UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~(Mark One)~~

x ~~Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934~~


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, ~~2019~~2021

o ~~Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934~~


☐			Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________ to _____________

Commission File Number: 001-38794

COVETRUS, INC.

(Exact Name of Registrant as Specified in its Charter)



Delaware						83-1448706
(State or other jurisdiction of incorporation)						(I.R.S. Employer Identification No.)

7 Custom House Street

Portland, ME 04101

Tel: (888) 280-2221

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Registration S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



~~Large accelerated filer~~	o	~~Accelerated filer~~	o
~~Non-accelerated filer~~	x	~~Smaller reporting company~~	o
		~~Emerging growth company~~	o

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 Securities Act. o

~~Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes~~ o No x

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

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share

~~CVET~~

~~The~~ CVET

Nasdaq ~~Stock Market (Nasdaq~~ Global Select ~~Market)~~Market

Yes

☒

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

☒

☐

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

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

☐

☒

The registrant had ~~111,699,291~~136,589,404 shares of common stock outstanding as of ~~May 13, 2019.~~April 30, 2021.

TABLE OF CONTENTS



	Page
Glossary of Defined Terms and Abbreviations		3
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated ~~and Combined~~ Financial Statements (Unaudited)
Balance Sheets		5
Statements of Operations		6
Statements of Comprehensive Income (Loss)		7
Statements of Shareholders' Equity		8
Statements of Cash Flows		9
Notes to ~~the~~Condensed Consolidated ~~and Combined~~ Financial Statements
Note 1: Business Overview and Significant Accounting Policies		10

Note 2: Segment Data		11
Note 3: Revenue from Contracts with Customers		12
Note 4: Earnings (Loss) Per Share		13
Note 5: Commitments and Contingencies		13
Note 6: Income Taxes		14
Note 7: Fair Value		14
Note 8: Derivatives		16
Note 9: Accumulated Other Comprehensive Income (Loss)		17
Note 10: Redeemable Non-controlling Interests		17

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		2518
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2927
Item 4. Controls and Procedures		3128

PART II - OTHER INFORMATION		31
Item 1. Legal Proceedings		3129
Item 1A. Risk Factors		3129
Item 2. Unregistered Sales of Securities and Use of Proceeds		29
Item 5. Other Information		30
Item 6. Exhibits		3230
Signatures		3431


Covetrus, Inc. 2021 Q1 Form 10-Q			2

Glossary of Defined Terms and Abbreviations


AAFCO			Association of American Feed Control Officials
Acquisition*			Our acquisition of Vets First Choice in an all-stock transaction
Adjusted EBITDA*			Adjusted EBITDA is the segment measure of profit or loss reported to the CODM. Adjusted EBITDA excludes share-based compensation, strategic consulting, transaction costs, formation of Covetrus expenses, separation programs and executive severance, carve-out operating expenses, certain IT infrastructure expenses necessary to establish ourselves as a newly public company, goodwill impairment charges, capital structure-related fees, operating lease right-of-use asset impairments, the proportionate share of the adjustments of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100%, managed exits from businesses we are exiting or closing, and other income and expense items, net. Non-GAAP Adjusted EBITDA on a total segment basis is reconciled in Note 2 - Segment Data as required by ASC 280
AIP*			Annual Incentive Plan
Investment and Shareholders Agreement*			The Investment and Shareholders Agreement of Distrivet, S.A. executed on January 13, 2020
Animal Health Business*			Former Parent's spun-off animal-health business
Animal Owners*			Patients of our Customers
APAC			Asia Pacific
APVMA			Australian Pesticides and Veterinary Medicines Authority
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
BEAT			Base Erosion & Anti-Abuse Tax
CEO			Chief Executive Officer
CARES			Coronavirus Aid, Relief, and Economic Security Act
CCPA			California Consumer Privacy Act
CFO			Chief Financial Officer
CODM			Chief Operating Decision Maker
COVID-19			Novel Coronavirus Disease 2019
Credit Facilities*			On February 7, 2019, we entered into a $1.5 billion syndicated credit agreement with a group of lenders for a five-year term
Customers*			Veterinarians and animal-health practitioners
CVM			Center for Veterinary Medicine
DEA			U.S. Drug Enforcement Administration
DGCL			Delaware General Corporation Law
Defendants*			The Company, our Former Parent, our former Chief Executive Officer and President, and our former Chief Financial Officer, collectively
Distribution*			All the shares of our common stock that were then owned by our Former Parent were distributed to its stockholders of record as of January 17, 2019. Concurrent with the Distribution, we paid a cash dividend of $1.2 billion to our Former Parent from loan proceeds from our newly established Term Loan Facility
Distrivet*			On April 30, 2020, we combined our subsidiary, SAHS, with Distrivet, S.A. to form a leading animal-health provider on the Iberian Peninsula. We own 50.01% of the new company, called Distrivet, a Covetrus company
EBITDA			Earnings Before Interest, Taxes, Depreciation, and Amortization
EFTA			European Free Trade Area
EFSA			European Food Safety Authority
EMA			European Medicines Agency
EPA			Environmental Protection Agency
EPS			Basic earnings (loss) per common share
ESG			Environmental, social, and corporate governance
ESPP			Employee Stock Purchase Plan
Exchange Act			Securities Exchange Act of 1934, as amended
FCMA			Fellow Chartered Management Accountant


Covetrus, Inc. 2021 Q1 Form 10-Q			3


FDA			U.S. Food and Drug Administration
FDII			Foreign-derived Intangible Income
Form 10-K			Audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2020
Form 10-Q or Report			Quarterly Report on Form 10-Q
Former Parent*			Henry Schein, Inc.
FTC			Federal Trade Commission
GAAP			Generally Accepted Accounting Principles in the United States of America
GDPR			EU General Data Protection Regulation
GFI			Guidance for Industry
GILTI			Global Intangible Low-Taxed Income
Global Technology Solutions*			The aggregation of our software services with our prescription management platform and related pharmacy services
IRS			Internal Revenue Service
ITGC			Information Technology General Controls
LIBOR			London Interbank Offered Rate
NYSE			New York Stock Exchange
NZ EPA			New Zealand Environmental Protection Authority
Revolving Credit Facility*			$300 million revolving line of credit for working capital and general corporate purposes
RSA			Restricted Stock Award
RSU			Restricted Stock Unit
SAHS*			Spain Animal Health Solutions S.L.U.
SEC			Securities and Exchange Commission
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, our Former Parent completed the spin-off of its Animal Health Business and transferred the applicable assets, liabilities, and ownership interests to us
SG&A			Selling, general and administrative expenses
Share Sale*			On February 7, 2019 and prior to the Distribution, we sold $361 million in shares to accredited institutional investors. The proceeds from the Share Sale were paid to us and distributed to our Former Parent
SMB			Small or Medium-Sized Business
Term Loan Facility*			$1.2 billion term loan facility
Transactions			Collectively the following events, effective February 7, 2019, Vets First Choice became a wholly-owned subsidiary of Covetrus, Inc. (f/k/a HS Spinco, Inc.), a company formed by our Former Parent in connection with the spin-off of the Animal Health Business and combination with Vets First Choice
TSA			Transition Service Agreements
U.K.			United Kingdom
USDA			U.S. Department of Agriculture
Vets First Choice*			Direct Vet Marketing, Inc. (d/b/a Vets First Choice)
VMD			Veterinary Medicines Directorate
VSG*			Veterinary Study Groups, Inc.
Covetrus, Company, we, us, our, or ourselves			Covetrus, Inc. and its consolidated subsidiaries, collectively
XBRL			eXtensible Business Reporting Language

*Defined term or abbreviation is specific to CVET


Covetrus, Inc. 2021 Q1 Form 10-Q			4

Table of Contents

~~CAUTIONARY NOTE REGARDING FORWARD‑LOOKING~~

PART I

Item 1. Condensed Consolidated Financial Statements

COVETRUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share amounts)


	March 31, 2021		December 31, 2020
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	211	$	290
Accounts receivable, net of allowance of $5 and $5	518		507
Inventories, net	555		530
Other receivables	87		67
Prepaid expenses and other	51		37
Total current assets	1,422		1,431
Non-current assets:
Property and equipment, net of accumulated depreciation of $112 and $106	118		116
Operating lease right-of-use assets, net	111		117
Goodwill	1,187		1,187
Other intangibles, net of accumulated amortization of $497 and $470	516		555
Investments and other	86		90
Total assets	$	3,440	$	3,496
LIABILITIES, MEZZANINE EQUITY, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	416	$	405
Current maturities of long-term debt and other borrowings	17		1
Accrued payroll and related liabilities	57		67
Accrued taxes	29		37
Other current liabilities	163		181
Total current liabilities	682		691
Non-current liabilities:
Long-term debt and other borrowings, net	1,054		1,068
Deferred income taxes	23		28
Other liabilities	125		136
Total liabilities	1,884		1,923
Commitments and contingencies (Note 5)	0		0
Mezzanine equity:
Redeemable non-controlling interests (Note 10)	36		36
Shareholders' equity:
Common stock, $0.01 par value per share, 675,000,000 shares authorized; 136,342,036 shares issued and outstanding as of March 31, 2021; 136,017,964 shares issued and outstanding as of December 31, 2020	1		1
Accumulated other comprehensive loss (Note 9)	(75)		(66)
Additional paid-in capital	2,637		2,629
Accumulated deficit	(1,043)		(1,027)
Total shareholders’ equity	1,520		1,537
Total liabilities, mezzanine equity, and shareholders’ equity	$	3,440	$	3,496

See notes to unaudited condensed consolidated financial statements.


Covetrus, Inc. 2021 Q1 Form 10-Q			5

Table of Contents

COVETRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts) (Unaudited)


	Three Months Ended March 31,
		2021		2020
Net sales (Note 3)		$	1,102	$	1,065
Cost of sales		892		863
Gross profit		210		202
Operating expenses:
Selling, general and administrative		213		222


Operating income (loss)		(3)		(20)
Other income (expense):
Interest income		0		0
Interest expense		(9)		(14)
Other, net		0		(1)
Income (loss) before taxes and equity in earnings of affiliates		(12)		(35)
Income tax benefit (expense) (Note 6)		(4)		2

Net income (loss)		(16)		(33)
Net (income) loss attributable to redeemable non-controlling interests		0		0
Net income (loss) attributable to Covetrus		$	(16)	$	(33)

Earnings (loss) per share attributable to Covetrus: (Note 4)
Basic		$	(0.11)	$	(0.30)
Diluted		$	(0.11)	$	(0.30)
Weighted-average common shares outstanding:
Basic		136		112
Diluted		136		112

See notes to unaudited condensed consolidated financial statements.


Covetrus, Inc. 2021 Q1 Form 10-Q			6

Table of Contents

COVETRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions) (Unaudited)


	Three Months Ended March 31,
		2021		2020
Net income (loss)		$	(16)	$	(33)
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)		(11)		(22)

Gain (loss) on derivative instruments		2		(8)

Total other comprehensive income (loss)		(9)		(30)
Comprehensive income (loss)		(25)		(63)
Comprehensive (income) loss attributable to redeemable non-controlling interests:
Net (income) loss		0		0
Foreign currency translation (gain) loss		(1)		(1)
Comprehensive (income) loss attributable to redeemable non-controlling interests		(1)		(1)
Comprehensive income (loss) attributable to Covetrus		$	(26)	$	(64)

See notes to unaudited condensed consolidated financial statements.


Covetrus, Inc. 2021 Q1 Form 10-Q			7

Table of Contents

COVETRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In millions, except share amounts) (Unaudited)




















	Three Months Ended March 31, 2021
	Common Stock			Accumulated Other Comprehensive Income (Loss)		Additional Paid-in Capital		Accumulated Deficit		Total Shareholders' Equity
	Shares	Amount
Balance at December 31, 2020	136,017,964	$	1	$	(66)	$	2,629	$	(1,027)	$	1,537
Net income (loss) attributable to Covetrus	—	—		—		—		(16)		(16)





Issuance of shares in connection with share-based compensation plans, net of shares withheld for taxes	324,072	—		—		(3)		—		(3)
Share-based compensation	—	—		—		11		—		11



Other comprehensive income (loss)	—	—		(9)		—		—		(9)
Balance at March 31, 2021	136,342,036	$	1	$	(75)	$	2,637	$	(1,043)	$	1,520



















	Three Months Ended March 31, 2020
	Common Stock			Accumulated Other Comprehensive Income (Loss)		Additional Paid-in Capital		Accumulated Deficit		Total Shareholders' Equity
	Shares	Amount
Balance at December 31, 2019	111,620,507	$	1	$	(86)	$	2,339	$	(1,001)	$	1,253
Net income (loss) attributable to Covetrus	—	—		—		—		(33)		(33)





Issuance of shares in connection with share-based compensation plans, net of shares withheld for taxes	233,932	—		—		0		—		0
Share-based compensation	—	—		—		9		—		9


Other comprehensive income (loss)	—	—		(30)		—		—		(30)
Balance at March 31, 2020	111,854,439	$	1	$	(116)	$	2,348	$	(1,034)	$	1,199

See notes to unaudited condensed consolidated financial statements.


Covetrus, Inc. 2021 Q1 Form 10-Q			8

Table of Contents

COVETRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions) (Unaudited)


	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities:
Net income (loss)	$	(16)	$	(33)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization	43		40
Amortization of right-of-use assets	3		6


Gain on sale of property and equipment	0		(1)

Share-based compensation expense	11		9

Benefit for deferred income taxes	(3)		(5)



Amortization of debt issuance costs	1		1

Other	3		1
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net	(18)		(112)
Inventories, net	(33)		44
Other assets and liabilities	(51)		5
Accounts payable and accrued expenses	1		(31)
Net cash provided by (used for) operating activities	(59)		(76)
Cash flows from investing activities:
Purchases of property and equipment	(13)		(11)


Proceeds from sale of property and equipment	0		4
Net cash provided by (used for) investing activities	(13)		(7)
Cash flows from financing activities:
Proceeds from revolving credit facility	0		190


Principal payments of debt	0		(17)
Debt issuance and amendment costs	0		(5)


Issuance of common shares in connection with share-based compensation plans, net of shares withheld for taxes	(2)		0






Acquisition payment	0		(9)
Acquisitions of non-controlling interests in subsidiaries	(1)		0
Net cash provided by (used for) financing activities	(3)		159
Effect of exchange rate changes on cash and cash equivalents	(4)		(1)
Net change in cash and cash equivalents	(79)		75
Cash and cash equivalents, beginning of period	290		130
Cash and cash equivalents, end of period	$	211	$	205

Supplemental disclosures of non-cash investing and financing activities:

Right-of-use assets obtained in exchange for new operating lease liabilities	$	3	$	46

See notes to unaudited condensed consolidated financial statements.


Covetrus, Inc. 2021 Q1 Form 10-Q			9

Table of Contents

COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~This report contains forward‑looking~~(In millions) (Unaudited)

1. BUSINESS OVERVIEW AND SIGNIFICANT ACCOUNTING POLICIES

Business

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

Basis of Presentation and Principles of Consolidation

The accompanying balance sheet as of December 31, 2020, which was derived from audited financial statements, and the unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2021, have been prepared in accordance with applicable rules and regulations of the SEC for interim financial reporting. Pursuant to those rules and regulations, we omitted certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP.

In our opinion, the accompanying condensed consolidated financial statements reflect all recurring adjustments and transactions necessary for a fair statement of our financial position, results of operations, and cash flows for the interim periods presented. Such operating results are not necessarily indicative of annual or future results. These condensed consolidated financial statements and notes should be read in conjunction with the Form 10-K filed with the SEC on March 1, 2021.

The accompanying unaudited condensed consolidated 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 were eliminated in consolidation. Investments in unconsolidated affiliates, which are 20% to 50.01% owned, or investments of less than 20% in which we could influence the operating or financial decisions, are accounted for under the equity method.

Accounting Pronouncements

•As of January 1, 2021, we adopted ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which removes specific technical exceptions to general principles found in Topic 740, items that often produce information that investors have difficulty understanding and simplifies the accounting for income taxes. The adoption of this ASU did not have a material impact on the results of our condensed consolidated financial statements.

•ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting for contracts, hedging relationships, and other transactions that reference LIBOR. The standard is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. Our debt agreements and interest rate swaps that utilize LIBOR have not yet discontinued the use of LIBOR and, therefore, this ASU is not yet effective for us. Because our interest rate swaps mature on July 31, 2021, we do not expect an accounting burden, or the relief provided by this ASU for hedging relationships, to impact the results of our condensed consolidated financial statements. The banking syndicate associated with our Credit Facilities 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. We will continue to monitor, and, to the extent our Credit Facilities require amendment to reflect a replacement rate prior to December 31, 2022, we will evaluate the benefits of adopting this ASU.


Covetrus, Inc. 2021 Q1 Form 10-Q			10

Table of Contents

COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)

2. SEGMENT DATA

The following tables reflect our segment and Corporate information and reconciles Adjusted EBITDA for reportable segments to consolidated Net income (loss) attributable to Covetrus:


	At and For the Three Months Ended March 31, 2021
	North America		Europe		APAC & Emerging Markets		Corporate		Eliminations		Total
Net sales	$	635	$	361	$	112	$	0	$	(6)	$	1,102
Adjusted EBITDA	$	52	$	21	$	10	$	(26)	$	0	$	57
Total assets	$	2,948	$	672	$	189	$	1,216	$	(1,585)	$	3,440

Reconciliation of Net income (loss) attributable to Covetrus to Adjusted EBITDA:
Net income (loss) attributable to Covetrus											$	(16)
Plus: Depreciation and amortization											43
Plus: Interest expense, net											9
Plus: Income tax (benefit) expense											4
Earnings (loss) before interest, taxes, depreciation, and amortization											40
Plus: Share-based compensation											11
Plus: Strategic consulting											2
Plus: Transaction costs (a)											1


Plus: Formation of Covetrus (b)											2

Plus: Equity method investment and non-consolidated affiliates (c)											1



Adjusted EBITDA											$	57


(a) Includes legal, accounting, tax, and other professional fees incurred in connection with acquisitions and divestitures
(b) Includes professional and consulting fees, 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%


Covetrus, Inc. 2021 Q1 Form 10-Q			11

Table of Contents

COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)


	At and For the Three Months Ended March 31, 2020
	North America		Europe		APAC & Emerging Markets		Corporate		Eliminations		Total
Net sales	$	550	$	422	$	95	$	0	$	(2)	$	1,065
Adjusted EBITDA	$	41	$	18	$	7	$	(18)	$	0	$	48
Total assets	$	3,063	$	725	$	128	$	787	$	(1,216)	$	3,487

Reconciliation of Net income (loss) attributable to Covetrus to Adjusted EBITDA:
Net income (loss) attributable to Covetrus											$	(33)
Plus: Depreciation and amortization											40
Plus: Interest expense, net											14
Plus: Income tax (benefit) expense											(2)
Earnings (loss) before interest, taxes, depreciation, and amortization											19
Plus: Share-based compensation											9
Plus: Strategic consulting											4
Plus: Transaction costs (a)											7
Plus: Separation programs and executive severance											1

Plus: IT infrastructure (b)											1
Plus: Formation of Covetrus (c)											6
Plus: Capital Structure											1



Adjusted EBITDA											$	48

(a) Includes legal, accounting, tax, and other professional fees incurred in connection with acquisitions and divestitures
(b) Includes certain IT infrastructure expenses necessary to establish ourselves as a newly public company
(c) 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

See Note 3 - Revenue from Contracts with Customers for our revenue disaggregated by major product category and reportable segment.

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Revenue

The tables below present our revenue disaggregated by major product category and reportable segment.



















	Three Months Ended March 31, 2021
	Supply Chain Services		Software Services		Prescription Management		Eliminations		Total
North America	$	525	$	20	$	112	$	(22)	$	635
Europe	364		3		0		(6)		361
APAC & Emerging Markets	109		3		0		0		112
Eliminations	(6)		0		0		—		(6)
Total Net sales	$	992	$	26	$	112	$	(28)	$	1,102

	Three Months Ended March 31, 2020
	Supply Chain Services		Software Services		Prescription Management		Eliminations		Total
North America	$	462	$	20	$	84	$	(16)	$	550
Europe	424		2		0		(4)		422
APAC & Emerging Markets	93		2		0		0		95
Eliminations	(2)		0		0		—		(2)
Total Net sales	$	977	$	24	$	84	$	(20)	$	1,065


Covetrus, Inc. 2021 Q1 Form 10-Q			12

Table of Contents

COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)

Contract Assets and Contract Liabilities

Contract asset balances as of March 31, 2021 and December 31, 2020 were not material. There have been no material changes in our current portion of contract liabilities since the end of fiscal year 2020, and the amounts related to non-current contract liabilities were not material as of March 31, 2021 and December 31, 2020. See Note 1 - Business Overview and Significant Accounting Policies and Note 5 - Revenue from Contracts with Customers of our Form 10-K.

Performance Obligations

Estimated future revenues expected to be generated from our long-term contracts with unsatisfied performance obligations as of March 31, 2021 were not material.

4. EARNINGS (LOSS) PER SHARE

EPS is computed by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. In addition, the shares of common stock issuable pursuant to restricted stock awards, restricted stock units, performance stock units, and stock options outstanding under our 2019 Omnibus Incentive Compensation Plan and shares issuable under our Employee Stock Purchase Plan are included in the diluted EPS calculation to the extent they are dilutive.

The following is a reconciliation of the numerator and denominator of the basic and diluted EPS computation for net income (loss) per share:


	Three Months Ended March 31,
(In millions, except per share amounts)		2021		2020
Numerator:






Net income (loss) available to common shareholders		$	(16)	$	(33)

Denominator:
Basic
Weighted-average common shares outstanding		136		112
Diluted
Effect of dilutive shares		0		0
Weighted-average common shares outstanding		136		112

Earnings (loss) per share attributable to Covetrus:
Basic		$	(0.11)	$	(0.30)
Diluted		$	(0.11)	$	(0.30)

Potentially dilutive securities (a)		6		7

(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

5. COMMITMENTS AND CONTINGENCIES

We are involved in various legal proceedings that arise in the ordinary course of business. Substantial judgment is required in predicting the outcome of these legal proceedings, many of which take years to adjudicate. We accrue estimated costs for a contingency when we believe that a loss is probable and can be reasonably estimated. Legal fees are expensed as incurred. No material accrued loss contingencies were recorded as of March 31, 2021.


Covetrus, Inc. 2021 Q1 Form 10-Q			13

Table of Contents

COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)

Securities Litigation Matter

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

Purchase Obligations

We are party to an exclusive supply arrangement for certain products within the ~~meaning~~U.S. market until 2025 with an aggregate remaining value of $34 million. Our unconditional purchase obligation for 2021 is $8 million. For the three months ended March 31, 2021, we paid $2 million 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 services over a three-year period ending December 31, 2022. We considered the contract to be of a “take-or-pay” nature due to the termination fees embedded in the contract: fixed termination fees of $12 million until mid-November 2020 and $14 million thereafter, plus any variable performance fees through termination. The fixed portion of the contract was capped at $14 million while the variable portion of the contract was capped at $39 million over the term of the engagement. In April 2021, we amended this contract with the third-party service provider such that the terms of the original agreement were deemed fully satisfied by both parties. In connection with the contract amendment, we agreed to pay the third party $10 million for specific services to be performed throughout the remainder of 2021. This amendment resulted in a decrease of $18 million from the remaining commitments under the original terms of the agreement.

6. INCOME TAXES

Income tax expense for the three months ended March 31, 2021 was $4 million on a loss before taxes and equity in earnings of affiliates of $12 million. The difference between our tax expense and the tax expense using the statutory tax rates for the jurisdictions in which we operate, for this period, primary related to valuation allowances due to uncertainty regarding the realization of future tax benefits from certain U.S. deferred tax assets.

Income tax benefit for the three months ended March 31, 2020 was $2 million on a loss before taxes and equity in earnings of affiliates of $35 million. The difference between our tax expense and the tax expense using the statutory tax rates for the jurisdictions in which we operate, for this period, primarily related to valuation allowances due to uncertainty regarding the realization of future tax benefits from certain U.S. deferred tax assets and non-deductible expenses associated with share-based compensation.

7. FAIR VALUE

GAAP defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

We have certain financial assets and liabilities that are measured at fair value on a recurring basis, certain nonfinancial assets and liabilities that may be measured at fair value on a non-recurring basis, and certain financial assets and liabilities that are not measured at fair value in our condensed consolidated balance sheets, but the fair value is disclosed. The fair value disclosures of these assets and liabilities are based on a three-level hierarchy, which is defined as follows:

•Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities


Covetrus, Inc. 2021 Q1 Form 10-Q			14

Table of Contents

COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)

•Level 2 -Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability

•Level 3 - Unobservable inputs for the asset or liability

There were no changes in valuation approaches or techniques during the three months ended March 31, 2021. See Note 11 - Fair Value in our Form 10-K for a description of our valuation techniques.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents our financial instruments measured at fair value on a recurring basis and indicates the level within the fair value hierarchy:


Assets	Level	March 31, 2021		December 31, 2020
Distrivet call option	3	$	2	$	2
Total assets		$	2	$	2


Liabilities	Level	March 31, 2021		December 31, 2020





Interest rate swap contracts	2	$	3	$	5
Distrivet put option	3	1		1
Total liabilities		$	4	$	6

Interest Rate Swap Contracts

Our derivatives at March 31, 2021 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. These interest rate swap contracts mature on July 31, 2021. See Note 8 - Derivatives.

Distrivet Options

The Distrivet options fair value was 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.

Assets and Liabilities 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 intangibles, 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. We did not have any assets or liabilities measured at fair value on a nonrecurring basis during the three months ending March 31, 2021.

Assets and Liabilities Not Measured at Fair Value

Financial Assets and Liabilities

The carrying amounts reported on the condensed consolidated balance sheets for Cash and cash equivalents, Accounts receivable, net, Other receivables, Accounts payable, and accrued expenses approximate their fair value due to the short maturity of those instruments.

Long-term Debt

Our long-term debt is classified as a level 2 instrument. The carrying amount of the term loan approximates fair value given the underlying interest rate applied to such amounts outstanding is currently reset to the prevailing monthly market rate.


Covetrus, Inc. 2021 Q1 Form 10-Q			15

Table of Contents

COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)

8. 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 effectively fix the borrowing rates on a portion of our floating rate debt. The base notional amounts mature on July 31, 2021. On the interest rate swap inception dates, we designated the swaps as a hedge of the variability in cash flows we pay on our variable rate borrowings.

Our 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 following table discloses the fair value and balance sheet location of our derivative instruments:

Liability Derivatives

Cash Flow Hedging Instruments

Balance Sheet Location

March 31, 2021

December 31, 2020

Interest rate swap contracts

Other liabilities

At inception of the hedging contract, we used statistical regression to assess the effectiveness of the interest rate hedges. The hedging contracts were deemed highly effective and are expected to be highly effective throughout the hedge period. Therefore, we perform a qualitative assessment of the hedge effectiveness at each subsequent quarterly reporting date. As of March 31, 2021, derivative gains and losses were reported as a component of Other comprehensive income (loss) and will subsequently be recorded in the condensed consolidated statements of operations when the hedged transaction is recognized in earnings.

The effect of cash flow hedges on Other comprehensive income (loss) was as follows:



		Three Months Ended March 31,
Cash Flow Hedging Instruments	Location		2021		2020

Interest rate swap contracts	Interest (income) expense		$	2	$	0

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 $3 million.


Covetrus, Inc. 2021 Q1 Form 10-Q			16

Table of Contents

COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)

9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in Accumulated other comprehensive loss, net of applicable taxes, by component:


	Derivative Gain (Loss)		Foreign Currency Translation Gain (Loss)		Total
Balance at December 31, 2019	$	0	$	(86)	$	(86)
Other comprehensive loss before reclassifications	(8)		(22)		(30)
Reclassified from Accumulated other comprehensive loss to earnings	0		0		0
Period Change	(8)		(22)		(30)
Balance at March 31, 2020	(8)		(108)		(116)

Balance at December 31, 2020	$	(3)	$	(63)	$	(66)
Other comprehensive loss before reclassifications	0		(11)		(11)
Reclassified from Accumulated other comprehensive loss to earnings	2		0		2
Period Change	2		(11)		(9)
Balance at March 31, 2021	$	(1)	$	(74)	$	(75)

Comprehensive income (loss) includes certain gains and losses that are excluded from Net income (loss) under GAAP as these amounts are recorded directly as an adjustment to total equity. We recognize foreign currency translation losses as a component of comprehensive income (loss) due to changes in foreign exchange rates from the beginning of the period to the end of the period. The condensed consolidated financial statements are denominated in the U.S. dollar. Fluctuations in the value of foreign currencies as compared to the U.S. dollar may have a significant impact on Comprehensive income (loss).

The tax effect on accumulated unrealized losses on derivative instruments was not material for the periods presented. See Note 8 - Derivatives.

10. REDEEMABLE NON-CONTROLLING INTERESTS

Some minority equity owners in certain of our subsidiaries have the right, at certain times, to require us to acquire their ownership interest in those entities. We initially record our Redeemable non-controlling interests at fair value on the date of acquisition and subsequently adjust to redemption value.

The following table presents the components of change and balances of Redeemable non-controlling interests within the condensed consolidated balance sheets as follows:


	Three Months Ended March 31, 2021		Year Ended December 31, 2020
Balance at beginning of period	$	36	$	10
Decrease due to redemptions	0		(4)
Increase due to business acquisitions	0		24
Net income (loss) attributable to redeemable non-controlling interests	0		2

Effect of foreign currency translation (gain) loss attributable to redeemable non-controlling interests	(1)		(2)
Change to redemption value	1		6
Balance at end of period	$	36	$	36


Covetrus, Inc. 2021 Q1 Form 10-Q			17

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

Certain matters discussed in this Form 10-Q, and in particular, this 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 ~~which statements~~and involve substantial risks and uncertainties. ~~These forward-looking statements include, without limitation, statements regarding our industry, business strategy, plans, and goals and expectations concerning our market position.~~ When used in this ~~report,~~Report, the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” ~~“future”~~“future,” and the negative of these or similar terms and phrases are intended to identify forward-looking statements. Such statements are subject to numerous risks and uncertainties, and actual results could differ materially from those anticipated due to a number of factors including but not limited to:

•the effect of health epidemics, including the COVID-19 pandemic, on our business and the success of any measures we have taken or may take in the future in response thereto, including our ability to continue operations at our distribution centers and pharmacies

•the ability to successfully integrate operations and employees

•the ability to continue to execute on our strategic plan

•the ability to retain key personnel

•the ability to achieve performance targets, including managing our growth effectively

•the ability to manage relationships with our supplier and distributor network, including negotiating acceptable pricing and other terms with these partners

•the ability to attract and retain customers in a price sensitive environment

•the ability to maintain quality standards in our technology product offerings as well as associated customer service interactions to minimize loss of existing Customers and attract new Customers

•changes in financial markets, interest rates, and foreign currency exchange rates

•changes in the legislative landscape in which we operate, including potential corporate tax reform, and our ability to adapt to those changes as well as adaptation by the third-parties we are dependent upon for supply and distribution

•the impact of litigation

•the impact of accounting pronouncements, seasonality of our business, leases, expenses, interest expense, and debt

•sufficiency of cash and access to liquidity

•cybersecurity risks, including risk associated with our dependence on third-party service providers as a large portion of our workforce is working from home

•additional risks and factors discussed under the heading Risk Factors in this ~~report.~~Report, in our Form 10-K filed on March 1, 2021, and in our other SEC filings

~~Forward-looking~~

Our forward-looking statements are based on current beliefs and expectations of our management team and, except as required by law, we undertake no obligations to make any revisions to the forward-looking statements contained in this Report or to update them to reflect ~~our current expectations regarding~~events or circumstances occurring after the date of this Report, whether as a result of new information, future ~~events, results~~developments, or ~~outcomes. These expectations may or may not be realized.~~ otherwise.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we can give ~~you~~ no assurance that these expectations will prove to have been correct. These expectations may or may not be realized. Some of these expectations may be based upon assumptions, data, or judgments that prove to be incorrect. Actual events, results, and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties, and other factors. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include those set forth in this Form 10-Q and under ~~“Risk~~the caption Item 1A. Risk Factors~~” as well as, among others, risks and uncertainties relating to:~~

~~our ability to realize the anticipated revenue growth opportunities and operational synergies from the Separation and Merger as described in the Quarterly Report on Form 10-Q;~~

~~our ability to successfully integrate the Animal Health Business with Vets First Choice;~~

~~our ability to access equivalent financial strength and resources that historically have been provided by Henry Schein, Inc.;~~

~~the reliability of historical combined financial data as representative of further results;~~

~~restricted operational flexibility due to requirements to maintain the tax-free status of the Transactions and potential liability if such status is not maintained;~~

~~restrictions on transfers of our shares;~~

~~restrictions on our use of net operating losses to offset future income;~~

~~our ability to successfully implement our business strategies;~~

~~slower development of the sales cycle for our technology and services;~~

~~the competitiveness of our industry;~~

~~changes in manufacturer sales channels for our products;~~

~~our reliance on third-party providers for the manufacture and supply of our products;~~

~~our substantial indebtedness;~~

~~restricted operational flexibility due to restrictive covenants~~ in our ~~indebtedness agreements;~~Form 10-K.

