UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___ ________________________
FORM 10-K

___________________________
☒

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 29, 2018

OR

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

31, 2020

Commission file number001-38794

_________________________
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COVETRUS, INC.

(Exact name of registrant as specified in its charter)

___________________________
Delaware83-1448706
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)(I.R.S. Employer Identification No.)


7 Custom House Street

Portland, ME 04101

(Address of principal executive offices)

(Zip Code)


(888)280-2221

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

___________________________
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Exchange on Which Registered

Common Stock, par value $0.01 per shareThe Nasdaq Stock Market LLC
(Nasdaq Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of 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.

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.  ☐

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.

COVETRUS, INC.

ANNUAL REPORT ON FORM10-K

For the Year Ended December 29, 2018

Table of Contents

Title of Each ClassTicker SymbolPage No.Name of Exchange on Which Registered

PART I

Common Stock, par value $0.01 per share		CVET2Nasdaq 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.YesxNoo
Item 1.

Business

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yeso2Nox
Item 1A.

Risk Factors

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.Yesx13Noo
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).YesxNoo
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.

The registrant had 136,225,089 shares of common stock outstanding as of February 19, 2021.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for use in connection with the 2021 Annual Meeting of Shareholders (our “2021 Proxy Statement”), are incorporated by reference into Part III of this report.

Table of Contents

COVETRUS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2020
TABLE OF CONTENTS
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Item 5.

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Item 10.

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10-K Summary101

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SIGNATURES

Covetrus, Inc. 2020 Form 10-K		1182

EXPLANATORY NOTE

Table of Contents

Explanatory Note

As previously disclosed, effective February 7, 2019, Direct Vet Marketing, Inc. (d/b/a Vets First Choice) (“Vets First Choice”) became a wholly ownedwholly-owned subsidiary of Covetrus, Inc. (f/k/a HS Spinco, Inc.) (“Covetrus” or the “Company”), a company formed by Henry Schein, Inc. (“Henry Schein” or “Former Parent”) in connection with the spin-off and combination with Vets First Choice andof the animal healthanimal-health business of Henry Schein (the “Animal Health Business”) and combination with Vets First Choice (collectively, the “Transactions”). Covetrus common stock began regular-way trading under the symbol “CVET” on the Nasdaq Global Select Stock Market on February 8, 2019.

This Annual Report on Form 10-K is for the period ended December 29, 2018 and, except


Except as otherwise specifically noted, herein, the combined financial statements and other financial information set forth herein only relatesfor the fiscal years ended December 29, 2018 relate to the Animal Health Business, as of and for the three fiscal years ended December 31, 2016, December 30, 2017 and December 29, 2018, whichthese periods predate the February 7, 2019 effective date of the previously disclosed merger transaction involvingacquisition of Vets First Choice. This Annual Report on Form 10-K (“Form 10-K” or “Report”) does not include the historical financial results of Vets First Choice for any periods,the fiscal year ended December 29, 2018 and it does not include any pro forma financial statements of Covetrus.


Beginning with the Quarterly Report on Form 10-Q for the quarter endingended March 31, 2019, Covetrus will reportbegan reporting on a consolidated basis, representing the combined operations of the Animal Health Business and Vets First Choice and their respective subsidiaries. Because the Animal Health Business is deemed the acquirer in this combination for accounting purposes under U.S. Generally Accepted Accounting Principles (“GAAP”), the Animal Health Business is considered Covetrus’ predecessor, and the historical combined financial statements of the Animal Health Business prior to February 7, 2019 will behave been reflected in Covetrus’ future quarterly reports and annual reportsthis Form 10-K for the year ended December 31, 2020 as Covetrus’ historical financial statements.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual


The terms “Covetrus,” “Company,” “we,” “our,” “us,” or “ourselves” included in this Report on Form10-K,mean Covetrus, Inc. and its consolidated subsidiaries, collectively.

Rounding adjustments applied to individual numbers and percentages shown in this Report may result in these figures differing immaterially from their absolute values, and tables may not foot or cross foot.

Forward-looking Statements

Certain matters discussed in this Annual Report, containsincluding the information presented in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain statements, estimates, and projections that are “forward-looking statements” as defined under U.S. federal securities laws. These forward-looking statements, withinwhich include statements regarding our business strategy, our expenses and sufficiency of cash, seasonality, deployment of our platform outside the meaningUnited States, and the timing and impact of Section 27A of the Securities Act of 1933, as amended,business transactions, involve substantial risks and Section 21E of the Securities Exchange Act of 1934, as amended,uncertainties and is subject to the “safe harbor” created by those sections. Any statements aboutinclude, without limitation, risks regarding our industry, business strategy, plans, goals, and our expectations beliefs, plans, objectives, assumptionsconcerning our market position, accounting pronouncements, litigation, seasonality of our business, leases, expenses, interest expense and debt, and sufficiency of cash. When used in this Report, the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “future,” and the negative of these or similar terms and phrases are intended to identify forward-looking statements. Except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or performanceotherwise.

These forward-looking statements reflect our current expectations regarding future events, results, or outcomes. Although we believe the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. These expectations may or may not historical facts andbe realized. Some of these expectations may be forward-looking. Somebased upon assumptions, data, or judgments that prove to be incorrect. Actual events, results, and outcomes may differ materially from our expectations due to a variety of theknown and unknown risks, uncertainties, and other factors. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements can be identified by the use of forward-looking terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “likely,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms includeforward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements regardingthose described in this Form 10-K in Part I, Item 1A, Risk Factors.

We operate in a very competitive and rapidly changing market. New risks emerge from time to time, and it is not possible for our expectations regarding our abilitymanagement to realize anticipated revenue growth opportunities, expectations regarding our personnel, strategy and commercial sales, anticipated expenses, the sufficiency of cash, andpredict all risks, nor can we assess the impact of accounting pronouncements. We cannot guarantee future results, levels of activity, performance or achievements, and you should not place undue relianceall factors on our forward-looking statements. Ourbusiness or the extent to which any factor, or combination of factors, may cause actual results mayto differ significantlymaterially from the results discussedthose contained in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those set forth in “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K. Except as may be required by law, we have no plans to update ourany forward-looking statements to reflect events or circumstances after the datewe may make.
Covetrus, Inc. 2020 Form 10-K3
Table of this Annual Report on Form 10-K. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.

Unless the content requires otherwise, references to “Covetrus,” “the Company,” “we,” “our,” and “us,” in this Annual Report on Form 10-K refer to Covetrus, Inc. and its subsidiaries.

Contents


PART I

Item 1.

Business

Item 1.    Business

Overview


We were incorporated in Delaware in April 2018 as a wholly-owned subsidiary of our Former Parent under the name HS Spinco, Inc., and subsequently changed our name to Covetrus, Inc. We are a global technology-enabled animal health business with a comprehensive serviceanimal-health technology and technology platform and supply chain infrastructureservices company dedicated to supporting the companion, equine, and large animallarge-animal veterinary markets. Our mission is to provide the best products, services, and technology to veterinarians and animal-health practitioners (“Customers”) across the globe, so they can deliver exceptional care to their patients (“Animal Owners”) when and where it is needed.

Segments

We havemanage our organization geographically in three reportable segments: (i) North America, (ii) Europe, and (iii) Asia Pacific (APAC) & Emerging Markets. Historically, the business was focused on driving growth through specific product and service offerings to our Customers; the Transactions allow us to bring together the different products and service offerings, along with prescription management, data analytics, and insights through veterinary practice management software, into one multi-channel veterinary platform. We will continue to focus on delivering this platform of products and services to our Customers on a geographical basis. We disaggregate our Net sales based on our major product categories: supply chain services, software services, and prescription management. See below, Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Segments, Note 5 - Revenue from Contracts with Customers, and Note 20 - Segment Data.
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Evolution of Covetrus

•Separation. In anticipation of the spin-off, affiliates of Covetrus purchased from certain minority holders their ownership interests in the applicable operating companies of the Animal Health Business. On February 7, 2019, Henry Schein completed the spin-off of its Animal Health Business and transferred the applicable assets, liabilities, and ownership interests to us (the “Separation”)
•Share Sale. Also, on February 7, 2019 and prior to the Distribution, we sold $361 million in shares to accredited institutional investors (the “Share Sale”). The proceeds from the Share Sale were paid to us and distributed to our Former Parent
•Distribution. All the shares of our common stock that were then owned by Henry Schein were distributed to its stockholders of record as of January 17, 2019 (the “Distribution”). Concurrent with the Distribution, we paid a cash
Covetrus, Inc. 2020 Form 10-K4
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dividend of $1.2 billion to our Former Parent from loan proceeds from our newly established credit facility (see Note9 - Long-Term Debt and Other Borrowings, Net)
•Acquisition. We then acquired Vets First Choice in an all-stock transaction (the “Acquisition”), and the following day, our shares began trading on the Nasdaq Global Select Market under the symbol “CVET”

Through this Acquisition, we combined the complementary capabilities of the animal health businesses previously operated by Henry Schein, Inc., or the Animal Health Business and Direct Vet Marketing, Inc. (d/b/a Vets First Choice), or Vets First Choice, bringing together leadinginnovative practice management software and supply chain and distribution businesses with a technology-enabled prescription management platform approach based on technology-driven insights, designed to promote connectivity between veterinarians and owners of pets, horses or large animals who purchase products or services from veterinarians, whom we refer to as Clients. Linking the power of insight and analytics, client engagement, practice management software and supply chain expertise into a multi-channel platform, werelated pharmacy services. We believe our innovative approach to the market will support the delivery of improved veterinary care and the health of our customers' veterinary practices while driving increased demand for our products and services.

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 Our Strategy as discussed below, prioritizes providing our supply chain expertise, specialty pharmacy services, innovative solutions to chronic care disease management, veterinarycompounding services, practice management software (PIMS), and client communication tools. Further, as a global company focused solely on animal health with a multi-channel strategy, we seekthe prescription management platform, all through the Covetrus platform. We have been taking steps to leverage our decades-long experience within the veterinary channel with a differentiated value proposition by increasing innovation, providing a more comprehensive setenable this level of integrated services, improving the experience and engagement of Clients and of the people and entities that purchase products and services from us, whom we refer to as Customers, and driving cost-effectiveness through efficient delivery of next-generation solutions.

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:


2019
The Acquisition brought together the fiscal year ended December 29, 2018 were approximately $4.0 billion.

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:


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Also, in 2019:
•We made progress establishing a corporate infrastructure, including the people and the technology, necessary to support finance, human resources, information technology, and legal capabilities, among other functions, including exiting 18 transition service agreements (“TSAs”) in 2019

•We made significant investments in our website is not incorporated in, and does not form a part of, this report.

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 had early success in cross-selling and penetrating our existing supply chain services Customer base with our prescription management platform, delivering an increased number of enrollments on this platform, and increasing growth in our specialty-pharmacy and compounded-medications businesses

•We experienced further adoption of our proprietary and Covetrus-branded products and solutions inside our existing customer base as our integration efforts continued

2020
In connection with our strategic focus for 2020, we made advancements in streamlining our business through the following initiatives:

In January 2020, we aligned our software services with our prescription management platform and related pharmacy services to create our “Global Technology Solutions” business which reflects the “voice of our Customers” throughout our suite of products, which includes solutions for practice management, client communications, and prescription management. This alignment focused the streamlining within our software services offerings and value-added solutions andthe integration of those services within the prescription management platform.

In December 2020, we announced the combination of the Animal Health Businesscommercial organizations of our supply chain services and Global Technology Solutions in North America to provide one face to our Customers. This alignment of our organizations was particularly impactful in North America where the prescription management platform provided by Vets First Choice.

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

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markets as well. Our expectation of the world’s largestfuture state of the technology experience on the Covetrus platform may include the potential for improved inventory management, streamlined technology solutions, support for prescription compliance, simplified Animal Owner engagement, and customizable views to leverage veterinary practice insights for success.

Mergers, Acquisitions, and Divestitures

Our future success will largely depend on our ability to grow and adapt to the changes in the veterinary market. We expect to focus our deals strategy for 2021 and beyond on the faster-paced growth and higher margin areas of our business. Currently, these areas are our prescription management platform, Covetrus-branded and proprietary-branded products, compounding services, and software services.

Equity Method Investments

In April 2020, we completed the previously announced combination of our subsidiary, Spain Animal Health Solutions S.L.U. (“SAHS”), with Distrivet, S.A. to form a leading animal-health provider on the Iberian Peninsula called Distrivet, a Covetrus company (“Distrivet”). See Note 4 - Divestitures and Equity Method Investments.

Acquisitions

In October 2020, we announced a strategic investment in Veterinary Study Groups, Inc. ("VSG") which was consolidated during the fourth quarter of 2020. This relationship brings together two highly complementary organizations each dedicated to veterinary practices and committed to driving enhanced patient care, empowering veterinarians to run better businesses, and advocating for the veterinary profession. This investment is an opportunity to accelerate our strategic initiative on driving increased customer alignment. See Note 3 - Business Acquisitions.

Divestitures

In April 2020, we completed the divestiture of our scil animal-care business (“scil”) to Heska Corporation (“Heska”) for approximately $100 million, net of deal-related fees and other transaction items. See Note 4 - Divestitures and Equity Method Investments.

During the third quarter of 2020, we announced a managed exit of the operations of our French distribution business specializing in medicines, pet food, equipment, and services for veterinary clinics. See Note 4 - Divestitures and Equity Method Investments.

Our Products and Services

Our revenue from our product and service offerings is generated from our major product categories: supply chain technologyservices, software services, and software providers toprescription management. Included below are also certain of the animal health market, with leading positions in North America, Europeavailable products and Australasia and growing businesses in South America and Asia. We utilize a multi-channel approach centered primarily on promoting veterinarians as the source of clinical expertise that benefits animals and the people that care for them. We serve 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.

services:


Supply Chain Services
We offer a comprehensive portfolio of products and services and value-added solutions for enhancing practice revenue, operating efficient practices, and delivering high-quality care. We sell and distribute pharmaceuticals, nutrition products, consumable products, diagnostic tests, small and large equipment, laboratory products and surgical products, among others. Our portfolio includes a large selection of products, including products sold under our proprietary brands. Our business was developed over a period of 20 years through a combination of organic growth and acquisitions of more than 30 companies.

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.


Software Services

We offer technology solutionsdevelop, provide, and services, includingsupport veterinary practices with a wide range of veterinary software systems. This includes practice management software, data-driven applications, client communications tools, and related services. We support, developservices, which are designed to increase staff efficiency and improve business health, allowing the veterinarian more time to provide veterinary practices with a wide range of veterinary software systems, including AVImark, eVetPractice, ImproMed and ImproMed Equine in North America; and Robovet, RxWorks and VisionVPM in the United Kingdom, Australia and New Zealand.patient care. We also 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.

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

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relationship and improving Animal Owners' loyalty. Our payment solutions also help veterinarians save time and money with credit card processing services, which we offer value-added servicesbuild into our veterinary software systems to our more than 20,000streamline workflow.

Prescription Management
Our prescription management platform, which integrates into veterinary practice management software Customers worldwide.

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.


Our Customers can access our accredited veterinary pharmacies to fulfill compounded, specialty, back-ordered, patient-specific customized medications, and in-clinic use medications through our prescription management platform. As discussed above, our strategic development includes investing in the prescription management platform and our high margin custom compounding services. We are growing our pharmacy presence in the U.S. to build the infrastructure necessary to support that growth. See Distribution Centers and Pharmacies below.

Through our integrated product and service offerings available on our prescription management platform, we seek to enable our veterinarian Customers to manage the lifecycle of a prescription to create new revenue opportunities, adapt to changing Pet Owneranimal-owner purchasing behaviors, enhanceand strengthen their Clientclient relationships through convenience of our e-commerce, auto-ship services, and access to accredited veterinary pharmacies for standard prescriptions, preventatives, diets, and custom-compounded medications. These products and services ultimately allow our Customers to improve the quality of animal care they provide.

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.

provided.

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 ServicesSoftware ServicesPrescription ManagementEliminationsTotal
North America$1,969 $78 $406 $(76)$2,377 
Europe1,574 10 — (13)1,571 
APAC & Emerging Markets394 8 — — 402 
Eliminations(11)— — — (11)
Total Net sales$3,926 $96 $406 $(89)$4,339 

Year Ended December 31, 2019
Supply Chain ServicesSoftware ServicesPrescription ManagementEliminationsTotal
North America$1,816 $82 $246 $(33)$2,111 
Europe1,513 10 — (14)1,509 
APAC & Emerging Markets361 7 — — 368 
Eliminations(12)— — — (12)
Total Net sales$3,678 $99 $246 $(47)$3,976 

Year Ended December 29, 2018
Supply Chain ServicesSoftware ServicesPrescription ManagementEliminationsTotal
North America$1,858 $83 $— $(2)$1,939 
Europe1,462 11 — (10)1,463 
APAC & Emerging Markets380 7 — — 387 
Eliminations(11)— — — (11)
Total Net sales$3,689 $101 $— $(12)$3,778 

Covetrus, Inc. 2020 Form 10-K7
Table of the veterinary practices and the veterinarian-client relationship.

Contents

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:

•

Leverage the scale, reach and infrastructure of the Animal Health Business network to accelerate the adoption of our prescription management platform. We plan to use our combined sales and account management organization of over 1,200 sales professionals to drive adoption of our prescription management platform by Customers of the Animal Health Business.

•

Increase sales to our existing Customers. We will focus on our Customers’ needs and seek to provide differentiated offerings and coordinated approaches. Further, we plan to cross-sell the products and services offered by the Animal Health Business and our prescription management platform to increase net sales.

•

Drive category growth. We expect to expand the existing served market by leveraging our medical compliance insights and innovation. We plan to deploy our comprehensive platform to help identify and narrow gaps in care through proactive prescription management.

•

Develop advanced insight and analytics and software. We believe that by positioning ourselves as the veterinary practice digital partner of choice, we can deliver insight and analytics that help veterinarians leverage technology in their practices and address changing Client expectations. We plan to continue developing a cohesive, cloud-enabled IT infrastructure and practice management solutions.

•

Enhance Customer and Client relationships. We plan to strengthen our value proposition offered to independent veterinary and corporate accounts in a consolidating industry landscape by leveraging our supply-chain expertise, proprietary technology-enabled solutions and innovation pipeline.

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


Our Customercustomer base is comprised principally of animal healthanimal-health and veterinary practices and clinics in the companion animalcompanion-animal, equine, and equinelarge-animal markets in North America, Europe, and Australasia.APAC & Emerging Markets. These veterinary practices consist of both small, privately owned businesses and an increasing number of consolidated, corporate-owned practices. We also serve animal healthanimal-health providers and producers and pet specialty retail stores. Our major product categories service customers in the large animal market.

following markets:

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

•Software services customers in the United States, more than 45,000 Customers in Europe (of which a large majority are veterinary practices) and a significant number of veterinary practices in Australia);

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.

U.S

Our Competitors

The market for providing products, services


Distribution Centers and technologyPharmacies

As of December 31, 2020, we own or lease the following properties which are integral to the global animal health industry is highly competitive and fragmented. Our principal competitors include:

•

Animal Health Divisions of Traditional Distribution Companies: the MWI Animal Health division of AmerisourceBergen and the Patterson Veterinary division of Patterson Companies, Inc.;

•

Animal Health Focused Companies: national, regional, local and online distributors and technology vendors, as well as manufacturers of animal health products that sell directly to veterinary practices and retailers; and

•

Practice Management Service Providers: IDEXX Laboratories, Inc. and a number of regional and local competitors.

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.


•Warehouses: 41 globally
•Offices: 65 globally
•Pharmacies: 4(a) in the U.S.
(a) Excluding Atlas Pharmaceuticals, an outsourcing facility

Sales and marketing

Marketing


Our team includes over 1,200 sales consultants, who facilitate order processing, generateand marketing teams are focused on (i) generating new sales through direct and frequent contactcommunication with Customers, staycustomers and Animal Owners, (ii) facilitating order processing, (iii) staying abreast of marketmarketing developments, and educate(iv) educating practice personnel regarding the hundreds of new products, services, and technologies introduced each year.

Our sales and marketing efforts are designed to establishfocused in the following areas:
•Establish and solidify Customercustomer relationships through personal visits by field sales representatives and telesales contact. We have also developedcontact from our inside sales and marketing capabilities aimed at expandingteam
•Use of our network of veterinary practice Customers and our relationships with pharmaceutical manufacturers. Our platform has a direct sales force, which we augment through our channel partners and other marketing initiatives.

initiatives

•Expanding our relationships with strategic accounts and pharmaceutical manufacturers

Effective January 1, 2021, we aligned our North America segment commercial organizations to drive increased strategic alignment between our customers and our full scope of products and capabilities available to those customers. The new structure brings together our North America segment commercial teams under unified leadership to maximize account management and support for our Customers’ businesses. We also changed our sales compensation structure in North America to better align with our strategic goals. This change also unlocks resources for our Global Technology Solutions team to focus on executing on our technology roadmap, including new software, e-commerce enhancements, and bringing our prescription management platform to new geographies in 2021 and beyond.

COVID-19 and Our Return to Work

To protect the health and safety of our employees, we implemented workplace regulations and guidelines recommended from government and public health authorities related to COVID-19. This includes frequent washing of hands, daily disinfecting of workspaces, and limiting non-essential travel. For employees who recently traveled to affected areas, a two-week quarantine is required prior to returning to work. In our pharmacies, it has been our standard practice to strictly comply with United States Pharmacopeia regulations on the use and application of personal protective equipment by all staff. In March 2020, we transitioned a large portion of our teams to working remotely and implemented staggered schedules in our distribution facilities. In October 2020, we issued internal guidance on the expected return to work in July 2021 for our North America workforce that is currently operating remotely. Outside of North America, we adhere to the regulations and guidelines instituted by local authorities in our area of operations and make judgments with the best available information at the time. We created a COVID-19 information portal on our intranet that provides best practices for working at home and staying connected, communications from our leadership, internal contacts for any COVID-19 questions, and helpful external reference links.

Covetrus, Inc. 2020 Form 10-K8
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We also assembled three cross-functional task forces that actively monitor our return-to-work guidelines. These task forces are global and their goal is to maintain a comprehensive plan of best practices for our essential facilities such as distribution centers and pharmacies and establish protocols for field-based employees to return to customer sites and for us to re-open our offices to safely accommodate more office-based employees.

Our return to work plan addresses four main areas:
•Health & Safety - create work schedules and rotations, use of personal protective equipment, and provide protocols for employee health screening, sick notifications, on-site visitors, and more
•Operations - deploy best practices and guidance for employee workspace reconfiguration required to support social distancing, cleaning protocols, training, and compliance management
•Commercial - enable and support field-based employees to make customer visits by establishing safety guidelines and strategies for our field sales teams
•Communications - communicate updates of employee-related policies and provide materials, onsite signage, and employee training on updated safety protocols and policies

We will continue to actively monitor how COVID-19 is impacting us and may take further actions to alter our business operations in the best interests of our employees, customers, partners, suppliers, and other stakeholders, or as required by federal, state, or local authorities.

Our Strategy

Our current three-year strategic plan prioritizes the following:

202020212022
StreamlineSynchronizeAccelerate
cvet-20201231_g6.jpg
cvet-20201231_g7.jpg
cvet-20201231_g8.jpg
Focus
Our Business
Harmonize
Our Capabilities
Expand
Our Offering

As a recently-formed and publicly listed company, we prioritized what we believe were the necessary building blocks to our independent operations and future success: (i)establishing reliable worldwide Customer support alongside a planned elimination of our reliance on our TSAs with our Former Parent, (ii) increasing coordination across our business units and technology capabilities as we phase-in our global integration efforts, and (iii) strengthening our capabilities so that we will be able to penetrate our Customer base across our various markets to tap into growth opportunities. In 2020, we made the following streamlining steps:

Focus
•Exited all of the remaining TSAs we had with our Former Parent

•Leveraged shared services to maximize efficiency and enhanced career development

•Integrated our software services and prescription management major product groups into Global Technology Solutions. We made significant investments in our portfolio of software services and technology-enabled prescription management platform that improved customer service and workflow and delivered deeper integration and coordination between our prescription management and software services businesses

•Combined our North American commercial organizations to provide “one face to our customer”

•Instituted broad-based cost containment measures and spending discipline to adapt to the changing COVID-19 economic environment
Covetrus, Inc. 2020 Form 10-K9
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Team
•Onboarded several more leaders with experience in driving growth and transformation to increase coordination across our business units and technology capabilities as we phase-in our global integration efforts and tap into growth opportunities

•Created a global diversity, equity, and inclusion program

•Launched the Covetrus hardship fund to help our colleagues with COVID-19 illness-related hardship

Differentiate
•Launched telemedicine at a critical moment for our customers

•Offered new Customer and Animal Owner strategies on our prescription management platform to help veterinary practices drive growth, improve clinical care and compliance, deter competition from alternative channels, as well as capitalize on COVID-19 industry changes

•Invested in Veterinary Study Groups (“VSG”) to strengthen customer relationships. This investment is expected to improve our scale, offer new avenues for driving our proprietary products and solutions, and enhance our overall growth and margin profile

Globalize
•Centralized our direct and indirect sourcing initiatives to coordinate purchasing activity and leverage our global scale

•We combined our Spanish and Portuguese supply chain and distribution businesses with Distrivet, to create a business with broader reach (Distrivet, a Covetrus company)

•Launched the framework for globalizing our prescription management platform (part of our Covetrus platform)

As we continue to expand on our accomplishments, our priorities entering 2021 are centered on driving improved outcomes and a differentiated value proposition for our stakeholders and delivering profitable growth through the increased adoption and utilization of our higher margin services, including: (i) growing our Covetrus-branded and proprietary products, (ii) sustaining our momentum in prescription management, and (iii) adding more resources to our compounding business. Executing against these will enable us to continue to invest in our product roadmap and bring our prescription management platform to new global markets in 2021 and beyond. 2021 is our year to synchronize.

Covetrus, Inc. 2020 Form 10-K10
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Synchronizing
with
Veterinarians and Animal Health PractitionersManufacturers and SuppliersAnimal OwnersOur Team
cvet-20201231_g9.jpg
cvet-20201231_g10.jpg
cvet-20201231_g11.jpg
cvet-20201231_g12.jpg
•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

Our Team
As of December 31, 2020, our global workforce was comprised of 5,657 employees (5,275 full-time employees and 382 part-time employees). Our employee base extends to 22 countries. Women represented 50% of our global workforce as of December 31, 2020. Additionally, 40% of the members of our Board of Directors were women.

We are committed to attracting, developing, and retaining the best talent globally. Our strategy is centered around our commitment to build a strong culture and teams, attract and retain the best talent, enable scale, effectiveness, and efficiency, and maintain the right capabilities and talent to drive business success.

Our culture is driven by our core values: Do Good, Never Settle, Give Power, Be Passionate, and Share the Customer Goal

These values drive our commitment to and investment in our people in the following ways:

•We created a global diversity, equity, and inclusion program, which includes a global advisory board and a number of global, business unit, and regional diversity and inclusion leads dedicated to driving our commitments and strategic focus areas as well as to ensure local support. The executive sponsors of program are Sharon Wienbar (member of our Board of Directors) and Ben Wolin (President and Chief Executive Officer). Our five diversity and inclusion commitments to drive lasting change within five years are:

Diversity-focused recruitment
Goal: employ a diverse workforce that is demographically reflective of our society
Diversify the animal-health industry
Goal: do good by changing both Covetrus and the industry
Employee education and training
Goal: foster diversity and inclusion for all employees at all levels
Inclusion & employee resource groups
Goal: create a workplace of inclusion and belonging
Transparency
Goal: capture data and be publicly accountable for a more diverse workforce
Covetrus, Inc. 2020 Form 10-K11
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•In 2020, we launched a global employee development program designed to build capabilities and accelerate transformation. Nearly 5,000 employees were enrolled in our 10-month virtual academy, which included digital lessons, team-based action planning, and peer-to-peer coaching

•We are actively engaged in monitoring and improving our organization health to empower our employees to have a voice and connect to our common goals. Our goal is to be a top talent destination by the end of 2021

•COVID-19 specific:
◦For employees who continued to work on site, we took deliberate measures to ensure safety in the workplace, from extra sanitation, issuing of personal protective equipment, employee training, and implementation of social distancing requirements
◦In August of 2020, with our focus on our team, retaining our hardworking talent, and the knowledge of how COVID-19 may be affecting team members in their personal lives, we launched the Covetrus Hardship Fund to help our colleagues with COVID-19 illness-related hardship

We believe we maintain positive relations with our employees. In certain countries, we are bound by union agreements negotiated by the employer's association with the respective union representatives. We are also party to shop agreements on workplace-related issues, negotiated with works councils at individual facilities that relate to those facilities.

Our Competition

The market for providing products, services, and technology to the global animal-health industry is highly competitive and fragmented. Competitive factors include price, product offerings, value-added services, service and delivery levels, credit terms, and customer support. Substantially all of the products we sell are available to Customers from a number of distributors, manufacturers and suppliers and, increasingly, some are being sold directly to Animal Owners and, as a result, significant price reductions by our competitors or changes in how products are ultimately procured by Animal Owners could result in competitive harm.

Our principal competitors include:

•Animal Health Divisions of Traditional Distribution Companies: the MWI Animal Health division of AmerisourceBergen Corporation and the Patterson Veterinary division of Patterson Companies, Inc.

•Animal Health-focused Companies:national, regional, and local full-service distributors, online commerce such as Amazon.com, Inc. and zooplus AG, retail and online pharmacy providers such as Chewy, Inc., PetMed Express, Inc., and Strategic Pharmaceutical Solutions, Inc. (d/b/a Vetsource), as well as manufacturers of animal-health products that sell directly to veterinary practices and retailers, thereby eliminating or reducing the role of distribution

•Practice Management Service Providers: IDEXX Laboratories, Inc. and several regional and local veterinary software vendors, including those offering cloud-based solutions

Additionally, the growth in online and brick-and-mortar retailers offering certain animal-health products and services directly to Animal Owners continues to impact our Customers and, in turn, our business given our strategic alignment with the veterinary community. COVID-19 has accelerated this trend. Our operating results may be materially adversely affected should this trend continue.

Our Competitive Strengths

We believe we are well situated within the markets in which we compete. We expect that our comprehensive and integrated multi-channel capabilities that are focused on empowering animal care givers, providing expertise, and delivering on a global scale will allow us to maintain and strengthen existing Customer relationships, win new business, and unlock new demand and access additional revenue opportunities while addressing the evolving needs of our Customers, Animal Owners, and our manufacturing partners.

Covetrus, Inc. 2020 Form 10-K12
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Seasonality

Our quarterly sales and operating results have varied from period to period in the past and will likely continue to do so in the future. In the companion-animal market, sales of parasite protection products have historically tended to be stronger during the spring and summer months, primarily due to an increase in vector-borne diseases during that time, which correlates with our second and third quarters given that most of our business is in the northern hemisphere. Parasite protection products represented 22% of our global Net sales in 2020. Buying patterns can also be affected by manufacturers’ and distributors’ marketing programs or price increase announcements, which can cause veterinarians to purchase animal-health products earlier than when those products are needed. This kind of early purchasing may reduce our sales in the quarters these purchases would have otherwise been made. The sales of animal products can also vary due to changes in the price of commodities used in manufacturing the products and weather patterns, which may also affect period-over-period financial results. We expect our historical seasonality trends to continue in the foreseeable future.

Working Capital

Our principal capital requirements include the funding of working capital needs, debt service, strategic investments, build out of our infrastructure, and capital expenditures. We require substantial working capital, which is susceptible to fluctuations in the level of accounts receivables and inventory purchase patterns and seasonal demands throughout the year. We extend credit to many of our customers globally in the ordinary course of business, which increases accounts receivable balances within our business segments and is dependent, to an extent, on seasonal demand. Our sales terms vary from due immediately for credit card payments to significantly longer periods generally offered to larger customers. Inventory purchase activity and stock levels are also dependent on sales activity and seasonal demand, however, on occasion, we consider special inventory buy-in opportunities to achieve better purchase terms and earn larger rebates.

Intellectual Property

We own multiple trademarks, service marks, and trade names that are important to our business. We believe that our trademarks are well recognized in the animal-health industry and by veterinarians and, therefore, are valuable assets.

Information about our Executive Officers
Covetrus, Inc. 2020 Form 10-K13
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Our executive officers, as of March 1, 2021 are as follows:
NameAgePosition(s) with our company
Benjamin Wolin46President and Chief Executive Officer
Matthew Foulston56Executive Vice President and Chief Financial Officer
Michael Ellis62Executive Vice President and President, Europe
Dustin Finer51Chief Administrative Officer
David Hinton60Executive Vice President and President, APAC and Emerging Markets
Timothy Ludlow55Executive Vice President and Chief Transformation Officer
Matthew Malenfant59President, Customer Operations North America
Laura Phillips51Vice President, Global Controller and Chief Accounting Officer
Anthony Providenti54Executive Vice President, Corporate Development
Jamey Seely49General Counsel and Secretary
Georgina Wraight46Executive Vice President and President, Global Technology Solutions

Ben Wolin currently serves as the President and Chief Executive Officer of the Company. Mr. Wolin became a Director of Covetrus in February 2019. Prior to Covetrus, Mr. Wolin served as the Chief Executive Officer and Co-founder of Everyday Health, Inc., a communications and marketing platform for consumers, doctors and healthcare companies, and a member of its Board of Directors from 2002 to 2016. Mr. Wolin founded Everyday Health and served as its Chief Executive Officer from inception, through its initial public offering and sale in 2016. Mr. Wolin has served on numerous private and public company boards including Diplomat Pharmacy, Rockwell Medical, AdhereTech, Aerami Therapeutics, Source Media, and Frontline Medical Communications. Mr. Wolin received his B.A. in History from Bowdoin College. Mr. Wolin has extensive experience with digital healthcare, pharmacy, technology, and public company management and governance.

Matthew Foulstonwas appointed our Executive Vice President and Chief Financial Officer in June 2020. Prior to joining the Company, Mr. Foulston served as the Executive Vice President and Chief Financial Officer of Treehouse Foods (NYSE: THS) from 2016 through 2019. He previously served as the Chief Financial Officer of Compass Minerals (NYSE: CMP), a specialty minerals company, from 2014 to 2016. He spent his earlier career in the automotive industry with Ford, Mazda, and Navistar. Mr. Foulston received his BSc from Loughborough University, Leicestershire, U.K.

Michael Ellis was appointed our Executive Vice President in January 2020. From February 2019 until such appointment, Mr. Ellis served as Senior Vice President and President, Europe. Prior to joining the Company, Mr. Ellis served as Chief Financial Officer—Europe, General Manager and Vice President—Europe, and President—Europe of Henry Schein Animal Health at Henry Schein since April 2009. Mr. Ellis is a qualified Fellow Chartered Management Accountant, FCMA, and has a diploma in Business Studies from Sheffield University.

Dustin Finer was appointed our Chief People Officer in September 2019 and our Chief Administrative Officer in November 2019. Prior to joining the Company, Mr. Finer was Chief Administrative and Internal Operations Officer at TiVo from 2016 to 2018. From 2012 until 2016, Mr. Finer was the Chief Human Resource Officer for Rovi Corporation. Prior to that, Mr. Finer was with MySpace, where he was Chief Operations Officer. Mr. Finer holds a J.D. from the University of the Pacific, McGeorge School of Law, and a B.A. from the University of California, San Diego.

David Hinton was appointed our Executive Vice President and President, APAC and Emerging Markets in January 2020. From February 2019 until such appointment, Mr. Hinton served as Senior Vice President and President APAC and Emerging Markets. From April 2016 until February 2019, Mr. Hinton served as Vice President and Managing Director—ANZ, and from January 2011 to April 2016 as Vice President and Managing Director—U.K., Ireland and France of Henry Schein Animal Health. Mr. Hinton holds a Post Graduate Diploma in Management Studies, and a Diploma in Marketing from the University of the West of England.

