☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
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For the transition period from to
31, 2020
Delaware | 83-1448706 | |||||
(State or other jurisdiction of | ||||||
incorporation or organization) | (I.R.S. Employer Identification No.) |
(Zip Code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, 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 Rule12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes ☐ No ☒.
As of June 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, there was no established public market for the registrant’s common stock, par value $0.01 per share. The registrant’s common stock began trading on the Nasdaq Global Select Market on February 8, 2019.
There were 111,338,881 shares of common stock outstanding as of March 15, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
None.
ANNUAL REPORT ON FORM10-K
For the Year Ended December 29, 2018
Table of Contents
Title of Each Class | Ticker Symbol | Name of Exchange on Which Registered | ||||||||||||||||
Common Stock, par value $0.01 per share | CVET | 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. | Yes | x | No | o | ||||||||||
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. | Yes | o | x | |||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Yes | x | o | |||||||||||
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 | ||||||||||
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 | ☒ | Accelerated filer | ☐ | |||||||||||
Non-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. |
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Item 10. | ||||||||||||||||
Item 15. | ||||||||||||||||
Covetrus, Inc. 2020 Form 10-K | 2 |
This Annual Report on Form 10-K is for the period ended December 29, 2018 and, except
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual
Covetrus, Inc. 2020 Form 10-K | 3 |
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Covetrus, Inc. 2020 Form 10-K | 4 |
We have a talented team of over 5,000 employees positioned Our strategic roadmap to support veterinarians’ evolving practice needs with an expanded offering that we believe enhancesall-in-one solution for the Client experience and improves medical and service compliance. In addition, we seek to improve veterinary practice economics by helping veterinarians identify and manage gaps in care through proactive prescription management, inventory management andmarket, see
By bringing the Animal Health Business and Vets First Choice together into one company, we expect to enhance our growth opportunities with our large base of established Customers and Clients and secure new business. We believe the combinationintegration of our capabilities serves as a foundation for incremental revenue growthmajor product categories in 2019 and operational synergies. Pro forma, combined net sales in2020:
History and Corporate Information
On February 7, 2019, we announced that we had consummated the previously disclosed Reverse Morris Trust transaction contemplated by (a) the Contribution and Distribution Agreement, dated as of April 20, 2018, as amended, or the Contribution and Distribution Agreement, by and among us, Henry Schein, Inc., a Delaware corporation, which we refer to herein as Henry Schein or the Parent, our parent prior to the Distribution (as defined below), Vets First Choice, and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the representative of the Vets First Choice stockholders and for the purposes of certain articles set forth therein, or the Vets First Choice Stockholders’ Representative and (b) the Agreement and Plan of Merger, dated as of April 20, 2018, as amended, or the Merger Agreement, by and among us, Henry Schein, HS Merger Sub, Inc., our wholly owned subsidiary, or Merger Sub, Vets First Choice and the Vets First Choice Stockholders’ Representative. In accordance with the terms and conditions of the Contribution and Distribution Agreement and the Merger Agreement, (i) prior to February 7, 2019, Henry Schein contributed the Animal Health Business to us, which we refer to as the Reorganization, (ii) on February 7, 2019, Henry Schein distributed all of the shares of our common stock, par value $0.01 per share, or the Common Stock, that were then owned by Henry Schein (after giving effect to the Share Sale discussed below) to Henry Schein stockholders
of record as of January 17, 2019, which we refer to as the Distribution, and (iii) immediately after the Distribution, Merger Sub merged with and into Vets First Choice, which we refer to as the Merger, with Vets First Choice surviving the Merger as our wholly owned subsidiary.
We were incorporated in Delaware in April 2018 under the name HS Spinco, Inc., or Spinco, which was formed as a wholly owned subsidiary of Henry Schein in order to effect the transactions contemplated by the Contribution and Distribution Agreement and the Merger Agreement, including the Reorganization, the Distribution and the Merger, which we collectively refer to as the Transactions. In connection with the Transactions, we changed our name to Covetrus, Inc., and we became an independent, publicly traded company that owns and operates the combined businessescomplementary capabilities of the Animal Health Business and Vets First Choice.
Our principal executive offices are located at 7 Custom House Street, Portland, Maine 04101, In 2019, while initiating our long-term transformation, we established our major product categories and began the process of integrating our telephone number at that address is (888)280-2221. Our website iswww.covetrus.com. Information on,product and which can be accessed through,service offerings:
Our Capabilities
Our portfolio of solutions includessoftware 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 veterinaryprocess of combining our prescription management and software services teams as one phase of our integration efforts
We are oneis 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 |
services:
We have commercial relationships with major manufacturers in the animal health industry. With over 50 distribution centers around the world, we offer our Customers rapid, accurate and complete order fulfillment.care. By combining our infrastructureexisting global scale and logistical expertise with robust software and ordering tools, a broad product and service offeringsoffering at competitive prices, and a strong commitment to customer service, we strive to be a single-source supplieran 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.
We also offer technology-enabled services that empower veterinarians with insights that are designed to increase customer engagement and veterinary practice health. Our prescription management platform, which is
built into the veterinary practice management software workflow, leverages insight and analytics, client engagement services and integrated pharmacy services, and is designed to improve medical compliance via proactive prescription management. By working directly with veterinary practices to manage gaps in care, we seek to enable our veterinarian Customers to create new revenue opportunities, adapt to changing companion animal or horse owner, or Pet Owner, purchasing behaviors, enhance their Client relationships and improve the quality of care they provide.
Veterinary Supply Chain
We are a leader in supply chain expertise in the animal health industry. We distribute products from over 50 distribution centers, including 16 North American distribution centers, 23 distribution centers in Europe and 10 distribution centers in Australasia.
We strive to provide veterinarians access to all products they need to operate a successful veterinary practice. We carry a wide portfolio of products sourced from both global and regional suppliers to ensure that our commitment to prompt product availability can be fulfilled whenever and wherever our Customer base requires. The Animal Health Business derived approximately 16% of its net sales for the fiscal year ended December 29, 2018 and 15% of its net sales in each of the fiscal years ended December 30, 2017 and December 31, 2016 from the sale of proprietary brands.
We offer a comprehensive portfolio of products for enhancing practice revenue, operating efficient practices and delivering high-quality care. We sell and distribute pharmaceuticals, nutrition products, consumable products, diagnostic tests, small and large equipment, laboratory products and surgical products, among others. For each of the fiscal years ended December 29, 2018, December 30, 2017, and December 31, 2016, approximately 70% of the Animal Health Business revenue was derived from the sales of pharmaceuticals and nutrition products.
Pharmaceuticals include vaccines for disease prevention and parasiticides for the control of fleas, ticks and internal and external parasites. Pharmaceutical products are sourced from major global pharmaceutical companies as well as regional companies in some parts of the world.
Additionally, we offer a wide range of nutrition products, including food, specialty products to address particular health issues, supplements and premium products for enhanced general diet. These products include those sourced from leading industry supply partners and our proprietary brands.
We offer small and large equipment from a variety of equipment suppliers as well as our own proprietary brands. In addition to diagnostic equipment, we provide a wide range of capital equipment to veterinary hospitals, including anesthetic machines, dental carts, imaging machines, cages and tables.
Substantially all of the products we distribute are manufactured by third parties and we are dependent on our suppliers for these products. We believe that effective purchasing is a key factor in maintaining our position as a leading provider of animal health products. We regularly assess our purchasing needs and our suppliers’ product offerings and prices.
We strive to maintain optimal inventory levels in order to satisfy customer demand for prompt delivery (typically, next day) and complete order fulfillment. These inventory levels are managed on a daily basis with the aid of our information management systems. Once an order is entered, it is electronically transmitted to the distribution center nearest the customer’s location and a packing slip for the entire order is printed for order fulfillment.
Practice Management Software and Value-Added Solutions and Services
We offer our Customers more than just veterinary supplies, serving as an integral partner to our Customers’ practices for information management solutions and client communications. We offer innovative technology-enabled solutions and services, including practice management software, support, data driven applications and related services. Our practice management solutions provide practitioners with electronic medical records, treatment history, billing, accounts receivable analyses and management, appointment calendars, electronic claims processing and word processing programs. For example, we support, develop and provide veterinary practices with veterinary software systems, including AVImark, eVetPractice, ImproMed and ImproMed Equine in North America, and Robovet, VisionVPM and RxWorks in the United Kingdom and Australia. Moreover, we offer solutions that integrate with our software platforms, including client communication services such as Vetstreet and Rapport, reminders, data backup services, hardware sales and support, and credit card processing. In total,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 |
Prescription Management Platform
We offer a prescription management platform that empowers veterinarians with insights that are designed to increase Customer engagement and veterinary practice health. The platform, which is built into the veterinary practice management software workflow, leverages insight and analytics, Clientclient engagement servicesand outreach communications, and integrated pharmacyveterinary-pharmacy services and is designed to improve medical compliance via proactive prescription management. By workingcompliance. To bring these benefits to fruition, we work directly with veterinary practices to manageprovide client and practice-level insights and identify gaps in care,medical care.
While the global companion animal marketthat is growing, we believe veterinary practices are currently combating pressures tied to the growthof e-commerce and retail competition. Evolving Client purchasing behavior has resulted in product revenue moving outside of the veterinary practice channel, creating financial pressures for veterinary practices that we believe will increase over time. We believe these increasing burdens create an opportunity for our prescription management platform to change veterinarians’ relationships with their Clients and the fundamental economics of their practices by providing greater insights into medical compliance and managing gaps in care. We believe that redefining how prescription management is delivered can not only help veterinarians recapture and grow their product revenue but alsodrive in-clinic service activity.
Our technology platform encompasses and integrates the core functionality of pharmacy service and prescription and inventory management in a single, secure and regulatory-compliant system. The underlying core of the platform is its real-time integration with veterinary practice management software systems and the ability to normalize and interpret analytics on disparate client records, creating a standardized view to help identify gaps in care in a specific veterinary practice. With this detailed insight organized by Client, therapy and practitioner, veterinarians within the practice can use that information to proactively manage prescription delivery. Our veterinary practice Customers engage on our platform in an effort to improve medical compliance and enhance practice economics while also offering convenient, moreaffordable, on-demand, high-quality veterinary medicine to their Clients and their pets and horses. The platform offers both the veterinarian Customer and its Client an experience centered on improving medication and service compliance. We believe veterinarians, regardless of geography or specialization, can leverage prescription management and client engagement with our platform.
The prescription management platform’s business model is aligned with the objectives of our veterinary practice Customers. A significant portion of our platform’s revenue is derived from the integrated pharmacy services we offer, based on the number of filled, refilled and renewed prescriptions that our veterinary practice Customers are channeling into the platform marketplace. Thispay-for-performance model provides for increased engagement on the platform and drives more Pet Owners to the network as veterinary practices expand and broaden the suite of products made available by our Customers to their Clients on the platform.
Our integrated prescription management platform solution is designed to position us at the center of the relationship among the veterinarian, Pet Owner and manufacturer and as a key participant in the market for veterinary prescription management services. We regularly incorporate new product features into the platform to meet the evolving needs of our Customers and their Clients and to enhance differentiation, designed to drive revenue for our veterinary practice Customers. Our prescription management platform supports the following capabilities:
insight and analytics from internal and external data sources, such as practice management software;
algorithmic interpretation of data to identify gaps in care by animal, therapy and practitioner;
proactive client outreach and engagement tools to narrow gaps in care;
practice management software integration into existing workflows to proactively engage and coordinate accredited pharmacy services; and
reporting and tracking of clinical and financial outcomes.
Our ability to normalize data from disparate sources within the practice management system enables us to incorporate pet, horse and Pet Owner information and clinical insight effectively and to provide individually tailored strategies for them. Our data integration, conversion and support services and solution delivery capabilities provide a single point of integration with more than 20 practice management systems, enabling a growing number of veterinary practice Customers to benefit from the platform.
We help veterinarians turn data into actionable insight and effectively integrate this into their workflow. We are able to standardize information, providing timely and useful insights. With gaps in care identified, our platform offers proactive prescription management and integrated pharmacy services designed to drive Client engagement and improve medication and service compliance. We believe this integrated solution offers a multitude of advantages over a piecemeal approach.
The configurable nature and broad capabilities of our prescription management platform help enhance the benefits our veterinary practice Customers receive and help increase the effectiveness of our veterinary practice Customers’ existing practice management software technology architecture. Our solutions are delivered as integral components of our Customers’ core operations, rather thanas add-on solutions, enhancing the overall value proposition we offer. We leverage the platform and centralized resources in conjunction with the growthNet sales generated in our veterinary practice Customers’ client lists to provide additional functionality and insight.
We believe our focus on providing deeper insights into medical compliance and integrating those insights into the veterinarians’ practice management workflow has created a platform that fundamentally strengthens the economicsmajor product categories, by segment, is below:
Year Ended December 31, 2020 | |||||||||||||||||||||||||||||
Supply Chain Services | Software Services | Prescription Management | Eliminations | Total | |||||||||||||||||||||||||
North America | $ | 1,969 | $ | 78 | $ | 406 | $ | (76) | $ | 2,377 | |||||||||||||||||||
Europe | 1,574 | 10 | — | (13) | 1,571 | ||||||||||||||||||||||||
APAC & Emerging Markets | 394 | 8 | — | — | 402 | ||||||||||||||||||||||||
Eliminations | (11) | — | — | — | (11) | ||||||||||||||||||||||||
Total Net sales | $ | 3,926 | $ | 96 | $ | 406 | $ | (89) | $ | 4,339 |
Year Ended December 31, 2019 | |||||||||||||||||||||||||||||
Supply Chain Services | Software Services | Prescription Management | Eliminations | Total | |||||||||||||||||||||||||
North America | $ | 1,816 | $ | 82 | $ | 246 | $ | (33) | $ | 2,111 | |||||||||||||||||||
Europe | 1,513 | 10 | — | (14) | 1,509 | ||||||||||||||||||||||||
APAC & Emerging Markets | 361 | 7 | — | — | 368 | ||||||||||||||||||||||||
Eliminations | (12) | — | — | — | (12) | ||||||||||||||||||||||||
Total Net sales | $ | 3,678 | $ | 99 | $ | 246 | $ | (47) | $ | 3,976 |
Year Ended December 29, 2018 | |||||||||||||||||||||||||||||
Supply Chain Services | Software Services | Prescription Management | Eliminations | Total | |||||||||||||||||||||||||
North America | $ | 1,858 | $ | 83 | $ | — | $ | (2) | $ | 1,939 | |||||||||||||||||||
Europe | 1,462 | 11 | — | (10) | 1,463 | ||||||||||||||||||||||||
APAC & Emerging Markets | 380 | 7 | — | — | 387 | ||||||||||||||||||||||||
Eliminations | (11) | — | — | — | (11) | ||||||||||||||||||||||||
Total Net sales | $ | 3,689 | $ | 101 | $ | — | $ | (12) | $ | 3,778 |
Covetrus, Inc. 2020 Form 10-K | 7 |
For the veterinarian, our prescription management platform enables proactive prescription management and integrated pharmacy services, which we believe simultaneously narrows gaps in care and enhances medical compliance,creates in-clinic and online demand, improves practice economics, and provides our veterinary practice Customers a competitive advantage against online and other distributors and strengthens client relationships.
For the Client, we believe proactive client engagement improves compliance with therapeutic recommendations, which drives improved health outcomes for their pets and horses, with the platform providing the high-quality, efficientand on-demand access that consumers increasingly demand from their shopping experience.
For the manufacturer, demand generation from narrowing gaps in care, quality accreditation, drug pedigree and chain of custody support a strengthening relationship with the veterinarian and the Pet Owner.
In total, our prescription management platform creates a value chain that connects veterinarians, Pet Owners and the manufacturers to facilitate the direct delivery of animal health care.
Our Strategy
Our strategy is comprised of the following elements:
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Our Key Capabilities
In pursuing our strategy, we plan to capitalize on our key strengths:
insight and analytics that help veterinarians identify and manage gaps in care;
multi-channel Client engagement thatdrives in-clinic service activity and online purchases;
proactive prescription management and pharmacy services that drive medication compliance, increase revenues and improve the Customer and Client experience;
inventory management and supply chain services and technology that help improve practice efficiency and economics;
specialty pharmacy services and proprietary brand products, which include innovative solutions and chronic care disease management; and
veterinary practice management software that improves workflow, manages animal health records and supports office administration.
Our Customers
In our major markets, our Customers include:
supply•Supply chain Customerscustomers in North America, Europe, and Australasia (including more than 90% of the approximately 30,000 veterinary practicesAPAC & Emerging Markets
practice management solutions Customers inU.S., the United States, the United Kingdom,U.K., Australia, New Zealand, and certain other countries (including more than 50% of the veterinary practices in the United States); and
prescription•Prescription management and pharmacy services Customers, including the approximately 7,500 veterinary practicescustomers in the United States utilizing our prescription management platform.
Our Competitors
The market for providing products, services
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Additionally, online andbrick-and-mortar retailers offer certain animal health products and services directly to Clients, which impacts our Customers and in turn our business.
We believe we are well suited to compete in this market. We expect that our global scale, comprehensiveoperations 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 integrated capabilities and expertise will allow us to win business and access additional revenue opportunities while addressing the evolving needsDistrict of our Customer base.
Columbia.
Marketing
initiatives
Covetrus, Inc. 2020 Form 10-K | 8 |
2020 | 2021 | 2022 | ||||||
Streamline | Synchronize | Accelerate | ||||||
Focus Our Business | Harmonize Our Capabilities | Expand Our Offering |
Covetrus, Inc. 2020 Form 10-K | 9 |
Covetrus, Inc. 2020 Form 10-K | 10 |
Synchronizing | ||||||||||||||||||||
with | ||||||||||||||||||||
Veterinarians and Animal Health Practitioners | Manufacturers and Suppliers | Animal Owners | Our Team | |||||||||||||||||
•Provide better service through “one face to our customer” | •Drive manufacturers' strategic priorities via total Covetrus solution | •Meet the consumer where they are & provide comprehensive experience | •Drive innovation | |||||||||||||||||
•Drive better outcomes via the “all-in” Covetrus solution | •Create demand and capture market share by leveraging our prescription management platform | •Deliver world-class e-commerce experience | •Align responsibilities and incentives around our strategic goals | |||||||||||||||||
•Deliver innovative technology products | •Provide insights & data to our manufacturer partners | •Integrate healthcare & digital commerce experience | •Recognize, reward, attract & develop talent | |||||||||||||||||
•Provide value through Covetrus proprietary brands | •Improve speed to delivery & price competitiveness | •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. |
Covetrus, Inc. 2020 Form 10-K | 11 |
Covetrus, Inc. 2020 Form 10-K | 12 |
Covetrus, Inc. 2020 Form 10-K | 13 |
Name | Age | Position(s) with our company | ||||||||||||
Benjamin Wolin | 46 | President and Chief Executive Officer | ||||||||||||
Matthew Foulston | 56 | Executive Vice President and Chief Financial Officer | ||||||||||||
Michael Ellis | 62 | Executive Vice President and President, Europe | ||||||||||||
Dustin Finer | 51 | Chief Administrative Officer | ||||||||||||
David Hinton | 60 | Executive Vice President and President, APAC and Emerging Markets | ||||||||||||
Timothy Ludlow | 55 | Executive Vice President and Chief Transformation Officer | ||||||||||||
Matthew Malenfant | 59 | President, Customer Operations North America | ||||||||||||
Laura Phillips | 51 | Vice President, Global Controller and Chief Accounting Officer | ||||||||||||
Anthony Providenti | 54 | Executive Vice President, Corporate Development | ||||||||||||
Jamey Seely | 49 | General Counsel and Secretary | ||||||||||||
Georgina Wraight | 46 | Executive Vice President and President, Global Technology Solutions |
Covetrus, Inc. 2020 Form 10-K | 14 |
Covetrus, Inc. 2020 Form 10-K | 15 |
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.
Covetrus, Inc. 2020 Form 10-K | 16 |
Animal feed additives
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.
Covetrus, Inc. 2020 Form 10-K | 17 |
The APVMA has the power to order compulsory product recalls and enforcement powers to ensure compliance with the requirements of the AgVet Code.
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 or the NZ EPA,(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 nutritionalAnimal-nutritional and animal careanimal-care products are covered by a group standardgroup-standard approval.
Employees
As
Intellectual Property
We own and use a numberwebsite https://covetrus.com/news-room/.
Covetrus, Inc. 2020 Form 10-K | 18 |
You should carefully considerfollowingprincipal risk factors in addition to the other information containeddescribed in this Annual Report on Form10-K,section:section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” andCOVID-19 pandemic, could have a material adverse effect on our financial statements and related notes. The risks described below are material risks, although not the only risks, relating to the Transactions, our business, and our common stock. If any of the events described in the following risk factors and the risks described elsewhere in this Annual Report onForm 10-K occurs, our business, financial condition, results of operations, and cash flows could be seriously harmed and the trading price of our common stock could decline. This Annual Report on Form10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this Annual Report on Form10-K.Risks Relating to the TransactionsWe may not realize the anticipated revenue growth opportunities and operational synergies from the Transactions.The benefits that we expect to achieve as a result 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 are able to 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 Transactionsmaintain effective internal controlsoffsethesitant to migrate or integrate their critical business systems and procedures to those provided by costs or delays incurred in integrating the businesses.The integration of the Animal Health Businessus, and Vets First Choice presents significant challenges.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: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; andthe potential difficulty in 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 as a result, the market and the sales cycle for our technology and services may develop slower than expectedintegration process,manufacture and supply of substantially all of our products could impact our business could suffer. We cannot assure you that we will successfully or cost-effectively integrate theand results of operationsHealth Business and Vets First Choice business. The failure to do soOwners could have a material adverse effect on our business, financial condition, results of operations and cash flows.We expect that we will incur significantone-time costs associated with the Transactions that could affectflowsperiod-to-period operating results.We anticipate that we will incur significantone-time 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 business and the length of time during which transition services are provided to us by Henry Schein. The amount and timing of these charges, including those related to information technology infrastructure and systems integration and planning, could adversely affect ourperiod-to-period operating results, whichproduct offerings could result in a reduction in the market price of sharesloss of our common stock. Moreover, delaysCustomers and create difficulty in completing the integrationattracting new customers
We may be unableexpose us to access equivalent benefitsliability and services that historically have been provided by Henry Schein to the Animal Health Business.
The Animal Health Business has been able to receive benefitspotential objections, and services from Henry Schein and has been able to benefit from Henry Schein’s financial strength and extensive business relationships. We no longer benefit from Henry Schein’s resources, other than pursuant to the Transition Services Agreement, dated as of February 7, 2019, by and between Henry Schein and Spinco, or the Transition Services Agreement, while that agreement is in effect. While Henry Schein will provide certain services to us for a specified period of time under the Transition Services Agreement, those services are transitional in nature and it cannot be assured that we will be ableour failure to adequately replace allprotect or appropriately use data could negatively affect our business and results of the resources provided by Henry Schein to the Animal Health Business or replace them at the same cost. If we are not able to replace the resources provided by Henry Schein, are unable to replace them at the same cost or are delayedoperations
The Animal Health Business’ historical combined financial dataflows
The Animal Health Business’ historical combined financial data includedother information in this Annual Report on Form10-K 10-K. These risks may not reflectbe 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 financial condition that would have been achieved had we been a combined company during the periods presented, or whattrading price of our results of operationssecurities, could decline. Investors and financial condition will beprospective investors should consider these risks, the information contained under the heading
PriorAnnual Report on Form 10-K before deciding whether to the Transactions, Henry Schein operated the Animal Health Business as part of its broader corporate organization and Henry Schein, or one of its affiliates, performed certain corporate functions for the Animal Health Business, including tax and treasury administration and certain governance functions, including internal audit and external reporting. Historical combined financial statements for the Animal Health Business reflect allocations of corporate expenses from Henry Schein for these and similar functions and may not reflect the costs that we will incur for similar services in the future.
The working capital and other capital required for the general corporate purposes of the Animal Health Business, including acquisitions and capital expenditures, historically have been satisfied as part of the company-wide cash management practices of Henry Schein. We will now need to generate our own funds to finance working capital or other cash requirements and may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities or other arrangements.
Other significant changes may occurinvest in our cost structure, management, financing and business operations as a result of operating as a combined company.
securities. We may be affected by significant restrictionsupdate these risk factors in orderour future periodic reports.
The Tax Matters Agreement, dated as of January 7, 2019, by and among Henry Schein, Spinco, Vets First Choice and the Vets First Choice Stockholders’ Representative (as it may be amended and/or restated from time to time), or the Tax Matters Agreement, generally prohibits us from taking certain actions that could cause the Distribution and
the Merger to fail to qualify astax-free transactions. In particular, for atwo-year period following the date of the Distribution, we may not (among other limitations):
cease, or permit certain of our wholly owned subsidiaries to cease, the active conduct of a business that was conducted immediately prior to the Distribution or from holding certain assets held at the time of the Distribution;
dissolve, liquidate, take any action that is a liquidation for federal income tax purposes, merge or consolidate with any other person, or permit certain of our wholly owned subsidiaries to do any of the foregoing;
approve or allow an extraordinary contribution to us by our stockholders in exchange for stock, redeem or otherwise repurchase (directly or indirectly) any of our stock, or amend our certificate of incorporation or other organizational documents, or take any other action, if such amendment or other action would affect the relative voting rights of our capital stock or would be inconsistent with the representations and statements made by us and Henry Schein in connection with the Opinion of Cleary Gottlieb Steen & Hamilton LLP, to the effect that the contribution of the Animal Health Business, the Distribution and certain related transactions will qualify as tax free to Henry Schein and Henry Schein stockholders for U.S. federal income tax purposes, or theSpin-off Tax Opinion; or
enter into any transaction or series of transactions as a result of which one or more persons would acquire (directly or indirectly) an amount of stock of Spinco (taking into account the stock of Spinco acquired pursuant to the Merger and Share Sale (as defined below)) that would reasonably be expected to cause the failure of thetax-free status of the Distribution, the Merger and certain related transactions.
In addition, we may not amend our certificate of incorporation or take any other action that would render ineffective the application of the Ownership Limitation (as defined below), and in certain circumstances this restriction may prevent us from taking certain actions even following the second anniversary of the Distribution. The Tax Matters Agreement also imposes additional obligations and restrictions on usWe face risk related to health epidemics, including the Ownership Limitation, including a requirement that we diligently enforce the provisions of the Ownership Limitation against any purported transfers in violation of its terms, and we may have an obligation to indemnify Henry Schein if we breach or otherwise fail to comply with these restrictions.
Due to these and other restrictions and indemnification obligations under the Tax Matters Agreement, we may be limited in our ability to pursue strategic transactions, equity or convertible debt financings or other transactions that may otherwise be in our best interests. Also, our potential indemnity obligations to Henry Schein might discourage, delay or prevent a change of control during thistwo-year period that our stockholders may consider favorable.
If the Distribution does not qualify as atax-freespin-off under Section 355 of the Internal Revenue Code, including as a result of subsequent acquisitions of our stock, then we may have certain indemnification obligationsCOVID-19 pandemic, which could have a material adverse effect on our business.
business and results of operations, and could also have an effect on our ability to maintain effective internal controls.
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Ifinternal 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 Transactions do not qualify for their intendedtax-free treatment,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 our failure to comply with the restrictionsits global economic impact, including any recession that has occurred or that may occur in the Tax Matters Agreementfuture.
Our amended and restated certificate of incorporation includes a share ownership limitation that, for atwo-year period following the Distribution, may prevent certain transfers of our shares.
In order to minimize the likelihood that an acquisition of our capital stock by one or more persons (or coordinating groups of persons) after the Distribution could be part of a plan or series of related transactions that includes the Distribution, our amended and restated certificate of incorporation generally prohibits, for thetwo-year period following the Distribution, direct or indirect beneficial ownership (taking into account applicable ownership provisions of the Code) and any agreement, understanding, or substantial negotiations to acquire beneficial ownership, by any person or persons of more than 9.8% of our outstanding common stock (or any other class or series of outstanding stock) or,cause continued volatility in the case of certain grandfathered holders of more than the requisite percentage of such stock held by such investor, or collectively, the Ownership Limitation. Any attempted transfer of our stock which, if effective, would result in a violation ofprice. We will continue to monitor the relevant Ownership Limitation will be null and voidab initio, and will cause the shares in excess of such Ownership Limitation (rounded up to the nearest whole share) to be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries, and the proposed transferee would not acquire any rights in the shares. A transfer for this purpose will include not only direct transfers, but also other direct and indirect changes in beneficial ownership. The trustee of the trust will receive all distributions on, and will exercise all voting rights in respect of, the shares in trust for the exclusive benefit of the charitable beneficiary. In addition, the trustee would be empowered to sell the shares in trust to a qualified person selected by the trustee, under procedures set out in our amended and restated certificate of incorporation, with all of the net profit being received by the trustee for the exclusive benefit of the charitable beneficiary. In the event that theshares-in-trust shall have been sold by the purported transferee in an open market transaction, such sale would be deemed to have been made on behalf of the trustee and all of the net profit, if any, from such sale shall be paid by the purported transferee to the trustee for the exclusive benefit of the charitable beneficiary. The purported transferee of the shares in trust would have no right to share in any profit that may be realized in respect of such shares.
Our Board has the power to waive the relevant Ownership Limitation for specific transfers after following procedures set out in our amended and restated certificate of incorporation. However, other than in respect of certain transfers that meet certain requirements described in our amended and restated certificate of incorporation, our Board is not obligated to grant a waiver. In addition, our ability to modify the relevant restrictions set forth in our amended and restated certificate of incorporation is limited by the Tax Matters Agreement.
The Ownership Limitation is intended to help preserve thetax-free treatment of the Distribution under Section 355 of the Code, but it is possible the restriction could depress the price of shares of our common stock, and, in certain circumstances while the Ownership Limitation is in effect, could inhibit proxy contests to change our Board or delay, defer or prevent a transaction or a change in control of us that might involve a premium price for holders of our common stock or that might otherwise be in the best interest of our stockholders.
Due to the Merger, our ability to use net operating losses to offset future taxable income may be restricted and these net operating losses could expire or otherwise be unavailable.
Due to the Merger, our ability to use net operating losses to offset future taxable income will be further restricted and these net operating losses, or NOLs, could expire or otherwise be unavailable. As of December 31, 2017, Vets First Choice had U.S. federal and state NOLs of $50.1 million and $29.2 million, respectively, which
begin to expire in 2030 and 2020, respectively. 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 itspre-change NOLs to offset future taxable income. For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Prior to the Merger, some of Vets First Choice’s existing NOLs were subject to limitations. Following the Merger, Vets First Choice’s existing NOLs may be subject to further limitations and we may not be able to fully use these NOLs to offset future taxable income. In addition, if we undergo any subsequent ownership change, our ability to utilize NOLs could be further limited. There is also a risk that, due to regulatory changes or for other unforeseen reasons, existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities.
Additionally, the Tax Act (as defined below) resulted in a reduction in the economic benefit of the NOLs and other deferred tax assets available to us. Under the Tax Act, U.S. federal NOLs generated after December 31, 2017 will not be subject to expiration.
Risks Relating to Our Business
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the
concerns•Concerns with entrusting a third party to maintain and manage data, especially confidential or sensitive data;
our•Our ability to minimize the time and resources required to implement our services;
our•Our ability to maintain high levels of Customer satisfaction;
our•Our ability to implement upgrades and other changes to our software without disrupting services we provide;
the•The level of customization or configuration we offer;
the•The ability to provide rapid response time during periods of intense activity on Customer websites;websites, and
the•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.
effectively.
To the extent thateffectively.
scale.
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unable to supply the market, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
operations.
Our substantial indebtedness
Based on outstanding indebtedness of Vets First Choice and the
We may incur significant additional indebtedness in the future, including secured indebtedness. Although the agreements governing the Initial Spinco Debt Financing and the Additional Spinco Financing contain restrictions on the incurrence of additional indebtedness, these restrictionshealth products are subject to unanticipated safety, quality or efficacy concerns, which may harm our reputation.
Our current level of pro forma indebtedness, and any additional indebtedness, could have a material adverse effect onmaterially adversely affect our business, financial condition and results of operations, and cash flows, including the following:
limiting our ability to obtain additional debt or equity financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes;
requiring that a substantial portionregardless of our cash flows from operations be dedicated to payments on our indebtedness instead of other purposes, including working capital, capital expenditures and future business opportunities;
making it more difficult for us to make payments on our indebtedness or satisfy other obligations;
limiting our ability to make the expenditures necessary to complete the integration of the Animal Health Business and Vets First Choice;
limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors that have less debt; and
increasing our vulnerability to a downturn in general economic conditions or in our business, and making us unable to carry out capital spending that is important to our growth.
The agreements governing our indebtedness contain restrictive covenants, which restrict our operational flexibility.
The agreements governing the Initial Spinco Debt Financing, the Additional Financing and any additional indebtedness 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 indebtedness or guarantees, or issue certain preferred shares;
pay dividends, redeem stock or make other distributions;
repurchase, prepay or redeem subordinated indebtedness;
make investments or acquisitions;
create liens;
make negative pledges;
consolidate or merge with another company;
sell or otherwise dispose of all or substantially all of our assets;
enter into certain transactions with affiliates; and
change the nature of our business.
The agreements governing the Initial Spinco Debt Financing and the Additional Financing also contain other restrictions customary for facilities of this nature.
Our ability to borrow additional amounts under the agreements governing the Initial Spinco Debt Financing and the Additional Financing will depend upon satisfaction of these covenants. Events beyond our control could affect our ability to meet these covenants. Our failure to comply with obligations under the agreements governing the Initial Spinco Debt Financing, the Additional Financing and any additional indebtedness, 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 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 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 upon conditions in the financial markets and/or the our financial performance, we may not be able to raise additional capital on favorable terms, or at all. If wewhether such reports are unable to pursue our current and future spending programs, we may be forced to cancel or scale back those programs. Failure to successfully pursue our capital expenditure and other spending plans could negatively affect our ability to compete effectively and have a material negative effect on our business and results of operations.
Many of our Customers and their Clients are price sensitive.
technology product offerings.
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maintain
receive,•Receive, process and ship orders on a timely basis;
manage•Manage the accurate billing and collections for thousands of Customers;Customers, and
process•Process payments to suppliers.
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/orand governmental agencies and involve fines and penalties, costs for remediation, and substantial defense and settlement expenses.
In addition, changes in the regulatory environment could increase our compliance related costs.
the
operational•Operational or business delays resulting from the disruption of information systems and subsequentclean-up and mitigation activities;
the•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,•Claims, fines and penalties, and costs for remediation, or substantial defense and settlement expenses;expenses, and
negative•Negative publicity resulting in reputation or brand damage with our Customers or their Clients,Animal Owners, suppliers or industry peers or the loss of sales or Customers.
