayments
2
—
—
5
—
7
(2)
—
5
$
$
62
60
60
65
960
1,207
(62)
(20)
1,125
We are exposed to the impact of changes in interest rates in the normal course of business. Our financial risk management
program is designed to manage the exposure arising from this cash flow risk and uses derivative financial instruments to minimize
this risk. We do not enter into derivative financial instruments for trading or speculative purposes.
In July and August 2019, we executed interest rate swap contracts with notional amounts aggregating $500 million that are
designated as cash flow hedges to manage interest rate risk on our floating rate debt. These interest rate swap contracts adjust the
amount of our total debt that is subject to variable interest rates by effectively fixing the borrowing rates on a portion of our
floating rate debt discussed in Note 8 - Debt.
Our interest rate swap agreements exchange payment streams based on the notional principal amount. These agreements fix our
future interest rates ranging from 1.63% to 1.70% plus the applicable margin as provided in our debt agreement on an amount of
our debt principal equal to the then-outstanding swap notional amount. The base notional amount matures two years from
inception on July 31, 2021. On the interest rate swap inception dates, we designated the swaps as a hedge of the variability in cash
flows we pay on our variable rate borrowings.
Our derivative instruments at December 29, 2018 primarily included foreign currency forward agreements related to certain
intercompany loans and certain forecasted inventory purchase commitments with foreign suppliers. The derivative instruments
were allocated to us based on a specific identification basis. Foreign currency forward agreements related to forecasted inventory
purchase commitments were designated as cash flow hedges. Foreign currency forward agreements related to foreign currency
balance sheet exposure provide economic hedges but were not designated as hedges for accounting purposes. The hedging
activities in 2018 did not have a material impact on the combined financial statements. Accordingly, additional disclosures related
to derivatives and hedging activities have been omitted.
The following table discloses the fair value and balance sheet location of our derivative instruments:
Cash Flow Hedging Instruments:
Interest rate swap contracts
Liability Derivatives
Balance Sheet Location
Other liabilities
December 31,
2019
December 29,
2018
$
1
$
—
At inception of the hedging contract, we used statistical regression to assess the effectiveness of the interest rate hedges. The
hedging contracts were deemed highly effective and are expected to be highly effective throughout the hedge period. Therefore,
we perform a qualitative assessment of the hedge effectiveness at each subsequent quarterly reporting date. As of December 31,
2019, derivative gains and losses were initially reported as a component of Other comprehensive (loss) income and subsequently
recorded in the consolidated statement of operations when the hedged transaction was recognized in earnings.
72
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The effect of cash flow hedges on Other comprehensive (loss) income was as follows:
Cash Flow Hedging Instruments:
Amounts recognized in Other comprehensive (loss) income
Location
Accumulated other comprehensive loss
Year Ended
December 31, 2019
$
(1)
Amounts reclassified out of Accumulated other
comprehensive (loss) income into earnings
Interest expense
$
1
The net amount of deferred gains on cash flow hedges that are expected to be reclassified from Accumulated other comprehensive
income (loss) into Interest expense within the next 12 months is not material.
10. Fair Value
GAAP defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that distinguishes
between (i) market participant assumptions developed based on market data obtained from independent sources (observable
inputs), and (ii) an entity’s own assumptions about market participant assumptions developed based on the best information
available in the circumstances (unobservable inputs).
We have certain financial assets and liabilities that are measured at fair value on a recurring basis, certain nonfinancial assets and
liabilities that may be measured at fair value on a non-recurring basis, and certain financial assets and liabilities that
are not measured at fair value in our consolidated and combined balance sheets, but the fair value is disclosed. The fair value
disclosures of these assets and liabilities are based on a three-level hierarchy, which is defined as follows:
• Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities
• Level 2 - Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for
identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are
observable for the asset or liability
• Level 3 - Unobservable inputs for the asset or liability
There were no changes in valuation approaches or techniques during the year ended December 31, 2019.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
Derivative contracts
Our derivatives at December 31, 2019 consisted of five interest rate swap contracts which are over-the-counter and not traded
through an exchange.
The following table presents our financial instruments measured at fair value on a recurring basis and indicates the level within
the fair value hierarchy:
Liabilities:
Interest rate swap contracts
Foreign currency forward contracts
Total liabilities
NM - Not material
See Note 9 - Derivatives and Financial Instruments for additional information.
Level
2
2
December 31,
2019
December 29,
2018
$
$
1
—
1
$
—
NM
$ NM
73
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
Assets that are measured at fair value on a nonrecurring basis primarily relate to Property and equipment, net, Operating lease
right-of-use assets, net, Goodwill, and Other intangible assets, net. We do not periodically adjust carrying value to fair value for
these assets; rather, the carrying value of the asset is reduced to its fair value when we determine that impairment has occurred. At
August 31, 2019, assets measured at fair value on a nonrecurring basis consisted of Goodwill. The fair value measurement of
goodwill was measured using both the market approach and income approach, which includes discounted expected cash flows. As
the discounted cash flows include unobservable inputs that were significant to the fair value measurement, the fair value was
classified as a Level 3 measurement within the fair value hierarchy. See Note 7 - Goodwill and Other Intangible Assets, Net.
Assets and Liabilities that are not Measured at Fair Value
Financial assets and liabilities
The carrying amounts reported on the consolidated and combined balance sheets for Cash and cash equivalents, Accounts
receivable, net, Other receivables, Accounts payable, and accrued expenses approximate their fair value due to the short maturity
of those instruments.
Investments in affiliates
There are no quoted market prices available for investments in affiliates, however, we believe the carrying amounts are a
reasonable estimate of fair value.
Long-term debt
Our Long-term debt is classified as a Level 2 instrument. The carrying amount of the term loan approximates fair value given the
underlying interest rate applied to such amounts outstanding is currently reset to the prevailing monthly market rate. See Note 8 -
Debt.
11. Commitments and Contingencies
We are involved in various legal proceedings that arise in the ordinary course of business. Substantial judgment is required in
predicting the outcome of these legal proceedings, many of which take years to adjudicate. We accrue estimated costs for a
contingency when we believe that a loss is probable and can be reasonably estimated. No material accrued loss contingencies
were recorded as of December 31, 2019.
Securities Litigation Matter
On September 30, 2019, the City of Hollywood (Florida) Police Officers' Retirement System filed a putative securities class
action lawsuit in the United States District Court for the Eastern District of New York, purportedly on behalf of purchasers of
Covetrus common stock from February 8, 2019 through August 12, 2019, against the Company, Henry Schein, Inc., our former
Chief Executive Officer and President, and our former Chief Financial Officer (“Defendants”). The complaint alleges that
Defendants violated Sections 10(b) and 20(a) of the Exchange Act by making allegedly false and misleading statements and
omissions, primarily regarding the Company’s financial prospects and the integration costs relating to the business combination
involving the Animal Health Business and Vets First Choice. The suit seeks unspecified damages, fees, interest, and costs. We
intend to defend the matter vigorously. Given the uncertainty of litigation, the preliminary stage of the case, and the legal
standards that must be met for, among other things, class certification and success on the merits, we cannot estimate the
reasonably possible loss or range of loss that may result from this action.