Timothy Ludlow was appointed our Executive Vice President in February 2020, having served as our Senior Vice President and Chief Transformation Officer since February 2019. Prior to such appointment, Mr. Ludlow served from August 2018 as Chief Integration and Transformation Officer and, from March 2015 to August 2018, as Chief Financial Officer of Vets First Choice. From October 2012 to March 2015, Mr. Ludlow served as Chief Financial Officer of Pine State Trading Company, a beverage distribution company, and from April 2008 until September 2012, Mr. Ludlow served as Senior Vice President and Treasurer of C&S Wholesale Grocers. Mr. Ludlow is a qualified U.K. accountant, FCCA.

Covetrus, Inc. 2020 Form 10-K14
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Matthew Malenfant was appointed our President, Customer Operations North America in May 2020. Prior to joining the Company, Mr. Malenfant served as the Principal of Malenfant Consulting, LLC. a leadership coaching and organizational design company. He previously served as the Chief Executive Officer of Saxco International, LLC, a packaging distributor for the spirits, wine, and beer industries, from 2012 through 2017 and prior to that as President, The Americas for VWR International, a life science and laboratory supply distribution company from 2007 through 2011. Mr. Malenfant currently serves as the Executive Chairman of DWK Life Sciences, LLC, a manufacturer of precision glassware, pharmaceutical packaging and specialty life science products, from 2019 to current and as a Director for Thomas Scientific, LLC, a distributor in the laboratory and critical environment industries. Mr. Malenfant has a B.A. and a B.S. from Arizona State University and achieved a Masters Certification from Merck University in Darmstadt, Germany.

Laura Phillipswas appointed our Vice President, Global Controller, and Chief Accounting Officer effective June 2019, having served as Vice President, Accounting for the Company since April 2019. Prior to Covetrus, Ms. Phillips served as Director of Finance Compliance at Google from 2017 until 2019. Prior to that, Ms. Phillips served as Vice President, Corporate Controller of Brown-Forman Corporation from 2014 until 2016. From 2007 until 2014, she served as Assistant Corporate Controller of General Motors. From 2003 until 2007, Ms. Phillips served on the staff of the Public Company Accounting Oversight Board, most recently as the Deputy Chief Auditor. Ms. Phillips holds an M.B.A. from the University of Michigan, Ross School of Business, and a B.S.B.A. in Accounting and Finance from Miami University. Ms. Phillips is a Certified Public Accountant.

Anthony Providentiwas appointed our Executive Vice President in February 2020, having served as our Senior Vice President, Corporate Development since February 2019. Prior to such appointment, Mr. Providenti served in a number of positions at Henry Schein since 2003, including Vice President, Corporate Business Development Group, and Vice President, Strategy and Development, Global Animal Health Group. Mr. Providenti holds a J.D. from Fordham University School of Law and a B.S. in Accounting from Lehigh University.

Jamey Seelywas appointed our General Counsel and Secretary in September 2020. Prior to joining the Company, Ms. Seely held both business and legal roles while serving as President and General Counsel of Integra, Inc. a developer of blockchain technology for the legal industry. Other past posts include Executive Vice President and General Counsel of the Gates Industrial Corporation, where she led to a successful IPO, and Executive Vice President and General Counsel and Corporate Secretary at ION Geophysical, Inc. Ms. Seely holds a J.D. from Southern Methodist University’s Deadman School of Law, a B.A. from Baylor University, and a Professional Certificate in Energy Innovation & Emerging Technologies from Stanford University.

Georgina Wraight was appointed our Executive Vice President and President, Global Technology Solutions, the business formed with the merging of Global Prescription Management and Global Software Services, in January 2020. Prior to this, and from February 2019, Ms. Wraight served as Senior Vice President, President of Global Prescription Management. From August 2018 to February 2019, Ms. Wraight served as President, and from January 2018 to August 2018, as Chief Operating Officer of Vets First Choice. From November 2015 until August 2017, she served as Chief Operating Officer of the Rockport Company, a shoe manufacturer. From September 2012 to November 2015, Ms. Wraight served as Group Chief Financial Officer and then as Chief Operating Officer of Highline United & Modern Shoe Company. Ms. Wraight is a qualified Chartered Global Management Accountant (CGMA).

Laws and Regulations


Our prescription management and pharmacy services business, which currently operates only in the U.S., is affected by federal and state laws and regulations governing, among other things, the purchase, distribution, management, compounding, dispensing, marketing, and labeling of prescription andnon-prescription drugs and related services. In addition, we are subject to U.S. Food and Drug Administration or FDA,(“FDA”), U.S. Drug Enforcement Administration or DEA,(“DEA”), and comparable state regulations affecting the pharmacy and pharmaceutical industries, including state pharmacy licensure, registration or permit standards, state and federal controlled substance laws, and statutes and regulations related to FDA approval of the sale and marketing of new pharmaceuticals and medical devices. State pharmacy laws require pharmacies to be licensed or otherwise authorized to dispense prescription medications.


Our pharmacies are located in Arizona, Maine, Nebraska, and Texas. EachTexas and authorized to dispense prescription medication in all 50 states and the District of Columbia. Non-resident pharmacies are licensed similar to resident pharmacies. As such, each prescription for a medication that is fulfilled by usone of our pharmacies is also likely to begenerally covered by the laws of the state where the PetAnimal Owner is located. These states generally permit the dispensing pharmacy to follow the laws of the state within which the dispensing pharmacy is physically located. The laws and regulations relating to the sale and delivery of prescription medications vary from state to state but generally require that prescription medications be dispensed with the authorization from a prescribing veterinarian. We are authorized to dispense prescription medications in all 50 states and the District

Covetrus, Inc. 2020 Form 10-K15
Table of Columbia.

Contents


The sale of animal healthanimal-health products is also governed by the laws and regulations specific to each country in which we sell our products.


United States


The regulatory body that is responsible for the regulation of animal healthanimal-health pharmaceuticals in the United StatesU.S. is the Center for Veterinary Medicine or the CVM,(“CVM”) housed within the FDA. Generally, all animal healthanimal-health pharmaceuticals are subject topre-market review and must be shown to be safe, effective, and produced by a consistent method of manufacture as defined under the Federal Food, Drug, and Cosmetic Act. If the drug is for food-producing animals, potential consequences for humans are also considered. The FDA’s basis for approving a drug application is documented in a Freedom of Information Summary. Post-approval monitoring of products is required, with reports being provided to the CVM’s Surveillance and Compliance group. Reports of product quality defects, adverse events, or unexpected results are produced in accordance with the law. Animal supplements generally are not required to obtain premarketpre-market approval from the CVM, although they may be treated as a food. Any substance that is added to, or is expected to become a component of, animal food must be used in accordance with a food additivefood-additive regulation, unless it is generally recognized as safe, under the conditions of its intended use. Alternatively, the FDA may consider animal supplements to be drugs. The FDA has agreed to exercise enforcement discretion for such supplements as long asif each such supplement meets certain conditions.


The regulatory body in the United StatesU.S. for veterinary biologics, such as vaccines, is the U.S. Department of Agriculture or the USDA.(“USDA”). The USDA’s Center for Veterinary Biologics is responsible for the regulation of animal healthanimal-health vaccines, including immunotherapeutics. Marketing of imported veterinary biological products in the United StatesU.S. requires a U.S. Veterinary Biological Product Permit. Veterinary biologics are subject topre-market review and must be shown to be pure, safe, potent, and efficacious, as defined under the Virus Serum Toxin Act. Post-licensing monitoring of products is required. Reports of product quality defects, adverse events, or unexpected results are produced in accordance with USDA requirements.


The main regulatory body in the United StatesU.S. for veterinary pesticides is the Environmental Protection Agency or the EPA.(“EPA”). The EPA’s Office of Pesticide Programs is responsible for the regulation of pesticide products applied to animals. Animal healthAnimal-health pesticides are subject topre-market review and must not cause “unreasonable adverse effects to man or the environment” as stated in the Federal Insecticide, Fungicide, and Rodenticide Act. Within the United States,U.S., pesticide products that are approved by the EPA must also be approved by individual state pesticide authorities before distribution in that state. Post-approval monitoring of products is required, with reports provided to the EPA and some state regulatory agencies.


Under the Controlled Substances Act, distributors of controlled substances are required to obtain, and renew annually, registrations for their facilities from the DEA. Distributors are also subject to other statutory and regulatory requirements relating to the storage, sale, marketing, handling, and distribution of such drugs, in accordance with the Controlled Substances Act and its implementing regulations, and these requirements have been subject to heightened enforcement activity in recent times. Distributors are subject to inspection by the DEA.


Advertising and promotion of animal healthanimal-health products that are not subject to approval by the CVM may be challenged by the Federal Trade Commission or the FTC,(“FTC”), as well as by state attorneys general and by consumers

under state consumer protection laws. The FTC regulates advertising pursuant to its authority to prevent “unfair or deceptive acts or practices in or affecting commerce” under the Federal Trade Commission Act. The FTC will find an advertisement to be deceptive if it contains a representation or omission of fact that is likely to mislead consumers acting reasonably under the circumstances, and the representation or omission is material, and if the advertiser does not possess and rely upon a reasonable basis, such as competent and reliable evidence, substantiating the claim. The FTC may attack unfair or deceptive advertising practices through either an administrative adjudication or judicial enforcement action, including preliminary or permanent injunction. The FTC may also seek consumer redress from the advertiser in instances of dishonest or fraudulent conduct.


States may require registration of animal druganimal-drug distributors and wholesalers. Additional requirements may apply when the product is also a controlled substance. States work closely with the Association of American Feed Control Officials or the AAFCO,(“AAFCO”) in their regulation of animal food. The AAFCO’s annual Official Publication contains model animal and pet foodpet-food labeling regulations that states may adopt. The publication is treated deferentially by the federal and state government agencies that regulate animal food. Many states require registration or licensing of animal foodanimal-food distributors. States may also review and approve animal foodanimal-food labels prior to sale of the product in their state.


Covetrus, Inc. 2020 Form 10-K16
Table of Contents

European Union


Veterinary medicines (which includes both prescription andover-the-counter products) must obtain a marketing authorization or MA,(“MA”) before they can be imported, marketed, and sold in any EUEuropean Union (“EU”) member state. In broad terms, there are four different routes for obtaining MAs: (i) a centralizedEU-wide authorization procedure;procedure, (ii) national authorization procedures for each member state;state, (iii) a mutual recognition procedure involving at least two member states;states, and (iv) the decentralized procedure.


The centralized authorization route is used to obtain MAs for marketing and sale of veterinary medicines throughout all of the EU member states as well as those countries in the European Free Trade Area or the EFTA.(the “EFTA”). The European Medicines Agency or the EMA,(the “EMA”), located in London, is responsible for assessing applications made under the centralized route. The agency is responsible for the scientific evaluation of medicines developed by pharmaceutical companies for use in the European Union.EU. The agency has a specialized veterinary review section distinct from the human medical review section. The Committee for Veterinary Medicinal Products is responsible for scientific review of the submissions for pharmaceuticals and vaccines. The EMA makes the final decision on the approval of products. Once granted by the European Commission or the EC,(the “EC”) a centralized marketing authorization is valid in all EU member states and EFTA states. A series of Regulations, Directives, Guidelines, and EU Pharmacopeia Monographs provide the requirements for approval in the European Union. In general, these requirements are similar tolike those in the United States,U.S., requiring demonstrated evidence of purity, safety, efficacy, and consistency of manufacturing processes. The EMA works closely with the competent authorities of each member state in the regulation of veterinary medicines, including with respect to pharmacovigilance and testing for residues of veterinary medicines or illegal substances in animals and animal products.


Veterinary medicines can also be authorized on a national level through application to the relevant member state’s competent authority. If a product already has been authorized in at least one EU member state, then the mutual recognition procedure can be used to gain approval in other member states. Finally, the decentralized procedure may be used if the product is not authorized in any member state and the applicant would like authorization in several or all member states. This may occur where the centralized procedure is not mandatory, the product is not eligible for the centralized procedure, or where the applicant does not wish to use the centralized procedure.

Animal feed additives


The EC must be authorized by the EC.authorize animal-feed additives. The European Food Safety Authority or the EFSA,(the “EFSA”) assesses applications on behalf of the EC. The EFSA will analyze a sample of the feed additive and provide an

opinion within six months of receiving the application. The EC will decide whether to grant or deny an authorization of the additive based upon this opinion. When authorized, all companies can (subject to any relevant third-party intellectual property rights) usually benefit from the authorization.


An EU regulation on animal medicines, which became effective in November 2018, relates to the advertising of veterinary products, in addition to various regulation that applies in individual EU member states. Health claims on animal pet food must not be misleading and claims that a food fulfills a particular nutritional need must be in line with the list of permitted claims that is published in an EU directive.


United Kingdom


The Veterinary Medicines Directorate or the VMD(the “VMD”) is the United Kingdom’s competent national authority responsible for overseeing the regulation of veterinary medicines in the United Kingdom or the UK. UK(“U.K.”). U.K. national applications follow an approach similar tolike centralized EU applications. The VMD is also responsible for post-market surveillance and adverse event reporting.


Australia


The Australian Pesticides and Veterinary Medicines Authority or the APVMA,(the “APVMA”) is an Australian government statutory authority established to centralize the registration of all agricultural and veterinary products in the Australian marketplace. Previously, each state and territory government had its own system of registration. The primary legislation governing the APVMA’s activities is the Agricultural and Veterinary Chemicals Code, or the AgVet Code. The AgVet Code is in turn given force of law pursuant to the Agricultural and Veterinary Chemicals Code Act 1994 (Cth).


The APVMA assesses applications from companies and individuals seeking registration so they can import, promote, and supply their products to the marketplace, and under the AgVet Code, the APVMA must be satisfied that any active constituents or chemical products will not have a harmful effect on human health, the environment, occupational health and safety, or trade, and that the product is effective for its intended use. Applications undergo rigorous assessment using the expertise of the APVMA’s scientific staff and drawing on the technical knowledge of other relevant scientific organizations, commonwealth government
Covetrus, Inc. 2020 Form 10-K17
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departments, and state agriculture departments. Labeling standards apply andpre-approval is required by the APVMA for veterinary chemicalveterinary-chemical products. In addition, all advertising and promotion of products is subject to the Australian Consumer Law, which, like the United StatesU.S. and European Union, emphasizes accuracy and transparency in advertising and prohibits any misleading or deceptive conduct.


If the product works as intended and the scientific data confirms that when used as directed on the product label it will have no harmful or unintended effects on people, animals, the environment, or international trade, the APVMA will register the product. As well as registering new agricultural and veterinary products, the APVMA reviews older products that have been on the market for a substantial period of time to ensure they and are still effective and safe to use. The APVMA also reviews registered products when particular concerns are raised about their safety and effectiveness. The review of a product may result in confirmation of its registration or continuing registration with some changes to the way the product can be used. In some cases, the review may result in the registration of a product being cancelled and the product taken off the market.

The APVMA has the power to order compulsory product recalls and enforcement powers to ensure compliance with the requirements of the AgVet Code.


New Zealand


All veterinary medicines, agricultural chemicals, and vertebrate toxic agents imported into New Zealand must be authorized under the Agricultural Compounds and Veterinary Medicines or the ACVM,(the “ACVM”) Act and

regulations. The New Zealand Ministry for Primary Industries maintains an ACVM Register of products that have been assessed to the ACVM Act registration information requirements and considered appropriate for registration. Conditions may be applied to such registration.

The New Zealand Environmental Protection Authority 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.


Rest of world


Country-specific laws have provisions that include requirements for licensing, regulatory approvals, certain labeling, safety, efficacy, and manufacturers’ quality control procedures (to assure the consistency of the products), as well as company records and reports. Many other countries’ regulatory agencies will generally refer to the FDA, the USDA, European Union, and other international animal healthanimal-health entities, including the World Organization for Animal Health and the Codex Alimentarius Commission, in establishing standards and regulations for veterinary pharmaceuticals and vaccines.

Employees

As


Where You Can Find Important Information

We are subject to the informational requirements of March 15, 2019,the Exchange Act and, in accordance with the Exchange Act, we have over 5,000 employees. Nonefile annual, quarterly, and current reports, proxy statements, and other information with the SEC. The SEC maintains an Internet web site that contains reports, proxy statements, and other information about issuers, like us, who file electronically with the SEC. The address of the site is http://www.sec.gov. The reports and other information, including any related amendments, filed by us with, or furnished by us to, the SEC are also available free of charge at our Internet web site as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Our principal executive offices are located at 7 Custom House Street, Portland, ME 04101, and our telephone number is (888) 280-2221. Our website is https://covetrus.com/. We may disclose important information through one or more of the following channels: SEC filings, public conference calls and webcasts, press releases, and the social media channels identified on the Newsroom page of our employees are covered by a collective bargaining agreement, and we believe our relations with our employees are good.

Intellectual Property

We own and use a numberwebsite https://covetrus.com/news-room/.


Covetrus, Inc. 2020 Form 10-K18
Table of trademarks, service marks and trade names that are important to our business. We believe that our trademarks are well recognized in the animal health industry and by veterinarians and, therefore, are valuable assets.

Properties

Our corporate headquarters consists of two facilities located in Portland, Maine. The first facility encompasses approximately 25,000 square feet of office space, the lease for which expires in July 2026. The second facility encompasses approximately 10,000 square feet of office space, the lease for which expires in December 2020. We also utilize approximately 50 distribution centers and approximately 75 offices throughout the world.

In August 2018, we signed two new leases for additional office and laboratory space in Portland, Maine. The first is for approximately 117,000 square feet of office space and the second is for approximately 46,000 square feet of laboratory space and will house certain compounding pharmacy operations. Pursuant to the lease agreements, the lease terms will commence at the earlier of the date on which we begin our operations in such facilities and the date on which the landlord obtains a permanent certificate of occupancy. The initial lease terms are for 20 years and include four optional five-year extensions.

In June 2018, we signed a new lease for office space in Phoenix, Arizona. The facility includes approximately 100,000 square feet of office space and will house certain compounding pharmacy operations. The lease term will commence upon the latest to occur of certain conditions related to our occupancy, receipt of 503B approvals and the availability of a portion of the space previously occupied by another tenant. The initial lease term is 13 years and three months.

Contents


Item 1A.    Risk Factors

You should carefully consider


Summary of Risk Factors

Our business is subject to a number of risks and uncertainties. The following is a summary of the followingprincipal risk factors in addition to the other information containeddescribed in this Annual Report on Form10-K,section:

•Health epidemics, including the 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 Transactions

We 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 controls

•Customers may be offsethesitant 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; and

the 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 expected

•We compete in the highly competitive animal-health market
•Changes in manufacturer sales channels and the increase in e-commerce options for companion animal products could negatively impact our market share, margins, and distribution of our products
•Our dependency on third parties for the integration 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 operations
•Price sensitivity of our Customers and Animal Health 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 affectflows

•Any defects, disruptions or poor service in ourperiod-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

•Interruptions, damage by unforeseen events, cyberattacks and failure in our information systems (or third-party systems we rely on) or unauthorized access to a Customer’s or their Client’s data may reduce the growth opportunitiescause significant liabilities and operational synergiescurtail or stop use of our products or services
•Legislative and other benefits expected from the Transactionsregulatory burdens imposed on our storage, processing and such reductionusage of Customer and Animal Owners information may be material.

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

•Risks associated with our significant operations in replacing the resources historically provided by Henry Schein, thereforeign jurisdictions could be a material adverse effect onnegatively affect our business, financial condition, results of operations and cash flows.

The Animal Health Business’ historical combined financial dataflows

•International sales are not necessarily representativeimportant for future growth of our business, and our recent and continuing international expansion efforts subject us to additional risks
•We are subject to substantial regulation in our business and operations and failure to comply with, or material changes to such regulations, could have a material adverse effect on our business and results of operations

Prospective investors should carefully consider the risks described in this section, together with all of the results we would have achieved and may not be a reliable indicator of our future results.

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 Forward-Looking Statements and the risks described in the future. Among other factors, this is because:

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.


Risks Relating to avoid significanttax-related liabilities and related indemnification obligations.

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

Our Business

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.


Our business has been and could continue to be adversely affected by a widespread outbreak of contagious disease, including the recent pandemic of respiratory illness caused by a novel coronavirus known as COVID-19. Global health concerns relating to the COVID-19 pandemic have been weighing on the macroeconomic environment, and the pandemic has significantly increased economic volatility and uncertainty.

The Transactions were conditioned upon Henry Schein’spandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. These measures may adversely impact our receiptemployees and operations and the operations of our customers, suppliers and business partners, and may negatively impact spending patterns, payment cycles, insurance coverage levels, and demand for our products and services. Such measures may remain in place for a significant period of time and may adversely affect our results of operations. Despite an
Covetrus, Inc. 2020 Form 10-K19
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increase in net sales in theSpin-off Tax Opinion. first quarter of 2020 relative to the prior year period, net sales weakened from mid-March to late-April and then recovered; however, it is possible that we may experience more significant declines in the future.

The parties did not obtain a private letter ruling from the IRSspread of COVID-19 caused us to modify our business practices, particularly with respect to our liquidity position and near-term cost structure (including through incremental borrowings on our revolving credit facility to increase cash, which have subsequently been repaid; reduction of non-critical capital expenditures; executive, board, and other senior-level employee compensation reductions that have been reversed subsequent to June 30, 2020; employee furloughs, certain shift eliminations, and a hiring freeze that have been reversed or eased; discretionary spending deferrals; the Transactions, and instead intend to rely solely on theSpin-off Tax Opinion for comfort that theSpin-off and certain related transactions qualify fortax-free treatment for U.S. federal income tax purposesdeferral of payroll taxes under the U.S. Internal Revenue Code of 1986, as amended, or the Code. TheSpin-off Tax Opinion is based on, among other things, certain representations and assumptions as to factual matters, as well as certain undertakings, made by us. The failure of any factual representation or assumption to be true, correct and complete in all material respects, or any undertakings to be fully complied with, could affect the validity of theSpin-off Tax Opinion. An opinion of counsel represents counsel’s best legal judgment, is not binding on the IRS or the courts,CARES Act; and the IRStemporary suspension of our 401(k) employer match, which has been reinstated). We also managed our inventory levels to ensure we hold appropriate stock for market conditions and have engaged in negotiations to extend payment terms on certain contracts. We may take further actions as may be required by government authorities or that we determine are in the courts may not agreebest interests of our employees, customers, and business partners. There is no certainty that such actions will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities. If significant portions of our workforce are unable to work effectively, including due to illness, quarantines, social distancing, government actions, or other restrictions in connection with the conclusions set forth inCOVID-19 pandemic, our operations will be negatively impacted, and our stock price could decline.

The extent to which theSpin-off Tax Opinion. In addition, theSpin-off Tax Opinion was based on current law, COVID-19 pandemic may impact our business, results of operations, financial condition, and potentially our control procedures is highly uncertain and cannot be relied upon ifpredicted. Such impact will depend on a number of factors including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, the timing of the vaccination rollout, and how quickly, and to what extent, normal economic and operating activities can resume. In the first quarter of 2020, the COVID-19 pandemic led to increased volatility in our stock price and a sustained decline in our market capitalization which required us to perform an interim impairment review, which could reoccur. In addition, due to current law changes with retroactive effect.

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.


Specifically, difficult macroeconomic conditions, such as decreases in per capita income and level of disposable income, increased and prolonged unemployment, or subsequent acquisitionsa decline in consumer confidence as a result of our stock, we may have an obligation under the Tax Matters Agreement to indemnify Henry Schein for the resulting tax liability (which may be significant). In the event we are required to indemnify Henry Schein for taxes incurred in connection with the Transactions, the indemnification obligationCOVID-19 pandemic could have a material adverse effect on the demand for our products and services. Under difficult economic conditions, consumers may seek to reduce discretionary spending by forgoing our services or choosing not to purchase our products. Decreased demand for our products and services could negatively affect our overall financial performance.

There are no comparable recent events that provide guidance as to the effect of the spread of COVID-19 and, as a result, the ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of COVID-19’s impact on our business, financial condition,our operations, control procedures, or the global economy as a whole. However, the effects could have a material adverse impact on our results of operations and cash flows.

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

situation closely.

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


We may not successfully implement our business strategies.


We are pursuing, and will continue to pursue, strategic initiatives that management considers critical to our long-term success, including: leveraging the scale, reach and infrastructure of the Animal Health Businessour supply chain network to accelerate the adoption of the Vets First Choiceour Prescription Management platform; increasing sales to our Customers; driving category growth; developing advanced insight and analytics and software; and enhancing Customer and ClientAnimal Owners relationships. There are significant risks involved with the execution of these initiatives, including significant business, economic and competitive uncertainties, many of which are outside of our control. Accordingly, we cannot predict whether we will succeed in implementing these strategic initiatives. It could take several years to realize the anticipated benefits from these initiatives, if any benefits are achieved at all. Additionally, our business strategy may change from time to time, which could delay our ability to implement initiatives that we believe are important to our business.


Since Customers may be hesitant to migrate or integrate their critical business systems and procedures to those provided by us, the market and the sales cycle for our technology and services may develop more slowly than we expect.


Our success depends, in part, on the willingness of Customers to adopt new technology and services. Many veterinary practices have invested substantial effort and financial resources into the information systems and procedures that support their businesses
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and may be reluctant or unwilling to migrate or integrate these systems with online or cloud-based,on-demand services. Other factors that may affect market acceptance of our services include:

the

•The security capabilities, reliability, and availability ofon-demand services;

services,

concerns•Concerns with entrusting a third party to maintain and manage data, especially confidential or sensitive data;

data,

our•Our ability to minimize the time and resources required to implement our services;

services,

our•Our ability to maintain high levels of Customer satisfaction;

satisfaction,

our•Our ability to implement upgrades and other changes to our software without disrupting services we provide;

provide,

the•The level of customization or configuration we offer;

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.

services

The market for these services may develop more slowly than we expect, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.


The animal healthanimal-health market is highly competitive, and if we domay not be able to compete effectively, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

effectively.


The animal healthanimal-health market is highly competitive and rapidly changing, and we expect competition to intensify in the future. Our competitors include the animal healthanimal-health businesses of large pharmaceutical and distribution companies, specialty animal healthanimal-health businesses, animal health divisions of large distribution companies, animal healthanimal-health focused businesses, and practice management service providers, and Internet-based businesses, such as Chewy, Inc. and PetMed Express, Inc., also known as 1-800-PetMeds, and may, in the future, include new market entrants. TheseSome of our competitors may have access to greater financial, marketing, technical, and other resources. As a result, they may be ableresources than us that could allow them to devotecompete more resources to developing, marketing and selling their products and services, initiating or withstanding substantial price competition or more readily taking advantage of acquisitions or other opportunities.

To the extent thateffectively.


If any of our competitors are more successful with respect to any key competitive factor such as technological advances or we are forcednewer low-cost business models with the ability to reduce, or are unable to raise, the price of any ofoperate at higher gross margins, our products or services in order to remain competitive, theresales and profitability could be a material adverse effect on our business, financial condition, results of operations and cash flows. Competitiveadversely affected. Additional competitive pressure could arise from, among other things, limited demand growth or a significant number of additional competitive products or services being introduced into a particular market, price reductions by competitors, or the ability of competitors to capitalize on their economies of scale, the ability of competitors to produce or otherwise procure animal health products at lower costs than us and the ability of competitors to access more or newer technology than us.

scale.


Changes in manufacturer sales channels and the increase in e-commerce options for companion animal products could negatively impact our market share, margins, and distribution of our products.


In most markets, companion animal ownersAnimal Owners typically purchase their animal healthanimal-health products directly from veterinarians. Companion animal ownersAnimal Owners increasingly have the option to purchase animal healthanimal-health products from sources other than veterinarians, such as online retailers,“big-box” “big-box” retail stores or otherover-the-counter distribution channels. This trend has been demonstrated, for example, by the significant shift away from the veterinarian distribution channel in the sale of flea and tick products in recent years. Companion animal owners alsoAdditionally, major U.S. online e-commerce retailers such as Amazon and Chewy.com are becoming licensed as veterinary mail order pharmacies to offer pharmacy products directly to consumers in all 50 US states. Even where prescriptions must be written by a veterinarian, companion Animal Owners may shift to these services for home delivery of prescription medications and diets. Decreased emphasis on veterinary visits, and increased consumer choice through familiar e-commerce retailers could decrease their reliancereduce demand for veterinarian-based e-commerce services and have a material adverse impact on and visits to, veterinarians as they rely more on online animal health information. Because weour business. 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 ownersAnimal 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. In addition, companion animal ownersbusiness. Companion Animal Owners may further choose to substitute human health products for animal healthanimal-health products if human health products are deemed to be lower-cost alternatives.


Because substantiallythe majority of all of the products that we distribute and sell are not manufactured by us, we are dependent uponon third parties for the manufacture and supply of substantially all of our products.


We obtain substantially all of our products from third parties. Generally, we do not have long-term contracts with our suppliers committing them to supply products to us. Therefore, suppliers may not provide the products we need in the quantities we request or at all. Additionally, certain key suppliers, in the aggregate, supply a significant portion of the products we sell. In addition, we currently purchase many products and materials from single sources. Some of the products that we purchase from these sources are proprietary and, therefore, cannot be readily or easily replaced by alternative sources. These products include branded and patented products from major pharmaceutical manufacturers, including Bayer AG, Boehringer Ingelheim International GmbH, (Boehringer Ingelheim), Elanco Animal Health Incorporated, Merck & Co., Inc., Vedco, Inc., and Zoetis, Inc., among others. IfThese five suppliers accounted for approximately 50% of our purchases for the year ended December 31, 2020. Effective January 1, 2021, we no longer are
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partnered with Merck & Co., in the U.K. which will result in reduced Net sales in future periods. We are taking steps to mitigate these effects and do not expect the profitability impact to be significant. Additionally, if we are unable to obtain adequate quantities of products in the future from single-source suppliers, we may be

unable to supply the market, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

operations.


Additionally, because we generally do not control the actual production of the products we sell, we may be subject to delays caused by interruption in production based on conditions outside of our control, including interruption due to physical loss of the manufacturers' or their suppliers facilities and the manufacturers’ failure to comply with applicable government requirements. The failure of manufacturers of products regulated by the FDA, the DEA, or other governmental agencies to meet these requirements could result in product recall, cessation of sales or other market disruptions. In the event thatIf any of our third-party suppliers were to become unable or unwilling to continue to provide the products in our required volumes, we would need to identify and obtain acceptable replacement sources on a timely basis. There is no guarantee that we would be able to obtain such alternative sources of supply on a timely basis, if at all. An extended interruption in the supply of our products, especially any high saleshigh-sales volume product, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our substantial indebtedness


Disruptive innovations and advances in medical practices and technologies could negatively affect the market for our products.

The market for our products could be impacted negatively by the introduction and broad market acceptance of newly-developed or alternative products that address the diseases and conditions for which we sell products, including “green” or “holistic” health products or specially bred disease-resistant animals. In addition, technological breakthroughs by others may obviate our technology and reduce or eliminate the market for our products. Introduction or acceptance of such products or technologies could materially adversely affect our financial conditionoperating results and impair our ability to operate our business. We may incur substantial additional indebtedness, which could further exacerbate the risks to our financial condition.

Based on outstanding indebtedness of Vets First Choice and the


Animal Health Business as of December 29, 2018, and after giving effect to the term loan A debt financing incurred by Spinco on February 7, 2019 in an aggregate principal amount of $1,200,000,000, or the Initial Spinco Debt Financing, and the revolving credit facility in the aggregate principal amount of up to $300,000,000 entered into by Spinco on February 7, 2019, or the Additional Spinco Financing, we have approximately $1.175 billion in total indebtedness outstanding as of the date of this Annual Report on Form10-K, net of debt issuance costs of approximately $25.0 million.

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.


Unanticipated safety, quality or efficacy concerns arise from time to time with respect to animal health products, whether or not scientifically or clinically supported, leading to product recalls, withdrawals or suspended or declining sales, as well as product liability and other claims.

Regulatory actions based on these types of safety, quality or efficacy concerns could impact all, or a numbersignificant portion, of qualificationsa product’s sales and exceptions,could, depending on the circumstances, materially adversely affect our results of operations.

In addition, since we depend on positive perceptions of the safety, quality and efficacy of our products, and animal health products generally, by veterinarians and pet owners, any concern as to the safety, quality or efficacy of our products, whether actual or perceived, may harm our reputation. These concerns and the additional indebtedness incurred in compliance with these restrictionsrelated harm to our reputation could be substantial.

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.

accurate.


Many of our Customers and their ClientsAnimal Owners are price sensitive, and if the prices for our products and services are unacceptable to them, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Many of our Customers and their Clients are price sensitive.


As the market for our services matures, or as new competitors introduce new products or services that compete with us, we may be unable to retain our existing Customers or attract new customers based on the basis of the same price pricing model as previously used. As a result, it is possible that competitive dynamics in our market may require us to change our pricing model or reduce our prices, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.


We may lose Customers and have difficulty attracting new customers if we have defects, disruptions, or disruptionspoor service in our service or if we provide poor service.

technology product offerings.


Because we deliver online and cloud-based applications as a service, errors or defects in the software applications underlying the service, or a failure of our hosting infrastructure, may render the service unavailable to Customers. Since our Customers will use our platform to manage critical aspects of their businesses, any errors, defects, disruptions in service or other performance problems with the platform, whether in connection with theday-to-day operation of the platform, upgrades or otherwise, could damage the Customers’ businesses. If we experience any errors, defects, disruptions in service or other performance problems with our online and cloud-based services, Customers could delay or withhold payment or stop doing business with us, and our business, results of operations and reputation could be harmed.

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Consolidation of our customers and distributors could negatively affect the pricing of our products.

Veterinarians are our primary customers. In recent years, there has been a trend towards the concentration of veterinarians in large clinics and hospitals. In addition, our distributors have seen consolidation in their industries. Furthermore, we have seen the expansion of corporate customers, including larger cross-border ones, and an increase in the consolidation of buying groups (cooperatives of veterinary practices that leverage volume to pursue discounts from manufacturers). The pace of consolidation and structure of markets varies greatly across geographies. If these trends towards consolidation continue, these customers and distributors could attempt to improve their profitability by leveraging their buying power to obtain favorable pricing. The resulting decrease in our prices could have a material adverse effect on our operating results and financial condition.

When our information systems (or third-party systems we rely on) are interrupted, damaged by unforeseen events, are subject to cyberattacks or fail for any extended period of time or unauthorized access is obtained to a Customer’s or their Client’s data, we may incur significant liabilities, our service may be perceived as not being secure, Customers may curtail or stop using our products or services and our results of operations could be materially adversely affected.


The services we offer involve the maintenance of our Customers’ and their Client’sAnimal Owners sensitive information. In addition, we rely on information systems or IS(“IS”) in our business to obtain, rapidly process, analyze, manage, and store data to, among other things:

maintain

•Maintain and manage systems to facilitate the purchase and distribution of thousands of inventory items from numerous distribution centers;

centers,

receive,•Receive, process and ship orders on a timely basis;

basis,

manage•Manage the accurate billing and collections for thousands of Customers;Customers, and

process•Process payments to suppliers.

suppliers


Information security risks have generally increased in recent years, and a third-party action, employee error, malfeasance or other eventevents that bypassesbypass our IS security systems causing an IS security breach may lead to a material disruption of our IS business systems and/orand the loss of business, customer or client information resulting in a material adverse effect on our business. Because techniques used to obtain unauthorized access to, or to sabotage, IS security systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures.