Covetrus, Inc. 2020 Form 10-K 23 their ClientsAnimal Owners that subjects us to legislative and regulatory burdens and may expose us to liability and/orand potential objections from such Customers and Clients,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.containcontains 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 their ClientsAnimal Owners may also object to or opt out of the collection and use of their data, which may harm our business.or the GDPR,(“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.
of our acquisition of Vets First Choice in an all-stock transaction (“Merger”).
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are
are•Are more difficult to reach with broad marketing campaigns;campaigns, and
often•Often require higher sales, marketing and support expenditures by vendors that sell to them per revenue dollar generated for those vendors.
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 as a resultbecause 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 PetAnimal 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.
A significant portion of our operations is conducted in foreign jurisdictions and is subject to the economic, political, legal 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 a number of risks and uncertainties, including:
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;
difficulties in building, staffing and managing foreign operations (including a geographically dispersed workforce) and maintaining compliance with foreign labor laws;
burdens to comply with, and different levels of protection offered by, multiple and potentially conflicting foreign laws and regulations, including those relating to environmental, health and safety requirements and intellectual property;
changes in laws, regulations, government controls or enforcement practices with respect to our business and the businesses of our Customers;
political and social instability, including crime, civil disturbance, terrorist activities, armed conflicts 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 June 2016 vote and formal notice in March 2017 to leave 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 Foreign Corrupt Practices 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 ornon-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.
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.
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Our pharmacyprovide domain name registration, web-hosting and supply chain businesses are impacted by federalother products in foreign jurisdictions,
The status of compounded animal drugs is uncertain. Currently, the FDA exercises enforcement discretion for unapproved compounded animal drugs. In 2015, the FDA revoked its Compliance Policy Guide regarding animal drug compounding and published a draft guidance proposingobtain financing. We may also seek financing to strictly limit the circumstances under which the FDA would permit compounding of veterinary drug products. The FDA withdrew this draft guidance in November 2017. It has stated that it will issue a new draft guidancefund our ongoing operations.
The marketingcompete effectively 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 ofFDA-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 forFDA-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 Pet Owners with written prescriptions and disclosure that the Pet Owner may fill prescriptions through a third party, which may further reduce the number of Pet 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 adversenegative effect on our business financial condition,and 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 labelling or quality of transportation, which may increase our costs of doing business. In particular, in the European Union, a revision of the current legislation on veterinary medicinal products is under way, proposing a new EU regulation on veterinary medicinal products that would be uniformly applicable throughout the European Union. The current draft legislation proposes to limit the use of antibiotics, to tighten importation rules, and to impose stricter pharmacovigilance standards. If adopted as proposed, the new regulation may have a material adverse effect on the sale of our products in the European Union; it furthermore may increase the compliance requirements for our business in the European Union with resulting costs. In addition, the uncertainty over Brexit and the question whether our business will continue to be able to freely sell and distribute between the United Kingdom and the European Union may affect our business in Europe.
operations.
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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 alternativenon-infringing technology, which could require significant effort and expense.
Loss
Tax legislation
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.
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On December 22, 2017, the Tax Act was enacted in the United States, which among other things, reduced the corporate tax rate from a top marginal rate of 35%subject to a flat rate of 21% and limited the ability to deduct net interest expense to 30% of adjusted earnings, in addition to making other significant changes to corporate and international tax provisions. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and our business and financial condition could be materially adversely affected. In addition, it is uncertain how various states will respond to the newly enacted federal tax law.
Prior to the Distribution Date (as defined below), there was no public market for our common stock. A limited market, commonly known as a “when-issued” trading market, for our common stock developed on February 4, 2019 under the symbol “CVETV,” and“regular-way” trading of our common stock began on February 8, 2019.
quarterly
developments•Developments in the financial markets and worldwide or regional economies;
announcements•Announcements of innovations or new products or services by us or our competitors;
announcements•Announcements by the government relating to regulations that govern our industry;
significant•Significant sales of our common stock or other securities in the open market;
variations•Variations in interest rates;
changes•Changes in the market valuations of other comparable companies;companies, and
changes•Changes in accounting principles.
Covetrus, Inc. 2020 Form 10-K 32 Covetrus, Inc. 2020 Form 10-K 33 Covetrus, Inc. 2020 Form 10-K 34 substantially.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/orand earnings guidance we may provide.
Failure to establish and maintain effective internal controls in accordance with Section 404 of theSarbanes-Oxley Act could have a material adverse effect on our stated operating results and harm our reputation.
The financial results of the Animal Health Business previously were included within the consolidated results of Henry Schein, and neither we nor Vets First Choice have been subject to the reporting and other requirements of the Exchange Act. As a result of the Transactions, we became an independent, publicly traded company and are subject to reporting and other obligations under the Exchange Act. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. We are responsible for ensuring that all aspects of our business comply with the Sarbanes-Oxley Act. Under the Sarbanes-Oxley Act, we are required to maintain effective disclosure controls and procedures and internal control over financial reporting. In addition, our management will be required to: (i) assess the effectiveness of our internal control over financial reporting; (ii) certify that the quarterly and annual financial reports fully comply with Exchange Act requirements and the information contained in the reports fairly presents, in all material respects, the financial conditions and results of operations of our business; and (iii) obtain a report by an independent registered public accounting firm attesting our management’s assessments of internal control over financial reporting, subject to applicablephase-in periods.
To comply with these requirements, we may need to upgrade and implement additional internal controls, reporting systems, information technology systems and procedures, and hire additional accounting, legal and finance staff. We expect to incur additional annual expenses for the purpose of addressing these requirements, and those expenses may be significant. If we are unable to upgrade our internal controls, reporting systems, information technology systems and procedures in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies under the Exchange Act and the Sarbanes-Oxley Act could be impaired. Any failure 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.
Sales of our common stock may negatively affect its market price.
It is likely that some stockholders may sell our common stock received in the Transactions for various reasons such as if our business profile or market capitalization as a combined company does not fit their investment objectives. The sales of significant amounts of our common stock or the perception in the market that this will occur may result in a decrease in the market price of our common stock.
Certain former stockholders of Vets First Choice holding approximately 17.3% of our common stock are subject to asix-monthlock-up period following February 7, 2019, or the Closing Date, with respect to the shares of our common stock they received in the Merger pursuant to a voting and support agreement. These shares will be not be restricted securities within the meaning of Rule 144 under the Securities Act after the expiration of thelock-up period and, unless held by our affiliates, may subsequently be sold into the public market without restriction. If some or all of these shares are sold, or if it is perceived that they will be sold, in the public market, the price of our common stock could decline substantially.
We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We do not intend to declare and pay dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth, to develop our business, for working capital needs and for general corporate purposes. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the value of shares received in connection with the Transactions. In addition, Delaware law or the agreements governing our indebtedness may impose requirements that may restrict our ability to pay dividends to holders of our common stock.
Under our amended and restated certificate of incorporation, ournon-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 anon-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 restatedby-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 restatedby-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 restatedby-laws, collectively:
authorize the issuance of “blank check” preferred stock that could be issued by our Board without approval of stockholders;
for the first three years following the Merger until the 2022 annual meeting of stockholders, divide our Board into three classes, serving staggered terms of one, two and three years, respectively;
limit the ability of stockholders to remove directors by requiring the affirmative vote of holders of at leasttwo-thirds of the outstanding shares of our capital stock then entitled to vote for removal and, until the 2022 annual meeting of stockholders, permitting directors to be removed only with cause;
provide that vacancies on our Board may be filled only by a majority vote of directors then in office;
prohibit stockholders from calling special meetings of stockholders;
prohibit stockholder action by written consent;
establish advance notice requirements for stockholder nominations of candidates for election as directors before an annual or special meeting of our stockholders or to bring other business before an annual meeting of our stockholders;
subject us to Section 203 of the DGCL, which will prohibit us from engaging in business combinations with certain “interested stockholders” for three years following the date such stockholder became interested unless certain criteria are met; and
require the approval of holders of at leasttwo-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 restatedby-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 restatedby-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 restatedby-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 restatedby-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 upon such stockholder in any such enforcement action by service upon 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.
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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 June 2018, we signed a new lease for office space in Phoenix, Arizona. The facility includes approximately 100,000 square feet of office space See
Supplementary Data.
We own or lease the following properties with more than 40,000 square feet:
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The properties listed in the table above are our principal properties primarily used by our supply chain segment. In addition, we lease numerous other distribution, office, showroom and sales space in locations throughout our global operations.
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As of December 29, 2018, we did not have any
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.As of December 29, 2018, we did not have any securities outstanding.
Recent Sales of Unregistered Securities
On December 25, 2018, we and Henry Schein entered into a Stock Subscription and Purchase Agreement, or
The consummation of the Share Sale was subject to the satisfaction or waiver of certain customary closing conditionsNasdaq Global Market Composite Index and the proceedsS&P 600 Health Care Index. An investment of the Share Sale were paid to Spinco$100 and distributed to Henry Schein. In connection with the Share Sale, Spinco entered into a registration rights agreement, or the Registration Rights Agreement, whereby, pursuant to the termsreinvestment of the Registration Rights Agreement, the selling stockholders were granted certain registration rights. In connection with Spinco’s execution of the Registration Rights Agreement, Henry Schein agreed to reimburse Vets First Choice and Spinco for certain costs they incurred and to indemnify Vets
First Choice and Spinco for certain losses they may incur, each in connection with any resale registration statement filed by Spinco pursuant to the Registration Rights Agreement. The foregoing descriptions of the Share Sale Agreement and the Registration Rights Agreementall dividends are qualified in their entirety by reference to the full texts of such agreements, which are filed as exhibits to our registration statement on FormS-1, filedassumed on February 7, 2019.
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 | $100 | $31 | $19 | $42 | $57 | $67 | |||||||||||||||||||||||||||||
Nasdaq Global Market Composite | $100 | $119 | $92 | $131 | $142 | $196 | |||||||||||||||||||||||||||||
S&P 600 Health Care | $100 | $111 | $89 | $104 | $114 | $146 |
Not applicable.
Period | Total Number of Shares Purchased (a) | Average Price Paid Per Share (a) | 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 | ||||||||||||||||||||||
October 2020 | 10,262 | $ | 26.84 | — | $ | — | ||||||||||||||||||||
November 2020 | 748 | $ | 26.61 | — | $ | — | ||||||||||||||||||||
December 2020 | 7,840 | $ | 28.13 | — | $ | — | ||||||||||||||||||||
18,850 | $ | 27.36 | — | — | ||||||||||||||||||||||
(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 |
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The following selected financial data, with respect to our financial position and results of operations for each of the five fiscal years in the period ended December 29, 2018, set forth below, has been derived from, should be read in conjunction with and is qualified in its entirety by reference to, our combined financial statements and notes thereto. The selected financial data presented below should also be read in conjunction with
Years ended | ||||||||||||||||||||
December 29, 2018 | December 30, 2017 | December 31, 2016 | December 26, 2015 | December 27, 2014 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||
Net sales | $ | 3,777,994 | $ | 3,579,795 | $ | 3,353,160 | $ | 2,978,328 | $ | 2,951,694 | ||||||||||
Gross profit | 684,112 | 652,025 | 619,913 | 530,018 | 476,926 | |||||||||||||||
Selling, general and administrative expenses | 538,469 | 516,703 | 488,816 | 417,867 | 376,578 | |||||||||||||||
Restructuring costs | 8,545 | — | 7,269 | 8,344 | — | |||||||||||||||
Operating income | 137,098 | 135,322 | 123,828 | 103,807 | 100,348 | |||||||||||||||
Other income, net | 6,079 | 3,447 | 2,966 | 4,689 | 7,528 | |||||||||||||||
Income before taxes and equity in earnings of affiliates | 143,177 | 138,769 | 126,794 | 108,496 | 107,876 | |||||||||||||||
Income taxes(1) | (37,028 | ) | (48,019 | ) | (27,938 | ) | (24,268 | ) | (23,733 | ) | ||||||||||
Equity in earnings of affiliates | 1,233 | 1,294 | 1,408 | 760 | 329 | |||||||||||||||
Net income | 107,382 | 92,044 | 100,264 | 84,988 | 84,472 | |||||||||||||||
Less: Net income attributable to noncontrolling interests | (6,521 | ) | (27,690 | ) | (29,966 | ) | (24,664 | ) | (24,645 | ) | ||||||||||
Net income attributable to the Animal Health Business | $ | 100,861 | $ | 64,354 | $ | 70,298 | $ | 60,324 | $ | 59,827 | ||||||||||
Earnings per share attributable to the Animal Health Business | ||||||||||||||||||||
Basic(2) | $ | 1.41 | $ | 0.90 | $ | 0.98 | $ | 0.84 | $ | 0.84 | ||||||||||
Diluted(2) | $ | 1.40 | $ | 0.89 | $ | 0.98 | $ | 0.84 | $ | 0.83 |
Years ended | ||||||||||||||||||||
December 29, 2018 | December 30, 2017 | December 31, 2016 | December 26, 2015 | December 27, 2014 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net Sales by Market Data: | ||||||||||||||||||||
Supply chain(3) | $ | 3,677,188 | $ | 3,479,327 | $ | 3,254,475 | $ | 2,921,990 | $ | 2,898,611 | ||||||||||
Technology and value-added services(4) | 100,806 | 100,468 | 98,685 | 56,338 | 53,083 | |||||||||||||||
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Total | $ | 3,777,994 | $ | 3,579,795 | $ | 3,353,160 | $ | 2,978,328 | $ | 2,951,694 | ||||||||||
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December 29, 2018 | December 30, 2017 | December 31, 2016 | December 26, 2015 | December 27, 2014 | ||||||||||||||||
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Balance Sheet data: | ||||||||||||||||||||
Total assets | $ | 2,233,084 | $ | 2,217,020 | $ | 1,991,124 | $ | 1,862,179 | $ | 1,709,082 | ||||||||||
Long-term debt | 23,529 | 23,529 | 25,831 | 23,922 | 27,604 | |||||||||||||||
Redeemable noncontrolling interests | 92,432 | 366,554 | 322,070 | 275,759 | 309,540 | |||||||||||||||
Total equity | 1,493,617 | 1,257,239 | 1,120,146 | 1,056,520 | 923,228 |
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Where You Can Find Important Information
We may disclose important
Overview
The Animal Health Business is onefinancial condition and results of the world’s largest veterinary supply chain, technology and software providers to the animal health market, with leading positions in North America, Europe and Australasia and growing businesses in South America and Asia. The Animal Health Business utilizes a multi-channel approach centered primarily on promoting veterinarians as the source of clinical expertise that benefits animals and the people that careoperations for them. The Animal Health Business serves animal health practitioners, providers and producers through the distribution of pharmaceuticals, vaccines, supplies and equipment and by the development, sale and distribution of veterinary practice management software and related solutions and services. The Animal Health Business served approximately 100,000 customers in over 100 countries and had net sales of approximately of $3.8 billion for the fiscal year ended December 29, 2018.
Segments
The Animal Health Business conducts its business through two reportable segments: (i) supply chain and (ii) technology and value-added services. For31, 2019 as compared to the fiscal year ended December 29, 2018 included in
The supply chain segment includeslarge-animal veterinary markets. Our mission is to provide the distribution of pharmaceuticals, nutritionbest products, consumable products, diagnostic tests, small and large equipment, laboratory products and surgical products, among others. The technology and value-added services segment consists of technology services, which include practice management software systems and computer hardware for animal health customers as well as software support, data driven applications, training and education, client communication services, and value-added services.
Trendstechnology to veterinarians and key factors affectinganimal-health practitioners across the performanceglobe, so they can deliver exceptional care to their patients when and financial conditionswhere 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.
Covetrus, Inc. 2020 Form 10-K | 38 |
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.
Veterinary visits and pet owner willingness to spend.The health Five suppliers accounted for approximately 50% of the business ofin-office veterinary care is a critical determinant in the financial performance of the Animal Health Business, both with respect to the number of visits by pet owners as well as their desire and ability to spend on preventative and therapeutic treatments and procedures. Because we market our companion animal prescription products through the veterinarian channel, bothin-office and through our online platform, any decrease in reliance on and visits to veterinarians by companion animal owners could reduce our market share for such products and have a material adverse effect on our business, financial condition, results of operations and cash flows.
Seasonality
The Animal Health Business’ 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 second and third fiscal quarters, primarily due to an increase in vector-borne diseases during those quarters. Buying patterns can also be affected by manufacturers’ and distributors’ marketing programs or price increase announcements, which can cause veterinarians to purchase large animal health products earlier than when those products are needed. This kind of early purchasing may reduce the Animal Health Business’ sales in the quarters these purchases would have otherwise been made. The sales of large animal products can also vary due to changes in commodity prices and weather patterns (for example, droughts or seasons of higher precipitation that determine how long cattle will graze), which may also affectperiod-to-period financial results. The Animal Health Business expects its historical seasonality trends to continue in the foreseeable future.
Working Capital
The Animal Health Business’ principal capital requirements include the funding of working capital needs, funding of strategic investments and purchases of fixed assets. The Animal Health Business requires substantial working capital, which is susceptible to fluctuations during the year as a result of levels of accounts receivables, inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity, special inventory forwardbuy-in opportunities and the Animal Health Business’ desired level of inventory.
Plans of Restructuring
On November 6, 2014, Henry Schein announced a company-wide initiative to rationalize operations and provide expense efficiencies. This initiative planned for the elimination of certain workforce positions and the closing of certain facilities. In conjunction with this initiative, the Animal Health Business eliminated approximately 180 positions and recorded restructuring costs of $8.3 million and $7.3 million associated with these actions in the fiscal year ended December 26, 2015 and the fiscal year ended December 31, 2016, respectively.2020.
Covetrus, Inc. 2020 Form 10-K | 39 |
Years Ended | |||||||||||||||||
(In millions) | December 31, 2020 | December 31, 2019 | December 29, 2018 | ||||||||||||||
Net sales | $ | 4,339 | $ | 3,976 | $ | 3,778 | |||||||||||
Cost of sales | 3,541 | 3,227 | 3,094 | ||||||||||||||
Gross profit | 798 | 749 | 684 | ||||||||||||||
Gross margin % | 18.4 | % | 18.8 | % | 18.1 | % | |||||||||||
Operating expenses: | |||||||||||||||||
Selling, general and administrative | 867 | 808 | 547 | ||||||||||||||
Goodwill impairment | — | 938 | — | ||||||||||||||
Operating income (loss) | $ | (69) | $ | (997) | $ | 137 | |||||||||||
Net income (loss) | $ | (17) | $ | (983) | $ | 107 | |||||||||||
Net income (loss) attributable to Covetrus | $ | (19) | $ | (980) | $ | 101 |
On July 9, 2018, Henry Schein announced a company-wide initiative31, 2020 compared to further rationalize operations and provide expense efficiencies. In conjunction with this initiative, the Animal Health Business eliminated 142 positions and recorded restructuring costs of $8.5 million during the fiscal year ended December 29, 2018. 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.
(In millions) | December 31, 2020 | % of Total | December 31, 2019 | % of Total | $ Change | % Change | |||||||||||||||||||||||||||||
North America | $ | 2,377 | 54.8 | % | $ | 2,111 | 53.1 | % | $ | 266 | 12.6 | % | |||||||||||||||||||||||
Europe | 1,571 | 36.2 | 1,509 | 38.0 | 62 | 4.1 | |||||||||||||||||||||||||||||
APAC & Emerging Markets | 402 | 9.3 | 368 | 9.3 | 34 | 9.2 | |||||||||||||||||||||||||||||
Eliminations | (11) | (0.3) | (12) | (0.3) | 1 | (8.3) | |||||||||||||||||||||||||||||
Total Net sales | $ | 4,339 | 100.0 | % | $ | 3,976 | 100.0 | % | $ | 363 | 9.1 | % |
Covetrus, Inc. 2020 Form 10-K | 40 |
(In millions) | December 31, 2020 | Gross Margin % | December 31, 2019 | Gross Margin % | $ Change | Gross Profit % Change | |||||||||||||||||||||||||||||
North America | $ | 500 | 21.0 | % | $ | 452 | 21.4 | % | $ | 48 | 10.6 | % | |||||||||||||||||||||||
Europe | 219 | 13.9 | 227 | 15.0 | (8) | (3.5) | |||||||||||||||||||||||||||||
APAC & Emerging Markets | 79 | 19.7 | 70 | 19.0 | 9 | 12.9 | |||||||||||||||||||||||||||||
Total Gross profit | $ | 798 | 18.4 | % | $ | 749 | 18.8 | % | $ | 49 | 6.5 | % |
(In millions) | December 31, 2020 | % of Respective Net Sales | December 31, 2019 | % of Respective Net Sales | $ Change | % Change | |||||||||||||||||||||||||||||
North America | $ | 495 | 20.8 | % | $ | 467 | 22.1 | % | $ | 28 | 6.0 | % | |||||||||||||||||||||||
Europe | 184 | 11.7 | 186 | 12.3 | (2) | (1.1) | |||||||||||||||||||||||||||||
APAC & Emerging Markets | 55 | 13.7 | 58 | 15.8 | (3) | (5.2) | |||||||||||||||||||||||||||||
Corporate | 133 | — | 97 | — | 36 | 37.1 | |||||||||||||||||||||||||||||
Total SG&A | $ | 867 | 20.0 | % | $ | 808 | 20.3 | % | $ | 59 | 7.3 | % |
Covetrus, Inc. 2020 Form 10-K | 41 |
(In millions) | December 31, 2020 | December 31, 2019 | $ Change | % Change | |||||||||||||||||||
Interest income | $ | 1 | $ | 2 | $ | (1) | (50.0) | % | |||||||||||||||
Interest expense | (47) | (56) | 9 | (16.1) | |||||||||||||||||||
Other, net | 91 | 22 | 69 | 313.6 | |||||||||||||||||||
Other income (expense) | $ | 45 | $ | (32) | $ | 77 | (240.6) | % |
Gross Profit
As a resultour subsidiary, SAHS, in Spain.
The Tax Act
non-deductible share-based compensation.
35% to 21%, modification of accelerated depreciation, the repeal of the domestic manufacturing deduction and changes to the limitations of the deductibility of interest. Additionally, the Tax Act moves from a global tax regime to a modified territorial regime, which requires U.S. companies to pay a mandatoryone-time transition tax on historical offshore earnings that have not been repatriated to the United States.
The Tax Act also includesincluded provisions for tax global intangiblelow-taxeson Global Intangible Low-Taxed Income (“GILTI”).
Due to the complexitiesa decrease of a portion of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, or SAB 118, that allows companies to record a provisional amount for any incomevaluation allowance recorded against U.S. deferred tax effects of the Tax Act in accordance with Accounting Standard Codification 740, or ASC 740, to the extent that a reasonable estimate can be made. SAB 118 allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts.
The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global IntangibleLow-Taxedassets.
Inincurred and estimated the fourth quarterimpact of 2017, the Animal Health Business recorded provisional amounts related toeach provision of the Tax Act on the effective tax and recorded tax expense for any items that could be reasonably estimated at the time. This includedGILTI provision of $10 million and an interest
Covetrus, Inc. 2020 Form 10-K | 42 |
For the year ended December 29, 2018, the Business recorded a net $4.4 million additional expense for theone-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 22, 2018, the Business has completed its analysis of the impact of the Tax Act in accordance with SAB 118 and the amounts are now considered final.
Due to theone-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;tax, however, there could be U.S. state and/orand foreign withholding taxes upon distribution of such unremitted earnings. Determination
Under Topic 740,earnings. However, with the Business estimatedrecent change in our capital structure due to the impact of each provisionconversion of the Tax Act onSeries A Preferred Stock and the Business effective tax and recorded a current tax expense for the GILTI provisionelimination of $1.6 million in the Business’s effective tax rate for the year ended December 29, 2018. For the BEAT, FDII and Interest Limitation computations, the Business has not recorded an estimate in the effective tax rate for the year ended December 29, 2018 because management has concluded that these provisions of the Tax Act will not apply to or will have an immaterial impact on its combined financial statements for the year ended December 29, 2018.
Results of Operations
The following tables summarize the significant components of the Animal Health Business’ operating results for the years ended December 29, 2018, December 30, 2017 and December 31, 2016:
Years Ended | ||||||||||||
Dollars in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Operating results: | ||||||||||||
Net sales | $ | 3,777,994 | $ | 3,579,795 | $ | 3,353,160 | ||||||
Cost of sales | 3,093,882 | 2,927,770 | 2,733,247 | |||||||||
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Gross profit | 684,112 | 652,025 | 619,913 | |||||||||
Operating expenses: | ||||||||||||
Selling, general and administrative | 538,469 | 516,703 | 488,816 | |||||||||
Restructuring costs | 8,545 | — | 7,269 | |||||||||
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Operating income | $ | 137,098 | $ | 135,322 | $ | 123,828 | ||||||
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Other income, net | $ | 6,079 | $ | 3,447 | $ | 2,966 | ||||||
Net income | 107,382 | 92,044 | 100,264 | |||||||||
Net income attributable to the Animal Health Business | 100,861 | 64,354 | 70,298 |
Year Ended December 29, 2018 Compared to Year Ended December 30, 2017
Net Sales
Net sales for the fiscal years ended December 29, 2018 and December 30, 2017 were as follows:
Dollars in thousands | Year Ended December 29, 2018 | % of Total | Year Ended December 30, 2017 | % of Total | Increase | |||||||||||||||||||
$ | % | |||||||||||||||||||||||
Supply chain | $ | 3,677,188 | 97.3 | % | $ | 3,479,327 | 97.2 | % | $ | 197,861 | 5.7 | % | ||||||||||||
Technology and value-added services | 100,806 | 2.7 | 100,468 | 2.8 | 338 | 0.3 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 3,777,994 | 100.0 | % | $ | 3,579,795 | 100.0 | % | $ | 198,199 | 5.5 | |||||||||||||
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|
|
Net sales were $3,778.0 million for the year ended December 29, 2018, compared to $3,579.8 million for the year ended December 30, 2017, an increase of $198.2 million, or 5.5%. The change was due to growth in net sales denominated in local currencies of $152.8 million (which includes a $63.3 million increase in organic growth and $89.5 million of growth from acquisitions)preferred dividends as well as an increasethe strong performance in our business, the opportunity to pursue new investments is a viable option available to us. Accordingly, we determined effective as of $45.4the fourth quarter ending December 31, 2020, that certain unremitted earnings of approximately $135 million related to foreign currency exchange.
Net sales for the supply chain segment were $3,677.2 million for the year ended December 29, 2018, compared to $3,479.3 million for the year ended December 30, 2017, an increase of $197.9 million, or 5.7%. The change was due to growth in net sales denominated in local currencies of $152.7 million (which includes a $66.1 million increase in organic growth and $86.6 million of growth from acquisitions) as well as an increase of $45.2 million related to foreign currency exchange. The growth in net sales denominated in local currencies in supply chain revenue was negatively affected by year over year changes to certain supplier agreements where the Animal Health Business acted as an agent in 2018 versus acting as a principalexisting in the prior year. When excluding the effects of this change, organic growth increased by $182.3 million.
Net sales for the technology and value-added services segment were $100.8 million for the year ended December 29, 2018, compared to $100.5 million for the year ended December 30, 2017, an increase of $0.3 million, or 0.3%. The change was due to growthCompany’s foreign subsidiaries located in net sales denominated in local currencies of $0.1 million
(which includesvarious jurisdictions are no longer indefinitely reinvested. As a $2.8 million decrease in organic growth and $2.9 million of growth from acquisitions) as well as an increase of $0.2 million related to foreign currency exchange.
No single customer accounted for more than 10%result of the Animal Health Business’ net sales inU.S. Tax Act, unremitted earnings can generally be remitted to the fiscal years ended December 29, 2018 or December 30, 2017.
Gross Profit
Gross profit and gross margins forU.S. without incurring additional U.S. federal income taxation. In addition, earnings repatriated from the fiscal years ended December 29, 2018 and December 30, 2017 were as follows:
Dollars in thousands | Year Ended December 29, 2018 | Gross Margin% | Year Ended December 30, 2017 | Gross Margin% | Increase | |||||||||||||||||||
$ | % | |||||||||||||||||||||||
Supply chain | $ | 624,460 | 17.0 | % | $ | 591,214 | 17.0 | % | $ | 33,246 | 5.6 | % | ||||||||||||
Technology and value-added services | 59,652 | 59.2 | 60,811 | 60.5 | (1,159 | ) | (1.9 | ) | ||||||||||||||||
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| |||||||||||||||||||
Total | $ | 684,112 | 18.1 | $ | 652,025 | 18.2 | $ | 32,087 | 4.9 | |||||||||||||||
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Gross profit was $684.1 million for the year ended December 29, 2018 compared to $652.0 million for the year ended December 30, 2017, an increase of $32.1 million, or 4.9%. Total gross profit margin was 18.1% for the year ended December 29, 2018, compared to 18.2% for the year ended December 30, 2017, a decrease of ten basis points.
Gross profit for the supply chain segment was $624.5 million for the year ended December 29, 2018, compared to $591.2 million for the year ended December 30, 2017, an increase of $33.2 million, or 5.6%. The change was due to a $17.3 million increase in organic growth, and $17.7 million attributable to acquisitions, partially offset by $1.8 million due to a decrease in gross margin rates. Gross profit margin for the supply chain segment for the year ended December 29, 2018 was 17.0%, the same as for the year ended December 30, 2017.
Gross profit for the technology and value-added services segment was $59.7 million for the year ended December 29, 2018, compared to $60.8 million for the year ended December 30, 2017, a decrease of $1.2 million, or 1.9%. A decrease in gross margin rates lowered gross profit by $1.4 million and a decline in organic growth lowered the gross profit by $0.9 million. Acquisitions partially offset the decrease by contributing an additional $1.4 million in gross profit. Gross profit margin for the technology and value-added services segment was 59.2% for the year ended December 29, 2018, compared to 60.5% for the year ended December 30, 2017, a decrease of 130 basis points.
Selling, General and Administrative
Selling, general and administrative expenses for the fiscal years ended December 29, 2018 and December 30, 2017 were as follows:
Dollars in thousands | Year Ended December 29, 2018 | % of Respective Net Sales | Year Ended December 30, 2017 | % of Respective Net Sales | Increase/ (Decrease) | |||||||||||||||||||
$ | % | |||||||||||||||||||||||
Supply chain | $ | 503,692 | 13.7 | % | $ | 478,868 | 13.8 | % | $ | 24,824 | 5.2 | % | ||||||||||||
Technology and value-added services | 34,777 | 34.5 | 37,835 | 37.7 | (3,058 | ) | (8.1 | ) | ||||||||||||||||
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| |||||||||||||||||||
Total | $ | 538,469 | 14.3 | $ | 516,703 | 14.4 | $ | 21,766 | 4.2 | |||||||||||||||
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Selling, general and administrative expenses were $538.5 million for the year ended December 29, 2018, compared to $516.7 million for the year ended December 30, 2017, an increase of $21.8 million, or 4.2%. As a percentage of net sales, selling, general and administrative expenses were 14.3% for the year ended December 29, 2018, compared to 14.4% for the year ended December 30, 2017.
Selling, general and administrative expenses for the supply chain segment were $503.7 million for the year ended December 29, 2018, compared to $478.9 million for the year ended December 30, 2017, an increase of $24.8 million, or 5.2%. The change was due to $14.6 million of additional costs from acquired companies and $10.2 million of additional operating costs.
Selling, general and administrative expenses for the technology and value-added services segment were $34.8 million for the year ended December 29, 2018, compared to $37.8 million for the year ended December 30, 2017, a decrease of $3.0 million, or 8.1%.
As a component of total selling, general and administrative expenses, selling expenses were $199.1 million for the year ended December 29, 2018, compared to $186.9 million for the year ended December 30, 2017, an increase of $12.2 million, or 6.5%. As a percentage of net sales, selling expenses for the year ended December 29, 2018 were 5.3%, compared to 5.2% for the year ended December 30, 2017, an increase of ten basis points.
As a component of total selling, general and administrative expenses, general and administrative expenses were $339.4 million for the year ended December 29, 2018, compared to $329.8 million for the year ended December 30, 2017, an increase of $9.6 million, or 2.9%. As a percentage of net sales, general and administrative expenses were 9.0% for the year ended December 29, 2018, compared to 9.2% for the year ended December 30, 2017, a decrease of 20 basis points.
Selling, general and administrative expenses include expense allocations for: (i) certain corporate functions historically provided by Henry Schein, including accounting,jurisdictions noted above, based upon our current legal information services, planning, compliance, investor relations, administration and communication, and similar costs; (ii) employee benefits and incentives; and (iii) stock-based compensation. The allocations may not reflect the actual expensesstructure, can generally be repatriated without incurring any withholding tax liability. Accordingly, we determined that the Animal Health Business would have incurred as a standalone company for the periods presented. During the years ended December 29, 2018 and December 30, 2017, the Business was allocated $55.4 million and $58.7 million, respectively, of general corporate expenses, which are included within selling, general and administrative expenses.
Other Income, Net
Other income, net for the fiscal years ended December 29, 2018 and December 30, 2017 was as follows:
Dollars in thousands | Year Ended December 29, 2018 | Year Ended December 30, 2017 | Variance | |||||||||||||
$ | % | |||||||||||||||
Interest income | $ | 5,745 | $ | 5,115 | $ | 630 | 12.3 | % | ||||||||
Interest expense | (2,770 | ) | (2,587 | ) | (183 | ) | 7.1 | |||||||||
Other, net | 3,104 | 919 | 2,185 | * | ||||||||||||
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Other income, net | $ | 6,079 | $ | 3,447 | $ | 2,632 | * | |||||||||
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Other income, net was $6.1 million for the year ended December 29, 2018, compared to $3.4 million for the year ended December 30, 2017, an increase of $2.6 million. Other, net was $3.1 million for the year ended December 29, 2018, an increase of $2.2 million from the year ended December 30, 2017. The change was primarily due to investment proceeds, the impact of foreign currency exchange rates and losses from fixed asset disposals in year ended December 30, 2017.
Income Taxes
For the year ended December 29, 2018, the effectivedeferred tax rate was 25.9% compared to 34.6% for the prior year period. In 2018, the effective tax rate was primarily impacted by an increase in the estimate of transition tax
liability associated with the Tax Act,repatriation of the impact of GILTI and state and foreign income taxes, partially offset by noncontrolling interestsundistributed earnings from the applicable subsidiaries located in our partnership investments and the impact of windfallthese tax benefits from share-based payment. In 2017, the effective tax rate was primarily impacted by the Tax Act and the adoption of ASU2016-09, Accounting for Stock Compensation.
Net Income
Net income was $107.4 million for the year ended December 29, 2018, compared to $92.0 million for the year ended December 30, 2017, an increase of $15.4 million or 16.7%.
Net income attributable to the Animal Health Business
Net income attributable to the Animal Health Business was $100.9 million for the year ended December 29, 2018, compared to $64.4 million for the year ended December 30, 2017, an increase of $36.5 million or 56.7%.
Year Ended December 30, 2017 Compared to Year Ended December 31, 2016
The fiscal year ended December 30, 2017 consisted of 52 weeks as compared to the fiscal year ended December 31, 2016, which consisted of 53 weeks.
