Prescription Management
Rx services & compounding
E-commerce solutions
Client engagement
2020 ANNUAL REPORT
Advancing the World
of Veterinary Medicine.
NASDAQ: CVET
covetrus.com
Well positioned
to drive better
outcomes & care
Throughout 2020, veterinarians and animal
healthcare providers did not skip a beat despite the
uncertainty and challenges created by COVID-19.
Neither did Covetrus. As an essential business,
Covetrus rose to the challenge – working every day to
meet and support our customers’ increased volumes
and changing needs. Whether it was supporting
veterinarians with our innovative online pharmacy
service, scaling our global logistics solutions or
introducing an innovative telehealth capability at the
start of the pandemic, our efforts ensured that our
customers could provide uninterrupted patient care
and drive better business and healthcare outcomes.
I am so proud of how our team responded throughout
the year, exceeded expectations across our
strategic plan and achieved a significant number of
accomplishments. First and foremost, we invested in
our people — an engaged and motivated workforce
translates into better operational performance. We
successfully exited all of our TSAs, sold non-core
assets and exited certain geographies in order to
streamline our business and focus on markets where
we have greater opportunity. We focused on the core
drivers of our business, increasing our distribution
market share in the U.S. and international markets,
as well as delivering robust prescription management
net sales growth through strong strategic execution.
Finally, we established global sourcing capabilities
to drive our Covetrus brand and proprietary brand
product strategy entering 2021.
Ben Wolin
President and Chief Executive Officer
Covetrus delivered a very successful 2020, and the
Company has good visibility and a clear plan to
deliver improved outcomes and another strong year
in 2021. We are investing heavily in technology and
e-commerce, have a funnel of new products to meet
the needs of both our customers and pet owners,
and we have added focus to our Covetrus products
and solutions to enhance our all-in Covetrus value
proposition for all constituents or stakeholders and
create shareholder value as we capitalize on our
opportunity.
The Company and I are confident in our strategy,
fueled by our momentum and performance, and we
thank you, our shareholders, for your support as we
continue to drive better care and better outcomes
for the animal health industry.
Sincerely,
Ben Wolin
President and Chief Executive Officer
Do good. Be passionate. Never settle. Share the customer goal. Give power.
THE COVETRUS RESPONSE TO COVID-19
We’re here to help
Supporting safety and
wellness throughout Covid-19
Throughout the pandemic, our leadership teams have
done an excellent job supporting safety measures
within our facilities. We have enforced social
distancing and increased hygiene and protective
measures, and we were able to preemptively reduce
our on-site staff by enabling extensive work-from-
home solutions for over 60% of our employees
around the globe. We have augmented our existing
protocols, as necessary, to meet COVID-19 specifics
Course completed!
Course completed!
assistance programs, we are encouraging
professional growth opportunities and team
connectivity during these uncertain times.
As parts of the world begin to reopen, our planning
efforts will anticipate a slow and gradual return of
in accordance with local government and health
employees to our offices. We will be deliberate in our
organizations, including illness reporting and case
planning and will maintain our focus on keeping our
management. Beyond the physical safety measures
team and our customers’ businesses as healthy as
taken, we are focused on the support of our
possible. In order to do so, our phased return-to-work
employees’ overall well-being. From providing on-line
approach may, in some cases, be more conservative
training modules to continuing access to employee
than local restrictions.
Anderson
Anderson
STSTAA RTRT CC AALLLL
WRITE RX
WRITE RX
Launching telemedicine to help
veterinarians continue to provide care
Covetrus provides industry-leading telemedicine tools through
AVImark, eVetPractice, ImproMed and Rx Management software.
get.covetrus.com/telemedicine
Donating 6,000 bottles of hand sanitizer
Covetrus donated 6,000 bottles of hand sanitizer to help protect Phoenix communities
and Arizona medical personnel from coronavirus. The sanitizer was manufactured by
employees of our Phoenix-based pharmacy compounding facility, Atlas Pharmaceuticals.
The sanitizer was donated to the Arizona Department of Health Services for distribution
to medical personnel throughout the state and to the Phoenix Community ToolBank for
distribution to nonprofit organizations and schools. Arizona Together, FEMA, and Valley
of the Sun United Way helped coordinate the multiple donations.
“ On behalf of the Navajo Elders living in the Black Mesa/Kitsili area, we thank
Covetrus for the donations. The hand sanitizer was included in 100 Care packages.
Our elders were very grateful and appreciative of the items they received.”
RAY YAZZIE, EXECUTIVE DIRECTOR & PRESIDENT, WE CARE SHÍ CHEÍÍ DÓÓ SHI MASANI FOUNDATION
It was a year
like no other
During Covid-19, Covetrus helped
practices thrive, stay relevant, and
meet pet owner needs at home
With an increase in pet ownership and social distancing needs, the future
of commerce in animal health is forever changed. Covetrus is perfectly
suited to provide continuity of care during the pandemic and meet the
ongoing e-commerce needs of the modern consumer. Preserving the
relationship between veterinarian and pet owner, we kept them essential
and continue to help them meet their customers where they are — at
home, and online.
While remaining committed to advancing the world of veterinary
medicine, and supporting veterinarians through the pandemic, we
experienced record growth.
SOFTWARE
SERVICES
$96M
REVENUE
APAC &
EMERGING MARKETS
$402M
NET SALES
EUROPE
PRESCRIPTION
MANAGEMENT
$406M
(v. $246M LY)
NET SALES
$1.6B
NET SALES
TOTAL ASSETS
$3.5B
$226M*
Total Non-GAAP
Adjusted EBITDA
(an increase of 13%)
$4.3B(9% Y/Y GROWTH)
NET SALES
SUPPLY CHAIN
$3.9B
(v. $3.7B LY)
NET SALES
NORTH AMERICA
$2.4B
NET SALES
2020
by the numbers
* Please refer to the reconciliation of Net Income (Loss) Attributable to Covetrus to Adjusted EBITDA in Note 20 - Segment Data
QUICK RESPONSE DURING COVID-19 PANDEMIC
Covetrus delivered solutions on top of our
existing platform to maintain continuity of care
Our telehealth solutions, convenient e-commerce platform for pet owners,
compounding ordering platform for practices, Covetrus-branded product line
and award-winning software solutions empowered practices so they didn’t
have to skip a beat in service of the animals.
IMPACT OF COVID-19 ON PET OWNERSHIP
Practices are seeing new
pets and pet owners
Covetrus solutions helped
veterinarians meet their
customers where they were
to meet the needs of new
pet owners—with telemedicine
options, convenient home
delivery and more.
36
23
MARCH
2020
AUGUST
2020
OVER
50%
INCREASE IN NEW
PETS SEEN PER
PRACTICE*
SUPPLY CHAIN
$3.9B
“
Shelter Animals Count, which runs a database that tracks shelter
and rescue activity, looked at pet adoptions during the pandemic.
The group, which tracks about 500 rescue organizations across the
country, recorded 26,000 more pet adoptions in 2020 than in the
year before — a rise of about 15%.”
THE WASHINGTON POST JAN 2021
* AVMA — www.avma.org/blog/are-pet-adoptions-really-skyrocketing
Managing through Crisis
A global, cross-functional group, supports and informs the Company’s response to crises and other emergent
threats to the business. From this action-based team, we receive a constant stream of information, awareness
and recommended actions in order to support the business, our employees, and the operations of our facilities.
The team meets often, cadence determined by the scope of issues at hand, ranging from daily to weekly. The
team is currently focused on the COVID-19 coronavirus pandemic.
Episode 3
WRITE RX
Exam Room Saftey
RX CREATED
Vet Tech Shelby
Course
Course
completed!
completed!
Sparky
Refill
Notify
Autoship
Launching our Covid-19 resource microsite
Curating resources and educational opportunities from industry experts,
team members, and our incredible customers we helped veterinarians
navigate Covid-19.
covetrus.com/covid-19-resources
Supporting our employees
through the Covetrus
Hardship fund
to support our employees, this newly created fund
will help those employees – or the covered members
of their families – who have contracted the illness
and generated unforeseen medical expenses.
Launched in August 2020, this $1MM USD fund was
established to help alleviate the healthcare expenses
associated with COVID-19 for Covetrus employees
in need. Our organization has continued to operate
distribution centers, pharmacies and all of our global
operations in the face of extreme adversity. In order
Our hope is that this effort can help our team
manage the personal financial burden of COVID-19
with greater ease. Employees below director level
can apply for assistance for eligible expenses
incurred since January 1, 2020.
WELLNESS INITIATIVES
Supporting resiliency across the company
• We are providing frequent and transparent communication through Global
Town Hall Webinars, clear and known strategic goals, engaging intranet
content and supportive leadership
• We’re offsetting stress through the Covetrus Hardship fund, and offering
mental health support
• We are celebrating employees and providing ways to connect through the
intranet and through the development of Employee Resource Groups
• We’re lessening intensity through Zoom-free Wednesdays, half-day Fridays
and with encouragement to take adequate breaks and time off
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, 2020
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, ME 04101
(Address of principal executive offices)
(888) 280-2221
(Registrant’s telephone number, including area code)
___________________________
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
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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.
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 x No o
Yes o No x
Yes x No o
Yes x No o
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.
☐
☐
☐
o
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued
its audit report.
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 30, 2020, was approximately $1.4 billion.
The registrant had 136,225,089 shares of common stock outstanding as of February 19, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for use in connection with the 2021 Annual Meeting of Shareholders (our “2021 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, 2020
TABLE OF CONTENTS
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.
4
19
35
35
35
35
36
38
38
49
51
96
96
97
98
98
98
98
98
99
101
102
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
Covetrus, Inc. 2020 Form 10-K
2
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 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 year ended December 29, 2018 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, 2020 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, 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, risks 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.
Covetrus, Inc. 2020 Form 10-K
3
Item 1.
Business
Overview
PART I
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. 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.
Segments
We manage our organization geographically in three reportable segments: (i) North America, (ii) Europe, and (iii) Asia Pacific
(APAC) & Emerging Markets. Historically, the business was focused on driving growth through specific product and
service offerings to our Customers; the Transactions allow us to bring together 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 continue to focus on delivering this platform of products and services to our Customers on a
geographical basis. We disaggregate our Net sales based on our major product categories: supply chain services, software
services, and prescription management. See below, Item 7- Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Segments, Note 5 - Revenue from Contracts with Customers, and Note 20 - Segment Data.
Evolution of Covetrus
•
•
•
Separation. In anticipation of 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”)
Share Sale. 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
Distribution. All the shares of our common stock that were then owned by Henry Schein were distributed to its
stockholders of record as of January 17, 2019 (the “Distribution”). Concurrent with the Distribution, we paid a cash
Covetrus, Inc. 2020 Form 10-K
4
dividend of $1.2 billion to our Former Parent from loan proceeds from our newly established credit facility (see Note 9 -
Long-Term Debt and Other Borrowings, Net)
Acquisition. 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”
•
Through this Acquisition, we combined the complementary capabilities of the Animal Health Business and Vets First Choice,
bringing together innovative 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 our customers' veterinary practices while driving increased demand for our
products and services. Our strategic roadmap to an all-in-one solution for the veterinary market, see Our Strategy as discussed
below, prioritizes providing our supply chain services, compounding services, practice management software (PIMS), and the
prescription management platform, all through the Covetrus platform. We have been taking steps to enable this level of
integration of our major product categories in 2019 and 2020:
2019
The Acquisition brought together the complementary capabilities of the Animal Health Business and Vets First Choice. In 2019,
while initiating our long-term transformation, we established our major product categories and began the process of integrating
our product and service offerings:
Also, in 2019:
• 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, including exiting 18
transition service agreements (“TSAs”) in 2019
• We made significant investments in our portfolio of software services and technology-enabled prescription management
platform that improved customer service and workflow and delivered deeper integration and coordination between our
prescription management and software services 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 experienced further adoption of our proprietary and Covetrus-branded products and solutions inside our existing
customer base as our integration efforts continued
2020
In connection with our strategic focus for 2020, we made advancements in streamlining our business through the following
initiatives:
In January 2020, we aligned our software services with our prescription management platform and related pharmacy services to
create our “Global Technology Solutions” business which reflects the “voice of our Customers” throughout our suite of products,
which includes solutions for practice management, client communications, and prescription management. This alignment focused
the streamlining within our software services offerings and the integration of those services within the prescription management
platform.
In December 2020, we announced the combination of the commercial organizations of our supply chain services and Global
Technology Solutions in North America to provide one face to our Customers. This alignment of our organizations was
particularly impactful in North America where the prescription management platform is already available to the veterinary
market. As part of our strategic plan, we plan to make our prescription management platform accessible to our international
Covetrus, Inc. 2020 Form 10-K
5
markets as well. Our expectation of the future state of the technology experience on the Covetrus platform may include the
potential for improved inventory management, streamlined technology solutions, support for prescription compliance, simplified
Animal Owner engagement, and customizable views to leverage veterinary practice insights for success.
Mergers, Acquisitions, and Divestitures
Our future success will largely depend on our ability to grow and adapt to the changes in the veterinary market. We expect to
focus our deals strategy for 2021 and beyond on the faster-paced growth and higher margin areas of our business. Currently, these
areas are our prescription management platform, Covetrus-branded and proprietary-branded products, compounding services, and
software services.
Equity Method Investments
In April 2020, we completed the previously announced combination of our subsidiary, Spain Animal Health Solutions S.L.U.
(“SAHS”), with Distrivet, S.A. to form a leading animal-health provider on the Iberian Peninsula called Distrivet, a Covetrus
company (“Distrivet”). See Note 4 - Divestitures and Equity Method Investments.
Acquisitions
In October 2020, we announced a strategic investment in Veterinary Study Groups, Inc. ("VSG") which was consolidated during
the fourth quarter of 2020. This relationship brings together two highly complementary organizations each dedicated to veterinary
practices and committed to driving enhanced patient care, empowering veterinarians to run better businesses, and advocating for
the veterinary profession. This investment is an opportunity to accelerate our strategic initiative on driving increased customer
alignment. See Note 3 - Business Acquisitions.
Divestitures
In April 2020, we completed the divestiture of our scil animal-care business (“scil”) to Heska Corporation (“Heska”) for
approximately $100 million, net of deal-related fees and other transaction items. See Note 4 - Divestitures and Equity Method
Investments.
During the third quarter of 2020, we announced a managed exit of the operations of our French distribution business specializing
in medicines, pet food, equipment, and services for veterinary clinics. See Note 4 - Divestitures and Equity Method Investments.
Our Products and Services
Our revenue from our product and service offerings is generated from our major product categories: supply chain services,
software services, and prescription management. Included below are also certain of the available products and services:
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 animal care. By combining our existing global scale and logistical expertise with
robust software and ordering tools, a broad product offering at competitive prices, and a strong commitment to customer service,
we strive to be an indispensable and trusted partner for our Customers’ evolving needs. As discussed above, a key area for further
development is our Covetrus-branded and proprietary-branded products. These are products and solutions we manufacture and
develop as well as engage third parties to manufacture products on our behalf, that we sell with Covetrus branding. Currently, our
main proprietary brands are Vi, Kruuse, SmartPak, Calibra, and Covetrus-branded products.
Software Services
We develop, provide, and support veterinary practices with a wide range of veterinary software systems. This includes 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 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
Covetrus, Inc. 2020 Form 10-K
6
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 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. To bring these benefits to fruition, we work directly with veterinary practices to provide
client and practice-level insights and identify gaps in medical care.
Our Customers can access our accredited veterinary pharmacies to fulfill compounded, specialty, back-ordered, patient-specific
customized medications, and in-clinic use medications through our prescription management platform. As discussed above, our
strategic development includes investing in the prescription management platform and our high margin custom compounding
services. We are growing our pharmacy presence in the U.S. to build the infrastructure necessary to support that growth. See
Distribution Centers and Pharmacies below.
Through our integrated product and service offerings available on our prescription management platform, we seek to enable our
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 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.
Net sales generated in our major product categories, by segment, is below:
North America
Europe
APAC & Emerging Markets
Eliminations
Total Net sales
North America
Europe
APAC & Emerging Markets
Eliminations
Total Net sales
North America
Europe
APAC & Emerging Markets
Eliminations
Total Net sales
Year Ended December 31, 2020
Supply
Chain
Services
Software
Services
$
1,969
$
1,574
394
(11)
$
3,926
$
78
10
8
—
96
Prescription
Management
406
$
Eliminations
$
(76) $
—
—
—
(13)
—
—
Total
2,377
1,571
402
(11)
$
406
$
(89) $
4,339
Year Ended December 31, 2019
Supply
Chain
Services
Software
Services
$
1,816
$
1,513
361
(12)
$
3,678
$
82
10
7
—
99
Prescription
Management
246
$
Eliminations
$
(33) $
—
—
—
(14)
—
—
Total
2,111
1,509
368
(12)
$
246
$
(47) $
3,976
Year Ended December 29, 2018
Supply
Chain
Services
Software
Services
$
1,858
$
1,462
380
(11)
83
11
7
—
Prescription
Management
$
— $
Eliminations
Total
—
—
—
(2) $
(10)
—
—
1,939
1,463
387
(11)
$
3,689
$
101
$
— $
(12) $
3,778
Covetrus, Inc. 2020 Form 10-K
7
Our Customers
Our customer base is comprised principally of animal-health and veterinary practices and clinics in the companion-animal,
equine, and large-animal markets in North America, Europe, and APAC & Emerging Markets. 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 and pet specialty retail stores. Our major product categories service customers in the following markets:
•
•
•
Supply chain customers in North America, Europe, and APAC & Emerging Markets
Software services customers in the U.S., the U.K., Australia, New Zealand, and certain other countries
Prescription management and pharmacy services customers in the U.S
Distribution Centers and Pharmacies
As of December 31, 2020, we own or lease the following properties which are integral to our global operations as well as
necessary infrastructure investment for our future growth, for example, with our investments in our higher-margin businesses (as
compared to our supply chain services), like compounding pharmacies. The pharmacies below are fully licensed in all 50 states
and the District of Columbia.
• Warehouses: 41 globally
Offices: 65 globally
•
Pharmacies: 4(a) in the U.S.
•
(a) Excluding Atlas Pharmaceuticals, an outsourcing facility
Sales and Marketing
Our sales and marketing teams are focused on (i) generating new sales through direct and frequent communication with customers
and Animal Owners, (ii) facilitating order processing, (iii) staying abreast of marketing developments, and (iv) educating practice
personnel regarding the hundreds of new products, services, and technologies introduced each year.
Our sales and marketing efforts are focused in the following areas:
•
•
•
Establish and solidify customer relationships through personal visits by field sales representatives and contact from our
inside sales team
Use of our direct sales force, which we augment through our channel partners and other marketing initiatives
Expanding our relationships with strategic accounts and pharmaceutical manufacturers
Effective January 1, 2021, we aligned our North America segment commercial organizations to drive increased strategic
alignment between our customers and our full scope of products and capabilities available to those customers. The new structure
brings together our North America segment commercial teams under unified leadership to maximize account management and
support for our Customers’ businesses. We also changed our sales compensation structure in North America to better align with
our strategic goals. This change also unlocks resources for our Global Technology Solutions team to focus on executing on our
technology roadmap, including new software, e-commerce enhancements, and bringing our prescription management platform to
new geographies in 2021 and beyond.
COVID-19 and Our Return to Work
To protect the health and safety of our employees, we implemented workplace regulations and guidelines recommended from
government and public health authorities related to COVID-19. This includes frequent washing of hands, daily disinfecting of
workspaces, and limiting non-essential travel. For employees who recently traveled to affected areas, a two-week quarantine is
required prior to returning to work. In our pharmacies, it has been our standard practice to strictly comply with United States
Pharmacopeia regulations on the use and application of personal protective equipment by all staff. In March 2020, we transitioned
a large portion of our teams to working remotely and implemented staggered schedules in our distribution facilities. In October
2020, we issued internal guidance on the expected return to work in July 2021 for our North America workforce that is currently
operating remotely. Outside of North America, we adhere to the regulations and guidelines instituted by local authorities in our
area of operations and make judgments with the best available information at the time. We created a COVID-19 information
portal on our intranet that provides best practices for working at home and staying connected, communications from our
leadership, internal contacts for any COVID-19 questions, and helpful external reference links.
Covetrus, Inc. 2020 Form 10-K
8
We also assembled three cross-functional task forces that actively monitor our return-to-work guidelines. These task forces are
global and their goal is to maintain a comprehensive plan of best practices for our essential facilities such as distribution centers
and pharmacies and establish protocols for field-based employees to return to customer sites and for us to re-open our offices to
safely accommodate more office-based employees.