In addition, we develop products and provide services to our Customers that are technology-based, and a cyberattack that bypasses the IS security systems of our products or services causing a security breach and/orand perceived security vulnerabilities in our products or services could also cause significant reputational harm, and actual or perceived vulnerabilities may lead to claims against us by our Customers, their clients and/orand governmental agencies. Perceived or actual security vulnerabilities in our products or services, or the perceived

or actual failure by us or our Customers who use our products to comply with applicable legal requirements, may not only cause us significant reputational harm, but may also lead to claims against us by our Customers, their clients and/orand governmental agencies and involve fines and penalties, costs for remediation, and substantial defense and settlement expenses.


Additionally, changes in the legislative or regulatory action related to cybersecurity may increase our costs to develop or implement new technology-based products and services.

In addition, changes in the regulatory environment could increase our compliance related costs.


Risks associated with these and other actual or perceived IS security breaches may include, among other things:

the

•The theft, destruction, loss, misappropriation or release of confidential data or intellectual property;

property,

operational•Operational or business delays resulting from the disruption of information systems and subsequentclean-up and mitigation activities;

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;

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.

Customers



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We store, process and use information collected from or about our Customers and 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.


Because we collect, store, process and use data, some of which 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.


Certain states in which we operate, including California, and countries outside of the United States have adopted or may in the future adopt new regulations governing handling, storage, use and protection of personal information. The California Consumer Privacy Act (“CCPA”) is a state statute intended to enhance privacy rights and consumer protection for residents of California, U.S. Both in the United States and abroad, these laws and regulations continue to evolve and remain subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain. If we fail to comply with such laws and regulations, we could be required to make significant changes to our products or services, or incur substantial fines, penalties, or other liabilities. For example, if legislation or regulations are adopted, interpreted or implemented in a manner that is inconsistent with our current business practices and that require changes to these practices, the design of our products and services or privacy practices, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. The costs of compliance with, and the other burdens imposed by, new or existing laws or regulatory actions may prevent us from selling our products or services, or increase the costs of doing so, and may affect our ability to invest in or develop products or services. In addition, a determination by a court or government agency that any of our practices do not meet these standards could result in liability or negative publicity and could have a material adverse effect on our business, financial condition, results of operations and cash flows.


In addition, the European Parliament and the Council of the European Union have adopted the EU General Data Protection Regulation 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.


Successful claims for misappropriation or release of confidential or personal data brought against us or fines or other penalties assessed or any claim that results in significant adverse publicity against us could have a material adverse effect on our business and reputation.


We may launch branding or rebranding initiatives that may involve substantial costs and may not be favorably received by Customers.


We now operate under the name “Covetrus, Inc.” In connection with this name change, we have incurred substantial costs, and may in the future incur substantial additional costs, in rebranding our products and services, and we may not be able to achieve or maintain brand name recognition or status under the new brand that is comparable to the recognition and status previously enjoyed by the Animal Health Business, and Vets First Choice separately.or any of our local brand name operations globally. The failure of any such rebranding initiative could adversely affect our ability to attract and retain customers, which could cause us not to realize some or all of the benefits contemplated by us toas a result from the Merger.

of our acquisition of Vets First Choice in an all-stock transaction (“Merger”).


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Many of our Customers are small andmedium-sized businesses, which can be challenging to cost-effectivelycost effectively reach, acquire, and retain.


We market and sell many of our services to veterinary practices and clinics, which are typically small ormedium-sized business or SMBs.(“SMBs”). To grow our business, we must develop new customers, sell additional services to existing Customers, and encourage existing Customers to remain on our platform. However, selling to and retaining SMBs can be more difficult than selling to and retaining large enterprises because SMB customers:

are

•Are more price sensitive;

sensitive,

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.

vendors


If we are unable to cost-effectivelycost effectively market and sell our services to our target customers, our ability to grow our business will be harmed.


Our business is subject to risk based on global economic conditions.


Macroeconomic, business, and financial disruptions could have a material adverse effect on our business, financial condition, results of operations and cash flows. Certain of our Customers, their ClientsAnimal Owners and our suppliers could be affected directly by an economic downturn, including as a result of the COVID-19 pandemic, and could face credit issues or cash flow problems

that could give rise to payment delays, increased credit risk, bankruptcies and other financial hardships that could decrease the demand for our products or hinder our ability to collect amounts due from Customers. If one or more of our large Customers discontinue their relationship with us 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.


Approximately 49%45% of our pro forma netNet sales for the Animal Health Businessour business in fiscal 20182020 was to Customers outside the United States. Changes innon-U.S. currencies relative to the U.S. dollar impact our sales, profits, assets, and liabilities. In addition, the weakening or strengthening of the U.S. dollar may result in significant favorable or unfavorable translation effects when the operating results of ournon-U.S. business activity are translated into U.S. dollars and could cause our results of operations to differ from our expectations and the expectations of our investors. For our international sales denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make our products and services less competitive in international markets. Alternately, a weakening of the currencies in which transactional sales are generated relative to the currencies in which costs are denominated would decrease operating profits and cash flow. Changes in currency exchange rates may also affect the relative prices at which we purchase materials and services in foreign markets. In addition, the impact of currency devaluations in countries experiencing high inflation rates or significant currency exchange fluctuations could negatively impact our operating results. While we may use financial instruments to mitigate the impact of fluctuations in currency exchange rates on our cash flows, unhedged exposures would continue to be subject to currency fluctuations.


The future growth of our business depends in significant part on increasing our global sales. Our recent and continuing international expansion efforts subject us to additional risks.

Net sales outside of the U.S. represented approximately 45% of our total Net sales in 2020, 47% in 2019, and 49% in 2018. Our international expansion efforts may be slow or unsuccessful to the extent we experience difficulties in recruiting, training, managing and retaining qualified personnel with international experience, language skills and cultural competencies in the geographic markets we target, which could negatively impact our financial condition, results of operation, and cash flow. Conducting and expanding international operations subjects us to risks we generally do not face in the U.S., including:

•Management, communication, and integration problems resulting from language barriers, cultural differences and geographic dispersion of our customers and personnel,
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•Language translation of, and associated Customer Care support for, our products,
•Compliance with foreign laws, including laws regarding online disclaimers, advertising, liability of online service providers for activities of customers especially with respect to hosted content, and more stringent laws in foreign jurisdictions relating to consumer privacy and protection of data collected from individuals and other third parties,
•Accreditation and other regulatory requirements to do business is subjectand to substantial regulation.

Our pharmacyprovide domain name registration, web-hosting and supply chain businesses are impacted by federalother products in foreign jurisdictions,

•Greater difficulty in enforcing contracts, including our universal terms of service and stateother agreements,
•Increased expenses incurred in establishing and maintaining office space and equipment for our international operations,
•Greater costs and expenses associated with international marketing and operations,
•Greater risk of unexpected changes in regulatory practices, tariffs, trade disputes and tax laws and regulations governing, among other things: the purchase, distribution, management, compounding, dispensing, marketingtreaties,
•Different or lesser degrees of protection for our or our customers' intellectual property and labelingfree speech rights in certain markets,
•Increased exposure to foreign currency risks,
•Increased risk of prescription drugs and related services; DEA and/or state regulation affecting the sale and distributiona failure of controlled substances; and statutes and regulations related to the sale and marketing of animal drugs, pet food, insecticides and devices. Our failureemployees to comply with both U.S. and foreign laws, including export and antitrust regulations, anti-bribery regulations and any trade regulations ensuring fair trade practices,
•Heightened risk of these lawsunfair or corrupt business practices in certain geographies, and regulations could
•The potential for political, social, or economic unrest, terrorism, hostilities or war, and multiple and possibly overlapping tax regimes

We may require financing to fund our ongoing operations and capital expenditures, the availability of which is highly uncertain.

The capital and credit markets can experience volatility and disruption. Such markets can exert extreme downward pressure on stock prices and upward pressure on the cost of new debt capital and can severely limit or curtail our pharmacy and supply chain operations, which would materially harm ourrestrict credit availability for most issuers. Our business and prospects. Further, our business could be affected by changes in these or any newly enacted laws and regulations, as well as federal and state agency interpretations of such statutes and regulations. Such statutory or regulatory changes couldwill require that we make changesexpenditures to develop enhancements to our business modelplatforms, expand capacity, and operations and/or could requireadd new businesses complementary to our product lines. In the future we may engage in transactions that we incur significantly increased costs in orderdepend on our ability to comply with such regulations.

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.


Depending on conditions in the future. Thesefinancial markets and our financial performance, we may not be able to raise additional capital on favorable terms, or at all. If we are unable to pursue our current and future spending programs, we may be forced to cancel or scale back those programs. Failure to successfully pursue our capital expenditure and other restrictions on the activities of compounding pharmacies may limit the available market for compounded formulations from bulk substances for animal use, as comparedspending plans could negatively affect our ability to the market available for theFDA-approved animal drugs.

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.


If a compounded drug formulation provided through our compounding pharmacy services leads to injury or death or results in a product recall, we may be exposed to liabilities or reputational harm.


The success of our compounding pharmacy services is dependent uponon perceptions of us and the safety and quality of our products and services. We could be adversely affected if we or any other compounding pharmacies or our formulations and technologies are subject to negative publicity. We could also be adversely affected if any of our formulations or technologies, any similar products sold by other companies, or any products sold by other veterinary compounding pharmacies prove to be, or are asserted to be, harmful. For instance, to the extent any of the components of approved drugs or other ingredients used to produce our compounded formulations have quality or other problems that adversely affect the finished compounded preparations, our business could be adversely affected. Also, because of our dependence uponon veterinarian and client perceptions, any adverse publicity associated with illness or other adverse effects resulting from the use or misuse of our products, any similar products sold by other companies or any products sold by veterinary compounding pharmacies could have a material adverse effect on our business, financial condition, results of operations and cash flows.


Assertions by a third party that we are infringing its intellectual property, whether successful or not, could subject us to costly and time-consuming litigation or expensive licenses.


The software and technology industries are characterized by the existence of a large number ofmany patents, copyrights, trademarks, and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. The preparation or sale of our products may infringe on the patent rights of others. As we face increasing competition, the possibility of intellectual property rights claims against us may grow. Our technology may not be able to withstand any third-party claims or rights against their use. Additionally, although we have licensed from other partiesparty's proprietary technology covered by patents, it cannot be certain that any such patents will not be challenged, invalidated, or circumvented. These types of claims could harm our relationships with our Customers, may deter future Customers from using our services or could expose us to litigation for such claims.

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Any intellectual property rights claimsclaim against us, with or without merit, could be time-consuming, expensive to litigate or settle and could divert management attention and financial resources. An adverse determination also could prevent us from offering our services to Customers and may require the procurement or development of substitute services that do not infringe.

As a result of intellectual property rights claims against us, we may have to pay damages or stop using technology or formulation found to be in violation of a third party’s rights. We may have to seek a license for the intellectual property, which may not be available on reasonable terms, if at all, and may significantly increase our operating expenses or may require us to restrict our business activities in one or more respects. As a result, we may also be required to develop alternativenon-infringing technology, which could require significant effort and expense.


In addition, we use open source software in our platform and will use open source software in the future. From time to time, we may face claims from companies that incorporate open source software into their products, claiming ownership of, or demanding release of, the source code, the open source software, or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional product, technology, and development resources to change our platform or services, any of which would have a material adverse effect on our business, financial condition, results of operations and cash flows.

Loss


Turnover of ourkey personnel, including executive officers, or other key personnel could disrupt our operations and our inability to attract and retain qualified personnel could harm our business.


Our success depends on the efforts of our executive officers and certain key personnel. Any unplanned turnover or our failure to develop an adequate succession plan for one or more of our executive officerofficers or other key positions could deplete our institutional knowledge base and erode our competitive advantage. The loss or limited availability of the services of one or more of our executive officers or other key personnel, or our inability to recruit and retain qualified executive officers or other key personnel in the future, could, at least temporarily, have a material adverse effect on our business, financial condition, results of operations and cash flows. Our future success also depends on our ability to attract, retain, and motivate talented technical, managerial, sales, marketing, and service and support personnel. Competition for sales, marketing, and technology development personnel is particularly intense in the software and technology industries. As a result, we may be unable to successfully attract or retain qualified personnel, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Tax legislation


Risks Relating to Indebtedness

Our substantial indebtedness could materially adversely affect our financial results.

condition and impair our ability to operate our business. We may incur substantial additional indebtedness, which could further exacerbate the risks to our financial condition.


On February 7, 2019, we entered into a $1.5 billion syndicated credit agreement with a group of lenders for a five-year term (the “Credit Facilities”). The Credit Facilities include a $1.2 billion term loan facility, (the “Term Loan Facility”), which was fully funded and primarily used to pay a dividend to Henry Schein, and a $300 million revolving line of credit for working capital and general corporate purposes (the “Revolving Credit Facility”). As of December 31, 2020, there was $1.1 billion outstanding under the Term Loan Facility and there were no borrowings from the Revolving Credit Facility, although we do utilize the Revolving Credit Facility from time to time.

We may incur significant additional indebtedness in the future, including secured indebtedness. Although the agreements governing our Credit Facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial.

Our current level of indebtedness, and any additional indebtedness, could have a material adverse effect on our business, financial condition, results of operations and cash flows, including the following:

•Limiting our ability to obtain additional debt or equity financing needed for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes,
•Requiring a substantial portion of our cash flows from operations be dedicated to payments on our indebtedness instead of other purposes, including working capital needs, funding capital expenditures and pursuing future business opportunities,
•Limiting our ability to make continuous improvements to our business model and adjust to changing market conditions that may place us at a competitive disadvantage compared to our competitors with less debt, and
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•Increasing our vulnerability to a downturn in general economic conditions or in our business

The agreements governing our Credit Facilities contain restrictive covenants, which restrict our operational flexibility.

The agreements governing our Credit Facilities contain restrictions and limitations on our ability to engage in activities that may be in our long-term best interests, including financial and other restrictive covenants that will limit our ability to:

•Incur additional indebtedness,
•Make dividends and other restricted payments,
•Incur additional liens,
•Consolidate, merge, sell, or otherwise dispose of all or substantially all assets,
•Make investments,
•Transfer or sell assets,
•Enter into restrictive agreements,
•Change the nature of the business, and
•Enter certain transactions with affiliates

The agreements governing our Credit Facilities also contain other restrictions customary for facilities of this nature.

Our ability to borrow additional amounts or avoid acceleration of borrowed amounts under these agreements will depend on satisfaction of these covenants, including two financial covenants: (i) a maximum consolidated net total leverage ratio and (ii) a minimum consolidated net interest coverage ratio. Events beyond our control could affect our ability to meet these covenants. Our failure to comply with obligations under these agreements may result in an event of default under those agreements. A default, if not cured or waived, may permit acceleration of our indebtedness. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. This could have a material adverse effect on our business, financial condition, results of operations and cash flows and could cause us to become bankrupt or insolvent.

We require a significant amount of cash to service our indebtedness. Our ability to generate such cash depends on many factors, some beyond our control.

Our ability to make payments on and to refinance our indebtedness, and to fund capital expenditures, will depend on our ability to generate cash. This ability, to a certain extent, is subject to economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. We have substantial indebtedness with significant debt service requirements, and we may incur additional indebtedness that would lead to increased interest expense and require additional cash flows to fund. In addition, borrowings under the Credit Facilities bear interest at variable interest rates. As of December 31, 2020, we maintained interest rate swap contracts with notional amounts aggregating $500 million, which are intended to fix a portion of future interest payments associated with our $1.1 billion variable-rate Term Loan Facility. These swap agreements expire July 31, 2021. Despite the presence of these derivative contracts, interest rate increases, and in some instances interest rate decreases, could result in larger debt service requirements. Such an increase in our debt service obligations would adversely affect our cash flows. We cannot guarantee that our business will generate sufficient cash flows from operations or that future borrowings will be available to us under our Credit Facilities or any subsequent credit agreement, or that we can obtain alternative financing proceeds in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness at or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

The debt service obligations under our Credit Facilities could also reduce funds available for working capital, capital expenditures and other general corporate purposes and may create competitive disadvantages relative to other companies with lower debt levels.

Risks Relating to Regulation and Governmental Action

We are subject to the taxsubstantial regulation in our business and operations and failure to comply with, or material changes to such regulations, could have a material adverse effect on our business and results of operations.

Our pharmacy and supply chain businesses are impacted by federal and state laws and regulations governing, among other things: the purchase, distribution, management, compounding, dispensing, marketing and labeling of prescription drugs and related services; DEA and state regulation affecting the sale and distribution of controlled substances; and statutes and regulations related
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to the sale and marketing of animal drugs, pet food, insecticides and devices. Our failure to comply with any of these laws and regulations could severely limit or curtail our pharmacy and supply chain operations, which would materially harm our business and prospects. Our business could be affected by changes in these or any newly enacted laws and regulations, as well as federal and state agency interpretations of such statutes and regulations. Such statutory or regulatory changes could require that we make changes to our business model and operations and could require that we incur significantly increased costs to comply with such regulations. Further, we are required to comply with the laws of, and regulations promulgated by, various states, including the pharmacy boards of such states. State pharmacy boards regulate the dispensing and marketing of our pharmaceutical products and may take action, including fines, against companies for violations of their rules and regulations.

The status of compounded animal drugs is uncertain. The FDA issued proposed guidance titled Guidance for Industry #256: Compounding Animal Drugs from Bulk Drug Substances (“GFI #256”) on November 18, 2019. The comment period for this proposed guidance ended on October 15, 2020. If adopted, GFI #256 would strictly limit the circumstances under which the FDA would permit compounding of veterinary drug products. It is uncertain whether GFI #256 will be adopted in the form proposed, or at all. The proposed guidance is similar to guidance proposed by the FDA in 2015 and ultimately withdrawn in November 2017. These and other restrictions that may be imposed on the activities of compounding pharmacies may limit the available market for compounded formulations from bulk substances for animal use, as compared to the market available for the FDA-approved animal drugs.

The marketing and sale of compounded formulations is subject to and must comply with state statutes and regulations governing compounding pharmacies. These statutes and regulations include, among other things, restrictions on compounding in advance of receiving an animal-specific prescription, restrictions on compounding drugs that are essentially copies of FDA-approved drugs, restrictions on compounding drug products for office use, and restrictions on wholesaling. These and other restrictions on the activities of compounding pharmacies may significantly limit the market available for compounded formulations, as compared to the market available for FDA-approved drugs.

Legislation may be proposed in the United States or other jurisdictions in the future that could impact the distribution channels for our companion animal products. For example, such legislation may require veterinarians to provide Animal Owners with written prescriptions and disclosure that the Animal Owner may fill prescriptions through a third party, which may further reduce the number of Animal Owners who purchase their animal-health products directly from veterinarians. Such requirements may lead to increased use of generic alternatives to our products or the increased substitution of our products with other animal-health products or human health products if such other products are deemed to be lower-cost alternatives. Any of these events could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The sale and distribution of our products is also regulated in most or all jurisdictions outside the United States where our business operates. Local regulations on sale and distribution may be tightened, for example regarding labeling, quality, or transportation, which may increase our costs of doing business. In the European Union, a revision of the current legislation on veterinary medicinal products is under way, establishing a new EU regulation on veterinary medicinal products will become effective January 28, 2022 throughout the European Union and will limit the use of antibiotics, tighten importation rules, and impose stricter pharmacovigilance standards. This regulation must still be implemented at the member state level and as such, additional requirements may be adopted by individual member states which would have the effect of increasing the compliance requirements for our business in the European Union with resulting costs.

A significant portion of our operations is conducted in foreign jurisdictions and is subject to the economic, political, legal, regulatory, and business environments of the countries in which we do business. Risks associated with such international operations could negatively affect our business, financial condition, results of operations and cash flows.

We have significant operations outside of the United States. We expect that we will continue to expand our international operations in the future. International operations inherently subject us to several risks and uncertainties, including:

•Compliance with governmental controls, trade restrictions, restrictions on direct investments, quotas, embargoes, import and export restrictions, tariffs, duties, and regulatory and licensing requirements by domestic or foreign entities, including restrictions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury, the U.K. Office of Financial Sanctions Implementation, United Nations Security Council, and Australia's Department of Foreign Affairs and Trade,
•Difficulties in building, staffing, and managing foreign operations (including a geographically dispersed workforce) and maintaining compliance with foreign labor laws,
•Burdens to comply with, and different levels of protection offered by, multiple and potentially conflicting foreign laws and regulations, including those relating to environmental, health and safety requirements and intellectual property,
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•Changes in laws, regulations, government controls or enforcement practices with respect to our business and the businesses of our Customers,
•Political and social instability, including crime, civil disturbance, terrorist activities, armed conflicts, outbreak of disease, and natural and other disasters,
•Ongoing instability or changes in a country’s or region’s regulatory, economic, or political conditions, including as a result of the United Kingdom’s leaving the European Union, or Brexit, and any other similar referenda or actions by other European Union member countries,
•Local business and cultural factors that differ from our normal standards and practices, including business practices prohibited by the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act, and other anti-corruption laws and regulations,
•Longer payment cycles and increased exposure to counterparty risk,
•Disruptions in transportation of our products or our supply chain, and
•The differing product and service needs of foreign Customers.

The multinational nature of our business subjects us to potential risks that various taxing authorities may challenge the pricing of our cross-border arrangements and subject us to additional tax, adversely impacting our effective tax rate and our tax liability. In addition, international transactions may involve increased financial and legal risks due to differing legal systems and customs. Compliance with these requirements may prohibit the import or export of certain products and technologies or may require us to obtain a license before importing or exporting certain products or technology. A failure to comply with any of these laws, regulations or requirements could result in civil or criminal legal proceedings, monetary or non-monetary penalties, or both, disruptions to our business, limitations on our ability to import and export products and services, and damage to our reputation. While the impact of these factors is difficult to predict, any of them could have a material adverse effect on our business, financial condition, results of operations and cash flows. Changes in any of these laws, regulations or requirements, or the political environment in a particular country, may affect our ability to engage in business transactions in certain markets, including investment, procurement, and repatriation of earnings.

Brexit may have a negative effect on our business.

The uncertainty regarding new or modified arrangements between the United Kingdom and other countries following Brexit may have a material adverse effect on the movement of products between the United Kingdom and members of the European Union and the United States, including the interruption of or delays in imports into the United Kingdom of products originating within the European Union and exports from the United Kingdom of products originating there. Such a situation could have an adverse effect on our business.

Changes in our tax rates or exposure to additional income tax liabilities could adversely affect our financial results.

Our future effective income tax rates could be unfavorably affected by various factors including, among others, changes in the tax rates, rules and regulations in jurisdictions in which we generate income. In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local governments,tax authorities and by non-U.S. tax authorities. If these audits result in assessments different from amounts recorded, our future financial results may include unfavorable tax adjustments.

Risks Relating to the Transactions

We may not realize the anticipated revenue growth opportunities and operational synergies from the Transactions.

The benefits that we expect to achieve because of the Transactions will depend, in part, on our ability to realize anticipated revenue growth opportunities and operational synergies. Our success in realizing these revenue growth opportunities and operational synergies, and the timing of their realization, depends on the successful integration of the Animal Health Business and the business of Vets First Choice. Even if we can integrate the businesses successfully, this integration may not result in the realization of the revenue growth and operational synergies that we currently expect within the anticipated time frame or at all. For example, we may not be able to accelerate the adoption of the Vets First Choice platform by the Animal Health Business’ customers. Moreover, we may incur substantial expenses in connection with the integration of the two businesses. Such expenses are difficult to estimate accurately and may exceed current estimates. Accordingly, the benefits from the Transactions may be offset by costs or delays incurred in integrating the businesses.

The on-going integration of the Animal Health Business and Vets First Choice presents significant challenges that may lead to unforeseen business interruptions or substantial costs.

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There is a significant degree of difficulty and management distraction inherent in the process of integrating the Animal Health Business and the Vets First Choice business. These difficulties include, among others:

•The challenge of integrating the businesses while carrying on the ongoing operations of each business,
•The challenge of integrating the cultures of each business,
•The challenge of integrating the information technology systems of each business, and
•The potential difficulty in attracting and retaining key employees and sales personnel of each business

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of the businesses and may require us to incur substantial costs. Members of our senior management may be required to devote considerable time and attention to this integration process, which will decrease the time and attention they will have to manage our operations, service existing Customers, attract new Customers and develop new products, services or strategies. If senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted because of the integration process, our business could suffer. We cannot guarantee that we will successfully or cost-effectively integrate the Animal Health Business and Vets First Choice businesses. Failure to do so could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We may continue to incur costs associated with the Transactions that could affect our period-to-period operating results.

We anticipate that we will continue to incur significant one-time non-recurring costs over the next several years as a result of the Transactions. We may not be able to quantify the exact amount of these costs or the period in which they will be incurred. Some of the factors affecting the costs associated with the Transactions include the resources required in integrating the Animal Health Business and the Vets First Choice businesses. The amount and timing of these charges, including those related to information technology infrastructure and systems integration and planning, could adversely affect our period-to-period operating results, which could result in a reduction in the market price of shares of our common stock. Moreover, delays in completing the integration may reduce the growth opportunities and operational synergies and other benefits expected from the Transactions and such reduction may be material.

We may be unable to access equivalent benefits and services that historically have been provided by Henry Schein to the Animal Health Business.

The Animal Health Business previously received benefits and services from Henry Schein and benefited from Henry Schein’s financial strength and extensive business relationships. We no longer benefit from Henry Schein’s resources and it cannot be assured that we will be able to adequately replace all of the resources provided by Henry Schein or replicate them at the same cost. If we are not able to replace the resources provided by Henry Schein, or at the same cost there could be a material adverse effect on our business, financial condition, results of operations and cash flows.

We may be affected by significant restrictions imposed on us to avoid significant tax-related liabilities and related indemnification obligations.

The Tax Matters Agreement, dated as of January 7, 2019, by and among Henry Schein, Covetrus, Vets First Choice and the Vets First Choice Stockholders’ Representative (as it may be amended and restated from time to time), (the “Tax Matters Agreement”), generally prohibits us from taking certain actions that could cause the Distribution and the Merger to fail to qualify as tax-free transactions.

If the Distribution does not qualify as a tax-free spin-off under Section 355 of the Internal Revenue Code, we may have certain indemnification obligations which could have a material adverse effect on our business.

The Transactions were conditioned on Henry Schein’s and our receipt of the Spin-off Tax Opinion. The parties did not obtain a private letter ruling from the Internal Revenue Service (“IRS”) with respect to the Transactions, and instead intend to rely solely on the Spin-off Tax Opinion for comfort that the spin-off and certain related transactions qualify for tax-free treatment for U.S. federal income tax purposes under the U.S. Internal Revenue Code of 1986, as amended (the “Code”). The Spin-off Tax Opinion is based on, among other things, certain representations, and assumptions as to factual matters, as well as foreign jurisdictions. From timecertain undertakings, made by us. The failure of any factual representation or assumption to time, various legislative initiativesbe true, correct, and complete in all material respects, or any undertakings to be fully complied with, could affect the validity of the Spin-off Tax Opinion. An opinion of counsel represents counsel’s best legal judgment, is not binding on the IRS or the courts, and the IRS or the courts may not agree with the conclusions set forth in the Spin-off Tax Opinion. In addition, the Spin-off Tax Opinion was based on current law, and cannot be relied on if current law changes with retroactive effect.
Covetrus, Inc. 2020 Form 10-K31
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If the Transactions do not qualify for their intended tax-free treatment, we may have an obligation under the Tax Matters Agreement to indemnify Henry Schein for the resulting tax liability (which may be proposedsignificant). In the event we are required to indemnify Henry Schein for taxes incurred in connection with the Transactions, the indemnification obligation could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Due to the Merger, our ability to use net operating losses to offset future taxable income may be restricted and these net operating losses could expire or otherwise be unavailable.

Due to the Merger, our ability to use net operating losses to offset future taxable income will be further restricted and these net operating losses (“NOLs”) could expire or otherwise be unavailable. In general, under Section 382 of the Code and corresponding provisions of state law, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Prior to the Merger, some of Vets First Choice’s existing NOLs were subject to limitations. Following the Merger, Vets First Choice’s existing NOLs may be subject to further limitations and we may not be able to fully use these NOLs to offset future taxable income. In addition, if we undergo any subsequent ownership change, our ability to utilize NOLs could materially adversely affect ourbe 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 positions. There can be no assurance that our effectiveliabilities.

Additionally, the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) resulted in a reduction in the economic benefit of the NOLs and other deferred tax rateassets available to us. Under the Tax Act, U.S. federal NOLs generated after December 31, 2017 will not be materially adversely affected by legislation resulting from these initiatives.

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.

expiration.


Risks Relating to Our Common Stock


The market price of our common stock is likely to be highly volatile and subject to wide fluctuations, and you may be unable to resell your shares at or above the price at which you acquired them, or at all.

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.


The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number ofmany factors that are beyond our control, including, but not limited to:

quarterly

•Quarterly variations in our revenues and operating expenses;

expenses,

developments•Developments in the financial markets and worldwide or regional economies;

economies,

announcements•Announcements of innovations or new products or services by us or our competitors;

competitors,

announcements•Announcements by the government relating to regulations that govern our industry;

industry,

significant•Significant sales of our common stock or other securities in the open market;

market,

variations•Variations in interest rates;

rates,

changes•Changes in the market valuations of other comparable companies;companies, and

changes•Changes in accounting principles.

principles


Our business could be materially adversely affected by a negative outcome in significant litigation or other legal proceedings.

We are currently involved in a shareholder securities litigation, and may be subject to future litigation matters, claims, and demands. These matters may divert financial and management resources that would otherwise be used to benefit our operations. No assurances can be given that the results of these matters will be favorable to us. An adverse resolution or outcome of any of these lawsuits, claims, demands or investigations could have a negative impact on our results of operations, financial condition, and liquidity.

Failure to establish and maintain effective internal controls could have a material adverse effect on our ability to report our financial condition, results of operations, or cash flows accurately and on a timely basis and could harm our reputation.

As a publicly traded company, we are subject to the Securities Exchange Act of 1934 (the “Exchange Act”) and the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”). The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting.

Covetrus, Inc. 2020 Form 10-K32
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To comply with these requirements, we have and will need to continue to upgrade and implement additional internal controls, reporting systems, information technology systems and procedures, and hire additional accounting, legal, compliance, and finance staff. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting that results in a more than reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.

During the quarter ended September 30, 2019, management identified a material weakness in our internal control related to ineffective information technology general controls (ITGC’s) in the areas of logical security and change management in certain of our business units within North America, APAC, and Europe. As a result of this material weakness, management concluded that our internal controls over financial reporting were not effective as of September 30, 2019 and through December 31, 2019.

During the quarter ended December 31, 2019, management identified a material weakness in our internal controls over financial reporting relating to our accounting for income taxes. Management's assessment identified control deficiencies associated with the transition to establishing expanded in-house tax capabilities and utilizing new tax consultants. As a result of these issues, our controls to review and analyze the Company's income tax provision and deferred income tax balances did not operate effectively. That led management to conclude that the control deficiencies that existed at December 31, 2019 represented a material weakness in internal controls.

We implemented remedial measures to address the material weaknesses prior to the end of fiscal 2020, however we cannot ensure that our efforts have been successful, or that we have identified all material weaknesses. Our remedial measures may result in additional technology and other expenses. Any failure to implement these remedial measures and to achieve and maintain effective internal controls and disclosure controls and procedures could have a material adverse effect on the market for our common stock.

For a discussion of our internal controls over financial reporting and a description of the identified material weakness, see Part II, Item 9A. Controls and Procedures of this Report.

Sales of our common stock may negatively affect its market price.

It is likely that some stockholders have sold or may sell our common stock received in the Transactions for various reasons such as if our business profile or market capitalization as a combined company does not fit their investment objectives. Certain of these shares were not restricted securities within the meaning of Rule 144 under the Securities Act after the expiration of the lock-up period and, unless held by our affiliates, may subsequently be sold into the public market without restriction The sales of significant amounts of our common stock or the perception in the market that this will occur may result in a decrease in the market price of our common stock.

Under our amended and restated certificate of incorporation, our non-employee directors generally have no obligation to offer us corporate opportunities.

Our amended and restated certificate of incorporation addresses potential conflicts of interest with respect to corporate opportunities and transactions that are presented to, or which otherwise come into the possession of, any of our directors who is not also one of our employees or an employee of any of our subsidiaries. Under our amended and restated certificate of incorporation, we renounce any interest or expectancy in such corporate opportunities unless they were presented to a non-employee director expressly and solely in such person’s capacity as one of our directors.

Anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated by-laws could discourage, delay, or prevent a change of control and may affect the trading price of our common stock.

Our amended and restated certificate of incorporation and amended and restated by-laws include a number of provisions that may discourage, delay, or prevent a change in our management or control over us that stockholders may consider favorable. For example, the amended and restated certificate of incorporation and amended and restated by-laws, collectively:

•Authorize the issuance of “blank check” preferred stock that could be issued by our Board without approval of stockholders,
•For the first three years following the Merger until the 2022 annual meeting of stockholders, divide our Board into three classes, serving staggered terms of one, two and three years, respectively,
Covetrus, Inc. 2020 Form 10-K33
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•Limit the ability of stockholders to remove directors by requiring the affirmative vote of holders of at least two-thirds of the outstanding shares of our capital stock then entitled to vote for removal and, until the 2022 annual meeting of stockholders, permitting directors to be removed only with cause,
•Provide that vacancies on our Board may be filled only by a majority vote of directors then in office,
•Prohibit stockholders from calling special meetings of stockholders,
•Prohibit stockholder action by written consent,
•Establish advance notice requirements for stockholder nominations of candidates for election as directors before an annual or special meeting of our stockholders or to bring other business before an annual meeting of our stockholders,
•Subject us to Section 203 of the Delaware General Corporation Law ("DGCL"), which will prohibit us from engaging in business combinations with certain “interested stockholders” for three years following the date such stockholder became interested unless certain criteria are met, and
•Require the approval of holders of at least two-thirds of the outstanding shares of our capital stock then entitled to vote to amend the amended and restated certificate of incorporation and the amended and restated by-laws.

These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of the common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of the common stock if the provisions are viewed as discouraging takeover attempts in the future. The amended and restated by-laws also make it difficult for stockholders to replace or remove management by giving our Board the sole ability to elect and remove officers. These provisions may facilitate management entrenchment that may delay, deter, render more difficult or prevent a change in our control, which may not be in the best interests of the stockholders.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware, or if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware or other state courts of the State of Delaware (each such court, as applicable, the “Selected Forum”), as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Our amended and restated certificate of incorporation provides that the Selected Forum will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed to us or our stockholders by any of our current or former directors, officers, employees or stockholders, (iii) any action asserting a claim against us arising under the DGCL, our amended and restated certificate of incorporation or our amended and restated by-laws or as to which the DGCL confers jurisdiction on a Selected Forum, (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, (v) any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or our amended and restated by-laws, or (vi) any other action asserting an “internal corporate claim” under Section 115 of the DGCL. If a stockholder files any of the preceding actions in a court other than a court located within the State of Delaware (a “Foreign Action”), such stockholder shall be deemed to have consented to (x) the personal jurisdiction of the Selected Forum in connection with any action brought in such court to enforce the choice of forum provision and (y) having service of process made on such stockholder in any such enforcement action by service on the stockholder’s counsel (as such stockholder’s agent) in the foreign action. By becoming a holder of our common stock, a person will be deemed to have notice of and have consented to the provisions of our amended and restated certificate of incorporation related to choice of forum. The choice of forum provision in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

General Risk Factors

If securities or industry analysts publish unfavorable research about us or cease to provide coverage of us, our stock price and trading volume could decline.


The trading market for our common stock will depend in part on the research reports that securities or industry analysts publish about us and our business. If one or more of the securities and industry analysts who cover our stock downgrades the stock or publishes unfavorable research about us, the stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause the stock price or trading volume to decline.