~~the availability of additional financing opportunities;~~

~~the price sensitivity of our customers;~~

~~defects or disruptions in our service;~~

~~our ability to successfully defend against cyberattacks;~~

~~legislative and regulatory burdens;~~

~~costs associated with new branding initiatives;~~

~~our ability to effectively market to our customers, many of whom operate small and medium-sized businesses;~~

~~changes in global economic conditions;~~

~~the impact of changes in the economic, political, legal and business environments of the countries in which we do business;~~

~~the impact of domestic and foreign currency fluctuations;~~

~~the impact of regulation on our business;~~

~~product recalls on our pharmaceutical products;~~

~~Table of Contents~~

~~the impact of severe weather on our business;~~

~~assertions that we are infringing on intellectual property of others;~~

~~our ability to attract and retain qualified employees and other key personnel;~~

~~the impact of tax legislation on our business;~~

~~the volatility of our common stock price and possible reductions in trading volume;~~

~~fluctuations in our quarterly results;~~

~~the impact of our intentions regarding dividends on ability to achieve a return on investment;~~

~~the impact of anti-takeover provisions on our common stock price;~~

~~our ability to comply with public company reporting, disclosure controls and internal control over financial reporting requirements.~~

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. Any of the foregoing risks and uncertainties could cause the actual events, results and outcomes to vary materially from the forward-looking statements included in this report. We operate in a very competitive and rapidly changing market. New risks emerge from time to time, and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. ~~You should~~The results of operations for the three months ended March 31, 2021 are not ~~rely upon forward-looking statements as predictions~~necessarily indicative of ~~future events. Although we believe that~~what our operating results for the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statementsfull fiscal year will ~~be achieved or occur. You should consider these important factors, as well as the risk factors set forth in this report, in evaluating any statement made in this report. See “Risk Factors.”~~be. For the foregoing reasons, you are cautioned against relying on any forward-looking statements. ~~We do not undertake any obligation to update or revise these forward-looking statements, except as required by law.~~

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~ITEM I. CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS~~

~~COVETRUS, INC.~~

~~CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2019 (UNAUDITED)~~

~~COMBINED BALANCE SHEET AS OF DECEMBER 29, 2018~~

~~(dollars in millions, except per share data)~~

March 31,
2019 December 29,
2018
ASSETS
Current assets:
Cash and cash equivalents $ 73
$ 23
Accounts receivable, net of reserves $7 and $7 461
431
Inventory, net 594
564
Other receivables 59
49
Prepaid expenses and other 32
19
Total current assets 1,219
1,086
Property and equipment, net of accumulated depreciation of $93 and $74 94
69
Operating lease right-of-use assets 62
—
Goodwill 2,105
750
Other intangibles, net of accumulated amortization of $264 and $241 728
208
Investments and other 61
120
Total assets $ 4,269
$ 2,233
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 431
$ 441
Current maturities of long-term debt and other borrowings 36
1
Accrued expenses:
Payroll and related 40
37
Taxes 19
17
Other 144
77
Total current liabilities 670
573
Long-term debt and other borrowings, net 1,167
24
Deferred taxes, net 51
16
Other liabilities 70
35
Total liabilities 1,958
648
Commitments and contingencies (Note 8)
Redeemable noncontrolling interests 17
92
Stockholders' Equity:
Common stock, $0.01 par value, 675,000,000 shares authorized as of March 31, 2019; 111,576,343 shares issued and outstanding as of March 31, 2019 1
—
Net parent investment —
1,576
Accumulated other comprehensive income (loss) (82 ) (83 )
Additional paid-in capital 2,396
—
Accumulated deficit (21 ) —
Total stockholders’ equity 2,294
1,493
Total liabilities, redeemable noncontrolling interests and stockholders’ equity $ 4,269
$ 2,233

~~The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.~~

~~Table of Contents~~

~~COVETRUS, INC.~~

~~CONSOLIDATED STATEMENT OF OPERATIONS FOR MARCH 31, 2019~~

~~COMBINED STATEMENT OF OPERATIONS FOR MARCH 31, 2018~~

~~(dollars in millions, except per share data)~~

~~(unaudited)~~

Three Months Ended

March 31,
2019 March 31,
2018
Net sales $ 941
$ 947
Cost of sales 761
771
Gross profit 180
176
Operating expenses:

Selling, general and administrative 189
143
Restructuring costs —
1
Operating income (expense) (9 ) 32
Other income (expense):

Interest income 2
2
Interest expense (12 ) (1 )
Other, net 1
1
Income (expense) before taxes and equity in earnings of affiliates (18 ) 34
Income tax benefit (provision) 4
(6 )
Net income (loss) (14 ) 28
Less: Net (income) loss attributable to redeemable noncontrolling interests 1
(5 )
Net income (loss) attributable to Covetrus, Inc. $ (13 ) $ 23

Earnings per share attributable to Covetrus, Inc.:

Basic $ (0.14 ) $ 0.32
Diluted $ (0.14 ) $ 0.31

Weighted-average common shares outstanding:

Basic 94,796
71,451
Diluted 94,796
71,973

~~The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.~~

~~COVETRUS, INC.~~

~~CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR MARCH 31, 2019~~

~~COMBINED STATEMENT OF COMPREHENSIVE INCOME FOR MARCH 31, 2018~~

~~(dollars in millions)~~

~~(unaudited)~~

Three Months Ended

43555 43190
Net income (loss) $ (14 ) $ 28
Other comprehensive income, net of tax:
Foreign currency translation gain 1
12

Other comprehensive income, net of tax: 1
12

Comprehensive income (13 ) 40

Comprehensive income:
Comprehensive income attributable to redeemable noncontrolling interests:
Net (income) loss 1
(5 )
Foreign currency translation loss —
(1 )

Comprehensive income attributable to redeemable noncontrolling interests 1
(6 )

Comprehensive income (loss) attributable to Covetrus, Inc. $ (12 ) $ 34

~~The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.~~

~~COVETRUS, INC.~~

~~CONSOLIDATED STATEMENT OF EQUITY~~

~~(dollars in millions)~~

~~(unaudited)~~

Common Stock Additional
Paid-In
Capital Retained Earnings/ (Accumulated Deficit) Accumulated Other Comprehensive Income/(Loss) Net Parent Investment Total Stockholders' Equity
Shares Amount
December 29, 2018 —
$ —
$ —
$ —
$ (83 ) $ 1,576
$ 1,493
Net income (loss) (1) —
—
(21 ) —
7
(14 )
Dividend to Henry Schein —
—
—
—
(1,153 ) (1,153 )
Issuance of common stock at separation (including share sale investors) 71,693,426
1
609
—
—
(609 ) 1
Issuance of common shares in connection with the Merger 39,742,089
—
1,772
—
—
—
1,772
Net increase (decrease) in parent investment —
—
—
—
—
179
179
Exercise of stock options 140,828
—
—
—
—
—
—
Stock-based compensation —
—
15
—
—
—
15
Other comprehensive loss —
—
—
—
1
—
1
March 31, 2019 111,576,343
$ 1
$ 2,396
$ (21 ) $ (82 ) $ —
$ 2,294

December 30, 2017 —
$ —
$ —
$ —
$ (42 ) $ 1,299
$ 1,257
Net income —
—
—
—
—
28
28
Cumulative impact of adopting new accounting standard —
—
—
—
—
2
2
Net increase (decrease) in parent investment —
—
—
—
—
(37 ) (37 )
Other comprehensive loss —
—
—
—
11
—
11
March 31, 2018 —
$ —
$ —
$ —
$ (31 ) $ 1,292
$ 1,261

~~(1) Net income earned from January 1, 2019 thru February 7, 2019 is attributed to the former parent as it was the sole shareholder prior to February 7, 2019.~~

~~The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.~~

~~COVETRUS, INC.~~

~~CONSOLIDATED STATEMENT OF CASH FLOWS FOR MARCH 31, 2019~~

~~COMBINED STATEMENT OF CASH FLOWS FOR MARCH 31, 2018~~

~~(dollars in millions)~~

~~(unaudited)~~

Three Months Ended

March 31,
2019 March 31,
2018
Cash flows from operating activities:
Net (loss) income $ (14 ) $ 28
Adjustments to reconcile net (loss) income to net cash used in operating activities:

Depreciation and amortization 35
16
Loss on sale of fixed assets —
—
Stock-based compensation 15
2
Provision for losses on trade and other accounts receivable 6
—
(Benefit from) provision for deferred income taxes (2 ) (1 )
Equity in earnings of affiliates —
—
Changes in unrecognized tax benefits —
—
Amortization of debt issuance costs 1
—
Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable, net (26 ) (34 )
Inventory, net (19 ) (2 )
Other assets and liabilities (59 ) (30 )
Accounts payable and accrued expenses 31
(9 )
Net cash used in operating activities (33 ) (30 )
Cash flows from investing activities:

Purchases of fixed assets (3 ) (6 )
Payments related to equity investments and business acquisitions, net of cash acquired (25 ) (8 )
Proceeds from sale of fixed assets —
—
Net cash used in investing activities (29 ) (14 )
Cash flows from financing activities:

Proceeds from issuance of debt 1,220
—
Principal payments of debt (24 ) (3 )
Debt issuance costs (24 ) —
Dividend paid to parent (1,153 )
Issuance of common shares at separation (including share sale investors) —
—
Issuance of common shares in connection with the Merger —
—
Issuance of common shares in connection with options —
—
Net transfers from Parent 167
51
Distributions to noncontrolling stockholders —
—
Acquisitions of noncontrolling interests in subsidiaries (70 ) (1 )
Net cash provided by financing activities 117
47
Effect of exchange rate changes on cash and cash equivalents (5 ) (1 )
Net change in cash and cash equivalents 50
2
Cash and cash equivalents, beginning of period 23
17
Cash and cash equivalents, end of period $ 73
$ 19

~~The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.~~

~~COVETRUS, INC.~~

~~CONSOLIDATED STATEMENT OF CASH FLOWS FOR MARCH 31, 2019~~

~~COMBINED STATEMENT OF CASH FLOWS FOR MARCH 31, 2018~~

~~(dollars in millions)~~

~~(unaudited)~~

Three Months Ended
March 31,
2019 March 31,
2018
Supplemental disclosures of cash flows information:
Cash paid during the period for:
Interest $ 8
$ —
Income taxes $ 4
$ 3
Supplemental disclosures of noncash investing and financing activities:

$ —
$ —

~~The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.~~

~~Notes to Consolidated and Combined Financial Statements~~

~~1. Business Overview and Significant Accounting Policies~~

~~Business~~

On February 7, 2019 (the “Distribution Date”), Henry Schein, Inc. ("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, “VFC”) (the “Merger”). This was accomplished by a series of transactions among VFC, 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”). In connection with the Separation, Henry Schein contributed, assigned and transferred to Covetrus certain applicable assets, liabilities, and capital stock and other ownership interests relating to the Animal Health Business. In connection with the Separation, and prior to the Distribution, Henry Schein entered into a series of agreements to purchase additional equity interests in certain consolidated subsidiaries of the Animal Health Business for a total purchase price of $73 million. On the Distribution Date, and prior to the Distribution, Covetrus issued shares of Covetrus common stock to certain institutional accredited investors (the “Share Sale Investors”) for $361 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, on a pro rata basis, all of the shares of the Covetrus common stock held by Henry Schein to its stockholders of record as of the close of business on January 17, 2019.

After the Share Sale and Distribution, Merger Sub consummated the Merger whereby it merged with and into VFC, with VFC 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 VFC immediately prior to the Merger, and (b) in respect of certain equity awards held by certain employees of VFC. The Merger with VFC was accounted for under the acquisition method of accounting for business combinations and the Company was considered the acquiring company per ASC 805 “Business Combinations.” Upon completion of the Merger, all VFC 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.

Covetrus, Inc. (sometimes referred to in this Quarterly Report on Form 10-Q as "we," "our," "us," "ourselves," the "Company" or "Covetrus") is a global, technology-enabled health business with a comprehensive service and technology platform and supply chain infrastructure dedicated to supporting the companion, equine and large animal veterinary markets.

~~Principles of Consolidation~~

The accompanying unaudited consolidated financial statements include the accounts 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. 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 Company has the ability to influence the operating or financial decisions, are accounted for under the equity method.

All prior period information is presented on a combined basis. The unaudited combined financial statements have been derived from the consolidated financial statements and accounting records of Henry Schein. The unaudited combined financial statements reflect the combined historical results of operations, financial position and cash flows of the Animal Health Business as they were historically managed in conformity with generally accepted accounting principles in the United States (“GAAP”). The unaudited combined financial statements include the accounts of the Animal Health Business and all of its controlled subsidiaries. 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 to influence the operating or financial decisions, are accounted for under the equity method. All intracompany transactions have been eliminated. All intercompany transactions between the Animal Health Business and Henry Schein have been included in these unaudited combined financial statements and are considered to be effectively settled for cash in the unaudited combined financial statements at the time the transaction is recorded. The unaudited combined financial statements include expense allocations for: (i) certain corporate functions historically provided by Henry Schein, including accounting, legal, information services, planning, compliance, investor relations, administration and communication, and similar costs; (ii) employee benefits and incentives; and (iii) stock-based compensation. These expenses have been allocated to the Animal Health Business 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 alone company for the periods presented. Actual costs that may have been incurred if the Animal Health Business had been a stand alone company would depend on a number of 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, these functions have been performed using the Animal Health Business’ own resources or third-party service providers. For an interim period, however, some of these functions will continue to be provided by Henry Schein under transition services agreements, which are planned to extend for a period of up to 21 months following the closing.

~~Basis of Presentation~~

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements.

The consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 31, 2019. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 29, 2018.

~~Use of Estimates~~

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The most significant estimates include the Company's evaluation of doubtful accounts receivable, inventory reserves, customer returns, goodwill impairment, self-insurance reserves, supplier rebates, fair value of redeemable noncotrolling interests, stock-based compensation expense, purchase price allocations and intangible assets acquired.

~~Fiscal Year~~

During fiscal year 2018, the Company operated on a 52-53 week basis ending on the last Saturday of December. For fiscal year 2019, the Company adopted a last day of the calendar year accounting and operating cycle. The Company made this change on a prospective basis and did not adjust operating results for periods prior to 2019.

~~Accounting Pronouncements Adopted~~

~~On January 1, 2019, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-02, "Leases~~(Topic 842)", which introduces the balance sheet recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company has adopted the new lease standard using the new transition option issued under the amendments in ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements", which allowed the Company to continue to apply the legacy guidance in Accounting Standards Codification ("ASC") 840,"Leases", in the comparative periods presented in the year of adoption. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company will recognize those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term. The impact of the adoption was an increase to the Company’s operating lease assets and liabilities on January 1, 2019 of $67 million. ~~See Note 12 for further information.~~

In January 1, 2019, the Company adopted FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other” (Topic 350) (“ASU 2017-04”). ASU 2017-04 eliminates step two from the goodwill impairment test, thereby eliminating the requirement

to calculate the implied fair value of a reporting unit. ASU 2017-04 will require the Company to perform an annual goodwill impairment test by comparing the fair value of the reporting units to the carrying value of those units. If the carrying value exceeds the fair value, the Company will be required to recognize an impairment charge; however, the impairment charge should not exceed the amount of goodwill allocated to such reporting unit. The adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.