Net Sales
Net sales for the fiscal years ended December 30, 2017 and December 31, 2016 were as follows:
Dollars in thousands | Year Ended December 30, 2017 | % of Total | Year Ended December 31, 2016 | % of Total | Increase | |||||||||||||||||||
$ | % | |||||||||||||||||||||||
Supply chain | $ | 3,479,327 | 97.2 | % | $ | 3,254,475 | 97.1 | % | $ | 224,852 | 6.9 | % | ||||||||||||
Technology and value-added services | 100,468 | 2.8 | 98,685 | 2.9 | 1,783 | 1.8 | ||||||||||||||||||
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Total | $ | 3,579,795 | 100.0 | % | $ | 3,353,160 | 100.0 | % | $ | 226,635 | 6.8 | |||||||||||||
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Net sales were $3,579.8 million for the year ended December 30, 2017, compared to $3,353.2 millionjurisdictions would be $2 million.
(In millions) | December 31, 2020 | % of Respective Net Sales | December 31, 2019 | % of Respective Net Sales | $ Change | % Change | |||||||||||||||||||||||||||||
North America | $ | 187 | 7.9 | % | $ | 153 | 7.2 | % | $ | 34 | 22.2 | % | |||||||||||||||||||||||
Europe | 72 | 4.6 | 68 | 4.5 | 4 | 5.9 | |||||||||||||||||||||||||||||
APAC & Emerging Markets | 28 | 7.0 | 18 | 4.9 | 10 | 55.6 | |||||||||||||||||||||||||||||
Corporate | (61) | NA | (39) | NA | (22) | NA | |||||||||||||||||||||||||||||
Total adjusted EBITDA | $ | 226 | 5.2 | % | $ | 200 | 5.0 | % | $ | 26 | 13.0 | % |
Covetrus, Inc. 2020 Form 10-K | 43 |
Neta 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.
Covetrus, Inc. 2020 Form 10-K | 44 |
(In millions) | December 31, 2020 | December 31, 2019 | December 29, 2018 | ||||||||||||||
Cash and cash equivalents | $ | 290 | $ | 130 | $ | 23 | |||||||||||
Working capital | $ | 740 | $ | 511 | $ | 514 |
Years Ended | |||||||||||||||||
(In millions) | December 31, 2020 | December 31, 2019 | December 29, 2018 | ||||||||||||||
Net cash provided by operating activities | $ | 53 | $ | 103 | $ | 158 | |||||||||||
Net cash used for investing activities | $ | (5) | $ | (65) | $ | (29) | |||||||||||
Net cash provided by (used for) financing activities | $ | 104 | $ | 66 | $ | (120) |
Covetrus, Inc. 2020 Form 10-K | 45 |
Net salescapital spending for the technologyproperty and value-added services segment were $100.5 million for the year ended December 30, 2017, compared to $98.7 million forequipment.
No single customer accountedcash used for more than 10% of the Animal Health Business’ net sales in the fiscal years ended December 30, 2017 or December 31, 2016.
Gross Profit
Gross profit and gross margins for the fiscal years ended December 30, 2017 and December 31, 2016 were as follows:
Dollars in thousands | Year Ended December 30, 2017 | Gross Margin % | Year Ended December 31, 2016 | Gross Margin % | Increase | |||||||||||||||||||
$ | % | |||||||||||||||||||||||
Supply chain | $ | 591,214 | 17.0 | % | $ | 563,574 | 17.3 | % | $ | 27,640 | 4.9 | % | ||||||||||||
Technology and value-added services | 60,811 | 60.5 | 56,339 | 57.1 | 4,472 | 7.9 | ||||||||||||||||||
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Total | $ | 652,025 | 18.2 | $ | 619,913 | 18.5 | $ | 32,112 | 5.2 | |||||||||||||||
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Gross profit was $652.0 million for the year ended December 30, 2017, compared to $619.9 million forinvesting activities increased over the year ended December 31, 2016,2018, primarily due to a $17 million dollar increase in capital spending for property and equipment and an $18 million increase of $32.1 million, or 5.2%. Gross margin was 18.2% for the year ended December 30, 2017, compared to 18.5% forbusiness acquisitions.
Gross profit for the supply chain segment was $591.2 million for the year ended December 30, 2017, compared to $563.6 million for the year ended December 31, 2016, an increase of $27.6 million, or 4.9%. The change was due to a $15.8 million increase from organic growth and a $23.1 million increase related to acquisitions partially offset by an $11.3 million decline in gross profit due to the decrease in the gross margin rates. Gross margin for the supply chain segment was 17.0% for the year ended December 30, 2017, compared to 17.3% for the year ended December 31, 2016.
Gross profit for the technology and value-added services segment was $60.8 million for the year ended December 30, 2017, compared to $56.3 million for the year ended December 31, 2016, an increase of $4.5 million, or 7.9%. The change was due to $1.0 million attributable to organic growth and $3.5 million attributable to the increase in gross margin rates. Gross margin for the technology and value-added services segment was 60.5% for the year ended December 30, 2017, compared to 57.1% for the year ended December 31, 2016.
Selling, General and Administrative
Selling, general and administrative expenses for the fiscal years ended December 30, 2017 and December 31, 2016 were as follows:
Dollars in thousands | Year Ended December 30, 2017 | % of Respective Net Sales | Year Ended December 31, 2016 | % of Respective Net Sales | Increase/ (Decrease) | |||||||||||||||||||
$ | % | |||||||||||||||||||||||
Supply chain | $ | 478,868 | 13.8 | % | $ | 450,281 | 13.8 | % | $ | 28,587 | 6.3 | % | ||||||||||||
Technology and value-added services | 37,835 | 37.7 | 38,535 | 39.0 | (700 | ) | (1.8 | ) | ||||||||||||||||
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Total | $ | 516,703 | 14.4 | $ | 488,816 | 14.6 | $ | 27,887 | 5.7 | |||||||||||||||
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Selling, general and administrative expenses were $516.7 million for the year ended December 30, 2017, compared to $488.8 million for the year ended December 31, 2016, an increase of $27.9 million, or 5.7%. Selling, general and administrative expenses for the supply chain segment were $478.9 million for the year ended December 30, 2017, compared to $450.3 million for the year ended December 31, 2016, an increase of $28.6 million, or 6.3%. The change was due to $21.5 million of additional costs from acquired companies and $7.1 million of additional operating costs. Selling, general and administrative expenses for the technology and value-added services segment were $37.8 million for the year ended December 30, 2017, compared to $38.5 million for the year ended December 31, 2016, a decrease of $0.7 million, or 1.8%. As a percentage of net sales, selling, general and administrative expenses were 14.4% for the year ended December 30, 2017, compared to 14.6% for the year ended December 31, 2016.
As a component of total selling, general and administrative expenses, selling expenses were $186.9 million for the year ended December 30, 2017, compared to $176.0 million for the year ended December 31, 2016, an increase of $10.9 million, or 6.2%. As a percentage of net sales, selling expenses for the year ended December 30, 2017 were 5.2%, the same as for the year ended December 31, 2016.
As a component of total selling, general and administrative expenses, general and administrative expenses were $329.8 million for the year ended December 30, 2017, compared to $312.8 million for the year ended December 31, 2016, an increase of $17.0 million, or 5.4%. As a percentage of net sales, general and administrative expenses were 9.2% for the year ended December 30, 2017, compared to 9.3% for the year ended December 31, 2016.
Selling, general and administrative expenses 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) stock-based compensation. The allocations may not reflect the actual expenses that the Animal Health Business would have incurred as a standalone company for the periods presented. During the years ended December 30, 2017 and December 31, 2016, the Business was allocated $58.7 million and $60.0 million, respectively, of general corporate expenses, which are included within selling, general and administrative expenses.
Other Income, Net
Other income, net for the fiscal years ended December 30, 2017 and December 31, 2016 was as follows:
Year Ended December 30, 2017 | Year Ended December 31, 2016 | Variance | ||||||||||||||
Dollars in thousands | $ | % | ||||||||||||||
Interest income | $ | 5,115 | $ | 4,915 | $ | 200 | 4.1 | % | ||||||||
Interest expense | (2,587 | ) | (1,957 | ) | (630 | ) | 32.2 | |||||||||
Other, net | 919 | 8 | 911 | * | ||||||||||||
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Other income, net | $ | 3,447 | $ | 2,966 | $ | 481 | 16.2 | |||||||||
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Other income, net was $3.4 million for the year ended December 30, 2017, compared to $2.9 million for the year ended December 31, 2016, an increase of $0.5 million, or 16.2%. Other, net was $0.9 million for the year ended December 30, 2017, an increase of $0.9 million from the year ended December 31, 2016. The change was primarily due to investment proceeds and the impact of foreign currency exchange rates.
Income Taxes
For the year ended December 30, 2017, the effective tax rate of the Animal Health Business was 34.6% compared to 22.0% for the year ended December 31, 2016. The effective tax rate of the Animal Health Business in 2017 was primarily higher due to the Tax Act and was favorably impacted in 2017 by the adoption of ASU2016-09. Absent those impacts, the difference between the Animal Health Business’ effective tax rate and the federal statutory tax rate for both periods primarily relates to state taxes, foreign income tax differential and pass through income from noncontrolling interest.
Net Income
Net income was $92.0 million for the year ended December 30, 2017, compared to $100.3 million for the year ended December 31, 2016, a decrease of $8.3 million, or 8.3%.
Net income attributable to the Animal Health Business
Net income attributable to the Animal Health Business was $64.4 million for the year ended December 30, 2017, compared to $70.3 million for the year ended December 31, 2016, a decrease of $5.9 million, or 8.4%.
Liquidity and Capital Resources
The Animal Health Business had historically participated in Henry Schein’s centralized treasury management, including centralized cash pooling and overall financing arrangements. The Animal Health Business has generated and expects to continue to generate positive cash flow from operations. Prior to the Separation, net cash used in or provided by financing activities was due to transfers to and from Henry Schein, acquisitions of and distributions to noncontrolling interests and to a lesser extent, principal payments of long term debt. The components of net transfers included: (i) cash transfers from the Animal Health Business to Henry Schein; (ii) cash investments from Henry Schein used to fund operations, capital expenditures and acquisitions; (iii) charges (benefits) for income taxes; and (iv) allocations of Henry Schein’s corporate expenses described elsewhere in the Notes of the Combined Financial Statements.
Following the Separation, the capital structure and sources of liquidity for the Animal Health Business changed significantly. The Animal Health Business no longer participates in cash management and funding arrangements with Henry Schein. Instead, Covetrus’ ability to fund the capital needs of the Animal Health Business will depend on its ongoing ability to generate cash from operations, and access to the bank and capital markets. The Animal Health Business’ primary future cash needs will be for working capital, capital expenditures and strategic investments. For at least the next 12 months, Covetrus expects the Animal Health Business to generate sufficient cash from operations to meet its liquidity and capital needs in both U.S. andnon-U.S. jurisdictions. Thereafter, it expects to have sufficient liquidity and capital resources arising from cash generated by its ongoing operations.
The following table summarizes cash flows for the fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016:
Years Ended | ||||||||||||
Dollars in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Cash flow: | ||||||||||||
Net cash provided by operating activities | $ | 157,904 | $ | 108,191 | $ | 104,799 | ||||||
Net cash used in investing activities | (29,368 | ) | (128,526 | ) | (122,757 | ) | ||||||
Net cash (used in) provided by financing activities | (119,695 | ) | 15,036 | 20,307 |
Net cash provided by operating activities
The Animal Health Business has generated significant cash flows from operations in each of the last three years.
Net cash provided by operating activities was $157.9 million for the year ended December 29, 2018, compared to $108.2 million for the year ended December 30, 2017, an increase of $49.7 million, or 45.9%. The change was driven primarily by growth in the Business’ results of operations due to an increase in organic growth, growth from acquisitions and working capital requirements. Net cash provided by operating activities was $108.2 million for the year ended December 30, 2017, compared to $104.8 million for the year ended December 31, 2016, an increase of $3.4 million, or 3.2%. The change was driven primarily by the growth in results of operations due to an increase in organic growth, growth from acquisitions, partially offset by the impact from the extra week in 2016.
Net cash used in investing activities
Net cash used for investing activities was $29.4 million for the year ended December 29, 2018, compared to $128.5 million for the year ended December 30, 2017, a decrease $99.1 million or 77.1%. The change was driven primarily due to the decrease in business acquisitions in the year ended December 29, 2018.
Net cash used for investing activities was $128.5 million for the year ended December 30, 2017, compared to $122.8 million for the year ended December 31, 2016, an increase of $5.7 million, or 4.6%. The change was driven primarily by increased capital expenditures mostly related to a new U.S. national distribution center, partially offset by a decrease in cash payments for acquisitions.
Net cash (used in) provided by financing activities
Net cash provided by (used in) in financing activities in all periods presented primarily reflects net transactions with Henry Schein and acquisitions of redeemable noncontrolling interests in subsidiaries.
Net cash used in financing activities was $119.7 million for the year ended December 29, 2018, compared to2020, net cash provided by financing activities of $15.0 million forincreased over the year ended December 30, 2017, a decrease31, 2019, primarily due to $250 million in gross proceeds from the issuance of $134.7Series A Preferred Stock, partially offset by principal payments, acquisition payments, preferred stock issuance costs, preferred stock dividends, and debt issuance costs totaling $156 million. The change was driven primarily by the purchase of additional equity interest of Butler Animal Health Holding Company, LLC in
Net31, 2019, net cash provided by financing activities was $15.0 million for the year ended December 30, 2017, compared to $20.3 million forincreased over the year ended December 31, 2016,2018, 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 $5.3non-controlling interests, partially offset by $1.2 billion paid as dividend to Henry Schein, a reduction in Net Former Parent investment of $109 million or 26.1%.
Selected measuresthat included the $361 million Share Sale and subsequent distribution of liquidityproceeds to Henry Schein, and capital resources
an increase of $41 million in debt repayments primarily related to the Animal Health Business debt.
Dollars in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Cash and cash equivalents | $ | 23,324 | $ | 16,656 | $ | 19,714 | ||||||
Working capital | 514,042 | 565,340 | 466,135 | |||||||||
Debt: | ||||||||||||
Current maturities of long-term debt | 675 | 3,204 | 1,103 | |||||||||
Long-term debt | 23,529 | 23,529 | 25,831 | |||||||||
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Total debt | $ | 24,204 | $ | 26,733 | $ | 26,934 | ||||||
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The Animal Health Business’ cash and cash equivalents consist of bank balances and marketable security investments in money market funds representing investments with a high degree of liquidity.
Accounts receivable days sales outstanding and inventory turns
The Animal Health Business’ accounts receivable days sales outstanding from operations decreased to 42.7 days as of December 29, 2018 from 44.4 days as of December 30, 2017. During the years ended December 29, 2018 and December 30, 2017, the Animal Health Business wrote off approximately $0.7 million and $0.8 million, respectively, of fully reserved accounts receivable against its trade receivable reserve. The Animal Health Business’ inventory turns from operations remained consistent at 5.5 times.
Contractual obligations
The following table summarizes the Animal Health Business’ contractualour long-term obligations related to fixed and variable rate long-term debt, including interest, as well as operating and capital lease obligations, as well as purchase obligations as of December 29, 2018:
Payments due by period | ||||||||||||||||||||
Dollars in thousands | < 1 year | 1 - 3 years | 3 - 5 years | > 5 years | Total | |||||||||||||||
Contractual obligations: | ||||||||||||||||||||
Long-term debt* | $ | 23,000 | $ | — | $ | — | $ | — | $ | 23,000 | ||||||||||
Operating lease obligations | 17,266 | 24,147 | 9,680 | 5,455 | 56,548 | |||||||||||||||
Capital lease obligations, including interest | 719 | 543 | 16 | — | 1,278 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 40,985 | $ | 24,690 | $ | 9,696 | $ | 5,455 | $ | 80,826 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
Long-term debt consisted of the following as of the following dates:
Dollars in thousands | December 29, 2018 | December 30, 2017 | ||||||
Various collateralized and uncollateralized loans payable in varying installments through 2022 at interest rates ranging from 2.61% to 5.01% at December 29, 2018 and ranging from 3.01% to 12.90% at December 30, 2017 | $ | 23,000 | $ | 25,416 | ||||
Capital lease obligations (see Note 11 to the audited combined financial statements of the Animal Health Business) | 1,204 | 1,317 | ||||||
|
|
|
| |||||
Total | 24,204 | 26,733 | ||||||
Less current maturities | (675 | ) | (3,204 | ) | ||||
|
|
|
| |||||
Total long-term debt | $ | 23,529 | $ | 23,529 | ||||
|
|
|
|
Redeemable noncontrolling interests
Some minority equity holders in certain of the Animal Health Business’ subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities at fair value. Accounting Standards Codification, or ASC, Topic 480 is applicable for noncontrolling interests where the Animal Health Business is or may be required to purchase all or a portion of the outstanding interest in a controlled subsidiary from the noncontrolling interest holder under the terms of a put option contained in contractual agreements. Certain holders of minority equity interests in certain subsidiaries of the Animal Health Business have exercised their rights to cause affiliates of Spinco to purchase such interests for cash, subject to the terms of the relevant agreements.
The components of the change in the redeemable noncontrolling interests for the years ended December 29, 2018, December 30, 2017 and December 31, 2016 are presented in the following table:
Dollars in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Balance, beginning of period | $ | 366,554 | $ | 322,070 | $ | 275,759 | ||||||
Decrease in redeemable noncontrolling interests due to redemptions | (382,180 | ) | (26,375 | ) | (3,803 | ) | ||||||
Increase in redeemable noncontrolling interests due to business acquisitions | 5,639 | 6,648 | 23,276 | |||||||||
Net income attributable to redeemable noncontrolling interests | 6,521 | 27,690 | 29,966 | |||||||||
Dividends declared | (9,859 | ) | (20,481 | ) | (22,204 | ) | ||||||
Effect of foreign currency translation gain (loss) attributable to redeemable noncontrolling interests | (1,701 | ) | 2,931 | (1,006 | ) | |||||||
Change in fair value of redeemable securities | 107,458 | 54,071 | 20,082 | |||||||||
|
|
|
|
|
| |||||||
Balance, end of period | $ | 92,432 | $ | 366,554 | $ | 322,070 | ||||||
|
|
|
|
|
|
Changes in the estimated redemption amounts of the noncontrolling interests subject to put options are adjusted at each reporting period with a corresponding adjustment to net Parent investment. Future reductions in the carrying amounts are subject to a floor amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments do not impact the calculation of earnings per share.
Additionally, some prior equity holders of such controlled subsidiaries are eligible to receive additional cash consideration if certain financial targets are met. Any adjustments to these accrual amounts are recorded in the Animal Health Business’ combined statements of operations.
2020:
Payments Due by Period | |||||||||||||||||||||||||||||
(In millions) | 2021 | 2022 - 2023 | 2024 - 2025 | After 2025 | Total | ||||||||||||||||||||||||
Long-term debt | $ | — | $ | 126 | $ | 960 | $ | — | $ | 1,086 | |||||||||||||||||||
Interest on long-term debt | 21 | 40 | 2 | — | 63 | ||||||||||||||||||||||||
Operating leases (a) | 28 | 51 | 39 | 140 | 258 | ||||||||||||||||||||||||
Finance leases, including interest | 1 | — | — | — | 1 | ||||||||||||||||||||||||
Purchase obligations (b) | 22 | 15 | 13 | — | 50 | ||||||||||||||||||||||||
Total | $ | 72 | $ | 232 | $ | 1,014 | $ | 140 | $ | 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 |
The Animal Health BusinessTax Benefits
Covetrus, Inc. 2020 Form 10-K | 46 |
Off-Balance Sheet Arrangements
The Animal Health Business does not have anyoff-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of combined financial statements requires the Animal Health Business to makein accordance with GAAP involves us making estimates and judgmentsassumptions that affect the reported amounts of assets and liabilities, revenuesnet sales and expenses, and related disclosures in the accompanying notes at the date of contingent assets and liabilities. The Animal Health Business bases itsour financial statements. We base our estimates on historical data, when available, experience, industry and market trends, and on various other assumptions that are believedwe believe to be reasonable under the circumstances, the combined results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.circumstances. However, by their nature, estimates are subject to various assumptions and uncertainties. Reported results are therefore sensitive to anyuncertainties, and changes in assumptions, judgmentscircumstances could cause actual results to differ from these estimates, sometimes materially.
The Animal Health Business believes that the followingrequire our most significant judgments are considered our critical accounting policies affectand are discussed below. In addition, refer to
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update, or ASUNo. 2014-09, “Revenue from Contracts with Customers,” ASC 606, or Topic 606. The Animal Health
Business adopted the provisions of this standard as of December 31, 2017, on a modified retrospective basis. The adoption of Topic 606 and its impacts on the Animal Health Business is further described in Notes 1 and 2 to the Combined Financial Statements.
Revenueassumptions derived from analysis of market conditions, discount rate, discounted cash flows, customer retention rates, and estimated useful lives. We generally allocate the sale of consumable products is recognized at a point in time when control transferspurchase price 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 obligationsidentifiable intangible assets, accounts receivable, inventory, property and this is when legal title and risks and rewards of ownership transfer to the customer and the point at which we have an enforceable right to payment.
Revenue derived from the sale of equipment, is recognized when control transfers to the customer. This 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 product generally carries standard warranty terms provided by the manufacturer, however, in instances where we provide warranty labor services, the warranty costs are accrued in accordance with ASC 460 “Guarantees.”
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 and/or training, is generally recognized over time using time elapsed as the input method that best depicts the transfer of control to the customer.
Prior to adopting Topic 606, the Animal Health Business sold products through either “buy/sell” or agency relationships with its suppliers. The Animal Health Business also sells software licensesdeferred taxes, and other related value-added services. The revenue recognitioncurrent and long-term assets and liabilities. Any excess of the Animal Health Business under Topic 605 is described below.
“Buy/sell” Revenue
In a “buy/sell” relationship, the Animal Health Business purchases and takes title to products from the supplier and recognizes revenue when the product is shipped to the customer. The Animal Health Business accepts only authorized product returns from its customers. The Animal Health Business estimates returns based upon historical experience and recognizes estimated returns as a reduction to product sales.
Multiple element arrangements that include elements that are not considered software consist primarily of equipment and the related installation service. The Animal Health Business allocates revenue for such arrangements based on the relative selling prices of the elements applying the following hierarchy: first vendor-specific objective evidence, or VSOE, then third-party evidence, or TPE, of the selling price if VSOE is not available, and finally, its best estimate of the selling price, or BESP, if neither VSOE nor TPE is available.
VSOE exists when the Animal Health Business sells the deliverables separately and represents the actual price charged by the Animal Health Business for each deliverable. BESP reflects the Animal Health Business’ best estimate of what the selling prices of each deliverable would be if it were sold regularly on a standalone basis taking intoacquisition consideration the cost structure of the Animal Health Business, technical skill required, customer location and other market conditions. Each element that has standalone value is accounted for as a separate unit of accounting. Revenue allocated to each unit of accounting is recognized when the service is provided or the product is delivered.
Agency Revenue
In an agency relationship, the Animal Health Business performs the sales function and in some cases performs the billing function, but does not purchase or take title of the product from the supplier. Agency
revenue is recognized on a net basis because the supplier is the primary obligor, takes the inventory and credit risk, establishes the price, picks, packs and ships the product, determines the product specifications and the amount is fixed.
Software Licenses and Other Value-Added Services Revenue
The Animal Health Business sells software licenses, maintenance on its software licenses and varying levels of professional services. For multiple-element software arrangements, total revenue is allocated to each element based on the residual method or the relative fair value method when applicable. Under the residual value method, the Animal Health Business allocates revenue to delivered components, normally the license component of the arrangement, based on VSOE of undelivered elements, which is specific to the Animal Health Business. Under the relative fair value method, the total revenue is allocated among the elements based upon the relative fair value of each element as determined through the fair value hierarchy as previously discussed.
The Animal Health Business recognizes revenue from the licensing of software when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable and collection of the resulting receivable is probable. Revenue from perpetual licenses is recognized once shipment to the Customer has taken place and when all other revenue recognition criteria have been met. Revenue from term licenses is recognized ratably over the contract term.
The Animal Health Business generally bills configuration, conversion, and installation and training services based on hourly rates plus reimbursable travel-related expenses. Configuration and conversion are generally performedin-house before the delivery of the related license. Revenue for all these services is recognized during the period the services are completed.
The Animal Health Business recognizes revenue from maintenance and support services ratably over the contract term. Maintenance agreements entitle customers to receive technical support and are generally between three months and one year in length.
The Animal Health Business recognizes revenue from other related products and services, which include healthcare reminders, Healthy Pet magazines and Pet ID cards. The revenue for these products is recognized on a monthly basis according to actual usage.
Accounts Receivable
The carrying amount of accounts receivable is reduced by a valuation allowance that reflects the Animal Health Business’ best estimate of the amounts that will not be collected. The reserve for accounts receivable is comprised of allowance for doubtful accounts and sales returns. In addition to reviewing delinquent accounts receivable, the Animal Health Business considers many factors in estimating its reserve, including historical data, experience, customer types, credit worthiness and economic trends. From time to time, the Animal Health Business adjusts its assumptions for anticipated changes in any of these or other factors expected to affect collectability.
Inventories
Inventories consist primarily of finished goods and are valued at the lower of cost or market. Cost is determined by thefirst-in,first-out method for merchandise or actual cost for large equipment and high tech equipment. In accordance with the Animal Health Business’ policy for inventory valuation, it considers many factors including the condition and salability of the inventory, historical sales, forecasted sales and market and economic trends.
Goodwill
Goodwill is not amortized, but is subject to impairment analysis at least once annually. Such impairment analyses for goodwill require a comparison of the fair value to the carrying value of reporting units. The Animal Health Business regards its reporting units to be supply chain and technology and value-added services. Goodwill was allocated to such reporting units, for the purposes of preparing the Animal Health Business’ impairment analyses, based on a specific identification basis.
For the years ended December 29, 2018, December 30, 2017 and December 31, 2016, the Animal Health Business tested goodwill for impairment using a quantitative analysis consisting of atwo-step approach. The first step of the Animal Health Business’ quantitative analysis consists of a comparison of the carrying value of its reporting units, including goodwill, to the estimated fair value of its reporting units using a discounted cash flow methodology. If step one results in the carrying value of the reporting unit exceeding the fair value of such reporting unit,identifiable net assets acquired is recorded as goodwill.
The Animal Health Business’a reporting unit is judgmental in nature and involves the use of a discountedsignificant estimates and assumptions. Fair values were estimated using both the income approach, discounting projected future cash flow methodology includes estimates of future revenueflows based uponon budget projections and growth rates that take into accountconsider estimated inflation rates. The Animal Health Business also developsrates, and the market approach, applying a multiple of earnings based on comparable publicly traded companies. Key estimates forinclude weighted-average cost of capital, future levels of gross and operating profits, and projected capital expenditures. The Animal Health Business’ methodology also includesrates used to discount projected future cash flows under the useincome approach reflect a weighted-average cost of estimated discount rates based upon industrycapital in the range of 8.0% to 9.0%, depending on the reporting unit, which considered capital structure and competitor analysis as well as other factors. The estimatesrisk premiums, including those reflected in our current market capitalization.
Some factors the Animal Health Business considers important that could triggera triggering event occurred and conducted an interim impairment review include:
significant underperformance relativetest 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 expected historical or projected future operating results;
significant
Covetrus, Inc. 2020 Form 10-K | 47 |
significant negative industry or economic trends.
If the Animal Health Business determines through the impairment review process thatDecember 31, 2020 and 2019, Goodwill was $1,187 million and $1,154 million, respectively. All goodwill or other indefinite-lived intangible assets are impaired, it records an impairment chargeis recorded in its combined statements of operations.
Supplier Rebates
Supplier rebates are included as a reduction of cost of sales and are recognized over the period they are earned. The factors the Animal Health Business considers 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.
Long-Livedour North America reporting unit.
Long-lived
property, and impairment losses are only recorded if the asset’s carrying amount is not recoverable through itsour undiscounted, probability-weighted future cash flows. The Animal Health Business measuresWe 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.
Stock-Based Compensation
Stock-based compensation represents
Covetrus, Inc. 2020 Form 10-K | 48 |
Stock-based awards were provided to certain employees under the terms of the Henry Schein 2013 Stock Incentive Plan, or as amended, the Plan. The Plan is administered by the Compensation Committee of the Henry Schein Board. Prior to March 2009, awards under the Plan principally included a combination ofat-the-money stock options and restricted stock and restricted stock units. Since March 2009, equity-based awards have been granted solely in the form of restricted stock and restricted stock units, with the exception of providing stock options to employees pursuant to certainpre-existing contractual obligations.
Grants of restricted stock and restricted stock units are stock-based awards granted to recipients with specified vesting provisions. In the case of restricted stock, the Parent’s common stock is delivered on the date of grant, subject to vesting conditions. In the case of restricted stock units, the Parent’s common stock is generally delivered on or following satisfaction of vesting conditions. The Parent’s issues restricted stock and restricted stock units, including to employees of the Animal Health Business, that vest solely based on the recipient’s continued service over time (primarily four-year cliff vesting), and restricted stock and restricted stock units that vest based on the Animal Health Business achieving specified performance measurements and the recipient’s continued service over time (primarily three-year cliff vesting).
With respect to time-based restricted stock and restricted stock units, the Animal Health Business estimates the fair value on the date of grant based on Henry Schein’s closing stock price. With respect to performance-based restricted stock and restricted stock units, the number of shares that ultimately vest and are received by the recipient is based upon performance as measured against specified targets over a specified period, as determined by the Compensation Committee of the Henry Schein Board. Although there is no guarantee that performance targets will be achieved, the Animal Health Business estimates the fair value of performance-based restricted stock and restricted stock units based on Henry Schein’s closing stock price at time of grant.
The Plan provides for adjustments to the performance-based restricted stock and restricted stock units targets for significant events, including acquisitions, divestitures, new business ventures, certain capital transactions (including share repurchases), restructuring costs, if any, changes in accounting principles or in applicable laws or regulations, foreign exchange fluctuations, certain litigation related costs and material changes in income tax rates. Over the performance period, the number of shares of common stock that will ultimately vestmaterial weakness and be issued and the related compensation expense is adjusted upward or downward based upon the Animal Health Business’ estimation of achieving such performance targets. The ultimate number of shares delivered to recipients and the related compensation cost is recognized as an expense based on the actual performance metrics as defined under the Plan.
our remediation efforts.
|
The Animal Health Business is exposed
follows:
Risk
Covetrus, Inc. 2020 Form 10-K | 49 |
Short-Termbe entirely eliminated through our interest rate swap contracts.
During the fiscal year ended December 29, 2018, the Animal Health Business limited its
Covetrus, Inc. 2020 Form 10-K | 50 |
|
PagePage 56575859606162
Covetrus, Inc. 2020 Form 10-K | 51 |
Shareholders
Covetrus, Inc. 2020 Form 10-K | 52 |
New York, NY
March 29, 2019
Covetrus, Inc. 2020 Form 10-K | 53 |
COMBINED BALANCE SHEETS
Dollars in thousands | December 29, 2018 | December 30, 2017 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 23,324 | $ | 16,656 | ||||
Accounts receivable, net of reserves of $7,412 and $7,570 | 430,783 | 427,866 | ||||||
Inventories, net | 564,163 | 534,664 | ||||||
Other receivables | 49,226 | 75,651 | ||||||
Prepaid expenses and other | 19,109 | 22,089 | ||||||
|
|
|
| |||||
Total current assets | 1,086,605 | 1,076,926 | ||||||
Property and equipment, net | 68,549 | 64,554 | ||||||
Goodwill | 749,762 | 759,768 | ||||||
Other intangibles, net | 208,213 | 252,927 | ||||||
Investments and other | 119,955 | 62,845 | ||||||
|
|
|
| |||||
Total assets | $ | 2,233,084 | $ | 2,217,020 | ||||
|
|
|
| |||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 441,453 | $ | 375,782 | ||||
Current maturities of long-term debt | 675 | 3,204 | ||||||
Accrued expenses: | ||||||||
Payroll and related | 36,948 | 33,382 | ||||||
Taxes | 16,922 | 16,301 | ||||||
Other | 76,565 | 82,917 | ||||||
|
|
|
| |||||
Total current liabilities | 572,563 | 511,586 | ||||||
Long-term debt, net | 23,529 | 23,529 | ||||||
Deferred income taxes | 16,372 | 18,908 | ||||||
Other liabilities | 34,571 | 39,204 | ||||||
|
|
|
| |||||
Total liabilities | 647,035 | 593,227 | ||||||
Redeemable noncontrolling interests | 92,432 | 366,554 | ||||||
Equity: | ||||||||
Net Parent investment | 1,575,831 | 1,299,227 | ||||||
Accumulated other comprehensive loss | (82,214 | ) | (41,988 | ) | ||||
|
|
|
| |||||
Total equity | 1,493,617 | 1,257,239 | ||||||
|
|
|
| |||||
Total liabilities, redeemable noncontrolling interests and equity | $ | 2,233,084 | $ | 2,217,020 | ||||
|
|
|
|
See accompanying notes to combined
ANIMAL HEALTH BUSINESS
COMBINED STATEMENTS OF OPERATIONS
Years Ended | ||||||||||||
Dollars in thousands except share and per share data | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Net sales | $ | 3,777,994 | $ | 3,579,795 | $ | 3,353,160 | ||||||
Cost of sales | 3,093,882 | 2,927,770 | 2,733,247 | |||||||||
|
|
|
|
|
| |||||||
Gross profit | 684,112 | 652,025 | 619,913 | |||||||||
Operating expenses: | ||||||||||||
Selling, general and administrative | 538,469 | 516,703 | 488,816 | |||||||||
Restructuring costs | 8,545 | — | 7,269 | |||||||||
|
|
|
|
|
| |||||||
Operating income | 137,098 | 135,322 | 123,828 | |||||||||
Other income: | ||||||||||||
Other, net | 6,079 | 3,447 | 2,966 | |||||||||
|
|
|
|
|
| |||||||
Income before taxes and equity in earnings of affiliates | 143,177 | 138,769 | 126,794 | |||||||||
Income taxes | (37,028 | ) | (48,019 | ) | (27,938 | ) | ||||||
Equity in earnings of affiliates | 1,233 | 1,294 | 1,408 | |||||||||
|
|
|
|
|
| |||||||
Net income | 107,382 | 92,044 | 100,264 | |||||||||
Less: Net income attributable to redeemable noncontrolling interests | (6,521 | ) | (27,690 | ) | (29,966 | ) | ||||||
|
|
|
|
|
| |||||||
Net income attributable to the Animal Health Business | $ | 100,861 | $ | 64,354 | $ | 70,298 | ||||||
|
|
|
|
|
| |||||||
Earnings per share attributable to the Animal Health Business: | ||||||||||||
Basic | $ | 1.41 | $ | 0.90 | $ | 0.98 | ||||||
|
|
|
|
|
| |||||||
Diluted | $ | 1.40 | $ | 0.89 | $ | 0.98 | ||||||
|
|
|
|
|
| |||||||
Weighted-average common shares outstanding: | ||||||||||||
Basic | 71,451,123 | 71,451,123 | 71,451,123 | |||||||||
|
|
|
|
|
| |||||||
Diluted | 71,973,249 | 71,973,249 | 71,973,249 | |||||||||
|
|
|
|
|
|
See accompanying notes to combined financial statements.