Purchase Obligations
We are party to an exclusive supply arrangement for certain products within the U.S. market. We amended this arrangement in
February 2020 to extend the purchase obligations until 2025.
74
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
This multi-year exclusive arrangement includes unconditional purchase obligations as reflected in the table below:
Year
2020
2021
2022
2023
2024
2025
Total
Amount
8
8
8
7
7
6
44
$
$
We paid $9 million in 2019, $9 million in 2018, and $2 million in 2017 for products purchased under this exclusive arrangement.
In 2019, we engaged a third-party for a three-year period ending December 31, 2022. We paid them $2 million in 2019. The fixed
portion of the contract is capped at $14 million while the variable portion of the contract is capped at $39 million over the term of
the engagement. We consider the contract to be of a “take-or-pay” nature due to the termination fees embedded in the contract:
fixed termination fees of $10 million until mid-May 2020, $12 million until mid-November 2020, and $14 million thereafter, plus
any variable performance fees through termination. Currently, these variable performance fees cannot be estimated as they are
calculated based on future performance achievement.
12. Redeemable Non-controlling Interests
Some minority equity owners in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership
interest in those entities. We initially record our Redeemable non-controlling interests at fair value on the date of acquisition and
subsequently adjust to redemption value. The following table presents the components of change and balances of Redeemable
non-controlling interests within the consolidated and combined balance sheets as of:
Balance at beginning of period
Decrease due to redemptions
Increase due to business acquisitions
Net (loss) income attributable to redeemable non-controlling interests
Dividends paid
Effect of foreign currency translation (loss) gain attributable to redeemable non-
controlling interests
Change to redemption value
Balance at end of period
13. Accumulated Other Comprehensive Income (Loss)
December 31,
2019
December 29,
2018
December 30,
2017
$
$
92
(74)
—
(3)
—
1
(6)
10
$
$
$
368
(383)
6
6
(10)
(2)
107
92
$
322
(26)
7
28
(20)
3
54
368
Comprehensive income (loss) includes certain gains and losses that are excluded from net income (loss) under GAAP as these
amounts are recorded directly as an adjustment to total equity.
75
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The following table presents the changes in Accumulated other comprehensive loss, net of applicable taxes, by component:
Balance as of December 31, 2016
Other comprehensive income attributable to
Covetrus before reclassifications
Balance as of December 30, 2017
Other comprehensive income (loss) attributable to
Covetrus before reclassifications
Balance as of December 29, 2018
Other comprehensive loss attributable to Covetrus
before reclassifications
Gain reclassified from Accumulated other
comprehensive loss to earnings
Balance as of December 31, 2019
(Loss) Gain
on Pension
Adjustment
Foreign
Currency
Translation
(Loss) Gain
Unrealized
Gain (Loss)
from Foreign
Currency
Hedging
Total
(2) $
(100) $
— $
(102)
Derivative
(Loss) Gain
$
— $
—
—
—
—
(1)
—
(2)
2
—
—
59
(41)
(41)
(82)
(4)
1
1
(1)
—
—
1
— $
—
— $
—
(86) $
—
— $
$
60
(42)
(40)
(82)
(5)
1
(86)
We recognized foreign currency translation gains (losses) as a component of comprehensive income due to changes in foreign
exchange rates from the beginning of the period to the end of the period. The consolidated and combined financial statements are
denominated in the U.S. dollar currency. Fluctuations in the value of foreign currencies as compared to the U.S. dollar may have a
significant impact on our comprehensive income (loss).
The tax effect on accumulated unrealized losses on derivative instruments, unrealized pension adjustment gains, and gains
recognized on derivative instruments was immaterial for all years presented.
14. Income Taxes
(Loss) income before taxes and equity in earnings of affiliates were as follows:
Domestic
Foreign
Total (loss) income before taxes and equity in earnings of affiliates
The provisions for income taxes were as follows:
Years Ended
December 31,
2019
December 29,
2018
December 30,
2017
$
$
(809) $
(220)
(1,029) $
59
84
143
$
$
69
70
139
Years Ended
December 31,
2019
December 29,
2018
December 30,
2017
Current income tax (benefit) expense:
U.S. federal
State and local
Foreign
Total current
Deferred income tax (benefit) expense:
U.S. federal
State and local
Foreign
Total deferred
Total income tax (benefit) expense
$
76
$
— $
2
16
18
(10)
(7)
(8)
(25)
(7) $
13
4
25
42
—
—
(5)
(5)
37
$
$
22
4
16
42
7
—
(1)
6
48
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Significant components of our deferred tax assets and liabilities were as follows:
Deferred income tax assets:
Investment in partnerships
Net operating losses and other carryforwards
Inventory, premium coupon redemptions, and accounts receivable valuation allowances
Share-based compensation
Other assets
Total deferred income tax assets
Valuation allowance for deferred tax assets
Net deferred income tax assets
Deferred income tax liabilities:
Intangibles amortization
Other liabilities
Total deferred income tax liabilities
Net deferred income tax (liabilities) assets
Years Ended
December 31,
2019
December 29,
2018
$
$
$
96
38
—
7
12
153
(49)
104
(125)
(6)
(131)
(27) $
72
3
1
—
1
77
(1)
76
(20)
—
(20)
56
The deferred income tax assets (liabilities) are classified in the consolidated and combined balance sheets as follows:
Non-current deferred income tax assets, net (a)
Non-current deferred income tax liabilities, net
Non-current deferred income tax (liabilities) assets
(a) Included in Investments and other
December 31,
2019
December 29,
2018
$
$
$
20
(47)
(27) $
72
(16)
56
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The assessment of the amount of value assigned to
the deferred tax assets under the applicable accounting rules is judgmental.
The valuation allowance was $49 million as of December 31, 2019 and $1 million as of December 29, 2018. In assessing the
realizability of deferred tax assets, management considers whether it is more likely than not that some or all the deferred tax
assets will be realized. The ultimate realization of deferred taxes assets is dependent upon generation of future taxable income
during the period in which those temporary differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and taxable income in carryback years and tax-planning strategies when
making this assessment. In evaluating whether it is more likely than not that our deferred tax assets would be recovered, we
considered various potential sources of positive and negative evidence including historical cumulative income or loss, projections
of future taxable income, available tax planning strategies which are prudent and feasible to implement, and future reversals of
existing taxable temporary differences.
In the fourth quarter of 2019, we incurred additional losses which, for the first time, created a three-year cumulative loss in the
U.S. We determined that the cumulative loss represented a significant piece of negative evidence which is difficult to overcome in
determining whether a valuation allowance was required. The cumulative loss caused us to reassess the weight of other available
evidence at September 30, 2019. That reassessment resulted in our conclusion that negative evidence at September 30, 2019
outweighed the positive which resulted in the need for a revision.