On January 1, 2019, the Company adopted FASB ASU No. 2018-02, “Treatment of Stranded Tax Effects 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. The adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.

On January 1, 2019, the Company adopted FASB ASU No. 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees. The adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.

~~Recently Issued Accounting Standards~~

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”), 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 obtain internal-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. ASU 2018-15 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 Company is currently evaluating the impact of this pronouncement on its consolidated financial statements and related disclosures.

~~2. Revenue from Contracts with Customers~~

~~Disaggregation of Revenue~~

~~The following table disaggregates the Company's revenue by segment:~~

Three months ended
Dollars in millions March 31, 2019 March 31, 2018
North America $ 497
$ 480
Europe 358
369
APAC & Emerging Markets 86
98
Total $ 941
$ 947

~~Contract Balances~~

Contract balances represent amounts presented in the consolidated and combined balance sheets when either the Company has transferred goods or services to the customer or the customer has paid consideration to the Company under the contract. These contract balances include accounts receivable, contract assets and contract liabilities.

~~Accounts Receivable~~

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects the Company’s best estimate of the amounts that will not be collected. In addition to reviewing delinquent accounts receivable, the Company considers many factors in estimating its reserve, including historical data, experience, customer types, credit-worthiness and economic trends. From time to time, the Company adjusts its assumptions for anticipated changes in any of these or other factors expected to affect collectability.

~~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 Company by customers, but not yet billed. Contract assets are transferred to accounts receivable when the right becomes unconditional. Current contract assets are included in prepaid expenses and other and the non-current contract assets are included in investments and other within the consolidated and combined balance sheets. The contract assets primarily relate to the bundled arrangements for the sale of equipment and consumables and sales of term software licenses. Current and non-current contract asset balances as of March 31, 2019 and December 29, 2018 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-other and the non-current contract liabilities are included in other liabilities within the combined balance sheet. The contract liabilities primarily relate to advance payments from customers and upfront payments for service arrangements provided over time. At March 31, 2019 and December 29, 2018, the current portion of contract liabilities of $19 million and $18 million, respectively, was reported in accrued expenses other. Amounts related to non-current contract liabilities were not material.

~~Performance Obligations~~

~~Estimated future revenue expected to be generated from long-term contracts with unsatisfied performance obligations~~

~~as of March 31, 2019 is not material.~~

~~3. Business Acquisitions~~

~~On February 7, 2019, the Company acquired VFC, see Note 1 for further information.~~

~~The acquisition date fair value of the consideration transferred consisted of the following (dollars in millions, except per share data):~~

Total Covetrus shares issued to VFC shareholders 39,742,089
Per share price (in actuals)* $ 43.05
Total fair value of shares issued to VFC shareholders $ 1,711
Fair value of VFC replacement stock option awards attributable to pre-merger service 62
VFC debt repaid at close 24
VFC expenses paid at close 18
Less VFC cash used to fund transaction (9 )
Total consideration $ 1,806

*Closing price on February 7, 2019, Covetrus shares trading on a when-issued basis (Nasdaq: CVET)

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:

Dollars in millions
Book value of net assets acquired $ 14
Goodwill 1,358
Intangible assets 545
Deferred tax liabilities (111 )
Total consideration $ 1,806

The size and breadth of the Merger necessitates use of the one year measurement period to adequately analyze all the factors used in establishing the asset and liability fair values as of the acquisition date, including, but not limited to intangible assets and deferred tax liabilities.

The Company 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. The Company engaged an independent valuation firm to assist in determining the fair value of the acquired intangible assets. The value attributed to the other identifiable intangible assets included $20 million in trademarks and trade names, $50 million in product formulas, $125 million in customer relationships and $350 million in developed technologies. These intangible assets are being amortized over a weighted average period of seven years.

The goodwill from this transaction arose as a result of the Company’s 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 following unaudited pro forma financial information presents the results of our operations for the three months ended March 31, 2019 and 2018, as if the acquisition had occurred as of December 31, 2017. The unaudited pro forma results reflect certain adjustments for items that are not expected to have a continuing impact, such as adjustments for transaction costs incurred, management fees, and purchase accounting. The information presented below has been prepared for comparative purposes only and does not purport to be indicative of either future results of operations or the results of operations that would have actually occurred had the acquisition been consummated on December 31, 2017 (dollars in millions, except per share data):

Three Months Ended March 31,

2019 2018
Net Sales $ 965
$ 992
Net income (loss) (24 ) (13 )
Net income (loss) attributable to Covetrus (23 ) (13 )

Net income per common share: basic $ (0.25 ) $ (0.19 )
Net income per common share: diluted $ (0.25 ) $ (0.19 )

~~4. Earnings Per Share~~

On February 7, 2019, Henry Schein distributed approximately 71 million shares of Covetrus common stock to its stockholders. The computation of basic earnings per common share ("EPS") for periods prior to the Separation was calculated using the shares distributed by Henry Schein on February 7, 2019. The weighted average number of shares outstanding for diluted EPS for the periods prior to the Separation also include approximately 1 million of diluted common share equivalents for restricted stock and restricted stock units as these share-based awards were previously issued by Henry Schein and outstanding at the time of the Separation and were assumed by Covetrus following the Separation.

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

~~The following is a reconciliation of basic shares to diluted shares (in thousands):~~

March 31, March 31,
2019 2018
Basic shares 94,796
71,451
Effect of dilutive shares* —
522
Diluted shares 94,796
71,973

* Shares from share-based awards are not included for periods in which a net loss occurs because to do so would be anti-dilutive

~~5. Goodwill~~

~~The change in the goodwill balances by segment for the three months ended March 31, 2019 and for the year ended~~ ~~December 29, 2018~~ ~~are as follows (dollars in millions):~~

Balance Goodwill Foreign Currency Balance
Segment 1/1/2019 Additions Adjustments 3/31/2019
North America $ 537
$ 1,314
$ —
$ 1,851
Europe 165
28
(3 ) 190
APAC & Emerging Markets 48
16
—
64
Total $ 750
$ 1,358
$ (3 ) $ 2,105

Balance Goodwill Foreign Currency Balance
Segment 12/31/2017 Additions Adjustments 12/29/2018
North America* $ 536
$ 2
$ (1 ) $ 537
Europe* 175
1
(11 ) 165
APAC & Emerging Markets* 49
—
(1 ) 48
Total $ 760
$ 3
$ (13 ) $ 750
* Recast to conform to 2019 presentation.

In the first quarter of 2019, in connection with the Separation and Merger, the Company made significant changes to its organizational and reporting structure. With these changes, the Company revised its reportable segments. Goodwill was reallocated to the new reporting segments, and as a result, an impairment assessment was performed. There were no goodwill impairment losses recorded during the first three months of 2019 or the full year of 2018 and the Company has no accumulated impairment losses. For further information regarding the segment change, refer to Note 13.

~~6. Fair Value~~

~~ASC 820, “Fair Value Measurement” ("ASC 820"), establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.~~

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 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).

The fair value 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 described as follows:

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

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and 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.~~

~~The following section describes the valuation methodologies that the Company used to measure different financial instruments at fair value.~~

~~Financial assets and liabilities~~

The carrying amounts reported on the consolidated and combined balance sheets for cash and cash equivalents, accounts receivable, other receivables, accounts payable and other current liabilities 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 Company believes the carrying amounts are a reasonable estimate of fair value.~~

~~Long-term debt~~

The Company's debts are Level 2 inputs in the fair value hierarchy. The carrying amount of the Term Loan Facility (see Note 11) approximates fair value, given its recent issuance and the underlying interest rate applied to such amounts outstanding is currently reset to market rate on a monthly basis.

~~Derivative contracts~~

~~The Company currently has no outstanding derivative contracts.~~

~~Redeemable noncontrolling interests~~

Some minority equity owners in certain of the Company's subsidiaries have the right, at certain times, to require the Company 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 Additional paid-in capital. 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 7.

~~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 year ended~~ ~~December 29, 2018, and the redeemable noncontrolling interests (Level 3) discussed in Note 7.~~

~~There were no transfers between levels within the fair value hierarchy and no changes in valuation techniques during the three months ended March 31, 2019.~~

~~7. Redeemable Noncontrolling Interests~~

Some minority equity owners in certain of the Company's subsidiaries have the right, at certain times, to require the Company to acquire their ownership interest in those entities at fair value. ASC 480, “Distinguishing Liabilities from Equity,” is applicable for noncontrolling interests where the Company 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 three months ended March 31, 2019 and the year ended~~ ~~December 29, 2018~~ ~~are presented in the following table:~~

March 31, December 29,
Dollars in millions 2019 2018
Balance, beginning of period $ 92
$ 367
Decrease in redeemable noncontrolling interests due to redemptions (70 ) (383 )
Increase in redeemable noncontrolling interests due to business acquisitions —
6
Net income attributable to redeemable noncontrolling interests (1 ) 7
Dividends paid —
(10 )
Effect of foreign currency translation loss attributable to redeemable noncontrolling interests —
(2 )
Change in fair value of redeemable securities (4 ) 107
Balance, end of period $ 17
$ 92

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 Additional paid-in capital. 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.

~~8. Commitments and Contingencies~~

~~Legal~~

The Company is involved in various legal proceedings that arise in the ordinary course of business. Substantial judgment is required in predicting the outcome of these legal proceedings, many of which take years to adjudicate. We accrue estimated costs for a contingency when we believe that a loss is probable and we can make a reasonable estimate of the loss, and then adjust the accrual as appropriate to reflect changes in facts and circumstances. We do not believe it is reasonably possible that these existing loss contingencies, individually or in the aggregate, would have a material adverse affect on our financial position, results of operations, or liquidity. No material accrued loss contingencies were recorded as of March 31, 2019.

~~9. Comprehensive Income~~

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

~~The following table summarizes the accumulated other comprehensive loss, net of applicable taxes, as of:~~

March 31, December 29,
Dollars in millions 2019 2018
Attributable to redeemable noncontrolling interests:
Foreign currency translation adjustment $ 1
$ 1

Attributable to the Company:
Foreign currency translation loss (82 ) (83 )
Accumulated other comprehensive loss (82 ) (83 )

Total accumulated other comprehensive loss $ (81 ) $ (82 )

~~The following table summarizes the components of comprehensive income, net of applicable taxes, as follows:~~

Three Months Ended
March 31, March 31,
Dollars in millions 2019 2018
Net income $ (14 ) $ 28

Foreign currency translation gain (loss) 1
12
Tax effect —
—
Foreign currency translation gain (loss) 1
12

Comprehensive income $ (13 ) $ 40

~~During the three months ended March 31, 2019 and 2018, the Company recognized, as a component of comprehensive income, a foreign currency translation (loss) gain of $1 million and $~~12 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 U.S. Dollars. Fluctuations in the value of foreign currencies as compared to the U.S. Dollar may have a significant impact on the comprehensive income.

~~The following table summarizes the components of total comprehensive income, net of applicable taxes, as follows:~~

Three Months Ended
March 31, March 31,
Dollars in millions 2019 2018
Comprehensive income attributable to Covetrus $ (12 ) $ 34
Comprehensive income attributable to redeemable noncontrolling interests (1 ) 6
Comprehensive income $ (13 ) $ 40

~~10. Income Taxes~~

The Company’s income tax (benefit) expense of $(4) million and $6 million for the three months ended March 31, 2019 and 2018, respectively, reflects an effective tax rate of 23.4% and 18.2%, respectively. The difference between the Company’s effective tax rate and the federal statutory tax rate for the ~~three months ended March 31, 2019~~ ~~and 2018 primarily relates to state and foreign income taxes and interest expense.~~

On December 22, 2017, the U.S. government passed the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act is comprehensive tax legislation that implemented complex changes to the U.S. Internal Revenue Code ("IRC") 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. The Tax Act also included provisions to tax global intangible low-taxed income (“GILTI”), a beneficial tax rate Foreign Derived Intangible Income (“FDII”), a base erosion and anti-abuse tax (“BEAT”) that imposes tax on certain foreign related-party payments, and IRC Section 163(j) interest limitation (“Interest Limitation”). We continue to monitor for potential future changes in certain federal, state, and local tax regulations resulting from the Tax Act which may have an impact on our consolidated income tax provision in future periods.

The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed 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. We elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.

~~11. Debt~~

~~Covetrus Credit Facilities~~

On February 7, 2019, Vet Intermediate Holdco II, LLC, (the “Borrower”) a wholly owned subsidiary of the Company, entered into a credit agreement with a syndicate of lenders for a term of five years (the “Credit Agreement”), which provides for (i) a term loan facility in an aggregate principal amount of $1.2 billion (the “Term Loan Facility”) the proceeds of which were primarily used to to pay a dividend to Henry Schein and (ii) a cash flow-based revolving credit facility of $300 million to fund working capital needs and for general corporate purposes (the “Revolving Facility” and, together with the Term Loan Facility, the “Covetrus Credit Facilities”). The Borrower also paid debt issuance costs of approximately $24 million in connection with the execution of the Credit Agreement. The Company is accreting this discount using the effective interest method with charges to interest expense made through the expiration date of February 7, 2024.

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants, among other things and subject to various exceptions and baskets set forth in the Credit Agreement, limit or restrict the ability of the Borrower and its subsidiaries 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 into certain transactions with affiliates. The Credit Agreement also includes financial covenants, which commencing with the quarterly period ending June 30, 2019, require (i) compliance with a maximum consolidated net total leverage ratio (the “Leverage Ratio”) calculated as of the last day of any fiscal quarter, which calculation permits deduction of up to $125 million in unrestricted cash, that must be less than or equal to a ratio of 5.50:1.00 as of April 1, 2019 and stepping down annually until reaching a ratio of 3.75:1:00 in 2022, and (ii) compliance with a minimum consolidated net interest coverage ratio, which ratio must be greater than or equal to 3.00:100 as of the last day of any fiscal quarter.

All borrowings under the Covetrus Credit Facilities are subject to the satisfaction of certain customary conditions. Borrowings under the Covetrus Credit Facilities bear interest at a floating rate, which at the Borrower’s option may be either (i) adjusted LIBOR for interest periods ranging from one month up to 12 months, subject to a floor of 0.00%, plus an applicable margin ranging from 1.25% to 2.25% per annum depending on the Borrower’s Leverage Ratio as of the last day of the prior quarterly period or (ii) an alternate base rate (subject to a floor of 1.00%) plus an applicable margin ranging from 0.25% to 1.25% per annum depending on the Borrower’s Leverage Ratio as of the last day of the prior quarterly period. Applicable margins are held constant at 1.00% for alternate base rate loans and 2.00% for LIBOR loans, respectively, initially through delivery of financial statements for the period ending June 30, 2019. Additionally, unused commitments under the Revolving Facility are subject to a fee ranging from 0.175% to 0.350% per annum depending on the Borrower’s Leverage Ratio with an applicable fee of 0.30% per annum established initially through delivery of financial statements for the period ending June 30, 2019. As of March 31, 2019, available borrowing capacity under the Revolving Facility was $300 million. Interest expense for the Covetrus Credit Facilities recognized by the Company during the quarterly period ended March 31, 2019, including accretion of the Company’s debt issuance costs, was $8 million.

The Term Loan Facility amortizes in quarterly installments equal to 5% of the aggregate initial principal amount per annum beginning with the quarter ending March 31, 2020, with the balance payable upon final maturity of the Term Loan Facility on February 7, 2024. There are no amortization payments under the Revolving Facility, and all borrowings under the Revolving Facility mature on February 7, 2024. The Term Loan Facility and the Revolving Facility may be prepaid at the Borrower’s option at any time, without premium or penalty (other than customary breakage costs), subject to minimum principal amount requirements.

Subject to certain exceptions, the Term Loan Facility is subject to mandatory prepayment in an amount equal to the net cash proceeds of (i) certain asset sales, (ii) certain debt offerings, and (iii) certain insurance recovery and condemnation events. In addition, if the aggregate extensions of credit outstanding exceed the lenders’ commitments made to the Revolving Facility at any time, then the amount of such excess is required to be prepaid.

Subject to certain conditions, including receipt of lending commitments, either the Term Loan Facility or the Revolving Facility may be expanded (or a new term loan facility, revolving credit facility or letter of credit facility added) by (i) up to at least $265 million, plus (ii) such additional amounts as would not cause the consolidated net senior secured leverage ratio, after giving effect to the incurrence of such additional amount and any use of such proceeds, to exceed 3.25:1.00.