ANIMAL HEALTH BUSINESS
COMBINED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended | ||||||||||||
Dollars in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Net income | $ | 107,382 | $ | 92,044 | $ | 100,264 | ||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||
Foreign currency translation (loss) gain | (43,056 | ) | 62,139 | (41,636 | ) | |||||||
Unrealized (loss) gain from foreign currency hedging activities | (592 | ) | 697 | (95 | ) | |||||||
Pension adjustment gain | 1,721 | 409 | 235 | |||||||||
|
|
|
|
|
| |||||||
Other comprehensive (loss) income, net of tax | (41,927 | ) | 63,245 | (41,496 | ) | |||||||
|
|
|
|
|
| |||||||
Comprehensive income | 65,455 | 155,289 | 58,768 | |||||||||
|
|
|
|
|
| |||||||
Comprehensive income: | ||||||||||||
Comprehensive income attributable to redeemable noncontrolling interests: | ||||||||||||
Net income | (6,521 | ) | (27,690 | ) | (29,966 | ) | ||||||
Foreign currency translation loss (gain) | 1,701 | (2,931 | ) | 1,006 | ||||||||
|
|
|
|
|
| |||||||
Comprehensive income attributable to redeemable noncontrolling interests | (4,820 | ) | (30,621 | ) | (28,960 | ) | ||||||
|
|
|
|
|
| |||||||
Comprehensive income attributable to the Animal Health Business | $ | 60,635 | $ | 124,668 | $ | 29,808 | ||||||
|
|
|
|
|
|
See accompanying notes to combined financial statements.
ANIMAL HEALTH BUSINESS
Dollars in thousands | Net Parent Investment | Accumulated Other Comprehensive Income (Loss) | Total Equity Attributable to the Business | |||||||||
Balance at December 26, 2015 | $ | 1,118,332 | $ | (61,812 | ) | $ | 1,056,520 | |||||
Net income attributable to the Animal Health Business | 70,298 | — | 70,298 | |||||||||
Other comprehensive loss | — | (40,490 | ) | (40,490 | ) | |||||||
Net transfers in Parent investment | 33,819 | — | 33,819 | |||||||||
|
|
|
|
|
| |||||||
Balance at December 31, 2016 | $ | 1,222,449 | $ | (102,302 | ) | $ | 1,120,147 | |||||
Net income attributable to the Animal Health Business | 64,354 | — | 64,354 | |||||||||
Other comprehensive income | — | 60,314 | 60,314 | |||||||||
Net transfers in Parent investment | 12,424 | — | 12,424 | |||||||||
|
|
|
|
|
| |||||||
Balance at December 30, 2017 | $ | 1,299,227 | $ | (41,988 | ) | $ | 1,257,239 | |||||
Cumulative impact of adopting new accounting standard | 1,536 | — | 1,536 | |||||||||
Net income attributable to the Animal Health Business | 100,861 | — | 100,861 | |||||||||
Other comprehensive loss | — | (40,226 | ) | (40,226 | ) | |||||||
Net transfers in Parent investment | 174,207 | — | 174,207 | |||||||||
|
|
|
|
|
| |||||||
Balance at December 29, 2018 | $ | 1,575,831 | $ | (82,214 | ) | $ | 1,493,617 | |||||
|
|
|
|
|
|
See accompanying notes to combined financial statements.
ANIMAL HEALTH BUSINESS
COMBINED STATEMENTS OF CASH FLOWS
Years Ended | ||||||||||||
Dollars in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 107,382 | $ | 92,044 | $ | 100,264 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 64,100 | 59,053 | 55,448 | |||||||||
Loss on sale of fixed assets | 69 | 475 | 4 | |||||||||
Stock-based compensation expense | 7,052 | 7,220 | 6,208 | |||||||||
Provision for losses on trade and other accounts receivable | 721 | 552 | 758 | |||||||||
(Benefit from) provision for deferred income taxes | (4,800 | ) | 6,186 | (6,278 | ) | |||||||
Equity in earnings of affiliates | (1,233 | ) | (1,294 | ) | (1,408 | ) | ||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||
Accounts receivable | (13,190 | ) | (33,941 | ) | (13,373 | ) | ||||||
Inventories | (42,607 | ) | (23,450 | ) | (54,876 | ) | ||||||
Accounts payable and accrued expenses | 75,004 | 6,452 | 22,272 | |||||||||
Other assets and liabilities | (34,594 | ) | (5,106 | ) | (4,220 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash provided by operating activities | 157,904 | 108,191 | 104,799 | |||||||||
|
|
|
|
|
| |||||||
Cash flows from investing activities: | ||||||||||||
Purchases of fixed assets | (22,025 | ) | (20,665 | ) | (12,748 | ) | ||||||
Payments related to equity investments and business acquisitions, net of cash acquired | (8,166 | ) | (108,933 | ) | (110,615 | ) | ||||||
Proceeds from sale of fixed assets | 823 | 1,072 | 606 | |||||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | (29,368 | ) | (128,526 | ) | (122,757 | ) | ||||||
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Cash flows from financing activities: | ||||||||||||
Principal payments for long-term debt | (2,104 | ) | (314 | ) | (373 | ) | ||||||
Net transfers from Parent | 274,448 | 62,206 | 46,687 | |||||||||
Distributions to noncontrolling stockholders | (9,859 | ) | (20,481 | ) | (22,204 | ) | ||||||
Acquisitions of noncontrolling interests in subsidiaries | (382,180 | ) | (26,375 | ) | (3,803 | ) | ||||||
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Net cash (used in) provided by financing activities | (119,695 | ) | 15,036 | 20,307 | ||||||||
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Effect of exchange rate changes on cash and cash equivalents | (2,173 | ) | 2,241 | (1,654 | ) | |||||||
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Net change in cash and cash equivalents | 6,668 | (3,058 | ) | 695 | ||||||||
Cash and cash equivalents, beginning of period | 16,656 | 19,714 | 19,019 | |||||||||
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Cash and cash equivalents, end of period | $ | 23,324 | $ | 16,656 | $ | 19,714 | ||||||
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Cash paid for income taxes | $ | 11,767 | $ | 7,698 | $ | 6,756 | ||||||
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See accompanying notes to combined financial statements.
Notes to Combined Financial Statements
1. Business Overview and Significant Accounting Policies
Separation from Henry Schein
On April 20, 2018, Henry Schein, Inc. (“Henry Schein” orreporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework(2013) issued by the “Parent”) entered into a Contribution and Exchange Agreement, an Agreement and PlanCommittee of Merger and certain other transaction documents, which contemplate, among other things, the separation and contribution of Parent’s animal health business (the “Animal Health Business” or the “Business”) to HS Spinco, Inc. (“Spinco”), the pro rata distributionSponsoring Organizations of the shares of Spinco common stock held by Parent to Parent’s stockholdersTreadway 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 recordCOSO criteria.
The Business conducts operations through two reportable segments, which are also its operating segments: (i) supply chain and (ii) technology and value-added services. These segments offer different products and servicesrequired to be independent with respect to the same customer base throughout North America, Europe, Australasia, South AmericaCompany in accordance with U.S. federal securities laws and Asia.
Basisthe applicable rules and regulations of Presentation
These combinedthe Securities and Exchange Commission and the PCAOB.
Covetrus, Inc. 2020 Form 10-K | 54 |
December 31, 2020 | December 31, 2019 | ||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 290 | $ | 130 | |||||||
Accounts receivable, net of allowance of $5 and $8 (Note 5) | 507 | 426 | |||||||||
Inventories, net | 530 | 636 | |||||||||
Other receivables | 67 | 67 | |||||||||
Prepaid expenses and other | 37 | 30 | |||||||||
Assets held for sale (Note 4) | 0 | 51 | |||||||||
Total current assets | 1,431 | 1,340 | |||||||||
Non-current assets: | |||||||||||
Property and equipment, net (Note 6) | 116 | 93 | |||||||||
Operating lease right-of-use assets, net (Note 7) | 117 | 84 | |||||||||
Goodwill (Note 8) | 1,187 | 1,154 | |||||||||
Other intangibles, net (Note 8) | 555 | 643 | |||||||||
Investments and other | 90 | 45 | |||||||||
Total assets | $ | 3,496 | $ | 3,359 | |||||||
LIABILITIES, MEZZANINE EQUITY, AND SHAREHOLDERS' EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 405 | $ | 520 | |||||||
Current maturities of long-term debt and other borrowings (Note 9) | 1 | 62 | |||||||||
Accrued payroll and related liabilities | 67 | 44 | |||||||||
Accrued taxes | 37 | 18 | |||||||||
Other current liabilities | 181 | 164 | |||||||||
Liabilities held for sale (Note 4) | 0 | 21 | |||||||||
Total current liabilities | 691 | 829 | |||||||||
Non-current liabilities: | |||||||||||
Long-term debt and other borrowings, net (Note 9) | 1,068 | 1,125 | |||||||||
Deferred income taxes (Note 16) | 28 | 48 | |||||||||
Other liabilities | 136 | 94 | |||||||||
Total liabilities | 1,923 | 2,096 | |||||||||
Commitments and contingencies (Note 12) | 0 | 0 | |||||||||
Mezzanine equity: | |||||||||||
Redeemable non-controlling interests (Note 13) | 36 | 10 | |||||||||
Shareholders' equity: | |||||||||||
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 | 1 | 1 | |||||||||
Accumulated other comprehensive loss (Note 15) | (66) | (86) | |||||||||
Additional paid-in capital | 2,629 | 2,339 | |||||||||
Accumulated deficit | (1,027) | (1,001) | |||||||||
Total shareholders’ equity | 1,537 | 1,253 | |||||||||
Total liabilities, mezzanine equity, and shareholders’ equity | $ | 3,496 | $ | 3,359 |
Covetrus, Inc. 2020 Form 10-K | 55 |
Years Ended | |||||||||||||||||
December 31, 2020 | December 31, 2019 | December 29, 2018 | |||||||||||||||
Net sales (Note 5) | $ | 4,339 | $ | 3,976 | $ | 3,778 | |||||||||||
Cost of sales | 3,541 | 3,227 | 3,094 | ||||||||||||||
Gross profit | 798 | 749 | 684 | ||||||||||||||
Operating expenses: | |||||||||||||||||
Selling, general and administrative | 867 | 808 | 547 | ||||||||||||||
Goodwill impairment (Note 8) | 0 | 938 | 0 | ||||||||||||||
Operating income (loss) | (69) | (997) | 137 | ||||||||||||||
Other income (expense): | |||||||||||||||||
Interest income | 1 | 2 | 1 | ||||||||||||||
Interest expense | (47) | (56) | (3) | ||||||||||||||
Other, net | 91 | 22 | 8 | ||||||||||||||
Income (loss) before taxes and equity in earnings of affiliates | (24) | (1,029) | 143 | ||||||||||||||
Income tax benefit (expense) (Note 16) | 7 | 46 | (37) | ||||||||||||||
Equity in earnings of affiliates | 0 | 0 | 1 | ||||||||||||||
Net income (loss) | (17) | (983) | 107 | ||||||||||||||
Net (income) loss attributable to redeemable non-controlling interests | (2) | 3 | (6) | ||||||||||||||
Net income (loss) attributable to Covetrus | $ | (19) | $ | (980) | $ | 101 | |||||||||||
Earnings (loss) per share attributable to Covetrus: (Note 17) | |||||||||||||||||
Basic | $ | (0.22) | $ | (9.14) | $ | 1.41 | |||||||||||
Diluted | $ | (0.22) | $ | (9.14) | $ | 1.40 | |||||||||||
Weighted-average common shares outstanding: | |||||||||||||||||
Basic | 118 | 107 | 71 | ||||||||||||||
Diluted | 118 | 107 | 72 |
Covetrus, Inc. 2020 Form 10-K | 56 |
Years Ended | |||||||||||||||||
December 31, 2020 | December 31, 2019 | December 29, 2018 | |||||||||||||||
Net income (loss) | $ | (17) | $ | (983) | $ | 107 | |||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||
Foreign currency translation gain (loss) | 23 | (3) | (43) | ||||||||||||||
Unrealized gain (loss) from foreign currency hedging activities | 0 | 0 | (1) | ||||||||||||||
Gain (loss) on derivative instruments | (3) | (1) | 0 | ||||||||||||||
Pension adjustment gain | 0 | 0 | 2 | ||||||||||||||
Total other comprehensive income (loss) | 20 | (4) | (42) | ||||||||||||||
Comprehensive income (loss) | 3 | (987) | 65 | ||||||||||||||
Comprehensive (income) loss attributable to redeemable non-controlling interests: | |||||||||||||||||
Net (income) loss | (2) | 3 | (6) | ||||||||||||||
Foreign currency translation (gain) loss | (2) | (1) | 2 | ||||||||||||||
Comprehensive (income) loss attributable to redeemable non-controlling interests | (4) | 2 | (4) | ||||||||||||||
Comprehensive income (loss) attributable to Covetrus | $ | (1) | $ | (985) | $ | 61 |
Covetrus, Inc. 2020 Form 10-K | 57 |
Common Stock | Accumulated Other Comprehensive Income (Loss) | Additional Paid-in Capital | Accumulated Deficit | Net Former Parent Investment | Total Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
December 30, 2017 | 0 | $ | 0 | $ | (42) | $ | 0 | $ | 0 | $ | 1,257 | $ | 1,215 | |||||||||||||||||||||||||||||||
Net income (loss) attributable to Covetrus | — | — | — | — | — | 101 | 101 | |||||||||||||||||||||||||||||||||||||
Cumulative impact of adopting ASC 606 | — | — | — | — | — | 2 | 2 | |||||||||||||||||||||||||||||||||||||
Net increase in Former Parent investment | — | — | — | — | — | 174 | 174 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | (40) | — | — | — | (40) | |||||||||||||||||||||||||||||||||||||
December 29, 2018 | 0 | 0 | (82) | 0 | 0 | 1,534 | 1,452 | |||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to Covetrus (a) | — | — | — | — | (1,001) | 21 | (980) | |||||||||||||||||||||||||||||||||||||
Dividend to Former Parent | — | — | — | (21) | — | (1,153) | (1,174) | |||||||||||||||||||||||||||||||||||||
Issuance of shares at Separation (including Share Sale investors) | 71,693,426 | 1 | — | 566 | — | (567) | 0 | |||||||||||||||||||||||||||||||||||||
Issuance of shares in connection with the Acquisition (b) | 39,742,089 | — | — | 1,772 | — | — | 1,772 | |||||||||||||||||||||||||||||||||||||
Shares canceled (b) | (700,400) | — | — | (30) | — | — | (30) | |||||||||||||||||||||||||||||||||||||
Net increase in Former Parent investment | — | — | — | — | — | 172 | 172 | |||||||||||||||||||||||||||||||||||||
Issuance of shares in connection with share-based compensation plans | 885,392 | — | — | 5 | — | — | 5 | |||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | 46 | — | — | 46 | |||||||||||||||||||||||||||||||||||||
Deferred tax impact of acquisition of non-controlling interest | — | — | — | — | — | (7) | (7) | |||||||||||||||||||||||||||||||||||||
Other | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | (4) | — | — | — | (4) | |||||||||||||||||||||||||||||||||||||
December 31, 2019 | 111,620,507 | 1 | (86) | 2,339 | (1,001) | 0 | 1,253 | |||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to Covetrus | — | — | — | — | (19) | 0 | (19) | |||||||||||||||||||||||||||||||||||||
Change in fair value of redeemable securities | — | — | — | (6) | — | — | (6) | |||||||||||||||||||||||||||||||||||||
Issuance of shares in connection with share-based compensation plans | 1,793,394 | — | — | 10 | — | — | 10 | |||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | 40 | — | — | 40 | |||||||||||||||||||||||||||||||||||||
Series A preferred stock dividend | — | — | — | — | (7) | — | (7) | |||||||||||||||||||||||||||||||||||||
Conversion of Series A preferred stock | 22,604,063 | — | — | 246 | — | — | 246 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | 20 | — | — | — | 20 | |||||||||||||||||||||||||||||||||||||
December 31, 2020 | 136,017,964 | $ | 1 | $ | (66) | $ | 2,629 | $ | (1,027) | $ | 0 | $ | 1,537 | |||||||||||||||||||||||||||||||
Covetrus, Inc. 2020 Form 10-K | 58 |
Years Ended | |||||||||||||||||
December 31, 2020 | December 31, 2019 | December 29, 2018 | |||||||||||||||
Cash flows from operating activities: | |||||||||||||||||
Net income (loss) | $ | (17) | $ | (983) | $ | 107 | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||||||||
Depreciation and amortization | 166 | 155 | 64 | ||||||||||||||
Amortization of right-of-use assets | 24 | 21 | 0 | ||||||||||||||
Goodwill impairment | 0 | 938 | 0 | ||||||||||||||
Operating lease right-of-use asset impairment | 8 | 0 | 0 | ||||||||||||||
Gain on divestiture of a business | (73) | 0 | 0 | ||||||||||||||
Share-based compensation expense | 40 | 46 | 7 | ||||||||||||||
Deferred income taxes | (32) | (25) | (5) | ||||||||||||||
Equity in earnings of affiliates | 0 | 0 | (1) | ||||||||||||||
Amortization of debt issuance costs | 6 | 5 | 0 | ||||||||||||||
Loss on managed exit of a business | 7 | 0 | 0 | ||||||||||||||
Other | (10) | (10) | 0 | ||||||||||||||
Changes in operating assets and liabilities, net of acquisitions: | |||||||||||||||||
Accounts receivable, net | (68) | 13 | (13) | ||||||||||||||
Inventories, net | 106 | (58) | (42) | ||||||||||||||
Other assets and liabilities | (19) | (92) | (34) | ||||||||||||||
Accounts payable and accrued expenses | (85) | 93 | 75 | ||||||||||||||
Net cash provided by operating activities | 53 | 103 | 158 | ||||||||||||||
Cash flows from investing activities: | |||||||||||||||||
Purchases of property and equipment | (58) | (39) | (22) | ||||||||||||||
Payments related to equity investments and business acquisitions, net of cash acquired | (54) | (26) | (8) | ||||||||||||||
Proceeds from divestiture of a business, net | 103 | 0 | 0 | ||||||||||||||
Proceeds from sale of property and equipment | 4 | 0 | 1 | ||||||||||||||
Net cash used for investing activities | (5) | (65) | (29) | ||||||||||||||
Cash flows from financing activities: | |||||||||||||||||
Proceeds from revolving credit facility | 190 | 0 | 0 | ||||||||||||||
Repayment of revolving credit facility | (190) | 0 | 0 | ||||||||||||||
Proceeds from the issuance of debt | 0 | 1,220 | 0 | ||||||||||||||
Principal payments of debt | (122) | (43) | (2) | ||||||||||||||
Debt issuance and amendment costs | (5) | (24) | 0 | ||||||||||||||
Dividend paid to Former Parent | 0 | (1,174) | 0 | ||||||||||||||
Issuance of common shares in connection with share-based compensation plans | 10 | 5 | 0 | ||||||||||||||
Net transfers from Former Parent | 0 | 165 | 274 | ||||||||||||||
Distributions to non-controlling shareholders | 0 | 0 | (10) | ||||||||||||||
Proceeds from issuance of Series A preferred stock | 250 | 0 | 0 | ||||||||||||||
Series A preferred stock issuance costs | (6) | 0 | 0 | ||||||||||||||
Series A preferred stock dividends | (6) | 0 | 0 | ||||||||||||||
Acquisition payments | (17) | (9) | 0 | ||||||||||||||
Acquisitions of non-controlling interests in subsidiaries | 0 | (74) | (382) | ||||||||||||||
Net cash provided by (used for) financing activities | 104 | 66 | (120) | ||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 8 | 3 | (2) | ||||||||||||||
Net change in cash and cash equivalents | 160 | 107 | 7 | ||||||||||||||
Cash and cash equivalents, beginning of period | 130 | 23 | 16 | ||||||||||||||
Cash and cash equivalents, end of period | $ | 290 | $ | 130 | $ | 23 |
Covetrus, Inc. 2020 Form 10-K | 59 |
Years Ended | |||||||||||||||||
December 31, 2020 | December 31, 2019 | December 29, 2018 | |||||||||||||||
Supplemental disclosures of cash payments: | |||||||||||||||||
Interest | $ | 40 | $ | 47 | $ | 0 | |||||||||||
Income taxes | $ | 24 | $ | 18 | $ | 12 | |||||||||||
Amounts included in the measurement of operating lease liabilities | $ | 27 | $ | 25 | $ | 0 | |||||||||||
Supplemental disclosures of noncash investing and financing activities: | |||||||||||||||||
Conversion of Series A preferred stock | $ | 245 | $ | 0 | $ | 0 | |||||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 56 | $ | 104 | $ | 0 | |||||||||||
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 0 | $ | 1 | $ | 0 | |||||||||||
Deconsolidation of a subsidiary | $ | 15 | $ | 0 | $ | 0 |
Covetrus, Inc. 2020 Form 10-K | 60 |
These 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
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 greater than or equal to 20% and less than or equal to 50% owned, or investments in unconsolidated affiliates of less than 20% in which the Business has the ability towe could influence the operating or financial decisions, are accounted for under the equity method.
All intracompany transactions have been eliminated. All intercompany transactions between the Business and Henry Schein have been included in these combined financial statements and are considered to be effectively settled for cash in the combined financial statements at the time the transaction is recorded.
Henry Schein uses a centralized approach to cash management and financing of its operations, excluding debt where the Animal Health Business is the legal obligor. The majority of the Animal Health Business’ cash is transferred to Henry Schein daily and Henry Schein funds Animal Health Business’ operating and investing activities as needed. Cash transfers to and from Henry Schein are reflected in “net Parent investment.”
The combined financial statements include certain assets and liabilities that have historically been held at the Henry Schein corporate level but are specifically identifiable or otherwise attributedconform to the Business. The cash and cash equivalents held by Henry Schein at the corporate level are not specifically identifiable to the Business and therefore were not attributed for any of the periods presented. Cash and cash equivalents in the combined balance sheets primarily represent cash held locally by entities included in the combined financial statements. Henry Schein’s third-party debt, and the related interest expense, has not been allocated to the Business for any of the periods presented as the Animal Health Business was not the legal obligor of the debt and the Henry Schein borrowings were not directly attributable to the Business.
current presentation.
The preparation of
The most significant estimates include the Business’ evaluation of doubtful accounts receivable, evaluation of inventory reserves, evaluation of customer returns,our evaluation of goodwill impairment, deferred taxes, contingencies, intangible assets acquired, fair value measurements, share-based compensation, self-insurance reserves, and supplier rebates, fair value of redeemable noncontrolling interest and intangible assets acquired.
rebates.
The Business reports its results of operations and cash flows
respectively.
On December 31, 2017, the Business adopted the Accounting Standard Update (“ASU”)No. 2014-09, “Revenue from Contracts with Customers,” Accounting Standards Codification (“ASC”) 606 (“Topic 606”) issued by the Financial Accounting Standards Board (“FASB”) by using the modified retrospective method applied to those contracts which were not completed as of the adoption date. The disclosures included below reflect the Business’ accounting policies under Topic 606.
Revenue is recognized
identify
identify•Identify the performance obligations in the contract;
determine•Determine the transaction price;
allocate•Allocate the transaction price to the performance obligations in the contract; and
recognize•Recognize revenue when, or as, the entity satisfies a performance obligation.
The Business generates
returns, and other contra revenue adjustments areis 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 |
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.
Revenue derived from agency relationshipsthe period the related revenue is recognized on a net basis as the supplier is the primary obligor, bears the inventory and credit risk, establishes the price, picks, packs and ships the product, determines the product specifications and the amount is fixed. Agency revenue included in the Business’ net sales were $26.0 million, $15.6 million and $20.7 million for the years ended December 29, 2018, December 30, 2017 and December 31, 2016, respectively. Gross billings associated with these agency arrangements were $453.8 million, $402.2 million and $404.9 million for the years ended December 29, 2018, December 30, 2017 and December 31, 2016, respectively.
recognized.
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.
For the years ended December 29, 2018, December 30, 2017 and December 31, 2016, software and related revenue totaled $100.8 million, $100.5 million and $98.7 million, respectively. As of December 29, 2018, and December 30, 2017, deferred revenue related to software post-contract customer support was $7.1 million and $7.4 million, respectively. Deferred revenue is included within accrued expenses-other and other liabilities in the combined balance sheets.
Sales,value-add and other taxes the Business collects concurrently with revenue-producing activities are excluded from revenue.
elements. There are no cases where revenue is deferred due to a lack of a stand alone selling price. Bundled arrangements that include elements that are not considered software consist primarily of equipment and the related installation service. The Business allocatesWe 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 the Business doeswe do not sell the goods or services separately, the Business useswe use one of the following techniques to estimate the stand alonestandalone 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 estimatedrelative selling price reflects the Business’our best estimate of what the selling prices of each deliverable would be if it were sold regularly on a stand alonestandalone 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 |
disclosures.
Accounts receivable balances are written off when it is probable that all contractual payments due will not be collected.
Deferred Commissions
Sales commissions earned by the Business’ sales force that relate to long-term arrangements are capitalized as costs to obtain a contract when the costs incurred are incremental and are expected to be recovered. Deferred
sales commissions are amortized over the estimated customer relationship period. The Business applies the practical expedient related to the capitalization of incremental costs of obtaining a contract, and recognizes such costs as an expense when incurred if the amortization period of the assets that the Business would have recognized is one year or less.
Sales Returns
Sales returns are recognized as a reduction of revenue by the amount of expected returns and are recorded as refund liability within current liabilities. The Business estimates the amount of revenue expected to be reversed to calculate the sales return liability based on historical data for specific products, adjusted as necessary for new products. The allowance for returns is presented gross as a refund liability and the Business records an inventory asset (and a corresponding adjustment to cost of sales) for any goods or services that it expects to be returned.
Prior to the Adoption of Topic 606
Results for reporting periods beginning after December 30, 2017 are presented under Topic 606, while prior period amounts continue to be reported under the accounting standards in effect for those periods (ASC 605). The Business’ revenue recognition accounting policies applied under ASC 605 are outlined below.
The Business sells products through either “buy/sell” or agency relationships with its suppliers. The Business also sells software licenses, and other related value-added services.
“Buy/sell” Revenue
In a “buy/sell” relationship, the Business purchases and takes title of products from the supplier and recognizes revenue when the product is shipped to the customer. The Business accepts only authorized product returns from its customers. The Business estimates returns based upon historical experience and recognizes estimated returns as a reduction of product sales.
Multiple element arrangements that include elements that are not considered software consist primarily of equipment, related installation service and cloud-based offerings. The Business allocates revenue for such arrangements based on the relative selling prices of the elements applying the following hierarchy: first vendor-specific objective evidence (“VSOE”), then third-party evidence (“TPE”) of the selling price if VSOE is not available, and finally, its best estimate of the selling price (“BESP”) if neither VSOE nor TPE is available. VSOE exists when the Business sells the deliverables separately and represents the actual price charged by the Business for each deliverable. BESP reflects the Business’ best estimate of what the selling prices of each deliverable would be if it were sold regularly on a stand alone basis taking into consideration the cost structure of the business, technical skill required, customer location and other market conditions. Each element that has stand alone value is accounted for as a separate unit of accounting. Revenue allocated to each unit of accounting is recognized when the service is provided, or the product is delivered.
Agency Revenue
In an agency relationship, the Business performs the sales function and, in some cases, performs the billing function, but does not purchase or take title of the product from the supplier. Agency revenue is recognized on a net basis because the supplier is the primary obligor, bears the inventory and credit risk, establishes the price, picks, packs and ships the product, determines the product specifications and the amount is fixed.
Software Licenses and Other Value-Added Services Revenue
The Business recognizes revenue from the licensing of software when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable and collection of the resulting
receivable is probable. Revenue from perpetual licenses is recognized once shipment to the customer has taken place and when all other revenue recognition criteria have been met. Revenue from term licenses is recognized ratably over the contract term.
The Business generally bills configuration, conversion and installation and training services based on hourly rates plus reimbursable travel-related expenses. Configuration and conversion are generally performedin-house before the delivery of the related license. Revenue for all these services is recognized during the period the services are completed.
The Business recognizes revenue from maintenance and support services ratably over the contract term. Maintenance agreements entitle customers to receive technical support and are generally between three months and one year in length.
The Business recognizes revenue from other related products and services, which include healthcare reminders, Healthy Pet magazines and Pet ID cards. The revenue for these products is recognized on a monthly basis according to actual usage.
For multiple-element software arrangements, total revenue is allocated to each element based on the residual method or the relative fair value method when applicable. Under the residual value method, the Business allocates revenue to delivered components, normally the license component of the arrangement, based on VSOE of undelivered elements, which is specific to the Business. Under the relative fair value method, the total revenue is allocated among the elements based upon the relative fair value of each element as determined through the fair value hierarchy as previously discussed.
Cash and Cash Equivalents
The Business considers
2018.
Covetrus, Inc. 2020 Form 10-K | 64 |
administrative.
advertising costs are reported on a net basis within selling,Selling, general and administrative expenses.administrative. When reimbursements received are in excess ofmore than the cost of advertising, the net amount is reported within costCost of sales. Advertising expense was $16.0$17 million $14.9in 2020, $17 million in 2019, and $15.4$16 million for the years ended December 29, 2018, December 30, 2017 and December 31, 2016, respectively.in 2018. Additionally, advertising and promotional costs incurred in connection with direct marketing, including product catalogs and printed material,materials, are deferred and amortized on a straight-line basis over the period that is benefited, generally not exceedingtypically one year. As of December 29, 2018, and December 30, 2017, the Business had $0.5 million and $0.3 million, respectively, of deferredDeferred direct marketing expenses included in Prepaid expenses and other current assets.
were not material in 2020 and 2019.
The Business receives
terms. See
Note 6 - Property and Equipment, Net.The Business accounts
Henry Schein files a U.S. consolidated federal income tax return and certain foreign group returns, which includes all of its eligible subsidiaries, including some entities of the Business. The16 - Income Taxes
Covetrus, Inc. 2020 Form 10-K | 65 |
exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates fromperiod-to-period period to period are included in accumulatedAccumulated other comprehensive incomeloss in equity. Gains and losses resulting from foreign currency transactions are included in earnings.
The Business used derivative instruments
Foreign currency forward agreements related to forecasted inventory purchase commitments were designated as cash flow hedges. Foreign currency forward agreements related to foreign currency balance sheet exposure provide economic hedges but are not designated as hedges for accounting purposes.
For agreements not designated as hedges, changes in the value of the derivative, along with the transaction gain or loss on the hedged item, were recorded in earnings.
The Business classified 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. The Business’ hedging activities have historically not had a material impact on the combined financial statements. Accordingly, additional disclosures related to derivatives and hedging activities required by ASC Topic 815 have been omitted.
See
Note 10 - Derivatives.Covetrus, Inc. 2020 Form 10-K | 66 |
Redeemable Noncontrolling Interests
Some minority equity owners in certain of the Animal Health Business’ subsidiaries have the right, at certain times, to require us to
impacted. Changes in the estimated redemption amounts of the noncontrolling interests subject to put options are reflected at each reporting period with a corresponding adjustment to net Parent investment. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level.
Goodwill
another company. Goodwill is not amortized, but is subject to impairment analysis at least annually. Impairment analysis for goodwill requires a comparison of the fair value to the carrying value of a reporting unit. The Business has two reporting units. The Business regards its reporting units to be its operating segments: supply chain and technology and value-added services. Goodwill was allocated to such reporting units for the purposes of preparing impairment analyses, based on a specific identification basis.
For the years ended December 29, 2018, December 30, 2017 and December 31, 2016, the Business tested goodwill for impairment using a quantitative analysis consisting of atwo-step approach. The first step of the quantitative analysis consists of a comparison of the carrying value of the Business’ reporting units, including goodwill, to the estimated fair value of the reporting units using a discounted cash flow methodology. If step one results in the carrying value of the reporting unit exceeding the fair value of such reporting unit, the Business would then proceed to step two, which would require the Business to calculate the amount of impairment loss, if any, that the Business would record for such reporting unit. The calculation of the impairment loss in step two would be equivalent to the reporting unit’s carrying value of goodwill less the implied fair value of such goodwill.
The use of a discounted cash flow methodology includes estimates of future revenue based upon budget projections and growth rates that take into account estimated inflation rates. The Business also develops estimates for future levels of gross and operating profits and projected capital expenditures. The Business’ methodology also includes the use of estimated discount rates based upon industry and competitor analysis as well as other factors. The estimates that the Business uses in the discounted cash flow methodology involve many assumptions by the Business that are based upon future growth projections.
The potential impairment of goodwill is assessed at least annually (at the beginning of the fourth quarter)(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.
significant
significant•Significant changes in the manner of the use of acquired assets or the strategy for the Business’our overall business strategy (e.g., decision to divest a business);,
significant•Significant negative industry or economic trends.
The Business performed this assessment in the current year by evaluating quantitative
Long-Lived
only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Business measuresWe 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. No impairment was recordedSee Note 8 - Goodwill and Other Intangibles, Net.
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 |
As a result of different practices of categorizing costs associated with distribution networks throughout the industry, the Business’ gross margins may not necessarily be comparable to other distribution companies. Total distribution network costs were $17.8 million, $15.7 million and $16.2 million for the years ended December 29, 2018, December 30, 2017 and December 31, 2016, respectively. Depreciation expense related to Property and Equipment is included within selling, general and administrative expenses in the combined statements of operations.
In May 2014, FASB issued
The impact of the new standard on the combined statements of operations, which the Business expects to be immaterial on an ongoing basis, is primarily related to software sales and sales commissions and is described as follows:
Software Sales
For software licenses sold together with post-contract support (“PCS”), the Business previously deferred software revenue if it did not have VSOE of fair value of the PCS. Under Topic 606, the concept of VSOE is eliminated and there are no cases where revenue is deferred due to a lack of stand alone selling price. In addition, the Business previously recognized revenue from term licenses ratably over the contract term. Under Topic 606, such licenses represent a right to use intellectual property and therefore require upfront recognition. Furthermore, certain upfront fees related to service arrangements were previously deferred and recognized over the estimated customer life. Under Topic 606, the period over which the Business will recognize these fees is reduced as the
upfront fee represents additional contract price that will be allocated to the performance obligations in the contract and recognized as those performance obligations are satisfied rather than being amortized over the estimated customer life. Based on the aforementioned changes, such software revenue will be recognized sooner than under the previous revenue recognition standard.