77
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
We revised our consolidated financial statements for our quarter ended September 30, 2019, see Note 1 - Business Overview and
Significant Accounting Policies. We determined that these amounts are not material to our previously issued quarterly financial
statements. The impact to our previously issued consolidated financial statements was as follows:
Consolidated Balance Sheet:
Non-current deferred income tax assets, net (a)
Total assets
Deferred income taxes
Total liabilities
Accumulated deficit
Total shareholders’ equity
Total liabilities, redeemable non-controlling interests, and
shareholders’ equity
(a) Included in Investments and other
Consolidated Statement of Operations:
Income tax benefit (expense)
Net (loss) income
Net (loss) income attributable to Covetrus
(Loss) earnings per share attributable to Covetrus:
Basic
Diluted
As of September 30, 2019
Previously
Reported
Revision
As Revised
$
38
3,328
11
1,989
(939)
1,329
(19) $
(19)
34
34
(53)
(53)
19
3,309
45
2,023
(992)
1,276
3,328
$
(19) $
3,309
Quarter Ended September 30, 2019
Previously
Reported
Revision
As Revised
$
60
(909) $
(906) $
(8.09) $
(8.09) $
(53) $
(53) $
(53) $
(0.47) $
(0.47) $
7
(962)
(959)
(8.56)
(8.56)
$
$
$
$
$
$
$
The balance sheet contains assets and liabilities held for sale. The amounts of deferred tax assets and liabilities held for sale at
December 31, 2019 were not material.
At December 31, 2019, we had the following tax loss and tax credit carryforwards available to offset taxable income in prior and
future years:
U.S. federal tax loss carryforwards
U.S. federal and state interest carryforwards
U.S. state tax loss carryforwards
Non-U.S. tax loss carryforwards
Total tax loss and tax credit carryforwards
Amount
21
8
5
4
38
$
$
$
$
$
Expiration Period
2023 - unlimited
unlimited
2020 - 2039
2020 - unlimited
The U.S. state tax loss carryforwards were incurred in various jurisdictions. The non-U.S. tax loss carryforwards were incurred in
various jurisdictions, predominantly France, Germany, Poland, Sweden, and the U.K.
78
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The tax provision (benefit) differs from the amount computed by applying the federal statutory income tax rate due to the
following:
Income tax provision at federal statutory rate
Transition tax on deemed repatriation of foreign earnings
Pass through non-controlling interest
State income tax provision, net of federal income tax effect
Foreign income tax provision (benefit)
Tax on GILTI
Excess tax benefits related to share-based compensation
Revaluation of deferred tax assets and liabilities
Valuation allowance impacts
Goodwill impairment
Other
Total income tax provision
Years Ended
December 31,
2019
December 29,
2018
December 30,
2017
21.0%
—
—
0.5
0.3
(0.9)
—
(0.9)
(3.9)
(14.4)
(1.0)
0.7%
21.0%
2.8
(2.1)
1.4
1.4
1.4
(0.7)
—
—
—
0.7
25.9%
35.0%
9.4
(7.9)
2.0
(6.2)
—
(2.9)
5.3
—
—
(0.1)
34.6%
We file U.S. federal and various state and local income tax returns as well as income tax returns in 25 foreign jurisdictions. Tax
returns are generally subject to examination for a period of three to five years after the filing of the respective return. The tax
years subject to examination by major tax jurisdictions include the years 2016 and forward by the U.S. Internal Revenue Service,
the years 2015 and forward for certain state and local jurisdictions, and the years 2011 and forward for certain foreign
jurisdictions.
The Tax Act is comprehensive tax legislation that implemented complex changes to the U.S. tax code and also moved from a
global tax regime to a modified territorial regime, which required U.S. companies to pay a mandatory one-time transition tax on
historical offshore earnings that have not been repatriated to the U.S., provisions for GILTI, a beneficial tax rate on FDII, BEAT
that imposes tax on certain foreign related-party payments, and interest limitation. We became subject to the GILTI, FDII, BEAT
and interest limitation provisions effective January 1, 2018.
We elected to recognize the tax on GILTI as a period expense in the period the tax is incurred and estimated the impact of each
provision of the Tax Act on the effective tax and recorded tax expense for the GILTI provision of $10 million and an interest
limitation of $7 million for the year ended December 31, 2019. We recorded a tax expense for the GILTI provision of $2 million
for the year ended December 29, 2018. We have concluded that the BEAT and FDII provisions of the Tax Act will not apply to or
will not have a material impact on our consolidated and combined financial statements, therefore, we have not recorded an
estimate for these items in the effective tax rate for the years ended December 29, 2018 and December 31, 2019.
Due to the complexities of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) that allowed us to
record a provisional amount for any income tax effects of the Tax Act in accordance with ASC 740, to the extent that a reasonable
estimate could be made, in our 2017 combined financial statements. SAB 118 allowed for a measurement period of up to one year
after the enactment date of the Tax Act to finalize the recording of the related tax impacts.
In the fourth quarter of 2017, we recorded provisional amounts related to the Tax Act for any items that could be reasonably
estimated at the time. This included the one-time transition tax that we estimated to be $13 million and a net deferred tax expense
of $7 million attributable to the revaluation of deferred tax assets and liabilities due to the lower-enacted federal income tax rate
of 21%. In the aggregate, for the quarter ended December 30, 2017, these Tax Act modifications resulted in a one-time tax
expense of $20 million. Absent the effects of the transition, the revaluation of deferred tax assets and liabilities, and the adoption
of ASU 2016-09, “Accounting for Stock Compensation,” our effective tax rate for the year ended December 30, 2017, would have
been 22.8% as compared to our actual effective tax rate of 34.6%.
For the year ended December 29, 2018, we recorded $4 million additional expense for the one-time transition tax. The change
was a result of additional analysis, changes in interpretation and assumptions, as well as additional regulatory guidance that was
issued. As of December 29, 2018, we completed our analysis of the impact of the Tax Act in accordance with SAB 118 and the
amounts are final.
79
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Due to the one-time transition tax and the imposition of the GILTI provisions, all previously unremitted earnings will no longer be
subject to U.S. federal income tax, however, there could be U.S. state and/or foreign withholding taxes upon distribution of such
unremitted earnings. Determination of the amount of unrecognized deferred tax liability with respect to such earnings is not
practicable.
ASC Topic 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements in accordance
with other provisions contained within the guidance. This topic prescribes a recognition threshold and a measurement attribute for
the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those
benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing
authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized
upon ultimate audit settlement. In the normal course of business, our tax returns are subject to examination by various taxing
authorities. Such examinations may result in future tax and interest assessments by these taxing authorities for uncertain tax
positions taken in respect to certain tax matters.
The following table provides a reconciliation of unrecognized tax benefits which are included in Other liabilities within the
balance sheets:
Balance at beginning of period
Additions based on prior year tax positions
Reductions from lapse in statutes of limitations
Balance at end of period
Years Ended
December 31,
2019
December 29,
2018
December 30,
2017
$
$
6
—
(2)
4
$
$
8
2
(4)
6
$
$
8
1
(1)
8
The amount of unrecognized tax benefits that would affect the effective tax rate if recognized during the year ended December 31,
2019 would be $4 million. We believe that it is reasonably possible that a decrease of up to $1 million in unrecognized tax
benefits related to foreign tax exposures may be necessary in the coming year due to lapses of statute of limitations.