Our return to work plan addresses four main areas:
•
•
•
•
Health & Safety - create work schedules and rotations, use of personal protective equipment, and provide protocols for
employee health screening, sick notifications, on-site visitors, and more
Operations - deploy best practices and guidance for employee workspace reconfiguration required to support social
distancing, cleaning protocols, training, and compliance management
Commercial - enable and support field-based employees to make customer visits by establishing safety guidelines and
strategies for our field sales teams
Communications - communicate updates of employee-related policies and provide materials, onsite signage, and
employee training on updated safety protocols and policies
We will continue to actively monitor how COVID-19 is impacting us and may take further actions to alter our business operations
in the best interests of our employees, customers, partners, suppliers, and other stakeholders, or as required by federal, state, or
local authorities.
Our Strategy
Our current three-year strategic plan prioritizes the following:
2020
2021
2022
Streamline
Synchronize
Accelerate
Focus
Our Business
Harmonize
Our Capabilities
Expand
Our Offering
As a recently-formed and publicly listed company, we prioritized what we believe were the necessary building blocks to our
independent operations and future success: (i) establishing reliable worldwide Customer support alongside a planned elimination
of our reliance on our 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. In 2020, we made the following
streamlining steps:
Focus
•
•
•
•
•
Exited all of the remaining TSAs we had with our Former Parent
Leveraged shared services to maximize efficiency and enhanced career development
Integrated our software services and prescription management major product groups into Global Technology
Solutions. We made significant investments in our portfolio of software services and technology-enabled
prescription management platform that improved customer service and workflow and delivered deeper
integration and coordination between our prescription management and software services businesses
Combined our North American commercial organizations to provide “one face to our customer”
Instituted broad-based cost containment measures and spending discipline to adapt to the changing COVID-19
economic environment
Covetrus, Inc. 2020 Form 10-K
9
Team
•
•
•
Onboarded several more leaders with experience in driving growth and transformation to increase coordination
across our business units and technology capabilities as we phase-in our global integration efforts and tap into
growth opportunities
Created a global diversity, equity, and inclusion program
Launched the Covetrus hardship fund to help our colleagues with COVID-19 illness-related hardship
Differentiate
•
•
•
Launched telemedicine at a critical moment for our customers
Offered new Customer and Animal Owner strategies on our prescription management platform to help
veterinary practices drive growth, improve clinical care and compliance, deter competition from alternative
channels, as well as capitalize on COVID-19 industry changes
Invested in Veterinary Study Groups (“VSG”) to strengthen customer relationships. This investment is expected
to improve our scale, offer new avenues for driving our proprietary products and solutions, and enhance our
overall growth and margin profile
Globalize
•
Centralized our direct and indirect sourcing initiatives to coordinate purchasing activity and leverage our global
scale
• We combined our Spanish and Portuguese supply chain and distribution businesses with Distrivet, to create a
business with broader reach (Distrivet, a Covetrus company)
•
Launched the framework for globalizing our prescription management platform (part of our Covetrus platform)
As we continue to expand on our accomplishments, our priorities entering 2021 are centered on driving improved outcomes and a
differentiated value proposition for our stakeholders and delivering profitable growth through the increased adoption and
utilization of our higher margin services, including: (i) growing our Covetrus-branded and proprietary products, (ii) sustaining our
momentum in prescription management, and (iii) adding more resources to our compounding business. Executing against these
will enable us to continue to invest in our product roadmap and bring our prescription management platform to new global
markets in 2021 and beyond. 2021 is our year to synchronize.
Covetrus, Inc. 2020 Form 10-K
10
Veterinarians and Animal
Health Practitioners
Manufacturers and Suppliers
Animal Owners
Our Team
Synchronizing
with
•
•
•
•
Provide better service
through “one face to
our customer”
Drive better outcomes
via the “all-in”
Covetrus solution
Deliver innovative
technology products
Provide value through
Covetrus proprietary
brands
Our Team
•
•
•
Drive manufacturers'
strategic priorities via
total Covetrus solution
Create demand and
capture market share by
leveraging our
prescription management
platform
Provide insights & data to
our manufacturer
partners
• Meet the consumer
where they are &
provide
comprehensive
experience
•
•
•
Deliver world-class e-
commerce experience
Integrate healthcare
& digital commerce
experience
Improve speed to
delivery & price
competitiveness
•
•
•
•
Drive innovation
Align responsibilities
and incentives
around our strategic
goals
Recognize, reward,
attract & develop
talent
Foster diversity &
inclusion
As of December 31, 2020, our global workforce was comprised of 5,657 employees (5,275 full-time employees and 382 part-
time employees). Our employee base extends to 22 countries. Women represented 50% of our global workforce as of December
31, 2020. Additionally, 40% of the members of our Board of Directors were women.
We are committed to attracting, developing, and retaining the best talent globally. Our strategy is centered around our
commitment to build a strong culture and teams, attract and retain the best talent, enable scale, effectiveness, and efficiency, and
maintain the right capabilities and talent to drive business success.
Our culture is driven by our core values: Do Good, Never Settle, Give Power, Be Passionate, and Share the Customer Goal
These values drive our commitment to and investment in our people in the following ways:
• We created a global diversity, equity, and inclusion program, which includes a global advisory board and a number of
global, business unit, and regional diversity and inclusion leads dedicated to driving our commitments and strategic focus
areas as well as to ensure local support. The executive sponsors of program are Sharon Wienbar (member of our Board
of Directors) and Ben Wolin (President and Chief Executive Officer). Our five diversity and inclusion commitments to
drive lasting change within five years are:
Diversity-focused recruitment
Goal: employ a diverse workforce that is demographically reflective of our society
Diversify the animal-health industry
Goal: do good by changing both Covetrus and the industry
Employee education and training
Goal: foster diversity and inclusion for all employees at all levels
Inclusion & employee resource groups
Goal: create a workplace of inclusion and belonging
Transparency
Goal: capture data and be publicly accountable for a more diverse workforce
Covetrus, Inc. 2020 Form 10-K
11
•
In 2020, we launched a global employee development program designed to build capabilities and accelerate
transformation. Nearly 5,000 employees were enrolled in our 10-month virtual academy, which included digital lessons,
team-based action planning, and peer-to-peer coaching
• We are actively engaged in monitoring and improving our organization health to empower our employees to have a voice
and connect to our common goals. Our goal is to be a top talent destination by the end of 2021
•
COVID-19 specific:
◦
◦
For employees who continued to work on site, we took deliberate measures to ensure safety in the workplace,
from extra sanitation, issuing of personal protective equipment, employee training, and implementation of social
distancing requirements
In August of 2020, with our focus on our team, retaining our hardworking talent, and the knowledge of how
COVID-19 may be affecting team members in their personal lives, we launched the Covetrus Hardship Fund to
help our colleagues with COVID-19 illness-related hardship
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.
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
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. COVID-19 has accelerated this trend. 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 animal care givers, providing expertise, and delivering on a 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.
Covetrus, Inc. 2020 Form 10-K
12
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. Parasite protection products represented
22% of our global Net sales in 2020. 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 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.
Information about our Executive Officers
Covetrus, Inc. 2020 Form 10-K
13
Our executive officers, as of March 1, 2021 are as follows:
Name
Benjamin Wolin
Matthew Foulston
Michael Ellis
Dustin Finer
David Hinton
Timothy Ludlow
Matthew Malenfant
Laura Phillips
Anthony Providenti
Jamey Seely
Georgina Wraight
Age Position(s) with our company
46
56
62
51
60
55
59
51
54
49
46
President and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President and President, Europe
Chief Administrative Officer
Executive Vice President and President, APAC and Emerging Markets
Executive Vice President and Chief Transformation Officer
President, Customer Operations North America
Vice President, Global Controller and Chief Accounting Officer
Executive Vice President, Corporate Development
General Counsel and Secretary
Executive Vice President and President, Global Technology Solutions
Ben Wolin currently serves as the President and Chief Executive Officer of the Company. Mr. Wolin became a Director of
Covetrus in February 2019. Prior to Covetrus, Mr. Wolin served as the Chief Executive Officer and Co-founder of Everyday
Health, Inc., a communications and marketing platform for consumers, doctors and healthcare companies, and a member of its
Board of Directors from 2002 to 2016. Mr. Wolin founded Everyday Health and served as its Chief Executive Officer from
inception, through its initial public offering and sale in 2016. Mr. Wolin has served on numerous private and public company
boards including Diplomat Pharmacy, Rockwell Medical, AdhereTech, Aerami Therapeutics, Source Media, and Frontline
Medical Communications. Mr. Wolin received his B.A. in History from Bowdoin College. Mr. Wolin has extensive experience
with digital healthcare, pharmacy, technology, and public company management and governance.
Matthew Foulston was appointed our Executive Vice President and Chief Financial Officer in June 2020. Prior to joining the
Company, Mr. Foulston served as the Executive Vice President and Chief Financial Officer of Treehouse Foods (NYSE: THS)
from 2016 through 2019. He previously served as the Chief Financial Officer of Compass Minerals (NYSE: CMP), a specialty
minerals company, from 2014 to 2016. He spent his earlier career in the automotive industry with Ford, Mazda, and Navistar. Mr.
Foulston received his BSc from Loughborough University, Leicestershire, U.K.
Michael Ellis was appointed our Executive Vice President in January 2020. From February 2019 until such appointment, Mr.
Ellis served as Senior Vice President and President, Europe. Prior to joining the Company, Mr. Ellis served as Chief Financial
Officer—Europe, General Manager and Vice President—Europe, and President—Europe of Henry Schein Animal Health at
Henry Schein since April 2009. Mr. Ellis is a qualified Fellow Chartered Management Accountant, FCMA, and has a diploma in
Business Studies from Sheffield University.
Dustin Finer was appointed our Chief People Officer in September 2019 and our Chief Administrative Officer in November
2019. Prior to joining the Company, Mr. Finer was Chief Administrative and Internal Operations Officer at TiVo from 2016 to
2018. From 2012 until 2016, Mr. Finer was the Chief Human Resource Officer for Rovi Corporation. Prior to that, Mr. Finer was
with MySpace, where he was Chief Operations Officer. Mr. Finer holds a J.D. from the University of the Pacific, McGeorge
School of Law, and a B.A. from the University of California, San Diego.
David Hinton was appointed our Executive Vice President and President, APAC and Emerging Markets in January 2020. From
February 2019 until such appointment, Mr. Hinton served as Senior Vice President and President APAC and Emerging Markets.
From April 2016 until February 2019, Mr. Hinton served as Vice President and Managing Director—ANZ, and from January
2011 to April 2016 as Vice President and Managing Director—U.K., Ireland and France of Henry Schein Animal Health. Mr.
Hinton holds a Post Graduate Diploma in Management Studies, and a Diploma in Marketing from the University of the West of
England.
Timothy Ludlow was appointed our Executive Vice President in February 2020, having served as our Senior Vice President and
Chief Transformation Officer since February 2019. Prior to such appointment, Mr. Ludlow served from August 2018 as Chief
Integration and Transformation Officer and, from March 2015 to August 2018, as Chief Financial Officer of Vets First Choice.
From October 2012 to March 2015, Mr. Ludlow served as Chief Financial Officer of Pine State Trading Company, a beverage
distribution company, and from April 2008 until September 2012, Mr. Ludlow served as Senior Vice President and Treasurer of
C&S Wholesale Grocers. Mr. Ludlow is a qualified U.K. accountant, FCCA.
Covetrus, Inc. 2020 Form 10-K
14
Matthew Malenfant was appointed our President, Customer Operations North America in May 2020. Prior to joining the
Company, Mr. Malenfant served as the Principal of Malenfant Consulting, LLC. a leadership coaching and organizational design
company. He previously served as the Chief Executive Officer of Saxco International, LLC, a packaging distributor for the spirits,
wine, and beer industries, from 2012 through 2017 and prior to that as President, The Americas for VWR International, a life
science and laboratory supply distribution company from 2007 through 2011. Mr. Malenfant currently serves as the Executive
Chairman of DWK Life Sciences, LLC, a manufacturer of precision glassware, pharmaceutical packaging and specialty life
science products, from 2019 to current and as a Director for Thomas Scientific, LLC, a distributor in the laboratory and critical
environment industries. Mr. Malenfant has a B.A. and a B.S. from Arizona State University and achieved a Masters Certification
from Merck University in Darmstadt, Germany.
Laura Phillips was appointed our Vice President, Global Controller, and Chief Accounting Officer effective June 2019, having
served as Vice President, Accounting for the Company since April 2019. Prior to Covetrus, Ms. Phillips served as Director of
Finance Compliance at Google from 2017 until 2019. Prior to that, Ms. Phillips served as Vice President, Corporate Controller of
Brown-Forman Corporation from 2014 until 2016. From 2007 until 2014, she served as Assistant Corporate Controller of General
Motors. From 2003 until 2007, Ms. Phillips served on the staff of the Public Company Accounting Oversight Board, most
recently as the Deputy Chief Auditor. Ms. Phillips holds an M.B.A. from the University of Michigan, Ross School of Business,
and a B.S.B.A. in Accounting and Finance from Miami University. Ms. Phillips is a Certified Public Accountant.
Anthony Providenti was appointed our Executive Vice President in February 2020, having served as our Senior Vice President,
Corporate Development since February 2019. Prior to such appointment, Mr. Providenti served in a number of positions at Henry
Schein since 2003, including Vice President, Corporate Business Development Group, and Vice President, Strategy and
Development, Global Animal Health Group. Mr. Providenti holds a J.D. from Fordham University School of Law and a B.S. in
Accounting from Lehigh University.
Jamey Seely was appointed our General Counsel and Secretary in September 2020. Prior to joining the Company, Ms. Seely held
both business and legal roles while serving as President and General Counsel of Integra, Inc. a developer of blockchain
technology for the legal industry. Other past posts include Executive Vice President and General Counsel of the Gates Industrial
Corporation, where she led to a successful IPO, and Executive Vice President and General Counsel and Corporate Secretary at
ION Geophysical, Inc. Ms. Seely holds a J.D. from Southern Methodist University’s Deadman School of Law, a B.A. from
Baylor University, and a Professional Certificate in Energy Innovation & Emerging Technologies from Stanford University.
Georgina Wraight was appointed our Executive Vice President and President, Global Technology Solutions, the business formed
with the merging of Global Prescription Management and Global Software Services, in January 2020. Prior to this, and from
February 2019, Ms. Wraight served as Senior Vice President, President of Global Prescription Management. From August 2018
to February 2019, Ms. Wraight served as President, and from January 2018 to August 2018, as Chief Operating Officer of Vets
First Choice. From November 2015 until August 2017, she served as Chief Operating Officer of the Rockport Company, a shoe
manufacturer. From September 2012 to November 2015, Ms. Wraight served as Group Chief Financial Officer and then as Chief
Operating Officer of Highline United & Modern Shoe Company. Ms. Wraight is a qualified Chartered Global Management
Accountant (CGMA).
Laws and Regulations
Our prescription management and pharmacy services business, which currently operates 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 authorized to dispense prescription medication in all 50 states
and the District of Columbia. 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 covered by the laws of the state where the Animal 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.
Covetrus, Inc. 2020 Form 10-K
15
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 pre-market 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 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.
Covetrus, Inc. 2020 Form 10-K
16
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
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
Covetrus, Inc. 2020 Form 10-K
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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, 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
We are subject to the informational requirements of the Exchange Act and, in accordance with the Exchange Act, we file annual,
quarterly, and current reports, proxy statements, and other information with the SEC. The SEC maintains an Internet web site that
contains reports, proxy statements, and other information about issuers, like us, who file electronically with the SEC. The address
of the site is http://www.sec.gov. The reports and other information, including any related amendments, filed by us with, or
furnished by us to, the SEC are also available free of charge at our Internet web site as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the SEC. 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 https://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/.
Covetrus, Inc. 2020 Form 10-K
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Item 1A. Risk Factors
Summary of Risk Factors
Our business is subject to a number of risks and uncertainties. The following is a summary of the principal risk factors described
in this section:
•
•
Health epidemics, including the COVID-19 pandemic, could have a material adverse effect on our business, results of
operations, and on our ability to maintain effective internal controls
Customers may be hesitant to migrate or integrate their critical business systems and procedures to those provided by us,
and as a result, the market and the sales cycle for our technology and services may develop slower than expected
• We compete in the highly competitive animal-health market
•
Changes in manufacturer sales channels and the increase in e-commerce options for companion animal products could
negatively impact our market share, margins, and distribution of our products
Our dependency on third parties for the manufacture and supply of substantially all of our products could impact our
business and results of operations
Price sensitivity of our Customers and Animal Owners could have a material adverse effect on our business, financial
condition, results of operations and cash flows
Any defects, disruptions or poor service in our technology product offerings could result in loss of our Customers and
create difficulty in attracting new customers
Interruptions, damage by unforeseen events, cyberattacks and failure in our information systems (or third-party systems
we rely on) or unauthorized access to a Customer’s or their Client’s data may cause significant liabilities and curtail or
stop use of our products or services
Legislative and regulatory burdens imposed on our storage, processing and usage of Customer and Animal Owners
information may expose us to liability and potential objections, and our failure to adequately protect or appropriately use
data could negatively affect our business and results of operations
Risks associated with our significant operations in foreign jurisdictions could negatively affect our business, financial
condition, results of operations and cash flows
International sales are important for future growth of our business, and our recent and continuing international expansion
efforts subject us to additional risks
•
•
•
•
•
•
•
• We are subject to substantial regulation in our business and operations and failure to comply with, or material changes to
such regulations, could have a material adverse effect on our business and results of operations
Prospective investors should carefully consider the risks described in this section, together with all of the other information in this
Annual Report on Form 10-K. These risks may not be the only risks we face but are risks we believe may be material at this time.
Additional risks and uncertainties that we do not yet know of, or that we currently think are immaterial, may also impair our
business operations or financial results. If any of the events or circumstances described in this section occur, our business,
financial condition or results of operations, and the trading price of our securities, could decline. Investors and prospective
investors should consider these risks, the information contained under the heading Forward-Looking Statements and the risks
described in this Annual Report on Form 10-K before deciding whether to invest in our securities. We may update these risk
factors in our future periodic reports.
Risks Relating to Our Business
We face risk related to health epidemics, including the COVID-19 pandemic, which could have a material adverse effect on
our business and results of operations, and could also have an effect on our ability to maintain effective internal controls.
Our business has been and could continue to be adversely affected by a widespread outbreak of contagious disease, including the
recent pandemic of respiratory illness caused by a novel coronavirus known as COVID-19. Global health concerns relating to the
COVID-19 pandemic have been weighing on the macroeconomic environment, and the pandemic has significantly increased
economic volatility and uncertainty.
The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel
bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. These measures may
adversely impact our employees and operations and the operations of our customers, suppliers and business partners, and may
negatively impact spending patterns, payment cycles, insurance coverage levels, and demand for our products and services. Such
measures may remain in place for a significant period of time and may adversely affect our results of operations. Despite an
Covetrus, Inc. 2020 Form 10-K
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increase in net sales in the first quarter of 2020 relative to the prior year period, net sales weakened from mid-March to late-April
and then recovered; however, it is possible that we may experience more significant declines in the future.
The spread of COVID-19 caused us to modify our business practices, particularly with respect to our liquidity position and near-
term cost structure (including through incremental borrowings on our revolving credit facility to increase cash, which have
subsequently been repaid; reduction of non-critical capital expenditures; executive, board, and other senior-level employee
compensation reductions that have been reversed subsequent to June 30, 2020; employee furloughs, certain shift eliminations, and
a hiring freeze that have been reversed or eased; discretionary spending deferrals; the deferral of payroll taxes under the CARES
Act; and the temporary suspension of our 401(k) employer match, which has been reinstated). We also managed our inventory
levels to ensure we hold appropriate stock for market conditions and have engaged in negotiations to extend payment terms on
certain contracts. We may take further actions as may be required by government authorities or that we determine are in the best
interests of our employees, customers, and business partners. There is no certainty that such actions will be sufficient to mitigate
the risks posed by the virus or will otherwise be satisfactory to government authorities. If significant portions of our workforce are
unable to work effectively, including due to illness, quarantines, social distancing, government actions, or other restrictions in
connection with the COVID-19 pandemic, our operations will be negatively impacted, and our stock price could decline.