Sales Commissions
The Business previously recognized sales commissions as an expense when incurred. Under Topic 606, the Business defers such sales commissions as costs to obtain a contract when the costs are incremental and expected to be recovered. Deferred sales commissions are amortized over the estimated customer relationship period. The Business applies the practical expedient to expense, as incurred, commissions with an expected amortization period of one year or less.
The impact of adoption on the combined balance sheet and combined statement of operations was as follows:
Dollars in thousands | As of December 29, 2018 | |||||||||||
Balance Sheet | As Reported | Balances Without Adoption of ASC 606 | Effect of Change Higher/(Lower) | |||||||||
Assets: | ||||||||||||
Other receivables, prepaid expenses and other | $ | 68,335 | $ | 68,693 | $ | (358 | ) | |||||
Investments and other | 119,955 | 119,234 | 721 | |||||||||
Liabilities: | ||||||||||||
Accrued expenses – taxes | $ | 16,922 | $ | 16,987 | $ | (65 | ) | |||||
Accrued expenses – other | 76,565 | 77,713 | (1,148 | ) | ||||||||
Deferred income taxes | 16,372 | 16,211 | 161 | |||||||||
Equity: | ||||||||||||
Net Parent investment | $ | 1,575,831 | $ | 1,574,295 | $ | 1,536 | ||||||
Accumulated other comprehensive loss | (82,214 | ) | (82,093 | ) | (121 | ) | ||||||
Dollars in thousands | Year Ended December 29, 2018 | |||||||||||
Statement of Operations | As Reported | Balances Without Adoption of ASC 606 | Effect of Change Higher/(Lower) | |||||||||
Net sales: | ||||||||||||
Supply chain | $ | 3,677,188 | $ | 3,677,188 | $ | — | ||||||
Technology and value-added services | 100,806 | 100,671 | 135 | |||||||||
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| |||||||
Total | $ | 3,777,994 | $ | 3,777,859 | $ | 135 | ||||||
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| |||||||
Costs and expenses: | ||||||||||||
Cost of sales | 3,093,882 | 3,093,882 | — | |||||||||
Selling, general and administrative | 538,469 | 538,506 | (37 | ) | ||||||||
Income taxes | (37,028 | ) | (36,995 | ) | (33 | ) | ||||||
Net income | 107,382 | 107,177 | 205 |
Additional information related to Topic 606 can be found in Note 2 – Revenue from Contracts with Customers.
In October 2016, the FASB issued ASUNo. 2016-16, “Income Taxes, Intra-Entity Transfers of Assets Other Than Inventory” (“Topic 740”). Topic 740 requires companies to recognize the income tax effects of
intercompany sales and transfers of assets other than inventory in the period which the transfer occurs. Previously, companies were required to defer the income tax effects on intercompany transfer of assets until the asset has been sold to an outside party. On December 31, 2017, the Business adopted the guidance, which is effective for annual periods and related interim periods beginning after December 15, 2017 on a modified retrospective basis. The adoption of this ASU did not have a material impact on the combined financial statements of the Business.
In January 2017, the FASB issued ASUNo. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU2017-01”), which provides a more robust framework to use in determining when a set of assets and activities is a business. The standard was effective for the Business beginning April 1, 2018. The adoption of this ASU did not have a material impact on the combined financial statements of the Business.
In February 2017, the FASB issued ASUNo. 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” The ASU defines nonfinancial assets, which include real estate (e.g., buildings, land, windmills, solar farms), ships and intellectual property, and clarifies that the derecognition of all businesses is in the scope of ASC 810. The amendments are effective at the same time as ASU2014-09. For public entities, that means annual periods beginning after December 15, 2017 and interim periods therein. The adoption of this ASU did not have a material impact on the combined financial statements of the Business.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASUNo. 2016-02, “Leases” (Topic 842) (“ASU2016-02”), which will require lessees to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidance will require both types of leases to be recognized on the balance sheet. The ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. In August 2018, the FASB issued ASUNo. 2018-11, “Leases (Topic 842): Targeted Improvements” which permits adoption of the guidance in ASU2016-02 using either a modified retrospective transition, requiring application at the beginning of the earliest comparative period presented or a transition method whereby companies could continue to apply existing lease guidance during the comparative periods and apply the new lease requirements through a cumulative-effect adjustment in the period of adoption rather than in the earliest period presented without adjusting historical financial statements.
The Business will use the modified retrospective transition approach in ASUNo. 2018-11 and apply the new lease requirements through a cumulative-effect adjustment in the period of adoption. The Business is currently finalizing the effects that the adoption of ASU2016-02 will have on the combined financial statements, but anticipate that the new guidance will significantly impact the combined balance sheet as the Business will recognize right of use assets and lease liabilities for the Business’ operating leases. The new standard provides a number of optional practical expedients in transition. The Business expects to elect the package of practical expedients, which permits the Business not to reassess, under the new standard, the prior conclusions about lease identification, lease classification and initial direct costs. The Business does not expect to elect theuse-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Business. The Business does not expect that this accounting standard will have a material impact on the Business’ debt covenants. The Business also does not expect that the implementation of this standard will have a material impact on the Business’ results of operations. The Business is implementing a new lease accounting system and updating its processes in preparation for the adoption of the new standard.
In June 2016, the FASB issued ASUNo. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of326, Credit Losses on Financial Instruments,”(“Topic 326”) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This ASUcost, including accounts receivable. Topic 326 is effective for interim and annual reporting periods beginning after December 15, 2019 with early adoption permitted for interim and annual reporting periods beginning after December 15, 2018. This ASU is required to be adopted using the modified retrospective basis, with a cumulative-effect adjustment to net Parent investmentRetained earnings (Accumulated deficit) as of the beginning of the first reporting period in which the guidance of this ASUTopic 326 is effective. The Business doesadoption of Topic 326 did not expect that this ASU will have a material impact on the results of the combinedour consolidated financial statements.
In January 2017,
In August 2017, the FASB issued
Covetrus, Inc. 2020 Form 10-K | 68 |
In February 2018, the FASB issued ASUNo. 2018-02, “Treatment of Stranded Tax Effectslocal regulations in Accumulated Other Comprehensive Income Resulting From the Tax Cuts and Jobs Act of 2017”, which allows the reclassification from accumulated comprehensive income to retained earnings of the income tax effects resulting from the Tax Act. This ASU is effectiveareas where we operate, as well as other changes.
In June 2018, the FASB issued ASUNo. 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU2018-07”), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees. ASU2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Business does not expect that the requirements ofASU-2018-07 will have a material impact on the combined financial statements.
In August 2018, the FASB issued ASUNo. 2018-15, “Intangibles—Goodwill andOther-Internal-Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. ASU2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal
years. Early adoption is permitted. The Business does not expect that the requirements of this ASU will have a material impact on the combined financial statements.
Revisions to Prior Periods
The prior period financial statements have been revised to reflect a change to certain goodwill balances that were previously recorded by the Parent, butcredit losses related to and were not included in the historical combined balance sheet of the Business. Accordingly, the combined balance sheet as of December 30, 2017 was revised to increase goodwill by $49.1 million, net Parent investment by $43.2 million, deferred income taxes by $4.8 million and decrease accumulated other comprehensive loss by $1.1 million. Similarly, the combined balance sheetour accounts receivable is adequate as of December 31, 2016 was revised2020, 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.
Covetrus, Inc. 2020 Form 10-K | 69 |
Estimated Consideration | ||||||||
Total Covetrus shares issued to Vets First Choice shareholders | 39,041,689 | |||||||
Per share price (in actuals) (a) | $ | 43.05 | ||||||
Total fair value of shares issued to Vets First Choice shareholders | $ | 1,681 | ||||||
Fair value of Vets First Choice replacement stock option awards attributable to pre-acquisition service | 62 | |||||||
Vets First Choice debt repaid at close | 24 | |||||||
Vets First Choice expenses paid at close | 18 | |||||||
Less: Vets First Choice cash used to fund transaction | (9) | |||||||
Total consideration | $ | 1,776 | ||||||
(a) Closing price on February 7, 2019, Covetrus shares trading on a when-issued basis (Nasdaq: CVETV) |
Estimated Fair Value | ||||||||
Fair value of net assets acquired | $ | 14 | ||||||
Goodwill | 1,324 | |||||||
Intangible assets | 545 | |||||||
Deferred tax liabilities | (107) | |||||||
Total acquisition cost | $ | 1,776 |
Covetrus, Inc. 2020 Form 10-K | 70 |
2. Revenue from Contracts with Customers
Revenue is recognized in accordance with the policies discussed in Note 1.
Disaggregation of Revenue
The following table disaggregates the Business’ revenue by segment and geography:
Year Ended December 29, 2018 | ||||||||||||||||
Dollars in thousands | United States | United Kingdom | Other | Total | ||||||||||||
Supply chain | $ | 1,845,176 | $ | 604,756 | $ | 1,227,256 | $ | 3,677,188 | ||||||||
Technology and value-added services | 82,424 | 10,895 | 7,487 | 100,806 | ||||||||||||
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Total | $ | 1,927,600 | $ | 615,651 | $ | 1,234,743 | $ | 3,777,994 | ||||||||
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3. Business acquisitions
The operating results of all acquisitions are reflectedoperations that would have occurred had the Acquisition been consummated on December 31, 2017:
Years Ended | ||||||||||||||
December 31, 2019 | December 29, 2018 | |||||||||||||
Net sales | $ | 4,000 | $ | 3,981 | ||||||||||
Goodwill impairment | $ | 938 | $ | 0 | ||||||||||
Net income (loss) | $ | (983) | $ | (63) | ||||||||||
Net income (loss) attributable to Covetrus | $ | (980) | $ | (63) |
On January 12, 2016, the Business completed the purchasethis transaction is not deductible for tax purposes. The results of an 80.1% interestoperations have been included in Vetstreet, Inc. (“Vetstreet”), a software provider of marketing solutions and health information analytics to veterinary practices and animal health product manufacturers. Effective August 6, 2017, Vetstreet became a wholly owned subsidiary of the Business, through the Business’ purchase of the remaining 19.9% interest. As of December 29, 2018, the Business has $21.4 million of goodwill related to this acquisition.
On February 3, 2016, the Business completedour North American segment since the acquisition of RxWorks, Inc.,date. This transaction is not a provider of veterinary practice management software, primarily to customers in Australia, New Zealand, the United Kingdom, the Netherlandsmaterial business combination. The acquisition expenses incurred were not material. See
On September 12, 2017, the Business completed the acquisition of Merritt Veterinary Supplies, Inc. (“Merritt”) for an aggregate consideration equal to $93.8 million. Merritt is a U.S.-based supplier of animal health products, headquartered in Columbia, South Carolina. As of December 29, 2018, the Business has $34.4 million of goodwill related to this acquisition.
The Business
4. Earnings Per Share
On February 7, 2019, Henry Schein distributed approximately 71 milliona 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 common stock to its shareholders. company (“Distrivet”).
Covetrus, Inc. 2020 Form 10-K | 71 |
Year Ended December 31, 2020 | |||||||||||||||||||||||||||||
Supply Chain Services | Software Services | Prescription Management | Eliminations | Total | |||||||||||||||||||||||||
North America | $ | 1,969 | $ | 78 | $ | 406 | $ | (76) | $ | 2,377 | |||||||||||||||||||
Europe | 1,574 | 10 | 0 | (13) | 1,571 | ||||||||||||||||||||||||
APAC & Emerging Markets | 394 | 8 | 0 | 0 | 402 | ||||||||||||||||||||||||
Eliminations | (11) | 0 | 0 | — | (11) | ||||||||||||||||||||||||
Total Net sales | $ | 3,926 | $ | 96 | $ | 406 | $ | (89) | $ | 4,339 |
Year Ended December 31, 2019 | |||||||||||||||||||||||||||||
Supply Chain Services | Software Services | Prescription Management | Eliminations | Total | |||||||||||||||||||||||||
North America | $ | 1,816 | $ | 82 | $ | 246 | $ | (33) | $ | 2,111 | |||||||||||||||||||
Europe | 1,513 | 10 | 0 | (14) | 1,509 | ||||||||||||||||||||||||
APAC & Emerging Markets | 361 | 7 | 0 | 0 | 368 | ||||||||||||||||||||||||
Eliminations | (12) | 0 | 0 | — | (12) | ||||||||||||||||||||||||
Total Net sales | $ | 3,678 | $ | 99 | $ | 246 | $ | (47) | $ | 3,976 |
Year Ended December 29, 2018 | |||||||||||||||||||||||||||||
Supply Chain Services | Software Services | Prescription Management | Eliminations | Total | |||||||||||||||||||||||||
North America | $ | 1,858 | $ | 83 | $ | 0 | $ | (2) | $ | 1,939 | |||||||||||||||||||
Europe | 1,462 | 11 | 0 | (10) | 1,463 | ||||||||||||||||||||||||
APAC & Emerging Markets | 380 | 7 | 0 | 0 | 387 | ||||||||||||||||||||||||
Eliminations | (11) | 0 | 0 | — | (11) | ||||||||||||||||||||||||
Total Net sales | $ | 3,689 | $ | 101 | $ | 0 | $ | (12) | $ | 3,778 |
Covetrus, Inc. 2020 Form 10-K | 72 |
The numerator for both basic and diluted EPS is net income.
amounts)
Balance Sheet Location | December 31, 2020 | December 31, 2019 | |||||||||||||||
Accounts receivable: | |||||||||||||||||
Accounts receivable, net | Accounts receivable, net | $ | 507 | $ | 426 | ||||||||||||
Contract liabilities: | |||||||||||||||||
Deferred revenue, current | Other current liabilities | $ | 22 | $ | 37 | ||||||||||||
in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Basic shares | 71,451 | 71,451 | 71,451 | |||||||||
Effect of dilutive shares | 522 | 522 | 522 | |||||||||
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Diluted shares | 71,973 | 71,973 | 71,973 | |||||||||
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5. Property and Equipment, Net
be generated from long-term contracts with unsatisfied performance obligations as of December 31, 2020 were not material.
Dollars in thousands | December 29, 2018 | December 30, 2017 | ||||||
Land | $ | 2,414 | $ | 2,538 | ||||
Buildings and permanent improvements | 17,395 | 18,383 | ||||||
Leasehold improvements | 12,064 | 9,641 | ||||||
Machinery and warehouse equipment | 42,423 | 35,658 | ||||||
Furniture, fixtures and other | 31,757 | 30,321 | ||||||
Computer equipment and software | 36,004 | 31,619 | ||||||
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142,057 | 128,160 | |||||||
Less: accumulated depreciation | 73,508 | 63,606 | ||||||
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Property and equipment, net | $ | 68,549 | $ | 64,554 | ||||
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Estimated Useful Life | December 31, 2020 | December 31, 2019 | |||||||||||||||
Land | N/A | $ | 1 | $ | 1 | ||||||||||||
Buildings and permanent improvements | 10-40 years | 10 | 9 | ||||||||||||||
Leasehold improvements | Lesser of the useful life or lease terms | 21 | 20 | ||||||||||||||
Machinery and warehouse equipment | 2-12 years | 45 | 44 | ||||||||||||||
Furniture, fixtures, and other | 2-10 years | 46 | 36 | ||||||||||||||
Computer equipment and software | 2-10 years | 76 | 57 | ||||||||||||||
Capital in progress | 23 | 10 | |||||||||||||||
Total property and equipment, gross | 222 | 177 | |||||||||||||||
Less: accumulated depreciation and amortization | (106) | (84) | |||||||||||||||
Total Property and equipment, net | $ | 116 | $ | 93 |
Years Ended | ||||||||||||||||||||
Location | 2020 | 2019 | 2018 | |||||||||||||||||
Cost of sales | $ | 1 | $ | 3 | $ | 2 | ||||||||||||||
Selling, general and administrative | 30 | 25 | 13 | |||||||||||||||||
Total depreciation and amortization expense | $ | 31 | $ | 28 | $ | 15 |
Covetrus, Inc. 2020 Form 10-K | 73 |
December 31, 2020 | December 31, 2019 | |||||||||||||
Operating Leases: | ||||||||||||||
Operating lease right-of-use assets, net | $ | 117 | $ | 84 | ||||||||||
Accrued expenses, other | $ | 22 | $ | 19 | ||||||||||
Other liabilities | 107 | 67 | ||||||||||||
Total operating lease liabilities | $ | 129 | $ | 86 | ||||||||||
Finance Leases: | ||||||||||||||
Property and equipment, net | $ | 1 | $ | 2 | ||||||||||
Current maturities of long-term debt and other borrowings | $ | 1 | $ | 1 | ||||||||||
Total finance lease liabilities | $ | 1 | $ | 1 | ||||||||||
Weighted-average remaining lease term: | ||||||||||||||
Operating leases | 8.1 years | 6.8 years | ||||||||||||
Finance leases | 2.5 years | 2.4 years | ||||||||||||
Weighted-average discount rate: | ||||||||||||||
Operating leases | 3.5 | % | 3.5 | % | ||||||||||
Finance leases | 3.8 | % | 8.1 | % |
Operating Leases | Finance Leases | ||||||||||
2021 | $ | 26 | $ | 1 | |||||||
2022 | 21 | 0 | |||||||||
2023 | 18 | 0 | |||||||||
2024 | 15 | 0 | |||||||||
2025 | 12 | 0 | |||||||||
Thereafter | 57 | 0 | |||||||||
Total minimum lease payments | 149 | 1 | |||||||||
Less: amount representing interest | (20) | 0 | |||||||||
Present value of net minimum lease payments | 129 | 1 | |||||||||
Less: current portion of lease obligations | (22) | (1) | |||||||||
Long-term lease obligations | $ | 107 | $ | 0 |
| Commencing | Lease Term | Total Future Lease Payments | |||||||||||||||||
| Expected 2021 | 20 years | $ | 28 | ||||||||||||||||
| Expected 2021 | 20 years | 78 | |||||||||||||||||
| ||||||||||||||||||||
Total | $ | 106 |
Depreciation expense
Covetrus, Inc. 2020 Form 10-K | 74 |
North America | Europe | APAC & Emerging Markets | Total | ||||||||||||||||||||
Balance at December 29, 2018 (a) | $ | 529 | $ | 172 | $ | 49 | $ | 750 | |||||||||||||||
Foreign currency translation | 0 | (8) | (1) | (9) | |||||||||||||||||||
Goodwill additions | 1,280 | 57 | 16 | 1,353 | |||||||||||||||||||
Goodwill impairment | (653) | (221) | (64) | (938) | |||||||||||||||||||
Divestitures and related adjustments (b) | (2) | 0 | 0 | (2) | |||||||||||||||||||
Balance at December 31, 2019 | 1,154 | 0 | 0 | 1,154 | |||||||||||||||||||
Goodwill additions (c) | 33 | 0 | 0 | 33 | |||||||||||||||||||
Balance at December 31, 2020 | $ | 1,187 | $ | 0 | $ | 0 | $ | 1,187 | |||||||||||||||
(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 | |||||||||||||||||||||||
North America | Europe | APAC & Emerging Markets | Total | ||||||||||||||||||||
Accumulated impairment as of December 31, 2019 | $ | (653) | $ | (221) | $ | (64) | $ | (938) | |||||||||||||||
Accumulated impairment as of December 31, 2020 | $ | (653) | $ | (221) | $ | (64) | $ | (938) |
6. Intangible Assets
December 29, 2018 | ||||||||||||||||
Dollars in thousands | Weighted Average Useful Life | Cost | Accumulated Amortization | Net | ||||||||||||
Customer relationships | 11.3 | $ | 368,018 | $ | (193,294 | ) | $ | 174,724 | ||||||||
Trademarks | 7.4 | 40,824 | (22,873 | ) | 17,951 | |||||||||||
Patents | 7.0 | 30,293 | (19,467 | ) | 10,826 | |||||||||||
Product development | 6.0 | 6,069 | (2,684 | ) | 3,385 | |||||||||||
Non-compete agreements | 5.1 | 3,717 | (2,390 | ) | 1,327 | |||||||||||
|
|
|
|
|
| |||||||||||
Total | $ | 448,921 | $ | (240,708 | ) | $ | 208,213 | |||||||||
|
|
|
|
|
|
December 30, 2017 | ||||||||||||||||
Dollars in thousands | Weighted Average Useful Life | Cost | Accumulated Amortization | Net | ||||||||||||
Customer relationships | 11.0 | $ | 370,079 | $ | (163,496 | ) | $ | 206,583 | ||||||||
Trademarks | 6.6 | 44,584 | (21,010 | ) | 23,574 | |||||||||||
Patents | 7.0 | 30,293 | (15,137 | ) | 15,156 | |||||||||||
Product development | 7.3 | 14,506 | (9,316 | ) | 5,190 | |||||||||||
Non-compete agreements | 3.4 | 7,225 | (4,801 | ) | 2,424 | |||||||||||
|
|
|
|
|
| |||||||||||
Total | $ | 466,687 | $ | (213,760 | ) | $ | 252,927 | |||||||||
|
|
|
|
|
|
Trademarks and customer relationships
December 31, 2020 | ||||||||||||||||||||
Cost (a) | Accumulated Amortization | Net | ||||||||||||||||||
Customer relationships | $ | 526 | $ | (265) | $ | 261 | ||||||||||||||
Trademarks | 64 | (33) | 31 | |||||||||||||||||
Patents | 30 | (28) | 2 | |||||||||||||||||
Product development | 403 | (143) | 260 | |||||||||||||||||
Non-compete agreements | 2 | (1) | 1 | |||||||||||||||||
Total Other intangibles | $ | 1,025 | $ | (470) | $ | 555 | ||||||||||||||
(a) Includes $45 million primarily related to customer relationships; see Note 3 - Business Acquisitions |
Covetrus, Inc. 2020 Form 10-K | 75 |
December 31, 2019 | ||||||||||||||||||||
Cost | Accumulated Amortization | Net | ||||||||||||||||||
Customer relationships | $ | 503 | $ | (234) | $ | 269 | ||||||||||||||
Trademarks | 60 | (28) | 32 | |||||||||||||||||
Patents | 30 | (24) | 6 | |||||||||||||||||
Product development | 406 | (71) | 335 | |||||||||||||||||
Non-compete agreements | 2 | (1) | 1 | |||||||||||||||||
Total Other intangibles | $ | 1,001 | $ | (358) | $ | 643 |
assets:
Years Ended | ||||||||||||||||||||
Location | 2020 | 2019 | 2018 | |||||||||||||||||
Cost of sales | $ | 5 | $ | 4 | $ | 0 | ||||||||||||||
Selling, general and administrative | 130 | 123 | 49 | |||||||||||||||||
Total amortization | $ | 135 | $ | 127 | $ | 49 |
Dollars in thousands | ||||
2019 | $ | 44,491 | ||
2020 | 43,032 | |||
2021 | 37,083 | |||
2022 | 21,231 | |||
2023 | 18,572 | |||
Thereafter | 43,804 | |||
|
| |||
Total | $ | 208,213 | ||
|
|
7. Goodwill
The changes in the carrying amount of goodwill for the years ended December 29, 2018 and December 30, 2017 were as follows:
Dollars in thousands | Supply Chain | Technology and Value- Added Services | Total | |||||||||
Balance as of December 31, 2016 (as revised) | $ | 608,300 | $ | 84,865 | $ | 693,165 | ||||||
Adjustments to goodwill: | ||||||||||||
Acquisitions | 40,746 | 7,399 | 48,145 | |||||||||
Foreign currency translation | 16,647 | 1,811 | 18,458 | |||||||||
|
|
|
|
|
| |||||||
Balance as of December 30, 2017 (as revised) | 665,693 | 94,075 | 759,768 | |||||||||
Adjustments to goodwill: | ||||||||||||
Acquisitions | 3,177 | — | 3,177 | |||||||||
Foreign currency translation | (11,659 | ) | (1,524 | ) | (13,183 | ) | ||||||
|
|
|
|
|
| |||||||
Balance as of December 29, 2018 | $ | 657,211 | $ | 92,551 | $ | 749,762 | ||||||
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|
|
|
|
|
As discussed in Note 1, the Business revised its combined balance sheet related to certain goodwill balances that were recorded by the Parent but not included in the historical combined balance sheet of the Business. The goodwill balance has been increased by $49.1 million and $46.1 million as of December 30, 201731, 2020 is as follows:
2021 | $ | 131 | |||
2022 | 128 | ||||
2023 | 114 | ||||
2024 | 59 | ||||
2025 | 22 | ||||
Thereafter | 101 | ||||
Total | $ | 555 |
8. Investments and Other
Investments and other borrowings, net consisted of the following as of:
Dollars in thousands | December 29, 2018 | December 30 2017 | ||||||
Investment in affiliates | $ | 21,678 | $ | 22,974 | ||||
Acquisition-related indemnification | 19,544 | 22,015 | ||||||
Non-current deferred foreign, state and local income taxes | 72,998 | 14,128 | ||||||
Capitalized costs for internally generated software for resale | 2,410 | 1,180 | ||||||
Other long-term assets | 3,325 | 2,548 | ||||||
|
|
|
| |||||
Total | $ | 119,955 | $ | 62,845 | ||||
|
|
|
|
Amortization expense related
Commencement Date | Maturity Date | Rate as of December 31, 2020 | December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||
Revolving line of credit | February 2019 | February 2024 | 0 | % | $ | 0 | $ | 0 | ||||||||||||||||||||||||
Term loan payable in quarterly installments of $15 million began March 31, 2020 | February 2019 | February 2024 | 2.6 | % | 1,080 | 1,200 | ||||||||||||||||||||||||||
Loan payable with balloon payment due at maturity | February 2019 | March 2023 | 4.0 | % | 6 | 6 | ||||||||||||||||||||||||||
Finance lease obligations | 1 | 1 | ||||||||||||||||||||||||||||||
Total | 1,087 | 1,207 | ||||||||||||||||||||||||||||||
Less: current maturities | (1) | (62) | ||||||||||||||||||||||||||||||
Total Long-term debt and other borrowings | $ | 1,086 | $ | 1,145 | ||||||||||||||||||||||||||||
Less: unamortized debt discount | (18) | (20) | ||||||||||||||||||||||||||||||
Total Long-term debt and other borrowings, net | $ | 1,068 | $ | 1,125 |
Covetrus, Inc. 2020 Form 10-K | 76 |
Total Amount | Amount Available as of December 31, 2020 | ||||||||||
Term loan | $ | 1,200 | $ | 0 | |||||||
Revolving line of credit (a) | 300 | 299 | |||||||||
Total Credit Facility (b) | $ | 1,500 | $ | 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 |
Covetrus, Inc. 2020 Form 10-K | 77 |
Credit Facility | Other Debt | Total Repayments | ||||||||||||||||||
2021 | $ | 0 | $ | 1 | $ | 1 | ||||||||||||||
2022 | 60 | 0 | 60 | |||||||||||||||||
2023 | 60 | 6 | 66 | |||||||||||||||||
2024 | 960 | 0 | 960 | |||||||||||||||||
Total debt maturities | 1,080 | 7 | 1,087 | |||||||||||||||||
Less: current maturities | 0 | (1) | (1) | |||||||||||||||||
Less: unamortized debt issuance costs | (18) | 0 | (18) | |||||||||||||||||
Long-term maturities | $ | 1,062 | $ | 6 | $ | 1,068 |
Covetrus, Inc. 2020 Form 10-K | 78 |
Liability Derivatives | ||||||||||||||||||||
Cash Flow Hedging Instruments | Balance Sheet Location | December 31, 2020 | December 31, 2019 | |||||||||||||||||
Interest rate swap contracts | Other liabilities | $ | 5 | $ | 1 | |||||||||||||||
9. Fair Value
ASC 820, “Fair Value Measurement,” establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.
ASC 820operations was as follows:
Years Ended December 31, | ||||||||||||||||||||
Cash Flow Hedging Instruments | Location | 2020 | 2019 | |||||||||||||||||
Interest rate swap contracts | Interest (income) expense | $ | 5 | $ | 1 |
•Level 2—Inputs other than2 - Unadjusted quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted pricesin active markets for similar assets or liabilities, in active markets,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 and
Level 3—Inputs that are unobservable for the asset or liability.
value on a recurring basis and indicates the level within the fair value hierarchy:
Assets | Level | December 31, 2020 | December 31, 2019 | |||||||||||||||||
Distrivet call option (a) | 3 | $ | 2 | $ | 0 | |||||||||||||||
Total assets | $ | 2 | $ | 0 | ||||||||||||||||
(a) At investment date fair value, the Distrivet call option had a fair value of $0 million |
Liabilities | Level | December 31, 2020 | December 31, 2019 | |||||||||||||||||
Interest rate swap contracts | 2 | $ | 5 | $ | 1 | |||||||||||||||
Distrivet put option (a) | 3 | 1 | 0 | |||||||||||||||||
Total liabilities | $ | 6 | $ | 1 | ||||||||||||||||
(a) At investment date fair value, the Distrivet put option had a value of $5 million |
Covetrus, Inc. 2020 Form 10-K | 79 |
Liabilities
Investments in affiliates
There are no quoted market prices available for investments in affiliates; however, the Business believes the carrying amounts are
Long-term debt
Level 2 instrument. The carrying amountsamount of the variable rate term loan (see Note 14) approximates fair value because itsgiven the underlying interest rate applied to such amounts outstanding is currently reset to athe prevailing monthly market rate monthly.
Derivative contracts
Derivative contractsrate. See
The fair values for the majority of the Business’ foreign currency derivative contracts are obtained by comparing the contract rate to a published forward price of the underlying market rates, which is based on market rates for comparable transactions and are classified within Level 2 of the fair value hierarchy.
Redeemable noncontrolling interests
Some minority equity owners in certain of the Business’ subsidiaries have the right, at certain times, to require the Business to acquire their ownership interest in those entities at fair value based on third-party valuations. The primary factor affecting the future value of redeemable noncontrolling interests is expected earnings and, if such earnings are not achieved, the value of the redeemable noncontrolling interests might be impacted. The noncontrolling interests subject to put options are adjusted to their estimated redemption amounts each reporting period with a corresponding adjustment to net Parent investment. Future reductions in the carrying
amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. The values for redeemable noncontrolling interests are classified within Level 3 of the fair value hierarchy. The details of the balances and changes in redeemable noncontrolling interests are presented in Note 10.
The assets and liabilities that are measured and recognized at fair value on a recurring basis are the derivative contracts (Level 2), which were immaterial for the years ended December 29, 2018, December 30, 2017 and December 31, 2016 and the redeemable noncontrolling interests (Level 3) discussed in Note 10.
10. Redeemable Noncontrolling Interests
Some minority equity owners in certain of the Business’ subsidiaries have the right, at certain times, to require the Business to acquire their ownership interest in those entities at fair value. ASC 480, “Distinguishing Liabilities from Equity,” is applicable for noncontrolling interests where the Business is, or may be, required to purchase all or a portion of the outstanding interest in a subsidiary from the noncontrolling interest holder under the terms of a put option contained in contractual agreements. The components of the change in the redeemable noncontrolling interests for the years ended December 29, 2018, December 30, 2017 and December 31, 2016 are presented in the following table:
Dollars in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Balance, beginning of period | $ | 366,554 | $ | 322,070 | $ | 275,759 | ||||||
Decrease in redeemable noncontrolling interests due to redemptions | (382,180 | ) | (26,375 | ) | (3,803 | ) | ||||||
Increase in redeemable noncontrolling interests due to business acquisitions | 5,639 | 6,648 | 23,276 | |||||||||
Net income attributable to redeemable noncontrolling interests | 6,521 | 27,690 | 29,966 | |||||||||
Dividends paid | (9,859 | ) | (20,481 | ) | (22,204 | ) | ||||||
Effect of foreign currency translation gain (loss) attributable to redeemable noncontrolling interests | (1,701 | ) | 2,931 | (1,006 | ) | |||||||
Change in fair value of redeemable securities | 107,458 | 54,071 | 20,082 | |||||||||
|
|
|
|
|
| |||||||
Balance, end of period | $ | 92,432 | $ | 366,554 | $ | 322,070 | ||||||
|
|
|
|
|
|
Changes in the estimated redemption amounts of the noncontrolling interests subject to put options are adjusted at each reporting period with a corresponding adjustment to net Parent investment. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level.
11. Commitments and Contingencies
Operating Leases
The Business leases warehouse facilities, office facilities, vehicles and computer equipment under leases expiring at various dates through 2033. The leases require the Business to pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased facilities. The terms of certain warehouse and office facility leases call for minimum rents to increase each year. Accordingly, the Business has accounted for the rent expense under the straight-line method. Noncancellable leases with an initial term greater than one year have
been categorized as capital or operating leases in conformity with the accounting standard for accounting for leases.
At December 29, 2018, future minimum lease payments for operating leases and the present value of the net minimum lease payments for operating leases are as follows:
Dollars in thousands | ||||
2019 | $ | 17,266 | ||
2020 | 14,207 | |||
2021 | 9,940 | |||
2022 | 5,875 | |||
2023 | 3,805 | |||
Thereafter | 5,455 | |||
|
| |||
Total minimum operating lease payments | $ | 56,548 | ||
|
|
Total rental expense for the years ended December 29, 2018, December 30, 2017 and December 31, 2016 was $20.0 million, $17.4 million and $16.3 million, respectively.
Capital Leases
The Business leases certain equipment under capital leases. Future minimum annual lease payments under the capital leases together with the present value of the minimum capital lease payments as of December 29, 2018 are as follows:
Dollars in thousands | ||||
2019 | $ | 719 | ||
2020 | 334 | |||
2021 | 209 | |||
2022 | 8 | |||
2023 | 8 | |||
Thereafter | 0 | |||
|
| |||
Total minimum capital lease payments | 1,278 | |||
Less: Amount representing interest | (74 | ) | ||
|
| |||
Total present value of minimum capital lease payments | $ | 1,204 | ||
|
|
Legal
The Business is involved in various legal proceedings that arise in the ordinary course of business. BasedSubstantial 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 |
Year | Amount | |||||||
2021 | $ | 8 | ||||||
2022 | 8 | |||||||
2023 | 7 | |||||||
2024 | 7 | |||||||
2025 | 6 | |||||||
Total | $ | 36 |
12. Comprehensive Income
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 |
December 31, 2020 | December 31, 2019 | December 29, 2018 | |||||||||||||||
Balance at beginning of period | $ | 10 | $ | 92 | $ | 368 | |||||||||||
Decrease due to redemptions | (4) | (74) | (383) | ||||||||||||||
Increase due to business acquisitions (a) | 24 | 0 | 6 | ||||||||||||||
Net income (loss) attributable to redeemable non-controlling interests | 2 | (3) | 6 | ||||||||||||||
Dividends paid | 0 | 0 | (10) | ||||||||||||||
Effect of foreign currency translation (gain) loss attributable to redeemable non-controlling interests | (2) | 1 | (2) | ||||||||||||||
Change to redemption value | 6 | (6) | 107 | ||||||||||||||
Balance at end of period | $ | 36 | $ | 10 | $ | 92 | |||||||||||
(a) See Note 3 - Business Acquisitions |
Covetrus, Inc. 2020 Form 10-K | 82 |
COVETRUS, INC.