The balance sheet at December 31, 2019 contains unrecognized tax benefits of $1 million related to assets held for sale.
We recognize interest and penalties related to unrecognized tax benefits as components of Income tax (benefit) expense in the
statements of operations and accrued $2 million in 2019 and $1 million in 2018.
15. Earnings Per Share
On February 7, 2019, Henry Schein distributed approximately 71 million shares of Covetrus common stock to its shareholders.
The computation of basic earnings per common share (“EPS”) for periods prior to the Separation was performed using the shares
distributed by Henry Schein on February 7, 2019. The weighted-average number of shares outstanding for diluted EPS for the
periods prior to the Separation also includes approximately 1 million of diluted common share equivalents for restricted stock and
restricted stock units as these share-based awards were previously issued by Henry Schein, outstanding at the time of the
Separation, and were assumed by Covetrus following the Separation.
Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted-average number of
shares of common stock outstanding during the period. In addition, the shares of common stock issuable pursuant to restricted
stock awards, restricted stock units, and stock options outstanding under our 2019 Omnibus Incentive Compensation Plan are
included in the diluted EPS calculation to the extent they are dilutive.
80
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The following is a reconciliation of the numerator and denominator of the basic and diluted EPS computation for net (loss)
earnings per share:
Numerator:
Net (loss) income attributable to Covetrus
Denominator:
Basic
Weighted-average common shares outstanding
Diluted
Effect of dilutive shares (a)
Diluted shares
Basic (loss) earnings per share
Diluted (loss) earnings per share
December 31,
2019
December 29,
2018
December 30,
2017
$
(1,019) $
101
$
64
107
—
107
(9.50) $
(9.50) $
71
1
72
1.41
1.40
$
$
71
1
72
0.90
0.89
$
$
(a) Shares from share-based awards are not included for periods with a net loss because they would be anti-dilutive. See Note 16 - Share-based Compensation
and Other Employee Benefits
16. Share-based Compensation and Other Employee Benefits
Share-based Compensation Plan
In connection with the Separation, Distribution, and Acquisition, all outstanding restricted stock awards (“RSAs”), restricted stock
units (“RSUs”), and stock options of Henry Schein and Vets First Choice were exchanged for economically equivalent awards of
Covetrus. RSAs and RSUs totaling 327,447 and stock options of 3,914,694 were issued in connection with the exchange.
On February 7, 2019, we adopted the 2019 Omnibus Incentive Compensation Plan (the “Plan”) which authorizes Covetrus'
Compensation Committee of the Board of Directors to grant stock options, stock awards, stock units, stock appreciation rights,
other share-based awards, and cash awards. Awards may be granted to employees, consultants, advisors, and non-employee
Directors of Covetrus and our subsidiaries. Awards issued under the Plan may not have a term greater than 10 years from the date
of grant, generally vest ratably over a three-year period, and must be issued at a price of not less than 100% of the fair market
value at the date of grant.
We reserved 11,527,675 shares of our common stock for issuance under the Plan. In addition, to the extent that awards
outstanding under the Plan are cancelled, forfeited, or otherwise terminated without being exercised, the number of shares
underlying such awards will be available for future grant under the Plan.
We recognized pre-tax share-based compensation expense of $46 million ($40 million after-tax) in 2019, $7 million ($6 million
after-tax) in 2018, and $7 million ($4 million after-tax) in 2017. No share-based compensation cost was capitalized as part of an
asset.
Stock Options
We grant stock options at an exercise price equal to the closing market price of our stock on the grant date. We use the Black-
Scholes pricing model to determine the fair value of options granted and have elected the accrual method for recognizing
compensation costs. The fair value of share-based payment awards calculated using the Black-Scholes model varies based on
share price, award exercise price, stock volatility, expected term, risk free interest rate, expected dividends, and the assumptions
used in determining these variables. No stock options were granted during 2017 and 2018.
81
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The following table summarizes our stock option activity under the Plan for the year ended December 31, 2019:
Stock Options
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Exercisable at end of year
Weighted-
average
Exercise
Price
Per Share
—
14.03
Number
of Shares
— $
5
(1)
—
4
2
$
$
Weighted-
average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
5.14
18.66
15.29
9.25
6.9 years
5.2 years
$
$
16
12
The following table provides the weighted-average grant-date fair value and related valuation assumptions for these awards
granted during the year ended December 31, 2019:
Weighted-average grant-date fair value
Valuation assumptions:
Expected term
Risk-free interest rate
Expected volatility
Expected dividend rate
We received cash from option exercises of $4 million during 2019.
RSAs/RSUs
$
14.03
6.0 years
1.8%
29.9%
—%
We grant RSAs and RSUs at an exercise price equal to the closing market price of our stock on the grant date.
The following table summarizes our RSA/RSU activity under the Plan for the year ended December 31, 2019:
Restricted Stock Awards/Restricted Stock Units
Nonvested at beginning of year
Granted
Vested
Forfeited
Nonvested at end of year
Weighted-
average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Number
of Shares
Weighted-
average
Grant Date
Fair Value
Per Share
76.86
27.83
66.84
— $
2
—
—
2
$
36.11
25.69
1.6 years
$
22
The weighted-average grant-date fair values for these awards granted during each of the last three years were as follows:
Weighted-average grant-date fair value
$
27.83
$
65.26
$
85.90
December 31, 2019
December 29, 2018
December 30, 2017
82
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Additional Information
As of December 31, 2019, there was $75 million in unrecognized compensation expense related to nonvested share-based awards
that is expected to be recognized over a weighted-average period of 2.4 years.
The following table provides further information related to our share-based awards for the last three years:
Intrinsic value of stock options exercised
Fair value of RSA/RSU shares vested
Employee Stock Purchase Plan
December 31, 2019
December 29, 2018
December 30, 2017
$
$
15
3
$
$
— $
$
2
—
—
On February 7, 2019, we adopted the Employee Stock Purchase Plan (the “ESPP”) and approved 2,223,864 shares for issuance
under this plan. The share reserve will increase automatically on the first trading day of January of each calendar year beginning
January 1, 2020. The ESPP is administered by the Compensation Committee.
The ESPP provides for the issuance of shares of our common stock to participating employees. At the end of each designated
offering period, which occurs every six months on May 31 and November 30, employees can elect to purchase shares of our
common stock with contributions of up to 15% of their base pay, accumulated via payroll deductions, at an amount equal to 85%
of the lower of our stock price on (i) the first day of the offering period, or (ii) the last day of the offering period. For the year
ended December 31, 2019, activity under the ESPP was not material.