The obligations under the Credit Agreement are guaranteed, pursuant to a Guarantee and Collateral Agreement dated as of February 7, 2019 by and among the Borrower, the guarantors and the lender’s collateral agent (the “Guarantee and Collateral Agreement”), by each direct and indirect wholly owned U.S. restricted subsidiary of the Borrower, subject to certain exceptions, and are secured by a perfected security interest in substantially all tangible and intangible assets of the Borrower and each subsidiary guarantor, including the capital stock of each direct material wholly owned U.S. restricted subsidiary owned by the

~~Borrower and each subsidiary guarantor, and 65% of the capital stock of any non-U.S. subsidiary held directly by the Borrower or any subsidiary guarantor, subject to certain exceptions.~~

~~12. Leases~~

The Company has warehouse facilities, office facilities, vehicles and equipment under non-cancelable operating leases with third parties. The leases have remaining lease terms of one year to eight years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes 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 the Company will exercise that option.

~~The following table presents the lease-related assets and liabilities reported in the consolidated balance sheet as of March 31, 2019:~~

March 31,
Dollars in millions Classification 2019
Assets
Operating lease assets Operating lease right-of-use assets $ 62
Finance lease assets Property and equipment, net 1
Total lease assets $ 63

Liabilities
Current
Operating Accrued expenses, other $ 21
Finance Current maturities of long-term debt and other borrowings —
Noncurrent
Operating Other liabilities 43
Finance Long-term debt and other borrowings, net —
Total lease liabilities $ 64

~~The following table presents information related to lease expense for the three months ended March 31, 2019:~~

Three months ended
Dollars in millions March 31, 2019
Finance lease cost:
Amortization of right-of-use asset $ —
Interest on lease liabilities —
Operating lease cost 6
Short-term lease cost —
Variable lease cost —
Total lease cost $ 6

~~The following table presents certain information related to lease terms and discount rates for leases as of March 31, 2019:~~



	~~March 31,~~
	~~2019~~
~~Weighted-average remaining lease term (in years):~~
~~Operating leases~~	~~4.2~~
~~Finance leases~~	~~1.9~~
~~Weighted-average discount rate:~~
~~Operating leases~~	~~5.1~~	%
~~Finance leases~~	~~3.6~~	%

~~The following table presents supplemental cash flow information related to leases for the three months ended March 31, 2019 :~~

Three months ended
Dollars in millions March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 6
Operating cash flows from financing leases —
Financing cash flows from finance leases —
Right-of-use assets obtained in exchange for new operating lease liabilities 67
Right-of-use assets obtained in exchange for new finance lease liabilities 1

~~The following table reconciles future minimum lease payments on an undiscounted cash flow basis to the lease liabilities reported in the consolidated balance sheet as of~~ ~~March 31, 2019~~:

Dollars in millions Operating Leases Finance Leases
2019 (remaining 9 months) $ 17
$ 1
2020 18
—
2021 12
—
2022 8
—
2023 4
—
Thereafter 7
—
Total minimum lease payments $ 66
$ 1
Less - amount representing interest 5
—
Present value of net minimum lease payments $ 61
$ 1
Less - current portion of operating lease obligation 20
1
Long-term operating lease obligation $ 41
$ —

~~As of~~ ~~March 31, 2019~~, we had additional operating leases which have not yet commenced, related to our new corporate headquarters and pharmacy, of $127.5 million. These operating leases are expected to commence in fiscal years 2019 and 2020 with lease terms of 13 to 20 years.

~~13. Segment Data~~

In connection with the Separation and Merger, the Company made significant changes to its organizational management and reporting structure. As a result, the Company has revised its reportable segments to reflect how the chief operating decision maker (the chief executive officer) currently reviews financial information and makes operating decisions. This resulted in a change in the operating segments from (1) supply chain and (2) technology and value added services to (1) North America, (2) Europe and (3) APAC & Emerging Markets. While the historical business was focused on driving growth through specific product and service offerings to its customers, the Merger allowed for the integration of the different products and service offerings, along with prescription management, data analytics and insights through veterinary practice management

~~software, into one multi-channel veterinary platform. The Company will be focused on delivering the integrated platform of products and services to its customers on a geographical basis.~~

The tables below present information about the Company's reportable segments consistent with the management and measurement system utilized within the Company. The segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in determining how to allocate resources and evaluate performance. The tables reflect the segment recast for the prior-year period.

Three Months Ended March 31, 2019
Dollars in millions North America Europe APAC & Emerging Markets Total
Net sales $ 497
$ 361
$ 86
$ 944
Eliminations (3 )
Total net sales $ 941
Operating income 7
11
3
21
Operating income related to Corporate (30 )
Total operting income $ (9 )
Total assets 4,059
1,799
190
6,048
Eliminations (4,542 )
Total assets related to Corporate 2,763
Total assets $ 4,269

Three Months Ended March 31, 2018
Dollars in millions North America Europe APAC & Emerging Markets Total
Net sales $ 480
$ 369
$ 98
$ 947
Operating income 29
12
4
45
Operating income related to Corporate (13 )
Total operting income $ 32
Total assets 1,326
780
192
$ 2,298

~~A reconciliation of operating income for reportable segments to the consolidated income before income taxes and equity earnings of affiliates is as follows:~~

Three Months Ended
Dollars in millions March 31, 2019 March 31, 2018
Operating income for reportable segments $ 21
$ 45
Adjustment for:
Corporate and other expense, net (30 ) (13 )
Total operating income (9 ) 32
Other income, net (9 ) 2
Income before taxes and equity in earnings of affiliates $ (18 ) $ 34

~~14. Stock-Based Compensation~~

In connection with the Separation and Merger of the Animal Health Business with Vets First Choice, all outstanding restricted stock awards, restricted stock units and stock options were exchanged for economically equivalent awards of Covetrus. Restricted stock awards and units of 327,447 and stock options of 3,914,694 were issued in connection with the exchange.

The Company issues options to purchase common stock, shares of restricted stock and restricted stock units under the Company’s 2019 Omnibus Incentive Compensation Plan (the “Plan”). The Plan provides for the grant of incentive stock options, non-qualified stock options, stock awards, stock units, stock appreciation rights, other stock-based awards and cash awards. Awards issued under the Plan may not have a term greater than ten years from the date of grant and generally vest ratably over a three-year period.

The Company utilizes the Black-Scholes option pricing model to determine the fair value of options granted and has elected the accrual method for recognizing compensation costs. The determination of the fair value of stock-based payment awards utilizing the Black-Scholes model is affected by the stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends.

During the three months ended March 31, 2019, the Company granted 376,283 restricted stock awards and units and 779,306 stock options with a weighted average fair value of $12.70 per share determined using the Black-Scholes option pricing model. For the three months ended March 31, 2019, the Company recorded stock-based compensation expense of $15 million, in connection with stock-based payment awards.

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF COVETRUS~~

You should read the following discussion and analysis of our financial condition and results of operations together with our ~~Unaudited Consolidated and Combined Financial Statements,~~unaudited condensed consolidated financial statements and the related notes thereto appearing elsewhere in this ~~Quarterly Report on~~ Form 10-Q ~~or Quarterly Report,~~ and our ~~combined~~consolidated financial statements and the related notes and other financial information included in our ~~Annual Report on~~ Form ~~10-K for the year ended December 29, 2018, filed with the Securities~~10-K.


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Rounding adjustments applied to individual numbers and ~~Exchange Commission, or SEC, on March 29, 2019. Some of the information contained~~percentages shown in this ~~discussion~~Report may result in these figures differing immaterially from their absolute values and ~~analysis~~certain tables may not foot or elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and our performance and future success, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” You should review the “Risk Factors” section of this Quarterly Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Note that the results of operations for the three months ended March 31, 2019are not necessarily indicative what our operating results for the full fiscal year will be. In this Item, “we,” “us,” “our,” “Covetrus” and the “Company” refer to Covetrus, Inc. and its consolidated subsidiaries, collectively.cross foot.

Overview

We are a global, ~~technology-enabled animal health business with a comprehensive service~~animal-health technology and ~~technology platform and supply chain infrastructure~~services company dedicated to supporting the companion, equine, and ~~large animal~~large-animal veterinary markets. ~~We have~~Our mission is to provide the best products, services, and technology to veterinarians and animal-health practitioners across the globe, so they can deliver exceptional care to their patients when and where it is needed. In February 2019, we combined the complementary capabilities of the ~~animal health businesses~~Animal Health Business, previously operated by ~~Henry Schein, or the Animal Health Business,~~our Former Parent, and ~~Direct Vet Marketing, Inc. (d/b/a Vets First Choice), or~~ Vets First Choice, bringing together leading practice management software and supply chain distribution businesses with a technology-enabled prescription management platform ~~approach~~and related pharmacy services.

We are organized based upon geographic region and focus on ~~technology driven insights, designed~~delivering our platform of products and services to ~~promote connectivity between veterinarians~~our Customers on a geographical basis. Our reportable segments are (i) North America, (ii) Europe, and ~~owners of pets, horses or large animals who purchase products or services from veterinarians, whom~~(iii) APAC & Emerging Markets. Our major product groups that we ~~refer to as Clients. Linking the power of insight and analytics, client engagement, practice management software and~~disaggregate within our reportable segments are (i) supply chain ~~expertise into~~services, (ii) software services, and (iii) prescription management. See Note 2 - Segment Data and Note 3 - 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 seek to strengthen the relationship between Customers and Animal Owners, enable our Customers to provide proactive healthcare options to Animal Owners, as well as invest in technology solutions, proprietary brand products, and compounding.

Key Factors and Trends Affecting our Results

Growth continues following the onset of the COVID-19 pandemic

During 2020, the animal-health market largely benefited from the lockdowns instituted in response to the COVID-19 pandemic, including the benefit to veterinary practices, including our Customers, from an increase in visits driven by people adopting more pets during 2020 as well as companion Animal Owners increasing their per-visit spend with their veterinarians. This is expected to be a ~~multi-channel platform,~~multi-year effect as these Animal Owners seek care from veterinary practices for their newly adopted pets. Additionally, the required responses to mitigate the spread of the COVID-19 pandemic shifted customer and animal-owner demand to our prescription management and online pharmacy services. However, we ~~believe~~did not experience this COVID-19 driven growth on a straight-line basis: there was a spike in supply chain services sales in March 2020 that we consider a pull-forward effect, followed by a significant weakening of sales in April 2020 as that pull-forward effect balanced out; our ~~innovative approach will support~~growth in supply chain services and prescription management then accelerated for the ~~delivery~~remainder of ~~improved veterinary care while driving increased demand~~the second quarter before normalizing in the third and fourth quarters. On a year-over-year basis, the surge of sales in March 2020 provided a difficult comparable for our ~~products and services.~~

~~Segments~~

~~Effective during~~first quarter of 2021 performance. The net sales growth in the first quarter of ~~2019,~~2021 reflects the continued resiliency of the companion- animal end-market, our improved sales execution which was furthered by our commercial organization realignment in ~~connection~~North America as of January 1, 2021, and elevated purchasing patterns from our prescription management and online pharmacy service users continuing into 2021. The retention of Customers brought to us during the COVID-19 pandemic in 2021 and beyond, our continued market penetration, and the introduction of product and service offerings aimed at driving higher utilization post enrollment could lead to long-term net sales growth.

Foreign Currency Effects

Our performance was positively affected by the appreciation of other currencies as compared to the U.S. dollar in the first quarter of 2021 as compared to the first quarter of 2020. However, this effect may be temporary.

Investing in Innovation and Corporate Infrastructure

During 2020, we undertook certain temporary cost-containment measures to help us manage the uncertainty created by the COVID-19 pandemic as well as experienced a continuing beneficial effect on our SG&A from decreased travel and in-person trade shows and conferences. Those cost-cutting measures we instituted in 2020 are still lowering certain SG&A items in the first quarter of 2021. However, we continue to spend on our corporate functions to build out the structure necessary to support our business today. Our strategic initiatives in the near and long-term are focused on accelerating the contribution provided by our higher margin technology, e-commerce, and proprietary products and solutions. SmartPak and Covetrus-branded products and


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proprietary brands like Kruuse, Vi, and Calibra are included within our supply chain services major product category. Our prescription management platform and compounding services are included within our prescription management major product category. To support these strategic initiatives, our corporate infrastructure spending will likely further increase to scale our internal environment to support our continued acquisitive and organic growth in the animal-health market. We also expect to invest in internal initiatives to develop technology to be used across our business to drive greater efficiency as well as coordination of our global employee base.

Terms with Key Suppliers, Customers, and Partners

Each year, suppliers in the ~~combination noted above,~~veterinary channel engage in negotiations with us regarding pricing terms, including performance rebates and other growth incentives. Our supply chain services are dependent upon third-party suppliers, and the results of these negotiations, including whether the contractual relationship remains in place, can have a material impact on the financial performance of our business.

Effective January 1, 2021, we ~~made changes~~no longer are partnered with Merck & Co., in the U.K., which contributed to a decrease in our U.K. Net sales in the current quarter, and which we expect will also result in decreases for the remainder of this fiscal year. We also are no longer partnered with one of our customers in the U.K., which further decreased our U.K. Net sales, which we expect to continue throughout 2021. 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. Our U.K. net sales as a percentage of our consolidated net sales decreased from 14% in the first quarter of 2020 to 9% in the first quarter of 2021.

The transition of our supply chain operations in Germany to a third-party in late 2020 has resulted in disruption to our ~~organizational~~supply chain, including a reduction in customer sales volumes. We are making progress on stabilizing our customer base and ~~reporting structure. As a result~~improving service levels in this market. However, we are likely to experience lower sales volume for the near term. Our German operations represent 1% of our Net sales in the first quarter of 2021.

Our supplier relationships are currently concentrated because five suppliers accounted for approximately 50% of our purchases for the three months ended March 31, 2021 and for the year ended December 31, 2020. If we were to lose one of these ~~changes,~~five major manufacturing relationships, our global financial performance could be materially affected. As these contracts are largely annual and separated between supply chain and prescription management, our ability to exercise influence over the terms is currently limited and negatively impacting our gross profit margin. We expect our future success necessitates achieving better terms and stronger relationships with our manufacturers and suppliers as we ~~revised~~work with these partners on global initiatives. However, if a competitor is able to obtain better terms with suppliers in the veterinary channel or obtain exclusivity on products we typically sell to our ~~reportable segments. For additional information~~Customers within the global animal-health market, our business could be impacted beyond the short term. We expect to also utilize our strategic growth initiatives to influence Customer and Animal-Owner brand loyalty, based on ~~the changes in reportable segments, see Note 13~~product launches on our prescription management platform, including launches of our ~~unaudited consolidated~~own higher-margin proprietary products.

Acquisition-driven Amortization

As we pursue a growth strategy through acquisitions, we are likely to acquire intangible assets, such as customer relationships, trademarks, patents, product development (including formulas), and ~~combined financial statements~~non-compete agreements. Our intangibles are predominately comprised of intangibles acquired through our acquisition of Vets First Choice. These acquired intangibles have useful lives of 5 years for trademarks and trade names, 11 years for product formulas, 11 years for customer relationships, and 5 years for developed technologies.

The amortization of these intangibles has a long-term effect on our expense recognition. Product formulas are amortized to 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 our other intangible assets not directly related to sales-generating activities, is included ~~elsewhere~~ in this Quarterly Report. The periods presented in this Form 10-Q are reported on a comparable basis. We provided recast historical segment information reflecting these changes in a Form 8-K dated May 7, 2019.SG&A.


	Three Months Ended March 31,
Location		2021		2020
Cost of sales		$	1	$	1
Selling, general and administrative		34		33
Total amortization expense		$	35	$	34


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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~~companion-animal market, sales of parasite protection products have historically tended to be stronger during the ~~second~~spring and ~~third fiscal quarters,~~summer months, primarily due to an increase in vector-borne diseases during ~~those quarters.~~that time, which correlates with our second and third quarters given that most of our business is in the northern hemisphere. Buying patterns can also be affected by manufacturers’ and distributors’ marketing programs or price increase announcements, which can cause veterinarians to purchase ~~large animal health~~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 ~~large~~ animal products can also vary due to changes in the price of commodities used in manufacturing the products and weather patterns, ~~(for example, droughts or seasons of higher precipitation that determine how long cattle will graze),~~ which may also affect ~~period-to-period~~period-over-period financial results. We expect our historical seasonality trends to continue in the foreseeable future.