Fluctuations in our quarterly or annual operating results may cause our stock price to decline.


Our quarterly and annual operating results may fluctuate significantly in the future, due to a number of factors, including: seasonality of certain product lines; changes in foreign currency exchange rates; changes in our accounting estimates; timing of operating expenditures; and timing of regulatory approvals and licenses, which could adversely impact the value of our common
Covetrus, Inc. 2020 Form 10-K34
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stock. Furthermore, our results may fluctuate due to a variety of other factors, many of which are outside of our control and may be difficult to predict.


The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on aperiod-to-period basis may not be meaningful. Investors should not rely on past results as an indication of our future performance. This variability and unpredictability could also result in our failure to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if any forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially.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.

Item 1B.

Unresolved Staff Comments

None.

Item 1B.    Unresolved Staff Comments

None

Item 2.

Properties

Item 2.    Properties

Our corporate headquarters consists of twothree facilities located in Portland, Maine. The first facility encompasses approximately 25,000 square feet of office space, the lease for which expires in July 2026. The second facility encompasses approximately 10,000 square feet of office space, the lease for which expires in December 2020. We also utilize approximately 5041 distribution centers and approximately 7565 offices throughout the world.

world and across all segments. We have 4 pharmacies, that are fully licensed in all 50 states and the District of Columbia, as well as an FDA registered outsourcing facility under section 503B of the Federal Food, Drug, and Cosmetic Act.


In August 2018, we signed two new leases for additional office and laboratory space in Portland, Maine. The first is for approximately 117,000 square feet of office space and the second is for approximately 46,000 square feet of laboratory space and will house certain compounding pharmacy operations. Pursuant to the lease agreements, theThe lease terms will commence at the earlier of the date on which(i) when we begin our operations in suchthese facilities, andor (ii) the date on which the landlord obtains a permanent certificate of occupancy. The initial lease terms are for 20 years and include four optional five-year extensions.

In June 2018, we signed a new lease for office space in Phoenix, Arizona. The facility includes approximately 100,000 square feet of office space See Note 7 - Leases under Item 8, Financial Statements and will house certain compounding pharmacy operations. The lease term will commence upon the latest to occur of certain conditions related to our occupancy, receipt of 503B approvals and the availability of a portion of the space previously occupied by another tenant. The initial lease term is 13 years and three months.

Supplementary Data.


We believe that our existing facilities are adequate for our near-term needs, but if we may need additional space as we grow and expand our operations. We believe that suitable additional or alternative office space would be available as required in the future on commercially reasonable terms.

We own or lease the following properties with more than 40,000 square feet:

Property

Location

Own or
Lease		Approximate
Square
Footage		Lease Expiration Date

Office

Dublin, Ohio

Lease66,000November 30, 2020

Office and Distribution Center

Cujik, Netherlands

Lease146,000May 31, 2022

Office and Distribution Center

Auckland, New Zealand

Lease89,000March 31, 2026

Office and Distribution Center

Beringen, Belgium

Lease89,000December 31, 2020

Office and Distribution Center

Prague Rudna, Czech Republic

Lease55,000January 31, 2026

Office and Distribution Center

Kurim-Blanenska, Czech Republic

Lease53,000January 31, 2021

Distribution Center

Copenhagen, Denmark

Own157,000N/A

Distribution Center

Fort Worth, Texas

Lease120,000May 31, 2021

Distribution Center

Lexington, Kentucky

Lease77,000November 30, 2024

Distribution Center

Visalia, California

Lease58,000August 31, 2021

Distribution Center

Des Moines, Iowa

Lease50,000November 5, 2022

Distribution Center

Southaven, Mississippi

Lease48,000November 30, 2024

Distribution Center

Richmond, Virginia

Lease48,000October 31, 2024

Distribution Center

Harrisburg, Pennsylvania

Lease46,000July 31, 2023

Distribution Center

Nocross, Georgia

Lease42,000December 31, 2020

Distribution Center

Albany, New York

Lease40,000April 30, 2021

Distribution Center

Tualatin, Oregon

Lease40,000December 31, 2021

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.


We believe that our properties are in good condition, are well maintained, and are suitable and adequate to carry on our business.business, apart from the space noted above. We have additional operating capacity at certain distribution center facilities.


Item 3.

Legal Proceedings

From time

Item 3.    Legal Proceedings

Refer to time, we may become a party to otherNote 12 - Commitments and Contingencies included in Part II, Item 8, Financial Statements and Supplementary Data in this Report for information on legal proceedings, including, without limitation, product liability claims, employment matters, commercial disputes, governmental inquiries and investigations (which may in some cases involve our entering into settlement arrangements or consent decrees), and other matters arising out of the ordinary course of our business. While the results of any legal proceeding cannot be predicted with certainty, in our opinion none of our pending matters are currently anticipated to have a material adverse effect on our consolidated financial position, liquidity or results of operations.

proceedings.

Item 4.    Mine Safety Disclosures

Not applicable


Item 4.

Mine Safety Disclosures

Covetrus, Inc. 2020 Form 10-K35

Not applicable.

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PART II


Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Our common stock has been listed on the Nasdaq Global Select Market under the symbol “CVET” since February 8, 2019. Prior to that date, there was no public trading market for our common stock. A “when-issued” trading market for our common stock existed between February 4, 2019 and February 7, 2019 under the symbol “CVETV”.


Holders of Common Stock


As of March 15, 2019,February 19, 2021, there were 438473 holders of record of our common stock. This number does not reflect beneficial owners whose shares are held in street name.


Securities Authorized for Issuance Under Equity Compensation Plans

As of December 29, 2018, we did not have any


Information regarding our equity compensation plans.

plans and the securities authorized for issuance thereunder is set forth herein under Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters below.


Dividend Policy


We have never declared or paid any cash dividends on our common stock or any other securities.stock. We anticipate that we will retain all available funds and any future earnings, if any, for use in the operation of our business and do not anticipate paying cash dividends in the foreseeable future. In addition, futureour debt instruments may materially restrict our ability to pay dividends on our common stock. Payment of future cash dividends, if any, will be at the discretion of the boardBoard of directorsDirectors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments, and other factors the boardBoard of directorsDirectors deems relevant.


Stock Performance Graph

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 graph below compares the “Share Sale Agreement, with the selling stockholders, who are “accredited investors,” as such term is defined in Rule 501(a) promulgated pursuant to the Securities Act of 1933, as amended, or the Securities Act, whereby we, subject to the terms and conditions of the Share Sale Agreement and prior to the Distribution, issued shares of our common stock representing in the aggregate 9.9% of the issued and outstanding shares of our common stock, which was equal to 11,008,129 shares of common stock at the time of the sale, at an aggregate offering price of $361,090,029, to the selling stockholders in a transaction that was exempt from registration under the Securities Act. We refer to this transaction as the Share Sale. We relied on the exemption from registration under the Securities Act provided by Section 4(a)(2) for the issuance of sharescumulative total shareholder return of our common stock to the selling stockholders.

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.

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cvet-20201231_g13.jpg
February 7, 2019December 31, 2019March 31, 2020June 30, 2020September 30, 2020December 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

Recent Sales of Unregistered Securities

On May 19, 2020, we issued 250,000 shares of our 7.50% Series A Convertible Preferred Stock (“Series A Preferred Stock”), par value $0.01 per share, for an aggregate purchase price of $250 million (the “Private Placement”). Information with respect to the Private Placement was previously included in our Current Reports on Form 8-K filed with the SEC on May 1, 2020 and May 19, 2020. Subsequent to the Private Placement, we converted the Series A Preferred Stock into common stock. See Item 8. Financial Statements and Supplementary Data - Note 14 - Redeemable Convertible Preferred Stock.

Issuer Purchases of Equity Securities

Not applicable.


The following table sets forth information about our purchases of our outstanding common stock during the quarter ended December 31, 2020:

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 ProgramsApproximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs
October 202010,262 $26.84 — $— 
November 2020748 $26.61 — $— 
December 20207,840 $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-K37
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Item 6.

Selected Financial Data

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

Item 7, “Management’s Discussion and Analysis of6.    Selected Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.”

   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 
Data

   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 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $3,777,994   $3,579,795   $3,353,160   $2,978,328   $2,951,694 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   As of 
   December 29,
2018		   December 30,
2017		   December 31,
2016		   December 26,
2015		   December 27,
2014		 
   (in thousands) 

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 

(1)

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and the combined financial statements and related notes contained in Item 8.

(2)

On February 7, 2019, Henry Schein, Inc. distributed approximately 71 million shares of Covetrus common stock to its shareholders. The computation of basic earnings per common share (“EPS”) for all periods disclosed was calculated using the shares distributed by Henry Schein on February 7, 2019 totaling 71 million. The weighted average number of shares outstanding for diluted EPS for periods prior to the separation included 0.5 million of diluted common share equivalents for restricted stock and restricted stock units as these share-based awards were previously issued by Henry Schein and outstanding at the time of separation and were assumed by Covetrus following the separation.

(3)

The supply chain segment includes the distribution of pharmaceuticals, nutrition products, consumable products, diagnostic tests, small and large equipment, laboratory products and surgical products, among others.

(4)

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.


Not applicable

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Where You Can Find Important Information

We may disclose important

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our financial information through one or moreis summarized in this Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and is intended to help the following channels: SEC filings, public conference callsreader better understand Covetrus, our operations, financial results, and webcasts, press releases,current business environment. This MD&A should be read in conjunction with our consolidated and the social media channels identified on the Newsroom pagecombined financial statements and accompanying notes in Item 8. Financial Statements and Supplementary Data of this Report.

The discussion of our website.

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 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the Animal Health Business’ supply chain segment and itsyear ended December 31, 2019 is incorporated by reference into this MD&A. During the fourth quarter of 2020, in conjunction with our efforts to remediate our income tax material weakness, we identified an error in the calculation of the deferred tax asset related to investments in partnerships. Specifically, as of December 30, 2017 our deferred tax asset was overstated by $42 million. As a result of the overstatement of this deferred tax asset, our valuation allowance established during the year ended December 31, 2019 was overstated. This revision did not affect our statement of operations in any other year. We have revised affected amounts below as of December 31, 2019 from the amounts previously reported.


Overview

We are a global, animal-health technology and value-added services segment made up approximately 97%company dedicated to supporting the companion, equine, and 3%, respectively, of its net sales.

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.


We are organized based upon geographic region and focus on delivering our platform of products and services to our customers on a geographical basis. Our reportable segments are (i) North America, (ii) Europe, and (iii) APAC & Emerging Markets. Our major product groups that we disaggregate within our reportable segments are (i) supply chain services, (ii) software services, and (iii) prescription management. See Note 20 - Segment Data and Note 5 - Revenue from Contracts with Customers.

Across our segments and major product groups, the willingness of Animal Owners to spend with their veterinarians on preventative and therapeutic treatments and procedures is critical to our financial performance. In the companion-animal market specifically, there is an ongoing trend of owners humanizing, or providing the best possible lives for their pets. Across the companion animal, equine, and large animal markets, we anticipate that for us to succeed on our strategic roadmap, we should prioritize value creation with our Customers so that we can seek to strengthen the relationship between Customers and Animal Owners as well as enable our Customers to provide proactive healthcare options to Animal Owners, including our investment in higher margin proprietary brand products and compounding.

See Item 1. Business for a detailed discussion of our corporate mission and strategy that should be read in conjunction with our discussion and analysis of financial condition and results of operations.

Key Factors and Trends Affecting our Results

COVID-19, Growth, and Cost Containment

In an effort to contain COVID-19 or slow its spread, governments around the world enacted various measures, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. The determination of what is an “essential” business is mandated by local authorities. The
Covetrus, Inc. 2020 Form 10-K38
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animal-health industry and veterinary-care sector have proven to be more resilient than originally anticipated. Operationally, all of our distribution centers and pharmacies continue to remain open as veterinary medicine has been deemed an essential service in most geographies across the globe. Our supply chain operations continue to work with manufacturers and suppliers across the globe to provide access to critical supplies and quality products. During 2020, the required responses to mitigate the spread of the pandemic helped shifted customer and animal-owner demand to our online channel due to the demand for our prescription management and online pharmacy services, including the increased adoption of our home delivery services. We continue to see an increase in people adopting pets and also that companion Animal Health Business is now an independent, publicly traded company in connectionOwners are increasing their per visit spend with their veterinarians. We are assessing how to differentiate COVID-19 growth, that may be temporary, with the Separationnormalization of our net sales growth in the third and Merger with Vets First Choice.By separating from Henry Schein,fourth quarters of 2020. However, due to the Animal Health Business is nowrelatively limited passage of time during COVID-19, we have not been able to determine the extent to which utilization of our products and services may be temporary.

During 2020, we undertook certain temporary cost containment measures to help better align our cost structure near-term, including temporary executive, board, and other senior-level employee compensation reductions, employee furloughs in certain European countries, certain shift eliminations, a temporary hiring freeze, discretionary spending deferrals, deferred payroll taxes as available under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and temporarily suspended our 401(k) employer match. We began to ease some of the above-mentioned cash and liquidity conservation measures as the impact of the COVID-19 pandemic on our results of operations, to date, has been less than anticipated. Specifically, we returned to pre-COVID-19 compensation levels and reinstated our 401(k) employer match. At the same time, we continue to closely monitor global developments unfolding during the pandemic and may reinstate any measures that we reverse, or we may take additional actions, as needed, to ensure we have enough liquidity for our business operations. The temporary cost containment measures were beneficial to our Selling, general and administrative (“SG&A”) expenses for 2020; however, costs incurred to grow our business outpaced the decreases we experienced through containment. Absent the cost containment measures, our SG&A would have increased further. For example, we expect that travel and entertainment expenses will return toward previous levels when the COVID-19 pandemic eventually subsides.

Investing in Innovation and Corporate Infrastructure

Since the Transactions, we have been responsible for the costs and governance associated with being an independent, publicly traded company, including costs related to corporate governance, investor and public relations, and public reporting.

While the substantial costs to phase in the ongoing integration of our businesses globally as well as take steps toward identifying our target processes and structure for operations is subsiding, we are still incurring considerable costs to invest in our growth, both through innovation and the internal infrastructure necessary to support that innovation and growth.


Terms with keyKey Suppliers, Customers, and Partners

We are subject to a concentration of risk with our suppliers. as the loss of one of our five major manufacturing relationships, globally, could have a material impact on our financial performance. Each year, suppliers in the veterinary channel engage in negotiations with the Animal Health Businessus regarding pricing terms, including performance rebates and other growth incentives. TheOur supply chain services are dependent upon third-party suppliers, and the results of these negotiations, including whether the contractual relationship remains in place, can have a material impact on the financial performance of the Animal Health Businessour business on an annual basis.

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.


Effective January 1, 2021, we no longer are partnered with Merck & Co., in the U.K., which will result in decreasing net sales in future periods. Using data from 2020, the loss of this supplier in the U.K. in 2021 is not expected to alter the concentration of our top five suppliers. We also are no longer partnered with one of our customers in the U.K., which we expect will cause a decrease in our Net sales in the U.K. We are pursuing options to mitigate the effects of the supplier and customer loss in the U.K., and we do not expect the profitability impact to be significant. For the year ended December 31, 2020, the U.K. represented 13% of our Net sales.

We are working toward a resolution with a third party logistics provider in Germany that we partnered with in late 2020. The costs associatedtransition of our operations over to this third party has resulted in disruption to our supply chain. We are likely to experience ongoing disruption in the near-term with this restructuring are includedpotential medium to long-term impacts. Our German operations represent 2% of our Net sales.

Definition of Non-GAAP Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”)

Adjusted EBITDA is a non-GAAP financial measure used to (i) aid management and investors with year-over-year comparability, (ii) determine management performance under our compensation plans, (iii) plan and forecast, (iv) communicate our financial
Covetrus, Inc. 2020 Form 10-K39
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performance to our Board of Directors, shareholders, and investment analysts, and (v) understand our operating performance without regard to items we do not consider a component of our core ongoing operating performance. Adjusted EBITDA has certain limitations in a separate line item, “restructuring costs” withinthat it does not consider the Animal Health Business’impact of certain expenses to our consolidated and combined statements of operations. AsAdjusted EBITDA excludes share-based compensation, strategic consulting, transaction costs, formation of December 31, 2016, these restructuring activities were completeCovetrus expenses, separation programs and no additional restructuringexecutive severance, carve-out operating expenses, IT infrastructure, goodwill impairment charges, were incurredcapital structure-related fees, operating lease right-of-use asset impairments, managed exits from businesses we are exiting or closing, and other income and expense items, net. Currently, we do not allocate expenses managed at the corporate level, such as corporate wages and related benefits, corporate occupancy costs, professional services utilized at the corporate level, and non-recurring expenses to our operating segments. Other companies may not define or calculate Adjusted EBITDA in the fiscalsame way. We provide Adjusted EBITDA by segment as a supplemental measure to GAAP. See below for our Adjusted EBITDA explanations on a segment basis as well as on a consolidated, non-GAAP basis. Non-GAAP Adjusted EBITDA on a total segment basis is reconciled in Note 20 - Segment Data, as required by ASC 280.

Results of Operations
 Years Ended
(In millions)December 31, 2020December 31, 2019December 29, 2018
Net sales$4,339 $3,976 $3,778 
Cost of sales3,541 3,227 3,094 
Gross profit798 749 684 
Gross margin %18.4 %18.8 %18.1 %
Operating expenses:
Selling, general and administrative867 808 547 
Goodwill impairment— 938 — 
Operating income (loss)$(69)$(997)$137 
Net income (loss)$(17)$(983)$107 
Net income (loss) attributable to Covetrus$(19)$(980)$101 


The year-over-year increase in Net sales for the year ended December 30, 2017.

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.


The year-over-year improvement in Operating loss for the year ended December 31, 2020 compared to the year ended December 31, 2019 was largely due to the goodwill impairment charge in the comparative period of the prior year, partially offset by increased SG&A expense related to various corporate functions as we continue to invest in our corporate infrastructure to enable our growth.

The year-over-year improvement in Net loss for the year ended December 31, 2020 compared to the year ended December 31, 2019 was largely due to the goodwill impairment charge in the comparative period of the prior year, as well as the gain on the divestiture of scil, partially offset by increased SG&A expense related to various corporate functions as we continue to invest in our corporate infrastructure to enable our growth.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Net Sales
(In millions)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 %
Europe1,571 36.2 1,509 38.0 62 4.1 
APAC & Emerging Markets402 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-K40
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Net sales for the year ended December 31, 2020 increased compared to the year ended December 31, 2019 primarily due to improved performance across certain of our markets, a $136 million increase from prescription management growth, and contribution of $70 million in net sales from acquisitions, including $24 million from the acquisition of Vets First Choice being present for a complete year of sales versus only 10.75 months in 2019, partially offset by $89 million of net sales from divestitures as the divested businesses contributed net sales for a full period in 2019, and $7 million due to unfavorable foreign exchange. The drivers by segment are detailed below:

•North America increased primarily due to increased contribution of $136 million from prescription management growth, $118 million of growth in our supply chain business, and $26 million from acquisitions (most of which is related to Vets First Choice being present for a complete year of sales versus only 10.75 months in 2019).

•Europe increased primarily due to $87 million of organic growth across most of our markets in the region, $41 million from our acquisitions in France and Romania being present for the full year in 2020, and favorable foreign exchange of $13 million. This increase was partially offset by $80 million from the disposition of scil and the deconsolidation of a subsidiary in Spain as the divested businesses contributed net sales for a full year in 2019.

•APAC & Emerging Markets increased primarily due to $51 million of organic growth, partially offset by unfavorable foreign exchange of $20 million.

Gross Profit and Gross Margin
(In millions)December 31, 2020Gross
Margin %		December 31, 2019Gross
Margin %		$ ChangeGross Profit
% Change
North America$500 21.0 %$452 21.4 %$48 10.6 %
Europe219 13.9 227 15.0 (8)(3.5)
APAC & Emerging Markets79 19.7 70 19.0 9 12.9 
Total Gross profit$798 18.4 %$749 18.8 %$49 6.5 %

During the year ended December 31, 2020, the increase in Gross profit was largely driven by a $34 million increase from prescription management, improved performance across certain distribution markets, and $18 million from acquisitions in the current year and being present for the full year in 2020 versus a partial period in 2019. These increases were partially offset by $26 million from the disposition of scil and the deconsolidation of a subsidiary in Spain as the divested businesses contributed gross profit for the full year in 2019 and unfavorable foreign exchange of $3 million. The drivers of the increase in our gross profit are further detailed below by segment:

•North America increased primarily due the growth of our prescription management business and $11 million from acquisitions.

•Europe decreased primarily due to $22 million from the disposition of scil and the deconsolidation of a subsidiary in Spain as the divested businesses contributed gross profit for the full year in 2019, partially offset by acquisitions of $6 million being present for the full year in 2020 versus a partial year in 2019, and $5 million from improved performance across certain distribution markets, and $2 million of favorable foreign exchange.

•APAC & Emerging Markets increased due to the contribution of $12 million from organic growth, partially offset by unfavorable foreign exchange of $5 million.

SG&A
(In millions)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 %
Europe184 11.7 186 12.3 (2)(1.1)
APAC & Emerging Markets55 13.7 58 15.8 (3)(5.2)
Corporate133 — 97 — 36 37.1 
Total SG&A$867 20.0 %$808 20.3 %$59 7.3 %

SG&A expenses for the year ended December 31, 2020 increased primarily due to costs related to various corporate functions as we continue to invest in our corporate infrastructure to enable our growth, the increase of $27 million from acquisitions (primarily
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Vets First Choice), $18 million of strategic consulting fees, $8 million operating lease right-of-use asset impairment, increased costs to support the growth in our prescription management business, and $6 million of costs accrued in connection with the managed exit of our French distribution business. These costs were partially offset by decreases due to the disposition of scil and the deconsolidation of a subsidiary in Spain as the divested businesses contributed expenses for a full year in 2019, $12 million decrease in expenses related to the formation of Covetrus, and favorable foreign exchange. The drivers by segment and at Corporate are detailed below:

•North America increased primarily due to the acquisition of Vets First Choice which contributed $18 million incremental expense from a complete year of SG&A expense this year versus 10.75 months last year, $8 million operating lease right-of-use asset impairment, and increased costs to support the growth in our prescription management business, partially offset by $9 million of lower share-based compensation expenses and expenses related to the formation of Covetrus.

•Europe decreased primarily due to $21 million for the disposition of scil and the deconsolidation of a subsidiary in Spain as the divested businesses contributed expenses for a full period in 2019. These decreases were partially offset by $7 million from acquisitions in France and Romania being present for the full year in 2020, $6 million of costs incurred in connection with the managed exit of our French distribution business, $3 million of increased IT and facility costs associated with this restructuring are includedthe formation of Covetrus as we exited our transition service agreements, and unfavorable foreign exchange of $2 million.

•APAC & Emerging Markets decreased primarily due to favorable foreign exchange.

•Corporate grew primarily due to increased costs incurred of $32 million as we continue to invest in our corporate infrastructure to enable our growth and $18 million related to strategic consulting fees, partially offset by decreased expenses of $15 million related to the formation of Covetrus.

Other Income (Expense)
(In millions)December 31, 2020December 31, 2019$ Change% Change
Interest income$1 $2 $(1)(50.0)%
Interest expense(47)(56)9 (16.1)
Other, net91 22 69 313.6 
Other income (expense)$45 $(32)$77 (240.6)%

For the year ended December 31, 2020, we generated other income, net as compared to other expense, net for the year ended December 31, 2019 primarily due to the gain on the divestiture of scil, a separate line item, “restructuring costs” withinmark-to-market adjustment related to our Distrivet options, and a gain on the Animal Health Business’ combined statementsdeconsolidation of operations.

Gross Profit

As a resultour subsidiary, SAHS, in Spain.


Income Taxes

For the year ended December 31, 2020, our effective tax rate was 28.9% compared to 4.5% for the prior year period. The increase in our effective tax rate is primarily related to the sale of different practices of categorizing costs associated with distribution networks throughout the animal health industry, the gross margins of the supply chain segment may not necessarily be comparable to its competitors. The Animal Health Business realizes substantially higher gross margin percentages in its technologyour scil business and value-added services segment than in its supply chain segment. These higher gross margins result from the Animal Health Business being both the developer and seller of software products and services.

The Tax Act

non-deductible share-based compensation.


On December 22, 2017, the U.S. government passed the U.S. Tax Act.Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act is comprehensive tax legislation that implements complex changes to the Code including 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 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”).


The valuation allowance on deferred tax assets was $11 million as of December 31, 2020 and $10 million as of December 31, 2019. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all the deferred tax assets will be realized. The ultimate realization of deferred taxes assets is dependent upon generation of future taxable income or GILTI, Foreign Derived Intangible Income, or FDII, a base erosionduring the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and anti-abusetaxable income in carryback years and tax-planning strategies when making this assessment. The change in valuation allowance for the year ended December 31, 2020 was $1 million and was attributable primarily to an increase related to the uncertainty regarding the realization of future tax or BEAT, that imposes tax onbenefit in certain foreign related-party paymentsjurisdictions and Code Section 163(j) interest limitation, or Interest Limitation.

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. See Note 16 - Income states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The BusinessTaxes.


We elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.

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-K42
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limitation of $2 million for theone-time transition year ended December 31, 2020. We recorded a tax expense for the GILTI provision of $10 million for the year ended December 31, 2019. We have concluded that the Animal Health Business estimated to be $13.0 millionBEAT and a net deferred tax expenseFDII provisions 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 resultedwill not apply to or will not have a material impact on our consolidated financial statements, therefore, we have not recorded an estimate for these items in aone-time tax expense of approximately $20.3 million. Absent the effects of the transition tax, the revaluation of deferred tax assets and liabilities, and the adoption of Accounting Standards Update, or ASU,No. 2016-09, “Stock Compensation” (Topic 718), or ASU2016-09. ASU2016-09, Accounting for Stock Compensation, the Business’ effective tax rate for the yearyears ended December 30, 2017 would have been 22.8% as compared31, 2019 and December 31, 2020.

Due to the Business’ actual effective tax rate of 34.6%.

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


We previously considered the earnings in all of the amount of unrecognizedour foreign subsidiaries as indefinitely reinvested and did not record deferred tax liabilityincome taxes with respect to such earnings is not practicable.

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 
  

 

 

   

 

 

   

 

 

 

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, 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 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

Total

  $3,777,994    100.0%  $3,579,795    100.0%  $198,199    5.5 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

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) 
  

 

 

    

 

 

    

 

 

  

Total

  $684,112    18.1  $652,025    18.2  $32,087   4.9 
  

 

 

    

 

 

    

 

 

  

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) 
  

 

 

    

 

 

    

 

 

  

Total

  $538,469    14.3  $516,703    14.4  $21,766   4.2 
  

 

 

    

 

 

    

 

 

  

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    * 
  

 

 

   

 

 

   

 

 

   

Other income, net

  $6,079   $3,447   $2,632    * 
  

 

 

   

 

 

   

 

 

   

*

Not meaningful.

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 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

Total

  $3,579,795    100.0%  $3,353,160    100.0%  $226,635    6.8 
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

Net sales were $3,579.8 million for the year ended December 30, 2017, compared to $3,353.2 millionjurisdictions would be $2 million.


Adjusted EBITDA
(In millions)December 31, 2020% of Respective Net SalesDecember 31, 2019% of Respective Net Sales$ Change% Change
North America$187 7.9 %$153 7.2 %$34 22.2 %
Europe72 4.6 68 4.5 4 5.9 
APAC & Emerging Markets28 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 %

Total non-GAAP Adjusted EBITDA for the year ended December 31, 2016, an increase2020 increased largely due to prescription management growth and improved performance across certain of $226.6 million, or 6.8%.our markets, partially offset by increasing costs incurred as we continue to invest in our corporate infrastructure to enable our growth.

Adjusted EBITDA is our primary segment performance metric. We do not allocate expenses managed at the corporate level to our segments. See Note 20 - Segment Data for additional information on corporate allocations and for a reconciliation of total adjusted EBITDA to net income (loss) in accordance with ASC 280. The change was drivenchanges by segment and at Corporate are detailed below:

•North America increased primarily by an increase of $206.6due to $22 million in organic growth of our prescription management business and $63.3$13 million from improved performance in our supply chain business.

•Europe increased primarily due to organic growth in certain of our European markets.

•APAC & Emerging Markets increased primarily due to organic growth, from acquisitions, partially offset by unfavorable foreign exchange.

•Corporate contributed a $43.3$22 million decrease primarily due to increased SG&A expenses incurred as we continue to invest in our corporate infrastructure to enable our growth.

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Liquidity and Capital Resources

Impact of COVID-19 on Liquidity and Capital Resources

The spread of COVID-19 as a global pandemic in early 2020 led to rapid pricing fluctuations and changing terms that impacted global capital markets. Many equity prices tumbled and the investment funds flowing into certain debt markets paused or became more expensive to borrowers in the early stages of the pandemic. The capital markets recovered to an extent over the course of the year, however volatility and uncertainty remain. In response to the pandemic, some governments offered deferred tax schemes, guarantees, and loan programs to individuals, small businesses, and larger companies as methods to boost liquidity and maintain workforces to help soften the impact of COVID-19 on capital structures and financial results of businesses. We have not been immune to the impact of COVID-19 and have taken and continue to take steps to improve our liquidity position.

In April 2020, under challenging conditions, we completed the sale of our scil animal-care business for net cash proceeds of approximately $103 million, representing gross proceeds of $110 million, net of cash included in the sale. We used $45 million to prepay our scheduled term loan amortization payments for 2020. In December 2020, we fully prepaid the 2021 Term Loan amortization payments. The next quarterly principal amortization payment of $15 million is due on March 31, 2022.

On May 19, 2020, we sold our Series A Preferred Stock in a private placement transaction for $244 million in net cash proceeds to further enhance our liquidity position. A portion of the Series A Preferred Stock proceeds, coupled with cash flow generated from better than anticipated sales during COVID-19, was used to repay our revolver borrowings outstanding at that time earlier than expected, with the extra weekremainder used to support general corporate purposes (see Note 14 - Redeemable Convertible Preferred Stock). In September 2020, we acted on the opportunity to convert a portion of our Series A Preferred Stock to common stock that resulted in 2016.

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.


Our operational plans to manage our liquidity continue to include seeking opportunities to reduce non-critical capital expenditures, sharpening our focus on collecting amounts owed to us by customers and for supplier rebates, managing opportunistic inventory purchases as we carefully monitor sales for the supply chain segment were $3,479.3 million forforecasts and timing of projected price increases, quickly reducing our other costs, and maximizing our payment terms wherever possible. We also continue to monitor cash flow projections and will consider additional borrowings, if needed, based on availability under our revolving credit facility from time-to-time.

Our interest expense was slightly lower during the year ended December 31, 2020 primarily due to fully paying the required $60 million 2020 amortization payments by April 2020, which reduced our term loan outstanding and lowered monthly floating interest rates applicable to the term loan. The February 2020 amendment to our credit agreement modified the leverage-based pricing grid that determines the quarterly applicable margin to be added to our borrowings, which applicable margin increases, decreases or stays constant in alignment with higher or lower credit agreement-defined leverage. The applicable margin added to our floating interest rate on borrowings outstanding was set at 1.75% based on credit agreement-defined leverage reported for the three-months ending September 30, 2017,2020.

In addition, the February 2020 amendment permitted us to maintain revolving credit facility borrowings near term, if needed, while remaining compliant with our financial covenants as the step down of our credit agreement-defined leverage covenant from 5.50x to 5.00x was delayed until June 30, 2021. We were in compliance with the covenants in our credit agreement as of December 31, 2020. Based on our expected credit agreement-defined leverage as of the year ended December 31, 2020, once the quarterly credit agreement compliance filing is made, the current applicable margin on our credit agreement borrowings outstanding will remain unchanged at least until the next compliance filing is made for the three months ended March 31, 2021.

The duration of the COVID-19 pandemic continues to be unknown. Should the pandemic extend throughout 2021 and beyond, we may experience a negative impact on our liquidity position. Therefore, we continuously assess steps we can take to improve working capital and increase cash on our balance sheet, research government-backed loan programs that may be available to us or to our customers, and closely monitor the capital markets for additional opportunities to improve our liquidity position.

Overview

Covetrus, Inc. 2020 Form 10-K44
Table of Contents

On February 7, 2019, we entered into a $1.5 billion syndicated credit agreement with a group of lenders for a five-year term (the “Credit Facilities”). The Credit Facilities include a $1.2 billion term loan facility (the “Term Loan Facility”), which was fully funded and primarily used to pay a dividend to Henry Schein, and a $300 million revolving line of credit for working capital and general corporate purposes (the “Revolving Credit Facility”). There were no borrowings from the Revolving Credit Facility as of December 31, 2020. See Note 9 - Long-Term Debt and Other Borrowings, Net for more information on our Credit Facilities.

Our primary sources of liquidity are cash and cash equivalents, cash flows generated by the operations of our business, and available borrowing capacity under our credit facility. Longer term, if we desire to access alternative sources of funding through the capital and credit markets, challenging global economic conditions, such as a long-lasting COVID-19 pandemic or economic downturn, could adversely impact our ability to do so. Our principal uses of cash include working capital-related items, capital expenditures, debt service, and strategic investments.

Working capital requirements, which can be substantial and susceptible to fluctuations during the year due to seasonal demands, generally result from sales growth, inventory purchase patterns driven by sales activity and buy-in opportunities, our desired level of inventory, and payment terms for receivables and payables.

Under normal historical operating conditions, we would expect to incur additional disbursements in connection with the following:

•Expansion of global sales and marketing efforts
•Increase of our pharmaceutical compounding operations capacity
•International development
•Equity investments and business acquisitions that we may fund from time to time
•Term loan facility amortization payments (beginning again in March 2022)
•Capital investments in current and future facilities
•Pursuit and maintenance of appropriate regulatory clearances, approvals for existing products, and any new products that may be developed

Business prospects for 2021 and how the global COVID-19 vaccination process unfolds will likely influence whether we pursue some of the opportunities noted above. Regardless, we anticipate that we will continue to incur significant interest expense related to debt service on the Term Loan Facility.

Selected Measures of Liquidity and Capital Resources
(In millions)December 31,
2020		December 31,
2019		December 29,
2018
Cash and cash equivalents$290 $130 $23 
Working capital$740 $511 $514 

We regularly monitor and assess our ability to meet funding requirements. We expect to meet our foreseeable liquidity needs over the next 12 months using our unrestricted cash and cash equivalents of $290 million, cash flow from operations, and access to borrowing capacity available under our Revolving Credit Facility. Our decisions on how we use available liquidity will be based upon the duration of the COVID-19 pandemic, the timing of cash flow generation and our continuing review of the funding needs for our business, as we seek to optimize the allocation of cash resources for investments, capital structure changes or business combinations.

Cash Flows

The following table summarizes our cash flows from operating, investing, and financing activities:
 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)

Cash inflows and outflows from changes in operating activities

Covetrus, Inc. 2020 Form 10-K45
Table of Contents

For the year ended December 31, 2020, net cash provided by operating activities decreased over the year ended December 31, 2019, primarily due to growth in working capital.

For the year ended December 31, 2019, net cash provided by operating activities decreased over the year ended December 31, 2018, primarily due to additional expenses related to the formation of Covetrus and lower operating earnings.

Cash inflows and outflows from changes in investing activities

For the year ended December 31, 2020, net cash used for investing activities decreased compared to $3,254.5 millionnet cash used for investing activities for the year ended December 31, 2016, an increase of $224.9 million, or 6.9%. The change was driven2019, primarily by an increase of $208.6due to $103 million in organic growth and $61.9 millionnet proceeds from the divestiture of growth from acquisitions,scil, partially offset by a $45.6$28 million decrease due to the impact from the extra weekincrease for business acquisitions and a $19 million increase in 2016. The growth in internally generated supply chain revenue was positively affected by year-over-year changes to certain supplier agreements where the Animal Health Business acted as a principal in 2017 versus acting as an agent in the prior year. When excluding the effects of this change, organic growth increased by $195.2 million.