The extent to which the COVID-19 pandemic may impact our business, results of operations, financial condition, and potentially
our control procedures is highly uncertain and cannot be predicted. Such impact will depend on a number of factors including, but
not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, the timing
of the vaccination rollout, and how quickly, and to what extent, normal economic and operating activities can resume. In the first
quarter of 2020, the COVID-19 pandemic led to increased volatility in our stock price and a sustained decline in our market
capitalization which required us to perform an interim impairment review, which could reoccur. In addition, due to current
internal policies, many of our employees continue to work remotely, which could have an adverse effect on our internal control
over financial reporting. The COVID-19 pandemic could also limit the ability of our customers, suppliers, and business partners
to perform, including our customers' ability to make timely payments to us during and following the pandemic. We may also
experience a suspension of services from third parties. Even after the COVID-19 pandemic has subsided, we may experience an
adverse impact to our business as a result of its global economic impact, including any recession that has occurred or that may
occur in the future.
Specifically, difficult macroeconomic conditions, such as decreases in per capita income and level of disposable income,
increased and prolonged unemployment, or a decline in consumer confidence as a result of the COVID-19 pandemic could have a
material adverse effect on the demand for our products and services. Under difficult economic conditions, consumers may seek to
reduce discretionary spending by forgoing our services or choosing not to purchase our products. Decreased demand for our
products and services could negatively affect our overall financial performance.
There are no comparable recent events that provide guidance as to the effect of the spread of COVID-19 and, as a result, the
ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet
know the full extent of COVID-19’s impact on our business, our operations, control procedures, or the global economy as a
whole. However, the effects could have a material adverse impact on our results of operations and could cause continued volatility
in our stock price. We will continue to monitor the situation closely.
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
Covetrus, Inc. 2020 Form 10-K
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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 and 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.
Changes in manufacturer sales channels and the increase in e-commerce options 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. Additionally, major U.S. online e-commerce retailers such as Amazon and Chewy.com are becoming
licensed as veterinary mail order pharmacies to offer pharmacy products directly to consumers in all 50 US states. Even where
prescriptions must be written by a veterinarian, companion Animal Owners may shift to these services for home delivery of
prescription medications and diets. Decreased emphasis on veterinary visits, and increased consumer choice through familiar e-
commerce retailers could reduce demand for veterinarian-based e-commerce services and have a material adverse impact on our
business. 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. Companion Animal Owners may further choose to
substitute human health products for animal-health products if human health products are deemed to be lower-cost alternatives.
Because the majority of 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, 2020. Effective January 1, 2021, we no longer are
Covetrus, Inc. 2020 Form 10-K
21
partnered with Merck & Co., in the U.K. which will result in reduced Net sales in future periods. We are taking steps to mitigate
these effects and do not expect the profitability impact to be significant. Additionally, 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.
Disruptive innovations and advances in medical practices and technologies could negatively affect the market for our
products.
The market for our products could be impacted negatively by the introduction and broad market acceptance of newly-developed
or alternative products that address the diseases and conditions for which we sell products, including “green” or “holistic” health
products or specially bred disease-resistant animals. In addition, technological breakthroughs by others may obviate our
technology and reduce or eliminate the market for our products. Introduction or acceptance of such products or technologies could
materially adversely affect our operating results and financial condition.
Animal health products are subject to unanticipated safety, quality or efficacy concerns, which may harm our reputation.
Unanticipated safety, quality or efficacy concerns arise from time to time with respect to animal health products, whether or not
scientifically or clinically supported, leading to product recalls, withdrawals or suspended or declining sales, as well as product
liability and other claims.
Regulatory actions based on these types of safety, quality or efficacy concerns could impact all, or a significant portion, of a
product’s sales and could, depending on the circumstances, materially adversely affect our results of operations.
In addition, since we depend on positive perceptions of the safety, quality and efficacy of our products, and animal health
products generally, by veterinarians and pet owners, any concern as to the safety, quality or efficacy of our products, whether
actual or perceived, may harm our reputation. These concerns and the related harm to our reputation could materially adversely
affect our business, financial condition and results of operations, regardless of whether such reports are accurate.
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.
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 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.
Covetrus, Inc. 2020 Form 10-K
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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.
When 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,
•
• Manage the accurate billing and collections for thousands of Customers, and
•
Process payments to suppliers
Information security risks have generally increased in recent years, and a third-party action, employee error, malfeasance or other
events that bypass our IS security systems causing an IS security breach may lead to a material disruption of our IS business
systems and 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 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 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 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:
•
•
•
•
•
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
Covetrus, Inc. 2020 Form 10-K
23
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 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 contains 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.
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, Vets First Choice or any of our local brand name operations globally. 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 as a result of our acquisition of Vets First Choice in an all-stock transaction
(“Merger”).
Covetrus, Inc. 2020 Form 10-K
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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, including as a result of the COVID-19 pandemic, 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.
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 45% of our Net sales for our business in fiscal 2020 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 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 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 transactional 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 global sales. Our recent and continuing
international expansion efforts subject us to additional risks.
Net sales outside of the U.S. represented approximately 45% of our total Net sales in 2020, 47% in 2019, and 49% in 2018. 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 financial condition, results of operation, and cash flow.
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
geographic dispersion of our customers and personnel,
Covetrus, Inc. 2020 Form 10-K
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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
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 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.
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
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.
Covetrus, Inc. 2020 Form 10-K
26
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.
Risks Relating to Indebtedness
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, 2020, there was $1.1 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
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:
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Limiting our ability to obtain additional debt or equity financing needed for working capital, capital expenditures, debt
service requirements, acquisitions and general corporate or other purposes,
Requiring a substantial portion of our cash flows from operations be dedicated to payments on our indebtedness instead
of other purposes, including working capital needs, funding capital expenditures and pursuing future business
opportunities,
Limiting our ability to make continuous improvements to our business model and adjust to changing market conditions
that may place us at a competitive disadvantage compared to our competitors with less debt, and
Covetrus, Inc. 2020 Form 10-K
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Increasing our vulnerability to a downturn in general economic conditions or in our business
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,
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• Make dividends and other restricted payments,
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• Make investments,
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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 or avoid acceleration of borrowed amounts under these agreements will depend on
satisfaction of these covenants, including two financial covenants: (i) a maximum consolidated net total leverage ratio and (ii) a
minimum 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 require a significant amount of cash to service our indebtedness. Our ability to generate such 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 ability, to a certain extent, is subject to economic, financial, competitive, legislative, regulatory, and other
factors that are beyond our control. We have substantial indebtedness with significant debt service requirements, and we may
incur additional indebtedness that would lead to increased interest expense and require additional cash flows to fund. In addition,
borrowings under the Credit Facilities bear interest at variable interest rates. As of December 31, 2020, we maintained interest
rate swap contracts with notional amounts aggregating $500 million, which are intended to fix a portion of future interest
payments associated with our $1.1 billion variable-rate Term Loan Facility. These swap agreements expire July 31, 2021. Despite
the presence of these derivative contracts, interest rate increases, and in some instances interest rate decreases, could result in
larger debt service requirements. Such an increase in our debt service obligations would adversely affect our cash flows. 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.
Risks Relating to Regulation and Governmental Action
We are subject to substantial regulation in our business and operations and failure to comply with, or material changes to
such regulations, could have a material adverse effect on our business and results of operations.
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 state regulation affecting the sale and distribution of controlled substances; and statutes and regulations related
Covetrus, Inc. 2020 Form 10-K
28
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. 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 require that we make
changes to our business model and operations and could require that we incur significantly increased costs to comply with such
regulations. Further, we are required to comply with the laws of, and regulations promulgated by, various states, including the
pharmacy boards of such states. State pharmacy boards regulate the dispensing and marketing of our pharmaceutical products and
may take action, including fines, against companies for violations of their rules and 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 ended on October 15, 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.
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,
Covetrus, Inc. 2020 Form 10-K
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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.
Changes in our tax rates or exposure to additional income tax liabilities could adversely affect our financial results.
Our future effective income tax rates could be unfavorably affected by various factors including, among others, changes in the tax
rates, rules and regulations in jurisdictions in which we generate income. In addition, the amount of income taxes we pay is
subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities. If these audits result in
assessments different from amounts recorded, our future financial results may include unfavorable tax adjustments.
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.
Covetrus, Inc. 2020 Form 10-K
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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 may continue to incur costs associated with the Transactions that could affect our period-to-period operating results.
We anticipate that we will continue to 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. 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 benefited from Henry Schein’s
financial strength and extensive business relationships. We no longer benefit from Henry Schein’s resources and it cannot be
assured that we will be able to adequately replace all of the resources provided by Henry Schein or replicate them at the same
cost. If we are not able to replace the resources provided by Henry Schein, or at the same cost there could be a material adverse
effect on our business, financial condition, results of operations and cash flows.
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 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.
If the Distribution does not qualify as a tax-free spin-off under Section 355 of the Internal Revenue Code, 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.
Covetrus, Inc. 2020 Form 10-K
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If the Transactions do not qualify for their intended tax-free treatment, 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.
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 U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) 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.
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.
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:
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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
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.
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.
Covetrus, Inc. 2020 Form 10-K
32
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 implemented remedial measures to address the material weaknesses prior to the end of fiscal 2020, however we cannot ensure
that our efforts have been successful, 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. Certain of 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 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.
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,
Covetrus, Inc. 2020 Form 10-K
33
•
•
•
•
•
•
•
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 Delaware General Corporation Law ("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
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.
General Risk Factors
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
Covetrus, Inc. 2020 Form 10-K
34
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, which
may also indicate that our remaining goodwill is potentially impaired. Such a stock price decline could occur even when we have
met any previously publicly stated revenue and earnings guidance we may provide.
Item 1B. Unresolved Staff Comments
None
Item 2.
Properties
Our corporate headquarters consists of three facilities located in Portland, Maine. We also utilize approximately 41 distribution
centers and 65 offices throughout the world and across all segments. We have 4 pharmacies, that are fully licensed in all 50 states
and the District of Columbia, as well as an FDA registered outsourcing facility under section 503B of the Federal Food, Drug, and
Cosmetic Act.
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. See Note 7 - Leases under Item 8, Financial Statements and
Supplementary Data.
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.
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 12 - 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
Covetrus, Inc. 2020 Form 10-K
35
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 19, 2021, there were 473 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, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
below.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. 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 to the Nasdaq Global Market Composite
Index and the S&P 600 Health Care Index. An investment of $100 and reinvestment of all dividends are assumed on February 7,
2019, the effective date of the registration of our common stock. The graph shows the value for each of these investments through
December 31, 2020.
Covetrus, Inc. 2020 Form 10-K
36
February 7,
2019
December 31,
2019
March 31,
2020
June 30,
2020
September 30,
2020
December 31,
2020
Covetrus Inc
Nasdaq Global Market Composite
S&P 600 Health Care
$100
$100
$100
$31
$119
$111
$19
$92
$89
$42
$131
$104
$57
$142
$114
$67
$196
$146
Recent Sales of Unregistered Securities
On May 19, 2020, we issued 250,000 shares of our 7.50% Series A Convertible Preferred Stock (“Series A Preferred Stock”), par
value $0.01 per share, for an aggregate purchase price of $250 million (the “Private Placement”). Information with respect to the
Private Placement was previously included in our Current Reports on Form 8-K filed with the SEC on May 1, 2020 and May 19,
2020. Subsequent to the Private Placement, we converted the Series A Preferred Stock into common stock. See Item 8. Financial
Statements and Supplementary Data - Note 14 - Redeemable Convertible Preferred Stock.
Issuer Purchases of Equity Securities
The following table sets forth information about our purchases of our outstanding common stock during the quarter ended
December 31, 2020:
Period
October 2020
November 2020
December 2020
Total Number of
Shares Purchased (a)
Average Price Paid
Per Share (a)
10,262 $
748 $
7,840 $
18,850 $
26.84
26.61
28.13
27.36
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares that
May Yet be
Purchased Under
Plans or Programs
— $
— $
— $
—
—
—
—
—
(a) Shares of common stock we purchased were solely for the cancellation of shares of stock withheld for related tax obligations that occurs upon vesting of
restricted shares
Covetrus, Inc. 2020 Form 10-K
37
Item 6.
Selected Financial Data
Not applicable
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.
The discussion of our financial condition and results of operations for the year ended December 31, 2019 as compared to the year
ended December 29, 2018 included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31, 2019 is incorporated by reference into this
MD&A. During the fourth quarter of 2020, in conjunction with our efforts to remediate our income tax material weakness, we
identified an error in the calculation of the deferred tax asset related to investments in partnerships. Specifically, as of December
30, 2017 our deferred tax asset was overstated by $42 million. As a result of the overstatement of this deferred tax asset, our
valuation allowance established during the year ended December 31, 2019 was overstated. This revision did not affect our
statement of operations in any other year. We have revised affected amounts below as of December 31, 2019 from the amounts
previously reported.
Overview
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 across the globe, so they can deliver exceptional care to their patients when and where it is needed. In
February 2019, we combined the complementary capabilities of the Animal Health Business, previously operated by our Former
Parent, and Vets First Choice, bringing together leading practice management software and supply chain 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 health of their practices while driving increased demand for our
products and services.
We are organized based upon geographic region and focus on delivering our platform of products and services to our customers
on a geographical basis. Our reportable segments are (i) North America, (ii) Europe, and (iii) APAC & Emerging Markets. Our
major product groups that we disaggregate within our reportable segments are (i) supply chain services, (ii) software services, and
(iii) prescription management. See Note 20 - Segment Data and Note 5 - Revenue from Contracts with Customers.
Across our segments and major product groups, the willingness of Animal Owners to spend with their veterinarians on
preventative and therapeutic treatments and procedures is critical to our financial performance. In the companion-animal market
specifically, there is an ongoing trend of owners humanizing, or providing the best possible lives for their pets. Across the
companion animal, equine, and large animal markets, we anticipate that for us to succeed on our strategic roadmap, we should
prioritize value creation with our Customers so that we can seek to strengthen the relationship between Customers and Animal
Owners as well as enable our Customers to provide proactive healthcare options to Animal Owners, including our investment in
higher margin proprietary brand products and compounding.
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.
Key Factors and Trends Affecting our Results
COVID-19, Growth, and Cost Containment
In an effort to contain COVID-19 or slow its spread, governments around the world enacted various measures, including orders to
close all businesses not deemed “essential,” isolate residents to their homes or places of residence, and practice social distancing
when engaging in essential activities. The determination of what is an “essential” business is mandated by local authorities. The
Covetrus, Inc. 2020 Form 10-K
38
animal-health industry and veterinary-care sector have proven to be more resilient than originally anticipated. Operationally, all of
our distribution centers and pharmacies continue to remain open as veterinary medicine has been deemed an essential service in
most geographies across the globe. Our supply chain operations continue to work with manufacturers and suppliers across the
globe to provide access to critical supplies and quality products. During 2020, the required responses to mitigate the spread of the
pandemic helped shifted customer and animal-owner demand to our online channel due to the demand for our prescription
management and online pharmacy services, including the increased adoption of our home delivery services. We continue to see an
increase in people adopting pets and also that companion Animal Owners are increasing their per visit spend with their
veterinarians. We are assessing how to differentiate COVID-19 growth, that may be temporary, with the normalization of our net
sales growth in the third and fourth quarters of 2020. However, due to the relatively limited passage of time during COVID-19,
we have not been able to determine the extent to which utilization of our products and services may be temporary.
During 2020, we undertook certain temporary cost containment measures to help better align our cost structure near-term,
including temporary executive, board, and other senior-level employee compensation reductions, employee furloughs in certain
European countries, certain shift eliminations, a temporary hiring freeze, discretionary spending deferrals, deferred payroll taxes
as available under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and temporarily suspended our
401(k) employer match. We began to ease some of the above-mentioned cash and liquidity conservation measures as the impact
of the COVID-19 pandemic on our results of operations, to date, has been less than anticipated. Specifically, we returned to pre-
COVID-19 compensation levels and reinstated our 401(k) employer match. At the same time, we continue to closely monitor
global developments unfolding during the pandemic and may reinstate any measures that we reverse, or we may take additional
actions, as needed, to ensure we have enough liquidity for our business operations. The temporary cost containment measures
were beneficial to our Selling, general and administrative (“SG&A”) expenses for 2020; however, costs incurred to grow our
business outpaced the decreases we experienced through containment. Absent the cost containment measures, our SG&A would
have increased further. For example, we expect that travel and entertainment expenses will return toward previous levels when the
COVID-19 pandemic eventually subsides.
Investing in Innovation and Corporate Infrastructure
Since the Transactions, 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. While the 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 is subsiding, we are still incurring considerable costs to invest in our growth, both through innovation and
the internal infrastructure necessary to support that innovation and growth.
Terms with Key Suppliers, Customers, and Partners
We are subject to a concentration of risk with our suppliers as the loss of one of our five major manufacturing relationships,
globally, could have a material impact on our financial performance. 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 are dependent upon third-party suppliers, and the results of these negotiations, including whether the contractual
relationship remains in place, 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, 2020.
Effective January 1, 2021, we no longer are partnered with Merck & Co., in the U.K., which will result in decreasing net sales in
future periods. Using data from 2020, the loss of this supplier in the U.K. in 2021 is not expected to alter the concentration of our
top five suppliers. We also are no longer partnered with one of our customers in the U.K., which we expect will cause a decrease
in our Net sales in the U.K. We are pursuing options to mitigate the effects of the supplier and customer loss in the U.K., and we
do not expect the profitability impact to be significant. For the year ended December 31, 2020, the U.K. represented 13% of our
Net sales.
We are working toward a resolution with a third party logistics provider in Germany that we partnered with in late 2020. The
transition of our operations over to this third party has resulted in disruption to our supply chain. We are likely to experience
ongoing disruption in the near-term with potential medium to long-term impacts. Our German operations represent 2% of our Net
sales.
Definition of Non-GAAP Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”)
Adjusted EBITDA is a non-GAAP financial measure used 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
Covetrus, Inc. 2020 Form 10-K
39
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, strategic consulting, transaction costs, formation
of Covetrus expenses, separation programs and executive severance, carve-out operating expenses, IT infrastructure, goodwill
impairment charges, capital structure-related fees, operating lease right-of-use asset impairments, managed exits from businesses
we are exiting or closing, and other income and expense items, net. Currently, 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 20 - 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
Operating income (loss)
Net income (loss)
Net income (loss) attributable to Covetrus
Years Ended
December 31, 2020
$
4,339
3,541
798
18.4 %
December 31, 2019
$
3,976
3,227
749
18.8 %
December 29, 2018
$
3,778
3,094
684
18.1 %
867
—
(69)
(17)
(19)
$
$
$
808
938
(997)
(983)
(980)
$
$
$
547
—
137
107
101
$
$
$
The year-over-year increase in Net sales for the year ended December 31, 2020 compared to the year ended December 31, 2019
was primarily due to improved performance across certain of our markets, prescription management growth, and acquisitions,
partially offset by net sales from divestitures as the divested businesses contributed net sales for a full period in 2019 as well as
unfavorable foreign exchange.
The year-over-year improvement in Operating loss for the year ended December 31, 2020 compared to the year ended December
31, 2019 was largely due to the goodwill impairment charge in the comparative period of the prior year, partially offset by
increased SG&A expense related to various corporate functions as we continue to invest in our corporate infrastructure to enable
our growth.
The year-over-year improvement in Net loss for the year ended December 31, 2020 compared to the year ended December 31,
2019 was largely due to the goodwill impairment charge in the comparative period of the prior year, as well as the gain on the
divestiture of scil, partially offset by increased SG&A expense related to various corporate functions as we continue to invest in
our corporate infrastructure to enable our growth.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Net Sales
(In millions)
North America
Europe
APAC & Emerging Markets
Eliminations
December 31, 2020
2,377
$
% of
Total
December 31, 2019
2,111
54.8 % $
% of
Total
53.1 % $
1,571
402
(11)
36.2
9.3
(0.3)
1,509
368
(12)
38.0
9.3
(0.3)
Total Net sales
$
4,339
100.0 % $
3,976
100.0 % $
Covetrus, Inc. 2020 Form 10-K
$ Change
% Change
266
62
34
1
363
12.6 %
4.1
9.2
(8.3)
9.1 %
40
Net sales for the year ended December 31, 2020 increased compared to the year ended December 31, 2019 primarily due to
improved performance across certain of our markets, a $136 million increase from prescription management growth, and
contribution of $70 million in net sales from acquisitions, including $24 million from the acquisition of Vets First Choice being
present for a complete year of sales versus only 10.75 months in 2019, partially offset by $89 million of net sales from
divestitures as the divested businesses contributed net sales for a full period in 2019, and $7 million due to unfavorable foreign
exchange. The drivers by segment are detailed below:
•
•
•
North America increased primarily due to increased contribution of $136 million from prescription management growth,
$118 million of growth in our supply chain business, and $26 million from acquisitions (most of which is related to Vets
First Choice being present for a complete year of sales versus only 10.75 months in 2019).