Dollars in thousands | December 29, 2018 | December 30, 2017 (as revised) | December 31, 2016 (as revised) | |||||||||
Attributable to redeemable noncontrolling interests: | ||||||||||||
Foreign currency translation adjustment | $ | 629 | $ | 2,330 | $ | (601 | ) | |||||
|
|
|
|
|
| |||||||
Attributable to the Business: | ||||||||||||
Foreign currency translation loss | (82,217 | ) | (40,862 | ) | (100,071 | ) | ||||||
Unrealized gain (loss) from foreign currency hedging activities | — | 592 | (105 | ) | ||||||||
Pension adjustment gain (loss) | 3 | (1,718 | ) | (2,127 | ) | |||||||
|
|
|
|
|
| |||||||
Accumulated other comprehensive loss | (82,214 | ) | (41,988 | ) | (102,303 | ) | ||||||
|
|
|
|
|
| |||||||
Total accumulated other comprehensive loss | $ | (81,585 | ) | $ | (39,658 | ) | $ | (102,904 | ) | |||
|
|
|
|
|
|
The following table summarizes the components of comprehensive income, net of applicable taxes for the years ended:
Dollars in thousands | December 29, 2018 | December 30, 2017 (as revised) | December 31, 2016 (as revised) | |||||||||
Net income | $ | 107,382 | $ | 92,044 | $ | 100,264 | ||||||
|
|
|
|
|
| |||||||
Foreign currency translation gain (loss) | (42,676 | ) | 62,287 | (41,876 | ) | |||||||
Tax effect | (380 | ) | (148 | ) | 240 | |||||||
|
|
|
|
|
| |||||||
Foreign currency translation gain (loss) | (43,056 | ) | 62,139 | (41,636 | ) | |||||||
|
|
|
|
|
| |||||||
Unrealized gain (loss) from foreign currency hedging activities | (748 | ) | 857 | (96 | ) | |||||||
Tax effect | 156 | (160 | ) | 1 | ||||||||
|
|
|
|
|
| |||||||
Unrealized gain (loss) from foreign currency hedging activities | (592 | ) | 697 | (95 | ) | |||||||
|
|
|
|
|
| |||||||
Pension adjustment gain | 2,177 | 506 | 284 | |||||||||
Tax effect | (456 | ) | (97 | ) | (49 | ) | ||||||
|
|
|
|
|
| |||||||
Pension adjustment gain | 1,721 | 409 | 235 | |||||||||
|
|
|
|
|
| |||||||
Comprehensive income | $ | 65,455 | $ | 155,289 | $ | 58,768 | ||||||
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|
|
|
|
|
During the years ended December 29, 2018, December 30, 2017 and December 31, 2016, the Businessby component:
Derivative Gain (Loss) | Gain (Loss) on Pension Adjustment | Foreign Currency Translation Gain (Loss) | Unrealized Gain (Loss) from Foreign Currency Hedging | Total | |||||||||||||||||||||||||
Balance as of December 30, 2017 | $ | 0 | $ | (2) | $ | (41) | $ | 1 | $ | (42) | |||||||||||||||||||
Other comprehensive income (loss) attributable to Covetrus before reclassifications | 0 | 2 | (41) | (1) | (40) | ||||||||||||||||||||||||
Period change | 0 | 2 | (41) | (1) | (40) | ||||||||||||||||||||||||
Balance as of December 29, 2018 | 0 | 0 | (82) | 0 | (82) | ||||||||||||||||||||||||
Other comprehensive income (loss) attributable to Covetrus before reclassifications | (1) | 0 | (4) | 0 | (5) | ||||||||||||||||||||||||
Reclassified from Accumulated other comprehensive loss to earnings | 1 | 0 | 0 | 0 | 1 | ||||||||||||||||||||||||
Period change | 0 | 0 | (4) | 0 | (4) | ||||||||||||||||||||||||
Balance as of December 31, 2019 | 0 | 0 | (86) | 0 | (86) | ||||||||||||||||||||||||
Other comprehensive income (loss) attributable to Covetrus before reclassifications | (8) | 0 | 21 | 0 | 13 | ||||||||||||||||||||||||
Reclassified from Accumulated other comprehensive loss to earnings | 5 | 0 | 2 | 0 | 7 | ||||||||||||||||||||||||
Period change | (3) | 0 | 23 | 0 | 20 | ||||||||||||||||||||||||
Balance as of December 31, 2020 | $ | (3) | $ | 0 | $ | (63) | $ | 0 | $ | (66) |
The following table summarizes the totalour comprehensive income net of applicable taxes,(loss).
Dollars in thousands | December 29, 2018 | December 30, 2017 (as revised) | December 31, 2016 (as revised) | |||||||||
Comprehensive income attributable to the Animal Health Business | $ | 60,635 | $ | 124,668 | $ | 29,808 | ||||||
Comprehensive income attributable to redeemable noncontrolling interests | 4,820 | 30,621 | 28,960 | |||||||||
|
|
|
|
|
| |||||||
Comprehensive income | $ | 65,455 | $ | 155,289 | $ | 58,768 | ||||||
|
|
|
|
|
|
As discussed in presented. See
13. 10 - Derivatives
Income(loss) before taxes and equity in earnings of affiliates waswere as follows:
Years Ended | ||||||||||||
Dollars in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Domestic | $ | 59,005 | $ | 68,956 | $ | 75,194 | ||||||
Foreign | 84,172 | 69,813 | 51,600 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 143,177 | $ | 138,769 | $ | 126,794 | ||||||
|
|
|
|
|
|
Years Ended | |||||||||||||||||
December 31, 2020 | December 31, 2019 | December 29, 2018 | |||||||||||||||
Domestic | $ | (164) | $ | (809) | $ | 59 | |||||||||||
Foreign | 140 | (220) | 84 | ||||||||||||||
Total income (loss) before taxes and equity in earnings of affiliates | $ | (24) | $ | (1,029) | $ | 143 |
Covetrus, Inc. 2020 Form 10-K | 83 |
Years Ended | ||||||||||||
Dollars in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Current income tax expense: | ||||||||||||
U.S. federal | $ | 12,559 | $ | 21,702 | $ | 17,449 | ||||||
State and local | 4,598 | 4,449 | 5,600 | |||||||||
Foreign | 24,671 | 15,682 | 11,167 | |||||||||
|
|
|
|
|
| |||||||
Total current | 41,828 | 41,833 | 34,216 | |||||||||
|
|
|
|
|
| |||||||
Deferred income tax (benefit) expense: | ||||||||||||
U.S. federal | 537 | 7,322 | (5,203 | ) | ||||||||
State and local | 11 | — | (772 | ) | ||||||||
Foreign | (5,348 | ) | (1,136 | ) | (303 | ) | ||||||
|
|
|
|
|
| |||||||
Total deferred | (4,800 | ) | 6,186 | (6,278 | ) | |||||||
|
|
|
|
|
| |||||||
Total provision | $ | 37,028 | $ | 48,019 | $ | 27,938 | ||||||
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|
Years Ended December 31, 2020 December 31, 2019 (as revised) December 29, 2018 Current income tax (benefit) expense: U.S. federal $ 1 $ 0 $ 13 State and local 2 2 4 Foreign 22 16 25 Total current income tax (benefit) expense 25 18 42 Deferred income tax (benefit) expense: U.S. federal (25) (46) 0 State and local (1) (10) 0 Foreign (6) (8) (5) Total deferred income tax (benefit) expense: (32) (64) (5) Total income tax (benefit) expense $ (7) $ (46) $ 37
Years Ended | |||||||||||
December 31, 2020 | December 31, 2019 (as revised) | ||||||||||
Deferred income tax assets: | |||||||||||
Investment in partnerships | $ | 0 | $ | 54 | |||||||
Net operating losses and other carryforwards | 41 | 38 | |||||||||
Share-based compensation | 6 | 7 | |||||||||
Lease asset | 20 | 6 | |||||||||
Other assets | 17 | 6 | |||||||||
Total deferred income tax assets | 84 | 111 | |||||||||
Valuation allowance for deferred tax assets | (11) | (10) | |||||||||
Net deferred income tax assets | 73 | 101 | |||||||||
Deferred income tax liabilities: | |||||||||||
Intangibles amortization | (74) | (125) | |||||||||
Other liabilities | (18) | (6) | |||||||||
Total deferred income tax liabilities | (92) | (131) | |||||||||
Net deferred income tax assets (liabilities) | $ | (19) | $ | (30) |
December 31, 2020 | December 31, 2019 (as revised) | ||||||||||
Non-current deferred income tax assets, net (a) | $ | 9 | $ | 18 | |||||||
Non-current deferred income tax liabilities, net | (28) | (48) | |||||||||
Non-current deferred income tax assets (liabilities) | $ | (19) | $ | (30) | |||||||
(a) Included in Investments and other |
Years Ended | ||||||||
December 29, 2018 | December 30, 2017 (as revised) | |||||||
Dollars in thousands | ||||||||
Deferred income tax asset: | ||||||||
Investment in partnerships | $ | 72,082 | $ | 13,737 | ||||
Net operating losses and other carryforwards | 2,655 | 5,115 | ||||||
Inventory, premium coupon redemptions and accounts receivable | ||||||||
valuation allowances | 1,443 | — | ||||||
Stock-based compensation | 155 | — | ||||||
Other assets | 1,030 | 2,156 | ||||||
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|
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| |||||
Total deferred income tax asset | 77,365 | 21,008 | ||||||
Valuation allowance for deferred tax assets | (1,132 | ) | (4,439 | ) | ||||
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|
| |||||
Net deferred income tax asset | 76,233 | 16,569 | ||||||
Deferred income tax liability | ||||||||
Intangibles amortization | (19,607 | ) | (21,349 | ) | ||||
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| |||||
Total deferred tax liability | (19,607 | ) | (21,349 | ) | ||||
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| |||||
Net deferred income tax asset (liability) | $ | 56,626 | $ | (4,780 | ) | |||
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purposes. The assessment of the amount of value assigned to the deferred tax assets under the applicable accounting rules is judgmental. The Business isWe are required to consider all available positive and negative evidence in evaluating the likelihood that the Businesswe will be able to realize the benefit of the Business’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 the Business’our deferred tax assets is dependent on generating sufficient taxable income in future periods.
Covetrus, Inc. 2020 Form 10-K | 84 |
However, if future events cause the Business to conclude that it is not more likely than not that the Business will be able to recover all of the value assigned to the deferred tax assets the Business will be required to adjustrealized. The ultimate realization of deferred taxes assets is dependent upon generation of future taxable income during the valuation allowance accordingly.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 29, 201831, 2020 was $3.3$1 million and was attributable primarily to decreasesan increase related to the uncertainty regarding the realization of future tax benefit in certain foreign operating loss carryforwards.
Asjurisdictions and a decrease of a portion of the valuation allowance recorded against U.S. deferred tax assets.
As of December 31, 2018 | ||||||||||||||||||||
Previously Reported | Revision | As Revised | ||||||||||||||||||
Net Parent investment | $ | 1,576 | $ | (42) | $ | 1,534 | ||||||||||||||
Total shareholders’ equity | 1,494 | (42) | 1,452 | |||||||||||||||||
As of December 31, 2019 | ||||||||||||||||||||
Consolidated Balance Sheet | Previously Reported | Revision | As Revised | |||||||||||||||||
Non-current deferred income tax assets, net (a) | $ | 20 | $ | (2) | $ | 18 | ||||||||||||||
Total assets | 3,361 | (2) | 3,359 | |||||||||||||||||
Deferred income taxes | 47 | 1 | 48 | |||||||||||||||||
Total liabilities | 2,095 | 1 | 2,096 | |||||||||||||||||
Additional paid in capital | 2,381 | (42) | 2,339 | |||||||||||||||||
Accumulated deficit | (1,040) | 39 | (1,001) | |||||||||||||||||
Total shareholders’ equity | 1,256 | (3) | 1,253 | |||||||||||||||||
Total liabilities, redeemable non-controlling interests, and shareholders’ equity | $ | 3,361 | $ | (2) | $ | 3,359 | ||||||||||||||
(a) Included in Investments and other | ||||||||||||||||||||
Year Ended December 31, 2019 | ||||||||||||||||||||
Consolidated Statement of Operations | Previously Reported | Revision | As Revised | |||||||||||||||||
Income tax benefit (expense) | $ | 7 | $ | 39 | $ | 46 | ||||||||||||||
Net income (loss) | (1,022) | 39 | (983) | |||||||||||||||||
Net income (loss) attributable to Covetrus | $ | (1,019) | $ | 39 | $ | (980) | ||||||||||||||
Earnings (Loss) per share attributable to Covetrus: | ||||||||||||||||||||
Basic | $ | (9.50) | $ | 0.36 | $ | (9.14) | ||||||||||||||
Diluted | $ | (9.50) | $ | 0.36 | $ | (9.14) |
Covetrus, Inc. 2020 Form 10-K | 85 |
Amount | Expiration Period | ||||||||||
U.S. federal tax loss carryforwards | $ | 20 | 2030 - unlimited | ||||||||
U.S. federal and state interest carryforwards | 8 | unlimited | |||||||||
U.S. federal other credit carryforwards | 2 | 2030-2040 | |||||||||
U.S. state tax loss carryforwards | 4 | 2021 - unlimited | |||||||||
Non-U.S. tax loss carryforwards | 7 | 2021 - unlimited | |||||||||
Total tax loss and tax credit carryforwards | $ | 41 |
Years Ended | ||||||||||||
December 29, 2018 | December 30, 2017 | December 31, 2016 | ||||||||||
Income tax provision at federal statutory rate | $ | 30,067 | $ | 48,569 | $ | 44,378 | ||||||
Transition tax on deemed repatriation of foreign earnings | 4,366 | 13,031 | — | |||||||||
Pass through noncontrolling interest | (2,815 | ) | (10,953 | ) | (11,824 | ) | ||||||
State income tax provision, net of federal income tax effect | 2,416 | 2,794 | 3,138 | |||||||||
Foreign income tax provision | 1,991 | (8,537 | ) | (6,795 | ) | |||||||
Tax on GILTI | 1,604 | — | — | |||||||||
Excess tax benefits related to stock compensation | (1,195 | ) | (4,025 | ) | — | |||||||
Unrecognized tax benefits and audit settlements | — | — | (1,879 | ) | ||||||||
Revaluation of deferred tax assets and liabilities | — | 7,323 | — | |||||||||
Other | 594 | (183 | ) | 920 | ||||||||
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| |||||||
Total income tax provision | $ | 37,028 | $ | 48,019 | $ | 27,938 | ||||||
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Fordue to the year ended December 29, 2018, the effective tax rate was 25.9% compared to 34.6% for the prior year period. In 2018, the effective tax rate was primarily impacted by an increase in the estimate of transition tax associated with the recently passed tax act (the “Tax Act”)following:
Years Ended | |||||||||||||||||
December 31, 2020 | December 31, 2019 | December 29, 2018 | |||||||||||||||
Income tax provision at federal statutory rate | 21.0 | % | 21 | % | 21.0 | % | |||||||||||
Transition tax on deemed repatriation of foreign earnings | 0 | 0 | 2.8 | ||||||||||||||
Pass through non-controlling interest | 0 | 0 | (2.1) | ||||||||||||||
State income tax provision, net of federal income tax effect | (3.7) | 0.9 | 1.4 | ||||||||||||||
Foreign income tax (benefit) provision | 15.7 | 0.3 | 1.4 | ||||||||||||||
Tax on GILTI | (42.6) | (0.9) | 1.4 | ||||||||||||||
Excess tax benefits related to share-based compensation | (28.4) | (0.5) | (0.7) | ||||||||||||||
Revaluation of deferred tax assets and liabilities | 0 | (0.9) | 0 | ||||||||||||||
Valuation allowance impacts | (2.2) | (0.5) | 0 | ||||||||||||||
Goodwill impairment | 0 | (14.4) | 0 | ||||||||||||||
Non-deductible expenses | (29.3) | (0.6) | 0 | ||||||||||||||
Reverse Book Gain/(Loss) on Foreign Sales | 69.2 | 0.3 | 0 | ||||||||||||||
Return to Provision | 12.1 | 0 | 0 | ||||||||||||||
Impact of Partnership Inside/Outside Basis Conversion | 7.5 | 0 | 0 | ||||||||||||||
Impact of Uncertain Tax Positions | 2.2 | 0.1 | 0 | ||||||||||||||
Credits | 6.6 | 0 | 0 | ||||||||||||||
Other | 0.8 | (0.3) | 0.7 | ||||||||||||||
Effective tax rate | 28.9 | % | 4.5 | % | 25.9 | % |
On December 22, 2017, the U.S. government passed the Tax Act. The Tax ActAct”) is comprehensive tax legislation that implemented complex changes to the U.S. tax code including, but not limited to, the reduction of the corporate tax rate from 35% to 21%, modification of accelerated depreciation, the repeal of the domestic manufacturing deduction and changes to the limitations of the deductibility of interest. Additionally, the Tax Actalso moved from a global tax regime to a modified territorial regime which requiresrequired U.S. companies to pay a mandatoryone-time transition tax on historical offshore earnings that have not been repatriated to the U.S. The Tax Act also included, provisions to tax global intangiblelow-taxed incomefor Global Intangible Low-Taxed Income (“GILTI”), a beneficial tax rate on foreign derivedForeign-derived intangible income (“FDII”), a base erosion and anti-abuse taxBase Erosion & Anti-Abuse Tax (“BEAT”) that imposes tax on certain foreign related-party payments, and IRC Section 163(j) interest limitation (Interest Limitation).limitation. We became subject to the GILTI, FDII, BEAT and Interest Limitationinterest limitation provisions effective January 1, 2018.
The Business
Under Topic 740, the Businessincurred and estimated the impact of each provision of the Tax Act on the effective tax and recorded a current tax expense for the GILTI provision of $1.6$10 million and an interest limitation of $2 million for the year ended December 29, 2018. For31, 2020. We recorded a tax expense for the BEAT, FDII and Interest Limitation computations, the Business has not recorded an estimate in the effective tax rateGILTI provision of $10 million for the year ended December 29, 2018, because the Business has31, 2019. We have concluded that thesethe BEAT and FDII provisions of the Tax Act will not apply to or
Covetrus, Inc. 2020 Form 10-K | 86 |
Due to the complexities of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) that allowed the Animal Health Business to record a provisional amount for any income tax effects of the
Tax Actthese items in accordance with ASC 740, to the extent that a reasonable estimate can be made, in its 2017 combined financial statements. SAB 118 allowed for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts.
In the fourth quarter of 2017, the Business recorded provisional amounts related to the Tax Act for any items that could be reasonably estimated at the time. This included theone-time transition tax that the Business estimated to be $13.0 million and a net deferred tax expense of $7.3 million attributable to the revaluation of deferred tax assets and liabilities due to the lower enacted federal income tax rate of 21%. In the aggregate, for the quarter ended December 30, 2017, these Tax Act modifications resulted in aone-time tax expense of approximately $20.3 million. Absent the effects of the transition, and the revaluation of deferred tax assets and liabilities, and the adoption of ASU2016-09, Accounting for Stock Compensation, the Business’ effective tax rate for the yearyears ended December 30, 2017 would have been 22.8% as compared to the Business’ actual effective tax rate of 34.6%.
31, 2020 and 2019.
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.
The total amount of unrecognized tax benefits, which are included in other liabilities within the combined balance sheets as of December 29, 2018 was approximately $5.8 million, of which $3.0 million would affect the effective tax rate if recognized. It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, the Business does not expect the change to have a material impact on the combined financial statements.
The total amounts of interest and penalties, which are classified as a component of the provision for income taxes and included in other liabilities, were approximately $0.9 million and $0, respectively, as of December 29, 2018.
The tax years subject to examination by major tax jurisdictions include the years 2012 and forward by the U.S. Internal Revenue Service, as well as the years 2011 and forward for certain states and certain foreign jurisdictions.
Years Ended | |||||||||||||||||
December 31, 2020 | December 31, 2019 | December 29, 2018 | |||||||||||||||
Balance at beginning of period | $ | 4 | $ | 6 | $ | 8 | |||||||||||
Additions based on prior year tax positions | (1) | 0 | 2 | ||||||||||||||
Reductions from lapse in statutes of limitations | 0 | (2) | (4) | ||||||||||||||
Balance at end of period | $ | 3 | $ | 4 | $ | 6 |
December 29, 2018 | December 30, 2017 | December 31, 2016 | ||||||||||
Balance, beginning of period | $ | 7,800 | $ | 8,200 | $ | 2,600 | ||||||
Additions based on current year tax positions | — | — | 220 | |||||||||
Additions based on prior year tax positions | 1,800 | 800 | 7,830 | |||||||||
Reductions resulting from lapse in statutes of limitations | (3,800 | ) | (1,200 | ) | (2,450 | ) | ||||||
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Balance, end of period | $ | 5,800 | $ | 7,800 | $ | 8,200 | ||||||
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As discussed in Note 1, the Business revised its combined balance sheetpenalties related to certain goodwill balances that were recordedunrecognized 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.
14. Long-Term Debt
Long-term debt as of December 29, 2018 and December 30, 2017 consisted of a $23.0 million term loan and capital lease obligations. See Note 11 for information on the capital lease obligations.
Term loan
On February 21, 2013, the Business entered into a credit agreement (the “Agreement”) with the Darby Group Companies, Inc. (“Darby”) and M&S Investment Holding I LLC (“M&S”). In conjunction with the Agreement, the Business entered into a guarantee and collateral agreement, which secures payment of the loans madediluted EPS calculation to the Business under the Agreement. The Agreement is collateralized by substantially allextent they are dilutive.
Covetrus, Inc. 2020 Form 10-K | 87 |
15. Segment and Geographic Data
The supply chain segment includes the sale and distribution of pharmaceuticals, nutrition products, consumable products, diagnostic tests, small and large equipment, laboratory products and surgical products, among others.
The technology and value-added services segment consists of technology-enabled solutions and services, including practice management software, data-driven applications, client communications tools and related services.
The following tables present information about the Business’ reportable and operating segments:
Years Ended | ||||||||||||
Dollars in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Net Sales: | ||||||||||||
Supply chain | $ | 3,677,188 | $ | 3,479,327 | $ | 3,254,475 | ||||||
Technology and value-added services | 100,806 | 100,468 | 98,685 | |||||||||
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Total | $ | 3,777,994 | $ | 3,579,795 | $ | 3,353,160 | ||||||
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Years Ended | ||||||||||||
Dollars in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Operating Income: | ||||||||||||
Supply chain | $ | 112,466 | $ | 112,346 | $ | 106,988 | ||||||
Technology and value-added services | 24,632 | 22,976 | 16,840 | |||||||||
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Total | $ | 137,098 | $ | 135,322 | $ | 123,828 | ||||||
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Income before taxes and equity in earnings of affiliates: | ||||||||||||
Supply chain | $ | 118,227 | $ | 115,898 | $ | 110,088 | ||||||
Technology and value-added services | 24,950 | 22,871 | 16,706 | |||||||||
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Total | $ | 143,177 | $ | 138,769 | $ | 126,794 | ||||||
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Depreciation and Amortization: | ||||||||||||
Supply chain | $ | 57,163 | $ | 52,009 | $ | 48,167 | ||||||
Technology and value-added services | 6,937 | 7,044 | 7,281 | |||||||||
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Total | $ | 64,100 | $ | 59,053 | $ | 55,448 | ||||||
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Income Tax Expense: | ||||||||||||
Supply chain | $ | 30,575 | $ | 40,105 | $ | 24,257 | ||||||
Technology and value-added services | 6,453 | 7,914 | 3,681 | |||||||||
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Total | $ | 37,028 | $ | 48,019 | $ | 27,938 | ||||||
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Interest Income: | ||||||||||||
Supply chain | $ | 5,743 | $ | 5,082 | $ | 4,897 | ||||||
Technology and value-added services | 2 | 33 | 18 | |||||||||
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Total | $ | 5,745 | $ | 5,115 | $ | 4,915 | ||||||
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Interest Expense: | ||||||||||||
Supply chain | $ | 2,762 | $ | 2,567 | $ | 1,951 | ||||||
Technology and value-added services | 8 | 20 | 6 | |||||||||
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Total | $ | 2,770 | $ | 2,587 | $ | 1,957 | ||||||
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As of | ||||||||||||
Dollars in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Total Assets: | ||||||||||||
Supply chain | $ | 2,091,161 | $ | 2,073,912 | $ | 1,852,431 | ||||||
Technology and value-added services | 141,923 | 143,108 | 138,693 | |||||||||
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Total | $ | 2,233,084 | $ | 2,217,020 | $ | 1,991,124 | ||||||
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Purchases of Fixed Assets: | ||||||||||||
Supply chain | $ | 21,059 | $ | 18,656 | $ | 11,820 | ||||||
Technology and value-added services | 966 | 2,009 | 928 | |||||||||
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Total | $ | 22,025 | $ | 20,665 | $ | 12,748 | ||||||
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The following table presents information about the Business’ operations by geographic area as of andshares outstanding for diluted EPS for the years ended December 29, 2018, December 30, 2017 and December 31, 2016. Net sales by geographic area are based on the Business’ respective locations. No country, except for the United States and United Kingdom, generated net sales greater than 10% of combined net sales. There were no material amounts of intercompany sales or transfers among geographic areas and there were no material amounts of export sales.
2018 | 2017 | 2016 | ||||||||||||||||||||||
Dollars in thousands | Net Sales | Long-Lived Assets | Net Sales | Long-Lived Assets | Net Sales | Long-Lived Assets | ||||||||||||||||||
United States | $ | 1,927,600 | $ | 718,917 | $ | 1,864,083 | $ | 748,433 | $ | 1,750,487 | $ | 690,244 | ||||||||||||
United Kingdom | 615,651 | 82,292 | 584,398 | 89,927 | 569,986 | 77,918 | ||||||||||||||||||
Other | 1,234,743 | 225,315 | 1,131,314 | 238,889 | 1,032,687 | 222,319 | ||||||||||||||||||
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Total | $ | 3,777,994 | $ | 1,026,524 | $ | 3,579,795 | $ | 1,077,249 | $ | 3,353,160 | $ | 990,481 | ||||||||||||
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16. Employee Benefit Plans
Stock-based compensation
The Business’ employees have historically participated in the Parent’s stock-based compensation plans. Stock-based compensation expense has been allocatedperiods prior to the Business based on the awards and terms previously granted to the Business’ employees, as well as an allocationSeparation also includes approximately 1 million of Parent’s corporate and shared functional employee expenses. The accompanying combined statements of operations reflectpre-tax stock-based compensation expense of $7.1 million ($5.5 millionafter-tax), $7.2 million ($4.0 millionafter-tax) and $6.2 million ($4.4 millionafter-tax)diluted common share equivalents for the years ended December 29 2018, December 30, 2017 and December 31, 2016, respectively.
Stock-based compensation represents the cost related to stock-based awards granted to employees. The Business measures stock-based compensation at the grant date, based on the estimated fair value of the award, and recognizes the cost (net of estimated forfeitures) as compensation expense on a straight-line basis over the requisite service period. The stock-based compensation expense is reflected in selling, general and administrative expenses in the combined statements of operations.
Stock-based awards are provided to certain employees of the Business under the terms of the Parent’s 2013 Stock Incentive Plan, as amended (the “Plan”). The Plan is administered by the Compensation Committee of the Parent Board.
Grants of restricted stock and restricted stock units are stock-basedas these share-based awards granted to recipients with specified vesting provisions. Inwere previously issued by Henry Schein, outstanding at the case of restricted stock, common stock is delivered on the date of grant, subject to vesting conditions. In the case of restricted stock units, common stock is generally delivered on or
following satisfaction of vesting conditions. The Parent issues restricted stock and restricted stock units to employeestime of the Business that vest solely based onSeparation, and were assumed by Covetrus following the recipient’s continued service over time (primarily four-year cliff vesting)Separation.
With respect to time-based restricted stock and restricted stock units,conversion, the Business estimates the fair value on the date of grant based on Henry Schein’s closing stock price. With respect to performance-based restricted stock and restricted stock units, the number ofadditional shares that ultimately vest and are received by the recipientwere included in weighted-average common shares outstanding.
The Plan provides for adjustments to the performance-based restricted stock and restricted stock units targets for significant events, including acquisitions, divestitures, new business ventures, certain capital transactions (including share repurchases), restructuring costs, if any, changes in accounting principles or in applicable laws or regulations and certain foreign exchange fluctuations. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense is adjusted upward or downward based upon the estimation of achieving such performance targets. The ultimate number of shares delivered to recipients and the related compensation cost is recognized as an expense based on the actual performance metrics as defined under the Plan.
The Business records deferred income tax assets for awards that will result in future deductions on the income tax returns based on the amount of compensation cost recognized and the statutory tax rate in the jurisdiction in which the Business will receive a deduction.
During the first quarter of 2017, the Business adopted the provisions of ASU2016-09, which requires that all excess tax benefits and tax deficiencies resulting from the difference between the deduction for tax purposes and the stock-based compensation cost recognized for financial reporting purposes be included as a component of income tax expense as of January 1, 2017. Prior to the implementation of ASU2016-09, excess tax benefits were recorded as a component of net Parent investment and tax deficiencies were recognized either as an offset to accumulated excess tax benefits or in the combined statement of operations if there were no accumulated excess tax benefits.
Stock-based compensation grants for the three years ended December 29, 2018 consisted of restricted stock and restricted stock unit grants. The weighted average grant date fair value of stock-based awards granted before forfeitures was, $65.26, $85.90 and $83.23 per share during the years ended December 29, 2018, December 30, 2017 and December 31, 2016, respectively.
Total unrecognized compensation cost related tonon-vested awards as of December 29, 2018 was $10.7 million, which was expected to be recognized over a weighted average period of approximately 1.56 years.
A summarydenominator of the restricted stockbasic and restricted stock unit activity under thediluted EPS computation for net (loss) earnings per share:
December 31, 2020 | December 31, 2019 (b) | December 29, 2018 | ||||||||||||||||||||||||
Numerator: | ||||||||||||||||||||||||||
Net income (loss) attributable to Covetrus | $ | (19) | $ | (980) | $ | 101 | ||||||||||||||||||||
Adjustment for: | ||||||||||||||||||||||||||
Dividends declared on Series A preferred stock | (7) | 0 | 0 | |||||||||||||||||||||||
Income (loss) available to common shareholders | $ | (26) | $ | (980) | $ | 101 | ||||||||||||||||||||
Denominator: | ||||||||||||||||||||||||||
Basic | ||||||||||||||||||||||||||
Weighted-average common shares outstanding | 118 | 107 | 71 | |||||||||||||||||||||||
Diluted | ||||||||||||||||||||||||||
Effect of dilutive shares | 0 | 0 | 1 | |||||||||||||||||||||||
Diluted shares | 118 | 107 | 72 | |||||||||||||||||||||||
Earnings (loss) per share attributable to Covetrus: | ||||||||||||||||||||||||||
Basic | $ | (0.22) | $ | (9.14) | $ | 1.41 | ||||||||||||||||||||
Diluted | $ | (0.22) | $ | (9.14) | $ | 1.40 | ||||||||||||||||||||
Potentially dilutive securities (a) | 6 | 6 | 0 | |||||||||||||||||||||||
(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 | ||||||||||||||||||||||||||
(b) See Note 16 - Income Taxes for discussion related to revisions to Net income (loss) attributable to Covetrus and Earnings (loss) per share |
Years Ended | ||||||||||||||||||||||||
December 29, 2018 | December 30, 2017 | December 31, 2016 | ||||||||||||||||||||||
Restricted Stock/ Restricted Stock Units | Weighted Average Grant Date Fair Value Per Share | Restricted Stock/ Restricted Stock Units | Weighted Average Grant Date Fair Value Per Share | Restricted Stock/ Restricted Stock Units | Weighted Average Grant Date Fair Value Per Share | |||||||||||||||||||
Outstanding at beginning of year | 311,915 | $ | 79.74 | 219,642 | $ | 76.71 | 118,838 | $ | 69.67 | |||||||||||||||
Granted | 67,365 | 65.26 | 107,947 | 85.90 | 115,122 | 83.23 | ||||||||||||||||||
Vested | (24,609 | ) | 69.80 | — | — | |||||||||||||||||||
Forfeited | (112,548 | ) | 77.03 | (15,674 | ) | 79.99 | (14,318 | ) | 70.72 | |||||||||||||||
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| |||||||||||||||||||
Outstanding at end of year | 242,123 | $ | 76.86 | 311,915 | $ | 79.74 | 219,642 | $ | 76.71 | |||||||||||||||
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|
The following table summarizes the status of thenon-vested restricted stock and restricted stock units for the year ended December 29, 2018:
Time-Based Restricted Stock/Units | ||||||||||||
Restricted Stock/ Restricted Stock Units | Weighted Average Grant Date Fair Value Per Share of Restricted Stock/ Restricted Stock Units | Intrinsic Value Per Share of Restricted Stock/ Restricted Stock Units | ||||||||||
Outstanding at beginning of period | 168,020 | $ | 79.52 | |||||||||
Granted | 35,472 | 65.27 | ||||||||||
Forfeited | (65,389 | ) | 75.17 | |||||||||
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| |||||||||||
Outstanding at end of period | 138,103 | $ | 76.26 | $ | 77.92 | |||||||
|
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Performance-Based Restricted Stock and Restricted Stock Units | ||||||||||||
Restricted Stock/ Restricted Stock Units | Weighted Average Grant Date Fair Value Per Share of Restricted Stock/ Restricted Stock Units | Intrinsic Value Per Share of Restricted Stock/ Restricted Stock Units | ||||||||||
Outstanding at beginning of period | 143,895 | $ | 80.01 | |||||||||
Granted | 31,893 | 65.26 | ||||||||||
Vested | (24,609 | ) | 69.80 | |||||||||
Forfeited | (47,159 | ) | 79.68 | |||||||||
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Outstanding at end of period | 104,020 | $ | 77.67 | $ | 77.92 | |||||||
|
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Covetrus, Inc. 2020 Form 10-K | 88 |
strategic initiatives we believe are necessary for our transformation that contained a one-year performance cycle and vesting.