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.


For the year ended December 31, 2016, an increase of $1.8 million, or 1.8%. The change was driven primarily by a $2.2 million increase in2019, net sales denominated in local currencies (including a $2.7 million increase in organic growth, partially offset by a $0.5 million decrease due to the impact from the extra week in 2016) partially offset by a decrease of $0.4 million related to foreign currency exchange.

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 
  

 

 

    

 

 

    

 

 

   

Total

  $652,025    18.2  $619,913    18.5  $32,112    5.2 
  

 

 

    

 

 

    

 

 

   

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.


Cash inflows and outflows from changes in financing activities

For the year ended December 31, 2016, a decrease of 30 basis points.

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) 
  

 

 

    

 

 

    

 

 

  

Total

  $516,703    14.4  $488,816    14.6  $27,887   5.7 
  

 

 

    

 

 

    

 

 

  

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    * 
  

 

 

   

 

 

   

 

 

   

Other income, net

  $3,447   $2,966   $481    16.2 
  

 

 

   

 

 

   

 

 

   

*

Not meaningful.

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


For the year ended December 29, 2018. In connection with the Separation, Henry Schein, Inc. purchased additional equity interest in certain consolidated subsidiaries of the Business.

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.



Contractual Obligations

We have long-term obligations related to borrowing arrangements and leases that we enter into in the normal course of business (see below and Note 7 - Leases, Note9 - Long-Term Debt and Other Borrowings, Net and Note12- Commitments and Contingencies). The following table summarizes selected measures of liquidity and capital resources as of the following dates:

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 
  

 

 

   

 

 

   

 

 

 

Total debt

  $24,204   $26,733   $26,934 
  

 

 

   

 

 

   

 

 

 

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 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

*

The maturity date for the long-term debt is June 30, 2022. Prior to the Separation date of February 7, 2019, the Business’ long-term debt of $23.0 million was repaid.

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)20212022 - 20232024 - 2025After 2025Total
Long-term debt$— $126 $960 $— $1,086 
Interest on long-term debt21 40 2 — 63 
Operating leases (a)
28 51 39 140 258 
Finance leases, including interest1 — — — 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

Unrecognized tax benefits

The Animal Health BusinessTax Benefits


We cannot reasonably estimate the timing of future cash flows related to the unrecognized tax benefits, including accrued interest and penalties, of $6.7$3 million as of December 29, 2018.31, 2020. See Note 1316 - Income Taxes.

Covetrus, Inc. 2020 Form 10-K46
Table of Contents

Off-balance Sheet Arrangements

In April 2020, we made a final payment of $9 million for a 2019 acquisition which increased the amount available to the audited combinedbe borrowed under our revolving line of credit. As of December 31, 2020, we had $1 million outstanding in standby letters of credit that primarily support our obligations related to our insurance programs and $4 million in surety bonds outstanding in support of various U.S. state registrations for pharmaceutical operations and distributions.

Critical Accounting Estimates

Preparing financial statements of the Animal Health Business.

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.


We believe that our policies and estimates including the possibility of obtaining materially different results if different assumptions were to be applied.

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 Note 1 - Business Overview and Significant Accounting Policies for further details.


Business Acquisitions, Acquired Goodwill, and Intangible Assets

Business Acquisitions

The net assets of businesses acquired are recorded at their fair value and the significantaccounting is based on critical estimates, judgments, and judgments used in the preparation of its combined financial statements:

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.


Goodwill

When using the Animal Health Business would then proceed to step two which would require it to calculatequantitative impairment test for assessing goodwill, determining the amount of impairment loss, if any, that it 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 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.


During the first quarter ended March 31, 2020, we experienced a sustained decline in our share price and a resulting decrease in our market capitalization due to the overall macroeconomic effects of the COVID-19 pandemic. Due to this overall market decline and the uncertainty surrounding COVID-19, we concluded that the Animal Health Business uses in its discounted cash flow methodology involve many assumptions by management that are based upon future growth projections.

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;

its carrying amount. Using the income-based approach, fair value exceeded the carrying amount as of March 31, 2020. The income-based approach resulted in a fair value that exceeded the carrying amount by $2 million and $156 million at discount rates of 9.0% and 8.5%, respectively.

significant

We did not experience triggering events for impairment following our testing performed in the first quarter of 2020. Our business has continued to perform well, in particular, prescription management. Our market capitalization has also increased significantly from the first quarter of 2020. As of December 31, 2020, our market capitalization increased over 300% as compared to March 31, 2020.

We completed our annual evaluation for impairment of goodwill during the fourth quarter of 2020. The evaluation indicated that the fair value estimates of our reporting units exceeded their carrying values by sufficient margins and no impairments were required. See Note 8 - Goodwill and Other Intangibles, Net for changes in the mannergoodwill by reporting unit.

Covetrus, Inc. 2020 Form 10-K47
Table of its useContents

As of acquired assets or the strategy for the overall business (e.g., decision to divest a business); or

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.


Intangible Assets

Long-lived


Intangible assets other than goodwill are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows to be derived from such assets.


Definite-lived intangible assets primarily consist ofnon-compete agreements, trademarks, trade names, customer lists, customer relationships, and intellectual property. For long-lived assets used in operations,

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


Loss Contingencies

We are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulations, and other matters arising out of the costnormal course of our business.
Certain of these matters include speculative claims for substantial or indeterminate amounts of damages. We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the possible loss in the notes to our financial statements.

We regularly evaluate developments in our legal matters that could affect whether the amount of the liability can be reasonably estimated and therefore accrued. We adjust our accruals and make changes to our disclosures as appropriate.

Significant judgment is required to determine both probability and the estimated amounts of loss contingencies. Such claims, suits, and proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our control. If any of these estimates and assumptions change, it could have a material impact on our results of operations, financial position, and cash flows.

Income Taxes

We are subject to income taxes in the U.S. and 25 foreign jurisdictions. Significant judgment is required in determining income tax expense, deferred taxes and liabilities and uncertain tax positions. The underlying assumptions are also highly susceptible to change from period to period.

We record a provision for income taxes for the anticipated tax consequences of our reported results of operations using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Although we believe our assumptions, judgments, and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. Should we determine that we would not be able to realize all or part of our net deferred tax asset in a particular jurisdiction in the future, a valuation allowance against the deferred tax asset would be charged to income in the period such determination was made. This valuation allowance is maintained for deferred tax assets that we estimate are more likely than not to be unrealizable based on available evidence at the time the estimate is made. The determination as to whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all positive and negative evidence, including our historical financial results, the source and consistency of those results, whether they should be adjusted for certain one-time or nonrecurring items, whether losses cumulatively exceed income over a reasonable period of time, the availability of tax-planning strategies, availability of carryback and carryforward periods, and other factors, including our expectations of future taxable income. Adjustments to income tax expense, to the extent we establish a valuation allowance or adjust the allowance in a future period, could have a material impact on our financial condition and results of operations. See Note 16 - Income Taxes.

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We identified an error in our calculation of the deferred tax asset related to stock-based awards grantedU.S. partnerships in conjunction with our efforts to employeesremediate our income tax material weakness. See Item 9A. Controls andnon-employee directors. The Animal Health Business measures stock-based compensation at the grant date, based Procedures for information 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. Stock-based compensation expense for the Animal Health Business is reflected in selling, general and administrative expenses in its combined statements of operations.

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.


Accounting Standards Update


For a discussion ofinformation on updated accounting standards updates that we have beenrecently adopted or will be adoptedadopt in the future please refer to periods, see Note 1 of the Combined- Business Overview and Significant Accounting Policies included under Item 8, Financial Statements.

Statements and Supplementary Data.


Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

The Animal Health Business is exposed

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

We have exposure to market risks as well asrelated to changes in foreign currency exchange rates and interest rates as measured against the U.S. dollar and each other, and changes to the credit markets. Henry Schein, on behalf of the Animal Health Business, previously attempted to minimize these risks by primarily using foreign currency forward contracts and by maintaining counter-party credit limits. These hedging activities provided only limited protection against currency exchange and credit risks. Factors that could influence the effectiveness of these hedging programs included currency markets and availability of hedging instruments and liquidity of the credit markets. All foreign currency forward contracts that were entered into were components of hedging programs and were entered into for the sole purpose of hedging an existing or anticipated currency exposure. Henry Schein did not enter into such contracts for speculative purposes and it managed its credit risks by diversifying its investments, maintaining a strong balance sheet and having multiple sources of capital.

follows:


Foreign Currency Agreements

Risk


The value of certain foreign currencies as compared to the U.S. dollar and the value of certain of itsour underlying functional currencies, including itsour foreign subsidiaries, may affect the Animal Health Business’our financial results. Fluctuations in exchange rates, for which we currently conduct our operations in multiple currencies, may positively or negatively affect the Animal Health Business’ revenues, gross margins, and operating expenses, and net Parent Investment, all of which are expressedpresented in U.S. dollars. WhereWe attempt to offset foreign currency assets and liabilities where and when possible, but have not, as of December 31, 2020 or December 31, 2019, entered into hedging arrangements. In the Animal Health Business deemed it prudent, it engaged in hedging programs using primarilyfuture, we may evaluate and decide, to the extent reasonable and practical, to enter into foreign currency forward exchange contracts aimed at limitingwith financial institutions. If we were to enter into such hedging transactions, the market risk resulting from foreign currency fluctuations is unlikely to be entirely eliminated. We do not enter into derivative financial instruments for trading or speculative purposes.

We have exposure to Brexit as approximately 13% of our Net sales was generated by our operations located within the U.K. in 2020. The primary Brexit risk we faced was not foreign currency related but rather was supply chain-related, specifically for our replenishment of certain inventory stock sourced from U.K. vendors who manufactured such goods in their subsidiaries outside the U.K. and thus needed to import those goods into the U.K.

As of December 31, 2020, a hypothetical 5% increase in foreign exchange rates, where we conduct our business in local currency, versus the U.S. dollar would have resulted in a decrease of $3 million in annualized operating income.

Conversely, a hypothetical 5% decrease in foreign exchange rates would have resulted in an improvement of $3 million in annualized operating income.

Interest Rate Risk

As of December 31, 2020, we had variable-rate borrowings outstanding of $1.1 billion under the Credit Facility. Increases in the underlying interest rate elections we make will negatively affect interest expense, while decreases to the underlying interest rates will have a positive influence on our interest expense. We regularly review the projected borrowings under the Credit Facility and the current interest rate environment.
In 2019, we executed interest rate swap contracts with notional amounts aggregating $500 million that are designated as cash flow hedges. See Note 10 - Derivatives. Our earnings are affected by changes in interest rates, however, due to our interest rate swap contracts, the effects are mitigated to an extent.

If market interest rates increase 1% over the next 12 months, our net interest expense, after considering the effects of our interest rate swap contracts, would increase by $7 million.

Conversely, if market interest rates decrease 1% over the next 12 months, our net interest expense, after considering the effects of our interest rate swap contracts, would increase by $2 million.

The market risk resulting from interest rate fluctuations will not be entirely eliminated through our interest rate swap contracts.

Our credit facility contains a LIBOR floor of 0.00% while our interest rate swap contracts do not include floors. Our interest expense could, theoretically, increase should LIBOR fall into negative territory. The further LIBOR falls below the fixed rates set within our swap contracts, the more additional interest expense we pay for swap settlements. Conversely, we receive interest for
Covetrus, Inc. 2020 Form 10-K49
Table of Contents

swap settlements when LIBOR is greater than the swaps’ fixed rates. The higher LIBOR rises above the fixed rates, the less interest expense we effectively pay.

Among the many actions taken by the Federal Reserve System to reduce the impact of foreign currency exchangethe COVID-19 pandemic, the decision by its Federal Open Market Committee to lower interest rates has generally benefited us in the form of lower interest expense. This benefit, though, is offset by higher interest rate swap settlement payments by us, the lower interest rates fall. Thus, the market risk resulting from interest rate fluctuations on earnings. The Animal Health Business used short-term (i.e., 18 months or less) foreign currency forward contracts to protect against currency exchange risks associated with intercompany loans due from its international subsidiaries and the payment of merchandise purchases to foreign suppliers. The Animal Health Business didcan be mitigated but will not hedge the translation of foreign currency profits into U.S. dollars, as it regarded this as an accounting exposure, not an economic exposure. The derivative instruments were allocated to the Animal Health Business based on a specific identification method. A hypothetical 5% change in the average value of the U.S. dollar in 2018 compared to foreign currencies would have changed the 2018 reported net income attributable to the Animal Health Business by approximately $2.5 million.

Short-Termbe entirely eliminated through our interest rate swap contracts.


Short-term Investments

During the fiscal year ended December 29, 2018, the Animal Health Business limited its


We limit our credit risk with respect to itsour cash equivalents and short-term investments and derivative instruments, by monitoring the credit worthiness of the financial institutions who were the counter-partiescounterparties to such financial instruments. As a risk management policy, the Animal Health Business limited the amount ofwe limit credit exposure by diversifying and utilizing numeroussuch investments among investment grade counter-parties.

counterparties.



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Item 8.

Financial Statements and Supplementary Data

Item 8.     Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

Page

Page
56
52

Balance Sheets as of December 29, 201831, 2020 and December 30, 201731, 2019

57
55

Statements of Operations for the years ended December 29, 2018,31, 2020, December 30, 2017,31, 2019, and December 31, 201629, 2018

58
56

Statements of Comprehensive Income (Loss) for the years ended December 29, 2018,31, 2020, December 30, 2017,31, 2019, and December 31, 201629, 2018

59
57

Statements of Shareholders' Equity for the years ended December 29, 2018,31, 2020, December 30, 2017,31, 2019, and December 31, 201629, 2018

60
58

Statements of Cash Flows for the years ended December 29, 2018,31, 2020, December 30, 2017,31, 2019, and December 31, 201629, 2018

61
59

Notes to Consolidated and Combined Financial StatementsStatements:


Note 1: Business Overview and Significant Accounting Policies
61
Note 2: Novel Coronavirus Disease 2019 (“COVID-19”)
62
69
Note 3: Business Acquisitions
70
Note 4: Divestitures and Equity Method Investments
71
Note 5: Revenue From Contracts with Customers
72
Note 6: Property and Equipment, Net
73
Note 7: Leases
73
74
Note 9: Long-Term Debt and Other Borrowings, Net
76
Note 10: Derivatives
78
Note 11: Fair Value
79
Note 12: Commitments and Contingencies
80
Note 13: Redeemable Non-controlling Interests
82
Note 14: Redeemable Convertible Preferred Stock
82
Note 15: Accumulated Other Comprehensive Income (Loss)
82
Note 16: Income Taxes
83
Note 17: Earnings (Loss) Per Share
87
Note 18: Share-based Compensation and Other Employee Benefits
88
Note 19: Related-Party Transactions
90
Note 20: Segment Data
91
Note 21: Summary of Quarterly Data (Unaudited)
94

Covetrus, Inc. 2020 Form 10-K51
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Report of Independent Registered Public Accounting Firm


Board of Directors and stockholders

Shareholders

Covetrus, Inc.

Portland, ME


Opinion on the Consolidated and CombinedFinancial Statements


We have audited the accompanying combinedconsolidated balance sheets of the Animal Health Business (as defined in Note 1)Covetrus, Inc. (the “Company”) as of December 29, 201831, 2020 and December 30, 2017,2019, the related consolidated and combined statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 29, 2018,31, 2020, and the related notes (collectively referred to as the “combined“consolidated and combined financial statements”). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Animal Health BusinessCompany at December 29, 201831, 2020 and December 30, 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2018,31, 2020, in conformity with accounting principles generally accepted in the United States of America.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 1, 2021 expressed an adverse opinion thereon.

Basis for Opinion


These consolidated and combined financial statements are the responsibility of the Animal Health Business’sCompany’s management. Our responsibility is to express an opinion on the Animal Health Business’sCompany’s consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Animal Health BusinessCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America.PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated and combined financial statements are free of material misstatement, whether due to error or fraud. The Animal Health Business is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Animal Health Business’s internal control over financial reporting. Accordingly, we express no such opinion.


Our audits included performing procedures to assess the risks of material misstatement of the consolidated and combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated and combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that our audits provide a reasonable basis for our opinion.


Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2019, the Company adopted Accounting Standards Codification Topic 842, Leases (Topic 842).

Emphasis of Matter


As described in Note 1, the financial statements of the Animal Health Business are not those of a stand alonestandalone entity. The combined financial statements of the Animal Health Business as of December 29, 2018 and for the year ended December 29, 2018 reflect the assets, liabilities, revenues, and expenses directly attributable to the Animal Health Business, as well as allocations deemed reasonable by management, to present the financial position, results of operations, changes in equity, and cash flows of the Animal Health Business on a stand alonestandalone basis and do not necessarily reflect the financial position, results of operations, changes in equity, and cash flows of the Animal Health Business in the future or what they would have been had the Animal Health Business been a separate, stand alonestandalone entity during the periods presented.


Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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Impairment Assessment of North America Reporting Unit Goodwill

As described in Note 8 of the Company's consolidated and combined financial statements, the Company reported goodwill related to its North America reporting unit of $1,187 million as of December 31, 2020. Goodwill impairment is assessed at least annually, at the beginning of the fourth quarter, and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable, including after changes in macroeconomic conditions. The Company concluded that a triggering event occurred and conducted an interim impairment test of goodwill as of March 31, 2020. Impairment analysis for goodwill requires a comparison of the fair value of a reporting unit to its carrying value. The fair value of the reporting unit is measured using both the market approach and income approach, which includes discounted expected cash flows.

We identified the assessment of goodwill impairment as a critical audit matter. Auditing management’s goodwill impairment tests for its North America reporting unit was complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting unit. The value of the North America reporting unit is sensitive to significant assumptions, such as the weighted-average cost of capital and estimated future levels of gross and operating profits, which are affected by expected future market and economic conditions. Auditing management’s impairment assessment involved especially challenging and subjective auditor judgment due to the uncertainty surrounding future events and the extent of specialized skill required to test certain valuation inputs.

The primary procedures we performed to address this critical audit matter included:
•Evaluating the design and testing the operating effectiveness of controls over the Company’s goodwill impairment testing process, including controls over management’s budgeting and forecasting process used to develop forecasts of future gross and operating profits;
•Evaluating the reasonableness of forecasts of future gross and operating profits and projected capital expenditures by comparing forecasts with historical results and industry benchmarks, and performing retrospective reviews and sensitivity analyses; and
•Utilizing professionals with specialized skills and knowledge in valuation to assist in evaluating the valuation models, methodologies and significant assumptions, including the weighted-average cost of capital, used by the Company to estimate the fair value of the North America reporting unit.

Realizability of Deferred Tax Assets

As described in Note 16 to the Company’s consolidated and combined financial statements, the Company had deferred tax assets related to deductible temporary differences and tax attributes of $84 million, net of a $11 million valuation allowance, as of December 31, 2020. The values assigned to deferred tax assets is judgmental, and the realizability of these assets is dependent upon generation of future taxable income during periods in which temporary differences become deductible. In assessing the realizability of deferred tax assets, the Company considers the scheduled reversal of existing temporary tax differences, projected future taxable income, taxable income in carryback years, and changes in tax laws.

We identified the realizability of deferred tax assets as a critical audit matter. The estimation of the future reversal pattern of existing temporary tax differences and other assumptions of future taxable income is subjective and may be affected by future market and economic conditions including changes in tax laws. Auditing these elements was especially challenging due to the nature and extent of auditor judgment involved in evaluating the Company’s estimation of the reversal of timing items and projected future taxable income including through the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included:
•Assessing evidence, both confirming and contradictory, to determine whether it is more likely than not that all or some portion of deferred tax assets will not be realized; and
•Assessing the reasonableness of scheduling of the reversal of existing taxable temporary differences;
•Utilizing professionals with specialized skills and knowledge to assist in evaluating management’s determination of the realizability of deferred tax assets and the overall reasonableness of tax positions which support the conclusions reached.

/s/ BDO USA, LLP

Boston, MA
March 1, 2021
We have served as the Animal Health Business’sCompany’s auditor since 2018.

New York, NY

March 29, 2019

Covetrus, Inc. 2020 Form 10-K53
Table of ContentsANIMAL HEALTH BUSINESS

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


Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Covetrus, Inc.
Portland, ME

Opinion on Internal Control over Financial Reporting

We have audited Covetrus, Inc. (the “Company’s”) internal control over financial statements.

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

COMBINED STATEMENTS OF EQUITY

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) 
  

 

 

  

 

 

  

 

 

 

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) 
  

 

 

  

 

 

  

 

 

 

Net cash (used in) provided by financing activities

   (119,695)   15,036   20,307 
  

 

 

  

 

 

  

 

 

 

Effect of exchange rate changes on cash and cash equivalents

   (2,173)   2,241   (1,654) 
  

 

 

  

 

 

  

 

 

 

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 
  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents, end of period

  $23,324  $16,656  $19,714 
  

 

 

  

 

 

  

 

 

 

Cash paid for income taxes

  $11,767  $7,698  $6,756 
  

 

 

  

 

 

  

 

 

 

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.


We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.

We also have audited, in accordance with the distribution, andstandards of the subsequent merger of a subsidiary of Spinco with and into Direct Vet Marketing, Inc. (d/b/a Vets First Choice)Public Company Accounting Oversight Board (United States) (“PCAOB”), with Vets First Choice continuing as the Surviving Company and a wholly owned subsidiary of Spinco. On February 7, 2019, the Parent completed these transactions and Spinco changed its name to Covetrus, Inc. The separation resulted in approximately 71 million sharesconsolidated balance sheets of Covetrus, Inc. common stock distributed(the “Company”) as of December 31, 2020 and 2019, the related consolidated and combined statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to shareholdersas “the financial statements”) and our report dated March 1, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of Henry Schein. See Note 4the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and Note 18 for additional information.

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.


We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements havewill not be prevented or detected on a timely basis. A material weakness regarding management’s failure to design and maintain controls over the accounting for income taxes has been derived fromidentified and described in management’s assessment. This material weakness was considered in determining the consolidatednature, timing, and extent of audit tests applied in our audit of the 2020 financial statements, and accounting recordsthis report does not affect our report dated March 1, 2021 on those financial statements.

Definition and Limitations of Henry Schein. These combinedInternal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the combined historical results of operations, financial positiontransactions and cash flowsdispositions of the Businessassets of the company; (2) provide reasonable assurance that transactions are recorded as they were historically managednecessary to permit preparation of financial statements in conformityaccordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the United States (“GAAP”company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ BDO USA, LLP
Boston, MA
March 1, 2021
Covetrus, Inc. 2020 Form 10-K54
Table of Contents

COVETRUS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
December 31, 2020December 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, net530 636 
Other receivables67 67 
Prepaid expenses and other37 30 
Assets held for sale (Note 4)0 51 
Total current assets1,431 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 other90 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 liabilities67 44 
Accrued taxes37 18 
Other current liabilities181 164 
Liabilities held for sale (Note 4)0 21 
Total current liabilities691 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 liabilities136 94 
Total liabilities1,923 2,096 
Commitments and contingencies (Note 12)00
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, respectively1 1 
Accumulated other comprehensive loss (Note 15)(66)(86)
Additional paid-in capital2,629 2,339 
Accumulated deficit(1,027)(1,001)
Total shareholders’ equity1,537 1,253 
Total liabilities, mezzanine equity, and shareholders’ equity$3,496 $3,359 

See notes to consolidated and combined financial statements.
Covetrus, Inc. 2020 Form 10-K55
Table of Contents

COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
 Years Ended
December 31, 2020December 31, 2019December 29, 2018
Net sales (Note 5)$4,339 $3,976 $3,778 
Cost of sales3,541 3,227 3,094 
Gross profit798 749 684 
Operating expenses:
Selling, general and administrative867 808 547 
Goodwill impairment (Note 8)0 938 0 
Operating income (loss)(69)(997)137 
Other income (expense):
Interest income1 2 1 
Interest expense(47)(56)(3)
Other, net91 22 8 
Income (loss) before taxes and equity in earnings of affiliates(24)(1,029)143 
Income tax benefit (expense) (Note 16)7 46 (37)
Equity in earnings of affiliates0 0 1 
Net income (loss)(17)(983)107 
Net (income) loss attributable to redeemable non-controlling interests(2)3 (6)
Net income (loss) attributable to Covetrus$(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:
Basic11810771
Diluted11810772

See notes to consolidated and combined financial statements.

Covetrus, Inc. 2020 Form 10-K56
Table of Contents

COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
 Years Ended
December 31, 2020December 31, 2019December 29, 2018
Net income (loss)$(17)$(983)$107 
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)23 (3)(43)
Unrealized gain (loss) from foreign currency hedging activities0 0 (1)
Gain (loss) on derivative instruments(3)(1)0 
Pension adjustment gain0 0 2 
Total other comprehensive income (loss)20 (4)(42)
Comprehensive income (loss)3 (987)65 
Comprehensive (income) loss attributable to redeemable non-controlling interests:
Net (income) loss(2)3 (6)
Foreign currency translation (gain) loss(2)(1)2 
Comprehensive (income) loss attributable to redeemable non-controlling interests(4)2 (4)
Comprehensive income (loss) attributable to Covetrus$(1)$(985)$61 

See notes to consolidated and combined financial statements.

Covetrus, Inc. 2020 Form 10-K57
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COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions, except share amounts)
Common StockAccumulated Other Comprehensive Income (Loss)Additional
Paid-in
Capital		Accumulated DeficitNet Former Parent InvestmentTotal Shareholders' Equity
SharesAmount
December 30, 20170 $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, 20180 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 plans885,392 — — 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, 2019111,620,507 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 plans1,793,394 — — 10 — — 10 
Share-based compensation— — — 40 — — 40 
Series A preferred stock dividend— — — — (7)— (7)
Conversion of Series A preferred stock22,604,063 — — 246 — — 246 
Other comprehensive income (loss)— — 20 — — — 20 
December 31, 2020136,017,964 $1 $(66)$2,629 $(1,027)$0 $1,537 

(a) Net income earned from January 1, 2019 through February 7, 2019 is attributed to the Former Parent as it was the sole shareholder prior to February 7, 2019

(b) See Note 3 - Business Acquisitions

See notes to consolidated and combined financial statements.
Covetrus, Inc. 2020 Form 10-K58
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COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In millions)
Years Ended
December 31, 2020December 31, 2019December 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 amortization166 155 64 
Amortization of right-of-use assets24 21 0 
Goodwill impairment0 938 0 
Operating lease right-of-use asset impairment8 0 0 
Gain on divestiture of a business(73)0 0 
Share-based compensation expense40 46 7 
Deferred income taxes(32)(25)(5)
Equity in earnings of affiliates0 0 (1)
Amortization of debt issuance costs6 5 0 
Loss on managed exit of a business7 0 0 
Other(10)(10)0 
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net(68)13 (13)
Inventories, net106 (58)(42)
Other assets and liabilities(19)(92)(34)
Accounts payable and accrued expenses(85)93 75 
Net cash provided by operating activities53 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, net103 0 0 
Proceeds from sale of property and equipment4 0 1 
Net cash used for investing activities(5)(65)(29)
Cash flows from financing activities:
Proceeds from revolving credit facility190 0 0 
Repayment of revolving credit facility(190)0 0 
Proceeds from the issuance of debt0 1,220 0 
Principal payments of debt(122)(43)(2)
Debt issuance and amendment costs(5)(24)0 
Dividend paid to Former Parent0 (1,174)0 
Issuance of common shares in connection with share-based compensation plans10 5 0 
Net transfers from Former Parent0 165 274 
Distributions to non-controlling shareholders0 0 (10)
Proceeds from issuance of Series A preferred stock250 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 subsidiaries0 (74)(382)
Net cash provided by (used for) financing activities104 66 (120)
Effect of exchange rate changes on cash and cash equivalents8 3 (2)
Net change in cash and cash equivalents160 107 7 
Cash and cash equivalents, beginning of period130 23 16 
Cash and cash equivalents, end of period$290 $130 $23 
Covetrus, Inc. 2020 Form 10-K59
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COVETRUS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In millions) (Continued)
Years Ended
December 31, 2020December 31, 2019December 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 

See notes to consolidated and combined financial statements.

Covetrus, Inc. 2020 Form 10-K60
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(In millions, except per share amounts)



1. BUSINESS OVERVIEW AND SIGNIFICANT ACCOUNTING POLICIES

Business

Covetrus, Inc. is a global animal-health technology and services company dedicated to supporting the companion, equine, and large-animal veterinary markets.

On February 7, 2019, Henry Schein completed the spin-off of its Animal Health Business and transferred the applicable assets, liabilities, and ownership interests to us (the “Separation”) and distributed all the shares of our common stock that were then owned by Henry Schein to its stockholders of record as of January 17, 2019 (the “Distribution”).

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 Note 9 - Long-Term Debt and Other Borrowings, Net). We then acquired Vets First Choice in an all-stock transaction (the “Acquisition”).


Immediately following the Share Sale, Distribution, and Acquisition, on a fully diluted basis, (i) approximately 63% of our outstanding common stock was owned by (a) shareholders of Henry Schein and the Share Sale investors, and (b) specific employees of the Animal Health Business who held certain equity awards, and (ii) approximately 37% was owned by (a) shareholders of Vets First Choice, and (b) certain employees of Vets First Choice who held certain equity awards. On February 8, 2019, our common stock began regular-way trading under the symbol “CVET” on the Nasdaq Global Select Market.

Basis of Presentation and Principles of Consolidation

We prepared the accompanying consolidated and combined financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).

Except as otherwise specifically noted, the combined financial statements and other financial information for the fiscal year ended December 29, 2018 relate to the Animal Health Business, as this period predates the February 7, 2019 effective date of the Acquisition. This Form 10-K does not include the accountshistorical financial results of Vets First Choice for the fiscal year ended December 29, 2018 and does not include any pro forma financial statements of Covetrus.

Beginning with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, Covetrus began reporting on a consolidated basis, representing the combined operations of the Animal Health Business and Vets First Choice and their respective subsidiaries. The Animal Health Business is deemed the acquirer in this combination for accounting purposes under GAAP, therefore, the Animal Health Business is considered Covetrus’ predecessor and the historical combined financial statements of the Animal Health Business prior to February 7, 2019 are reflected in Covetrus’ quarterly and annual reports as Covetrus’ historical financial statements.

The accompanying consolidated and combined financial statements include the operations of the Company as well as those of our wholly-owned and majority-owned subsidiaries from their respective dates of inception or acquisition. All significant intercompany transactions and balances are eliminated in consolidation. All intracompany transactions have been eliminated and all of its controlled subsidiaries.

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.


The combined financial statements include expense allocations for: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;costs, (ii) employee benefits and incentives;incentives, and (iii) stock-basedshare-based compensation. These expenses have been allocated to the Animal Health Business based on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of net sales, headcount, or other measures of the Animal Health Business and Henry Schein. The Animal Health Business believes the bases on which the expenses have been allocated are a reasonable reflection of the utilization of services provided to, or the benefit received by, the Animal Health Business during the periods presented. The allocations may not, however, reflect the actual expenses that the Animal Health Business would have incurred as a stand alonestandalone company for the periods presented. Actual costs that may have been incurred if the Animal Health Business had been a stand alonestandalone company would depend on a number of
61
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COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

factors, including the chosen organizational structure, what functions were outsourced or performed by employees, and strategic decisions made in areas such as information technology and infrastructure. Following the separation from Henry Schein,Separation, these functions have been performed using the Business’our own resources or third-party service providers. For an interim period, however, someAs of these functions will continue to be provided by Henry Schein underDecember 31, 2020, we exited all our transition services agreements which are plannedwith our Former Parent.

During the fourth quarter ended December 31, 2020, we recorded a revision to extenddeferred tax assets associated with investment in partnerships. The revision to deferred tax assets to correct for athe overstatement was $42 million. We have concluded that this adjustment was not material to any previously issued financial statements. See Note 16 - Income Taxes.

Certain immaterial prior period of upamounts were reclassified to 21 months following the closing.

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.


Use of Estimates

The preparation of


Preparing financial statements in conformity with GAAP requires the Businessus to make estimates and assumptions that affect the amounts reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date ofdisclosed in the financial statements and the reported amounts of revenues and expenses during the reporting period. Actualaccompanying notes. Changes in circumstances could cause actual results couldto differ materially from thosethese estimates.

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.


Fiscal Year

The Business reports its results of operations and cash flows


During fiscal year 2018, we operated on a52-53 week 52-53-week basis ending on the last Saturday of December. TheFor fiscal year 2019, we adopted a last day of the calendar year accounting and operating cycle. We made this change on a prospective basis and did not adjust operating results for periods prior to 2019 as the results were not material. Unless otherwise indicated, year-end 2020, 2019, and 2018 refer to our fiscal years ended December 31, 2020, December 31, 2019, and December 29, 2018, and December 30, 2017 consisted of 52 weeks, and the year ended December 31, 2016 consisted of 53 weeks.

respectively.


Revenue Recognition

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


We recognize revenue when a customer obtains control of promised goods or services in an amount that reflects the consideration that the Business expectswe expect to receive for those goods or services. To recognize revenue, the Business doeswe do the following:

identify

•Identify the contract(s) with a customer;

customer

identify•Identify the performance obligations in the contract;

contract

determine•Determine the transaction price;

price

allocate•Allocate the transaction price to the performance obligations in the contract; and

contract

recognize•Recognize revenue when, or as, the entity satisfies a performance obligation.

obligation

The Business generates


Our revenue is generated from the following major product categories:

•Supply Chain Services- primarily includes the sale of animal healthanimal-health consumable products, including our own proprietary and Covetrus-branded products, small equipment, laboratory products, large equipment, equipment repair services, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products, parasiticides, and vitamins and supplements to wholesale and retail customers. Our value-added practice solutions include equipment repair, inventory management, e-commerce, as well as equipment,continuing education services for practitioners.
•Software Services- includes practice management software productssystems for veterinary practitioners and animal-health clinics, client communication services, reminders, data backup services, and other sources. Provisionshardware sales and support.
•Prescription Management- includes the distribution of finished goods pharmacy products, specialty pharmaceutical compounding, e-commerce, shipping, manufacturer incentives, service fees, and data integration and support services.

We estimate the transaction price at contract inception, including any variable consideration, and update the estimate each reporting period for any changes in circumstances. Variable consideration, including provisions for discounts, rebates to customers, customer

returns, and other contra revenue adjustments 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-K62
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

Many of our contracts with customers require us to take possession of the inventory, provide the goods or services, and establish the price for the goods or services. Revenue and cost of sales from this type of contract are recognized on a gross basis. From time to time, certain contracts require us to arrange for the Business performs the sales function and, in some cases, performs the billing function,procurement of goods or services on behalf of our customer, but doeswe do not purchase or take title of the product from the supplier whichbefore they are knowntransferred to our customer. In this type of contract, we are acting as agency relationships.

an agent, and revenue is recognized on a net basis (revenue less cost of sales is included in Net sales) (“Net Agency Revenue”), as the supplier is the primary obligor, bears the inventory and credit risk, establishes the price, determines the product specifications, and the amount is fixed. Payment terms differ by customer and jurisdiction and generally range from 30 to 60 days.


Supply Chain Services

Revenue derived from the sale of consumable products is recognized at a point in time when control transfers to the customer. Such sales typically entail high-volume,low-dollar orders shipped using third-party common carriers. The Business believesWe believe that the shipment date is the most appropriate point in time indicating control has transferred to the customer, because the Business haswe have no post-shipment obligations, and this is when legal title and risks and rewards of ownership transfer to the customer, and the point at which the Business haswe have an enforceable right to payment.