~~Plans~~Definition of ~~Restructuring~~Non-GAAP Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization

~~On July 9, 2018, Henry Schein announced~~Adjusted EBITDA is a ~~company-wide initiative~~non-GAAP financial measure used to ~~further rationalize operations~~(i) aid management and ~~provide expense efficiencies. In conjunction~~investors with ~~this initiative,~~year-over-year comparability, (ii) determine management performance under our compensation plans, (iii) plan and forecast, (iv) communicate our financial performance to our Board of Directors, shareholders, and investment analysts, and (v) understand our operating performance without regard to items we do not consider a component of our core ongoing operating performance. Adjusted EBITDA has certain limitations in that it does not consider the ~~Animal Health Business eliminated 142 positions and recorded restructuring costs~~impact of ~~$1 million during the three months ended March 31, 2018. The costs associated with this restructuring are included in a separate line item, “restructuring costs” within the~~certain expenses to our consolidated statements of operations. Adjusted EBITDA excludes share-based compensation, strategic consulting, transaction costs, formation of Covetrus expenses, separation programs and executive severance, carve-out operating expenses, certain IT infrastructure expenses necessary to establish ourselves as a newly public company, goodwill impairment charges, capital structure-related fees, operating lease right-of-use asset impairments, the proportionate share of the adjustments to EBITDA of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100%, managed exits from businesses we are exiting or closing, and other income and expense items, net. Currently, we do not allocate expenses managed at the corporate level, such as corporate wages and related benefits, corporate occupancy costs, professional services utilized at the corporate level, and non-recurring expenses to our operating segments. Other companies may not define or calculate Adjusted EBITDA in the same way. We provide Adjusted EBITDA by segment as a supplemental measure to GAAP as well as on a consolidated, non-GAAP basis. Non-GAAP Adjusted EBITDA on a total segment basis is reconciled in Note 2 - Segment Data as required by ASC 280.

Results of Operations


	Three Months Ended
(In millions)		March 31, 2021		March 31, 2020		$ Increase (Decrease)		% Increase (Decrease)
Net sales		$	1,102	$	1,065	$	37	3	%
Cost of sales		892		863		29		3
Gross profit		210		202		8		4
Operating expenses:
Selling, general and administrative		213		222		(9)		(4)


Operating income (loss)		$	(3)	$	(20)	$	(17)	(85)	%

Interest expense, net		$	(9)	$	(14)	$	(5)	(36)	%
Other, net		$	—	$	(1)	$	1	(100)	%

Net income (loss)		$	(16)	$	(33)	$	(17)	(52)	%
Net income (loss) attributable to Covetrus		$	(16)	$	(33)	$	(17)	(52)	%

~~The following table summarizes the significant components of our operating results and cash flows for the three months ended March 31, 2019 and 2018:~~

Three Months Ended Change
Dollars in millions 43555 43190 $ %
Net sales $ 941
$ 947
$ (6 ) (1 )%
Cost of sales 761
771
(10 ) (1 )
Gross profit 180
176
4
2
Operating expenses:
Selling, general and administrative 189
143
46
32
Restructuring costs —
1
(1 ) (91 )
Operating income (expense) $ (9 ) $ 32
(42 ) (129 )%

Net income (loss) $ (14 ) $ 28
(42 ) (150 )%
Net income (loss) attributable to Covetrus, Inc. (13 ) 23
(36 ) (159 )%


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~~Comparison of Results of Operations for the Three Months Ended March 31, 2019 and 2018~~Year-Over-Year Period Comparisons

Net Sales


	Three Months Ended
(In millions)		March 31, 2021		March 31, 2020		$ Change		% Change
North America		$	635	$	550	$	85	15	%
Europe		361		422		(61)		(14)
APAC & Emerging Markets		112		95		17		18
Eliminations		(6)		(2)		(4)		200
Total Net sales		$	1,102	$	1,065	$	37	3	%

Net sales for the three months ended March 31, ~~2019 and 2018 were as follows:~~

Three Months Ended Change
Dollars in millions 43555 % of Total 43190 % of Total $ %
North America $ 497
52.8 % $ 480
50.7 % $ 17
3.5 %
Europe 361
38.4
369
39.0
(8 ) (2.1 )
APAC & Emerging Markets 86
9.1
98
10.3
(12 ) (12.4 )
Eliminations (3 ) (0.4 ) —
—
(3 ) 100.0
Total $ 941
100.0 % $ 947
100.0 % $ (6 ) (0.7 )%

~~Net Sales decreased $6 million, or 0.7%, due~~2021 increased compared to an increase in net sales as denominated in local currencies of $32 million more than offset by $38 million of unfavorable foreign currency exchange, driven largely by the dollar strengthening against the British pound, Euro, and Australian dollar.

Net Sales for the North America segment increased $17 million, or 3.5%, due to the addition of VFC in 2019 partially offset by a decrease in customer operations sales of $18 million driven by certain products moving from core to agency basis and the loss of a specific customer.

Net sales for the Europe segment decreased $8 million, or 2.1%. The change is due to $28 million of unfavorable foreign currency exchange, partially offset by an increase in net sales as denominated in local currencies of $20 million.

Net sales for the APAC & Emerging Markets segment decreased $12 million, or 12.4%. The change was due to $9 million of unfavorable foreign currency exchange and a decline in net sales denominated in local currencies of $3 million due largely to the loss of a manufacturer relationship in the fourth quarter of 2018.

~~Gross Profit and Gross Margins~~

~~Gross profit and gross margins for~~ the three months ended March 31, ~~2019 and 2018 were as follows:~~

Three Months Ended Change
Dollars in millions 43555 Gross Margin % 43190 Gross Margin % $ %
North America $ 108
21.7 % $ 100
20.9 % $ 8
7.8 %
Europe 55
15.4
57
15.6
(3 ) (4.4 )
APAC & Emerging Markets 17
19.9
18
18.9
(1 ) (7.7 )
Total $ 180
19.1 % $ 176
18.6 % $ 4
2.2 %

~~Note: Totals may differ~~2020 primarily due to ~~rounding.~~favorable foreign exchange, prescription management growth, and supply chain organic growth. Consolidated supply chain organic growth was heavily affected by the decrease in Europe, largely driven by the loss of Merck & Co. as a supply partner as well as a loss of a customer, both in the U.K., and disruption in our supply chain operations resulting from our transition to a third- party logistics provider in Germany. The overall increase in net sales was partially offset by net sales that are no longer being contributed following our disposition of scil, the deconsolidation of a subsidiary in Spain, and the managed exit of our French distribution business, all of which occurred after the first quarter of 2020. The drivers by segment are detailed below:

•North America increased primarily due to $59 million in net supply chain organic growth and a $28 million increase from prescription management growth, partially offset by $3 million in net sales related to our divestiture of scil in the second quarter of 2020.

•Europe decreased primarily due to a $46 million decrease in net supply chain sales and a $39 million decrease from divestitures that occurred in 2020 as the divested businesses contributed net sales for the entirety of the first quarter of 2020. These decreases were partially offset by a favorable foreign exchange impact of $27 million, positive organic growth in several markets including the Netherlands, Ireland, and Belgium, and strong performance in proprietary brands of Kruuse and Vi.

•APAC & Emerging Markets increased primarily due to favorable foreign exchange of $10 million and strong underlying supply chain organic growth in the region contributing to $6 million in net sales growth.

Gross ~~profit increased $4 million, or 2.2%. Total gross profit margin was 19.1% for~~Profit and Gross Profit Margin


	Three Months Ended
(In millions)	March 31, 2021		Gross Margin %		March 31, 2020		Gross Margin %		$ Change		Gross Profit % Change
North America	$	131	20.6	%	$	119	21.6	%	$	12	10	%
Europe	55		15.2		64		15.2		(9)		(14)
APAC & Emerging Markets	24		21.4		19		20.0		5		26
Total Gross profit	$	210	19.1	%	$	202	19.0	%	$	8	4	%

During the three months ended March 31, ~~2019,~~2021, the increase in gross profit compared to ~~18.6% for~~ the three months ended March 31, ~~2018,~~2020 was largely driven by favorable foreign exchange, prescription management growth, supply chain organic growth, and an increase from our acquisition of 50VSG in the fourth quarter of 2020, which is contributing gross profit in 2021 but has no comparable basis ~~points. The improvement~~in the same period of 2020. Consolidated supply chain gross profit was heavily affected by the decrease in Europe, largely due to disruption in our supply chain operations resulting from our transition to a third-party logistics provider in Germany and the loss of Merck & Co. as a supply partner as well as a loss of a customer, both in the U.K. These increases in gross profit ~~margin was driven~~were partially offset by the disposition of scil, the deconsolidation of a subsidiary in Spain, and the managed exit of our ~~inclusion of~~French distribution business, as the ~~VFC platform and our stagy to move to higher-margin owned brands, more than offsetting margin pressure from consolidations in our corporate and manufacturer customer base.~~

~~Gross~~divested businesses contributed gross profit for the entirety of the first quarter of 2020. The drivers of the increase in our gross profit are further detailed below by segment:

•North America ~~segment~~ increased $8primarily due to the growth of our prescription management business of $6 million, ~~or 7.8%. Total~~$4 million from supply chain organic growth, and $2 million from our acquisition of VSG in the fourth quarter of 2020, which is contributing gross profit ~~margin was 21.7% for~~in 2021 but has no comparable basis in same period of 2020.


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•Europe decreased primarily due to $9 million from divestitures that occurred in 2020 as the ~~three months ended March 31, 2019, compared to 20.9% for the three months ended March 31, 2018, an increase of 80 basis points. The improvement in~~divested businesses contributed gross ~~profit margin was driven primarily by the addition of VFC.~~

~~Gross~~ profit for the ~~Europe segment decreased $3~~entirety of the first quarter of 2020 and a $4 million ~~or 4.4%. Total~~decrease in supply chain gross profit, ~~margin was 15.4% for the three months ended March 31, 2019, compared to 15.6% for the three months ended March 31, 2018, a decrease~~partially offset by favorable foreign exchange of ~~20 basis points. The deterioration in~~$4 million. Our proprietary brands are also contributing higher gross profit ~~margin was primarily due to customer consolidation-driven margin pressure in~~which is lessening the ~~one of our geographic regions.~~impact from the disruptions noted above.

~~Gross profit for the~~ •APAC & Emerging Markets ~~segment decreased $1~~increased due to the contribution of $3 million ~~or 7.7%. Total gross profit margin was 19.9% for the three months ended March 31, 2019, compared~~from organic growth, primarily related to ~~18.9% for the three months ended March 31, 2018, an increase~~supply chain, and favorable foreign exchange of ~~100 basis points. The improvement in gross profit margin was driven by higher sales of owned-brand products.~~$2 million.

SG&A

~~Selling, General and Administrative~~


	Three Months Ended
(In millions)		March 31, 2021		March 31, 2020		$ Change		% Change
North America		$	124	$	121	$	3	2	%
Europe		42		53		(11)		(21)
APAC & Emerging Markets		14		13		1		8
Corporate		33		35		(2)		(6)
Total SG&A		$	213��	$	222	$	(9)	(4)	%

~~Selling, general and administrative~~SG&A expenses for the three months ended March 31, ~~2019 and 2018 were as follows:~~

Three Months Ended Change
Dollars in millions 43555 % of Total 43190 % of Total $ %
North America $ 101
53.4 % $ 71
49.6 % $ 30
42.4 %
Europe 44
23.4
47
32.6
(2 ) (4.9 )
APAC & Emerging Markets 14
7.4
15
10.3
(1 ) (4.3 )
Corporate 30
15.8
11
7.6
19
175.4
Total $ 189
100.0 % $ 143
100.0 % $ 46
32.3 %

~~Selling, general and administrative expenses increased $46 million, or 32.4%. The change was~~2021 decreased compared to prior year period primarily due to ~~$28 million~~a decrease in ~~costs associated with~~expenses that are no longer being incurred following our disposition of scil, the ~~addition~~deconsolidation of ~~VFC~~a subsidiary in ~~2019~~Spain, and the ~~stand-up~~managed exit of ~~the new organization, including one-time merger and~~our French distribution business, a decrease in transaction costs largely driven by the absence of divestitures in 2021, decreased travel and advertising expense, a decrease in expense related to the formation of Covetrus, and decreased strategic consulting fees. These decreases were partially offset by increased costs to support the growth in our prescription management business, an unfavorable foreign exchange effect, increased costs incurred as ~~well as~~we continue to invest in innovation and corporate infrastructure to enable our growth, and increased expense from VSG following our acquisition in the fourth quarter of 2020. The drivers by segment and at Corporate are detailed below:

•North America increased primarily due to an increase of ~~$13~~$3 million from our acquisition of VSG and $3 million of increased costs to support the growth in our prescription management business, partially offset by a decrease in travel and advertising expense of $3 million. Acquisition-related intangible amortization was 25% of North America SG&A in 2021 and 24% in 2020.

•Europe decreased primarily due to $9 million from expenses that are no longer being incurred following divestitures that occurred in 2020, reduced transaction costs of $2 million largely from the absence of divestitures in 2021, a $1 million decrease in travel and advertising expense, and $1 million in ~~depreciation~~decreased expenses related to the formation of Covetrus. These decreases were partially offset by an increase of $3 million due to unfavorable foreign exchange.

•APAC & Emerging Markets increased primarily due to unfavorable foreign exchange.

•Corporate decreased primarily due to a $4 million decrease in transaction costs, a $3 million decrease in expenses related to the formation of Covetrus, and ~~amortization.~~decreased strategic consulting fees of $2 million. These decreases were partially offset by $3 million of increased costs incurred as we continue to invest in innovation and our corporate infrastructure to enable our growth and $1 million from increased short-term incentive bonus attributable to Corporate.

Income ~~tax (expense)/benefit~~Taxes

Income tax ~~(expense)/benefit was $4 million~~expense for the three months ended March 31, ~~2019, compared~~2021 was $4 million on a loss before taxes and equity in earnings of affiliates of $12 million. The difference between our tax expense and the tax expense using the statutory tax rates for the jurisdictions in which we operate, for this period, primarily related to ~~$(6) million~~valuation allowances due to uncertainty regarding the realization of future tax benefits from certain U.S. deferred tax assets.

The income tax benefit for the three months ended March 31, ~~2018.~~2020 was $2 million on a loss before taxes and equity in earnings of affiliates of $35 million. The difference between our tax expense and the tax expense using the statutory tax rates for the jurisdictions in which we operate, for this period, primarily related to valuation allowances due to uncertainty regarding the realization of future tax benefits from certain U.S. deferred tax assets and non-deductible expenses associated with share-based compensation.


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Adjusted EBITDA


	Three Months Ended
(In millions)		March 31, 2021		March 31, 2020		$ Change		% Change
North America		$	52	$	41	$	11	27	%
Europe		21		18		3		17
APAC & Emerging Markets		10		7		3		43
Corporate		(26)		(18)		(8)		NA
Total Adjusted EBITDA		$	57	$	48	$	9	19	%

Total non-GAAP Adjusted EBITDA for the three months ended March 31, 2021 increased 19% compared to the same period in 2020, largely due to improved performance across certain of our markets, including increased contribution from higher margin businesses, and a favorable foreign exchange impact, partially offset by increasing costs incurred as we continue to invest in innovation and our corporate infrastructure to enable our growth. The changes by segment and at Corporate are detailed below:

•North America increased primarily due to $6 million in supply chain services from organic growth, $2 million growth in our prescription management business, and the contribution of adjusted EBITDA from VSG's operations in 2021.

•Europe experienced a $5 million increase in contribution from our higher margin proprietary brands that was offset by $5 million decreases comprised of the loss of Merck & Co. as a supply partner and a loss of a customer, both in the U.K., and the disruption from our transition to a third-party logistics provider in Germany. Following these offsetting effects, Europe increased $2 million from favorable foreign exchange as well as the continuing impact of cost containment actions.

•APAC & Emerging Markets increased primarily due to $2 million in organic growth mainly related to supply chain.