Annual Incentive Plan
Our Compensation Committee adopted the Annual Incentive Plan (the “AIP”) on February 7, 2019. The AIP provides pay for
performance incentive compensation to our employees, including our named executive officers, rewarding them for their
contributions to us with incentive compensation based on attainment of predetermined corporate performance goals, as applicable.
Our Compensation Committee designates participants in the AIP for each performance period and may establish corporate
performance goals and individual performance goals for our named executive officers under the AIP. The Compensation
Committee may subsequently adjust the performance goals to consider such unanticipated circumstances or significant events as
our Compensation Committee determines.
Our Compensation Committee is responsible for administering the AIP and has full discretionary authority under the AIP and the
authority to take any actions it deems necessary or advisable in carrying out its duties thereunder, including delegating their
authority under the AIP.
For the year ended December 31, 2019, we recorded compensation expense of $7 million associated with the AIP.
401(k) Plan
Covetrus maintains a qualified 401(k) plan covering eligible employees of certain of the U.S. entities as well as certain other
defined contribution plans. Matching contributions and administrative expenses related to these plans were $9 million in 2019, $6
million in 2018, and $6 million in 2017.
17. Related-party Transactions
Long-term Debt
As of December 29, 2018, the combined financial statements included long-term debt with Darby Group Companies, Inc. and
M&S Investment Holding I LLC, each a related party of the Former Parent and the Animal Health Business. Prior to the
Separation and Distribution date of February 7, 2019, the Former Parent repaid the Animal Health Business’ long-term debt.
83
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Allocation of General Corporate Expenses
As discussed in Note 1 - Business Overview and Significant Accounting Policies, we were allocated general corporate expenses of
$5 million in 2019, $55 million in 2018, and $59 million in 2017 which are included within Selling, general and administrative in
the consolidated and combined statements of operations.
Net Former Parent Investment
The net transfers from the Former Parent are reflected in equity on the consolidated and combined balance sheets and statements
of shareholders' equity.
A reconciliation of Net Former Parent investment in the consolidated and combined statements of equity to the corresponding
amount presented on the consolidated and combined statements of cash flows for all periods presented were as follows:
December 31,
2019
December 29,
2018
December 30,
2017
Net transfers from Former Parent from statements of shareholders' equity
Share-based compensation expense
Changes to redemption value of redeemable non-controlling interests
Other
Total net transfers from Former Parent from statements of cash flows
$
$
18. Segment Data
172
$
—
(6)
(1)
165
$
174
(7)
107
—
$
274
$
13
(7)
54
2
62
In connection with the Separation, Distribution, and Acquisition, we revised our reportable segments to reflect how the chief
operating decision maker (the chief executive officer) (the “CODM”) reviews financial information and makes operating
decisions. This resulted in a change in the operating segments from (i) supply chain and (ii) technology and value-added services
to (i) North America, (ii) Europe, and (iii) APAC & Emerging Markets. While the historical business was focused on driving
growth through specific product and service offerings to its customers, the Separation, Distribution, and Acquisition allowed for
the integration of the different products and service offerings, along with prescription management, data analytics, and
insights through veterinary practice management software into one multi-channel veterinary platform. We will focus on delivering
the integrated platform of products and services to our customers on a geographical basis.
During the second quarter of 2019, our CODM began evaluating segment profit (loss) solely based on Adjusted EBITDA. In the
prior period, our CODM was using both operating income and Adjusted EBITDA for measurement purposes, thus operating
income was presented as it most closely reflected the measurement principle applied to our consolidated and combined financial
statements. We do not allocate expenses managed at the corporate level to our segments, such as corporate wages and related
benefits, corporate occupancy costs, professional services utilized at the corporate level, and non-recurring expenses. All
intersegment balances and transactions have been eliminated in consolidation.
84
3,976
202
155
7
3,361
39
(1,019)
155
53
(7)
(818)
46
2
34
11
5
6
938
(3)
(19)
202
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The following tables reflect our segment information and Corporate, the segment recast for the prior years, and reconciles
Adjusted EBITDA for reportable segments to consolidated net (loss) income attributable to Covetrus:
At and For the Year Ended December 31, 2019
Net sales
Adjusted EBITDA
Depreciation and amortization
Income tax benefit (expense)
Total assets
Expenditures for long-lived assets
North
America
$
$
$
$
$
$
2,111
154
131
8
2,941
23
$
$
$
$
$
$
Europe
1,509
$
$
68
$
18
(3) $
$
726
10
$
APAC &
Emerging
Markets
Corporate
Eliminations
Total
368
$
$
19
$
6
(4) $
$
137
1
$
— $
(39) $
— $
6
783
5
$
$
$
(12) $
— $
— $
— $
(1,226) $
— $
Reconciliation of Net Loss Attributable to Covetrus to Adjusted EBITDA:
Net loss attributable to Covetrus
Plus: Depreciation and amortization
Plus: Interest expense, net
Less: Income tax benefit
Earnings before interest, taxes, depreciation, and amortization
Plus: Share-based compensation
Plus: Transaction costs
Plus: Formation of Covetrus
Plus: Separation programs and executive severance
Plus: Carve-out operating expenses
Plus: IT infrastructure
Plus: Goodwill impairment
Less: Minority interest in goodwill impairment
Less: Other (income) expense items, net
Adjusted EBITDA
$
$
85
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
At and For the Year Ended December 29, 2018
Net sales
Adjusted EBITDA
Depreciation and amortization
Income tax expense
Total assets
Expenditures for long-lived assets
North
America
Europe
APAC &
Emerging
Markets
$
$
$
$
$
$
1,939
157
$
$
41
$
(18) $
1,343
14
$
$
1,463
75
$
$
17
$
(15) $
$
702
$
7
387
20
$
$
6
$
(3) $
$
$
182
1
Reconciliation of Net Income Attributable to Covetrus to Adjusted EBITDA:
Net income attributable to Covetrus
Plus: Depreciation and amortization
Plus: Interest expense, net
Plus: Income tax expense
Earnings before interest, taxes, depreciation, and amortization
Plus: Share-based compensation
Plus: Separation programs and executive severance
Adjusted EBITDA
Corporate
Eliminations
Total
— $
(32) $
— $
(1) $
$
10
— $
(11) $
— $
— $
— $
(4) $
— $
$
3,778
220
64
(37)
2,233
22
101
64
2
37
204
7
9
$
220
Net sales
Adjusted EBITDA
Depreciation and amortization
Income tax expense
Total assets
Expenditures for long-lived assets
At and For the Year Ended December 30, 2017
North
America
Europe
APAC &
Emerging
Markets
1,876
$
1,373
$
349 $
136 $
38 $
(34) $
1,301
$
13 $
62 $
16 $
(11) $
735
$
7 $
16 $
5
$
(2) $
174
1
$
$
$
$
$
$
$
$
Corporate
Eliminations
Total
— $
(37) $
— $
(1) $
11 $
— $
(18) $
3,580
— $
— $
— $
(4) $
— $
177
59
(48)
2,217
21
Reconciliation of Net Income Attributable to Covetrus to Adjusted EBITDA:
Net income attributable to Covetrus
Plus: Depreciation and amortization
Plus: Interest expense, net
Plus: Income tax expense
Earnings before interest, taxes, depreciation, and amortization
Plus: Share-based compensation
Adjusted EBITDA
$
$
64
59
2
48
173
4
177
See Note 4 - Revenue from Contracts with Customers for our revenue disaggregated by major product category and reportable
segment.