Revenue derived from the sale of equipment is recognized when control transfers to the customer. This generally occurs when the equipment is delivered. Such sales typically entail scheduled deliveries of large equipment primarily by equipment service technicians. Some equipment sales require minimal installation which is typically completed at the time of delivery. The Business’Our products generally carry standard warranty terms provided by the manufacturer, however, in instances where the Business provideswe provide warranty labor services, the warranty costs are accrued in accordance with ASC 460 “Guarantees.”

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.


Software Services

Revenue derived from the sale of software products is recognized when products are shipped to customers or made available electronically. Such software is generally installed by customers and does not require extensive training due to the nature of its design. Revenue derived from post-contract customer support for software, including annual support, and/or training is generally recognized over time using time elapsed as the input method that best depictslife of the transfersupport period while revenue from training services is recognized over the period the services are provided.

Prescription Management

Revenue under this category is primarily generated from two sources: (i) prescription management and pharmacy services (including the distribution of finished goods products, specialty pharmaceutical compounding, shipping, manufacturer incentives, and service fees), which is recognized when control transfers to the customer.

customer, typically upon shipment or delivery, and (ii) data integration and support services (including software as a service, initial setup to connect customers to hosted software applications, data conversions, custom software developments, upgrades and enhancements, training, software configuration, and technical support), which is recognized over the period the services are provided.


Other Revenue

Revenue derived from other sources, including freight charges and equipment repairs, is recognized when the related product revenue is recognized or when the services are provided. The Business appliesWe applied the practical expedient to treat shipping and handling activities performed after the customer obtains control as fulfillment activities, rather than a separate performance obligation in the contract.

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.


Certain of the Business’our revenue is derived from bundled arrangements that include multiple distinct performance obligations that are accounted for separately. When the Business sellswe sell software products together with related services (e.g., training and technical support), it allocateswe allocate revenue to software using the residual method, usingutilizing an estimate of the stand aloneour standalone selling price to estimate the fair value of the undelivered

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-K63
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

Sales, value-add, and other taxes we collect concurrently with revenue-producing activities are excluded from revenue, and are recorded as liabilities and included in Accrued taxes. See Note 25 - Revenue from Contracts with Customers and Note 1520 - Segment Data for additional disclosures of disaggregated net sales by segment and geographic data.

disclosures.


Contract Balances


Contract balances represent amounts presented in the combinedconsolidated balance sheetsheets when we have either the Business has transferred goods or services to the customer or the customer has paid consideration to the Businessus under the contract. These contract balances include accounts receivable, contract assets, and contract liabilities.


Accounts Receivable


The carrying amount of accountsAccounts receivable is reduced by a valuationan allowance that reflects the Business’our best estimate of the amounts that willare not expected to be collected. In addition to reviewing delinquentWe estimate and reserve for our expected credit loss exposure based on our experience with past due accounts, write-off history, the aging of accounts receivable, the Business considers many factors in estimating its reserve, including historicalour analysis of customer data, experience, customer types, credit worthinesscurrent economic conditions, and economic trends.reasonable and supportable future forecasts. From time to time, the Business adjusts itswe adjust our assumptions for anticipated changes in any of these or other factors expected to affect collectability.

Accounts receivable balances are written off when it is probable that all contractual payments due will not be collected.


Contract Assets


Contract assets include amounts related to any conditional right to consideration for work completed but not billed as of the reporting date and generally represent amounts owed to the Businessus by customers, but not yet billed. Contract assets are transferred to accounts receivable when the right becomes unconditional. Current contract assets are included in prepaidPrepaid expenses and other and thenon-current contract assets are included in investmentsInvestments and other within the combinedconsolidated balance sheet.sheets. The contract assets primarily relate to the bundled arrangements for the sale of equipment and consumables and sales of term software licenses. Current andnon-current contract asset balances as of December 29, 2018 and December 30, 2017 were not material.


Contract Liabilities


Contract liabilities are comprised of advance payments and deferred revenue amounts. Contract liabilities are transferred to revenue once the performance obligation has been satisfied. Current contract liabilities are included in accrued expenses-otherOther current liabilities and thenon-current contract liabilities are included in otherOther liabilities within the combinedconsolidated balance sheet.sheets. The contract liabilities primarily relate to advance payments from customers and upfront payments for service arrangements provided over time. At December 30, 2017, the current portion of contract liabilities of $19.6 million was reported in the accrued expenses other, and $0.1 million related tonon-current contract liabilities was reported in other liabilities. During the year ended December 29, 2018, the Business recognized $17.2 million of the amount previously deferred at December 30, 2017. At December 29, 2018, the current andnon-current portion of contract liabilities were $18.3 million and $0.3 million, respectively.

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


We classify all highly liquid short-term investmentsinstruments with an original maturity of three months or less to beas cash equivalents. Due toWe maintain cash depository accounts with high-quality banks throughout the short-term maturity of such investments, the carrying amounts are a reasonable estimate of fair value. Outstanding checks in excess of fundsworld. Our cash on deposit primarilyin the U.S. may at times exceed federally insured limits. We have not incurred any related to paymentslosses for inventory, were reclassified as accounts payable as ofthe years ended December 31, 2020, December 31, 2019, and December 29, 2018 and December 30, 2017.

2018.


Inventories


Inventories consist primarily of finished goods and are valued at the lower of cost or net realizable value. When inventory is adjusted to net realizable value, the corresponding adjustment is included in Cost of sales. Cost is determined by thefirst-in,first-out method for merchandise or actual cost for large equipment and high-tech equipment. In accordance with theour policy for inventory valuation, the Business considerswe consider many factors, including the condition and salability of the inventory, historical sales, forecasted sales, and market and economic trends. From time to time, the Business adjusts the Business’we adjust our assumptions for anticipated changes in any of these or other factors expected to affect the value of inventory.


We record a liability for unconditional purchase commitments with contract suppliers for quantities greater than future demand forecasts consistent with excess and obsolete inventory valuations. As of December 31, 2020 and 2019, we did not record any liability related to excess unconditional purchase commitments.

We are subject to a concentration of risk with our suppliers, as 5 suppliers accounted for approximately 50% of our purchases for the years ended December 31, 2020 and 2019.
Covetrus, Inc. 2020 Form 10-K64
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)


Assets and Liabilities Held for Sale

Assets and liabilities are considered held for sale when certain criteria are met, including when management has committed to a plan to sell the asset, the asset is available for sale in its immediate condition, and the sale is probable within one year of the reporting date. Assets and liabilities held for sale are reported at the lower of cost or fair value less costs to sell. See Note 4 - Divestitures and Equity Method Investments.

Shipping and Handling Costs


Freight and other direct shipping costs are included in costCost of sales. Direct handling costs, which represent primarily direct compensation costs of employees who pick, pack, and otherwise prepare, if necessary, merchandise for shipment to customers, are reflected in selling,Selling, general and administrative expenses. Direct shipping and handling costs were $31.6 million, $28.4 million and $23.9 million for the years ended December 29, 2018, December 30, 2017 and December 31, 2016, respectively.

administrative.


Advertising


Advertising costs are charged to operations when incurred as part of selling,Selling, general and administrative expenses. The Business receivesadministrative. We receive reimbursements from certain vendors for advertising costs. Reimbursements for

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.


Supplier Rebates

The Business receives


We receive quarterly and annual performance rebates from suppliers based upon attainment of certain sales and/purchase or purchasesales goals. Supplier rebates are included as a reduction of costCost of sales and are recognized over the period they are earned. The factors considered in estimating supplier rebate accruals include forecasted inventory purchases and sales in conjunction with supplier rebate contract terms, which generally provide for increasing rebates based on either increased purchase or sales volume.


Property and Equipment


Property and equipment are stated at cost, net of accumulated depreciation orand amortization. Depreciation is computed primarily under the straight-line method (see Note 5 – Property and Equipment, Net for estimated useful lives).method. Amortization of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the assets or the lease term.

terms. See Note 6 - Property and Equipment, Net.


Capitalized software costs consist of costs to purchase and develop software.software for internal use. Costs incurred during the application development stage for software bought and further customized by outside suppliers, for use and software developed by a supplier for the proprietary use, and costs incurred for the Business’our own personnel who are directly associated with software development are capitalized.


Income Taxes

The Business accounts


We account for income taxes under an asset and liability approach that requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. In estimating future tax consequences, the Businesswe generally considersconsider all expected future events other than enactments of changes in tax laws or rates. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized as income or expense in the period of the enactment date. Accounting for the Tax Cuts and Jobs Act, enacted on December 22, 2017, is further discussed in See Note 13.

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.


Our tax provision for the Business has beenfiscal years 2019 and 2018 were prepared utilizing the separate return methodology as if the Businesswe had not been included in a consolidated or group income tax return with Henry Schein. Current income tax liabilities are presented based on current amounts owed for the current tax year for entities that file separate returns. Current taxes payable for entities that joined in a consolidated or group filing with Henry Schein have beenwere settled in netNet Former Parent investment consistent with other intercompany obligations.



Covetrus, Inc. 2020 Form 10-K65
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

Redeemable Convertible Preferred Stock

We classified our redeemable convertible preferred stock issued on May 19, 2020 as mezzanine equity on our consolidated balance sheets as the redemption features were outside of our control. We recorded redeemable convertible preferred stock at fair value upon issuance, net of any issuance costs. Our redeemable convertible preferred stock was converted during the year ended December 31, 2020. See Note14 - Redeemable Convertible Preferred Stock.

Redeemable Non-Controlling Interests

Some minority equity owners in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities. As a result of these redemption features, we record the non-controlling interests as redeemable and classify them as mezzanine equity on our consolidated balance sheets initially at their acquisition-date fair value. The non-controlling interests are adjusted each reporting period for income (or loss) attributable to the non-controlling interests. A measurement period adjustment, if any, is then made to adjust the non-controlling interests to the higher of redemption value or carrying value each reporting period. These adjustments are recognized through retained earnings and are not reflected in net income or net income attributable to Covetrus. SeeNote 13 - Redeemable Non-controlling Interests.

Share-based Compensation

Share-based compensation represents the cost related to share-based awards granted to employees and non-employee directors, which are measured at the grant date fair value. We recognize share-based compensation expense, net of estimated expected forfeitures, on a straight-line basis over the requisite service period of the award, which is included in Selling, general and administrative in our consolidated and combined statements of operations.

Foreign Currency Translation and Transactions


The financial position and results of operations of the Business’our foreign subsidiaries are determined using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at eachyear-end. year end. Statement of operations accounts are translated at the average rate of

exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates 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


Derivatives

Our global business exposes us to minimize exposurerisks related to fluctuationschanges in foreign currency exchange rates and interest rates. The objective wasOur financial risk management program is designed to manage the impact that foreign currency exchange rate fluctuations could have on recognized assetexposure arising from cash flow variability and liability fair values, earnings and cash flows. The Business’ risk management policy required thatuses derivative contracts used as hedges be effective at reducing the risks associated with the exposure being hedged and be designated as a hedge at the inception of the contract. The Business doesfinancial instruments to minimize this risk. We do not enter into derivative financial instruments for trading or speculative purposes. The derivative instruments primarily included foreign currency forward agreements related to certain intercompany loans and certain forecasted inventory purchase commitments with foreign suppliers. The derivative instruments were allocated to the Business based on a specific identification basis.

Foreign currency forward agreements related to forecasted inventory purchase commitments were designated as cash flow hedges. Foreign currency forward agreements related to foreign currency balance sheet exposure provide economic hedges but 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.


For cash flow hedges, the effective portion of the changes in the fair value of the derivative along with any gain or loss on the hedged item, wereare recorded as a component of accumulatedAccumulated other comprehensive income (loss) and subsequently reclassified into earnings in the period(s) during which the hedged transaction affects 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.


Business Acquisitions


The net assets of businesses acquired are recorded at their fair value at the acquisition date and the consolidated and combined financial statements include their results of operations from that date. Any excess of acquisition consideration over the fair value of identifiable net assets acquired is recorded as goodwill. The major classes of assets and liabilities that the Businesswe generally allocatesallocate purchase price to, excluding goodwill, include identifiable intangible assets (e.g., trademarks and trade names, customer relationships and lists, andnon-compete agreements), accounts receivable, inventory, property plant and equipment, deferred taxes, and other current and long-term assets and liabilities. The estimated fair value of identifiable intangible assets is based on critical estimates, judgments, and assumptions derived from analysis of market conditions, discount rate, discounted cash flows, customer retention rates, and estimated useful lives. Some prior ownersSee Note 3 - Business Acquisitions.

Covetrus, Inc. 2020 Form 10-K66
Table of such acquired businesses are eligible to receive additional purchase price cash consideration if certain financial targets are met. For the years ended December 29, 2018, December 30, 2017 and December 31, 2016, there were no material adjustments recordedContents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

Goodwill

As noted in the combined statements of operations relating to changes in estimated contingent purchase price liabilities.

Redeemable Noncontrolling Interests

Some minority equity owners in certain of the Animal Health Business’ subsidiaries have the right, at certain times, to require us toBusiness Acquisitions above, our Goodwill is derived when we acquire their ownership interest in those entities at fair value. Their interests are classified outside permanent equity on the combined balance sheets and are carried at the estimated redemption amounts. The redemption amounts have been estimated based on expected future earnings and cash flows and, if such earnings and cash flows are not achieved, the value of the redeemable noncontrolling interests might be

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.


Some important factors that could trigger an interim impairment review include:

significant

•Significant underperformance relative to expected historical or projected future operating results;

results,

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);,

•Sustained decline in our share price and a resulting decrease in our market capitalization, or

significant•Significant negative industry or economic trends.

The Business performed this assessment in the current year by evaluating quantitative


See Note 8 - Goodwill and qualitative factors to determine whether goodwill was impaired. There were no such impairment charges recognized during the years ended December 29, 2018, December 30, 2017Other Intangibles, Net and December 31, 2016.

Long-Lived Note 11 - Fair Value.


Long-lived Assets


Long-lived assets, other than goodwill, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets.


Definite-lived intangible assets consist primarily ofnon-compete agreements, trademarks, trade names,patents, customer relationships, and intellectual property.product development. For long-lived assets used in operations, impairment losses are

only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. 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.


Leases

We evaluate whether an arrangement is or contains a lease at contract inception. For all our leases, we determine the classification as either operating or financing. Leases with an initial term of 12 months or less are not recognized on the balance sheet. We have lease agreements with both lease and non-lease components, which are generally accounted for together as a single lease component. We recognize lease expense for these leases on a straight-line basis over the lease term. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use the incremental borrowing rate which is based on similarly secured borrowings available to us at commencement date in determining the years ended December 29, 2018, December 30, 2017present value of future lease payments. We use the implicit rate when readily determinable. See Note 7 - Leases.

Equity Method Investments

Equity investments are accounted for using the equity method of accounting if the investment gives us the ability to exercise significant influence, but not control, over an investee. Equity method investments are included within Investments and December 31, 2016.

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-K67
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

Cost of Sales


The primary components of costCost of sales include the cost of the product (net of purchase discounts, supplier chargebacks, and rebates) and inbound and outbound freight charges. Costs related toOur distribution network costs, such as purchasing, receiving, inspections, warehousing, internal inventory transfers, and other related costs of the Business’ distribution network are included in selling,Selling, general and administrative expenses along with other operating costs.

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.


Cost of sales also includes costs directly related to the design and production of software, distribution of licenses, hardware and costs related to services provided, and amortization of the capitalized costs for internally generated software for resale.


Amortization of intangible assets is also included within our Cost of sales if the costs and expenses related to the specific class of intangible assets are directly linked with revenue-generating activities. We include the amortization of our product formulas within Cost of sales as these formulas are directly tied to the production of compounded products as alternatives to back-ordered solutions, patient-specific customized medications, and in-clinic use medications. Amortization expense for intangible assets that are not directly related to sales-generating activities is included in Selling, general and administrative expenses.

Loss Contingencies

We are subject to loss contingencies, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulations, and other matters arising out of the normal course of our business. We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the possible loss in the notes to our financial statements. See Note 12 - Commitments and Contingencies.

Comprehensive Income


Comprehensive income (loss) includes certain gains and losses that, under GAAP, are excluded from net income as such amounts are recorded directly as an adjustment to equity. Comprehensive income (loss) is primarily comprised of net income, foreign currency translation gain (loss), unrealized gain (loss) from foreign currency hedging activities, and pension adjustment gain (loss).


Accounting Pronouncements Adopted

In May 2014, FASB issued


•As of January 1, 2020, we adopted Accounting Standard UpdateNo. 2014-09, “Revenue from Contracts with Customers,”Standards Codification Topic 606. The Business adopted the provisions of this standard as of December 31, 2017, on a modified retrospective basis. The Business applied the requirements of the new standard only to contracts that were not completed as of the adoption date. The Business recorded an immaterial adjustment to the opening balance of net Parent investment for the adoption of Topic 606. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

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 
  

 

 

   

 

 

   

 

 

 

Total

  $3,777,994   $3,777,859   $135 
  

 

 

   

 

 

   

 

 

 

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,


•Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740): Simplifying the FASB issued ASUNo. 2017-04, “Intangibles-GoodwillAccounting for Income Taxes,” removes specific technical exceptions to general principles found in Topic 740, items that often produce information that investors have difficulty understanding and Other” (Topic 350) (“ASU2017-04”). ASU2017-04 eliminates step two fromsimplifies the goodwill impairment test, thereby eliminating the requirement to calculate the implied fair value of a reporting unit. ASU2017-04 will require the Business to perform an annual goodwill impairment test by comparing the fair value of the reporting units to the carrying value ofaccounting for income taxes. The standard is effective for fiscal years, and interim periods within those units. If the carrying value exceeds the fair value, the Business will be required to recognize an impairment charge; however, the impairment charge should not exceed the amount of goodwill allocated to such reporting unit. ASU2017-04 is required to be implemented on a prospective basis for fiscal years, beginning after December 15, 2019. The Business does2020, with early adoption permitted. As of January 1, 2021, we adopted this ASU and it is not expect that the requirements of ASU2017-04 willexpected to have a material impact on the combinedresults of our consolidated financial statements.

In August 2017, the FASB issued


•ASUNo. 2017-12, “Derivatives and Hedging” 2020-04, “Reference Rate Reform (Topic 815) (“ASU2017-12”), which simplifies the requirements for hedge accounting, more closely aligns hedge accounting with risk management activities and increases transparency848): Facilitation of the scopeEffects of Reference Rate Reform on Financial Reporting,” provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting for contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”). The standard is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. Our term loan and revolving line of credit bear interest on a floating rate basis at our option, which are referenced to LIBOR. The banking syndicate associated with our credit facility intends to cease using the 1 week and 2 month USD LIBOR at the end of 2021, with the other USD Tenors to cease June 30, 2023. Our credit agreement will be amended accordingly.
Covetrus, Inc. 2020 Form 10-K68
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

2. NOVEL CORONAVIRUS DISEASE 2019 (“COVID-19”)

The COVID-19 pandemic developed throughout 2020 and in response to the pandemic, measures were and continue to be instituted, including phased temporary closures of non-essential businesses throughout many of the regions in which we conduct operations. Veterinary care has been deemed an essential business in most of these regions and we continue to deliver products and services to our customers and their animal-owner clients. In addition, most of our customers are generally able to continue their operations by following new social distancing guidelines which, depending on local regulations, can include telehealth and animal curbside check-in and drop-off at clinics. To date, we continue to experience limited disruption to our results of hedging activities. This ASU amendsoperations from the presentationCOVID-19 pandemic. However, the COVID-19 pandemic continues to create volatility and disclosure requirementsunpredictability to our business, including shifts in timing and provides options for new hedging strategieschannel mix, inventory replenishment, reduced travel and methodsentertainment expenses due to travel restrictions, expected extension of assessing hedge effectiveness in certain circumstances. ASU2017-12 is required to be implemented for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Business does not expect that the requirements of ASU2017-12 will have a material impactour workforce working from home based on the combined financial statements.

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.


We believe our allowance for interim and annual reporting periods beginning after December 15, 2018. The Business does not expect that the requirements of ASU2018-02 will have a material impact on the combined financial statements.

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.


During the first quarter ended March 31, 2020, we experienced a sustained decline in our share price and a resulting decrease in our market capitalization due to the overall macroeconomic effects of the COVID-19 pandemic. Due to this overall market decline and the uncertainty surrounding COVID-19, we concluded that a triggering event occurred and conducted an interim impairment review of our goodwill as of March 31, 2020. We tested for goodwill impairment by quantitatively comparing the fair value of our North America reporting unit (the only reporting unit currently bearing goodwill) to its carrying amount. Using the income-based approach, fair value exceeded the carrying amount as of March 31, 2020. We did not experience triggering events during the remainder of 2020. We conducted our annual goodwill impairment testing and determined that our fair value significantly exceeds our carrying value of goodwill.

We have taken the following actions to help ensure that our business has flexibility to mitigate potential effects from continued global economic pressure:

•During the quarter ended March 31, 2020, we borrowed funds under our revolving line of credit to increase our cash position and provide flexibility. In May 2020, we issued 7.50% Series A Convertible Preferred Stock (“Series A Preferred Stock”) which have since been fully converted, and we used a portion of the $244 million aggregate net proceeds to repay borrowings under our revolving line of credit. See Note 9 - Long-Term Debt and Other Borrowings, Net and Note 14 - Redeemable Convertible Preferred Stock
•We reduced our non-critical, near-term planned capital expenditures
•We negotiated for extended payment terms on certain contracts
•We managed our inventory levels in line with expected demand
•We instituted cost containment measures including temporary executive, board, and other senior-level employee compensation reductions, employee furloughs in certain European countries, certain shift eliminations, a temporary hiring freeze, discretionary spending deferrals, deferred payroll taxes as available under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and temporarily suspended our 401(k) employer match

During the second half of 2020, we returned to pre-COVID-19 compensation levels and reinstated our 401(k) employer match. We continue to monitor our business performance and take a cautious yet balanced approach in managing our expenses due to uncertainty created by the COVID-19 pandemic. Some of the measures we implement from an expense management perspective may continue as we transform our business. The temporary cost containment measures described above were beneficial to our Selling, general and administrative (“SG&A”) expenses for 2020; however, costs incurred to grow our business outpaced the decreases we experienced through containment. Absent the cost containment measures, our SG&A expenses would have increased further.

Risk and Uncertainties

The duration and severity of COVID-19-related potential disruptions and the actions we have taken, and may take in the future, in response thereto, involve risks and uncertainties, and it is not possible at this time to estimate the impact that COVID-19 could have on our business. The impact of COVID-19 on various business activities in affected countries could adversely affect our estimates, results of operations, and financial condition.
Covetrus, Inc. 2020 Form 10-K69
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

3. BUSINESS ACQUISITIONS

Vets First Choice

On February 7, 2019, we acquired Vets First Choice. See Note 1 - Business Overview and Significant Accounting Policies. During the third quarter ended September 30, 2019, we recorded a measurement period adjustment, which was made to reflect the facts and circumstances in existence as of the acquisition date. This adjustment reflected a reduction to the purchase price of $30 million, offset by a corresponding decrease to goodwill. This measurement period adjustment related to the cancellation of 700,400 Covetrus shares issued to Vets First Choice shareholders that were held in escrow. During the fourth quarter ended December 31, 2019, we recorded a final measurement period adjustment of $4 million which decreased the deferred tax liability with a corresponding decrease to goodwill. The estimated consideration and fair value in the tables below have been updated to reflect this measurement period adjustment.

The acquisition date fair value of the consideration transferred consisted of the following:
Estimated Consideration
Total Covetrus shares issued to Vets First Choice shareholders39,041,689
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 service62 
Vets First Choice debt repaid at close24 
Vets First Choice expenses paid at close18 
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)

The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed:
Estimated Fair Value
Fair value of net assets acquired$14 
Goodwill1,324 
Intangible assets545 
Deferred tax liabilities(107)
Total acquisition cost$1,776 

We determined the estimated fair value of the identifiable intangible assets after review and consideration of relevant information including discounted cash flow analysis, market data, and management’s estimates. We engaged an independent valuation firm to assist in determining the fair value of the acquired intangible assets. The value attributed to the other identifiable intangible assets included $20 million in trademarks and trade names, $50 million in product formulas, $125 million in customer relationships, and $350 million in developed technologies. The useful lives of trademarks and trade names is 5 years, product formulas is 11 years, customer relationships is 11 years, and developed technologies is 5 years. These intangible assets are being amortized over a weighted-average period of seven years.

The goodwill by $46.1 million, net Parent investment by $43.2 million, deferred income taxes by $4.8from this transaction arose because of our expected ability to leverage existing and new marketing opportunities across a larger revenue base. The goodwill from this transaction is not deductible for tax purposes.

The results of operations of Vets First Choice are included in our consolidated results of operations since February 7, 2019, during which period Vets First Choice contributed revenue of $246 million and accumulated other comprehensivenet loss by $1.9of $525 million.

Covetrus, Inc. 2020 Form 10-K70
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In addition,millions, except per share amounts)

The following unaudited pro forma financial information presents the beginning balanceresults of net Parent investmentoperations for the years ended December 31, 2019 and December 29, 2018 as if the Acquisition had occurred as of December 26, 2015 was increased by $43.2 million within the combined statements31, 2017. The unaudited pro forma results reflect certain adjustments for items that are not expected to have a continuing impact, such as adjustments for transaction costs incurred, management fees, and purchase accounting.

The information presented below has been prepared for comparative purposes only and does not purport to be indicative of equity. The revisions were considered immaterial based on quantitative and qualitative considerations because they affected total assets by only 2% and had no impact on the combined statementseither future results of operations or cash flows.

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 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,927,600   $615,651   $1,234,743   $3,777,994 
  

 

 

   

 

 

   

 

 

   

 

 

 

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, 2019December 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)

Veterinary Study Groups

On October 7, 2020, we acquired an 80% interest in Veterinary Study Groups, Inc., which manages a family of more than 50 Veterinary Management Groups in the combined financial statementsUnited States and Canada. The goodwill from their respective acquisition dates.

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 Note 8 -Goodwill and other certain countries around the world. As of December 29, 2018, the Business has $8.1 million of goodwill related to this acquisition.

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.

Other Intangibles, Net and Note 13 - Redeemable Non-controlling Interests.

The Business

Other

We completed certain other acquisitions during the yearsyear ended December 29, 2018 and December 30, 2017,31, 2020 which were immaterial to the combinedour consolidated financial statements individually andor in the aggregate. As

4. DIVESTITURES AND EQUITY METHOD INVESTMENTS

Divestitures

On April 1, 2020, we completed the divestiture of December 29, 2018, and December 30, 2017, the Business recorded approximately $3.2our scil animal-care business (“scil”) to Heska Corporation for $110 million and $48.1 million, respectively, of goodwill through preliminarypursuant to an amended purchase price allocations for these acquisitions. Total acquisition transaction costs incurred inagreement. During the year ended December 29, 2018 were immaterial31, 2020, we recorded a pre-tax gain of $73 million included in Other, net in our consolidated and combined statements of operations which reflects a $1 million foreign exchange adjustment for the finalization of the purchase price. It was primarily included within our Europe segment.

During the third quarter of 2020, we announced a managed exit of the operations of our French distribution business specializing in medicines, pet food, equipment, and services for veterinary clinics. We accrued $6 million in severance costs based on French statutory requirements and $1 million of other costs associated with this decision. We ceased operations as of December 31, 2020, including the sale of certain assets.

Equity Method Investments

On April 30, 2020, we completed the previously announced combination of our subsidiary, Spain Animal Health Solutions S.L.U. (“SAHS”), with Distrivet, S.A. to form a leading animal-health provider on the combined statementIberian Peninsula. We contributed SAHS by means of operations.

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”).


Based on Distrivet's governance structure, we do not have power over key financial and operating decisions that are made in the ordinary course of business. Accordingly, our investment in Distrivet is accounted for under the equity method and Distrivet is considered a related party. See Note 19 - Related-Party Transactions.

Covetrus, Inc. 2020 Form 10-K71
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

The computationInvestment and Shareholders Agreement of basic earnings per common share (EPS) for all periods disclosed was calculated usingDistrivet, S.A. (“Agreement”) executed on January 13, 2020, contains put and call options on the shares distributedowned by Henry Scheinthe Distrivet Shareholders, representing up to 49.99%, that are exercisable at fair market value based on February 7, 2019 totaling 71 million.floor and ceiling prices tied to Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) multiples as specified in the Agreement. See Note 11 - Fair Value.

During the second quarter of 2020, we deconsolidated SAHS, remeasured our retained investment initially at a fair value of $45 million, which was included in Investments and other in our consolidated balance sheets, and recognized a gain of $1 million, which was included in Other, net in our consolidated and combined statements of operations. The weighted average numberfair value was measured using third-party valuation models and was determined using both the market approach and income approach, which includes discounted expected cash flows. As of shares outstanding for diluted EPS forDecember 31, 2020, the periods prior to separation also include 0.5carrying amount of our investment in Distrivet was $50 million which was included in Investments and other in our consolidated balance sheets.

5. REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of diluted commonRevenue

The tables below presents our revenue disaggregated by major product category and reportable segment:
Year Ended December 31, 2020
Supply Chain ServicesSoftware ServicesPrescription ManagementEliminationsTotal
North America$1,969 $78 $406 $(76)$2,377 
Europe1,574 10 0 (13)1,571 
APAC & Emerging Markets394 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 ServicesSoftware ServicesPrescription ManagementEliminationsTotal
North America$1,816 $82 $246 $(33)$2,111 
Europe1,513 10 0 (14)1,509 
APAC & Emerging Markets361 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 ServicesSoftware ServicesPrescription ManagementEliminationsTotal
North America$1,858 $83 $0 $(2)$1,939 
Europe1,462 11 0 (10)1,463 
APAC & Emerging Markets380 7 0 0 387 
Eliminations(11)0 0 — (11)
Total Net sales$3,689 $101 $0 $(12)$3,778 

Covetrus, Inc. 2020 Form 10-K72
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share equivalents for restricted stock and restricted stock units as these share-based awards were previously issued by Henry Schein and outstanding at the time of separation and were assumed by Covetrus following the separation.

The numerator for both basic and diluted EPS is net income.

amounts)


Contract Balances

The following is a reconciliationtable presents information about our receivables and contract liabilities from contracts with customers:
Balance Sheet LocationDecember 31, 2020December 31, 2019
Accounts receivable:
Accounts receivable, netAccounts receivable, net$507 $426 
Contract liabilities:
Deferred revenue, currentOther current liabilities$22 $37 

For the years ended December 31, 2020 and 2019, our contract assets and long-term contract liabilities were determined to be immaterial. For the year ended December 31, 2020, deferred revenue recognized from performance obligations completed this period approximates the balance outstanding as of basic sharesDecember 31, 2019.

Performance Obligations

Estimated future revenues expected to diluted shares.

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 
  

 

 

   

 

 

   

 

 

 

Diluted shares

   71,973    71,973    71,973 
  

 

 

   

 

 

   

 

 

 

5. Property and Equipment, Net

be generated from long-term contracts with unsatisfied performance obligations as of December 31, 2020 were not material.



6. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following as of:

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 
  

 

 

   

 

 

 
   142,057    128,160 

Less: accumulated depreciation

   73,508    63,606 
  

 

 

   

 

 

 

Property and equipment, net

  $68,549   $64,554 
  

 

 

   

 

 

 

Estimated Useful LifeDecember 31,
2020		December 31,
2019
LandN/A$1 $1 
Buildings and permanent improvements10-40 years10 9 
Leasehold improvementsLesser of the useful life or lease terms21 20 
Machinery and warehouse equipment2-12 years45 44 
Furniture, fixtures, and other2-10 years46 36 
Computer equipment and software2-10 years76 57 
Capital in progress23 10 
Total property and equipment, gross222 177 
Less: accumulated depreciation and amortization(106)(84)
Total Property and equipment, net$116 $93 

The following table sets forth our depreciation and amortization expense related to property and equipment:
Years Ended
Location202020192018
Cost of sales$1 $3 $2 
Selling, general and administrative30 25 13 
Total depreciation and amortization expense$31 $28 $15 


7. LEASES

We have office space, warehouse facilities, vehicles, and equipment under non-cancelable operating leases with third parties. The leases have remaining lease terms of 1 to 14 years.

Rent expense charged to operations under operating leases during the years ended December 31, 2020 and 2019 was $30 million and $25 million, respectively. Common Area Maintenance and taxes for the years ended December 31, 2020 and 2019 was $3 million and $2 million, respectively. Short-term lease expense and variable rent expense for the years ended December 31, 2020 and 2019 were not material. Rent expense, under ASC 840, was $20 million for the year ended December 29, 2018.

Covetrus, Inc. 2020 Form 10-K73
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

The following table presents the lease balances within the consolidated balance sheets and other supplemental information related to our leases as of:
December 31, 2020December 31, 2019
Operating Leases:
Operating lease right-of-use assets, net$117 $84 
Accrued expenses, other$22 $19 
Other liabilities107 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 leases8.1 years6.8 years
Finance leases2.5 years2.4 years
Weighted-average discount rate:
Operating leases3.5 %3.5 %
Finance leases3.8 %8.1 %

The following table presents the maturities of our lease liabilities as of December 31, 2020:
Operating LeasesFinance Leases
2021$26 $1 
202221 0 
202318 0 
202415 0 
202512 0 
Thereafter57 0 
Total minimum lease payments149 1 
Less: amount representing interest(20)0 
Present value of net minimum lease payments129 1 
Less: current portion of lease obligations(22)(1)
Long-term lease obligations$107 $0 

As of December 31, 2020, we had additional operating leases that have not yet commenced which included the following:

Estimated Useful
Lives (in years)

Buildings and permanent improvements

Description		Commencing40Lease TermTotal Future Lease Payments

Machinery and warehouse equipment

Compounding pharmacy		Expected 20215-1020 years$28 

Furniture, fixtures and other

New corporate headquarters		Expected 20213-1020 years78 

Computer equipment and software

3-10
Total$106 

Depreciation expense



8. GOODWILL AND OTHER INTANGIBLES, NET

Goodwill

Covetrus, Inc. 2020 Form 10-K74
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

During the first quarter of 2019, in connection with the Separation, Distribution, and Acquisition, we made changes to our organizational and reporting structure. With these changes, we revised our reportable segments and goodwill was reallocated to the new reporting segments. See Note 20 - Segment Data.

In August 2019, we released our results for the three and six months ended June 30, 2019 which failed to meet expectations and included a downward revision to our previously provided full-year guidance for the year ended December 31, 2019. We experienced a sustained decline in our share price and a resulting decrease in our market capitalization. These events triggered an interim impairment review as of August 31, 2019. Based on our analysis, we determined that the carrying value of our reporting units exceeded their fair value and recorded an impairment charge. See Note 11 - Fair Value for further information.

The changes in the Goodwill balances by segment for the years ended December 29, 2018, December 30, 201731, 2020 and December 31, 2016 was $15.4 million, $12.6 million2019 were as follows:
North AmericaEuropeAPAC & Emerging MarketsTotal
Balance at December 29, 2018 (a)
$529 $172 $49 $750 
Foreign currency translation0 (8)(1)(9)
Goodwill additions1,280 57 16 1,353 
Goodwill impairment(653)(221)(64)(938)
Divestitures and related adjustments (b)
(2)0 0 (2)
Balance at December 31, 20191,154 0 0 1,154 
Goodwill additions (c)
33 0 0 33 
Balance at December 31, 2020$1,187 $0 $0 $1,187 
(a) Recast to conform to 2019 presentation
(b) Attributable to scil; see Note 4 - Divestitures and Equity Method Investments
(c) See Note 3 - Business Acquisitions
North AmericaEuropeAPAC & Emerging MarketsTotal
Accumulated impairment as of December 31, 2019$(653)$(221)$(64)$(938)
Accumulated impairment as of December 31, 2020$(653)$(221)$(64)$(938)

Other Intangibles, Net

We periodically review our long-lived assets for indications of impairment to determine if the carrying value is recoverable and $11.7 million, respectively,exceeds fair value. The carrying amount of long-lived assets is not recoverable if it exceeds the sum of undiscounted cash flows expected as a result from use and was included within selling, general and administrative expenses ineventual disposition of the combined statements of operations.

asset.