•Corporate contributed an $8 million decrease ~~of $10~~primarily due to $3 million ~~or (169)%, was primarily~~in increased expenses incurred as we continue to invest in innovation and our corporate infrastructure to enable our growth, $2 million from unfavorable foreign exchange transaction loss related to intercompany notes, and $1 million from increased short-term incentive bonus attributable to ~~a decrease in pre-tax earnings.~~Corporate.

Liquidity and Capital Resources ~~and Plan of Operations~~

Overview

Our primary sources of liquidity are cash and cash equivalents, cash flows from the operations of our business, and available borrowing capacity under our Revolving Facility. For discussion of the Revolving Facility and Term Loan Facility, refer to Note 11 to the consolidated and combined financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additional information.Credit Facilities. Our principal uses of cash include working capital-related items, capital expenditures, debt service, and strategic investments.

~~Working capital requirements, which can be substantial~~Credit Facilities

The Credit Facilities include a Term Loan Facility and ~~susceptible to fluctuations~~a Revolving Credit Facility. There were no borrowings from the Revolving Credit Facility as of March 31, 2021 and December 31, 2020.

Short-Term

Our liquidity fluctuates during the year due to ~~seasonal demands, generally result~~sales seasonality. Generally, our sales of parasite protection products in the companion-animal market peak during the spring and summer months, which are hemisphere dependent, as vector-borne diseases typically increase during these seasons. This seasonality also affects the timing and amount of our inventory purchases, and subsequently our accounts payable balances.

We also operate on a disciplined, global approach to inventory management, including replenishing stock as sales deplete inventory to lower holding levels, executing inventory buy-ins only when price discounts make economic sense with no outsized working capital effect, or when vendor rebate targets are within reasonable reach with incremental purchases and no meaningful impact on cash forecasts.

Planned investments included in our near-term strategic plan:


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•Pharmacy innovation and operational capacity in Arizona and Maine

•Enhancing the consumer experience through continuous improvements in e-Commerce, appointment management, and veterinarian to pet owner connectivity

•Cloud-based practice management software development and coordination with select existing service offerings

•Business-to-business ordering capabilities focused on our compounding services, distribution, and inventory management services

•Optimizing our distribution network in North America, including investments in the systems that support our network like our warehouse management system

•Implementing a regional-wide enterprise resource planning system in Europe to reduce complexity in our global enterprise resource planning landscape

•We continuously evaluate external growth opportunities that support our strategic objectives and may make acquisitions and investments earlier or later than we expect, including that some acquisitions and investments may not come to fruition. In connection with our creation of Distrivet in 2020, we were contractually obligated to pay $12 million to the former owners of Distrivet S.A. on the one-year anniversary of closing, or April 30, 2021

Trends

Our operational plans to manage our liquidity continue to involve seeking opportunities to reduce non-critical capital expenditures, sharpening our focus on collecting supplier rebates and amounts owed to us by customers, managing opportunistic inventory purchases as we carefully monitor sales forecasts and timing of projected price increases, quickly reducing our other costs, and maximizing our payment terms wherever possible. We also continue to monitor cash flow projections and will consider additional borrowings, if needed, based on availability under our Revolving Credit Facility from ~~sales growth, inventory purchase patterns driven~~time to time.

In December 2020, we fully prepaid the 2021 Term Loan Facility's amortization payments which reduced our outstanding balance and lowered the applicable monthly floating interest rates. The next quarterly principal amortization payment of $15 million is due on March 31, 2022.

Our interest rate swap contracts, which effectively fix the borrowing rates on a portion of our floating rate debt, mature on July 31, 2021. Based on the current floating interest rate environment, we anticipate that we will incur lower interest expense, at least for a period of time, following the maturity of our interest rate swap contracts.

We were in compliance with the covenants in our Credit Facilities as of March 31, 2021. Based on our expected Credit Facilities-defined leverage as of March 31, 2021, once the quarterly compliance filing is made, the current applicable margin on our borrowings outstanding will remain unchanged at least until the next compliance filing is made for the three months ended June 30, 2021. Based on the revised schedule contained in the 2020 amendment to our Credit Facilities, we are required to remain compliant with a Credit Facilities-defined leverage covenant that is currently set at 5.50x, but will decrease by ~~sales activity, special inventory forward buy-in opportunities~~0.5x as of June 30, 2021, then an additional 0.5x as of December 31, 2021, and finally to 3.75x as of June 30, 2022 through maturity of the Credit Facilities. The decrease in this particular financial covenant and our ~~business's desired level~~required compliance may influence our investment decisions.

The duration of ~~inventory,~~the COVID-19 pandemic continues to be unknown. Should the pandemic extend throughout 2021 and ~~payment terms for receivables~~beyond, or the severity of variant strains increase that reduces the effectiveness of vaccines and payables. In addition, the Company expects that its general and administrative expenses will increase over the near term due to additional operational and reporting costs associated with the Merger. Similarly,negatively impacts global economic conditions, then we ~~anticipate significant interest expense over the near term related to debt service~~may experience a negative impact on our ~~Term Loan Facility~~liquidity position. Therefore, we continuously assess steps we can take to improve working capital and increase cash on our balance sheet, investigate government sponsored financing or tax holiday programs that may be available to us or to our customers, and closely monitor the capital markets for ~~any borrowings we may make from~~additional opportunities to improve our ~~Revolving Facility.~~liquidity position.

Long-term

Our long-term liquidity is expected to be aligned with our strategic development, and the needs of our growing business in terms of investment to fund growth, as well as availability of financing. We ~~also expect to incur additional expenditures~~currently anticipate the following long-term liquidity trends for our business:

Uses of liquidity:

•Investing in ~~the foreseeable future in connection with the following:~~

•our expansion of global sales and marketing ~~efforts;~~efforts

•~~increase~~Launching new products and services

•Pursuit of ~~the Company's~~strategic, higher-margin acquisition and investment targets

•Increasing our pharmaceutical compounding ~~capacity;~~operations capacity

•~~international development;~~International development of presence, product, and service offerings


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•~~capital investment~~Term Loan Facility amortization payments (beginning again in March 2022)

•Ongoing operating lease payments

•Capital investments in current and future ~~facilities;~~facilities

•Pursuit and

~~pursuing and maintaining~~ maintenance of appropriate regulatory clearances, ~~and~~ approvals for existing products, and any new products that may be ~~developed.~~developed

~~We regularly monitor and assess our ability to meet funding requirements. We expect to meet our foreseeable liquidity needs over the next 12 months through use~~Sources of ~~our approximately~~ ~~$73 million~~ ~~in unrestricted~~liquidity:

•Operations-driven cash ~~and cash equivalents, cash flow from operations, and access to available funds by borrowing against~~generation

•Borrowings on our Revolving ~~Facility.~~Credit Facility

•Availability of financing through the capital markets

Our Term Loan Facility and Revolving Credit Facility bear interest on a floating rate basis at our option, which are referenced to LIBOR. The ~~decisions~~banking syndicate associated with our Credit Facilities intends to cease using the 1-week and 2-month USD LIBOR at the end of 2021, with the ~~Company as~~other USD Tenors to ~~the use of available liquidity~~cease June 30, 2023. Our Credit Facilities, with which we primarily elect to reference 1-month USD LIBOR for our borrowings, will be ~~based upon our continuing review of~~amended to reflect the ~~funding needs for our business, optimizing the allocation of cash resources, and timing of cash flow generation.~~ replacement basis rate accordingly, when identified.

Longer term, ~~should the Company~~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.

Cash and Cash Equivalents

As of March 31, ~~2019, the Company~~2021, we had ~~cash~~Cash and cash equivalents of ~~approximately $73 million in its bank accounts globally and a de minimus amount in restricted cash allocated to self-insurance deposits.~~

$211 million. We consider all highly liquid short-term investments with an original maturity of three months or less to be cash equivalents. Due to the short-term maturity of such investments, the carrying amounts are a reasonable estimate of fair value. ~~Checks outstanding~~

Cash Flows

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


	Three Months Ended
(In millions)	March 31, 2021		March 31, 2020		$ Change
Net cash provided by (used for) operating activities	$	(59)	$	(76)	$	17
Net cash provided by (used for) investing activities	(13)		(7)		(6)
Net cash provided by (used for) financing activities	(3)		159		(162)
Total net cash flows	$	(75)	$	76	$	(151)

Cash inflows and outflows from changes in ~~excess of funds on deposit were reclassified as accounts payable as of~~operating activities

For the three months ended March 31, ~~2019.~~2021, net cash used for operating activities decreased over the three months ended March 31, 2020, primarily due to improved profitability.

Cash inflows and outflows from changes in investing activities

For the three months ended March 31, 2021, net cash used for investing activities increased compared to net cash used for investing activities for the three months ended March 31, 2020, primarily due to $4 million in proceeds from the sale of property and equipment in the prior year period which reduced the net cash used for investing activities in 2020 with no comparable inflows from property and equipment sales in 2021 and a $2 million increase in purchases of property and equipment in the current period.


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Cash inflows and outflows from changes in financing activities

For the three months ended March 31, 2021, net cash used for financing activities increased compared to net cash provided by financing activities for the three months ended March 31, 2020, primarily due to net inflows in the prior year related to $190 million we borrowed under our Revolving Credit Facility as a precaution in 2020 to increase our cash balance on hand in response to COVID-19 uncertainty, partially offset by $31 million comprised of principal payments for our Term Loan Facility, debt issuance and amendment costs for our Credit Facilities, and acquisition payments.

Contractual Obligations

~~The Company did not have any~~We had a material ~~changes~~change in ~~its~~our contractual obligations since the end of fiscal year ~~2018 other than~~2020 due to a decrease of $18 million in our purchase obligations. See Note 5 - Commitments and Contingencies.

Off-balance Sheet Arrangements

We did not have any material changes in our off-balance sheet arrangements since the end of fiscal year 2020 outside of activities in the ordinary course of business.

~~Cash Flow Discussion~~

~~The following table sets forth a summary of cash flows for the periods indicated.~~

Three Months Ended
March 31,
Dollars in millions 2019 2018
Net cash (used in) provided by:
Operating activities $ (33 ) $ (30 )
Investing activities (29 ) (14 )
Financing activities 117
47
Total $ 55
$ 3

~~Operating Activities~~

For the three months ended March 31, 2019, net cash used in operating activities primarily reflects a net loss of $14 million, $59 million related to other assets and liabilities, an increase in net working capital of $14 million primarily due to a seasonal increase in accounts receivable and higher inventory buying activity, partially offset by $35 million increase in non-cash depreciation and amortization, $15 million provided from stock-based compensation-related activity, and $6 million decrease in the provision for accounts receivable losses.

For the three months ended March 31, 2018, net cash used in operating activities had a $45 million increase in net working capital primarily due to seasonal fluctuations in accounts receivable, along with ~~$30 million~~ ~~reduction in other assets and liabilities, partially offset by $28 million net income and $16 million increase in non-cash depreciation and amortization.~~

~~Investing Activities~~

For the three months ended March 31, 2019, net cash used in investing activities increased primarily due to $25 million equity investments and business acquisitions net of cash acquired, along with a slight increase in capital spending for fixed assets.

For the three months ended March 31, 2018, net cash used in investing activities was $14 million resulting from business acquisitions of $8 million and increased purchases of property and equipment of $6 million.

~~Financing Activities~~

For the three months ended March 31, 2019, net cash provided by financing activities increased primarily from debt issuance proceeds of $1.2 billion, net of $24 million debt issuance costs and $167 million funding provided by Henry Schein to Animal Health for transactions related to the Merger, partially offset by $1.2 billion paid as a dividend to Henry Schein, along with $70 million reimbursement to Henry Schein for acquisition of non-controlling interests in joint ventures, and $24 million debt principal payments by VFC that were related to the Merger.

For the three months ended March 31, 2018, net cash provided by financing activities related to net transfers received from Henry Schein in the sum of $51 million, partially offset by principal repayments of debt.

~~Off-Balance Sheet Arrangements~~

~~We do not have any off-balance sheet arrangements.~~

Critical Accounting ~~Policies~~Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and ~~Estimates~~

assumptions that affect the reported amounts in our condensed consolidated financial statements. There have been no material changes in our critical accounting ~~policies and~~ estimates from those disclosed in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operationsof our ~~Annual Report on~~ Form ~~10-K for the year ended December 29, 2018.~~10-K. For a discussion of critical accounting policies and

estimates as well as accounting policies adopted, see Note 1 ~~to the Consolidated~~- Business Overview and ~~Combined Financial Statements appearing in Part I, Item 1 in this Quarterly Report on~~Significant Accounting Policies of our Form ~~10-Q.~~10-K.

Recent Accounting Pronouncements

For information on recent accounting pronouncements, see Note 1 ~~to the Consolidated~~- Business Overview and ~~Combined Financial Statements appearing in Part I, Item 1 in this Quarterly Report on Form 10-Q.~~Significant Accounting Policies.

~~ITEM~~Item 3. ~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~Quantitative and Qualitative Disclosures About Market Risk

~~Covetrus has~~We continuously evaluate our exposure to ~~market risks related~~foreign currency exchange rate and interest rate risk. There have been no meaningful changes in our exposure to ~~changes~~risk associated with fluctuations in foreign currency exchange rates and interest ~~rates.~~

~~Foreign Currency Risk~~

~~The value of certain foreign currencies as compared~~rates related to the U.S. dollar and the value of certain of its underlying functional currencies, including its foreign subsidiaries, may affect Covetrus' financial results. Fluctuations in exchange rates, for which the Company currently conducts it operations in multiple currencies, may positively or negatively affect revenues, gross

margins, and operating expenses, all of which are expressed in U.S. dollars. The Company attempts to offset foreign currency assets and liabilities where and when possible, but it does not, as of March 31, 2019, enter into hedging arrangements. In the future, Covetrus may evaluate and decide, to the extent reasonable and practical, to enter into foreign currency forward exchange contracts with financial institutions. If the Company were to enter into such hedging transactions, the market risk resulting from foreign currency fluctuations is unlikely to be entirely eliminated. The Company does not plan to enter into derivative financial instrument transactions for foreign currency speculative purposes.

As of March 31, 2019, a hypothetical 5% fluctuation in local currencies where the Company conducts it business vis-à-vis the U.S. dollar would have resulted in a change of $9 million in annualized operating income.

~~Interest Rate Risk~~

~~At March 31, 2019, the Company had~~our variable-rate borrowings of $1.2 billion under its Term Loan Facility. Increases in the underlying interest rate elections the Company makes will negatively affect interest expense, while decreases to the underlying interest rates will have a positive influence on the Company's interest expense. The Company periodically reviews the projected borrowings under the Credit ~~Agreement and the current interest rate environment. As~~Facilities from that discussed in our Form 10-K.


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Table of March 31, 2019, Covetrus does not enter into hedging arrangements for managing interest rate risks, although the Company may decide in the future, to the extent reasonable and practical, to enter into interest rate swap contracts to manage exposure to interest rates. If the Company were to enter into such hedging transactions, the market risk resulting from interest rate fluctuations is unlikely to be entirely eliminated. The Company does not plan to enter into derivative financial instrument transactions for interest rate speculative purposes.Contents

As of March 31, 2019, a uniform hypothetical 1% fluctuation up or down in the underlying interest rate elected by the Company for the Term Loan Facility outstanding balance would have resulted in a change of $12 million in annualized interest expense.

~~ITEM~~Item 4. ~~CONTROLS AND PROCEDURES~~Controls and Procedures

~~Evaluation of~~ Disclosure Controls and Procedures

~~Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our~~We maintain disclosure controls and procedures as of the end of the period covered by this quarterly report as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concludeddesigned to provide reasonable assurance that ~~our disclosure controls and procedures were effective as of March 31, 2019 to ensure that all material~~ information required to be disclosed ~~by us~~ in reports ~~that we file or submit~~filed under the Exchange Act, is recorded, processed, summarized, and reported within the specified time periods and accumulated and communicated to ~~them~~our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our CEO and our CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) at March 31, 2021. Based on this evaluation, the CEO and CFO concluded that ~~all such information is recorded, processed, summarized~~as of that date, our disclosure controls and ~~reported within~~procedures required by paragraph (b) of Rules 13a-15 or 15d-15 were not effective, at a reasonable assurance level, because of a material weakness in internal control over financial reporting, which we view as an integral part of our disclosure controls and procedures.