19. Subsequent Events
In January 2020, we entered into an agreement to combine our business operating in Spain and Portugal with Distrivet, a leading
provider of veterinary products and services in Spain. We will own 50.01% of the new company, to be called Distrivet, a Covetrus
86
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
company. The transaction is expected to close during the second quarter ended June 30, 2020, subject to satisfaction of customary
closing conditions, including regulatory clearance.
20. Summary of Quarterly Data (Unaudited)
A summary of quarterly data follows:
Net sales
Gross profit (a)
Goodwill impairment
Operating loss
Net loss attributable to Covetrus (b)
Loss per share: (b)
Basic
Diluted
For the Three Months Ended
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
941
$
177
$
— $
(9) $
(13) $
1,009
$
1,018
$
1,008
193
$
— $
(5) $
(10) $
$
191
$
939
(958) $
(959) $
188
(1)
(25)
(37)
(0.14) $
(0.14) $
(0.09) $
(0.09) $
(8.56) $
(8.56) $
(0.33)
(0.33)
$
$
$
$
$
$
$
(a) 2019 quarterly data reflects a reclassification of Vets First Choice shipping expenses that were previously included in Selling, general and administrative
into Cost of sales to classify these Vets First Choice shipping expenses consistently with the rest of our business.
(b) The third quarter ended September 30, 2019 includes a revision (see Note 14 - Income Taxes).
Net sales
Gross profit
Operating income
Net income attributable to Covetrus
Earnings per share:
Basic
Diluted
For the Three Months Ended
March 31,
2018
June 30,
2018
September 30,
2018
December 29,
2018
$
$
$
$
$
$
947
176
32
23
0.32
0.31
$
$
$
$
$
$
1,005
183
38
29
0.40
0.40
$
$
$
$
$
$
923
166
34
16
0.22
0.22
$
$
$
$
$
$
903
159
33
33
0.47
0.46
87
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rule 13a-15(f) or 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of our assets,
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors, and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”),
evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated
under the Exchange Act) at December 31, 2019. Based on this evaluation, the CEO and CFO concluded that as of that date, our
disclosure controls and procedures required by paragraph (b) of Rules 13a-15 or 15d-15 were not effective, at a reasonable
assurance level, because of material weaknesses in our internal control over financial reporting, which we view as an integral part
of our disclosure controls and procedures.
As previously disclosed in our Form 10-Q for the quarter ended September 30, 2019, Management identified deficiencies in our
internal control over financial reporting which are related to the operation of information technology general controls (“ITGCs”)
in the areas of logical security and change management in certain financially relevant systems. A material weakness is a
deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely
basis. Management has determined that the aggregate impact of these deficiencies resulted in the following material weakness:
•
ITGCs: deficiencies in certain financially relevant systems used by us resulted in the risk of failure of other automated
controls and other controls that rely on data from these applications, primarily in change management and logical
security functions.
The material weakness did not result in any identified misstatements in the current period consolidated financial statements, nor in
any restatements of combined financial statements previously reported by us, and there were no changes in previously released
financial results. We developed remediation plans for this material weakness as follows:
•
•
•
Improving the operation and monitoring of control activities and procedures associated with logical security including
user and administrator access to the affected IT systems, including both preventive and detective control activities,
Improving the operation of program change management control activities to track authorizations to changes and
emergency change management procedures across the affected IT systems, including both preventive and detective
controls activities, and
Implementing additional training for resources in the functional areas that support and monitor our IT systems and
information generated therefrom.
During the fourth quarter ended December 31, 2019, Management identified deficiencies in our internal control over financial
reporting which relate to the accounting for income taxes and determined the impact of these deficiencies resulted in a material
weakness. This material weakness stemmed from issues associated with the transition to establish expanded in-house tax capabilities
88
and utilization of new tax consultants. As a result of these issues, our controls to review and analyze the Company's income tax
provision and deferred income tax balances did not operate effectively.
The material weakness described above resulted in certain material and immaterial misstatements in the preliminary financial
statement accounts that were adjusted prior to the issuance of the annual consolidated financial statements. We developed remediation
plans for this material weakness as follows:
Increasing oversight by our management in the calculation and reporting of certain tax balances of our global operations,
•
• Enhancing policies, procedures, and controls relating to significant judgments impacting our income tax accounts,
• Augmenting our tax accounting resources,
•
•
Increasing communication to information providers for tax jurisdiction specific information, and
Strengthening communication and information flows between the tax department and the finance group.
Management believes that these efforts will effectively remediate the material weaknesses. However, the material weaknesses in
our internal control over financial reporting will not be considered remediated until (i) the controls are fully implemented and
existing controls are reinforced, (ii) the controls are in operation for a sufficient period of time, and (iii) the controls are tested and
concluded by management to be designed and operating effectively. We cannot provide any assurance that these remediation
efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. In
addition, as we continue to evaluate and work to improve our internal control over financial reporting, management may
determine to take additional measures to address control deficiencies or determine to modify the remediation plans described
above. Management will test and evaluate the implementation of these revised processes and internal controls to ascertain
whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material
error in our financial statements.
Changes in Internal Control over Financial Reporting
Other than as described above, there have been no other changes in our internal control over financial reporting during the most
recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations of the Effectiveness of Internal Control
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation
of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
Item 9B. Other Information
We executed an Amendment, dated as of February 27, 2020, to the Credit Agreement dated as of February 7, 2019, by and among
Vet Intermediate Holdco II, LLC, JP Morgan Chase Bank, N.A., and the several banks and other financial institutions from time
to time. See Part IV, Item 15, Exhibits and Financial Statement Schedules, Exhibit 10.31.
On March 3, 2020, our Board of Directors appointed Benjamin Wolin as our President and Chief Executive Officer. Mr. Wolin
had been serving as our acting President and Chief Executive Officer since October 2019. Mr. Wolin’s biographical information
can be found in Item 1, Business under the caption Employees and Executive Officers. We anticipate that we will enter into a
mutually acceptable employment agreement with Mr. Wolin, which will be disclosed on a Form 8-K filing.
89
Item 10. Directors, Executive Officers, and Corporate Governance
PART III
The information required by this item of Form 10-K is incorporated by reference to our definitive proxy statement (which will be
filed with the SEC pursuant to Regulation 14A under the Exchange Act) relating to our 2020 Annual Meeting of Shareholders
(our “2020 Proxy Statement”).
Item 11. Executive Compensation
The information required by this item is incorporated by reference to our 2020 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table summarizes information as of December 31, 2019, about our equity compensation plans under which we have
made grants of restricted stock, restricted stock units, and options.