6. Intangible Assets


Definite-lived intangible assets consisted of the following as of:

   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 
Trademarks64 (33)31 
Patents30 (28)2 
Product development403 (143)260 
Non-compete agreements2 (1)1 
Total Other intangibles$1,025 $(470)$555 
(a) Includes $45 million primarily related to customer relationships; see Note 3 - Business Acquisitions

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Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

 December 31, 2019
CostAccumulated
Amortization		Net
Customer relationships$503 $(234)$269 
Trademarks60 (28)32 
Patents30 (24)6 
Product development406 (71)335 
Non-compete agreements2 (1)1 
Total Other intangibles$1,001 $(358)$643 

Other intangible assets were established through business acquisitions. The Business amortizesWe amortize intangible assets on a straight-line basis over thetheir estimated useful life.Non-compete agreements represent amounts paid primarily to key employees and prior owners of acquired businesses, as well as certain sales persons, in exchange for placing restrictions on their ability to pose a competitive risk to the Business. Such amounts are amortized, on a straight-line basis, over the respectivenon-compete period, which generally commences upon termination of employment or separation from the Business. Amortizationlives.

The table below sets forth amortization of intangible assets was $48.2 million, $46.2 million and $43.4 million for the years ended December 29, 2018, December 30, 2017 and December 31, 2016, respectively, and was included within selling, general and administrative expenses in the combined statements of operations.

assets:

Years Ended
Location202020192018
Cost of sales$5 $4 $0 
Selling, general and administrative130 123 49 
Total amortization$135 $127 $49 

The estimated future amortization of intangible assets is as follows:

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 
  

 

 

   

 

 

   

 

 

 

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 
2022128 
2023114 
202459 
202522 
Thereafter101 
Total$555 


9. LONG-TERM DEBT AND OTHER BORROWINGS, NET

Long-term debt and December 31, 2016, respectively.

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 DateMaturity DateRate as of December 31, 2020December 31, 2020December 31, 2019
Revolving line of creditFebruary 2019February 20240 %$0 $0 
Term loan payable in quarterly installments of $15 million began March 31, 2020February 2019February 20242.6 %1,080 1,200 
Loan payable with balloon payment due at maturityFebruary 2019March 20234.0 %6 6 
Finance lease obligations1 1 
Total1,087 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-K76
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)


On February 7, 2019, we entered into a $1.5 billion syndicated credit agreement with a five-year term (the “Credit Facility”) primarily to capitalized costspay a dividend to Henry Schein, as well as provide funding for internally generated softwareworking capital and general corporate purposes. The Credit Facility is comprised of the following:
Total AmountAmount 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

In February 2020, the Credit Facility was amended, and the revised terms are reflected below.

The term loan and revolving line of credit bear interest on a floating rate basis at our option, according to a leverage-based pricing grid and incur fees as follows:

•LIBOR (ranging from one month to 12 months) subject to a floor of 0.00%
◦plus, an applicable margin ranging from 1.25% to 2.50% annually based on our leverage ratio at the end of the prior quarter.
•Alternative base rate determined as 1.00% plus the highest of the Prime Rate, Federal Funds Rate plus 0.50%, or one month LIBOR
◦plus, an applicable margin ranging from 0.25% to 1.50% annually based on our leverage ratio at the end of the prior quarter.
•Unused capacity under the revolving line of credit loan incurs a fee ranging from 0.175% to 0.400% per annum based on our leverage ratio at the end of the prior quarter.
•Additionally, customary letter of credit fees, as well as fronting fees, are incurred for resaleletters of credit outstanding.

The applicable margins on LIBOR and alternative base rate borrowings fluctuated over the course of 2020. As of December 31, 2020, the applicable margins on LIBOR and alternative base rate borrowings were 1.75% and 0.75%, respectively, for both the term loan and revolving line of credit. The commitment fee for the yearsrevolving line of credit as of December 31, 2020 was 0.25%.

Starting March 31, 2020, the term loan began amortizing in quarterly installments equal to 5.00% per annum of the initial borrowed amount and requires full payment at maturity of all remaining amounts owed. No amortizing payments are required for the revolving line of credit, however all amounts owed are due at maturity. We have the option to prepay both the term loan and revolving line of credit without penalty, subject to certain conditions. If the aggregate balance of loans outstanding exceeds the lender's commitments made to the revolving line of credit at any time, then the amount of such excess is required to be repaid. Mandatory prepayments of the term loan are required in an amount equal to the net cash proceeds of, subject to specific conditions, (i) certain assets sales, (ii) certain debt offerings, and (iii) certain insurance recovery and condemnation events.

Additionally, the Credit Facility limits or restricts our ability, subject to certain exceptions, to:

•Incur additional indebtedness
•Make dividends and other restricted payments
•Incur additional liens
•Consolidate, merge, sell, or otherwise dispose of all or substantially all assets
•Make investments
•Transfer or sell assets
•Enter into restrictive agreements
•Change the nature of the business
•Enter certain transactions with affiliates

Covetrus, Inc. 2020 Form 10-K77
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

On April 10, 2020, we used $45 million in net cash proceeds from the sale of scil (see Note 4 - Divestitures and Equity Method Investments) to prepay our remaining quarterly principal amortization term loan payments for 2020. On December 31, 2020, we prepaid $60 million of scheduled term loan amortization payments for 2021. Following this prepayment, the next quarterly principal amortization term loan payment of $15 million is due on March 31, 2022.

Starting April 1, 2019, we were required to maintain a net interest coverage ratio of greater than 3.00x at the end of each quarter and a leverage ratio of less than 5.50x, which latter financial covenant was to begin stepping down with the quarter ended June 30, 2020.

We amended our Credit Facility primarily to delay the step down of our leverage ratio covenant from 5.50x to 5.00x until our second quarter ending June 30, 2021. The leverage ratio covenant steps down to 4.50x for the quarter ending December 31, 2021 and then to 3.75x for the quarter ending June 30, 2022 and thereafter.

We continuously monitor our compliance with the terms and conditions of our Credit Facility and take such actions as are necessary to attain and ensure compliance. We were in compliance with all financial covenants as of and for the year ended December 29, 2018, December 30, 201731, 2020.

The Credit Facility is guaranteed by Covetrus, the subsidiary borrower, and its subsidiary guarantors. We have pledged substantially all tangible and intangible assets, as well as our ownership interests in certain subsidiary companies, in support of the Credit Facility.

The following table presents the maturities of our Long-term debt and other borrowings, net as of December 31, 20162020:
Credit FacilityOther DebtTotal Repayments
2021$0 $1 $1 
202260 0 60 
202360 6 66 
2024960 0 960 
Total debt maturities1,080 7 1,087 
Less: current maturities0 (1)(1)
Less: unamortized debt issuance costs(18)0 (18)
Long-term maturities$1,062 $6 $1,068 


10. DERIVATIVES

We are exposed to the impact of changes in interest rates in the normal course of business. Our financial risk management program is designed to manage the exposure arising from this cash flow risk and uses derivative financial instruments to minimize this risk. We do not enter into derivative financial instruments for trading or speculative purposes.

In July and August 2019, we executed interest rate swap contracts with notional amounts aggregating $500 million that are designated as cash flow hedges to manage interest rate risk on our floating rate debt. These interest rate swap contracts adjust the amount of our total debt that is subject to variable interest rates by effectively fixing the borrowing rates on a portion of our floating rate debt discussed in Note 9 - Long-Term Debt and Other Borrowings, Net.

Our interest rate swap agreements exchange payment streams based on the notional principal amount. These agreements fix our future interest rates ranging from 1.63% to 1.70% plus the applicable margin as provided in our debt agreement on an amount of our debt principal equal to the then-outstanding swap notional amount. The base notional for these agreements matures on July 31, 2021. On the interest rate swap inception dates, we designated the swaps as a hedge of the variability in cash flows we pay on our variable rate borrowings.

Covetrus, Inc. 2020 Form 10-K78
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

The following table discloses the fair value and balance sheet location of our derivative instruments:
Liability Derivatives
Cash Flow Hedging InstrumentsBalance Sheet LocationDecember 31, 2020December 31, 2019
Interest rate swap contractsOther liabilities$5 $1 

At inception of the hedging contract, we used statistical regression to assess the effectiveness of the interest rate hedges. The hedging contracts were deemed highly effective and are expected to be highly effective throughout the hedge period. Therefore, we perform a qualitative assessment of the hedge effectiveness at each subsequent quarterly reporting date. Derivative gains and losses are initially reported as a component of Other comprehensive (loss) income and subsequently recorded in the consolidated statement of operations when the hedged transaction was $0.5 million, $0.2 millionrecognized in earnings.

The effect of cash flow hedges on our consolidated and $0.3 million, respectively, and was included within cost of sales in the combined statements of operations.

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 InstrumentsLocation20202019
Interest rate swap contractsInterest (income) expense$5 $1 

The net amount of deferred losses on cash flow hedges that are expected to be reclassified from Accumulated other comprehensive income (loss) into Interest expense within the next 12 months is $5 million.


11. FAIR VALUE

GAAP defines fair value as the price that would be received to sellfrom the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820GAAP establishes a fair value hierarchy that distinguishes between (i) market participant assumptions developed based on market data obtained from independent sources (observable inputs), and (ii) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).


We have certain financial assets and liabilities that are measured at fair value on a recurring basis, certain nonfinancial assets and liabilities that may be measured at fair value on a nonrecurring basis, and certain financial assets and liabilities that
are not measured at fair value in our consolidated balance sheets, but the fair value is disclosed. The fair value disclosures of these assets and liabilities are based on a three-level hierarchy, which consists of three broad levels, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are describedis defined as follows:


•Level 1—1 - Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

•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 - Unobservable inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3—Inputs that are unobservable for the asset or liability.

liability


Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The following section describes the valuation methodologies that the Business used to measure differenttable presents our financial instruments measured at fair value.

value on a recurring basis and indicates the level within the fair value hierarchy:

AssetsLevelDecember 31, 2020December 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

LiabilitiesLevelDecember 31, 2020December 31, 2019
Interest rate swap contracts2$5 $1 
Distrivet put option (a)
31 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-K79
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

Interest Rate Swap Contracts

Our derivatives at December 31, 2020 consisted of 5 interest rate swap contracts which are over-the-counter and not traded through an exchange. The fair values of our swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. See Note 10 - Derivatives.

Distrivet Options

The Distrivet options fair value were derived from a Monte Carlo simulation methodology. The significant unobservable inputs utilized in this Level 3 fair value measurement includes the enterprise value of Distrivet ($156 million), volatility (30%), and cost of capital (15%). We regularly evaluate each of the assumptions used in establishing the asset and liability. Significant changes in assumptions could result in significantly lower or higher fair value measurements. See Note 4 - Divestitures and Equity Method Investments.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

Assets that are measured at fair value on a nonrecurring basis primarily relate to Property and equipment, net, Operating lease right-of-use assets, net, Goodwill, and Other intangible assets, net. We do not periodically adjust carrying value to fair value for these assets; rather, the carrying value of the asset is reduced to its fair value when we determine that impairment has occurred. At August 31, 2019, assets measured at fair value on a nonrecurring basis consisted of Goodwill. The fair value measurement of goodwill was measured using both the market approach and income approach, which includes discounted expected cash flows. As the discounted cash flows include unobservable inputs that were significant to the fair value measurement, the fair value was classified as a Level 3 measurement within the fair value hierarchy. See Note 8 - Goodwill and Other Intangibles, Net.

At September 30, 2020, we recorded an operating lease right-of-use asset impairment of $8 million included in Selling, general and administrative in our consolidated and combined statements of operations in our North American segment as this asset group was not recoverable based on COVID-19's effect on the subleasing market as well as other asset group specific factors. The fair value of the operating lease right-of-use asset was $8 million, determined using the discounted expected cash flow. The significant unobservable inputs utilized in this Level 3 fair value measurement included market rent assumptions and discount rate.

Assets and Liabilities that are not Measured at Fair Value

Financial assetsAssets and liabilities

Liabilities


The carrying amounts reported on the combinedconsolidated balance sheets for cashCash and cash equivalents, accountsAccounts receivable, othernet, Other receivables, accountsAccounts payable, and other current liabilitiesAccrued expenses approximate their fair value due to the short maturity of those instruments.

Investments in affiliates

There are no quoted market prices available for investments in affiliates; however, the Business believes the carrying amounts are


Long-Term Debt

Our Long-term debt is classified as a reasonable estimate of fair value.

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 Note 9 - Long-Term Debt and Other Borrowings, Net.



12. COMMITMENTS AND CONTINGENCIES

We are valued using quoted market prices and significant other observable and unobservable inputs. The Business uses derivative instruments to minimize exposure to fluctuations in foreign currency exchange rates. Derivative instruments primarily include foreign currency forward agreements related to certain forecasted inventory purchase commitments with suppliers.

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-K80
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)


Securities Litigation Matter

On September 30, 2019, the City of Hollywood (Florida) Police Officers' Retirement System filed a putative securities class action lawsuit in the United States District Court for the Eastern District of New York, purportedly on present knowledge,behalf of purchasers of Covetrus common stock from February 8, 2019 through August 12, 2019, against the Business believes noneCompany, Henry Schein, Inc., our former Chief Executive Officer and President, and our former Chief Financial Officer (“Defendants”). The complaint alleges that Defendants violated Sections 10(b) and 20(a) of the claimsExchange Act by making allegedly false and misleading statements and omissions, primarily regarding the Company’s financial prospects and the integration costs relating to such proceedings will have a material effectthe business combination involving the Animal Health Business and Vets First Choice. The suit seeks unspecified damages, fees, interest, and costs. We intend to defend the matter vigorously. Given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, class certification and success on the financial condition, resultsmerits, we cannot estimate the reasonably possible loss or range of operationsloss that may result from this action.

Purchase Obligations

We are party to an exclusive supply arrangement for certain products within the U.S. market. We amended this arrangement in February 2020 to extend the purchase obligations until 2025.

The following table presents the remaining unconditional purchase obligations as of December 31, 2020:
YearAmount
2021$8 
20228 
20237 
20247 
20256 
Total$36 

We paid $8 million in 2020, $9 million in 2019, and cash flows$9 million in 2018 for products purchased under this exclusive arrangement. Our forecasted sales for products under this exclusive supply arrangement exceed our purchase obligations.
In 2019, we engaged a third-party for a three-year period ending December 31, 2022. The fixed portion of the Business.

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-K81
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

13. REDEEMABLE NON-CONTROLLING INTERESTS

The following table presents the components of change and balances of Redeemable non-controlling interests within the consolidated and combined balance sheets as of:
December 31,
2020		December 31,
2019		December 29,
2018
Balance at beginning of period$10 $92 $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 interests2 (3)6 
Dividends paid0 0 (10)
Effect of foreign currency translation (gain) loss attributable to redeemable non-controlling interests(2)1 (2)
Change to redemption value6 (6)107 
Balance at end of period$36 $10 $92 
(a) See Note 3 - Business Acquisitions


14. REDEEMABLE CONVERTIBLE PREFERRED STOCK

On May 19, 2020, we issued 250,000 shares of our 7.50% Series A Preferred Stock, with a par value of $0.01 per share, for an aggregate purchase price of $250 million, or $1,000 per share, pursuant to an Investment Agreement (the “Investment Agreement”) with CD&R VFC Holdings, L.P. (the “Purchaser”), an affiliate of Clayton, Dubilier & Rice, LLC (“CD&R”), dated April 30, 2020. We received net proceeds of $244 million after issuance costs and used the proceeds to provide additional short-term liquidity and support general corporate purposes.

Our right to elect a conversion was triggered on September 4, 2020, when the closing share price of our common stock was $22.29 , which marked the twentieth trading day in a period of thirty consecutive trading days that our volume weighted-average stock price closed above $22.20 (which was equal to 200% of the conversion price for the Series A Preferred Stock of $11.10 in effect at that time). On September 9, 2020, we converted a portion of our Series A Preferred Stock to 14.4 million shares of common stock in accordance with the terms of the Investment Agreement. On November 18, 2020, we converted the remaining 90,632 shares of our Series A Preferred Stock into 8.2 million shares of common stock.

Under the terms of the Investment Agreement, the Purchaser appointed 2 designees to our Board of Directors (see Note19 - Related-Party Transactions).


15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes certain gains and losses that are excluded from netNet income (loss) under GAAP as suchthese amounts are recorded directly as an adjustment to total equity. The Business’ comprehensive income is primarily comprised

Covetrus, Inc. 2020 Form 10-K82
Table of net income, foreign currency translation loss, unrealized gain (loss) on foreign currency hedging activities and pension adjustment gain (loss).

Contents

COVETRUS, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

The following table summarizespresents the accumulatedchanges in Accumulated other comprehensive loss, net of applicable taxes, as of:

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 
  

 

 

   

 

 

   

 

 

 

During the years ended December 29, 2018, December 30, 2017 and December 31, 2016, the Businessby component:

Derivative Gain (Loss)Gain (Loss) on Pension AdjustmentForeign Currency Translation Gain (Loss)Unrealized Gain (Loss) from Foreign Currency HedgingTotal
Balance as of December 30, 2017$0 $(2)$(41)$1 $(42)
Other comprehensive income (loss) attributable to Covetrus before reclassifications0 2 (41)(1)(40)
Period change0 2 (41)(1)(40)
Balance as of December 29, 20180 0 (82)0 (82)
Other comprehensive income (loss) attributable to Covetrus before reclassifications(1)0 (4)0 (5)
Reclassified from Accumulated other comprehensive loss to earnings1 0 0 0 1 
Period change0 0 (4)0 (4)
Balance as of December 31, 20190 0 (86)0 (86)
Other comprehensive income (loss) attributable to Covetrus before reclassifications(8)0 21 0 13 
Reclassified from Accumulated other comprehensive loss to earnings5 0 2 0 7 
Period change(3)0 23 0 20 
Balance as of December 31, 2020$(3)$0 $(63)$0 $(66)

We recognized foreign currency translation gains (losses) as a component of comprehensive income a foreign currency translation (loss) gain of $(43.1) million, $62.1 million and $(41.6) million, respectively, due to changes in foreign exchange rates from the beginning of the period to the end of the period. The consolidated and combined financial statements are denominated in the U.S. Dollardollar currency. Fluctuations in the value of foreign currencies as compared to the U.S. Dollardollar may have a significant impact on the comprehensive income.

The following table summarizes the totalour comprehensive income net of applicable taxes,(loss).


The tax effect on accumulated unrealized losses on derivative instruments, unrealized pension adjustment gains, and gains recognized on derivative instruments was immaterial for theall years ended:

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 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 accumulated other comprehensive loss balance was decreased by $1.1 million as of December 30, 2017 and increased by $1.9 million as of December 31, 2016.

13. 10 - Derivatives.



16. INCOME TAXES

Income Taxes

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)$59 
Foreign140 (220)84 
Total income (loss) before taxes and equity in earnings of affiliates$(24)$(1,029)$143 

Covetrus, Inc. 2020 Form 10-K83
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

The provisions for income taxes were as follows:

   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 
  

 

 

   

 

 

   

 

 

 

Years Ended
December 31, 2020December 31, 2019 (as revised)December 29, 2018
Current income tax (benefit) expense:
U.S. federal$1 $0 $13 
State and local2 2 4 
Foreign22 16 25 
Total current income tax (benefit) expense25 18 42 
Deferred income tax (benefit) expense:
U.S. federal(25)(46)0 
State and local(1)(10)0 
Foreign(6)(8)(5)
Total deferred income tax (benefit) expense:(32)(64)(5)
Total income tax (benefit) expense$(7)$(46)$37 


Significant components of our deferred tax assets and liabilities were as follows:
Years Ended
December 31,
2020		December 31, 2019 (as revised)
Deferred income tax assets:
Investment in partnerships$0 $54 
Net operating losses and other carryforwards41 38 
Share-based compensation6 7 
Lease asset20 6 
Other assets17 6 
Total deferred income tax assets84 111 
Valuation allowance for deferred tax assets(11)(10)
Net deferred income tax assets73 101 
Deferred income tax liabilities:
Intangibles amortization(74)(125)
Other liabilities(18)(6)
Total deferred income tax liabilities(92)(131)
Net deferred income tax assets (liabilities)$(19)$(30)

The deferred income tax effectsassets (liabilities) are classified in the consolidated balance sheets as follows:
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

Deferred income taxes reflect the net tax effect of temporary differences that give rise tobetween the deferredcarrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax asset (liability) were as follows as of:

   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 
  

 

 

   

 

 

 

Total deferred income tax asset

   77,365    21,008 

Valuation allowance for deferred tax assets

   (1,132)    (4,439) 
  

 

 

   

 

 

 

Net deferred income tax asset

   76,233    16,569 

Deferred income tax liability

    

Intangibles amortization

   (19,607)    (21,349) 
  

 

 

   

 

 

 

Total deferred tax liability

   (19,607)    (21,349) 
  

 

 

   

 

 

 

Net deferred income tax asset (liability)

  $56,626   $(4,780) 
  

 

 

   

 

 

 

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-K84
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

The Business believes thatvaluation allowance was $11 million as of December 31, 2020 and $10 million as of December 31, 2019. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that future taxable income will be sufficient to allow it to recover substantiallysome or all of the value assigned to the deferred tax assets.

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.


During the fourth quarter of 2020, in conjunction with our efforts to remediate our income tax material weakness in accounting for income taxes, management identified an error in the calculation of the deferred tax asset related to investments in partnerships. Specifically, as of December 30, 2017 our deferred tax asset was overstated by $42 million. In addition, as a result of the overstatement of this deferred tax asset, our valuation allowance established during the year ended December 31, 2019 was overstated. The errors were not material to any individual prior year; however, the correction of these errors would have been material to the 2020 financial statements. We have revised ending net Former Parent investment and deferred taxes as of December 30, 2017, and have revised our financial statements as of and for the years ended December 29, 2018 and December 31, 2019 from the Businessamounts previously reported.

As of December 31, 2018
Previously ReportedRevisionAs Revised
Net Parent investment$1,576 $(42)$1,534 
Total shareholders’ equity1,494 (42)1,452 
As of December 31, 2019
Consolidated Balance SheetPreviously ReportedRevisionAs Revised
Non-current deferred income tax assets, net (a)
$20 $(2)$18 
Total assets3,361 (2)3,359 
Deferred income taxes47 1 48 
Total liabilities2,095 1 2,096 
Additional paid in capital2,381 (42)2,339 
Accumulated deficit(1,040)39 (1,001)
Total shareholders’ equity1,256 (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 OperationsPreviously ReportedRevisionAs 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)

At December 31, 2020, we had foreign net operatingthe following tax loss and tax credit carryforwards available to offset taxable income in prior and future years:
Covetrus, Inc. 2020 Form 10-K85
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

AmountExpiration Period
U.S. federal tax loss carryforwards$20 2030 - unlimited
U.S. federal and state interest carryforwards8 unlimited
U.S. federal other credit carryforwards2 2030-2040
U.S. state tax loss carryforwards4 2021 - unlimited
Non-U.S. tax loss carryforwards7 2021 - unlimited
Total tax loss and tax credit carryforwards$41 

The U.S. state tax loss carryforwards of $6.7 million, which can be utilized against future foreign income through December 31, 2026. Additionally, as of December 29, 2018, there were foreign net operatingincurred in various jurisdictions. The non-U.S. tax loss carryforwards of $5.2 million that have an indefinite life.

were incurred in various jurisdictions, predominantly in France, Germany, Poland and Sweden.


The tax provisions differprovision (benefit) differs from the amount computed usingby applying the federal statutory income tax rate as follows:

   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 
  

 

 

   

 

 

   

 

 

 

Total income tax provision

  $37,028   $48,019   $27,938 
  

 

 

   

 

 

   

 

 

 

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 rate21.0 %21 %21.0 %
Transition tax on deemed repatriation of foreign earnings0 0 2.8 
Pass through non-controlling interest0 0 (2.1)
State income tax provision, net of federal income tax effect(3.7)0.9 1.4 
Foreign income tax (benefit) provision15.7 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 liabilities0 (0.9)0 
Valuation allowance impacts(2.2)(0.5)0 
Goodwill impairment0 (14.4)0 
Non-deductible expenses(29.3)(0.6)0 
Reverse Book Gain/(Loss) on Foreign Sales69.2 0.3 0 
Return to Provision12.1 0 0 
Impact of Partnership Inside/Outside Basis Conversion7.5 0 0 
Impact of Uncertain Tax Positions2.2 0.1 0 
Credits6.6 0 0 
Other0.8 (0.3)0.7 
Effective tax rate28.9 %4.5 %25.9 %

We file U.S. federal and various state and local income tax returns as well as income tax returns in 25 foreign income taxes, partially offsetjurisdictions. Tax returns are generally subject to examination for a period of three to five years after the filing of the respective return. The tax years subject to examination by noncontrolling interests inmajor tax jurisdictions include the Business’ partnership investments. Inyears 2017 the effective tax rate was primarily impactedand forward by the Tax ActU.S. Internal Revenue Service, the years 2016 and forward for certain state and local jurisdictions, and the adoptionyears 2011 and forward for certain foreign jurisdictions.

The U.S. Tax Cuts and Jobs Act of ASUNo. 2016-09, “Stock Compensation” (Topic 718)2017 (“ASU2016-09”).

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


We elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.

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-K86
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

will not have an immateriala material impact on itsour consolidated and combined financial statements, therefore, we have not recorded an estimate for the year ended December 29, 2018.

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.


For the year ended December 29, 2018, the Businesswe recorded $4.4$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 22,29, 2018, the Business haswe completed itsour 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

We previously considered the earnings in all of the amount of unrecognizedour foreign subsidiaries as indefinitely reinvested. Accordingly, we had not recorded deferred tax liabilityincome taxes with respect to such earnings. However, in consideration of recent changes in our business and emerging funding needs, we determined effective as of the fourth quarter ending December 31, 2020 that certain unremitted earnings is not practicable.

of approximately $135 million existing in the Company’s foreign subsidiaries located in various jurisdictions are no longer indefinitely reinvested. As a result of the U.S. Tax Act, unremitted earnings can generally be remitted to the U.S. without incurring additional U.S. federal income taxation. In addition, earnings repatriated from the jurisdictions noted above, based upon our current legal structure, can generally be repatriated without incurring any withholding tax liability. Accordingly, we determined that the deferred tax liability associated with the repatriation of the undistributed earnings from the applicable subsidiaries located in these tax jurisdictions would be $2 million.


ASC Topic 740 prescribes the accounting for uncertainty in income taxes recognized in the financial statements in accordance with other provisions contained within thisthe guidance. This topic prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate audit settlement. In the normal course of business, the Business’our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities for uncertain tax positions taken in respect to certain tax matters.

The 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.


The following table provides a reconciliation of unrecognized tax benefits excludingwhich are included in Other liabilities within the effectsbalance sheets:
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 limitations0 (2)(4)
Balance at end of period$3 $4 $6 

The amount of deferred taxes,unrecognized tax benefits that would affect the effective tax rate if recognized during the year ended December 31, 2020 would be $3 million. We believe that it is reasonably possible that a decrease of up to $0.3 million in unrecognized tax benefits related to foreign tax exposures may be necessary in the coming year due to lapses of statute of limitations.

We recognize interest and penalties:

   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) 
  

 

 

   

 

 

   

 

 

 

Balance, end of period

  $5,800   $7,800   $8,200 
  

 

 

   

 

 

   

 

 

 

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.



17.EARNINGS (LOSS) PER SHARE

Basic earnings per common share (“EPS”) is computed by dividing net income (loss) available to common shareholders by the Parent but notweighted-average number of shares of common stock outstanding during the period. In addition, the shares of common stock issuable pursuant to restricted stock awards, restricted stock units, performance stock units, and stock options outstanding under our 2019 Omnibus Incentive Compensation Plan, and shares issuable under our Employee Stock Purchase Plan are included in the historical combined balance sheet of the Business. The deferred income tax balance has been increased by $4.8 million as of December 30, 2017.

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-K87
Table of the Business’ assets and contains various affirmative and negative covenants, which include restrictions on indebtedness, liens, disposition of property, restricted payments, acquisitions, investments and transactions with affiliates, among others.

The loan commitments under the Agreement of $23.0 million mature on June 30, 2022 and include $14.0 million provided by Darby and $9.0 million by M&S.

Interest payments are due monthly and are determined based on aone-month interest period plus 1.0% plus the applicable margin, which is adjusted based on the Business’ leverage ratio. At December 29, 2018, December 30, 2017 and December 31, 2016, the applicable margin was 2.25% for interest rates of 4.75%, 3.81% and 3.01%, respectively. Total interest expense on the term loan for the years ended December 29, 2018, December 30, 2017 and December 31, 2016 was $1.1 million, $1.0 million and $0.8 million, respectively.

Prior to the separation and distribution date ofContents

COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)


On February 7, 2019, Henry Schein distributed approximately 71 million shares of Covetrus common stock to its shareholders. The computation of EPS for periods prior to the Business’ long-term debtSeparation was performed using the shares distributed by Henry Schein on February 7, 2019. The weighted-average number of $23.0 million was repaid by the Parent.

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 
  

 

 

   

 

 

   

 

 

 

Total

  $3,777,994   $3,579,795   $3,353,160 
  

 

 

   

 

 

   

 

 

 

   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 
  

 

 

   

 

 

   

 

 

 

Total

  $137,098   $135,322   $123,828 
  

 

 

   

 

 

   

 

 

 

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 
  

 

 

   

 

 

   

 

 

 

Total

  $143,177   $138,769   $126,794 
  

 

 

   

 

 

   

 

 

 

Depreciation and Amortization:

      

Supply chain

  $57,163   $52,009   $48,167 

Technology and value-added services

   6,937    7,044    7,281 
  

 

 

   

 

 

   

 

 

 

Total

  $64,100   $59,053   $55,448 
  

 

 

   

 

 

   

 

 

 

Income Tax Expense:

      

Supply chain

  $30,575   $40,105   $24,257 

Technology and value-added services

   6,453    7,914    3,681 
  

 

 

   

 

 

   

 

 

 

Total

  $37,028   $48,019   $27,938 
  

 

 

   

 

 

   

 

 

 

Interest Income:

      

Supply chain

  $5,743   $5,082   $4,897 

Technology and value-added services

   2    33    18 
  

 

 

   

 

 

   

 

 

 

Total

  $5,745   $5,115   $4,915 
  

 

 

   

 

 

   

 

 

 

Interest Expense:

      

Supply chain

  $2,762   $2,567   $1,951 

Technology and value-added services

   8    20    6 
  

 

 

   

 

 

   

 

 

 

Total

  $2,770   $2,587   $1,957 
  

 

 

   

 

 

   

 

 

 

   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 
  

 

 

   

 

 

   

 

 

 

Total

  $2,233,084   $2,217,020   $1,991,124 
  

 

 

   

 

 

   

 

 

 

Purchases of Fixed Assets:

      

Supply chain

  $21,059   $18,656   $11,820 

Technology and value-added services

   966    2,009    928 
  

 

 

   

 

 

   

 

 

 

Total

  $22,025   $20,665   $12,748 
  

 

 

   

 

 

   

 

 

 

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 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $3,777,994   $1,026,524   $3,579,795   $1,077,249   $3,353,160   $990,481 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.


During 2020, we issued 7.50% Series A Preferred Stock and restricted stock and restricted stock units that vest based on achieving specified performance measurements andsubsequently converted them to common shares. See Note14 - Redeemable Convertible Preferred Stock.Following the recipient’s continued service over time (primarily three-year cliff vesting).

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 following is based upon the performance as measured against specified targets over a specified period, as determined by the Compensation Committeereconciliation of the Parent’s Board of Directors. Although there is no guarantee that performance targets will be achieved, the Business estimates the fair value of performance-based restricted stocknumerator and restricted stock units based on the 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 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)$101 
Denominator:
Basic
Weighted-average common shares outstanding118 107 71 
Diluted
Effect of dilutive shares0 0 1 
Diluted shares118 107 72 
Earnings (loss) per share attributable to Covetrus:
Basic$(0.22)$(9.14)$1.41 
Diluted$(0.22)$(9.14)$1.40 
Potentially dilutive securities (a)
660 
(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


18. SHARE-BASED COMPENSATION AND OTHER EMPLOYEE BENEFITS

Share-based Compensation Plan is presented below:

   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 
  

 

 

    

 

 

    

 

 

  

Outstanding at end of year

   242,123  $76.86    311,915  $79.74    219,642  $76.71 
  

 

 

    

 

 

    

 

 

  

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   
  

 

 

     

Outstanding at end of period

   138,103   $76.26   $77.92 
  

 

 

     

   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   
  

 

 

     

Outstanding at end of period

   104,020   $77.67   $77.92 
  

 

 

     


In connection with the separationSeparation, Distribution, and mergerAcquisition, all outstanding restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and stock options of the Business withHenry Schein and Vets First Choice these awards were exchanged for economically equivalent awards of Covetrus. See Note 18RSAs and RSUs totaling 327,447 and stock options of 3,914,694 were issued in connection with the exchange.
On February 7, 2019, we adopted the 2019 Omnibus Incentive Compensation Plan (the “Plan”) which authorizes our Compensation Committee of the Board of Directors to grant stock options, stock awards, stock units, stock appreciation rights, other share-based awards, and cash awards. Awards may be granted to employees, consultants, advisors, and non-employee directors of Covetrus and our subsidiaries. Awards issued under the Plan may not have a term greater than 10 years from the date of grant and generally vest ratably over a three-year period. During 2020, we granted performance stock units (“PSUs”) subject to specific performance conditions to senior management members that have one year performance cycles over a three-year term,
Covetrus, Inc. 2020 Form 10-K88
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

vesting ratably. We also granted PSUs to certain employees who bear responsibility for additional information.

strategic initiatives we believe are necessary for our transformation that contained a one-year performance cycle and vesting.


We reserved 16 million shares of our common stock for issuance under the Plan. In addition, to the extent that awards outstanding under the Plan are cancelled, forfeited, or otherwise terminated without being exercised, the number of shares underlying such awards will be available for future grant under the Plan.

We recognized pre-tax share-based compensation expense of $40 million ($32 million after-tax) in 2020, $46 million ($40 million after-tax) in 2019, and $7 million ($6 million after-tax) in 2018.

Stock Options

We grant stock options at an exercise price equal to the closing market price of our stock on the grant date. We use the Black-Scholes pricing model to determine the fair value of options granted and have elected the accrual method for recognizing compensation costs. The fair value of share-based payment awards calculated using the Black-Scholes model varies based on share price, award exercise price, stock volatility, expected term, risk free interest rate, expected dividends, and the assumptions used in determining these variables. NaN stock options were granted during 2020 and 2018.

The following table summarizes our stock option activity under the Plan for the year ended December 31, 2020:
(In millions, except per share amounts)Number
of Shares		Weighted-
average
Exercise Price
Per Share		Weighted-
average
Remaining
Contractual
Life (Years)		Aggregate
Intrinsic
Value
Outstanding at beginning of year4 $15.29 
Granted0 0 
Exercised(1)6.80 
Forfeited(1)28.59 
Outstanding at end of year2 $15.58 6.9$31 
Exercisable at end of year1 $11.99 6.6$24 

The following table provides the weighted-average grant-date fair value and related valuation assumptions for these awards granted during the year ended December 31, 2019:

Weighted-average grant-date fair value$12.19
Valuation assumption ranges:
Expected term (years)6.0
Risk-free interest rate1.8 %-2.5%
Expected volatility29.6 %-30.0%

Cash received from option exercises for the years ended December 31, 2020 and 2019 was $7 million and $4 million, respectively.