(In millions, except per share amounts) | Number of Shares | Weighted- average Exercise Price Per Share | Weighted- average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||||||||||||
Outstanding at beginning of year | 4 | $ | 15.29 | ||||||||||||||||||||
Granted | 0 | 0 | |||||||||||||||||||||
Exercised | (1) | 6.80 | |||||||||||||||||||||
Forfeited | (1) | 28.59 | |||||||||||||||||||||
Outstanding at end of year | 2 | $ | 15.58 | 6.9 | $ | 31 | |||||||||||||||||
Exercisable at end of year | 1 | $ | 11.99 | 6.6 | $ | 24 |
Weighted-average grant-date fair value | $12.19 | ||||||||||||||||||||||
Valuation assumption ranges: | |||||||||||||||||||||||
Expected term (years) | 6.0 | ||||||||||||||||||||||
Risk-free interest rate | 1.8 | % | - | 2.5% | |||||||||||||||||||
Expected volatility | 29.6 | % | - | 30.0% | |||||||||||||||||||
Number of Shares | Weighted-average Grant-date Fair Value Per Share | Weighted-average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||||||||||||||||
Nonvested at beginning of year | 2 | $ | 25.69 | |||||||||||||||||||||||
Granted | 3 | 11.51 | ||||||||||||||||||||||||
Vested | (1) | 28.24 | ||||||||||||||||||||||||
Forfeited | 0 | 19.37 | ||||||||||||||||||||||||
Nonvested at end of year | 4 | $ | 14.07 | 1.25 | $ | 124 |
Covetrus, Inc. 2020 Form 10-K | 89 |
Years Ended | |||||||||||||||||
2020 | 2019 | 2018 | |||||||||||||||
Weighted-average grant-date fair value | $ | 11.51 | $ | 27.83 | $ | 65.26 |
Years Ended | |||||||||||||||||
2020 | 2019 | 2018 | |||||||||||||||
Intrinsic value of stock options exercised | $ | 13 | $ | 15 | $ | 0 | |||||||||||
Fair value of RSA/RSU shares vested | $ | 6 | $ | 3 | $ | 2 |
The BusinessPlan
Matching contributions and administrative expenses related to these plans charged to operations duringwere $11 million in 2020, $9 million in 2019, and $6 million in 2018.
Covetrus, Inc. 2020 Form 10-K | 90 |
17. Related-Party Transactions
Long-term debt
The combined financial statements includesSandra E. Peterson (advisor board member). CD&R’s right to representation on our board is directly related to their level of long-term debtshare ownership. Should CD&R's beneficial ownership decrease below 50% of its ownership as of December 29, 2018May 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
Allocation ofour transition service agreements. We incurred allocated general corporate expenses
The combined financial statements include expense allocations as discussed of $5 million in Note 1. During the years ended December 29,2019 and $55 million in 2018 December 30, 2017 and December 31, 2016, the Business was allocated $55.4 million, $58.7 million and $60.0 million, respectively, of general corporate expenses, which are included within selling,Selling, general and administrative expenses in the combined statements of operations.
Parent company equity
The net transfers from the Parent are reflected in equity on the combined balance sheetsconsolidated and combined statements of equity. The net transfers to/from the Parent amounted to $174.2 million, $12.4 million and $33.8 million for the years ended December 29, 2018, December 30, 2017 and December 31, 2016, respectively.
A reconciliation of net Parent investment in the combined statements of equity to the corresponding amount presented on the combined statements of cash flows for all periods presented were as follows:
Dollars in thousands | December 29, 2018 | December 30, 2017 | December 31, 2016 | |||||||||
Net transfers from Parent per combined statements of equity | $ | 174,207 | $ | 12,424 | $ | 33,819 | ||||||
Stock compensation expense | (7,052 | ) | (7,220 | ) | (6,208 | ) | ||||||
Change in fair value of redeemable noncontrolling interest | 107,458 | 54,071 | 20,082 | |||||||||
Other | (165 | ) | 2,931 | (1,006 | ) | |||||||
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Total net transfers from Parent per combined statements of cash flows | $ | 274,448 | $ | 62,206 | $ | 46,687 | ||||||
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18. Subsequent Events
Consummation of thespin-off and issuance of stock of Covetrus, Inc.
On February 7, 2019 (the “Distribution Date”), Henry Schein completed the previously announced separation (the “Separation”), distribution (the “Distribution”), and subsequent merger of its animal health business (the “Animal Health Business”) with Direct Vet Marketing, Inc. (d/b/a Vets First Choice, “Vets First Choice”) (the “Merger”). This was accomplished by a series of transactions among Vets First Choice, Henry Schein, Covetrus, Inc. (f/k/a HS Spinco, Inc. “Covetrus”), a wholly owned subsidiary of Henry Schein prior to the Distribution Date, and HS Merger Sub, Inc., a wholly owned subsidiary of Covetrus (“Merger Sub”). operations.
purchase pricedifferent products and service offerings, along with prescription management, data analytics, and insights through veterinary practice management software into 1 multi-channel veterinary platform. We will focus on delivering the integrated platform of $73.3 million. On the Distribution Date,products and priorservices to the Distribution, Covetrus issued shares of Covetrus common stock to certain institutional accredited investors (the “Share Sale Investors”) for $361.1 million (the “Share Sale”). The proceeds of the Share Sale were paid to Covetrus and distributed to Henry Schein. Subsequent to the Share Sale, Henry Schein distributed,our customers on a pro rata basis, allgeographical basis.
Debt financing
In connection with the Separation, Covetrus entered into a financing arrangement consisting of a five-year term loan of $1,200.0 million and a five-year revolving credit facility of $300.0 million. Covetrus may elect that the amounts borrowed under the financing arrangement bear interest at a rate per annum equal to (a) LIBOR plus a margin2019, our CODM began evaluating segment profit (loss) solely based on Covetrus’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 |
At and For the Year Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||
North America | Europe | APAC & Emerging Markets | Corporate | Eliminations | Total | ||||||||||||||||||||||||||||||
Net sales | $ | 2,377 | $ | 1,571 | $ | 402 | $ | 0 | $ | (11) | $ | 4,339 | |||||||||||||||||||||||
Adjusted EBITDA | $ | 187 | $ | 72 | $ | 28 | $ | (61) | $ | 0 | $ | 226 | |||||||||||||||||||||||
Depreciation and amortization | $ | 144 | $ | 17 | $ | 5 | $ | 0 | $ | 0 | $ | 166 | |||||||||||||||||||||||
Income tax benefit (expense) | $ | 19 | $ | (11) | $ | (6) | $ | 5 | $ | 0 | $ | 7 | |||||||||||||||||||||||
Total assets | $ | 3,077 | $ | 713 | $ | 188 | $ | 1,415 | $ | (1,897) | $ | 3,496 | |||||||||||||||||||||||
Expenditures for long-lived assets | $ | 41 | $ | 11 | $ | 3 | $ | 3 | $ | 0 | $ | 58 | |||||||||||||||||||||||
Reconciliation of Net Income (Loss) Attributable to Covetrus to Adjusted EBITDA: | |||||||||||||||||||||||||||||||||||
Net income (loss) attributable to Covetrus | $ | (19) | |||||||||||||||||||||||||||||||||
Plus: Depreciation and amortization | 166 | ||||||||||||||||||||||||||||||||||
Plus: Interest expense, net | 47 | ||||||||||||||||||||||||||||||||||
Less: Income tax (benefit) expense | (7) | ||||||||||||||||||||||||||||||||||
Earnings (loss) before interest, taxes, depreciation, and amortization | 187 | ||||||||||||||||||||||||||||||||||
Plus: Share-based compensation | 40 | ||||||||||||||||||||||||||||||||||
Plus: Strategic consulting | 20 | ||||||||||||||||||||||||||||||||||
Plus: Transaction costs (a) | 8 | ||||||||||||||||||||||||||||||||||
Plus: Separation programs and executive severance | 11 | ||||||||||||||||||||||||||||||||||
Plus: IT infrastructure | 4 | ||||||||||||||||||||||||||||||||||
Plus: Formation of Covetrus (b) | 19 | ||||||||||||||||||||||||||||||||||
Plus: Capital structure | 2 | ||||||||||||||||||||||||||||||||||
Plus: Equity method investments and non-consolidated affiliates (c) | 2 | ||||||||||||||||||||||||||||||||||
Plus: Operating lease right-of-use asset impairment | 8 | ||||||||||||||||||||||||||||||||||
Plus: France managed exit (d) | 7 | ||||||||||||||||||||||||||||||||||
Less: Other items, net (e) | (82) | ||||||||||||||||||||||||||||||||||
Adjusted EBITDA | 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 |
At and For the Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||
North America | Europe | APAC & Emerging Markets | Corporate | Eliminations | Total | ||||||||||||||||||||||||||||||
Net sales | $ | 2,111 | $ | 1,509 | $ | 368 | $ | 0 | $ | (12) | $ | 3,976 | |||||||||||||||||||||||
Adjusted EBITDA | $ | 153 | $ | 68 | $ | 18 | $ | (39) | $ | 0 | $ | 200 | |||||||||||||||||||||||
Depreciation and amortization | $ | 131 | $ | 18 | $ | 6 | $ | 0 | $ | 0 | $ | 155 | |||||||||||||||||||||||
Income tax benefit (expense) | $ | 47 | $ | (3) | $ | (4) | $ | 6 | $ | 0 | $ | 46 | |||||||||||||||||||||||
Total assets | $ | 2,939 | $ | 726 | $ | 137 | $ | 783 | $ | (1,226) | $ | 3,359 | |||||||||||||||||||||||
Expenditures for long-lived assets | $ | 23 | $ | 10 | $ | 1 | $ | 5 | $ | 0 | $ | 39 | |||||||||||||||||||||||
Reconciliation of Net Income (Loss) Attributable to Covetrus to Adjusted EBITDA: | |||||||||||||||||||||||||||||||||||
Net income (loss) attributable to Covetrus | $ | (980) | |||||||||||||||||||||||||||||||||
Plus: Depreciation and amortization | 155 | ||||||||||||||||||||||||||||||||||
Plus: Interest expense, net | 53 | ||||||||||||||||||||||||||||||||||
Less: Income tax (benefit) expense | (46) | ||||||||||||||||||||||||||||||||||
Earnings (loss) before interest, taxes, depreciation, and amortization | (818) | ||||||||||||||||||||||||||||||||||
Plus: Share-based compensation | 46 | ||||||||||||||||||||||||||||||||||
Plus: Strategic consulting | 2 | ||||||||||||||||||||||||||||||||||
Plus: Transaction costs (a) | 2 | ||||||||||||||||||||||||||||||||||
Plus: Formation of Covetrus (b) | 31 | ||||||||||||||||||||||||||||||||||
Plus: Separation programs and executive severance | 11 | ||||||||||||||||||||||||||||||||||
Plus: Carve-out operating expenses | 5 | ||||||||||||||||||||||||||||||||||
Plus: IT infrastructure | 6 | ||||||||||||||||||||||||||||||||||
Plus: Goodwill impairment | 938 | ||||||||||||||||||||||||||||||||||
Less: Equity method investments and non-consolidated affiliates (c) | (4) | ||||||||||||||||||||||||||||||||||
Less: Other items, net (d) | (19) | ||||||||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 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 |
At and For the Year Ended December 29, 2018 | |||||||||||||||||||||||||||||||||||
North America | Europe | APAC & Emerging Markets | Corporate | Eliminations | Total | ||||||||||||||||||||||||||||||
Net sales | $ | 1,939 | $ | 1,463 | $ | 387 | $ | 0 | $ | (11) | $ | 3,778 | |||||||||||||||||||||||
Adjusted EBITDA | $ | 157 | $ | 75 | $ | 19 | $ | (32) | $ | 0 | $ | 219 | |||||||||||||||||||||||
Depreciation and amortization | $ | 41 | $ | 17 | $ | 6 | $ | 0 | $ | 0 | $ | 64 | |||||||||||||||||||||||
Income tax expense | $ | (18) | $ | (15) | $ | (3) | $ | (1) | $ | 0 | $ | (37) | |||||||||||||||||||||||
Total assets | $ | 1,302 | $ | 702 | $ | 182 | $ | 10 | $ | (4) | $ | 2,192 | |||||||||||||||||||||||
Expenditures for long-lived assets | $ | 14 | $ | 7 | $ | 1 | $ | 0 | $ | 0 | $ | 22 | |||||||||||||||||||||||
Reconciliation of Net Income (Loss) Attributable to Covetrus to Adjusted EBITDA: | |||||||||||||||||||||||||||||||||||
Net income (loss) attributable to Covetrus | $ | 101 | |||||||||||||||||||||||||||||||||
Plus: Depreciation and amortization | 64 | ||||||||||||||||||||||||||||||||||
Plus: Interest expense, net | 2 | ||||||||||||||||||||||||||||||||||
Plus: Income tax (benefit) expense | 37 | ||||||||||||||||||||||||||||||||||
Earnings (loss) before interest, taxes, depreciation, and amortization | 204 | ||||||||||||||||||||||||||||||||||
Plus: Share-based compensation | 7 | ||||||||||||||||||||||||||||||||||
Plus: Separation programs and executive severance | 9 | ||||||||||||||||||||||||||||||||||
Less: Equity method investments and non-consolidated affiliates | (1) | ||||||||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 219 |
For the Three Months Ended | ||||||||||||||||||||||||||
December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | |||||||||||||||||||||||
Net sales | $ | 1,121 | $ | 1,126 | $ | 1,026 | $ | 1,065 | ||||||||||||||||||
Gross profit | $ | 206 | $ | 197 | $ | 192 | $ | 202 | ||||||||||||||||||
Goodwill impairment | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
Operating income (loss) | $ | (19) | $ | (27) | $ | (4) | $ | (20) | ||||||||||||||||||
Net income (loss) attributable to Covetrus | $ | (4) | $ | (35) | $ | 54 | $ | (33) | ||||||||||||||||||
Earnings (loss) per share: | ||||||||||||||||||||||||||
Basic | $ | (0.04) | $ | (0.33) | $ | 0.40 | $ | (0.30) | ||||||||||||||||||
Diluted | $ | (0.04) | $ | (0.33) | $ | 0.40 | $ | (0.30) |
Covetrus, Inc. 2020 Form 10-K | 94 |
For the Three Months Ended | ||||||||||||||||||||||||||
December 31, 2019 | September 30, 2019 | June 30, 2019 | March 31, 2019 | |||||||||||||||||||||||
Net sales | $ | 1,008 | $ | 1,018 | $ | 1,009 | $ | 941 | ||||||||||||||||||
Gross profit (a) | $ | 188 | $ | 191 | $ | 193 | $ | 177 | ||||||||||||||||||
Goodwill impairment | $ | (1) | $ | 939 | $ | 0 | $ | 0 | ||||||||||||||||||
Operating income (loss) | $ | (25) | $ | (958) | $ | (5) | $ | (9) | ||||||||||||||||||
Net income (loss) attributable to Covetrus (b) | $ | (37) | $ | (920) | $ | (10) | $ | (13) | ||||||||||||||||||
Earnings (Loss) per share: (b) | ||||||||||||||||||||||||||
Basic | $ | (0.33) | $ | (8.22) | $ | (0.09) | $ | (0.14) | ||||||||||||||||||
Diluted | $ | (0.33) | $ | (8.22) | $ | (0.09) | $ | (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 |
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Not Applicable.
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Disclosure controls and procedures, as defined in Rules13a-15(e) and15d-15(e)
In connection with the preparation of this Annual Report on Form10-K, we completed an evaluation, as of December 29, 2018, under the supervision of and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer as to(“CFO”), of the effectiveness of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, (as such term is defined in Rules13a-15(e) and15d-15(e) under the Exchange Act).
It should be notedwe recognize that any system of controls howeverand procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is basedour management necessarily applies its judgment in part upon certain assumptions about the likelihood of future events.evaluating and implementing possible controls and procedures. Based upon that evaluation, the evaluation, our Chief Executive OfficerCEO and Chief Financial Officer haveCFO concluded that, as of December 29, 2018,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.
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.Covetrus, Inc. 2020 Form 10-K | 96 |
There were
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Our Board
The following table sets forth the names, ages as of March 15, 2019 and positions of the individuals who are members of our Board:
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Listed below is the biographical information for each person who is a member of our Board.
Benjamin Shaw was appointed our President and Chief Executive Officer and a director in February 2019 in connection with the Transactions. From May 2010 until such appointment, Mr. Shaw was the Chief Executive Officerand Co-Founder and until August 2018, President of Vets First Choice. Previously,Mr. Shaw co-founded Black Point Group and served as Partner from 2003 to 2017. Mr. Shaw holds a B.A. in Biology, Political Science and Environmental Studies from Bates College.
Betsy Atkins was appointedreference to our Board in February 2019 in connection with the Transactions. Prior to such appointment, Ms. Atkins served from November 2016 as a member of the Vets First Choice Board. Ms. Atkins has served as Chief Executive Officer of Baja LLC, a venture capital firm, since 1994. Ms. Atkins served as Chairman and Chief Executive Officer of Clear Standards, Inc., a software company, from 2009 until its sale to SAP AG in 2010. She previously served as Chairman and Chief Executive Officer of NCI, Inc., a food manufacturing company, from 1991 through its sale in 1993.Ms. Atkins co-founded Ascend Communications, a manufacturer of communications equipment, in 1989, where she was also a member of the board of directors until its acquisition by Lucent Technologies in 1999. Ms. Atkins serves on the board of directors of Schneider
Electric SE, SL Green Realty Corp., Volvo Car Group and Volvo Car AB, and Wynn Resorts. Ms. Atkins previously served on the boards of directors of Darden Restaurants, Inc., from 2014 to 2015, HD Supply Holdings, Inc., an industrial distributor, from 2013 to 2018, Wix.com Ltd., from 2013 to 2014, Chico’s FAS, Inc., from 2004 to 2013 and SunPower Corporation, from 2005 to 2012. Ms. Atkins holds a B.A. from the University of Massachusetts, Amherst. Ms. Atkins’ depth of executive leadership experience and global business perspective from her service on other public company boards led to the conclusion that she should serve as a member of our Board.
Deborah G. Ellinger was appointed to our Board in February 2019 in connection with the Transactions. Ms. Ellinger is a Senior Advisor for The Boston Consulting Group, or BCG, a consulting firm, Lead Independent Director of iRobot Corp, a technology company, and is the former CEO or President of four private-equity backed firms. She has been a Senior Advisor to BCG since June 2018, working primarily with their private equity team, and has served on the iRobot board since 2011, where she is also Chair of the nominating and governance committee and has sat on several other board committees. Her leadership roles include: President and Chief Executive Officer of Ideal Image, an aesthetic treatment company, from 2016 to 2018; Chairman and Chief Executive Officer of The Princeton Review, a test preparation company, from 2012 to 2014; President of Restoration Hardware from 2008 to 2009, and President and Chief Executive Officer of Wellness Pet Food from 2004 to 2008. Previously, she served as an Executive Vice President at CVS Pharmacy, a Senior Vice President at Staples, Inc., and was a partner at The Boston Consulting Group; she began her career with Mellon Financial Corporation. Ms. Ellinger has extensive additional board experience: from 2015 to 2017, she served as a director of Interpublic Group of Companies, sitting on the audit committee, compensation committee and finance committees at different times. She was also a member of the board of directors of National Life Group from 2007 to 2014 and served on its executive committee, audit committee and was Chair of its nominating and governance committee. She served on the board of Sealy, Inc. from 2010 to 2013, where she was a member of the compensation and audit committees. She has also sat on the boards of several private companies since 2004. Ms. Ellinger’s assignments have taken her all over the world; she has lived and worked in Europe, Asia and the United States. She holds an M.A. and B.A. in Law and Mathematics from the University of Cambridge, England. Ms. Ellinger is also a qualified asa Barrister-at-Law in London, as a member of the Inner Temple. Ms. Ellinger’s extensive experience in international consumer-oriented businesses, including in the animal health and pharmacy markets, her experience with oversight of business strategy and her global business perspective led to the conclusion that she should serve as a member of our Board.
Sandra L. Helton was appointed to our Board in February 2019 in connection with the Transactions. Ms. Helton was Executive Vice President and Chief Financial Officer of Telephone and Data Systems, Inc., or TDS, a telecommunications organization that includes United States Cellular Corporation, from 1998 through 2006. In her role, Ms. Helton had responsibility for finance, information technology and other corporate functions. She also served on the boards of directors of both TDS and US Cellular Corporation. Prior to joining TDS, Ms. Helton spent over 20 years with Corning Incorporated, a technology company, where she held engineering, strategy and finance positions, including Senior Vice President and Treasurer from 1991 through 1997. She also served as Vice President and Corporate Controller of Compaq Computer Corporation from 1997 through 1998. Since 2001, Ms. Helton has served on the board of directors of Principal Financial Group, Inc., and is currently Chair of its audit committee and a member of its executive committee and finance committee. Since February 2018, she has been a director of OptiNose, Inc., and is Chair of its audit committee. Ms. Helton previously served as a director of Lexmark International, Inc., including as a member of its audit committee. Ms. Helton also previously served as a member of the board of directors of Covance, Inc. and as Chair of its audit and finance committee and a member of its nominating and governance committee. Ms. Helton is currently a trustee oftwo non-profit organizations, Northwestern Memorial Foundation (serving on its executive committee) and Chicago Architectural Foundation (serving as past Chair of its finance committee, Chair of its governance committee and member of its executive committee). Ms. Helton received a B. S. in mathematics from the University of Kentucky and a S.M. from Massachusetts Institute of Technology’s Sloan School with double majors in Finance and Planning & Control. Ms. Helton’s global executive experience in corporate strategy, finance, accounting and control, treasury, investments, information technology and other corporate
administrative functions, as well as her extensive corporate governance experience, led to the conclusion that she should serve as a member of our Board.
Philip A. Laskawy was appointed to our Board in February 2019 in connection with the Transactions and serves as lead independent director. Mr. Laskawy joined the accounting firm of EY LLP, or EY, formerly known as Ernst & Young LLP, in 1961 and served as a partner in the firm from 1971 to 2001, when he retired. Mr. Laskawy served in various senior management positions at EY, including Chairman and Chief Executive Officer, to which he was appointed in 1994. Mr. Laskawy is currently a director of Henry Schein, having served on the board since 2002 and as the Lead Independent Director since 2012. He is currently the Chair of Henry Schein’s nominating and governance committee and is a member of its audit committee. Since 2002, Mr. Laskawy has served as a member of the board of directors of Loews Corporation and as a member of its audit committee. Additionally, since 2008, he has served as a member of the board of directors of Lazard Ltd. and is Chair of its audit committee and a member of its compensation committee. Mr. Laskawy previously served on the American Institute of Certified Public Accountants to review and update rules regarding auditor independence. In 2006 and 2007, he served as Chairman and Vice Chairman of the International Accounting Standards Committee Foundation, which was created by the Securities and Exchange Commission and sets accounting standards in more than 100 countries, and he served as a member of the 1999 Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. During the past five years, Mr. Laskawy served on the Board of Directors of General Motors Corporation and wasthe Non-Executive Chairman of Federal National Mortgage Association (Fannie Mae). Mr. Laskawy received a B.A. in Economics from Wharton School of the University of Pennsylvania. As a Certified Public Accountant with over 50 years of experience, Mr. Laskawy’s exceptional skills in corporate finance and accounting, corporate governance, compliance, disclosure and international business conduct led to the conclusion that he should serve as a member of our Board.
Mark J. Manoff was appointed to our Board in February 2019 in connection with the Transactions. Mr. Manoff was a partner of EY from 1990 until his retirement as Americas Vice Chair in 2017. During his time with EY, Mr. Manoff held various positions including New York Office Managing Partner and Northeast Region Managing Partner. He also founded and led the EY Center for Board Matters. Mr. Manoff is a member of the board of directors of The First Tee of Metropolitan New York, a youth development organization. In addition, Mr. Manoff was a member of the board of directors for Roundabout Theatre in New York City for approximately 10 years (through May 2018) and was chair of its audit committee during that period. Mr. Manoff serves on the Advisory Board (previously serving as Chair) at the University of Maryland’s Robert H. Smith School of Business, where he received his B.S. in Accounting. Mr. Manoff’s extensive experience in accounting and corporate governance led to the conclusion that he should serve as a member of our Board.
Edward M. (Ted) McNamara was appointed to our Board in February 2019 in connection with the Transactions. Prior to such appointment, Mr. McNamara served from June 2011 as a member of the Vets First Choice Board. He is the President of TeamLaunch, LLC, a venture-building company, which he cofounded in 2013. He is the Chief Financial Officer and director of RCW Inc. (dba M.Gemi), a luxury product company founded by TeamLaunch, LLC. Other TeamLaunch private portfolio companies where Mr. McNamara serves or has served as Secretary, Treasurer or director include Launch Kids, Inc. from December 2015 to December 2017; Follain Launch, Inc. from May 2016 to present; and Seed Leaf, LLC from December 2016 to present. Prior to founding TeamLaunch, Mr. McNamara served as an executive in residence at General Catalyst Partners from 2011 to 2013 and focused on consumer growth opportunities. Prior to that, he served as the Chief Financial Officer of Retail Convergence Inc. (dba Rue La La), a private-sale business and its predecessor Smartbargains Inc., from 2005 to 2011. Mr. McNamara served in a number of executive roles, including Chief Financial Officer, Chief Operating Officer, President and Interim Chief Executive Officer, at two operating businesses of Cendant Corporation from 1996 to 2004, including Wright Express, Inc. and Cendant’s Travel Distribution Division. Mr. McNamara was Chairman of the Board of Wright Express Financial Services, Inc, a banking company, from 1999 to 2001. Mr. McNamara served in a number of accounting, finance and administrative positions for Abex Inc., an aerospace manufacturing company, and its related company Fisher Scientific Corp., a
biotechnology company, from 1993 to 1996. Mr. McNamara started his career with PriceWaterhouse, an accounting firm, from 1986 to 1993, in the audit and advisory group focused on public company audits and mergers and acquisitions, leaving as a manager in the audit practice. Mr. McNamara has also served as a member of the board of directors of, and a formal advisor to, Counter Brands, LLC (dba Beauty Counter), a cosmetics company, since 2014. Mr. McNamara holds a B.S. from Providence College. Mr. McNamara’s significant finance and management experience in high growth businesses as well as his deep current knowledge of Internet and digital based commerce across multiple industries led to the conclusion that he should serve as a member of our Board.
Steven Paladino was appointed to our Board in April 2018. Prior to the Transactions, Mr. Paladino served as Spinco’s President, Treasurer and Chief Financial Officer. Mr. Paladino has been Henry Schein’s Executive Vice President and Chief Financial Officer since 2000 and has served as a member of the Henry Schein Board since 1992. He started his career with Henry Schein in 1987. He is also a member of Henry Schein’s Executive Management Committee. Prior to holding his current position, from 1993 to 2000, Mr. Paladino served as Senior Vice President and Chief Financial Officer, from 1990 to 1992, as Vice President and Treasurer and, from 1987 to 1990, as Corporate Controller. Before joining Henry Schein, Mr. Paladino was employed as a Certified Public Accountant for seven years, most recently with the international accounting firm of BDO USA, LLP. Mr. Paladino also served as a Nasdaq Listing and Hearing Review Council member. Mr. Paladino currently serves on the board of directors of MSC Industrial Direct Co., Inc., and is a member of its audit committee and compensation committee. He holds a B.A. from Bernard M. Baruch College. Mr. Paladino’s extensive financial, accounting and industry expertise and a strong, credible reputation within the financial industry led to the conclusion that he should serve as a member of our Board.
Ravi Sachdev was appointed to our Board in February 2019 in connection with the Transactions. Prior to such appointment, Mr. Sachdev served from July 2015 as a member of the Vets First Choice Board. As a Partner of the private equity firm CD&R since June 2015, Mr. Sachdev focuses on the healthcare sector. From November 2010 to May 2015, Mr. Sachdev was a Managing Directorand Co-Head of Healthcare Services at J.P. Morgan Chase & Co., a financial services company. Prior to November 2010, Mr. Sachdev held the positions of Managing Director at Deutsche Bank Securities, Inc., an investment banking firm, from January 2009 until November 2010 and Director at Deutsche Bank AG from January 2007 until January 2009. Prior to joining Deutsche Bank AG in 2006 as a Vice President, Mr. Sachdev served as a Vice President at Peter J. Solomon Company, an investment banking firm, specializing in mergers and acquisitions in the healthcare sector, from 1998 to 2006. Mr. Sachdev serves on the Board of Directors of Healogics, Inc., Agilon Health, Inc., and naviHealth, Inc., a private technology enabled health services company. Mr. Sachdev holds a B.A. from the University of Michigan. Mr. Sachdev possesses knowledge of finance and the financial analytics used to measure business performance. Mr. Sachdev’s 20 years of professional experience in investment banking and private equity, thorough understanding of the financial issues affecting public companies, insights into business valuation and practical orientation with respect to acquisitions and integrations led to the conclusion that he should serve as a member of our Board.
David E. Shaw was appointed to our Board in February 2019 in connection with the Transactions and serves as the Chairman of our Board. Mr. Shaw wasthe co-founder of Vets First Choice and served as chair of Vets First Choice Board from May 2010 until such appointment. Mr. Shaw is currently Managing Partner of Black Point Group, a private investment partnership. He founded and has led Black Point Group since January 2003. Mr. Shaw also founded IDEXX Laboratories, Inc., or IDEXX, a developer of products and services for the companion animal and veterinary industry. He served as Chief Executive Officer and board chair of IDEXX from 1984 to 2002. He has served on the board of directors of Itaconix PLC, a private company that creates functional polymers, from 2011 to present, and Modern Meadow, Inc., a private company that manufactures an environmentally friendly leather alternative, from 2014 to present. Mr. Shaw previously served on the board of directors of Ironwood Pharmaceuticals, Inc., a pharmaceutical company, from 2004 to 2014. Additionally, Mr. Shaw has served on the faculty of Harvard’s John F. Kennedy School of Government as well as onthe non-profit boards of The Jackson Laboratory, the American Association for the Advancement of Science
(AAAS), the National Park Foundation, and the Aspen Institute’s Aspen High Seas Initiative. He began his career as a strategy consultant to consumer product, food, and agribusiness companies. Mr. Shaw earned his B.A. from the University of New Hampshire and MBA from the University of Southern Maine. He has been awarded honorary degrees by Colby College, Bates College, Maine College of Art, and the University of SouthernMaine. As co-founder of Vets First Choice and a leader in the animal health industry, Mr. Shaw has significant knowledge of the business and market, and brings deep insight into organizational and strategic issues faced by us. It is for these reasons that it was determined he should serve as chair of our Board.
Benjamin Wolin was appointed to our Board in February 2019 in connection with the Transactions. Mr. Wolin currently serves as an advisor to 3L Capital LLC, a growth-stage private equity firm. Prior to his experience as an advisor, Mr. Wolin served as the Chief Executive Officerand 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 currently serves on the board of directors of Diplomat Pharmacy, Inc. and as Lead Independent Director of the board and a member of the audit committee and Chair of the nominating and corporate governance committee. Mr. Wolin also currently serves as Chairman of the board of Rockwell Medical, Inc., and as a member of the audit committee and nominating and governance committee. Mr. Wolin also currently serves as a member of the board of directors of Dance Biopharm, Frontline Medical Communications and SourceMedia, LLC. Mr. Wolin received his BA in History from Bowdoin College. Mr. Wolin’s extensive experience with digital healthcare, pharmacy, technology, and public company board governance and his financial and operating expertise led to the conclusion that he should serve as a member of our Board.
Executive Officers
The following table sets forth the names, ages as of March 15, 2019 and positions of the individuals who are our executive officers. Each executive officer is employed by us pursuant to an employment agreement entered into in connection with the Transactions. We refer to each of these persons as our executive officers.
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Benjamin Shaw’s biography is set forth above under “—Board of Directors.”
Christine T. Komola was appointed our Executive Vice President and Chief Financial Officer in February 2019 in connection with the Transactions. From October 2018 until such appointment, Ms. Komola served as Executive Vice President and Chief Financial Officer of Vets First Choice. Prior to joining Vets First Choice, Ms. Komola served as Chief Financial Officer of Staples, Inc., an office supply company, which she first joined in 1997. Ms. Komola holds a B.S. in Business Administration, Accounting from Miami University.
Erin Powers Brennan was appointed our Senior Vice President, General Counsel and Secretary in February 2019 in connection with the Transactions. From April 2018 until such appointment, Ms. Brennan
served as general counsel of Vets First Choice. Prior to joining Vets First Choice, Ms. Brennan was a partner at Morgan, Lewis & Bockius LLP, a law firm, where she worked from September 2013 to April 2018. Ms. Brennan holds a J.D. from Boston College Law School, an M.A. in Law and Diplomacy from the Tufts University Fletcher School of Law and Diplomacy and a B.A. in Government and Latin American Studies from Scripps College.
Russell Cooke was appointed our Senior Vice President and Operational Chief Financial Officer in February 2019 in connection with the Transactions. From July 2016 until such appointment, Mr. Cooke served as Vice President and CFO Global Animal Health for Henry Schein. He also previously served as CFO US Animal Health from 2014 to 2016, CFO European Animal Health from 2012 to 2014, and CFO UK Animal Health from 2010 to 2012. Mr. Cooke is a member of the Chartered Institute of Management Accountants and holds a B.A. (Hons) in Accounting and Finance.
David Christopher Dollar was appointed our Senior Vice President and President, Global Software Services, in February 2019 in connection with the Transactions. From September 2015 until such appointment, Mr. Dollar served as President, Global Animal Health Practice Solutions at Henry Schein. From October 2014 to August 2015, Mr. Dollar was Chief Operating Officer at HealthMEDX, a software company, and from November 2011 through September 2014, Mr. Dollar served as President, Global Animal Health Practice Solutions at Henry Schein. Mr. Dollar holds a B.S. in Communications and Media Studies from Missouri State University.
Michael Ellis was appointed our Senior Vice President and President, Europe in February 2019 in connection with the Transactions. Prior to such appointment, 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.
David Hinton was appointed our Senior Vice President and President APAC and Emerging Markets in February 2019 in connection with the Transactions. From April 2016 until such appointment, Mr. Hinton served as Vice President & Managing Director—ANZ, and from January 2011 to April 2016 as Vice President & Managing Director—UK, 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 Senior Vice President and Chief Transformation Officer in February 2019 in connection with the Transactions. 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 UK accountant, FCCA.
Anthony Providenti was appointed our Senior Vice President, Corporate Development in February 2019 in connection with the Transactions. Prior to such appointment, Mr. Providenti has 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.
Georgina Wraight was appointed our Senior Vice President and President, Global Prescription Management, in February 2019 in connection with the Transactions. Prior to such appointment, Ms. Wraight served from August 2018 as President, and from January 2018 to August 2018, as Chief Operating Officer of Vets First Choice, and 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 Fellow Chartered Management Accountant, FCMA.
James Young was appointed our Senior Vice President and Chief Human Resources Officer in February 2019 in connection with the Transactions. From November 2018 until such appointment, Mr. Young served as Senior Vice President and Chief Human Resources Officer of Vets First Choice. Prior to joining Vets First Choice, Mr. Young served as Chief Human Resources Officer at Aptuit, LLC from April 2013 to August 2017. From May 2010 to February 2013, he servedas co-founder and Chief Operating Officer of Ruckus Media Group. Mr. Young holds a B.A. in Philosophy and Political Science from Fairleigh Dickinson University.
On March 26, 2019, we announced that Matthew Leonarddefinitive proxy statement (which will be appointed our Executive Vice President, President North America and Global Supply Chain Officer effective as of April 8, 2019.