Plan Category
Equity compensation plans approved by common
shareholders
Equity compensation plans not approved by common
shareholders
Number of Securities to
be Issued Upon Exercise
of Outstanding Rights
and Options (a)
Weighted-average Price
of Options (b)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (c)
5,573,706
$
— $
15.29
—
16,531,361
—
(a) Includes 1,633,499 restricted stock units (RSUs) and 77,648 restricted stock awards (RSAs), and 3,862,559 stock options issued under our 2019 Omnibus
Incentive Compensation Plan.
(b) RSUs have no exercise price. Their value depends on continued employment or service over time and are settled for shares of common stock. Accordingly,
these have been disregarded for purposes of computing the weighted-average exercise price.
(c) 2,101,144 shares are available for purchase under our employee stock purchase plan as of December 31, 2019 and 127,748 shares are subject to purchase
during the offering period December 1, 2019 to May 31, 2020.
Other information required by this item is incorporated by reference to our 2020 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to our 2020 Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to our 2020 Proxy Statement.
90
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a) (1)
(a) (2)
Financial Statements: See “Index to Consolidated and Combined Financial Statements”
Financial Statement Schedules: None
We have omitted schedules for which provision is made in the applicable accounting regulations of
the SEC because they are not required under the related instructions, or they do not apply.
Page
48
(a) (3)
Exhibits:
Exhibit
Number
Exhibit Description
2.1
2.2
2.3
2.4
2.5
2.6
3.1
3.2
4.1
4.2*
10.1
10.2
10.3
10.4
10.5
Contribution and Distribution Agreement, dated as of April 20, 2018, by and among
Henry Schein, Inc., HS Spinco, Inc., Direct Vet Marketing, Inc. and Shareholder
Representative Services LLC
Agreement and Plan of Merger, dated as of April 20, 2018, by and among Henry
Schein, Inc., HS Spinco, Inc., HS Merger Sub, Inc., Direct Vet Marketing, Inc. and
Shareholder Representative Services LLC
Letter Agreement, Amendment No. 1 to Contribution and Distribution Agreement
and Amendment No. 1 to Agreement and Plan of Merger, dated as of September 14,
2018, by and among Henry Schein, Inc., HS Spinco, Inc., HS Merger Sub, Inc.,
Direct Vet Marketing, Inc. and Shareholder Representative Services LLC
Letter Agreement and Amendment No. 2 to Contribution and Distribution
Agreement, dated as of November 30, 2018, by and among Henry Schein, Inc., HS
Spinco, Inc., Direct Vet Marketing, Inc. and Shareholder Representative Services
LLC
Letter Agreement, Amendment No. 3 to Contribution and Distribution Agreement
and Amendment No. 2 to Agreement and Plan of Merger, dated as of December 25,
2018, by and among Henry Schein, Inc., HS Spinco, Inc., HS Merger Sub, Inc.,
Direct Vet Marketing, Inc. and Shareholder Representative Services LLC
Letter Agreement and Amendment No. 4 to Contribution and Distribution
Agreement, dated as of January 15, 2019, by and among Henry Schein, Inc., HS
Spinco, Inc., Direct Vet Marketing, Inc. and Shareholder Representative Services
LLC
Amended and Restated Certificate of Incorporation of Covetrus, Inc.
Amended and Restated Bylaws of Covetrus, Inc.
Specimen Common Stock Certificate
Description of the Registrant’s Securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934
Credit Agreement, dated as of February 7, 2019, by and among Vet Intermediate
Holdco II, LLC, JP Morgan Chase Bank, N.A., and the several banks and other
financial institutions from time to time party thereto
Form
Date
No.
S-4
12/26/2018
2.1
S-4
12/26/2018
2.2
S-4
12/26/2018
2.3
S-4
12/26/2018
2.4
S-4
12/26/2018
2.5
S-4/A
1/15/2019
2.6
S-4/A
1/15/2019
S-4/A
S-4/A
1/8/2019
1/8/2019
3.4
3.5
4.1
8-K
2/7/2019
10.1
Guarantee and Collateral Agreement, dated as of February 7, 2019, by and among
Vet Intermediate Holdco II, LLC and JP Morgan Chase Bank, N.A.
8-K
2/7/2019
10.2
Employee Matters Agreement, dated as of April 20, 2018, by and among Henry
Schein, Inc., HS Spinco, Inc. and Direct Vet Marketing, Inc.
S-4
12/26/2018
10.1
Transition Services Agreement, dated as of February 7, 2019, by and between Henry
Schein, Inc. and HS Spinco, Inc.
8-K
2/7/2019
10.4
Letter Agreement to Transition Services Agreement, dated as of February 7, 2019, by
and between Covetrus, Inc. and Henry Schein, Inc.
8-K
2/7/2019
10.5
91
Exhibit
Number
10.6
10.7
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18†
10.19†
10.20
10.21
10.22
10.23
10.24
10.25†
10.26†
10.27†
10.28†
10.29†
10.30†
Tax Matters Agreement, dated as of January 7, 2019, by and among Henry
Schein, Inc., HS Spinco, Inc. and Direct Vet Marketing, Inc.
Exhibit Description
Escrow Agreement, dated as of February 7, 2019, by and among Henry Schein,
Inc., HS Spinco, Inc., Shareholder Representative Services LLC and Continental
Stock Transfer & Trust Company
Form
S-4/A
Date
1/8/2019
No.
10.3
8-K
2/7/2019
10.3
Form of Indemnification Agreement between HS Spinco, Inc. and each of its
directors and executive officers
S-4
12/26/2018
10.5
Direct Vet Marketing, Inc. 2010 Stock Incentive Plan
Amendment to Direct Vet Marketing, Inc. 2010 Stock Incentive Plan dated
June 30, 2017
Amendment to Direct Vet Marketing, Inc. 2010 Stock Incentive Plan dated
December 6, 2017
Covetrus 2019 Omnibus Incentive Compensation Plan, and forms of agreement
thereunder
Covetrus Employee Stock Purchase Plan
Covetrus Annual Incentive Plan
Employment Agreement, dated as of February 7, 2019, by and between HS
Spinco, Inc. and Benjamin Shaw
S-4
12/26/2018
S-4
12/26/2018
10.6
10.7
S-4
12/26/2018
10.8
S-4
12/26/2018
10.9
S-4
12/26/2018
10.10
S-4/A
1/8/2019
10.11
8-K
2/7/2019
10.8
Employment Agreement, dated as of February 7, 2019, by and between HS
Spinco, Inc. and Christine T. Komola
8-K
2/7/2019
10.9
Employment Agreement, dated as of February 7, 2019, by and between HS
Spinco, Inc. and Francis Dirksmeier
8-K
2/7/2019
10.10
Employment Agreement, dated as of February 7, 2019, by and between HS
Spinco, Inc. and David Christopher Dollar
8-K
2/7/2019
10.11
Employment Agreement, dated as of February 7, 2019, by and between HS
Spinco, Inc. and Georgina Wraight
8-K
2/7/2019
10.12
Lease Agreement, dated as of August 20, 2018, by and between 86 Newbury
Street LLC and Direct Vet Marketing, Inc.