Europe increased primarily due to $87 million of organic growth across most of our markets in the region, $41 million
from our acquisitions in France and Romania being present for the full year in 2020, and favorable foreign exchange of
$13 million. This increase was partially offset by $80 million from the disposition of scil and the deconsolidation of a
subsidiary in Spain as the divested businesses contributed net sales for a full year in 2019.
APAC & Emerging Markets increased primarily due to $51 million of organic growth, partially offset by unfavorable
foreign exchange of $20 million.
Gross Profit and Gross Margin
(In millions)
North America
Europe
APAC & Emerging Markets
Total Gross profit
December 31, 2020
500
$
219
79
798
$
Gross
Margin %
21.0 % $
13.9
19.7
18.4 % $
December 31, 2019
452
227
70
749
Gross
Margin %
$ Change
Gross Profit
% Change
21.4 % $
15.0
19.0
18.8 % $
48
(8)
9
49
10.6 %
(3.5)
12.9
6.5 %
During the year ended December 31, 2020, the increase in Gross profit was largely driven by a $34 million increase from
prescription management, improved performance across certain distribution markets, and $18 million from acquisitions in the
current year and being present for the full year in 2020 versus a partial period in 2019. These increases were partially offset by
$26 million from the disposition of scil and the deconsolidation of a subsidiary in Spain as the divested businesses contributed
gross profit for the full year in 2019 and unfavorable foreign exchange of $3 million. The drivers of the increase in our gross
profit are further detailed below by segment:
North America increased primarily due the growth of our prescription management business and $11 million from
acquisitions.
Europe decreased primarily due to $22 million from the disposition of scil and the deconsolidation of a subsidiary in
Spain as the divested businesses contributed gross profit for the full year in 2019, partially offset by acquisitions of $6
million being present for the full year in 2020 versus a partial year in 2019, and $5 million from improved performance
across certain distribution markets, and $2 million of favorable foreign exchange.
APAC & Emerging Markets increased due to the contribution of $12 million from organic growth, partially offset by
unfavorable foreign exchange of $5 million.
•
•
•
SG&A
(In millions)
North America
Europe
APAC & Emerging Markets
Corporate
Total SG&A
December 31, 2020
495
$
184
55
133
867
$
% of
Respective
Net Sales
20.8 % $
11.7
13.7
—
20.0 % $
December 31, 2019
467
186
58
97
808
% of
Respective
Net Sales
22.1 % $
12.3
15.8
—
20.3 % $
$ Change
% Change
28
(2)
(3)
36
59
6.0 %
(1.1)
(5.2)
37.1
7.3 %
SG&A expenses for the year ended December 31, 2020 increased primarily due to costs related to various corporate functions as
we continue to invest in our corporate infrastructure to enable our growth, the increase of $27 million from acquisitions (primarily
Covetrus, Inc. 2020 Form 10-K
41
Vets First Choice), $18 million of strategic consulting fees, $8 million operating lease right-of-use asset impairment, increased
costs to support the growth in our prescription management business, and $6 million of costs accrued in connection with the
managed exit of our French distribution business. These costs were partially offset by decreases due to the disposition of scil and
the deconsolidation of a subsidiary in Spain as the divested businesses contributed expenses for a full year in 2019, $12 million
decrease in expenses related to the formation of Covetrus, and favorable foreign exchange. The drivers by segment and at
Corporate are detailed below:
•
•
•
•
North America increased primarily due to the acquisition of Vets First Choice which contributed $18 million incremental
expense from a complete year of SG&A expense this year versus 10.75 months last year, $8 million operating lease
right-of-use asset impairment, and increased costs to support the growth in our prescription management business,
partially offset by $9 million of lower share-based compensation expenses and expenses related to the formation of
Covetrus.
Europe decreased primarily due to $21 million for the disposition of scil and the deconsolidation of a subsidiary in Spain
as the divested businesses contributed expenses for a full period in 2019. These decreases were partially offset by $7
million from acquisitions in France and Romania being present for the full year in 2020, $6 million of costs incurred in
connection with the managed exit of our French distribution business, $3 million of increased IT and facility costs
associated with the formation of Covetrus as we exited our transition service agreements, and unfavorable foreign
exchange of $2 million.
APAC & Emerging Markets decreased primarily due to favorable foreign exchange.
Corporate grew primarily due to increased costs incurred of $32 million as we continue to invest in our corporate
infrastructure to enable our growth and $18 million related to strategic consulting fees, partially offset by decreased
expenses of $15 million related to the formation of Covetrus.
Other Income (Expense)
(In millions)
Interest income
Interest expense
Other, net
December 31, 2020
$
1 $
December 31, 2019
$ Change
% Change
(47)
91
45 $
2 $
(56)
22
(32) $
(1)
9
69
77
(50.0)%
(16.1)
313.6
(240.6)%
Other income (expense)
$
For the year ended December 31, 2020, we generated other income, net as compared to other expense, net for the year ended
December 31, 2019 primarily due to the gain on the divestiture of scil, a mark-to-market adjustment related to our Distrivet
options, and a gain on the deconsolidation of our subsidiary, SAHS, in Spain.
Income Taxes
For the year ended December 31, 2020, our effective tax rate was 28.9% compared to 4.5% for the prior year period. The increase
in our effective tax rate is primarily related to the sale of our scil business and non-deductible share-based compensation.
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 on deferred tax assets was $11 million as of December 31, 2020 and $10 million as of December 31,
2019. 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, 2020 was $1 million
and was attributable primarily to an increase related to the uncertainty regarding the realization of future tax benefit in certain
foreign jurisdictions and a decrease of a portion of the valuation allowance recorded against U.S. deferred tax assets. See Note 16
- 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
Covetrus, Inc. 2020 Form 10-K
42
limitation of $2 million for the year ended December 31, 2020. We recorded a tax expense for the GILTI provision of $10 million
for the year ended December 31, 2019. 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 financial statements, therefore, we have not recorded an estimate for these
items in the effective tax rate for the years ended December 31, 2019 and December 31, 2020.
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 foreign withholding taxes upon distribution of such
unremitted earnings.
We previously considered the earnings in all of our foreign subsidiaries as indefinitely reinvested and did not record deferred
income taxes with respect to such earnings. However, with the recent change in our capital structure due to the conversion of the
Series A Preferred Stock and the elimination of preferred dividends as well as the strong performance in our business, the
opportunity to pursue new investments is a viable option available to us. Accordingly, we determined effective as of the fourth
quarter ending December 31, 2020, that certain unremitted earnings of approximately $135 million existing in the Company’s
foreign subsidiaries located in various jurisdictions are no longer indefinitely reinvested. As a result of the U.S. Tax Act,
unremitted earnings can generally be remitted to the U.S. without incurring additional U.S. federal income taxation. In addition,
earnings repatriated from the jurisdictions noted above, based upon our current legal structure, can generally be repatriated
without incurring any withholding tax liability. Accordingly, we determined that the deferred tax liability associated with the
repatriation of the undistributed earnings from the applicable subsidiaries located in these tax jurisdictions would be $2 million.
Adjusted EBITDA
(In millions)
North America
Europe
APAC & Emerging Markets
Corporate
Total adjusted EBITDA $
December 31, 2020
187
$
72
28
(61)
226
% of
Respective Net
Sales
December 31, 2019
153
68
18
(39)
200
7.9 % $
4.6
7.0
NA
5.2 % $
% of
Respective Net
Sales
$ Change
% Change
7.2 % $
4.5
4.9
NA
5.0 % $
34
4
10
(22)
26
22.2 %
5.9
55.6
NA
13.0 %
Total non-GAAP Adjusted EBITDA for the year ended December 31, 2020 increased largely due to prescription management
growth and improved performance across certain of our markets, partially offset by increasing costs incurred as we continue to
invest in our corporate infrastructure to enable our growth.
Adjusted EBITDA is our primary segment performance metric. We do not allocate expenses managed at the corporate level to our
segments. See Note 20 - 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 increased primarily due to $22 million in organic growth of our prescription management business and
$13 million from improved performance in our supply chain business.
Europe increased primarily due to organic growth in certain of our European markets.
APAC & Emerging Markets increased primarily due to organic growth, partially offset by unfavorable foreign exchange.
Corporate contributed a $22 million decrease primarily due to increased SG&A expenses incurred as we continue to
invest in our corporate infrastructure to enable our growth.
Covetrus, Inc. 2020 Form 10-K
43
Liquidity and Capital Resources
Impact of COVID-19 on Liquidity and Capital Resources
The spread of COVID-19 as a global pandemic in early 2020 led to rapid pricing fluctuations and changing terms that impacted
global capital markets. Many equity prices tumbled and the investment funds flowing into certain debt markets paused or became
more expensive to borrowers in the early stages of the pandemic. The capital markets recovered to an extent over the course of the
year, however volatility and uncertainty remain. In response to the pandemic, some governments offered deferred tax schemes,
guarantees, and loan programs to individuals, small businesses, and larger companies as methods to boost liquidity and maintain
workforces to help soften the impact of COVID-19 on capital structures and financial results of businesses. We have not been
immune to the impact of COVID-19 and have taken and continue to take steps to improve our liquidity position.
In April 2020, under challenging conditions, we completed the sale of our scil animal-care business for net cash proceeds of
approximately $103 million, representing gross proceeds of $110 million, net of cash included in the sale. We used $45 million to
prepay our scheduled term loan amortization payments for 2020. In December 2020, we fully prepaid the 2021 Term Loan
amortization payments. The next quarterly principal amortization payment of $15 million is due on March 31, 2022.
On May 19, 2020, we sold our Series A Preferred Stock in a private placement transaction for $244 million in net cash proceeds
to further enhance our liquidity position. A portion of the Series A Preferred Stock proceeds, coupled with cash flow generated
from better than anticipated sales during COVID-19, was used to repay our revolver borrowings outstanding at that time earlier
than expected, with the remainder used to support general corporate purposes (see Note 14 - Redeemable Convertible Preferred
Stock). In September 2020, we acted on the opportunity to convert a portion of our Series A Preferred Stock to common stock that
resulted in a reduction of our cash dividend payments on the Series A Preferred Stock by $12 million, on an annualized basis
assuming cash payments. On November 17, 2020, we held a Special Meeting of Shareholders which voted to approve the
conversion of the remaining outstanding Series A Preferred Stock into common stock that would allow us to further save
approximately $7 million in annual dividend payments. In November 2020, all remaining preferred shares were converted into
common stock with no continuing dividend payment requirements.
Our operational plans to manage our liquidity continue to include seeking opportunities to reduce non-critical capital
expenditures, sharpening our focus on collecting amounts owed to us by customers and for supplier rebates, managing
opportunistic inventory purchases as we carefully monitor sales forecasts and timing of projected price increases, quickly
reducing our other costs, and maximizing our payment terms wherever possible. We also continue to monitor cash flow
projections and will consider additional borrowings, if needed, based on availability under our revolving credit facility from time-
to-time.
Our interest expense was slightly lower during the year ended December 31, 2020 primarily due to fully paying the required $60
million 2020 amortization payments by April 2020, which reduced our term loan outstanding and lowered monthly floating
interest rates applicable to the term loan. The February 2020 amendment to our credit agreement modified the leverage-based
pricing grid that determines the quarterly applicable margin to be added to our borrowings, which applicable margin increases,
decreases or stays constant in alignment with higher or lower credit agreement-defined leverage. The applicable margin added to
our floating interest rate on borrowings outstanding was set at 1.75% based on credit agreement-defined leverage reported for the
three-months ending September 30, 2020.
In addition, the February 2020 amendment permitted us to maintain revolving credit facility borrowings near term, if needed,
while remaining compliant with our financial covenants as the step down of our credit agreement-defined leverage covenant from
5.50x to 5.00x was delayed until June 30, 2021. We were in compliance with the covenants in our credit agreement as of
December 31, 2020. Based on our expected credit agreement-defined leverage as of the year ended December 31, 2020, once the
quarterly credit agreement compliance filing is made, the current applicable margin on our credit agreement borrowings
outstanding will remain unchanged at least until the next compliance filing is made for the three months ended March 31, 2021.
The duration of the COVID-19 pandemic continues to be unknown. Should the pandemic extend throughout 2021 and beyond, we
may experience a negative impact on our liquidity position. Therefore, we continuously assess steps we can take to improve
working capital and increase cash on our balance sheet, research government-backed loan programs that may be available to us or
to our customers, and closely monitor the capital markets for additional opportunities to improve our liquidity position.
Overview
Covetrus, Inc. 2020 Form 10-K
44
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, 2020. See Note 9 - Long-Term Debt and Other Borrowings, Net for more information on our Credit Facilities.
Our primary sources of liquidity are cash and cash equivalents, cash flows generated by the operations of our business, and
available borrowing capacity under our credit facility. Longer term, if we desire to access alternative sources of funding through
the capital and credit markets, challenging global economic conditions, such as a long-lasting COVID-19 pandemic or economic
downturn, 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.
Under normal historical operating conditions, we would expect to incur additional disbursements in connection with the
following:
•
•
•
•
•
•
•
Expansion of global sales and marketing efforts
Increase of our pharmaceutical compounding operations capacity
International development
Equity investments and business acquisitions that we may fund from time to time
Term loan facility amortization payments (beginning again in March 2022)
Capital investments in current and future facilities
Pursuit and maintenance of appropriate regulatory clearances, approvals for existing products, and any new products that
may be developed
Business prospects for 2021 and how the global COVID-19 vaccination process unfolds will likely influence whether we pursue
some of the opportunities noted above. Regardless, 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,
2020
December 31,
2019
December 29,
2018
$
$
290
740
$
$
130
511
$
$
23
514
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 $290 million, cash flow from operations, and access to
borrowing capacity available under our Revolving Credit Facility. Our decisions on how we use available liquidity will be based
upon the duration of the COVID-19 pandemic, the timing of cash flow generation and our continuing review of the funding needs
for our business, as we seek to optimize the allocation of cash resources for investments, capital structure changes or business
combinations.
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,
2020
Years Ended
December 31,
2019
December 29,
2018
$
$
$
53
$
(5) $
$
104
103
$
(65) $
$
66
158
(29)
(120)
Covetrus, Inc. 2020 Form 10-K
45
For the year ended December 31, 2020, net cash provided by operating activities decreased over the year ended December 31,
2019, primarily due to growth in working capital.
For the year ended December 31, 2019, net cash provided by operating activities decreased over the year ended December 31,
2018, primarily due to additional expenses related to the formation of Covetrus and lower operating earnings.
Cash inflows and outflows from changes in investing activities
For the year ended December 31, 2020, net cash used for investing activities decreased compared to net cash used for investing
activities for the year ended December 31, 2019, primarily due to $103 million in net proceeds from the divestiture of scil,
partially offset by a $28 million increase for business acquisitions and a $19 million increase in capital spending for property and
equipment.
For the year ended December 31, 2019, net cash used for investing activities increased over the year ended December 31, 2018,
primarily due to a $17 million dollar increase in capital spending for property and equipment and an $18 million increase for
business acquisitions.
Cash inflows and outflows from changes in financing activities
For the year ended December 31, 2020, net cash provided by financing activities increased over the year ended December 31,
2019, primarily due to $250 million in gross proceeds from the issuance of Series A Preferred Stock, partially offset by principal
payments, acquisition payments, preferred stock issuance costs, preferred stock dividends, and debt issuance costs totaling $156
million.
For the year ended December 31, 2019, net cash provided by financing activities increased over the year ended December 31,
2018, primarily due to debit issuances proceeds of $1.2 billion, net of $24 million debt issuance costs, and a $308 million decrease
in acquisitions of non-controlling interests, partially offset by $1.2 billion paid as dividend to Henry Schein, a reduction in Net
Former Parent investment of $109 million that included the $361 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.
Contractual 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 Note 7 - Leases, Note 9 - Long-Term Debt and Other Borrowings, Net and Note 12 - 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, 2020:
(In millions)
Long-term debt
Interest on long-term debt
Operating leases (a)
Finance leases, including interest
Purchase obligations (b)
Total
2021
2022 - 2023
2024 - 2025
After 2025
Total
Payments Due by Period
$
$
— $
21
28
1
22
72
$
126
40
51
—
15
232
$
$
960
2
39
—
13
1,014
$
$
— $
—
140
—
—
140
$
1,086
63
258
1
50
1,458
(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
Unrecognized Tax Benefits
We cannot reasonably estimate the timing of future cash flows related to the unrecognized tax benefits, including accrued interest
and penalties, of $3 million as of December 31, 2020. See Note 16 - Income Taxes.
Covetrus, Inc. 2020 Form 10-K
46
Off-balance Sheet Arrangements
In April 2020, we made a final payment of $9 million for a 2019 acquisition which increased the amount available to be borrowed
under our revolving line of credit. As of December 31, 2020, we had $1 million outstanding in standby letters of credit that
primarily support our obligations related to our insurance programs and $4 million in surety bonds outstanding in support of
various U.S. state registrations for pharmaceutical operations and distributions.
Critical Accounting 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
Business Acquisitions
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 the 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.
Goodwill
When using the quantitative impairment test for assessing goodwill, determining the fair value of a reporting unit is judgmental in
nature and involves the use of significant estimates and assumptions. 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. 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 8.0% to
9.0%, depending on the reporting unit, which considered capital structure and risk premiums, including those reflected in our
current market capitalization.
During the first quarter ended March 31, 2020, we experienced a sustained decline in our share price and a resulting decrease in
our market capitalization due to the overall macroeconomic effects of the COVID-19 pandemic. Due to this overall market
decline and the uncertainty surrounding COVID-19, we concluded that a triggering event occurred and conducted an interim
impairment test of goodwill as of March 31, 2020 by quantitatively comparing the fair value of our North America reporting unit
(the only reporting unit currently bearing goodwill) to its carrying amount. Using the income-based approach, fair value exceeded
the carrying amount as of March 31, 2020. The income-based approach resulted in a fair value that exceeded the carrying amount
by $2 million and $156 million at discount rates of 9.0% and 8.5%, respectively.
We did not experience triggering events for impairment following our testing performed in the first quarter of 2020. Our business
has continued to perform well, in particular, prescription management. Our market capitalization has also increased significantly
from the first quarter of 2020. As of December 31, 2020, our market capitalization increased over 300% as compared to March
31, 2020.
We completed our annual evaluation for impairment of goodwill during the fourth quarter of 2020. The evaluation indicated that
the fair value estimates of our reporting units exceeded their carrying values by sufficient margins and no impairments were
required. See Note 8 - Goodwill and Other Intangibles, Net for changes in goodwill by reporting unit.
Covetrus, Inc. 2020 Form 10-K
47
As of December 31, 2020 and 2019, Goodwill was $1,187 million and $1,154 million, respectively. All goodwill is recorded in
our North America reporting unit.
Intangible Assets
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, customer relationships, and intellectual
property, and impairment losses are 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.
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 taxes and liabilities and uncertain tax positions. The underlying assumptions are also highly susceptible to
change from period to period.
We record a provision for income taxes for the anticipated tax consequences of our reported results of operations using the asset
and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Although we believe our assumptions, judgments, and estimates are reasonable, changes in tax laws or our interpretation of tax
laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in our consolidated
financial statements. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the
period that includes the enactment date. 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 against 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 as to
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 the allowance in a future period, could have a material impact on our financial condition and
results of operations. See Note 16 - Income Taxes.
Covetrus, Inc. 2020 Form 10-K
48
We identified an error in our calculation of the deferred tax asset related to U.S. partnerships in conjunction with our efforts to
remediate our income tax material weakness. See Item 9A. Controls and Procedures for information on the income tax material
weakness and our remediation efforts.
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.
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, 2020 or 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 enter into derivative financial instruments for trading or
speculative purposes.
We have exposure to Brexit as approximately 13% of our Net sales was generated by our operations located within the U.K. in
2020. The primary Brexit risk we faced was not foreign currency related but rather was supply chain-related, specifically for our
replenishment of certain inventory stock sourced from U.K. vendors who manufactured such goods in their subsidiaries outside
the U.K. and thus needed to import those goods into the U.K.