Covetrus Board Composition and Director Independence
For the first three years following the Merger, until the 2022 annual meeting of stockholders, our Board will be divided into three classes, serving staggered terms of one, two and three years, respectively. The first class of directors includes two directors designated by Henry Schein and one director designated by Vets First Choice whose terms will expire at the 2020 annual meeting of stockholders. The second class of directors includes two directors designated by Henry Schein and two directors designated by Vets First Choice whose terms will expire at the 2021 annual meeting of stockholders. The third class of directors includes two directors designated by Henry Schein and two directors designated by Vets First Choice whose terms will expire at the 2022 annual meeting of stockholders. Following the 2022 annual meeting of stockholders, each director will be elected annually and will hold office fora one-year term until the next annual meeting of stockholders.
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Our Board includes eight independent directors as determined in accordance with the criteria for independence required by Nasdaq. Henry Schein designated five independent directors and Vets First Choice designated three independent directors. Henry Schein designated the lead independent director. The number of directors may be determined from time to time by resolution of our Board adopted by the affirmative voteof two-thirds of the entire Board in accordance with our amended andrestated by-laws, whether or not there exist any vacancies.
Any vacancies or newly created directorships will be filled in accordance with our amended andrestated by-laws. Each director will hold office until his or her successor has been duly elected and qualified or until his or her earlier death, resignation or removal.
Our Chairman and lead independent director will serve in such positions until the 2022 annual meeting of stockholders and, until such time, may only be removed, and his or her successor may only be elected, by the affirmative voteof two-thirds of our full Board. Following the 2022 annual meeting of stockholders, the Chairman and lead independent director will be elected annually by a majority of our full Board.
Committees of the Covetrus Board
Our Board has the following committees: an Audit Committee; a Compensation Committee; a Nominating and Governance Committee; and a Strategy Committee. Members will serve on these committees until their resignation or until otherwise determined by our Board. The charters for the Audit Committee, Compensation Committee, Governance and Nominating Committee and Strategy Committee are all available on our website at www.covetrus.com.
Audit Committee
Our Audit Committee provides oversight of our accounting and financial reporting process, the audit of our financial statements and our internal control function. Among other matters, the Audit Committee is responsible for the following: sole responsibility for oversight of the independent auditors’ qualifications, independence and performance; the engagement, retention and compensation of the independent auditors; reviewing the scope of the annual audit; reviewing and discussing with management and the independent auditors the results of the annual audit and the review of our quarterly financial statements, including the disclosures in our annual and quarterly reports filed with the SEC; reviewing our risk assessment and risk management processes; establishing procedures for receiving, retaining and investigating complaints received by us regarding accounting, internal accounting controls or audit matters; and approving audit andpermissible non-audit services provided by our independent auditor.
The following people were appointedSEC pursuant to Regulation 14A under the Exchange Act) relating to our Audit Committee: Sandra Helton, who is the chair2021 Annual Meeting of the committee; Mark Manoff; and Edward McNamara. All members of our Audit Committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and Nasdaq. Our Board has determined that each of the persons who were appointed to our Audit Committee is an “audit committee financial expert,” as defined under the rules of the SEC and, as such, each satisfy the requirements of Nasdaq’s Rule 5605(c)(2)(A)Shareholders (our “2021 Proxy Statement”). All of the members of our Audit Committee are independent directors as defined under the applicable rules and regulations of the SEC and Nasdaq.
Compensation Committee
Our Compensation Committee adopts and administers the compensation policies, plans and benefit programs for our executive officers and all other members of our executive team. In addition, among other things, our Compensation Committee evaluates annually, in consultation with the board of directors, the performance of our chief executive officer, reviews and approves corporate goals and objectives relevant to compensation of our chief executive officer and other executives and evaluates the performance of these executives in light of those goals and objectives. Our Compensation Committee also adopts and administers our equity compensation plans.
The following people were appointed to our Compensation Committee: Betsy Atkins, who is the chair of the committee; Deborah Ellinger; Edward McNamara; Ravi Sachdev; and Benjamin Wolin. All of the members of our Compensation Committee are independent under the applicable rules and regulations of the SEC and Nasdaq.
Nominating and Governance Committee
Our Nominating and Governance Committee is responsible for, among other things, making recommendations regarding corporate governance, the composition of our board of directors, the identification, evaluation and nomination of director candidates and the structure and composition of committees of our board of directors. In addition, our Nominating and Governance Committee oversees our corporate governance guidelines, approves our committee charters, contributes to succession planning and periodically reviews our organizational documents.
The following people were appointed to our Nominating and Governance committee: Philip Laskawy, who is the chair of the committee; Deborah Ellinger; Sandra Helton; and Betsy Atkins. All of the members of our governance and nominating committee are independent under the applicable rules and regulations of Nasdaq.
Strategy Committee
Our Strategy Committee is an advisory committee responsible for, among other things, reviewing and implementing our management’s strategic business development plan initiatives, responding to emerging issues related to business development, monitoring the strategic and financial outcomes of business development initiatives, and evaluating post-transaction audits to track performance.
The following people were appointed to our Strategy Committee: Ravi Sachdev, who is the chair of the committee; Mark Manoff; Steven Paladino; Benjamin Shaw; and Benjamin Wolin.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports of ownership on Forms 3, 4 and 5 with the SEC. Officers, directors and greater than 10% stockholders are required to furnish us with copies of all Forms 3, 4 and 5 they file.
We did not have a class of equity securities registered pursuant Section 12 of the Exchange Act during the fiscal year ended December 31, 2018, as our initial public offering was completed in February 2019. As a result, our executive officers and directors, and persons who own more than 10% of a registered class our common stock, were not subject to Section 16(a) during the fiscal year ended December 31, 2018.
Code of Business Conduct and Ethics for Employees, Executive Officers and Directors
We have adopted a Code of Business Conduct and Ethics for Employees, Executive Officers and Directors that applies to our executive officers, including the principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions, directors, employees and others acting on our behalf. A copy of the Code of Business Conduct and Ethics for Employees, Executive Officers and Directors is available on our website at www.covetrus.com. We will promptly disclose any substantive changes to or waiver of, together with reasons for any waiver of, this code granted to our executive officers, including our principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions, and our directors by posting such information on our website.
Item 11. Executive |
Director Compensation
Executive Compensation
During 2018, we did not pay any compensation to our named executive officers. The historical compensation paid by the Animal Health Business and Vets First Choice to our named executive officers is not indicative of the future compensation of those executives. Accordingly, we have not included information regarding compensation and other benefits paid to those executives by the Animal Health Business or Vets First Choice, as the case may be, during 2018 or prior years.
In connection with the Transactions, the compensation committee of the Henry Schein Board retained Willis Towers Watson plc, or WTW, and the compensation committee of the Vets First Choice Board retained PricewaterhouseCoopers LLP, or PWC, and Radford, a business unit of Aon plc, or Radford, to provide market intelligence and analysis relating to named executive officer compensation. PWC also provided market intelligence and analysis with respect to our executive compensation program. After considering the intelligence and analysis provided by WTW, PWC and Radford, the Animal Health Business and Vets First Choice evaluated and determined the appropriate process for establishing named executive officer compensation, the appropriate design of our executive compensation program, and the initial compensation and severance arrangements of our Chief Executive Officer and our other named executive officers, each of which is described below.
Our Compensation Committee oversees the compensation of our Chief Executive Officer and our other named executive officers. With respect to base salaries, annual incentive compensation and any long-term incentive awards, the Compensation Committee will develop programs reflecting appropriate measures, goals, targets and business objectives based on our competitive marketplace and our need to create appropriate incentive and retention arrangements. The Compensation Committee will continue to analyze our executive compensation program and the appropriate compensation and benefits, if any, that we will make available to our named executive officers. If determined to be necessary or appropriate by the Compensation Committee, the Compensation Committee will retain a compensation consultant to provide advice and support to the committee in the design and implementation of our executive compensation program.
The discussion below may contain forward-looking statements about executive compensation and benefits that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt may differ materially from the currently planned programs summarized in this discussion.
Compensation Philosophy
Our compensation philosophy is described below. Our Compensation Committee will periodically review and consider this philosophy and may make adjustments as it determines are necessary or appropriate. Our current compensation philosophy aims to achieve the following:
retain key leadership and talent;
align executives with investors and our long-term vision and growth strategy;
ensure line-of-sight to our key performance measures and results;
promote internal equity across grades, departments and geographies in a transparent and sustainable manner; and
focus on challenging performance goals to creatively drive solutions and develop tools to support significant growth.
Primary Elements of Expected Compensation from Covetrus
Our executive compensation program consists of the following key elements:
Base Salary. Base salary is the fixed element of a named executive officer’s annual cash compensation and is intended to attract and retain highly qualified executives and to compensate for expectedday-to-day
performance. Each of our named executive officers are paid a base salary. The base salaries set forth in the employment agreements that were entered into by our named executive officers, and described more fully below, are based on the intelligence and analysis provided by PWC and Radford with input from Henry Schein. Factors our Compensation Committee considers in making determinations about the base salaries for our named executive officers include the named executive officer’s position, responsibilities associated with that position, length of service, experience, expertise, knowledge and qualifications, market factors, the industry in which we operate and compete, recruitment and retention factors, the named executive officer’s individual compensation history, salary levels of the other members of our executive team and similarly situated executives at comparable companies, and our overall compensation philosophy.
Annual Non-Equity Incentive Compensation. Our named executive officers are also eligible for annual bonus compensation, which is intended to motivate the named executive officers to achieve short-term company performance goals, to align named executive officers’ interests with those of our stockholders and to reward the named executive officers for individual achievements. Our Compensation Committee has adopted an annual incentive plan and annual bonus framework for our named executive officers as described more fully below. See “—Annual Incentive Plan” below. The respective employment arrangements of our named executive officers, which are described in more detail below, provide for a specified target annual bonus opportunity.
Long-Term Equity-Based Awards. Our named executive officers are eligible to participate in our long-term equity incentive compensation programs, which are designed to motivate named executive officers to achieve long-term performance goals and to ensure goal alignment with our stockholders. The amount and timing of any long-term equity-based incentive compensation to be paid or awarded to our named executive officers will be determined by our Compensation Committee. The respective employment agreements of our named executive officers, which are described in more detail below, provide for annual long-term incentive opportunities, which were developed based on the intelligence and analysis provided by PWC and Radford with input from Henry Schein. In 2019, 50% of each equity grant to a named executive officer will be in the form of performance-based stock options, and the remaining 50% of such grant will be in the form of full value awards (which may be in the form of restricted stock or restricted stock units). Any equity incentive awards granted, paid or awarded to our named executive officers will generally be granted pursuant to our 2019 Omnibus Incentive Compensation Plan, or the 2019 Plan.
Employment Agreements
We have entered into employment agreements with each of our named executive officers effective as of February 7, 2019.
Certain key terms applicable to each of the employment agreements are described below.
The employment agreements with each of our named executive officers entitle the executive to an annual base salary and annual target bonus opportunity, which for 2019 will equal a percentage of the executive’s annual base salary. The employment agreements provide that each named executive officer is eligible to participate in our long-term incentive equity compensation program. In 2019, 50% of each equity grant under the long-term incentive equity compensation program to a named executive officer will be in the form of performance-based stock options, and the remaining 50% of such grant will be in the form of full value awards (which may be in the form of restricted stock or restricted stock units). Each employment agreement has an initial three-year term and will automatically renew fora one-year period on each anniversary thereafter unless noticeof non-renewal is given 60 days (90 days for our Chief Executive Officer) prior to the expiration of the renewal date or it is otherwise terminated pursuant to its terms.
In the event a named executive officer is terminated by us without cause or resigns for good reason, subject to the applicable executive’s timely execution and nonrevocation of a release of claims in our favor, the executive will be entitled to receive continued base salary for a certain number of months,a pro-rated annual
bonus amount based on the executive’s target bonus opportunity and continued medical, dental and vision coverage pursuant to COBRA at the active employee rate, if elected, up to a certain number of months. If the executive’s termination occurs during the period commencing on the date that is two months prior to (or the earlier date of execution of a definitive agreement with respect to a change of control) and ending 12 months following a change in control, or a Change in Control Termination, subject to the executive’s timely execution and nonrevocation of a release of claims in our favor, the executive is entitled to receive the following in lieu of the severance benefits described in the previous sentence: (i) a multiple of the executive’s base salary plus target bonus opportunity, paid in regular payroll installments over a certain period following the executive’s employment termination date; (ii) up to a certain number of months of continued medical, dental and vision coverage pursuant to COBRA at the active employee rate, if elected; and (iii) accelerated vesting of the executive’s time-based equity awardsand pro-rated vesting of awards subject to performance-based vesting conditions at the greater of (x) target-level performance and (y) actual performance, in each case through the later of the executive’s termination date or the date of the change in control.
Subject to the key terms described above, terms of the employment agreement with each named executive officer are as follows:
Benjamin Shaw
Mr. Shaw’s employment agreement governs the terms and conditions of his employment as our Chief Executive Officer. Mr. Shaw’s employment agreement entitles Mr. Shaw to an annual base salary of $835,000 and an annual target bonus opportunity, which for 2019 equals 100% of Mr. Shaw’s annual base salary. Under the terms of his employment agreement, Mr. Shaw is eligible to participate in our long-term incentive equity plan. The value of Mr. Shaw’s initial grant under the long-term incentive equity plan was equal to $3,500,000, of which fifty percent (50%) was in the form of performance-based stock options, and the remaining fifty percent (50%) was in the form of full value awards. If Mr. Shaw is terminated by us without cause or resigns for good reason (whichincludes non-renewal of the employment term by us), he is entitled to receive continued base salary for twenty-four months,a pro-rated annual bonus, and continued COBRA coverage for eighteen months. If Mr. Shaw experiences a Change in Control Termination, he is entitled to receive two times his base salary plus target bonus opportunity, COBRA coverage for eighteen months, and the equity acceleration described above.
Mr. Shaw received a $927,671 transaction bonus on Friday, December 28, 2018 and used a portion of such bonus to repay in full the promissory note between Mr. Shaw and Vets First Choice. See “Certain Relationships and Related-Party Transactions—Promissory Note with Benjamin Shaw” for details of the promissory note with Mr. Shaw.
Christine T. Komola
Ms. Komola’s employment agreement governs the terms and conditions of her employment as our Executive Vice President and Chief Financial Officer. Ms. Komola’s employment agreement entitles her to an annual base salary of $650,000 and an annual target bonus opportunity, which for 2019 equals 75% of Ms. Komola’s annual base salary. Ms. Komola’s initial grant under our long-term incentive equity plan was equal to $1,500,000. Ms. Komola was also entitled to receive a “new hire” grant under our long-term incentive equity plan in an amount equal to approximately $1,250,000. Ms. Komola is entitled to reimbursement of certain relocation expenses, in an amount not to exceed $250,000, together with reimbursement of certain short-term living expenses prior to her relocation. If Ms. Komola is terminated by us without cause or resigns for good reason (whichincludes non-renewal of the employment term by us), Ms. Komola is entitled to receive continued base salary for eighteen months,a pro-rated annual bonus, and continued COBRA coverage for eighteen months. If Ms. Komola experiences a Change in Control Termination, she is entitled to receive one and one half times her base salary plus target bonus opportunity, COBRA coverage for eighteen months, and the equity acceleration described above.
Francis Dirksmeier
Effective February 22, 2019, Mr. Dirksmeier resigned as our Senior Vice President and President, North America.
Prior to his resignation, Mr. Dirksmeier’s employment agreement governed the terms and conditions of his employment as our Senior Vice President and President, North America. Mr. Dirksmeier’s employment agreement entitled him to an annual base salary of $450,000 and an annual target bonus opportunity, which for 2019 equaled 60% of Mr. Dirksmeier’s annual base salary. If Mr. Dirksmeier had been terminated by us without cause or resigned for good reason (which includednon-renewal of the employment term by us), Mr. Dirksmeier would have been entitled to receive continued base salary for twelve months,a pro-rated annual bonus, and continued COBRA coverage for twelve months. If Mr. Dirksmeier had experienced a Change in Control Termination, he would have been entitled to receive a multiple of one times his base salary plus target bonus opportunity, COBRA coverage for twelve months, and the equity acceleration described above.
David Christopher Dollar
Mr. Dollar’s employment agreement governs the terms and conditions of his employment as our Senior Vice President and President, Global Software Services. Mr. Dollar’s employment agreement entitles him to an annual base salary of $400,001 and an annual target bonus opportunity, which for 2019 equals 60% of Mr. Dollar’s annual base salary. Mr. Dollar’s initial grant under our long-term incentive equity plan was equal to $600,000. If Mr. Dollar is terminated by us without cause or resigns for good reason (which includesnon-renewal of the employment term by us), Mr. Dollar is entitled to receive continued base salary for twelve months,a pro-rated annual bonus, and continued COBRA coverage for twelve months. If Mr. Dollar experiences a Change in Control Termination, he is entitled to receive a multiple of one times his base salary plus target bonus opportunity, COBRA coverage for twelve months, and the equity acceleration described above.
Georgina Wraight
Ms. Wraight’s employment agreement governs the terms and conditions of her employment as our Senior Vice President and President, Global Prescription Management. Ms. Wraight’s employment agreement entitles her to an annual base salary of $400,001 and an annual target bonus opportunity, which for 2019 equals 60% of Ms. Wraight’s annual base salary. Ms. Wraight’s initial grant under our long-term incentive equity plan was equal to $600,000. If Ms. Wraight is terminated by us without cause or resigns for good reason (which includesnon-renewal of the employment term by us), Ms. Wraight is entitled to receive continued base salary for twelve months,a pro-rated annual bonus, and continued COBRA coverage for twelve months. If Ms. Wraight experiences a Change in Control Termination, she is entitled to receive a multiple of one times her base salary plus target bonus opportunity, COBRA coverage for twelve months, and the equity acceleration described above.
Terms Applicable to All Employment Agreements with NEOs
The employment agreements described above contain restrictive covenants pursuant to which the named executive officers have agreed to refrain from competing with us or soliciting our employees or customers fora 12-month period following the executive’s termination of employment.
Payments and benefits under the employment agreements are reduced to the maximum amount that does not trigger the excise tax under Code sections 280G and 4999 unless the named executive officer would be better off (onan after-tax basis) if the named executive officer received all payments and benefits and paid all excise and income taxes.
For purposes of the employment agreements:
“cause” generally means, subject to certain notice requirements and cure rights, the executive’s: (i) knowing and material dishonesty or fraud committed in connection with the executive’s employment; (ii) theft, misappropriation or embezzlement of our funds; (iii) repeatedly negligently performing or repeatedly negligently failing to perform, or willfully refusing to perform, the executive’s duties to us (other than a failure resulting from the executive’s incapacity due to physical or mental illness); (iv) conviction of or a plea of guilty or nolo contendere to any felony, a crime involving fraud or misrepresentation, or any other crime (whether or not connected with the executive’s employment) the effect of which is likely to adversely affect us or our affiliates; (v) material breach of any of the provisions or covenants set forth in the employment agreement; or (vi) a material breach of our Code of Business Conduct and Ethics for Employees, Executive Officers and Directors.
“good reason” generally means, subject to certain notice requirements and cure rights, (i) material diminution of the executive’s authority, duties or responsibilities; (ii) a relocation of our offices at which the executive is principally employed to a location more than fifty miles from the location of such offices immediately prior to the relocation; (iii) a material diminution in the executive’s basesalary; (iv) non-renewal of the employment agreement; or (v) any action or inaction that constitutes a material breach by us of a material provision of the employment agreement.
“change in control” has the meaning set forth in our 2019 Plan.
Annual Incentive Plan
Our Compensation Committee has adopted the Covetrus Annual Incentive Plan, or the AIP. 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 ofpre-determined corporate and individual performance goals, as applicable.
Our Compensation Committee designates participants in the AIP for each performance period. Our Compensation Committee may establish corporate performance goals and individual performance goals for our named executive officers under the AIP. The Compensation Committee may subsequently adjust the performance goals to take into account such unanticipated circumstances or significant events as our Compensation Committee determines.
Each named executive officer’s incentive award opportunity is expressed as a target award level, which may be a percentage of annualized base salary or a set dollar amount. The incentive awards may be paid in cash or equity or any other form of consideration as determined by our Compensation Committee. Incentive awards, if any, are expected to be paid as soon as administratively practicable after the end of the performance period. Generally, our named executive officers will need to be actively employed on the date awards are paid to receive an award.
Our Compensation Committee is responsible for administering the AIP and has full discretionary authority under the AIP and the authority to take any actions it deems necessary or advisable in carrying out its duties thereunder, including delegating their authority under the AIP.
Potential Payments Upon Termination
Each of the employment agreements with our named executive officers provide for certain payments and benefits upon a separation from us. See “—Employment Agreements” above for details of the payments and benefits payable upon a separation.
Except as expressly set forth in the employment agreements with our named executive officers with respect to a Change in Control Termination, the consequences of a termination of employment upon any equity awards
granted to our named executive officers will be determined by our Compensation Committee as provided in the 2019 Plan and applicable award agreements.
Compensation Committee Interlocks and Insider Participation
None of the members of our Compensation Committee is or has at any time during the past year been one of our officers or employees. None of our executive officers currently serves or in the past year has served as a member of the board of directors or Compensation Committee of any entity that has one or more executive officers serving on our board of directors or Compensation Committee.
Compensation Committee Report
Our Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on such review and discussion, our Compensation Committee recommended to our Board that the Compensation Discussion and Analysis be included on this Form10-K for the Fiscal Year ended December 29, 2018.
Betsy Atkins, Chair
Deborah Ellinger
Edward McNamara
Ravi Sachdev
Benjamin Wolin
No compensation was paid to our Directors and Officers in the fiscal year ended December 29, 2018.
Item 12. Security Ownership |
The table below sets forth the beneficial ownership of our common stock as of March 15, 2019. As of March 15, 2019, approximately 111,338,881 shares of our common stock are issuedCertain Beneficial Owners and outstanding.
Management and Related Stockholder Matters
Plan Category | 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) | |||||||||||||||||
Equity compensation plans approved by common shareholders | 6,457,292 | $ | 15.58 | 19,206,998 | ||||||||||||||||
Equity compensation plans not approved by common shareholders | — | $ | — | — | ||||||||||||||||
(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. |
each of our named executive officers;
each of our directors;
all directors and executive officers as a group; and
each person known to beneficially own more than 5% of our common stock.
The amounts and percentages of shares beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days of the determination date, which in the case of the following table is March 15, 2019. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.
Unless otherwise indicated, the address for each person is c/o Covetrus, Inc., 7 Custom House Street, Portland, Maine 04101.
Name and Address of Beneficial Owner | Number of Shares Beneficially Owned | Percentage of Shares Beneficially Owned | ||||||
Named Executive Officers and Directors | ||||||||
Benjamin Shaw(1) | 1,432,631 | 1.3 | % | |||||
Christine T. Komola | — | * | ||||||
Francis Dirksmeier | — | * | ||||||
David Christopher Dollar | 14,012 | * | ||||||
Georgina Wraight(2) | 30,684 | * | ||||||
Betsy Atkins(3) | 157,047 | * | ||||||
Deborah G. Ellinger | — | * | ||||||
Sandra L. Helton | — | * | ||||||
Philip A. Laskawy | 1,058 | * | ||||||
Mark J. Manoff | — | * | ||||||
Edward M. McNamara(4) | 134,049 | * | ||||||
Steven Paladino(5) | 39,422 | * | ||||||
Ravi Sachdev | — | * | ||||||
David E. Shaw(6) | 2,147,115 | 1.9 | % | |||||
Benjamin Wolin | — | * | ||||||
All directors and executive officers as a group (22 persons)(7) | 4,240,541 | 3.8 | % | |||||
5% Stockholders: | ||||||||
CD&R VFC Holdings, L.P.(8) | 11,265,198 | 10.1 | % | |||||
Morgan Stanley Investment Management Inc.(9) | 8,721,692 | 7.8 | % | |||||
The Vanguard Group, Inc.(10) | 6,525,826 | 5.9 | % |
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Item 13. Certain Relationships and Related |
Indemnification Agreements
Pursuant to the terms of the Merger Agreement, we have agreed to indemnify (and maintain policies of directors’ and officers’ liability insurance for) certain parties, including all of our past and present directors or officers, for a period of at least six years following the Closing in respect of acts or omissions relating to the Transactions, and occurring at or priorDirector Independence
The employment agreements with our executive officers also include indemnification provisions pursuant to which we have agreed to indemnify each of these individuals against claims arising out of events or occurrences related to that individual’s service as an executive officer of Covetrus.
Promissory Note with Benjamin Shaw
In May 2016, Benjamin Shaw, Chief Executive Officer andCo-Founder of Vets First Choice, acquired restricted common stock of Vets First Choice pursuant to an award agreement under the 2010 Plan, which provides for the purchase of 292,179 shares of restricted common stock of Vets First Choice. As payment for the stock, Benjamin Shaw issued a promissory note to Vets First Choice in the principal amount of $452,877.45, with an interest rate of 1.5% per annum, and entered into a pledge agreement pursuant to which the shares of restricted common stock were pledged as collateral for the promissory note. Benjamin Shaw repaid all amounts due and payable under the promissory note, or approximately $470,679, on December 28, 2018.
Compensation and Employment Arrangements
Compensation and employment arrangements for our directors and named executive officers are described elsewhere in this Annual Report on Form10-K. See “Compensation of Directors” and “Executive Compensation.”
Material Contracts
Other than as disclosed in this Annual Report on Form10-K, there are no past, present or proposed material contracts, arrangements, understandings, relationships, negotiations or transactions between us and any of our affiliates.
Policies and Procedures for Related-Party Transactions
Our Board has approved policies and procedures with respect to the review and approval of certain transactions between us and Related Parties, which we refer to as our “Related-Party Transaction Policy.” The following is a summary of material provisions of our Related-Party Transaction Policy. Pursuant to the terms of our Related-Party Transaction Policy, any Related-Party Transaction (as defined below) will be required to be reported to the chair of the audit committee of our Board. The audit committee will then be required to review and decide whether to approve any such Related-Party Transaction.
For the purposes of our Related-Party Transaction Policy, a “Related-Party Transaction” is defined as a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we (including any of our subsidiaries) were, are or will be a participant and the amount involved exceeds $120,000, and in which any Related Party had, has or will have a direct or indirect interest.
For the purposes of our Related-Party Transaction Policy, a “Related Party” is defined as: any person who is, or at any time since the beginning of our last fiscal year was, a director or executive officer or a nominee to become a director; any person who is known to be the beneficial owner of more than five percent of our common stock; any immediate family member of any of the foregoing persons, including any child, stepchild, parent, stepparent, spouse, sibling,mother-in-law,father-in-law,son-in-law,daughter-in-law,brother-in-law orsister-in-law, and any person (other than a tenant or employee) sharing the household of any of the foregoing persons; and any firm, corporation or other entity in which any of the foregoing persons is a general partner or, for other ownership interests, a limited partner or other owner in which such person has a beneficial ownership interest of 10% or more.
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Covetrus, Inc. 2020 Form 10-K | 98 |
The Audit Committeepre-approves all auditing services, and permittednon-audit services (including the fees and terms thereof) to be performed by BDO USA, LLP, subject to the de minimis exception fornon-audit services that are approved by the Audit Committee prior to the completion
We regularly review the services and fees of our independent accountants. These services and fees are also reviewed by the Audit Committee on an annual basis. The aggregate fees billed for the fiscal years ended December 29, 2018 and December 30, 2017 for each of the following categories of services are as follows:
Fee Category | 2018 | 2017 | ||
Audit Fees | $1,985,000 | $1,835,000 | ||
Audited Related Fees | — | — | ||
Tax Fees | — | — | ||
All Other Fees | — | — | ||
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Total Fees | $1,985,000 | $1,835,000 | ||
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Audit Fees. Consist of aggregate fees for professional services provided in connection with the annual audit of our combined financial statements, the review of our quarterly condensed combined financial statements, consents and assistance with and review of documents filed with the SEC.
Audit-Related Fees. Consist of aggregate fees for accounting consultations and other services that were reasonably related to the performance of audits or reviews of our combined financial statements and were not reported above under “Audit Fees.”
Tax Fees. Consist of aggregate fees for tax compliance, tax advice and tax planning services including the review and preparation of our federal and state income tax returns.
All Other Fees. Consist of aggregate fees billed for products and services provided by the independent registered public accounting firm other than those fees disclosed above.
The Audit Committeepre-approved all services performed since thepre-approval policy was adopted.
Item 15. Exhibits and |
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For a list of the combined financial statements included herein, see Index on page 55 of this report.
2. Financial Statement Schedules.
All required information is included in the financial statements or notes thereto.
3. List of Exhibits.
See the Exhibit Index on the pages immediately preceding the signature page hereto.
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None
Exhibit Index
EXHIBIT INDEX
Page | ||||||||
(a) (1) | Financial Statements: See “Index to Consolidated and Combined Financial Statements” | |||||||
(a) (2) | 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. | |||||||
(a) (3) | Exhibits: |
Exhibit Number | Exhibit Description | Form | Date | No. | ||||||||||||||||||||||
2.1 | S-4 | 12/26/2018 | 2.1 | |||||||||||||||||||||||
2.2 | S-4 | 12/26/2018 | 2.2 | |||||||||||||||||||||||
2.3 | S-4 | 12/26/2018 | 2.3 | |||||||||||||||||||||||
2.4 | S-4 | 12/26/2018 | 2.4 | |||||||||||||||||||||||
2.5 | S-4 | 12/26/2018 | 2.5 | |||||||||||||||||||||||
2.6 | S-4/A | 1/15/2019 | 2.6 | |||||||||||||||||||||||
3.1 | S-4/A | 1/15/2019 | 3.4 | |||||||||||||||||||||||
3.2 | S-4/A | 1/8/2019 | 3.5 | |||||||||||||||||||||||
3.3 | 8-K | 5/19/2020 | 3.1 | |||||||||||||||||||||||
4.1 | S-4/A | 1/8/2019 | 4.1 | |||||||||||||||||||||||
4.2* | ||||||||||||||||||||||||||
10.1 | 8-K | 2/7/2019 | 10.1 | |||||||||||||||||||||||
10.2 | 8-K | 2/7/2019 | 10.2 | |||||||||||||||||||||||
10.3 | S-4 | 12/26/2018 | 10.1 | |||||||||||||||||||||||
10.4 | 8-K | 2/7/2019 | 10.4 | |||||||||||||||||||||||
10.5 | 8-K | 2/7/2019 | 10.5 |
Covetrus, Inc. 2020 Form 10-K | 99 |
Exhibit Number | Exhibit Description | Form | Date | No. | ||||||||||||||||||||||
10.6 | S-4/A | 1/8/2019 | 10.3 | |||||||||||||||||||||||
10.7 | 8-K | 2/7/2019 | 10.3 | |||||||||||||||||||||||
10.8† | S-4 | 12/26/2018 | 10.5 | |||||||||||||||||||||||
10.9† | S-4 | 12/26/2018 | 10.6 | |||||||||||||||||||||||
10.10† | S-4 | 12/26/2018 | 10.7 | |||||||||||||||||||||||
10.11† | S-4 | 12/26/2018 | 10.8 | |||||||||||||||||||||||
10.12† | S-4 | 12/26/2018 | 10.9 | |||||||||||||||||||||||
10.13† | S-4 | 12/26/2018 | 10.10 | |||||||||||||||||||||||
10.14† | S-4/A | 1/8/2019 | 10.11 | |||||||||||||||||||||||
10.19† | 8-K | 2/7/2019 | 10.12 | |||||||||||||||||||||||
10.20 | S-4 | 12/26/2018 | 10.16 | |||||||||||||||||||||||
10.21 | S-4 | 12/26/2018 | 10.17 | |||||||||||||||||||||||
10.22 | S-4 | 12/26/2018 | 10.18 | |||||||||||||||||||||||
10.23 | S-4 | 12/26/2018 | 10.19 | |||||||||||||||||||||||
10.24 | S-4 | 12/26/2018 | 10.20 | |||||||||||||||||||||||
10.25† | 8-K | 3/5/2019 | 10.7 | |||||||||||||||||||||||
10.26† | 8-K | 10/22/2019 | 10.1 | |||||||||||||||||||||||
10.27† | 8-K | 3/24/2020 | 10.1 | |||||||||||||||||||||||
10.28† | 8-K | 1/21/2020 | 10.1 | |||||||||||||||||||||||
10.29† | 10-Q | 11/10/2020 | 10.1 | |||||||||||||||||||||||
10.30† | 8-K/A | 6/30/2020 | 10.1 | |||||||||||||||||||||||
10.31† | 8-K | 1/21/2020 | 10.1 | |||||||||||||||||||||||
10.32† | 8-K | 1/21/2020 | 10.2 | |||||||||||||||||||||||
10.33 | 10-K | 3/3/2020 | 10.31 | |||||||||||||||||||||||
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100 |
Exhibit Number | Exhibit Description | Form | Date | No. | ||||||||||||||||||||||
10.34† | 8-K/A | 2/2/2020 | 10.1 | |||||||||||||||||||||||
10.35 | 8-K | 5/1/2020 | 10.1 | |||||||||||||||||||||||
10.36 | 8-K | 5/19/2020 | 10.1 | |||||||||||||||||||||||
21.1* | ||||||||||||||||||||||||||
23.1* | ||||||||||||||||||||||||||
31.1* | ||||||||||||||||||||||||||
31.2* | ||||||||||||||||||||||||||
32.1** | ||||||||||||||||||||||||||
32.2** | ||||||||||||||||||||||||||
101.INS* | XBRL Instance Document | |||||||||||||||||||||||||
101.SCH* | XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||||||||
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||||||||||||||
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||||||||||||||
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||||||||||||||
104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document. | |||||||||||||||||||||||||
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COVETRUS, INC. | ||||||||||||||
Date: March | By: | /s/ Benjamin | ||||||||||||
Benjamin Wolin President and Chief Executive Officer |
Name | Title | Date | ||||||||||||
/s/ Benjamin
| President, Chief Executive Officer and Director
| March | ||||||||||||
Benjamin Wolin | ||||||||||||||
/s/
| Executive Vice President and Chief Financial Officer
| March | ||||||||||||
Matthew Foulston | ||||||||||||||
/s/
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| March | ||||||||||||
Laura J. Phillips | ||||||||||||||
/s/ Philip A. Laskawy | Chairman of the Board and Director | March 1, 2021 | ||||||||||||
Philip A. Laskawy | ||||||||||||||
/s/ Deborah G. Ellinger | Director | March 1, 2021 | ||||||||||||
Deborah G. Ellinger | ||||||||||||||
/s/
| Director | March | ||||||||||||
Sandra L. Helton | ||||||||||||||
/s/
| Director | March | ||||||||||||
Mark J. Manoff | ||||||||||||||
/s/
| Director | March | ||||||||||||
Edward M. McNamara | ||||||||||||||
/s/
| Director | March | ||||||||||||
Steven Paladino | ||||||||||||||
/s/
| Director | March | ||||||||||||
Sandra E. Peterson | ||||||||||||||
/s/ Ravi Sachdev | Director | March 1, 2021 | ||||||||||||
Ravi Sachdev | ||||||||||||||
/s/
| Director | March | ||||||||||||
Sharon Wienbar |
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