Lease Agreement, dated as of August 20, 2018, by and between 86 Newbury
Street LLC and VFC Pharmacy #101, LLC
Lease Agreement, dated as of June 22, 2018, by and between Northgate Office,
LLC and Direct Vet Marketing, Inc.
S-4
12/26/2018
10.16
S-4
12/26/2018
10.17
S-4
12/26/2018
10.18
Stock Subscription and Purchase Agreement, dated as of December 25, 2018, by
and among Henry Schein, Inc., HS Spinco, Inc. and the purchasers party thereto
S-4
12/26/2018
10.19
Registration Rights Agreement, dated as of December 25, 2018, by and among
HS Spinco, Inc. and the other parties thereto
Non-Employee Director Compensation Policy of Covetrus, Inc.
Separation and Release Agreement, dated October 21, 2019, by and between the
Company and Benjamin Shaw
Employment Agreement, dated as of October 29, 2019, by and between
Covetrus, Inc. and Benjamin Wolin
Separation and Release Agreement, dated as of January 15, 2020, by and
between Covetrus, Inc. and Christine T. Komola
Form of Performance Stock Unit Agreement
Form of Performance Stock Unit Agreement for Non-U.S. Participants
S-4
12/26/2018
10.20
8-K
3/5/2019
8-K 10/22/2019
10.7
10.1
8-K
11/4/2019
10.1
8-K
1/21/2020
10.1
8-K
8-K
1/21/2020
1/21/2020
10.1
10.2
92
Form
Date
No.
Exhibit
Number
10.31*
21.1*
23.1*
31.1*
31.2*
32.1**
32.2**
Exhibit Description
First Amendment, dated as of February 27, 2020, to the Credit Agreement dated
as of February 7, 2019, by and among Vet Intermediate Holdco II, LLC, JP
Morgan Chase Bank, N.A., and the several banks and other financial institutions
from time to time
Subsidiaries of the Registrant
Consent of BDO USA, LLP, Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
Certification of the Chief Financial Officer, as required by Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
Certification of the Chief Executive Officer, as required by Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
Certification of the Chief Financial Officer, as required by Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith
** Furnished and not filed herewith
† Indicates management contract or compensatory plan
Item 16. 10-K Summary
None
93
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 3, 2020
COVETRUS, INC.
By:
/s/ Benjamin Wolin
Benjamin Wolin
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Benjamin Wolin
Benjamin Wolin
/s/ Stuart B. Gleichenhaus
Stuart B. Gleichenhaus
/s/ Laura J. Phillips
Laura J. Phillips
/s/ Philip A. Laskawy
Philip A. Laskawy
/s/ Deborah G. Ellinger
Deborah G. Ellinger
/s/ Sandra L. Helton
Sandra L. Helton
/s/ Mark J. Manoff
Mark J. Manoff
/s/ Edward M. McNamara
Edward M. McNamara
/s/ Steven Paladino
Steven Paladino
/s/ Ravi Sachdev
Ravi Sachdev
/s/ David E. Shaw
David E. Shaw
President, Chief Executive Officer and Director
(Principal Executive Officer)
March 3, 2020
Interim Chief Financial Officer
(Principal Financial Officer)
March 3, 2020
Vice President, Global Controller and Chief
Accounting Officer (Principal Accounting Officer)
March 3, 2020
Chairman of the Board and Director
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
March 3, 2020
Director
Director
Director
Director
Director
Director
Director
94
Chairman’s Corner
2019 was a foundational year for Covetrus and one that
included significant change. We formed the company and
our board of directors, established our governance structure,
and implemented leadership changes to help address the
challenges we faced as a newly public company and to
drive our transformation forward. While the company’s
financial performance has suffered from some initial growing
pains, there are also many successes to celebrate and we
remain confident that Covetrus offers a compelling and
transformative value proposition within the attractive and
growing global animal-health market.
We are excited about the direction of the company under the
leadership of Ben Wolin, who was appointed acting president
and chief executive officer in October. Ben’s leadership and
experience have been critical over the last several months
in focusing the company on executing on its strategy and
strengthening the platform and balance sheet. Recognizing
the board’s confidence in Ben, we removed “acting” from his
title in March 2020. His ability to motivate and inspire the
team and foster a culture of collaboration and success has
been integral in keeping the company on a path towards
sustainable growth. The board is confident in Ben’s ability to
build on this momentum.
Covetrus has a great team of more than 5,500 talented
employees across the globe. While the global COVID-19
pandemic has created short-term challenges for the animal
health community at large, our team has responded with such
great passion for our customers and we are confident that
our organization can weather through this and deliver on our
opportunity long-term. These are early days for Covetrus,
and we believe the long-term outlook is increasingly bright as
the company continues to focus on its priorities and the core
business, and delivers on innovation and the promise of an
integrated value proposition. We believe that these efforts, in
time, will help accelerate growth and deliver increasing value
for our customers, employees, and shareholders.
Thank you for your continued support as a valued shareholder
of Covetrus.
Philip A. Laskawy
Chairman of the Board
Executive Officers
Board of Directors
Worldwide Headquarters
Benjamin Wolin
President and Chief
Executive Officer
Erin Powers Brennan
Senior Vice President,
General Counsel and Secretary
Michael Ellis
Executive Vice President, President
of Europe and North America
Dustin K. Finer
Chief Administrative Officer
Stuart B. Gleichenhaus
Interim Chief Financial Officer
David Hinton
Executive Vice President, President of
APAC & Emerging Markets
Timothy Ludlow
Executive Vice President and
Chief Transformation Officer
Laura J. Phillips
Vice President, Global Controller
and Chief Accounting Officer
Anthony Providenti
Executive Vice President,
Corporate Development
Georgia Wraight
Executive Vice President, President
of Global Technology Solutions
Philip A. Laskawy
Chairman of the Board
Deborah G. Ellinger
Sandra L. Helton
Mark J. Manoff
Edward M. McNamara
Steven Paladino
Ravi Sachdev
David E. Shaw
Benjamin Wolin
Independent Public
Accountants
BDO USA, LLP
One International Place
Boston, MA 02110
Outside Legal
Counsel
Morgan, Lewis & Bockius LLP
One Federal Street
Boston, MA 02110
Covetrus, Inc.
7 Custom House Street
Portland, ME 04101
888-280-2221
covetrus.com
Annual Meeting
2020 Annual Meeting
of Shareholders
Virtual meeting
May 13,2020 | 10 a.m. EDT
Common Stock Listing
Nasdaq Global Select
Market Symbol:
CVET
Transfer Agent
Continental Stock Transfer
& Trust Company
1 State Street, 30th Floor
New York, NY 10004-1561
Investor Relations
Nicholas Jansen
nicholas.jansen@covetrus.com
Worldwide Headquarters
Covetrus, Inc.
7 Custom House Street
Portland, ME 04101
888-280-2221
covetrus.com