As of December 31, 2020, a hypothetical 5% increase in foreign exchange rates, where we conduct our business in local currency,
versus the U.S. dollar would have resulted in a decrease of $3 million in annualized operating income.
Conversely, a hypothetical 5% decrease in foreign exchange rates would have resulted in an improvement of $3 million in
annualized operating income.
Interest Rate Risk
As of December 31, 2020, we had variable-rate borrowings outstanding of $1.1 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 2019, we executed interest rate swap contracts with notional amounts aggregating $500 million that are designated as cash flow
hedges. See Note 10 - Derivatives. 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 increase by $2 million.
The market risk resulting from interest rate fluctuations will not be entirely eliminated through our interest rate swap contracts.
Our credit facility contains a LIBOR floor of 0.00% while our interest rate swap contracts do not include floors. Our interest
expense could, theoretically, increase should LIBOR fall into negative territory. The further LIBOR falls below the fixed rates set
within our swap contracts, the more additional interest expense we pay for swap settlements. Conversely, we receive interest for
Covetrus, Inc. 2020 Form 10-K
49
swap settlements when LIBOR is greater than the swaps’ fixed rates. The higher LIBOR rises above the fixed rates, the less
interest expense we effectively pay.
Among the many actions taken by the Federal Reserve System to reduce the impact of the COVID-19 pandemic, the decision by
its Federal Open Market Committee to lower interest rates has generally benefited us in the form of lower interest expense. This
benefit, though, is offset by higher interest rate swap settlement payments by us, the lower interest rates fall. Thus, the market risk
resulting from interest rate fluctuations can be mitigated but 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.
Covetrus, Inc. 2020 Form 10-K
50
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated and Combined Financial Statements:
Balance Sheets as of December 31, 2020 and December 31, 2019
Statements of Operations for the years ended December 31, 2020, December 31, 2019, and December 29, 2018
Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, December 31, 2019, and
December 29, 2018
Statements of Shareholders' Equity for the years ended December 31, 2020, December 31, 2019, and December 29, 2018
Statements of Cash Flows for the years ended December 31, 2020, December 31, 2019, and December 29, 2018
Notes to Consolidated and Combined Financial Statements:
Note 1: Business Overview and Significant Accounting Policies
Note 2: Novel Coronavirus Disease 2019 (“COVID-19”)
Note 3: Business Acquisitions
Note 4: Divestitures and Equity Method Investments
Note 5: Revenue From Contracts with Customers
Note 6: Property and Equipment, Net
Note 7: Leases
Note 8: Goodwill and Other Intangibles, Net
Note 9: Long-Term Debt and Other Borrowings, Net
Note 10: Derivatives
Note 11: Fair Value
Note 12: Commitments and Contingencies
Note 13: Redeemable Non-controlling Interests
Note 14: Redeemable Convertible Preferred Stock
Note 15: Accumulated Other Comprehensive Income (Loss)
Note 16: Income Taxes
Note 17: Earnings (Loss) Per Share
Note 18: Share-based Compensation and Other Employee Benefits
Note 19: Related-Party Transactions
Note 20: Segment Data
Note 21: Summary of Quarterly Data (Unaudited)
Page
52
55
56
57
58
59
61
69
70
71
72
73
73
74
76
78
79
80
82
82
82
83
87
88
90
91
94
Covetrus, Inc. 2020 Form 10-K
51
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 balance sheets of Covetrus, Inc. (the “Company”) as of December 31, 2020 and 2019,
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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United
States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our
report dated March 1, 2021 expressed an adverse opinion thereon.
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.
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 year 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material
to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication
of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to
which they relate.
Covetrus, Inc. 2020 Form 10-K
52
Impairment Assessment of North America Reporting Unit Goodwill
As described in Note 8 of the Company's consolidated and combined financial statements, the Company reported goodwill related to its
North America reporting unit of $1,187 million as of December 31, 2020. Goodwill impairment 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, including after changes in macroeconomic conditions. The Company concluded that a triggering event occurred and
conducted an interim impairment test of goodwill as of March 31, 2020. Impairment analysis for goodwill requires a comparison of the fair
value of a reporting unit to its carrying value. The fair value of the reporting unit is measured using both the market approach and income
approach, which includes discounted expected cash flows.
We identified the assessment of goodwill impairment as a critical audit matter. Auditing management’s goodwill impairment tests for its
North America reporting unit was complex and highly judgmental due to the significant estimation required in determining the fair value of
the reporting unit. The value of the North America reporting unit is sensitive to significant assumptions, such as the weighted-average cost
of capital and estimated future levels of gross and operating profits, which are affected by expected future market and economic conditions.
Auditing management’s impairment assessment involved especially challenging and subjective auditor judgment due to the uncertainty
surrounding future events and the extent of specialized skill required to test certain valuation inputs.
The primary procedures we performed to address this critical audit matter included:
•
•
•
Evaluating the design and testing the operating effectiveness of controls over the Company’s goodwill impairment testing
process, including controls over management’s budgeting and forecasting process used to develop forecasts of future gross and
operating profits;
Evaluating the reasonableness of forecasts of future gross and operating profits and projected capital expenditures by comparing
forecasts with historical results and industry benchmarks, and performing retrospective reviews and sensitivity analyses; and
Utilizing professionals with specialized skills and knowledge in valuation to assist in evaluating the valuation models,
methodologies and significant assumptions, including the weighted-average cost of capital, used by the Company to estimate the
fair value of the North America reporting unit.
Realizability of Deferred Tax Assets
As described in Note 16 to the Company’s consolidated and combined financial statements, the Company had deferred tax assets related to
deductible temporary differences and tax attributes of $84 million, net of a $11 million valuation allowance, as of December 31, 2020. The
values assigned to deferred tax assets is judgmental, and the realizability of these assets is dependent upon generation of future taxable
income during periods in which temporary differences become deductible. In assessing the realizability of deferred tax assets, the Company
considers the scheduled reversal of existing temporary tax differences, projected future taxable income, taxable income in carryback years,
and changes in tax laws.
We identified the realizability of deferred tax assets as a critical audit matter. The estimation of the future reversal pattern of existing
temporary tax differences and other assumptions of future taxable income is subjective and may be affected by future market and economic
conditions including changes in tax laws. Auditing these elements was especially challenging due to the nature and extent of auditor
judgment involved in evaluating the Company’s estimation of the reversal of timing items and projected future taxable income including
through the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•
•
•
Assessing evidence, both confirming and contradictory, to determine whether it is more likely than not that all or some portion
of deferred tax assets will not be realized; and
Assessing the reasonableness of scheduling of the reversal of existing taxable temporary differences;
Utilizing professionals with specialized skills and knowledge to assist in evaluating management’s determination of the
realizability of deferred tax assets and the overall reasonableness of tax positions which support the conclusions reached.
/s/ BDO USA, LLP
Boston, MA
March 1, 2021
We have served as the Company’s auditor since 2018.
Covetrus, Inc. 2020 Form 10-K
53
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Covetrus, Inc.
Portland, ME
Opinion on Internal Control over Financial Reporting
We have audited Covetrus, Inc. (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the “COSO criteria”) In our opinion, the Company did not maintain, in all material respects, effective internal control over
financial reporting as of December 31, 2020, based on the COSO criteria.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the
Company after the date of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
consolidated balance sheets of Covetrus, Inc. (the “Company”) as of December 31, 2020 and 2019, 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, 2020, and the related notes (collectively referred to as “the financial statements”) and our report dated
March 1, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A material weakness is a deficiency, or a 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. A material weakness regarding management’s failure to design and maintain controls over the accounting for
income taxes has been identified and described in management’s assessment. This material weakness was considered in determining the
nature, timing, and extent of audit tests applied in our audit of the 2020 financial statements, and this report does not affect our report
dated March 1, 2021 on those financial statements.
Definition and Limitations of Internal Control over Financial Reporting
A company’s 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
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.
/s/ BDO USA, LLP
Boston, MA
March 1, 2021
Covetrus, Inc. 2020 Form 10-K
54
COVETRUS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
December 31,
2020
December 31,
2019
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance of $5 and $8 (Note 5)
Inventories, net
Other receivables
Prepaid expenses and other
Assets held for sale (Note 4)
Total current assets
Non-current assets:
Property and equipment, net (Note 6)
Operating lease right-of-use assets, net (Note 7)
Goodwill (Note 8)
Other intangibles, net (Note 8)
Investments and other
Total assets
LIABILITIES, MEZZANINE EQUITY, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
Current maturities of long-term debt and other borrowings (Note 9)
Accrued payroll and related liabilities
Accrued taxes
Other current liabilities
Liabilities held for sale (Note 4)
Total current liabilities
Non-current liabilities:
Long-term debt and other borrowings, net (Note 9)
Deferred income taxes (Note 16)
Other liabilities
Total liabilities
Commitments and contingencies (Note 12)
Mezzanine equity:
Redeemable non-controlling interests (Note 13)
Shareholders' equity:
$
$
$
$
290
507
530
67
37
—
130
426
636
67
30
51
1,431
1,340
116
117
1,187
555
90
93
84
1,154
643
45
3,496
$
3,359
405
$
1
67
37
181
—
691
1,068
28
136
1,923
520
62
44
18
164
21
829
1,125
48
94
2,096
36
10
Common stock, $0.01 par value per share, 675,000,000 shares authorized as of December 31, 2020 and
December 31, 2019; 136,017,964 and 111,620,507 shares issued and outstanding as of December 31,
2020 and 2019, respectively
Accumulated other comprehensive loss (Note 15)
Additional paid-in capital
Accumulated deficit
Total shareholders’ equity
1
(66)
2,629
(1,027)
1,537
Total liabilities, mezzanine equity, and shareholders’ equity
$
3,496
$
See notes to consolidated and combined financial statements.
1
(86)
2,339
(1,001)
1,253
3,359
Covetrus, Inc. 2020 Form 10-K
55
COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Net sales (Note 5)
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Goodwill impairment (Note 8)
Operating income (loss)
Other income (expense):
Interest income
Interest expense
Other, net
Income (loss) before taxes and equity in earnings of affiliates
Income tax benefit (expense) (Note 16)
Equity in earnings of affiliates
Net income (loss)
Net (income) loss attributable to redeemable non-controlling interests
Net income (loss) attributable to Covetrus
Earnings (loss) per share attributable to Covetrus: (Note 17)
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
December 31,
2020
Years Ended
December 31,
2019
December 29,
2018
$
4,339
$
3,976
$
3,541
798
867
—
(69)
1
(47)
91
(24)
7
—
(17)
(2)
3,227
749
808
938
(997)
2
(56)
22
(1,029)
46
—
(983)
3
$
$
$
(19) $
(980) $
(0.22) $
(0.22) $
(9.14) $
(9.14) $
118
118
107
107
3,778
3,094
684
547
—
137
1
(3)
8
143
(37)
1
107
(6)
101
1.41
1.40
71
72
See notes to consolidated and combined financial statements.
Covetrus, Inc. 2020 Form 10-K
56
COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
Net income (loss)
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)
Unrealized gain (loss) from foreign currency hedging activities
Gain (loss) on derivative instruments
Pension adjustment gain
Total other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive (income) loss attributable to redeemable non-controlling interests:
Net (income) loss
Foreign currency translation (gain) loss
Years Ended
December 31,
2020
December 31,
2019
December 29,
2018
$
(17) $
(983) $
107
23
—
(3)
—
20
3
(2)
(2)
(3)
—
(1)
—
(4)
(987)
3
(1)
(43)
(1)
—
2
(42)
65
(6)
2
(4)
61
Comprehensive (income) loss attributable to redeemable non-controlling
interests
Comprehensive income (loss) attributable to Covetrus
(4)
(1) $
2
(985) $
$
See notes to consolidated and combined financial statements.
Covetrus, Inc. 2020 Form 10-K
57
COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions, except share amounts)
December 30, 2017
— $ — $
(42) $
— $
— $
1,257
$
1,215
Common Stock
Shares
Amount
Accumulated
Other
Comprehensive
Income (Loss)
Additional
Paid-in
Capital
Accumulated
Deficit
Net Former
Parent
Investment
Total
Shareholders'
Equity
Net income (loss) attributable to
Covetrus
Cumulative impact of adopting
ASC 606
Net increase in Former Parent
investment
Other comprehensive income (loss)
December 29, 2018
Net income (loss) 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 income (loss)
—
—
—
—
—
—
—
71,693,426
39,742,089
(700,400)
—
885,392
—
—
—
—
December 31, 2019
111,620,507
Net income (loss) attributable to
Covetrus
Change in fair value of redeemable
securities
Issuance of shares in connection
with share-based compensation
plans
Share-based compensation
Series A preferred stock dividend
Conversion of Series A preferred
stock
—
—
1,793,394
—
—
22,604,063
Other comprehensive income (loss)
—
December 31, 2020
136,017,964
$
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
1
—
—
—
(40)
(82)
—
—
—
—
—
—
—
—
—
—
(4)
(86)
—
—
—
—
—
—
20
—
—
—
—
—
—
(21)
566
1,772
(30)
—
5
46
—
1
—
—
—
—
—
—
(1,001)
—
—
—
—
—
—
—
—
—
—
2,339
(1,001)
—
(6)
10
40
—
246
—
(19)
—
—
—
(7)
—
—
101
2
174
—
1,534
21
(1,153)
(567)
—
—
172
—
—
(7)
—
—
—
—
—
—
—
—
—
—
101
2
174
(40)
1,452
(980)
(1,174)
—
1,772
(30)
172
5
46
(7)
1
(4)
1,253
(19)
(6)
10
40
(7)
246
20
$
(66) $
2,629
$
(1,027) $
— $
1,537
(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 3 - Business Acquisitions
See notes to consolidated and combined financial statements.
Covetrus, Inc. 2020 Form 10-K
58
COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In millions)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
$
(17) $
(983) $
107
December 31,
2020
Years Ended
December 31,
2019
December 29,
2018
Depreciation and amortization
Amortization of right-of-use assets
Goodwill impairment
Operating lease right-of-use asset impairment
Gain on divestiture of a business
Share-based compensation expense
Deferred income taxes
Equity in earnings of affiliates
Amortization of debt issuance costs
Loss on managed exit of a business
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 divestiture of a business, net
Proceeds from sale of property and equipment
Net cash used for investing activities
Cash flows from financing activities:
Proceeds from revolving credit facility
Repayment of revolving credit facility
Proceeds from the issuance of debt
Principal payments of debt
Debt issuance and amendment 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
Proceeds from issuance of Series A preferred stock
Series A preferred stock issuance costs
Series A preferred stock dividends
Acquisition payments
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
Covetrus, Inc. 2020 Form 10-K
$
166
24
—
8
(73)
40
(32)
—
6
7
(10)
(68)
106
(19)
(85)
53
(58)
(54)
103
4
(5)
190
(190)
—
(122)
(5)
—
10
—
—
250
(6)
(6)
(17)
—
104
8
160
130
290
155
21
938
—
—
46
(25)
—
5
—
(10)
13
(58)
(92)
93
103
(39)
(26)
—
—
(65)
—
—
1,220
(43)
(24)
(1,174)
5
165
—
—
—
—
(9)
(74)
66
3
107
23
$
130
$
59
64
—
—
—
—
7
(5)
(1)
—
—
—
(13)
(42)
(34)
75
158
(22)
(8)
—
1
(29)
—
—
—
(2)
—
—
—
274
(10)
—
—
—
—
(382)
(120)
(2)
7
16
23
COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In millions) (Continued)
Supplemental disclosures of cash payments:
Interest
Income taxes
Amounts included in the measurement of operating lease liabilities
Supplemental disclosures of noncash investing and financing activities:
Conversion of Series A preferred stock
Right-of-use assets obtained in exchange for new operating lease liabilities
Right-of-use assets obtained in exchange for new finance lease liabilities
Deconsolidation of a subsidiary
Years Ended
December 31,
2020
December 31,
2019
December 29,
2018
$
$
$
$
$
$
$
40
24
27
245
56
$
$
$
$
$
— $
15
$
47
18
25
$
$
$
— $
104
1
$
$
— $
—
12
—
—
—
—
—
See notes to consolidated and combined financial statements.
Covetrus, Inc. 2020 Form 10-K
60
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(In millions, except per share amounts)
1. BUSINESS OVERVIEW AND SIGNIFICANT ACCOUNTING POLICIES
Business
Covetrus, Inc. 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 9 - Long-Term Debt and Other Borrowings, Net).
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 U.S. Generally Accepted
Accounting Principles (“GAAP”).
Except as otherwise specifically noted, the combined financial statements and other financial information for the fiscal year ended
December 29, 2018 relate to the Animal Health Business, as this period predates 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 year ended
December 29, 2018 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 the 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 standalone company for the periods presented. Actual
costs that may have been incurred if the Animal Health Business had been a standalone company would depend on a number of
Covetrus, Inc. 2020 Form 10-K
61
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. As of December 31, 2020, we exited all our transition
services agreements with our Former Parent.
During the fourth quarter ended December 31, 2020, we recorded a revision to deferred tax assets associated with investment in
partnerships. The revision to deferred tax assets to correct for the overstatement was $42 million. We have concluded that this
adjustment was not material to any previously issued financial statements. See Note 16 - Income Taxes.
Certain immaterial prior period amounts were reclassified to conform to the current presentation.
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, deferred
taxes, contingencies, intangible assets acquired, fair value measurements, share-based compensation, self-insurance reserves, and
supplier rebates.
Fiscal Year
During fiscal year 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 results were not material. Unless otherwise indicated, year-end 2020,
2019, and 2018 refer to our fiscal years ended December 31, 2020, December 31, 2019, and December 29, 2018, respectively.
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
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,
parasiticides, and vitamins and supplements to wholesale and retail customers. Our value-added practice solutions
include equipment repair, inventory management, e-commerce, as well as continuing education services for practitioners.
Software Services - 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.
Covetrus, Inc. 2020 Form 10-K
62
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, determines the product
specifications, and the amount is fixed. Payment terms differ by customer and jurisdiction and 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 Services
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. 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 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.
Covetrus, Inc. 2020 Form 10-K
63
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Sales, value-add, and other taxes we collect concurrently with revenue-producing activities are excluded from revenue, and are
recorded as liabilities and included in Accrued taxes. See Note 5 - Revenue from Contracts with Customers and Note 20 - Segment
Data for additional disclosures.
Contract Balances
Contract balances represent amounts presented in the consolidated 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 are not
expected to be collected. We estimate and reserve for our expected credit loss exposure based on our experience with past due
accounts, write-off history, the aging of accounts receivable, our analysis of customer data, current economic conditions, and
reasonable and supportable future forecasts. From time to time, we adjust our assumptions for anticipated changes in any of these
or other factors expected to affect collectability. Accounts receivable balances 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 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 balance sheets. The contract liabilities
primarily relate to advance payments from customers and upfront payments for service arrangements provided over time.
Cash and Cash Equivalents
We classify all highly liquid short-term instruments with an original maturity of three months or less as cash equivalents. We
maintain cash depository accounts with high-quality banks throughout the world. Our cash on deposit in the U.S. may at times
exceed federally insured limits. We have not incurred any related losses for the years ended December 31, 2020, December 31,
2019, and December 29, 2018.
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.
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, 2020 and 2019, we did not record any
liability related to excess unconditional purchase commitments.
We are subject to a concentration of risk with our suppliers, as five suppliers accounted for approximately 50% of our purchases
for the years ended December 31, 2020 and 2019.
Covetrus, Inc. 2020 Form 10-K
64
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
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 4 -
Divestitures and Equity Method Investments.
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 2020, $17 million in 2019, and $16 million in 2018.
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 2020 and 2019.
Supplier Rebates
We receive quarterly and annual performance rebates from suppliers based upon attainment of certain purchase or sales 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 terms. See Note 6 - Property and Equipment, Net.
Capitalized software costs consist of costs to purchase and develop software for internal use. Costs incurred during the application
development stage for software bought and further customized by outside suppliers, software developed by a supplier for
proprietary use, and costs incurred for our own personnel who are directly associated with software development are capitalized.
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 16 - Income Taxes.
Our tax provision for fiscal years 2019 and 2018 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.