RSAs/RSUs/PSUs

The following table summarizes our RSA/RSU activity under the Plan for the year ended December 31, 2020:
Number of SharesWeighted-average
Grant-date
Fair Value
Per Share		Weighted-average
Remaining
Contractual
Life (Years)		Aggregate
Intrinsic
Value
Nonvested at beginning of year2 $25.69 
Granted3 11.51 
Vested(1)28.24 
Forfeited0 19.37 
Nonvested at end of year4 $14.07 1.25$124 
Covetrus, Inc. 2020 Form 10-K89
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)


The weighted-average grant-date fair values for these awards granted:
Years Ended
202020192018
Weighted-average grant-date fair value$11.51 $27.83 $65.26 

Additional Information

As of December 31, 2020, there was $50 million in unrecognized compensation expense related to nonvested share-based awards that is expected to be recognized over a weighted-average period of 1.8 years.

The following table provides further information related to our share-based awards:
Years Ended
202020192018
Intrinsic value of stock options exercised$13 $15 $0 
Fair value of RSA/RSU shares vested$6 $3 $2 

Employee Stock Purchase Plan

On February 7, 2019, we adopted the Employee Stock Purchase Plan (the “ESPP”) and approved 2 million shares for issuance under this plan. The ESPP is administered by the compensation committee.

The ESPP provides for the issuance of shares of our common stock to participating employees. At the end of each designated offering period, which occurs every six months on May 31 and November 30, employees can elect to purchase shares of our common stock with contributions of up to 15% of their base pay, accumulated via payroll deductions, at an amount equal to 85% of the lower of our stock price on (i) the first day of the offering period, or (ii) the last day of the offering period. For the years ended December 31, 2020 and December 31, 2019, activity under the ESPP was not material.

Annual Incentive Plan

Our compensation committee adopted the Annual Incentive Plan (the “AIP”) on February 7, 2019. The AIP provides pay for performance incentive compensation to our employees, including our named executive officers, rewarding them for their contributions to us with incentive compensation based on attainment of predetermined corporate performance goals, as applicable.

We recorded compensation expense associated with the AIP for the year ended December 31, 2020 of $16 million and $7 million for the year ended December 31, 2019.

401(k) and other defined contribution plans

The BusinessPlan


Covetrus maintains a qualified 401(k) plan covering substantially all eligible employees of certain of the Business’ U.S. entities as well as certain other defined contribution plans. Additionally, the Parent offers a qualified 401(k) plan to certain of the Business’ eligible employees.

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.



19. RELATED-PARTY TRANSACTIONS

Upon closing the yearstransaction with Distrivet, S.A. on April 30, 2020 (see Note 4 - Divestitures and Equity Method Investments), Distrivet, our equity method investee, became a related party. During the year ended December 29, 2018, December 30, 201731, 2020, we provided management services and corporate branding to Distrivet under our agreement, and we provided goods to Distrivet. These services and product sales were not material during this period.

Covetrus, Inc. 2020 Form 10-K90
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

As of December 31, 2016 amounted2020, CD&R beneficially owns 24.80% of our outstanding common stock and are deemed a related party. As part of the terms of the Investment Agreement, CD&R had the right to $6.4 million, $5.6 milliondesignate 2 members to our Board of Directors, which resulted in increasing the number of directors serving on the board from 9 to 10 directors. CD&R's current designees on our Board of Directors are Ravi Sachdev (investor board member) and $5.4 million, respectively.

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 Note 14 - Redeemable Convertible Preferred Stock.


Allocation of General Corporate Expenses

As discussed in Note 1 - Business Overview and December 30, 2017 with Darby and M&S, each a related partySignificant Accounting Policies, we exited all of Parent and the Business.

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) 
  

 

 

   

 

 

   

 

 

 

Total net transfers from Parent per combined statements of cash flows

  $274,448   $62,206   $46,687 
  

 

 

   

 

 

   

 

 

 

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.



20. SEGMENT DATA

In connection with the Separation, Henry Schein contributed, assignedDistribution, and transferredAcquisition, we revised our reportable segments to Covetrus certain applicable assets, liabilities,reflect how the chief operating decision maker (the chief executive officer) (the “CODM”) reviews financial information and capital stockmakes operating decisions. This resulted in a change in the operating segments from (i) supply chain and other ownership interests relating(ii) technology and value-added services to (i) North America, (ii) Europe, and (iii) APAC & Emerging Markets. While the Animal Health Business. In connection withhistorical business was focused on driving growth through specific product and service offerings to its customers, the Separation, Distribution, and prior toAcquisition allowed for the Distribution, Henry Schein entered into a series of agreements to purchase additional equity interests in certain consolidated subsidiariesintegration of the Business for a total

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.


During the second quarter of the shares of the common stock of Covetrus held by Henry Schein to its stockholders of record as of the close of business on January 17, 2019.

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-K91
Table of Contents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

The following tables reflect our segment information and Corporate, the segment recast for the prior years, and reconciles Adjusted EBITDA for reportable segments to consolidated net total leverage ratio or (b) the alternate base rate, which will be the highestincome (loss) attributable to Covetrus:
At and For the Year Ended December 31, 2020
North AmericaEuropeAPAC & Emerging MarketsCorporateEliminationsTotal
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 amortization166 
Plus: Interest expense, net47 
Less: Income tax (benefit) expense(7)
Earnings (loss) before interest, taxes, depreciation, and amortization187 
Plus: Share-based compensation40 
Plus: Strategic consulting20 
Plus: Transaction costs (a)
8 
Plus: Separation programs and executive severance11 
Plus: IT infrastructure4 
Plus: Formation of Covetrus (b)
19 
Plus: Capital structure2 
Plus: Equity method investments and non-consolidated affiliates (c)
2 
Plus: Operating lease right-of-use asset impairment8 
Plus: France managed exit (d)
7 
Less: Other items, net (e)
(82)
Adjusted EBITDA226 
(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-K92
Table of (x) the rateContents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

At and For the Year Ended December 31, 2019
North AmericaEuropeAPAC & Emerging MarketsCorporateEliminationsTotal
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 amortization155 
Plus: Interest expense, net53 
Less: Income tax (benefit) expense(46)
Earnings (loss) before interest, taxes, depreciation, and amortization(818)
Plus: Share-based compensation46 
Plus: Strategic consulting2 
Plus: Transaction costs (a)
2 
Plus: Formation of Covetrus (b)
31 
Plus: Separation programs and executive severance11 
Plus: Carve-out operating expenses5 
Plus: IT infrastructure6 
Plus: Goodwill impairment938 
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-K93
Table of interest last quotedContents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

At and For the Year Ended December 29, 2018
North AmericaEuropeAPAC & Emerging MarketsCorporateEliminationsTotal
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 amortization64 
Plus: Interest expense, net2 
Plus: Income tax (benefit) expense37 
Earnings (loss) before interest, taxes, depreciation, and amortization204 
Plus: Share-based compensation7 
Plus: Separation programs and executive severance9 
Less: Equity method investments and non-consolidated affiliates(1)
Adjusted EBITDA$219 

See Note 5 - Revenue from Contracts with Customers for our revenue disaggregated by The Wall Street Journal in the U.S. as the prime rate in effect, (y) 0.50% in excessmajor product category and reportable segment.


21. SUMMARY OF QUARTERLY DATA (UNAUDITED)

A summary of the overnight federal funds rate and (z) the eurodollar rate applicable for an interest periodquarterly data follows:
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-K94
Table of one month plus 1.00%, plus a margin based on Covetrus’ consolidated net total leverage ratio. Following the first anniversaryContents
COVETRUS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(In millions, except per share amounts)

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-K95
Table of the closing date of the Separation and Merger, the term loan shall be repayable in equal quarterly installments in an aggregate amount equal to 5% per annum of the original principal amount of the facility. The financing arrangement contains customary representations and warranties and customary affirmative and negative covenants. The net proceeds of the term loan amounted to $1,120.0 million and was distributed to Henry Schein as atax-free distribution. Prior to the Separation, the Business’ long-term debt of $23.0 million was repaid.

Merger with Vets First Choice

After the Share Sale and Distribution, Merger Sub consummated the Merger whereby it merged with and into Vets First Choice, with Vets First Choice surviving the Merger as a wholly owned subsidiary of Covetrus. Immediately following the consummation of the Merger, on a fully diluted basis, (i) approximately 63% of the shares of Covetrus common stock were (a) owned by stockholders of Henry Schein and the Share Sale Investors, and (b) in respect of certain equity awards held by certain employees of the Animal Health Business, and (ii) approximately 37% of the shares of Covetrus common stock were (a) owned by stockholders of Vets First Choice immediately prior to the Merger, and b) in respect of certain equity awards held by certain employees of Vets First Choice. The Merger with Vets First Choice was accounted for under the acquisition method of accounting for business combinations and the Business was considered the acquiring company per ASC 805 “Business combinations”. Upon completion of the Merger, all Vets First Choice unvested stock option awards and Restricted Stock and Restricted Stock Units owned by Henry Schein’s employees who transferred to Covetrus were exchanged with economically equivalent awards of Covetrus. The purchase price will be based on (i) the fair value of Vets First Choice common stock as of the Merger date of $1.7 billion which was determined based on the number of shares of Covetrus common stock of 39,742,089 that were issued to Vets First Choice stockholders in connection with the Merger and (ii) the portion of the fair value attributable topre-Merger service for replacement stock option and unvested restricted stock awards that were exchanged for the outstanding awards held by Vets First Choice employees. Due to the limited time between the completion of the Merger and the filing of this annual report on Form10-K, it is not practicable for the Business to disclose the preliminary allocation of purchase price to assets acquired and liabilities assumed.

Transition Services Agreement with Henry Schein

In connection with the Separation, Covetrus entered into a Transition Services Agreement pursuant to which Henry Schein will provide Covetrus with certain services to enable its operations (“TSA Services”). The TSA Services include certain supply chain services and various corporate support services. The TSA Services will be provided at a cost to Covetrus for a period ranging from one month up to 21 months after the Separation.

Contents


Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

Not Applicable.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None

Item 9A.

Controls and Procedures

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures, as defined in Rules13a-15(e) and15d-15(e)


As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended or(the “Exchange Act”), as of the Exchange Act, are controls and other procedures designed to ensure that information required to be disclosed in reports filed or submittedend of the period covered by this report, we carried out an evaluation under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

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.


Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

(i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets,
(ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and
(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may change.

Our management, with the participation of our CEO and our CFO, evaluated the effectiveness of our internal control over financial reporting at December 31, 2020. Based on this evaluation, the CEO and CFO concluded that as of that date, our internal control over financial reporting was not effective, at a reasonable assurance level.

level, because of a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of in our annual or interim financial statements will not be prevented or detected on a timely basis.


Ongoing Remediation of Previously Identified Material Weakness

As previously disclosed in our Form 10-K for the year ended December 31, 2019, management identified deficiencies in our internal control over financial reporting which related to the accounting for income taxes and determined that the impact of these deficiencies resulted in a material weakness. This material weakness stemmed from issues associated with the transition to expanded in-house tax capabilities and utilization of new tax consultants. As a result of these issues, our controls to review and analyze the our income tax provision and deferred income tax balances were not effective.

The material weakness described above resulted in certain material and immaterial misstatements in the preliminary financial statement accounts that were adjusted prior to the issuance of the annual consolidated financial statements for the year ended December 31, 2019. We developed remediation plans for this material weakness as follows:

•Increasing oversight by our management in the calculation and reporting of certain tax balances of our global operations,
•Enhancing policies, procedures, and controls relating to significant judgments impacting our income tax accounts,
Covetrus, Inc. 2020 Form 10-K96
Table of Contents

•Augmenting our tax accounting resources,
•Increasing communication to information providers for tax jurisdiction specific information, and
•Strengthening communication and information flows between the tax department and the finance group.

As part of Management’s execution of the remediation plan, during the fourth quarter of 2020 we identified an error in the calculation of the deferred tax asset related to investments in partnerships and revised our prior period financial statements. Specifically, as of December 30, 2017 our deferred tax asset was overstated by $42 million. As a result of the overstatement of this deferred tax asset, our valuation allowance established during the year ended December 31, 2019 was overstated. This revision did not affect our Statement of Operations in any other year. We have revised affected amounts above as of December 31, 2019 from the amounts previously reported.

While Management has made progress to expand our in-house tax resource capabilities and further formalize our internal controls framework, the material weakness in our internal control over financial reporting has not been remediated as of December 31, 2020. It will not be considered remediated until (i) the controls are fully implemented and existing controls are reinforced, (ii) the incremental controls are in operation for a sufficient period of time, and (iii) the controls are tested and concluded by management to be designed and operating effectively. We cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.

Changes in Internal Control Overover Financial Reporting

There were


As previously disclosed in our Form 10-Q for the quarter ended September 30, 2019, management identified deficiencies in our internal control over financial reporting which are related to the operation of information technology general controls (“ITGCs”) in the areas of logical security and change management in certain financially relevant systems. To address our ITGC deficiencies, we developed and implemented our previously disclosed remediation plans. During the fourth quarter of 2020, we completed our testing of the operating effectiveness of the implemented controls and found them to be effective. As a result, we have concluded the material weakness related to ITGCs has been remediated as of December 31, 2020.

Other than as described above, there have been no other changes in our internal control over financial reporting (as defined in Rules13a-15(f) and15d-15(f) under the Exchange Act) that occurred during the fourthmost recent quarter of 2018 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.


Limitations of the Effectiveness of Internal Control

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

Item 9B.    Other Information

Not applicable


Item 9B.

Other Information

Covetrus, Inc. 2020 Form 10-K97

None.

Table of Contents

PART III


Item 10.

Directors, Executive Officers and Corporate Governance

Our Board

Item 10.     Directors, Executive Officers, and Corporate Governance

The information required by this item of Directors, or the Board,Form 10-K is comprised of 11 directors. Six directors were designatedincorporated by Henry Schein, one of whom serves as lead independent director, including one director who is affiliated with Henry Schein and five directors unaffiliated with Henry Schein. Henry Schein designated Deborah Ellinger, Sandra Helton, Philip Laskawy, Mark Manoff, Steven Paladino and Benjamin Wolin. Henry Schein designated Mr. Laskawy as lead independent director. Five directors were designated by Vets First Choice, including two directors who were affiliated with Vets First Choice and three directors unaffiliated with Vets First Choice. Vets First Choice designated Betsy Atkins, Ted McNamara, Ravi Sachdev, Benjamin Shaw and David Shaw. Each of Messrs. Laskawy, Manoff, McNamara, Sachdev and Wolin and Mmes. Atkins, Ellinger and Helton are independent directors. David Shaw, Chairman of the Vets First Choice Boardand Co-Founder of Vets First Choice, serves as Chairman of our Board. David Shaw is Benjamin Shaw’s father.

The following table sets forth the names, ages as of March 15, 2019 and positions of the individuals who are members of our Board:

Name

Age

Position(s)

Benjamin Shaw(4)40President, Chief Executive Officer and Director
Betsy Atkins(2)(3)65Director
Deborah G. Ellinger(2)(3)60Director
Sandra L. Helton(1)(3)69Director
Philip A. Laskawy(3)78Director and Lead Independent Director
Mark J. Manoff(1)(4)62Director
Edward M. McNamara(1)(2)54Director
Steven Paladino(4)62Director
Ravi Sachdev(2)(4)42Director
David E. Shaw67Director and Chairman
Benjamin Wolin(2)(4)44Director

(1)

Member of our Audit Committee

(2)

Member of our Compensation Committee

(3)

Member of our Nominating and Governance Committee

(4)

Member of our Strategy Committee

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.

Name

Age

Position(s)

Benjamin Shaw40President, Chief Executive Officer and Director
Christine T. Komola51Executive Vice President and Chief Financial Officer
Erin Powers Brennan48Senior Vice President, General Counsel and Secretary
Russell Cooke53Senior Vice President and Operational Chief Financial Officer
David Christopher Dollar53Senior Vice President and President, Global Software Services
Michael Ellis60Senior Vice President and President, Europe
David Hinton58Senior Vice President and President, APAC and Emerging Markets
Timothy Ludlow53Senior Vice President and Chief Transformation Officer
Anthony Providenti52Senior Vice President, Corporate Development
Georgina Wraight44Senior Vice President and President, Global Prescription Management
James Young60Senior Vice President and Chief Human Resources Officer

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.

Name

Class
Sandra L. HeltonI
David E. ShawI
Benjamin WolinI
Betsy AtkinsII
Mark J. ManoffII
Edward M. McNamaraII
Steven PaladinoII
Benjamin ShawIII
Deborah G. EllingerIII
Philip A. LaskawyIII
Ravi SachdevIII

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.

Item 11.     Executive Compensation

Director Compensation


The non-management members of our Board will be paid annual directors’ fees in the amount of $285,000, consisting of $60,000 in cash and $225,000 in equity or other equity-linked compensation. In 2019, each ofthe non-management chair of our Board and the lead independent director will receive additional fees in the amount of $200,000 in cash. Additional annual cash stipends are as follows: (i) $90,000 for thenon-management chair of our Board; (ii) $60,000 for the lead independent director; (iii) $30,000 for the Audit Committee chair; (iv) $25,000 for the Compensation Committee chair; (v) $15,000 for the Nominating and Governance Committee chair; (vi) $15,000 for the Strategy Committee chair; (vii) $15,000 for each member of the Audit Committee (other than the chair); (viii) $12,500 for each member of the Compensation Committee (other than the chair); (ix) $7,500 for each member of the Nominating and Governance Committee (other than the chair); and (x) $7,500 for each member of the Strategy Committee (other than the chair). We did not pay any compensationinformation required by this item is incorporated by reference to our directors during 2018.

2021 Proxy Statement.

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.

Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

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


The following table providessummarizes information with respectabout our equity compensation plans as of December 31, 2020:
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 shareholders6,457,292 $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.

Other information required by this item is incorporated by reference to the beneficial ownership of our common stock by the following:

2021 Proxy Statement.

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% 

*

Represents less than 1%

(1)

Represents (i) 1,011,632 shares owned directly and over which Benjamin Shaw has sole voting and dispositive power and (ii) 420,999 shares underlying stock options that are currently exercisable or that will become exercisable within 60 days of March 15, 2019.

(2)

Represents 30,684 shares underlying stock options that are currently exercisable or that will become exercisable within 60 days of March 15, 2019.

(3)

Represents 157,047 shares underlying stock options that are currently exercisable or that will become exercisable within 60 days of March 15, 2019.

(4)

Represents (i) 55,504 shares owned directly and over which Edward McNamara has sole voting and dispositive power and (ii) 78,545 shares underlying stock options that are currently exercisable or that will become exercisable within 60 days of March 15, 2019.

(5)

Represents (i) 36,749 shares owned directly and over which Steven Paladino has sole voting and dispositive power and (ii) 2,673 shares held in a 401(k) Plan account.

(6)

Represents (i) 2,069,263 shares owned directly and over which David Shaw has sole voting and dispositive power, (ii) 72,928 shares underlying stock options that are currently exercisable or that will become exercisable within 60 days of March 15, 2019 and (iii) 4,924 shares over which David Shaw has shared voting and dispositive power as Managing Partner of Black Point Group LLC.

(7)

Includes (i) with respect to all directors and Named Executive Officers, (a) 3,195,815 shares, directly or indirectly, beneficially owned and (b) 760,203 shares that are currently exercisable or that will become exercisable within 60 days of March 15, 2019 and (ii) with respect to all executive officers that are not Named Executive Officers or directors, (a) 149,810 shares, directly or indirectly, beneficially owned and (b) 134,713 shares that are currently exercisable or that will become exercisable within 60 days of March 15, 2019.

(8)

CD&R VFC Holdings, L.P. (“CD&R Stockholder”) is the beneficial owner of 11,265,198 shares of common stock that, as of March 15, 2019, are held directly by CD&R Stockholder. CD&R Investment Associates IX, Ltd. (“CD&R Holdings GP”), as the general partner of CD&R Stockholder, may be deemed to beneficially own the shares of common stock in which CD&R Stockholder has beneficial ownership. CD&R Holdings GP expressly disclaims beneficial ownership of the shares of common stock in which CD&R Stockholder has beneficial ownership. Investment and voting decisions with respect to the shares of common stock held by CD&R Stockholder or CD&R Holdings GP are made by an investment committee of limited partners of CD&R Associates IX, L.P., currently consisting of more than ten individuals, each of whom is also an investment professional of Clayton, Dubilier & Rice, LLC (the “Investment Committee”). All members of the Investment Committee disclaim beneficial ownership of the shares shown as beneficially owned by CD&R Stockholder. CD&R Holdings GP is managed by atwo-person board of directors. Donald J. Gogel and Kevin J. Conway, as the directors of CD&R Holdings GP, may be deemed to share beneficial ownership of the shares of common stock directly held by CD&R Stockholder. Such persons expressly disclaim such beneficial ownership. The principal office of the CD&R Stockholder is c/o Maples Corporate Services Limited, PO Box 309, Ugland House, South Church Street, George Town, Grand Cayman,KY1-1104, Cayman Islands. The foregoing information regarding the stock holdings of CD&R Stockholder is based on a Schedule 13D relating to CD&R Stockholder’s ownership of our common stock filed by CD&R Stockholder with the SEC on February 11, 2018.

(9)

Includes 299,503 shares held by Inception Trust; 3,882,112 shares held by Morgan Stanley Institutional Fund, Inc.—Growth Portfolio; 1,545,048 shares held by Morgan Stanley Investment Funds US Growth Fund; 93,409 shares held by Morgan Stanley Variable Insurance Fund, Inc.—Mid Cap Growth Portfolio; 638,602 shares held by Morgan Stanley Multi Cap Growth Trust; 411,228 shares held by Morgan Stanley Institutional Fund Trust—Mid Cap Growth Portfolio; 170,596 shares held by Master Trust for Defined Contribution Plans of American Airlines, Inc., US Airways, Inc., and Affiliates; 575,719 shares held by Growth Trust; 121,668 shares held by Johnson & Johnson Pension and Savings Plans Master Trust; 42,039 shares held by Lawrencium Atoll Investments Ltd; 746,751 shares held by Brighthouse Funds Trust I—Morgan Stanley Mid Cap Growth Fund; and 195,017 shares held by Morgan Stanley Variable Insurance Fund, Inc.—Growth Portfolio. The foregoing information regarding the holdings of Morgan Stanley Investment Management Inc. and its affiliates is based on the Share Sale Agreement. The address for each of these entities is c/o Morgan Stanley Investment Management Inc. 522 Fifth Avenue, New York, New York 10036.

(10)

The principal office of The Vanguard Group, Inc. (“Vanguard”) is 100 Vanguard Blvd., Malvern, Pennsylvania 19355. The foregoing information regarding the stock holdings of Vanguard is based on an amended Schedule 13G relating to Vanguard’s ownership of Henry Schein common stock filed by Vanguard with the SEC on February 12, 2018.

Item 13.

Item 13.     Certain Relationships and Related Transactions, and Director Independence

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 information required by this item is incorporated by reference to the consummation of the Merger. In addition, we have entered into separate indemnification agreements with each of the Covetrus directors and executive officers. Under these indemnification agreements, we, subject to certain limitations, have agreed to indemnify our directors and executive officers against certain liabilities arising out of service as a director of Covetrus.

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.

2021 Proxy Statement.

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.


Item 14.     Principal Accountant Fees and Services

The information required by this item is incorporated by reference to our 2021 Proxy Statement.

Item 14.

Principal Accountant Fees and Services

Covetrus, Inc. 2020 Form 10-K98

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

Table of an audit. The Audit Committee may delegatepre-approval authority to one or more members of the Audit Committee consistent with applicable law and listing standards, provided that the decisions of such Audit Committee member or members must be presented to the full Audit Committee at its next scheduled meeting.

Contents

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

  —    —  
  

 

  

 

Total Fees

  $1,985,000  $1,835,000
  

 

  

 

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.


PART IV

Item 15.

Item 15.     Exhibits and Financial Statement Schedules

(a)

1. Combined Financial Statements.

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.

Item 16.

10-K Summary

None

Schedules

Exhibit Index

EXHIBIT INDEX

      Incorporated by Reference 

Exhibit
Number

  

Exhibit Description

  Form   Date   Number 
    2.1  Contribution and Distribution Agreement, dated as of April  20, 2018, by and among Henry Schein, Inc., HS Spinco, Inc., Direct Vet Marketing, Inc. and Shareholder Representative Services LLC   S-4    12/26/2018    2.1 
    2.2  Agreement and Plan of Merger, dated as of April  20, 2018, by and among Henry Schein, Inc., HS Spinco, Inc., HS Merger Sub, Inc., Direct Vet Marketing, Inc. and Shareholder Representative Services LLC   S-4    12/26/2018    2.2 
    2.3  Letter Agreement, Amendment No. 1 to Contribution and Distribution Agreement and Amendment No.  1 to Agreement and Plan of Merger, dated as of September 14, 2018, by and among Henry Schein, Inc., HS Spinco, Inc., HS Merger Sub, Inc., Direct Vet Marketing, Inc. and Shareholder Representative Services LLC   S-4    12/26/2018    2.3 
    2.4  Letter Agreement and Amendment No. 2 to Contribution and Distribution Agreement, dated as of November  30, 2018, by and among Henry Schein, Inc., HS Spinco, Inc., Direct Vet Marketing, Inc. and Shareholder Representative Services LLC   S-4    12/26/2018    2.4 
    2.5  Letter Agreement, Amendment No. 3 to Contribution and Distribution Agreement and Amendment No.  2 to Agreement and Plan of Merger, dated as of December 25, 2018, by and among Henry Schein, Inc., HS Spinco, Inc., HS Merger Sub, Inc., Direct Vet Marketing, Inc. and Shareholder Representative Services LLC   S-4    12/26/2018    2.5 
    2.6  Letter Agreement and Amendment No. 4 to Contribution and Distribution Agreement, dated as of January  15, 2019, by and among Henry Schein, Inc., HS Spinco, Inc., Direct Vet Marketing, Inc. and Shareholder Representative Services LLC   S-4/A    01/15/2019    2.6 
    3.4  Amended and Restated Certificate of Incorporation of Covetrus, Inc.   S-4/A    01/15/2019    3.4 
    3.5  Amended and RestatedBy-laws of Covetrus, Inc.   S-4/A    01/08/2019    3.5 
    4.1  Specimen Common Stock Certificate   S-4/A    01/08/2019    4.1 
  10.1  Credit Agreement, dated as of February  7, 2019, by and among Vet Intermediate Holdco II, LLC, JP Morgan Chase Bank, N.A., and the several banks and other financial institutions from time to time party thereto   8-K    02/07/2019    10.1 
  10.2  Guarantee and Collateral Agreement, dated as of February  7, 2019, by and among Vet Intermediate Holdco II, LLC and JP Morgan Chase Bank, N.A.   8-K    02/07/2019    10.2 
  10.3  Employee Matters Agreement, dated as of April  20, 2018, by and among Henry Schein, Inc., HS Spinco, Inc. and Direct Vet Marketing, Inc.   S-4    12/26/2018    10.1 

      Incorporated by Reference 

Exhibit
Number

  

Exhibit Description

  Form   Date   Number 
  10.4  Transition Services Agreement, dated as of February 7, 2019, by and between Henry Schein, Inc. and HS Spinco, Inc.   8-K    02/07/2019    10.4 
  10.5  Letter Agreement to Transition Services Agreement, dated as of February  7, 2019, by and between Covetrus, Inc. and Henry Schein, Inc.   8-K    02/07/2019    10.5 
  10.6  Tax Matters Agreement, dated as of January  7, 2019, by and among Henry Schein, Inc., HS Spinco, Inc. and Direct Vet Marketing, Inc.   S-4/A    01/08/2019    10.3 
  10.7  Escrow Agreement, dated as of February  7, 2019, by and among Henry Schein, Inc., HS Spinco, Inc., Shareholder Representative Services LLC and Continental Stock Transfer & Trust Company   8-K    02/07/2019    10.3 
  10.8†  Form of Indemnification Agreement between HS Spinco, Inc. and each of its directors and executive officers   S-4    12/26/2018    10.5 
  10.9†  Direct Vet Marketing, Inc. 2010 Stock Incentive Plan   S-4    12/26/2018    10.6 
  10.10†  Amendment to Direct Vet Marketing, Inc. 2010 Stock Incentive Plan dated June 30, 2017   S-4    12/26/2018    10.7 
  10.11†  Amendment to Direct Vet Marketing, Inc. 2010 Stock Incentive Plan dated December 6, 2017   S-4    12/26/2018    10.8 
  10.12†*  Covetrus 2019 Omnibus Incentive Compensation Plan, and forms of agreement thereunder      
  10.13†  Covetrus Employee Stock Purchase Plan   S-4    12/26/2018    10.10 
  10.14†  Covetrus Annual Incentive Plan   S-4/A    01/08/2019    10.11 
  10.15†  Employment Agreement, dated as of February 7, 2019, by and between HS Spinco, Inc. and Benjamin Shaw   8-K    02/07/2019    10.8 
  10.16†  Employment Agreement, dated as of February 7, 2019, by and between HS Spinco, Inc. and Christine T. Komola   8-K    02/07/2019    10.9 
  10.17  Employment Agreement, dated as of February 7, 2019, by and between HS Spinco, Inc. and Francis Dirksmeier   8-K    02/07/2019    10.10 
  10.18†  Employment Agreement, dated as of February 7, 2019, by and between HS Spinco, Inc. and David Christopher Dollar   8-K    02/07/2019    10.11 
  10.19†  Employment Agreement, dated as of February 7, 2019, by and between HS Spinco, Inc. and Georgina Wraight   8-K    02/07/2019    10.12 
  10.20  Lease Agreement, dated as of August 20, 2018, by and between 86 Newbury Street LLC and Direct Vet Marketing, Inc.   S-4    12/26/2018    10.16 
  10.21  Lease Agreement, dated as of August 20, 2018, by and between 86 Newbury Street LLC and VFC Pharmacy #101, LLC   S-4    12/26/2018    10.17 
  10.22  Lease Agreement, dated as of June 22, 2018, by and between Northgate Office, LLC and Direct Vet Marketing, Inc.   S-4    12/26/2018    10.18 
  10.23  Stock Subscription and Purchase Agreement, dated as of December  25, 2018, by and among Henry Schein, Inc., HS Spinco, Inc. and the purchasers party thereto   S-4    12/26/2018    10.19 
  10.24  Registration Rights Agreement, dated as of December 25, 2018, by and among HS Spinco, Inc. and the other parties thereto   S-4    12/26/2018    10.20 

Page
(a) (1)Financial Statements: See “Index to Consolidated and Combined Financial Statements”
51
(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 DescriptionFormDateNo.
2.1S-412/26/20182.1
2.2S-412/26/20182.2
2.3S-412/26/20182.3
2.4S-412/26/20182.4
2.5S-412/26/20182.5
2.6S-4/A1/15/20192.6
3.1S-4/A1/15/20193.4
3.2S-4/A1/8/20193.5
3.38-K5/19/20203.1
4.1S-4/A1/8/20194.1
4.2*
10.18-K2/7/201910.1
10.28-K2/7/201910.2
10.3S-412/26/201810.1
10.48-K2/7/201910.4
10.58-K2/7/201910.5


Covetrus, Inc. 2020 Form 10-KIncorporated by Reference99
Table of Contents

Exhibit
Number		Exhibit DescriptionFormDateNo.
10.6S-4/A1/8/201910.3
10.78-K2/7/201910.3
10.8†S-412/26/201810.5
10.9†S-412/26/201810.6
10.10†S-412/26/201810.7
10.11†S-412/26/201810.8
10.12†S-412/26/201810.9
10.13†S-412/26/201810.10
10.14†S-4/A1/8/201910.11
10.19†8-K2/7/201910.12
10.20S-412/26/201810.16
10.21S-412/26/201810.17
10.22S-412/26/201810.18
10.23S-412/26/201810.19
10.24S-412/26/201810.20
10.25†8-K3/5/201910.7
10.26†8-K10/22/201910.1
10.27†8-K3/24/202010.1
10.28†8-K1/21/202010.1
10.29†10-Q11/10/202010.1
10.30†8-K/A6/30/202010.1
10.31†8-K1/21/202010.1
10.32†8-K1/21/202010.2
10.3310-K3/3/202010.31

Exhibit
Number

Exhibit Description

FormDateNumber
  10.25†Non-Employee Director Compensation Policy of Covetrus, Inc. 2020 Form 10-K8-K3/5/201910.7100
Table of Contents

Exhibit
Number		Exhibit DescriptionFormDateNo.
10.34†8-K/A2/2/202010.1
10.358-K5/1/202010.1
10.368-K5/19/202010.1
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
104Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.
*            Filed herewith
**          Furnished and not filed herewith
†            Indicates management contract or compensatory plan

Item 16.     10-K Summary

None
  23.1*Consent of BDO USA, LLP, Independent Registered Public Accounting Firm.
  31.1*Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
  31.2*Certification of the Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
  32.1**Certification of the Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
  32.2**Certification of the Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

*

Filed herewith.

**

The certifications furnished in Exhibit 32.1 and Exhibit 32.2 hereto are deemed to accompany this Annual Report onCovetrus, Inc. 2020 Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference.

†

Identifies management compensation plan or arrangement.

101

Table of Contents

SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

COVETRUS, INC.

Date: March 29, 2019

1, 2021		By:

/s/ Benjamin Shaw

Wolin

Benjamin Shaw

Wolin

President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name

Title

Date

/s/ Benjamin Shaw

Benjamin Shaw

Wolin

President, Chief Executive Officer and Director

(Principal (Principal Executive Officer)

March 29, 20191, 2021
Benjamin Wolin

/s/ Christine T. Komola

Christine T. Komola

Matthew Foulston

Executive Vice President and Chief Financial Officer and Treasurer


(Principal Financial and Accounting Officer)

March 29, 20191, 2021
Matthew Foulston

/s/ Betsy Atkins

Betsy Atkins

Laura J. Phillips

Director

Vice President, Global Controller and Chief Accounting Officer (Principal Accounting Officer)		March 29, 20191, 2021
Laura J. Phillips
/s/ Philip A. LaskawyChairman of the Board and DirectorMarch 1, 2021
Philip A. Laskawy
/s/ Deborah G. EllingerDirectorMarch 1, 2021
Deborah G. Ellinger

/s/ Deborah G. Ellinger

Deborah G. Ellinger

Sandra L. Helton

Director

March 29, 20191, 2021
Sandra L. Helton

/s/ Sandra L. Helton

Sandra L. Helton

Mark J. Manoff

Director

March 29, 20191, 2021
Mark J. Manoff

/s/ Philip A. Laskawy

Philip A. Laskawy

Edward M. McNamara

Director

March 29, 20191, 2021
Edward M. McNamara

/s/ Mark J. Manoff

Mark J. Manoff

Steven Paladino

Director

March 29, 20191, 2021
Steven Paladino

/s/ Edward M. McNamara

Edward M. McNamara

Sandra E. Peterson

Director

March 29, 20191, 2021
Sandra E. Peterson
/s/ Ravi SachdevDirectorMarch 1, 2021
Ravi Sachdev

/s/ Steven Paladino

Steven Paladino

Sharon Wienbar

Director

March 29, 20191, 2021
Sharon Wienbar

/s/ Ravi Sachdev

Ravi Sachdev

Covetrus, Inc. 2020 Form 10-K

Director

March 29, 2019

/s/ David E. Shaw

David E. Shaw

Director

March 29, 2019

/s/ Benjamin Wolin

Benjamin Wolin

Director

March 29, 2019102

118