Covetrus, Inc. 2020 Form 10-K
65
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Redeemable Convertible Preferred Stock
We classified our redeemable convertible preferred stock issued on May 19, 2020 as mezzanine equity on our consolidated
balance sheets as the redemption features were outside of our control. We recorded redeemable convertible preferred stock at fair
value upon issuance, net of any issuance costs. Our redeemable convertible preferred stock was converted during the year ended
December 31, 2020. See Note 14 - Redeemable Convertible Preferred Stock.
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. As a result of these redemption features, we record the non-controlling interests as redeemable and
classify them as mezzanine equity on our consolidated balance sheets initially at their acquisition-date fair value. The non-
controlling interests are adjusted each reporting period for income (or loss) attributable to the non-controlling interests. A
measurement period adjustment, if any, is then made to adjust the non-controlling interests to the higher of redemption value or
carrying value each reporting period. These adjustments are recognized through retained earnings and are not reflected in net
income or net income attributable to Covetrus. See Note 13 - Redeemable Non-controlling Interests.
Share-based Compensation
Share-based compensation represents the cost related to share-based awards granted to employees and non-employee directors,
which are measured at the grant date fair value. 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
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 cash flow hedges, the changes in the fair value of the derivative are recorded as a component of Accumulated other
comprehensive income (loss) and subsequently reclassified into earnings in the period(s) during which the hedged transaction
affects earnings. We classify 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 10 - Derivatives.
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 3 - Business Acquisitions.
Covetrus, Inc. 2020 Form 10-K
66
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 (on October 1st) 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 8 - Goodwill and Other Intangibles, Net and Note 11 - Fair Value.
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 8 - Goodwill and Other Intangibles, Net.
Leases
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. Leases with an initial term of 12 months or less are not recognized on the balance sheet. We have
lease agreements with both lease and non-lease components, which are generally accounted for together as a single lease
component. 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.
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 which
is based on similarly secured borrowings available to us at commencement date in determining the present value of future lease
payments. We use the implicit rate when readily determinable. See Note 7 - Leases.
Equity Method Investments
Equity investments are accounted for using the equity method of accounting if the investment gives us the ability to exercise
significant influence, but not control, over an investee. Equity method investments are included within Investments and other on
our consolidated balance sheets. Our share of the earnings or losses as reported by equity method investees, amortization of basis
differences, related gains or losses, and impairments, if any, are recognized in Equity in earnings of affiliates on our consolidated
and combined statements of operations. Each reporting period, we evaluate whether declines in fair value below carrying value
are other-than-temporary and if so, we write down the investment to its estimated fair value. See Note 4 - Divestitures and Equity
Method Investments.
Covetrus, Inc. 2020 Form 10-K
67
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
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.
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.
Amortization of intangible assets is also included within our Cost of sales if the costs and expenses related to the specific class of
intangible assets are directly linked with revenue-generating activities. We include the amortization of our product formulas
within Cost of sales as these formulas are directly tied to the production of compounded products as alternatives to back-ordered
solutions, patient-specific customized medications, and in-clinic use medications. Amortization expense for intangible assets that
are not directly related to sales-generating activities is included in Selling, general and administrative expenses.
Loss Contingencies
We are subject to loss contingencies, 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. 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. See Note 12 - Commitments and Contingencies.
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
•
As of January 1, 2020, we adopted Accounting Standards Codification Topic 326, Credit Losses (“Topic 326”) which
requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including
accounts receivable. Topic 326 is effective for interim and annual reporting periods beginning after December 15, 2019
and 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 Topic 326 is
effective. The adoption of Topic 326 did not have a material impact on the results of our consolidated financial
statements.
• Accounting Standards Update (“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 that investors have difficulty 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. As of January 1, 2021, we adopted this ASU and it is not expected to have a material impact on the
results of our consolidated financial statements.
• ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial
Reporting,” provides optional guidance for a limited period of time to ease the potential burden in accounting for (or
recognizing the effects of) reference rate reform on financial reporting for contracts, hedging relationships, and other
transactions that reference the London Interbank Offered Rate (“LIBOR”). The standard is currently effective and upon
adoption may be applied prospectively to contract modifications made on or before December 31, 2022. Our term loan
and revolving line of credit bear interest on a floating rate basis at our option, which are referenced to LIBOR. The
banking syndicate associated with our credit facility intends to cease using the 1 week and 2 month USD LIBOR at the
end of 2021, with the other USD Tenors to cease June 30, 2023. Our credit agreement will be amended accordingly.
Covetrus, Inc. 2020 Form 10-K
68
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
2. NOVEL CORONAVIRUS DISEASE 2019 (“COVID-19”)
The COVID-19 pandemic developed throughout 2020 and in response to the pandemic, measures were and continue to be
instituted, including phased temporary closures of non-essential businesses throughout many of the regions in which we
conduct operations. Veterinary care has been deemed an essential business in most of these regions and we continue to deliver
products and services to our customers and their animal-owner clients. In addition, most of our customers are generally able to
continue their operations by following new social distancing guidelines which, depending on local regulations, can include
telehealth and animal curbside check-in and drop-off at clinics. To date, we continue to experience limited disruption to our
results of operations from the COVID-19 pandemic. However, the COVID-19 pandemic continues to create volatility and
unpredictability to our business, including shifts in timing and channel mix, inventory replenishment, reduced travel and
entertainment expenses due to travel restrictions, expected extension of our workforce working from home based on the local
regulations in areas where we operate, as well as other changes.
We believe our allowance for credit losses related to our accounts receivable is adequate as of December 31, 2020, due to the
essential nature of our customers' businesses, as noted above, as well as the historic behavior of our large customer base. As the
COVID-19 pandemic continues, there could be an increase in the aging of our accounts receivable, however, we do not
anticipate a significant increase in defaults for such accounts receivable.
During the first quarter ended March 31, 2020, we experienced a sustained decline in our share price and a resulting decrease in
our market capitalization due to the overall macroeconomic effects of the COVID-19 pandemic. Due to this overall market
decline and the uncertainty surrounding COVID-19, we concluded that a triggering event occurred and conducted an interim
impairment review of our goodwill as of March 31, 2020. We tested for goodwill impairment by quantitatively comparing the
fair value of our North America reporting unit (the only reporting unit currently bearing goodwill) to its carrying amount. Using
the income-based approach, fair value exceeded the carrying amount as of March 31, 2020. We did not experience triggering
events during the remainder of 2020. We conducted our annual goodwill impairment testing and determined that our fair value
significantly exceeds our carrying value of goodwill.
We have taken the following actions to help ensure that our business has flexibility to mitigate potential effects from continued
global economic pressure:
•
During the quarter ended March 31, 2020, we borrowed funds under our revolving line of credit to increase our cash
position and provide flexibility. In May 2020, we issued 7.50% Series A Convertible Preferred Stock (“Series A
Preferred Stock”) which have since been fully converted, and we used a portion of the $244 million aggregate net
proceeds to repay borrowings under our revolving line of credit. See Note 9 - Long-Term Debt and Other Borrowings,
Net and Note 14 - Redeemable Convertible Preferred Stock
• We reduced our non-critical, near-term planned capital expenditures
• We negotiated for extended payment terms on certain contracts
• We managed our inventory levels in line with expected demand
• We instituted cost containment measures including temporary executive, board, and other senior-level employee
compensation reductions, employee furloughs in certain European countries, certain shift eliminations, a temporary
hiring freeze, discretionary spending deferrals, deferred payroll taxes as available under the Coronavirus Aid, Relief,
and Economic Security Act (the “CARES Act”), and temporarily suspended our 401(k) employer match
During the second half of 2020, we returned to pre-COVID-19 compensation levels and reinstated our 401(k) employer match.
We continue to monitor our business performance and take a cautious yet balanced approach in managing our expenses due to
uncertainty created by the COVID-19 pandemic. Some of the measures we implement from an expense management
perspective may continue as we transform our business. The temporary cost containment measures described above were
beneficial to our Selling, general and administrative (“SG&A”) expenses for 2020; however, costs incurred to grow our
business outpaced the decreases we experienced through containment. Absent the cost containment measures, our SG&A
expenses would have increased further.
Risk and Uncertainties
The duration and severity of COVID-19-related potential disruptions and the actions we have taken, and may take in the future,
in response thereto, involve risks and uncertainties, and it is not possible at this time to estimate the impact that COVID-19
could have on our business. The impact of COVID-19 on various business activities in affected countries could adversely affect
our estimates, results of operations, and financial condition.
Covetrus, Inc. 2020 Form 10-K
69
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
3. 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 reflected 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 decreased 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. The useful lives of trademarks and trade names is 5 years, product formulas is 11 years,
customer relationships is 11 years, and developed technologies is 5 years. These intangible assets are being amortized over a
weighted-average period of seven years.
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.
Covetrus, Inc. 2020 Form 10-K
70
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
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 income (loss)
Net income (loss) attributable to Covetrus
Veterinary Study Groups
Years Ended
December 31,
2019
December 29,
2018
$
$
$
$
4,000
938
$
$
(983) $
(980) $
3,981
—
(63)
(63)
On October 7, 2020, we acquired an 80% interest in Veterinary Study Groups, Inc., which manages a family of more than 50
Veterinary Management Groups in the United States and Canada. The goodwill from this transaction is not deductible for tax
purposes. The results of operations have been included in our North American segment since the acquisition date. This transaction
is not a material business combination. The acquisition expenses incurred were not material. See Note 8 - Goodwill and Other
Intangibles, Net and Note 13 - Redeemable Non-controlling Interests.
Other
We completed certain other acquisitions during the year ended December 31, 2020 which were immaterial to our consolidated
financial statements individually or in the aggregate.
4. DIVESTITURES AND EQUITY METHOD INVESTMENTS
Divestitures
On April 1, 2020, we completed the divestiture of our scil animal-care business (“scil”) to Heska Corporation for $110 million
pursuant to an amended purchase agreement. During the year ended December 31, 2020, we recorded a pre-tax gain of
$73 million included in Other, net in our consolidated and combined statements of operations which reflects a $1 million foreign
exchange adjustment for the finalization of the purchase price. It was primarily included within our Europe segment.
During the third quarter of 2020, we announced a managed exit of the operations of our French distribution business specializing
in medicines, pet food, equipment, and services for veterinary clinics. We accrued $6 million in severance costs based on French
statutory requirements and $1 million of other costs associated with this decision. We ceased operations as of December 31, 2020,
including the sale of certain assets.
Equity Method Investments
On April 30, 2020, we completed the previously announced combination of our subsidiary, Spain Animal Health Solutions S.L.U.
(“SAHS”), with Distrivet, S.A. to form a leading animal-health provider on the Iberian Peninsula. We contributed SAHS by
means of a contribution in kind of all the shares of SAHS in exchange for the transfer of shares from shareholders of Distrivet,
S.A. (“Distrivet Shareholders”). In addition, at closing, we made a payment of $11 million and we are obligated to make an
additional payment of approximately $13 million on the one-year anniversary. As a result of these transactions, we now
own 50.01% of the new company, called Distrivet, a Covetrus company (“Distrivet”).
Based on Distrivet's governance structure, we do not have power over key financial and operating decisions that are made in the
ordinary course of business. Accordingly, our investment in Distrivet is accounted for under the equity method and Distrivet is
considered a related party. See Note 19 - Related-Party Transactions.
Covetrus, Inc. 2020 Form 10-K
71
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The Investment and Shareholders Agreement of Distrivet, S.A. (“Agreement”) executed on January 13, 2020, contains put and
call options on the shares owned by the Distrivet Shareholders, representing up to 49.99%, that are exercisable at fair market
value based on floor and ceiling prices tied to Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”)
multiples as specified in the Agreement. See Note 11 - Fair Value.
During the second quarter of 2020, we deconsolidated SAHS, remeasured our retained investment initially at a fair value of $45
million, which was included in Investments and other in our consolidated balance sheets, and recognized a gain of $1 million,
which was included in Other, net in our consolidated and combined statements of operations. The fair value was measured using
third-party valuation models and was determined using both the market approach and income approach, which includes
discounted expected cash flows. As of December 31, 2020, the carrying amount of our investment in Distrivet was $50 million
which was included in Investments and other in our consolidated balance sheets.
5. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The tables below presents our revenue disaggregated by major product category and reportable segment:
North America
Europe
APAC & Emerging Markets
Eliminations
Total Net sales
North America
Europe
APAC & Emerging Markets
Eliminations
Total Net sales
North America
Europe
APAC & Emerging Markets
Eliminations
Total Net sales
Year Ended December 31, 2020
Supply
Chain
Services
Software
Services
$
1,969
$
1,574
394
(11)
$
3,926
$
78
10
8
—
96
Prescription
Management
406
$
Eliminations
$
(76) $
—
—
—
(13)
—
—
Total
2,377
1,571
402
(11)
$
406
$
(89) $
4,339
Year Ended December 31, 2019
Supply
Chain
Services
Software
Services
$
1,816
$
1,513
361
(12)
$
3,678
$
82
10
7
—
99
Prescription
Management
246
$
Eliminations
$
(33) $
—
—
—
(14)
—
—
Total
2,111
1,509
368
(12)
$
246
$
(47) $
3,976
Year Ended December 29, 2018
Supply
Chain
Services
Software
Services
$
$
1,858
1,462
380
(11)
83
11
7
—
Prescription
Management
$
Eliminations
Total
— $
—
—
—
(2) $
(10)
—
—
1,939
1,463
387
(11)
$
3,689
$
101
$
— $
(12) $
3,778
Covetrus, Inc. 2020 Form 10-K
72
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 and contract liabilities from contracts with customers:
Accounts receivable:
Accounts receivable, net
Contract liabilities:
Deferred revenue, current
Balance Sheet Location
December 31, 2020
December 31, 2019
Accounts receivable, net
Other current liabilities
$
$
507
22
$
$
426
37
For the years ended December 31, 2020 and 2019, our contract assets and long-term contract liabilities were determined to be
immaterial. For the year ended December 31, 2020, deferred revenue recognized from performance obligations completed this
period approximates the balance outstanding as of December 31, 2019.
Performance Obligations
Estimated future revenues expected to be generated from long-term contracts with unsatisfied performance obligations as of
December 31, 2020 were not material.
December 31,
2020
December 31,
2019
$
$
1 $
10
21
45
46
76
23
222
(106)
116 $
1
9
20
44
36
57
10
177
(84)
93
2
13
15
6. 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
Capital in progress
Total property and equipment, gross
Less: accumulated depreciation and amortization
Total Property and equipment, net
Estimated Useful Life
N/A
10-40 years
Lesser of the useful life or lease terms
2-12 years
2-10 years
2-10 years
The following table sets forth our depreciation and amortization expense related to property and equipment:
Location
Cost of sales
Selling, general and administrative
Total depreciation and amortization expense
7. LEASES
2020
Years Ended
2019
2018
$
$
1
30
31
$
$
3
25
28
$
$
We have office space, warehouse facilities, vehicles, and equipment under non-cancelable operating leases with third parties. The
leases have remaining lease terms of 1 to 14 years.
Rent expense charged to operations under operating leases during the years ended December 31, 2020 and 2019 was $30 million
and $25 million, respectively. Common Area Maintenance and taxes for the years ended December 31, 2020 and 2019 was $3
million and $2 million, respectively. Short-term lease expense and variable rent expense for the years ended December 31, 2020
and 2019 were not material. Rent expense, under ASC 840, was $20 million for the year ended December 29, 2018.
Covetrus, Inc. 2020 Form 10-K
73
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The following table presents the lease balances within the consolidated balance sheets and other supplemental information related
to our leases as of:
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
Total finance lease liabilities
Weighted-average remaining lease term:
Operating leases
Finance leases
Weighted-average discount rate:
Operating leases
Finance leases
The following table presents the maturities of our lease liabilities as of December 31, 2020:
2021
2022
2023
2024
2025
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
December 31, 2020 December 31, 2019
$
$
$
$
$
$
117
22
107
129
1
1
1
$
$
$
$
$
$
84
19
67
86
2
1
1
8.1 years
2.5 years
6.8 years
2.4 years
3.5 %
3.8 %
3.5 %
8.1 %
Operating Leases
26
$
$
21
18
15
12
57
149
(20)
129
(22)
$
107
$
Finance Leases
1
—
—
—
—
—
1
—
1
(1)
—
As of December 31, 2020, we had additional operating leases that have not yet commenced which included the following:
Description
Compounding pharmacy
New corporate headquarters
Total
Commencing
Expected 2021
Expected 2021
Lease Term
20 years
20 years
Total Future Lease Payments
28
$
78
$
106
8. GOODWILL AND OTHER INTANGIBLES, NET
Goodwill
Covetrus, Inc. 2020 Form 10-K
74
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
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 20 - 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. Based on our analysis, we determined that the carrying value of our reporting
units exceeded their fair value and recorded an impairment charge. See Note 11 - Fair Value for further information.
The changes in the Goodwill balances by segment for the years ended December 31, 2020 and December 31, 2019 were as
follows:
Balance at December 29, 2018 (a)
Foreign currency translation
Goodwill additions
Goodwill impairment
Divestitures and related adjustments (b)
Balance at December 31, 2019
Goodwill additions (c)
Balance at December 31, 2020
(a) Recast to conform to 2019 presentation
(b) Attributable to scil; see Note 4 - Divestitures and Equity Method Investments
(c) See Note 3 - Business Acquisitions
Accumulated impairment as of December 31, 2019
Accumulated impairment as of December 31, 2020
Other Intangibles, Net
North
America
Europe
$
529
$
172
$
—
1,280
(653)
(2)
1,154
33
(8)
57
(221)
—
—
—
APAC &
Emerging
Markets
Total
$
49
(1)
16
(64)
—
—
—
750
(9)
1,353
(938)
(2)
1,154
33
$
1,187
$
— $
— $
1,187
North
America
Europe
APAC &
Emerging
Markets
$
$
(653) $
(653) $
(221) $
(221) $
(64) $
(64) $
Total
(938)
(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.
Definite-lived intangible assets consisted of the following as of:
Customer relationships
Trademarks
Patents
Product development
Non-compete agreements
Total Other intangibles
(a) Includes $45 million primarily related to customer relationships; see Note 3 - Business Acquisitions
December 31, 2020
Accumulated
Amortization
$
(265) $
(33)
Net
(28)
(143)
(1)
$
Cost (a)
526
64
30
403
2
$
1,025
$
(470) $
261
31
2
260
1
555
Covetrus, Inc. 2020 Form 10-K
75
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Customer relationships
Trademarks
Patents
Product development
Non-compete agreements
Total Other intangibles
December 31, 2019
Accumulated
Amortization
$
(234) $
Net
(28)
(24)
(71)
(1)
(358) $
$
269
32
6
335
1
643
Cost
503
60
30
406
2
1,001
$
$
Other intangible assets were established through business acquisitions. We amortize intangible assets on a straight-line basis over
their estimated useful lives.
The table below sets forth amortization of intangible assets:
Location
Cost of sales
Selling, general and administrative
Total amortization
2020
Years Ended
2019
2018
$
$
5
130
135
$
$
4
123
127
The estimated future amortization of intangible assets as of December 31, 2020 is as follows:
2021
2022
2023
2024
2025
Thereafter
Total
$
$
$
$
—
49
49
131
128
114
59
22
101
555
9. LONG-TERM DEBT AND OTHER BORROWINGS, NET
Long-term debt and other borrowings, net consisted of the following as of:
Revolving line of credit
Term loan payable in quarterly installments of
$15 million began March 31, 2020
Loan payable with balloon payment due at
maturity
Finance lease obligations
Total
Less: current maturities
Total Long-term debt and other
borrowings
Less: unamortized debt discount
Total Long-term debt and other
borrowings, net
Commencement
Date
February 2019
Maturity Date
February 2024
Rate as of
December 31,
2020
December 31,
2020
December 31,
2019
— % $
— $
—
February 2019
February 2024
2.6 %
1,080
1,200
February 2019
March 2023
4.0 %
6
1
1,087
(1)
1,086 $
(18)
6
1
1,207
(62)
1,145
(20)
1,068 $
1,125
$
$
Covetrus, Inc. 2020 Form 10-K
76
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
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, 2020
$
$
1,200
300
1,500
$
$
—
299
299
(a) Letters of credit reduce our borrowing capacity under the revolving line of credit. At December 31, 2020, we had $1 million for letters of
credit outstanding against the total $35 million sub-limit available
(b) We paid $28 million of debt issuance costs related to the Credit Facilities which we deferred and amortize on an effective yield basis to
interest expense
In February 2020, the Credit Facility was amended, and the revised terms are reflected below.
The term loan and revolving line of credit bear interest on a floating rate basis at our option, according to a leverage-based pricing
grid 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 determined as 1.00% plus the highest of the Prime Rate, Federal Funds Rate plus 0.50%, or one
month LIBOR
◦ 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 2020. As of December 31,
2020, the applicable margins on LIBOR and alternative base rate borrowings were 1.75% and 0.75%, respectively, for both the
term loan and revolving line of credit. The commitment fee for the revolving line of credit as of December 31, 2020 was 0.25%.
Starting March 31, 2020, the term loan began amortizing 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 repaid.
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.
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
Enter certain transactions with affiliates
Covetrus, Inc. 2020 Form 10-K
77
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
On April 10, 2020, we used $45 million in net cash proceeds from the sale of scil (see Note 4 - Divestitures and Equity Method
Investments) to prepay our remaining quarterly principal amortization term loan payments for 2020. On December 31, 2020, we
prepaid $60 million of scheduled term loan amortization payments for 2021. Following this prepayment, the next quarterly
principal amortization term loan payment of $15 million is due on March 31, 2022.
Starting April 1, 2019, we were required to maintain a net interest coverage ratio of greater than 3.00x at the end of each quarter
and a leverage ratio of less than 5.50x, which latter financial covenant was to begin stepping down with the quarter ended June 30,
2020.
We amended our Credit Facility primarily to delay the step down of our leverage ratio covenant from 5.50x to 5.00x until our
second quarter ending June 30, 2021. The leverage ratio covenant steps down to 4.50x for the quarter ending December 31, 2021
and then to 3.75x for the quarter ending June 30, 2022 and thereafter.
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. We were in compliance with all financial covenants as of and for the year ended
December 31, 2020.
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.
The following table presents the maturities of our Long-term debt and other borrowings, net as of December 31, 2020:
2021
2022
2023
2024
Total debt maturities
Less: current maturities
Less: unamortized debt issuance costs
Long-term maturities
10. DERIVATIVES
Credit Facility
$
— $
60
60
960
1,080
—
(18)
$
1,062
$
Other Debt
Total
Repayments
1
—
6
—
7
(1)
—
6
$
1
60
66
960
1,087
(1)
(18)
$
1,068
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 9 - Long-Term Debt and Other Borrowings, Net.
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 for these agreements matures 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.
Covetrus, Inc. 2020 Form 10-K
78
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
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, 2020
5
$
December 31, 2019
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. Derivative gains and
losses are 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.
The effect of cash flow hedges on our consolidated and combined statements of operations was as follows:
Cash Flow Hedging Instruments
Interest rate swap contracts
Location
Interest (income) expense
Years Ended December 31,
2020
2019
$
5
$
1
The net amount of deferred losses 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 $5 million.
11. 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 nonrecurring basis, and certain financial assets and liabilities that
are not measured at fair value in our consolidated 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
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The following table presents our financial instruments measured at fair value on a recurring basis and indicates the level within
the fair value hierarchy:
Assets
Distrivet call option (a)
Total assets
(a) At investment date fair value, the Distrivet call option had a fair value of $0 million
Liabilities
Interest rate swap contracts
Distrivet put option (a)
Total liabilities
(a) At investment date fair value, the Distrivet put option had a value of $5 million
Level
3
Level
2
3
December 31, 2020
December 31, 2019
$
$
2 $
2 $
—
—
December 31, 2020
$
December 31, 2019
1
—
1
5 $
1
6 $
$
Covetrus, Inc. 2020 Form 10-K
79
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Interest Rate Swap Contracts
Our derivatives at December 31, 2020 consisted of five interest rate swap contracts which are over-the-counter and not traded
through an exchange. The fair values of our swap contracts are determined based on inputs that are readily available in public
markets or can be derived from information available in publicly quoted markets. See Note 10 - Derivatives.
Distrivet Options
The Distrivet options fair value were derived from a Monte Carlo simulation methodology. The significant unobservable inputs
utilized in this Level 3 fair value measurement includes the enterprise value of Distrivet ($156 million), volatility (30%), and cost
of capital (15%). We regularly evaluate each of the assumptions used in establishing the asset and liability. Significant changes in
assumptions could result in significantly lower or higher fair value measurements. See Note 4 - Divestitures and Equity Method
Investments.
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 8 - Goodwill and Other Intangibles, Net.
At September 30, 2020, we recorded an operating lease right-of-use asset impairment of $8 million included in Selling, general
and administrative in our consolidated and combined statements of operations in our North American segment as this asset group
was not recoverable based on COVID-19's effect on the subleasing market as well as other asset group specific factors. The fair
value of the operating lease right-of-use asset was $8 million, determined using the discounted expected cash flow. The
significant unobservable inputs utilized in this Level 3 fair value measurement included market rent assumptions and discount
rate.
Assets and Liabilities that are not Measured at Fair Value
Financial Assets and Liabilities
The carrying amounts reported on the consolidated 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.
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 9 -
Long-Term Debt and Other Borrowings, Net.
12. 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. Legal fees are expensed as incurred. No
material accrued loss contingencies were recorded as of December 31, 2020.
Covetrus, Inc. 2020 Form 10-K
80
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
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.
The following table presents the remaining unconditional purchase obligations as of December 31, 2020:
Year
2021
2022
2023
2024
2025
Total
Amount
8
8
7
7
6
36
$
$
We paid $8 million in 2020, $9 million in 2019, and $9 million in 2018 for products purchased under this exclusive arrangement.
Our forecasted sales for products under this exclusive supply arrangement exceed our purchase obligations.
In 2019, we engaged a third-party for a three-year period ending December 31, 2022. 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. During 2019, we incurred $2 million in fixed fees. In 2020, we incurred $16 million in variable fees and
$4 million in fixed fees under this arrangement, leaving a remaining potential commitment of $31 million.
Covetrus, Inc. 2020 Form 10-K
81
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
13. REDEEMABLE NON-CONTROLLING INTERESTS
The following table presents the components of change and balances of Redeemable non-controlling interests within the
consolidated and combined balance sheets as of:
December 31,
2020
December 31,
2019
December 29,
2018
Balance at beginning of period
$
10 $
92
$
Decrease due to redemptions
Increase due to business acquisitions (a)
Net income (loss) attributable to redeemable non-controlling interests
Dividends paid
Effect of foreign currency translation (gain) loss attributable to redeemable non-
controlling interests
Change to redemption value
Balance at end of period
(a) See Note 3 - Business Acquisitions
(4)
24
2
—
(2)
6
(74)
—
(3)
—
1
(6)
$
36 $
10
$
368
(383)
6
6
(10)
(2)
107
92
14. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On May 19, 2020, we issued 250,000 shares of our 7.50% Series A Preferred Stock, with a par value of $0.01 per share, for an
aggregate purchase price of $250 million, or $1,000 per share, pursuant to an Investment Agreement (the “Investment
Agreement”) with CD&R VFC Holdings, L.P. (the “Purchaser”), an affiliate of Clayton, Dubilier & Rice, LLC (“CD&R”), dated
April 30, 2020. We received net proceeds of $244 million after issuance costs and used the proceeds to provide additional short-
term liquidity and support general corporate purposes.
Our right to elect a conversion was triggered on September 4, 2020, when the closing share price of our common stock was
$22.29 , which marked the twentieth trading day in a period of thirty consecutive trading days that our volume weighted-average
stock price closed above $22.20 (which was equal to 200% of the conversion price for the Series A Preferred Stock of $11.10 in
effect at that time). On September 9, 2020, we converted a portion of our Series A Preferred Stock to 14.4 million shares of
common stock in accordance with the terms of the Investment Agreement. On November 18, 2020, we converted the remaining
90,632 shares of our Series A Preferred Stock into 8.2 million shares of common stock.
Under the terms of the Investment Agreement, the Purchaser appointed two designees to our Board of Directors (see Note 19 -
Related-Party Transactions).
15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
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.
Covetrus, Inc. 2020 Form 10-K
82
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 30, 2017
Other comprehensive income (loss) attributable to
Covetrus before reclassifications
Period change
Balance as of December 29, 2018
Other comprehensive income (loss) attributable to
Covetrus before reclassifications
Reclassified from Accumulated other comprehensive
loss to earnings
Period change
Balance as of December 31, 2019
Other comprehensive income (loss) attributable to
Covetrus before reclassifications
Reclassified from Accumulated other comprehensive
loss to earnings
Period change
Balance as of December 31, 2020
Gain (Loss)
on Pension
Adjustment
Foreign
Currency
Translation
Gain (Loss)
Unrealized
Gain (Loss)
from Foreign
Currency
Hedging
Total
(2) $
(41) $
1
$
Derivative
Gain (Loss)
$
— $
—
—
—
(1)
1
—
—
(8)
2
2
—
—
—
—
—
—
(41)
(41)
(82)
(4)
—
(4)
(86)
21
(1)
(1)
—
—
—
—
—
—
5
(3)
(3) $
—
—
— $
2
23
(63) $
—
—
— $
$
(42)
(40)
(40)
(82)
(5)
1
(4)
(86)
13
7
20
(66)
We recognized foreign currency translation gains (losses) as a component of comprehensive income (loss) 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. See Note 10 - Derivatives.
16. INCOME TAXES
Income (loss) before taxes and equity in earnings of affiliates were as follows:
Domestic
Foreign
Total income (loss) before taxes and equity in earnings of affiliates
Years Ended
December 31,
2020
December 31,
2019
December 29,
2018
$
$
(164) $
140
(24) $
(809) $
(220)
(1,029) $
59
84
143
Covetrus, Inc. 2020 Form 10-K
83
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The provisions for income taxes were as follows:
December 31, 2020
Years Ended
December 31, 2019
(as revised)
December 29, 2018
Current income tax (benefit) expense:
U.S. federal
State and local
Foreign
Total current income tax (benefit) expense
Deferred income tax (benefit) expense:
U.S. federal
State and local
Foreign
Total deferred income tax (benefit) expense:
Total income tax (benefit) expense
$
$
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
Share-based compensation
Lease asset
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 assets (liabilities)
1 $
2
22
25
(25)
(1)
(6)
(32)
(7) $
— $
2
16
18
(46)
(10)
(8)
(64)
(46) $
13
4
25
42
—
—
(5)
(5)
37
Years Ended
December 31,
2020
December 31, 2019
(as revised)
$
$
— $
41
6
20
17
84
(11)
73
(74)
(18)
(92)
(19) $
54
38
7
6
6
111
(10)
101
(125)
(6)
(131)
(30)
The deferred income tax assets (liabilities) are classified in the consolidated balance sheets as follows:
Non-current deferred income tax assets, net (a)
Non-current deferred income tax liabilities, net
Non-current deferred income tax assets (liabilities)
(a) Included in Investments and other
December 31,
2020
December 31, 2019
(as revised)
$
$
$
9
(28)
(19) $
18
(48)
(30)
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. We are required to consider all available positive and
negative evidence in evaluating the likelihood that we will be able to realize the benefit of our deferred tax assets in the future.
Such evidence includes scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and
the results of recent operations. Since this evaluation requires consideration of events that may occur some years into the future,
there is an element of judgment involved. Realization of our deferred tax assets is dependent on generating sufficient taxable
income in future periods.
Covetrus, Inc. 2020 Form 10-K
84
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The valuation allowance was $11 million as of December 31, 2020 and $10 million as of December 31, 2019. 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, 2020 was $1 million and was attributable
primarily to an increase related to the uncertainty regarding the realization of future tax benefit in certain foreign jurisdictions and
a decrease of a portion of the valuation allowance recorded against U.S. deferred tax assets.
During the fourth quarter of 2020, in conjunction with our efforts to remediate our income tax material weakness in accounting
for income taxes, management identified an error in the calculation of the deferred tax asset related to investments in partnerships.
Specifically, as of December 30, 2017 our deferred tax asset was overstated by $42 million. In addition, as a result of the
overstatement of this deferred tax asset, our valuation allowance established during the year ended December 31, 2019 was
overstated. The errors were not material to any individual prior year; however, the correction of these errors would have been
material to the 2020 financial statements. We have revised ending net Former Parent investment and deferred taxes as of
December 30, 2017, and have revised our financial statements as of and for the years ended December 29, 2018 and December
31, 2019 from the amounts previously reported.
Net Parent investment
Total shareholders’ equity
Consolidated Balance Sheet
Non-current deferred income tax assets, net (a)
Total assets
Deferred income taxes
Total liabilities
Additional paid in capital
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 income (loss)
Net income (loss) attributable to Covetrus
Earnings (Loss) per share attributable to Covetrus:
Basic
Diluted
As of December 31, 2018
Previously
Reported
Revision
As Revised
1,576
$
1,494
(42) $
(42)
1,534
1,452
As of December 31, 2019
Previously
Reported
Revision
As Revised
$
20
3,361
47
2,095
2,381
(1,040)
1,256
(2) $
(2)
1
1
(42)
39
(3)
18
3,359
48
2,096
2,339
(1,001)
1,253
3,361
$
(2) $
3,359
Year Ended December 31, 2019
Previously
Reported
Revision
As Revised
$
7
(1,022)
(1,019) $
(9.50) $
(9.50) $
39
39
39
0.36
0.36
$
$
$
$
46
(983)
(980)
(9.14)
(9.14)
$
$
$
$
$
$
$
At December 31, 2020, we had the following tax loss and tax credit carryforwards available to offset taxable income in prior and
future years:
Covetrus, Inc. 2020 Form 10-K
85
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
U.S. federal tax loss carryforwards
U.S. federal and state interest carryforwards
U.S. federal other credit carryforwards
U.S. state tax loss carryforwards
Non-U.S. tax loss carryforwards
Total tax loss and tax credit carryforwards
Amount
20
8
2
4
7
41
$
$
Expiration Period
2030 - unlimited
unlimited
2030-2040
2021 - unlimited
2021 - 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 in France, Germany, Poland and Sweden.
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 (benefit) provision
Tax on GILTI
Excess tax benefits related to share-based compensation
Revaluation of deferred tax assets and liabilities
Valuation allowance impacts
Goodwill impairment
Non-deductible expenses
Reverse Book Gain/(Loss) on Foreign Sales
Return to Provision
Impact of Partnership Inside/Outside Basis Conversion
Impact of Uncertain Tax Positions
Credits
Other
Effective tax rate
Years Ended
December 31,
2020
December 31,
2019
December 29,
2018
21.0 %
—
—
(3.7)
15.7
(42.6)
(28.4)
—
(2.2)
—
(29.3)
69.2
12.1
7.5
2.2
6.6
0.8
28.9 %
21 %
—
—
0.9
0.3
(0.9)
(0.5)
(0.9)
(0.5)
(14.4)
(0.6)
0.3
—
—
0.1
—
(0.3)
4.5 %
21.0 %
2.8
(2.1)
1.4
1.4
1.4
(0.7)
—
—
—
—
—
—
—
—
—
0.7
25.9 %
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 2017 and forward by the U.S. Internal Revenue Service,
the years 2016 and forward for certain state and local jurisdictions, and the years 2011 and forward for certain foreign
jurisdictions.
The U.S. Tax Cuts and Jobs Act of 2017 (“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 Global
Intangible Low-Taxed Income (“GILTI”), a beneficial tax rate on Foreign-derived intangible income (“FDII”), Base Erosion &
Anti-Abuse Tax (“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 $2 million for the year ended December 31, 2020. We recorded a tax expense for the GILTI provision of $10 million
for the year ended December 31, 2019. We have concluded that the BEAT and FDII provisions of the Tax Act will not apply to or
Covetrus, Inc. 2020 Form 10-K
86
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
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 31, 2020 and 2019.
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.
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 foreign withholding taxes upon distribution of such
unremitted earnings.
We previously considered the earnings in all of our foreign subsidiaries as indefinitely reinvested. Accordingly, we had not
recorded deferred income taxes with respect to such earnings. However, in consideration of recent changes in our business and
emerging funding needs, we determined effective as of the fourth quarter ending December 31, 2020 that certain unremitted
earnings of approximately $135 million existing in the Company’s foreign subsidiaries located in various jurisdictions are no
longer indefinitely reinvested. As a result of the U.S. Tax Act, unremitted earnings can generally be remitted to the U.S. without
incurring additional U.S. federal income taxation. In addition, earnings repatriated from the jurisdictions noted above, based upon
our current legal structure, can generally be repatriated without incurring any withholding tax liability. Accordingly, we
determined that the deferred tax liability associated with the repatriation of the undistributed earnings from the applicable
subsidiaries located in these tax jurisdictions would be $2 million.
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,
2020
December 31,
2019
December 29,
2018
$
$
4
(1)
—
3
$
$
6
—
(2)
4
$
$
8
2
(4)
6
The amount of unrecognized tax benefits that would affect the effective tax rate if recognized during the year ended December 31,
2020 would be $3 million. We believe that it is reasonably possible that a decrease of up to $0.3 million in unrecognized tax
benefits related to foreign tax exposures may be necessary in the coming year due to lapses of statute of limitations.
We recognize interest and penalties related to unrecognized tax benefits as components of Income tax (benefit) expense in the
statements of operations and accrued $0.1 million in 2020 and $2 million in 2019.
17. EARNINGS (LOSS) PER SHARE
Basic earnings per common share (“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, performance stock units, and stock options outstanding under
our 2019 Omnibus Incentive Compensation Plan, and shares issuable under our Employee Stock Purchase Plan are included in the
diluted EPS calculation to the extent they are dilutive.
Covetrus, Inc. 2020 Form 10-K
87
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
On February 7, 2019, Henry Schein distributed approximately 71 million shares of Covetrus common stock to its shareholders.
The computation of 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.
During 2020, we issued 7.50% Series A Preferred Stock and subsequently converted them to common shares. See Note 14 -
Redeemable Convertible Preferred Stock. Following the conversion, the additional shares were included in weighted-average
common shares outstanding.
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 income (loss) attributable to Covetrus
Adjustment for:
Dividends declared on Series A preferred stock
Income (loss) available to common shareholders
Denominator:
Basic
Weighted-average common shares outstanding
Diluted
Effect of dilutive shares
Diluted shares
Earnings (loss) per share attributable to Covetrus:
Basic
Diluted
December 31,
2020
December 31,
2019 (b)
December 29,
2018
$
$
(19) $
(980) $
101
(7)
(26) $
—
(980) $
—
101
118
—
118
107
—
107
71
1
72
$
$
(0.22) $
(0.22) $
(9.14) $
(9.14) $
1.41
1.40
Potentially dilutive securities (a)
(a) Potentially dilutive securities attributable to outstanding stock options, restricted stock units, restricted stock awards, and performance stock units were
excluded from the computation of diluted earnings per share because the securities would have had an antidilutive effect
6
6
—
(b) See Note 16 - Income Taxes for discussion related to revisions to Net income (loss) attributable to Covetrus and Earnings (loss) per share
18. 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 our
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 and generally vest ratably over a three-year period. During 2020, we granted performance stock units (“PSUs”) subject to
specific performance conditions to senior management members that have one year performance cycles over a three-year term,
Covetrus, Inc. 2020 Form 10-K
88
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
vesting ratably. We also granted PSUs to certain employees who bear responsibility for strategic initiatives we believe are
necessary for our transformation that contained a one-year performance cycle and vesting.
We reserved 16 million 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 $40 million ($32 million after-tax) in 2020, $46 million ($40 million
after-tax) in 2019, and $7 million ($6 million after-tax) in 2018.
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 2020 and 2018.
The following table summarizes our stock option activity under the Plan for the year ended December 31, 2020:
(In millions, except per share amounts)
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Exercisable at end of year
Number
of Shares
4
—
(1)
(1)
2
1
Weighted-
average
Exercise
Price
Per Share
15.29
—
6.80
28.59
15.58
11.99
$
$
$
Weighted-
average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
6.9
6.6
$
$
31
24
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 assumption ranges:
Expected term (years)
Risk-free interest rate
Expected volatility
$12.19
6.0
1.8 % - 2.5%
29.6 % - 30.0%
Cash received from option exercises for the years ended December 31, 2020 and 2019 was $7 million and $4 million,
respectively.
RSAs/RSUs/PSUs
The following table summarizes our RSA/RSU activity under the Plan for the year ended December 31, 2020:
Nonvested at beginning of year
Granted
Vested
Forfeited
Nonvested at end of year
Number of Shares
Weighted-average
Grant-date
Fair Value
Per Share
Weighted-average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
2 $
3
(1)
—
4 $
25.69
11.51
28.24
19.37
14.07
1.25
$
124
Covetrus, Inc. 2020 Form 10-K
89
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
The weighted-average grant-date fair values for these awards granted:
Weighted-average grant-date fair value
$
11.51
$
27.83
$
65.26
2020
Years Ended
2019
2018
Additional Information
As of December 31, 2020, there was $50 million in unrecognized compensation expense related to nonvested share-based awards
that is expected to be recognized over a weighted-average period of 1.8 years.
The following table provides further information related to our share-based awards:
2020
Years Ended
2019
Intrinsic value of stock options exercised
Fair value of RSA/RSU shares vested
$
$
13
6
$
$
Employee Stock Purchase Plan
15
3
$
$
2018
—
2
On February 7, 2019, we adopted the Employee Stock Purchase Plan (the “ESPP”) and approved 2 million shares for issuance
under this plan. 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 years
ended December 31, 2020 and 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.
We recorded compensation expense associated with the AIP for the year ended December 31, 2020 of $16 million and $7 million
for the year ended December 31, 2019.
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 $11 million in 2020,
$9 million in 2019, and $6 million in 2018.
19. RELATED-PARTY TRANSACTIONS
Upon closing the transaction with Distrivet, S.A. on April 30, 2020 (see Note 4 - Divestitures and Equity Method Investments),
Distrivet, our equity method investee, became a related party. During the year ended December 31, 2020, we provided
management services and corporate branding to Distrivet under our agreement, and we provided goods to Distrivet. These
services and product sales were not material during this period.
Covetrus, Inc. 2020 Form 10-K
90
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
As of December 31, 2020, CD&R beneficially owns 24.80% of our outstanding common stock and are deemed a related party. As
part of the terms of the Investment Agreement, CD&R had the right to designate two members to our Board of Directors, which
resulted in increasing the number of directors serving on the board from nine to ten directors. CD&R's current designees on our
Board of Directors are Ravi Sachdev (investor board member) and Sandra E. Peterson (advisor board member). CD&R’s right to
representation on our board is directly related to their level of share ownership. Should CD&R's beneficial ownership decrease
below 50% of its ownership as of May 19, 2020, or below approximately 16.8 million shares, then its right to designate an advisor
board member terminates. Should CD&R's beneficial ownership decrease below 25% of its ownership as of May 19, 2020, or
below approximately 8.4 million shares, then its right to designate an investor board member is also terminated. See Note 14 -
Redeemable Convertible Preferred Stock.
Allocation of General Corporate Expenses
As discussed in Note 1 - Business Overview and Significant Accounting Policies, we exited all of our transition service
agreements. We incurred allocated general corporate expenses of $5 million in 2019 and $55 million in 2018 which are included
within Selling, general and administrative in the consolidated and combined statements of operations.
20. SEGMENT DATA
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.
Covetrus, Inc. 2020 Form 10-K
91
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 income (loss) attributable to Covetrus:
Net sales
Adjusted EBITDA
Depreciation and amortization
Income tax benefit (expense)
Total assets
Expenditures for long-lived assets
At and For the Year Ended December 31, 2020
North
America
Europe
APAC &
Emerging
Markets
Corporate
Eliminations
Total
$
$
$
$
$
$
2,377
187
144
19
3,077
41
$
$
$
$
$
$
1,571
72
$
$
17
$
(11) $
713
11
$
$
402
28
$
$
5
$
(6) $
188
3
$
$
— $
(61) $
— $
$
5
(11) $
4,339
— $
— $
— $
226
166
7
1,415
3
$
$
(1,897) $
3,496
— $
58
Reconciliation of Net Income (Loss) Attributable to Covetrus to Adjusted EBITDA:
Net income (loss) attributable to Covetrus
$
Plus: Depreciation and amortization
Plus: Interest expense, net
Less: Income tax (benefit) expense
Earnings (loss) before interest, taxes, depreciation, and amortization
Plus: Share-based compensation
Plus: Strategic consulting
Plus: Transaction costs (a)
Plus: Separation programs and executive severance
Plus: IT infrastructure
Plus: Formation of Covetrus (b)
Plus: Capital structure
Plus: Equity method investments and non-consolidated affiliates (c)
Plus: Operating lease right-of-use asset impairment
Plus: France managed exit (d)
Less: Other items, net (e)
Adjusted EBITDA
(19)
166
47
(7)
187
40
20
8
11
4
19
2
2
8
7
(82)
226
(a) Includes legal, accounting, tax, and other professional fees incurred in connection with acquisitions and divestitures
(b) Includes professional and consulting fees, duplicative costs associated with transition service agreements, and other costs incurred in connection with the
separation from Former Parent and establishing Covetrus as an independent public company
(c) Includes the proportionate share of the adjustments to EBITDA of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100%
(d) Includes $6 million of severance and $1 million of other costs. See Note 4 - Divestitures and Equity Method Investments for further discussion
(e) Includes a pre-tax gain of $73 million from the sale of scil, a $6 million mark-to-market adjustment for our Distrivet options, and a $1 million gain on the
deconsolidation of SAHS. See Note 4 - Divestitures and Equity Method Investments
Covetrus, Inc. 2020 Form 10-K
92
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Net sales
Adjusted EBITDA
Depreciation and amortization
Income tax benefit (expense)
Total assets
Expenditures for long-lived assets
At and For the Year Ended December 31, 2019
North
America
Europe
APAC &
Emerging
Markets
Corporate
Eliminations
Total
$
$
$
$
$
$
2,111
153
131
47
2,939
23
$
$
$
$
$
$
1,509
68
$
$
18
$
(3) $
726
10
$
$
368
18
$
$
6
$
(4) $
137
1
$
$
— $
(39) $
— $
$
6
783
5
$
$
(12) $
3,976
— $
— $
— $
200
155
46
(1,226) $
3,359
— $
39
Reconciliation of Net Income (Loss) Attributable to Covetrus to Adjusted EBITDA:
Net income (loss) attributable to Covetrus
$
(980)
Plus: Depreciation and amortization
Plus: Interest expense, net
Less: Income tax (benefit) expense
Earnings (loss) before interest, taxes, depreciation, and amortization
Plus: Share-based compensation
Plus: Strategic consulting
Plus: Transaction costs (a)
Plus: Formation of Covetrus (b)
Plus: Separation programs and executive severance
Plus: Carve-out operating expenses
Plus: IT infrastructure
Plus: Goodwill impairment
Less: Equity method investments and non-consolidated affiliates (c)
Less: Other items, net (d)
Adjusted EBITDA
155
53
(46)
(818)
46
2
2
31
11
5
6
938
(4)
(19)
200
$
(a) Includes legal, accounting, tax, and other professional fees incurred in connection with acquisitions and divestitures
(b)Includes professional and consulting fees, duplicative costs associated with transition service agreements, and other costs incurred in connection with the
separation from Former Parent and establishing Covetrus as an independent public company
(c) Includes the proportionate share of the adjustments to EBITDA of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100%
(d) Includes $15 million of gains associated with acquisitions in France and Romania, $2 million gain on legacy investment, and $1 million government grant
income
Covetrus, Inc. 2020 Form 10-K
93
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Net sales
Adjusted EBITDA
Depreciation and amortization
Income tax expense
Total assets
Expenditures for long-lived assets
At and For the Year Ended December 29, 2018
North
America
Europe
APAC &
Emerging
Markets
$
$
$
$
$
$
1,939
157
$
$
41
$
(18) $
1,302
14
$
$
1,463
75
$
$
17
$
(15) $
702
7
$
$
387
19
$
$
6
$
(3) $
182
1
$
$
Corporate
Eliminations
Total
— $
(32) $
— $
(1) $
10
$
— $
(11) $
3,778
— $
— $
— $
(4) $
— $
219
64
(37)
2,192
22
Reconciliation of Net Income (Loss) Attributable to Covetrus to Adjusted EBITDA:
Net income (loss) attributable to Covetrus
Plus: Depreciation and amortization
Plus: Interest expense, net
Plus: Income tax (benefit) expense
Earnings (loss) before interest, taxes, depreciation, and amortization
Plus: Share-based compensation
Plus: Separation programs and executive severance
Less: Equity method investments and non-consolidated affiliates
Adjusted EBITDA
$
$
101
64
2
37
204
7
9
(1)
219
See Note 5 - Revenue from Contracts with Customers for our revenue disaggregated by major product category and reportable
segment.
21. SUMMARY OF QUARTERLY DATA (UNAUDITED)
A summary of quarterly data follows:
Net sales
Gross profit
Goodwill impairment
Operating income (loss)
Net income (loss) attributable to Covetrus
Earnings (loss) per share:
Basic
Diluted
For the Three Months Ended
December 31,
2020
September 30,
2020
June 30,
2020
March 31,
2020
$
$
$
$
$
$
$
1,121 $
1,126 $
1,026 $
206 $
— $
(19) $
(4) $
197 $
— $
(27) $
(35) $
192 $
— $
(4) $
54 $
(0.04) $
(0.04) $
(0.33) $
(0.33) $
0.40 $
0.40 $
1,065
202
—
(20)
(33)
(0.30)
(0.30)
Covetrus, Inc. 2020 Form 10-K
94
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)
Net sales
Gross profit (a)
Goodwill impairment
Operating income (loss)
Net income (loss) attributable to Covetrus (b)
Earnings (Loss) per share: (b)
Basic
Diluted
For the Three Months Ended
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
$
$
$
$
$
$
$
1,008 $
1,018 $
1,009 $
188 $
(1) $
(25) $
(37) $
191 $
939 $
(958) $
(920) $
193 $
— $
(5) $
(10) $
941
177
—
(9)
(13)
(0.33) $
(0.33) $
(8.22) $
(8.22) $
(0.09) $
(0.09) $
(0.14)
(0.14)
(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 16 - Income Taxes)
Covetrus, Inc. 2020 Form 10-K
95
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the
period covered by this report, we carried out an evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure
controls and procedures. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and our management necessarily applies its judgment in evaluating and implementing possible controls and
procedures. Based upon that evaluation, the CEO and CFO concluded that, as of the end of the period covered by this Report, our
disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting
discussed below in Management’s Annual Report on Internal Control Over Financial Reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
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 change.
Our management, with the participation of our CEO and our CFO, evaluated the effectiveness of our internal control over
financial reporting at December 31, 2020. Based on this evaluation, the CEO and CFO concluded that as of that date, our internal
control over financial reporting was not effective, at a reasonable assurance level, because of a material weakness. A material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of in our annual or interim financial statements will not be prevented or detected on a timely
basis.
Ongoing Remediation of Previously Identified Material Weakness
As previously disclosed in our Form 10-K for the year ended December 31, 2019, management identified deficiencies in our
internal control over financial reporting which related to the accounting for income taxes and determined that the impact of these
deficiencies resulted in a material weakness. This material weakness stemmed from issues associated with the transition to
expanded in-house tax capabilities and utilization of new tax consultants. As a result of these issues, our controls to review and
analyze the our income tax provision and deferred income tax balances were not effective.
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 for the year ended
December 31, 2019. 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,
Covetrus, Inc. 2020 Form 10-K
96
•
•
•
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.
As part of Management’s execution of the remediation plan, during the fourth quarter of 2020 we identified an error in the
calculation of the deferred tax asset related to investments in partnerships and revised our prior period financial statements.
Specifically, as of December 30, 2017 our deferred tax asset was overstated by $42 million. As a result of the overstatement of
this deferred tax asset, our valuation allowance established during the year ended December 31, 2019 was overstated. This
revision did not affect our Statement of Operations in any other year. We have revised affected amounts above as of December
31, 2019 from the amounts previously reported.
While Management has made progress to expand our in-house tax resource capabilities and further formalize our internal controls
framework, the material weakness in our internal control over financial reporting has not been remediated as of December 31,
2020. It will not be considered remediated until (i) the controls are fully implemented and existing controls are reinforced, (ii) the
incremental 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.
Changes in Internal Control over Financial Reporting
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. To address our ITGC deficiencies,
we developed and implemented our previously disclosed remediation plans. During the fourth quarter of 2020, we completed our
testing of the operating effectiveness of the implemented controls and found them to be effective. As a result, we have concluded
the material weakness related to ITGCs has been remediated as of December 31, 2020.
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
Not applicable
Covetrus, Inc. 2020 Form 10-K
97
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 2021 Annual Meeting of Shareholders
(our “2021 Proxy Statement”).
Item 11. Executive Compensation
The information required by this item is incorporated by reference to our 2021 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table summarizes information about our equity compensation plans as of December 31, 2020:
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)
6,457,292
$
— $
15.58
—
19,206,998
—
(a) Includes 4,336,290 restricted stock units (RSUs) and 22,760 restricted stock awards (RSAs), and 2,098,242 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) 1,834,139 shares are available for purchase under our employee stock purchase plan as of December 31, 2020 and 15,999 shares are subject to purchase
during the offering period December 1, 2020 to May 31, 2021.
Other information required by this item is incorporated by reference to our 2021 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to our 2021 Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to our 2021 Proxy Statement.
Covetrus, Inc. 2020 Form 10-K
98
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
51
(a) (3)
Exhibit
Number
2.1
2.2
2.3
2.4
2.5
2.6
3.1
3.2
3.3
4.1
4.2*
10.1
10.2
10.3
10.4
10.5
Exhibits:
Exhibit Description
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.
Certificate of Designations Classifying Series A Convertible Preferred Stock
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
8-K
S-4/A
1/8/2019
5/19/2020
1/8/2019
3.4
3.5
3.1
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.
Transition Services Agreement, dated as of February 7, 2019, by and between Henry
Schein, Inc. and HS Spinco, Inc.
Letter Agreement to Transition Services Agreement, dated as of February 7, 2019,
by and between Covetrus, Inc. and Henry Schein, Inc.
S-4
12/26/2018
10.1
8-K
2/7/2019
10.4
8-K
2/7/2019
10.5
Covetrus, Inc. 2020 Form 10-K
99
Exhibit
Number
10.6
10.7
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
10.19†
10.20
10.21
10.22
10.23
10.24
10.25†
10.26†
10.27†
10.28†
10.29†
10.30†
10.31†
10.32†
10.33
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 Georgina Wraight
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.
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
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
S-4
S-4
12/26/2018
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
10.12
S-4
12/26/2018
10.16
S-4
12/26/2018
10.17
S-4
12/26/2018
10.18
S-4
12/26/2018
10.19
S-4
12/26/2018
10.20
8-K
3/5/2019
8-K 10/22/2019
10.7
10.1
Employment Agreement, dated as of March 30, 2020, by and between Covetrus,
Inc. and Benjamin Wolin
8-K
3/24/2020
10.1
Separation and Release Agreement, dated as of January 15, 2020, by and
between Covetrus, Inc. and Christine T. Komola
8-K
1/21/2020
10.1
Amended and Restated Employment Agreement, effective as of November 9,
2020, by and between the Company and Dustin Finer
10-Q 11/10/2020
10.1
Employment Agreement, effective as of June 1, 2020, by and between the
Company and Matthew Foulston
8-K/A
6/30/2020
10.1
Form of Performance Stock Unit Agreement
Form of Performance Stock Unit Agreement for Non-U.S. Participants
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
8-K
8-K
1/21/2020
1/21/2020
10.1
10.2
10-K
3/3/2020
10.31
Covetrus, Inc. 2020 Form 10-K
100
Exhibit
Number
10.34†
10.35
10.36
21.1*
23.1*
31.1*
31.2*
32.1**
32.2**
Exhibit Description
Form
Date
No.
Separation and Release Agreement, effective as of February 13, 2020, by and
between the Company and David Christopher Dollar
8-K/A
2/2/2020
10.1
Investment Agreement, dated as of April 30, 2020, between Covetrus, Inc. and
CD&R VFC Holdings, L.P.
8-K
5/1/2020
10.1
Registration Rights Agreement, dated as of May 19, 2020, by and between
Covetrus, Inc. and CD&R VFC, L.P.
8-K
5/19/2020
10.1
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*
101.DEF*
101.LAB*
101.PRE*
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
104
*
**
†
Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.
Filed herewith
Furnished and not filed herewith
Indicates management contract or compensatory plan
Item 16.
10-K Summary
None
Covetrus, Inc. 2020 Form 10-K
101
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 1, 2021
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/ Matthew Foulston
Matthew Foulston
/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/ Sandra E. Peterson
Sandra E. Peterson
/s/ Ravi Sachdev
Ravi Sachdev
/s/ Sharon Wienbar
Sharon Wienbar
President, Chief Executive Officer and Director
(Principal Executive Officer)
March 1, 2021
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
March 1, 2021
Vice President, Global Controller and Chief
Accounting Officer (Principal Accounting Officer)
March 1, 2021
Chairman of the Board and Director
March 1, 2021
Director
Director
Director
Director
Director
Director
Director
Director
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
Covetrus, Inc. 2020 Form 10-K
102
2020
Highlights
COVETRUS TAKES GOLD
At Learning Technologies Awards 2020
for work with UK Charity, Dogs Trust
EXPANDING DISTRIBUTION THROUGH DISTRIVET
We expanded our distribution in the Iberian market through a joint
venture with Distrivet, located in Spain. We accelerated our strategy to
strengthen customer relationships through an investment in veterinary
Study Groups, and iconic veterinary organization in North America.
As a global animal-health company with a mission
to advance the world of veterinary medicine, we
are dedicated to providing ethical and sustainable
solutions that improve the lives of our employees,
customers and partners, while positively impacting
the communities we serve.
CHAMPIONING DIVERSITY & INCLUSION
At Covetrus, we believe in taking the broadest
perspective — covering diversity, equity,
anti-racism, inclusion, belonging, global skills and
impact on the industry communities we serve. To
drive change, we dedicated resources and defined
a new governance of Global Diversity and Inclusion.
INITIATING EMPLOYEE RESOURCE GROUPS
We believe when employees drive an effort, along with their colleagues,
we demonstrate how diversity, different perspectives and common
understanding can enrich Covetrus and society.
LGBTIQA+
BLACK
PROFESSIONAL
ALLIANCE
MILITARY
VETERANS
HEALTHY
LIVING
WOMEN’S
LEADERSHIP
ALLIANCE
W
OUR 5 DIVERSITY &
INCLUSION COMMITMENTS
1
Diversity-focused recruitment
Have a diverse workforce that is
demographically reflective of our
society at all levels
2
Diversify the
animal-health industry
Do good by changing both
Covetrus and the industry
3
Employee education & training
Foster diversity and inclusion
for employees at all levels
4
Inclusion/employee
resource groups
Create a workplace of
inclusion and belonging
5
Transparency
Have data and be publicly
accountable for a more diverse
workforce at all levels
We are the leading tech-enabled service
company in the animal health industry
Covetrus is a global animal-health company dedicated to empowering veterinary
practices. We combine products, services, and technology in a single platform
that connects our customers to the solutions and insights they need to grow.
Software Services
Client communications & telemedicine
Practice management software
Supply Chain Services
Logistics & distribution
Inventory Management
Prescription Management
Rx services & compounding
E-commerce solutions
Payment processing
Proprietary Brands
Client engagement
Executive Officers
Benjamin Wolin
President and Chief Executive Officer
Matthew Foulston
Executive Vice President and Chief Financial Officer
Dustin K. Finer
Chief Administrative Officer
Michael Ellis
Executive Vice President and President, Europe
David Hinton
Executive Vice President and President, APAC
and Emerging Markets
Timothy Ludlow
Executive Vice President and Chief Transformation Officer
Matthew Malenfant
President, North America
Ditte Marstrand Wulf
Global Chief Human Resources Officer
Steve Palmucci
Global Chief Information Officer
Laura J. Phillips
Vice President, Global Controller and Chief Accounting Officer
Anthony Providenti
Executive Vice President, Corporate Development
Jamey Seely
General Counsel and Secretary
Georgia Wraight
Executive Vice President and President,
Global Technology Solutions
Board of Directors
Worldwide Headquarters
Philip A. Laskawy
Chairman of the Board
Deborah G. Ellinger
Sandra L. Helton
Mark J. Manoff
Edward M. McNamara
Steven Paladino
Sandra Peterson
Ravi Sachdev
Sharon Wienbar
Benjamin Wolin
Independent Public
Accountants
BDO USA, LLP
One International Place
Boston, MA 02110
Outside Legal
Counsel
Kirkland & Ellis
601 Lexington Avenue
New York, NY 10022
Covetrus, Inc.
7 Custom House Street
Portland, ME 04101
888-280-2221
covetrus.com
Annual Meeting
2021 Annual Meeting
of Shareholders
Virtual meeting
May 12, 2021 | 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