Ongoing Remediation of Previously Identified Material Weakness

As previously disclosed in our Form 10-K, management identified deficiencies in our internal control over financial reporting which related to the ~~time periods specified~~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 our income tax provision and deferred income tax balances were not effective.

We developed remediation plans for this material weakness as follows:

•Increasing oversight by our management in the ~~SEC’s rules~~calculation and ~~forms.~~reporting of certain tax balances of our global operations

•Enhancing policies, procedures, and controls relating to significant judgments impacting our income tax accounts

•Augmenting our tax accounting resources

•Increasing communication to information providers for tax jurisdiction specific information and

•Strengthening communication and information flows between the tax department and the finance group

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 March 31, 2021. It will not be considered remediated until (i) the controls are fully implemented and existing controls are reinforced, (ii) the incremental controls are in operation for a sufficient period of time, and (iii) the controls are tested and concluded by management to be designed and operating effectively. We cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.

Changes in Internal Control over Financial Reporting

There ~~has~~have been no ~~change~~other changes in our internal control over financial reporting during the most recent quarter that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

See Item 1A. Risk Factors.

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.


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PART ~~II. OTHER INFORMATION~~II

~~ITEM~~Item 1. ~~LEGAL PROCEEDINGS~~Legal Proceedings

~~From time~~Refer to ~~time, we may become a party~~Note 5 - Commitments and Contingencies for information relating to ~~other~~ 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~~Item 1A. ~~RISK FACTORS~~Risk Factors

In addition to the ~~other~~ information set forth in ~~this report,~~the Forward-looking Statements in Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, you should carefully consider the factors discussed in ~~Part I, “Item 1A. Risk Factors”~~our Form 10-K. There have been no material changes to the risk factors disclosed in our ~~Annual Report on~~Form 10-K. If any of the events described in our Form 10-K ~~for the year ended December 29, 2018, which could materially affect~~actually occur, our business, financial condition, ~~or future results. The risks described in~~results of operations, and cash flows could be materially and adversely affected, and the trading price of our ~~Annual Report on Form 10-K~~common stock could decline. Our business could also be affected by additional factors that are not ~~the only risks facing our Company. Additional risks and uncertainties not currently~~presently known to us or that we currently ~~deem~~consider not material. The reader should not consider these factors to be ~~immaterial also may materially adversely affect~~a complete statement of all risks and uncertainties.

Item 2. Unregistered Sales of Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer

The following table sets forth information about our ~~business, financial condition and/or operating results.~~purchases of our outstanding common stock during the quarter ended March 31, 2021:


Period	Total Number of Shares Purchased (a)	Average Price Paid Per Share (a)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
January 2021	53,696	$	38.54	—	$	—
February 2021	17,170	36.93		—	—
March 2021	22,876	31.84		—	—
	93,742	$	36.61	—	$	—

(a) Shares of common stock we purchased were solely for the cancellation of shares of stock withheld for related tax obligations that occur upon vesting of restricted shares


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Item 5. Other Information

On May 4, 2021, the Company entered into an amended and restated employment agreement with Michael Ellis. The agreement is attached hereto as Exhibit 10.1.

The Company approved and amended certain performance stock unit agreements which are attached hereto as Exhibits 10.2, 10.3, and 10.4.

~~ITEM~~Item 6. ~~EXHIBITS~~Exhibits

Incorporated by Reference
Exhibit
Number
Exhibit Description Form Date Number
2.1
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 1/15/2019 2.6

3.1
Amended and Restated Certificate of Incorporation of Covetrus, Inc.
8-K 2/7/2019 3.1

3.2
Amended and Restated By-laws of Covetrus, Inc.
8-K 2/7/2019 3.2

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 2/7/2019 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 2/7/2019 10.2

10.3
Transition Services Agreement, dated as of February 7, 2019, by and between Henry Schein, Inc. and Covetrus, Inc.
8-K 2/7/2019 10.4

10.4
Letter Agreement to Transition Services Agreement, dated as of February 7, 2019, by and between Covetrus, Inc. and Henry Schein, Inc.
8-K 2/7/2017 10.5

10.5
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 1/8/2019 10.3

10.6
Escrow Agreement, dated as of February 7, 2019, by and among Henry Schein, Inc., Covetrus, Inc., Shareholder Representative Services LLC and Continental Stock Transfer & Trust Company
8-K 2/7/2019 10.3

10.7†
Form of Indemnification Agreement between Covetrus, Inc. and each of its directors and executive officers
S-4 12/26/2018 10.5

10.8†
Covetrus 2019 Omnibus Incentive Compensation Plan
S-4 12/26/2018 10.9

10.9†
Covetrus Employee Stock Purchase Plan
8-K 2/7/2019 10.15

10.10†
Covetrus Annual Incentive Plan
S-4/A 1/8/2019 10.11

10.11†
Employment Agreement, dated as of February 7, 2019, by and between Covetrus, Inc. and Benjamin Shaw
8-K 2/7/2019 10.8

10.12†
Employment Agreement, dated as of February 7, 2019, by and between Covetrus, Inc. and Christine Komola
8-K 2/7/2019 10.9

10.13†
Employment Agreement, dated as of February 7, 2019, by and between Covetrus, Inc. and Francis Dirksmeier
8-K 2/7/2019 10.10

10.14†
Employment Agreement, dated as of February 7, 2019, by and between Covetrus, Inc. and David Christopher Dollar
8-K 2/7/2019 10.11

10.15†
Employment Agreement, dated as of February 7, 2019, by and between Covetrus, Inc. and Georgina Wraight
8-K 2/7/2019 10.12

10.16
Form of Restricted Stock Unit Agreement
8-K 3/5/2019 10.1

10.17
Form of Incentive Stock Option Grant Agreement
8-K 3/5/2019 10.2

10.18
Form of Nonqualified Stock Option Grant Agreement
8-K 3/5/2019 10.3

10.19
Form of Restricted Stock Unit Agreement for Non-U.S. Participants
8-K 3/5/2019 10.4

10.20
Form of Restricted Stock Grant Agreement
8-K 3/5/2019 10.5

Incorporated by Reference
Exhibit
Number
Exhibit Description Form Date Number
10.21
Form of Restricted Stock Unit Agreement for Non-Employee Directors
8-K 3/5/2019 10.6

10.22
Non-Employee Director Compensation Policy of Covetrus, Inc.
8-K 3/5/2019 10.7

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).

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.

†

~~Identifies management compensation plan or arrangement.~~

*Exhibit
Number

~~Filed herewith.~~

Exhibit Description

Form

Date

No.

10.1†*

Amended and Restated Employment Agreement, effective as of May 4, 2021, by and between the Company and Michael Ellis

10.2†*

Amended Transformation Performance Stock Unit Agreement

10.3†*

2021 Performance Stock Unit Agreement

10.4†*

2021 Performance Stock Unit Agreement for Non-U.S. Participants

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).

101.INS*

Inline XBRL Instance Document - the instance
document does not appear in the Interactive Data
File because its XBRL tags are embedded within the
Inline XBRL document.

101.SCH*

Inline XBRL Taxonomy Extension Schema Document.

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104*

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

* Filed herewith

** Furnished ~~herewith.~~herewith

*** To be filed by amendment† Indicates management contract or compensatory plan


Covetrus, Inc. 2021 Form 10-Q			30

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COVETRUS, INC.

Date:

May 6, 2021

By:

/s/ Benjamin Wolin

Name:

Benjamin Wolin

Title:

President, Chief Executive Officer and Director
(Principal Executive Officer)

Date:

May 6, 2021

~~Covetrus, Inc.~~By:

/s/ Matthew Foulston

Name:

Matthew Foulston

~~Date:~~

~~May 15, 2019~~

~~By:~~Title:

~~/s/ Benjamin Shaw~~

~~Name:~~

~~Benjamin Shaw~~

~~Title:~~

~~Chief~~ Executive ~~Officer,~~Vice President ~~and Director~~

~~(Principal Executive Officer)~~

~~Date:~~

~~May 15, 2019~~

~~By:~~

~~/s/ Christine T. Komola~~

~~Name:~~

~~Christine T. Komola~~

~~Title:~~

~~EVP~~ and Chief Financial Officer

(Principal Financial ~~and Accounting~~ Officer)


Covetrus, Inc. 2021 Form 10-Q			31



	March 31, 2019			December 29, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	73		$	23
Accounts receivable, net of reserves $7 and $7	461			431
Inventory, net	594			564
Other receivables	59			49
Prepaid expenses and other	32			19
Total current assets	1,219			1,086
Property and equipment, net of accumulated depreciation of $93 and $74	94			69
Operating lease right-of-use assets	62			—
Goodwill	2,105			750
Other intangibles, net of accumulated amortization of $264 and $241	728			208
Investments and other	61			120
Total assets	$	4,269		$	2,233
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	431		$	441
Current maturities of long-term debt and other borrowings	36			1
Accrued expenses:
Payroll and related	40			37
Taxes	19			17
Other	144			77
Total current liabilities	670			573
Long-term debt and other borrowings, net	1,167			24
Deferred taxes, net	51			16
Other liabilities	70			35
Total liabilities	1,958			648
Commitments and contingencies (Note 8)
Redeemable noncontrolling interests	17			92
Stockholders' Equity:
Common stock, $0.01 par value, 675,000,000 shares authorized as of March 31, 2019; 111,576,343 shares issued and outstanding as of March 31, 2019	1			—
Net parent investment	—			1,576
Accumulated other comprehensive income (loss)	(82		)	(83		)
Additional paid-in capital	2,396			—
Accumulated deficit	(21		)	—
Total stockholders’ equity	2,294			1,493
Total liabilities, redeemable noncontrolling interests and stockholders’ equity	$	4,269		$	2,233



	Three Months Ended
	March 31, 2019			March 31, 2018
Net sales	$	941		$	947
Cost of sales	761			771
Gross profit	180			176
Operating expenses:
Selling, general and administrative	189			143
Restructuring costs	—			1
Operating income (expense)	(9		)	32
Other income (expense):
Interest income	2			2
Interest expense	(12		)	(1		)
Other, net	1			1
Income (expense) before taxes and equity in earnings of affiliates	(18		)	34
Income tax benefit (provision)	4			(6		)
Net income (loss)	(14		)	28
Less: Net (income) loss attributable to redeemable noncontrolling interests	1			(5		)
Net income (loss) attributable to Covetrus, Inc.	$	(13	)	$	23

Earnings per share attributable to Covetrus, Inc.:
Basic	$	(0.14	)	$	0.32
Diluted	$	(0.14	)	$	0.31

Weighted-average common shares outstanding:
Basic	94,796			71,451
Diluted	94,796			71,973



	Three Months Ended
	43555			43190
Net income (loss)	$	(14	)	$	28
Other comprehensive income, net of tax:
Foreign currency translation gain	1			12

Other comprehensive income, net of tax:	1			12

Comprehensive income	(13		)	40

Comprehensive income:
Comprehensive income attributable to redeemable noncontrolling interests:
Net (income) loss	1			(5		)
Foreign currency translation loss	—			(1		)

Comprehensive income attributable to redeemable noncontrolling interests	1			(6		)

Comprehensive income (loss) attributable to Covetrus, Inc.	$	(12	)	$	34



	Common Stock			Additional Paid-In Capital		Retained Earnings/ (Accumulated Deficit)			Accumulated Other Comprehensive Income/(Loss)			Net Parent Investment			Total Stockholders' Equity
	Shares	Amount		Additional Paid-In Capital		Retained Earnings/ (Accumulated Deficit)			Accumulated Other Comprehensive Income/(Loss)			Net Parent Investment			Total Stockholders' Equity
December 29, 2018	—	$	—	$	—	$	—		$	(83	)	$	1,576		$	1,493
Net income (loss) (1)	—	—				(21		)	—			7			(14		)
Dividend to Henry Schein	—	—				—			—			(1,153		)	(1,153		)
Issuance of common stock at separation (including share sale investors)	71,693,426	1		609		—			—			(609		)	1
Issuance of common shares in connection with the Merger	39,742,089	—		1,772		—			—			—			1,772
Net increase (decrease) in parent investment	—	—		—		—			—			179			179
Exercise of stock options	140,828	—		—		—			—			—			—
Stock-based compensation	—	—		15		—			—			—			15
Other comprehensive loss	—	—		—		—			1			—			1
March 31, 2019	111,576,343	$	1	$	2,396	$	(21	)	$	(82	)	$	—		$	2,294

December 30, 2017	—	$	—	$	—	$	—		$	(42	)	$	1,299		$	1,257
Net income	—	—		—		—			—			28			28
Cumulative impact of adopting new accounting standard	—	—		—		—			—			2			2
Net increase (decrease) in parent investment	—	—		—		—			—			(37		)	(37		)
Other comprehensive loss	—	—		—		—			11			—			11
March 31, 2018	—	$	—	$	—	$	—		$	(31	)	$	1,292		$	1,261



	Three months ended
Dollars in millions	March 31, 2019		March 31, 2018
North America	$	497	$	480
Europe	358		369
APAC & Emerging Markets	86		98
Total	$	941	$	947




Total Covetrus shares issued to VFC shareholders	39,742,089
Per share price (in actuals)*	$	43.05
Total fair value of shares issued to VFC shareholders	$	1,711
Fair value of VFC replacement stock option awards attributable to pre-merger service	62
VFC debt repaid at close	24
VFC expenses paid at close	18
Less VFC cash used to fund transaction	(9		)
Total consideration	$	1,806

*Closing price on February 7, 2019, Covetrus shares trading on a when-issued basis (Nasdaq: CVET)



Dollars in millions
Book value of net assets acquired	$	14
Goodwill	1,358
Intangible assets	545
Deferred tax liabilities	(111		)
Total consideration	$	1,806



	Three Months Ended March 31,
	2019			2018
Net Sales	$	965		$	992
Net income (loss)	(24		)	(13		)
Net income (loss) attributable to Covetrus	(23		)	(13		)

Net income per common share: basic	$	(0.25	)	$	(0.19	)
Net income per common share: diluted	$	(0.25	)	$	(0.19	)



	March 31,	March 31,
	2019	2018
Basic shares	94,796	71,451
Effect of dilutive shares*	—	522
Diluted shares	94,796	71,973

* Shares from share-based awards are not included for periods in which a net loss occurs because to do so would be anti-dilutive



	Balance		Goodwill		Foreign Currency			Balance
Segment	1/1/2019		Additions		Adjustments			3/31/2019
North America	$	537	$	1,314	$	—		$	1,851
Europe	165		28		(3		)	190
APAC & Emerging Markets	48		16		—			64
Total	$	750	$	1,358	$	(3	)	$	2,105

	Balance		Goodwill		Foreign Currency			Balance
Segment	12/31/2017		Additions		Adjustments			12/29/2018
North America*	$	536	$	2	$	(1	)	$	537
Europe*	175		1		(11		)	165
APAC & Emerging Markets*	49		—		(1		)	48
Total	$	760	$	3	$	(13	)	$	750
* Recast to conform to 2019 presentation.



	March 31,			December 29,
Dollars in millions	2019			2018
Balance, beginning of period	$	92		$	367
Decrease in redeemable noncontrolling interests due to redemptions	(70		)	(383		)
Increase in redeemable noncontrolling interests due to business acquisitions	—			6
Net income attributable to redeemable noncontrolling interests	(1		)	7
Dividends paid	—			(10		)
Effect of foreign currency translation loss attributable to redeemable noncontrolling interests	—			(2		)
Change in fair value of redeemable securities	(4		)	107
Balance, end of period	$	17		$	92



		March 31,
Dollars in millions	Classification	2019
Assets
Operating lease assets	Operating lease right-of-use assets	$	62
Finance lease assets	Property and equipment, net	1
Total lease assets		$	63

Liabilities
Current
Operating	Accrued expenses, other	$	21
Finance	Current maturities of long-term debt and other borrowings	—
Noncurrent
Operating	Other liabilities	43
Finance	Long-term debt and other borrowings, net	—
Total lease liabilities		$	64



Dollars in millions	Operating Leases		Finance Leases
2019 (remaining 9 months)	$	17	$	1
2020	18		—
2021	12		—
2022	8		—
2023	4		—
Thereafter	7		—
Total minimum lease payments	$	66	$	1
Less - amount representing interest	5		—
Present value of net minimum lease payments	$	61	$	1
Less - current portion of operating lease obligation	20		1
Long-term operating lease obligation	$	41	$	—



	Three Months Ended March 31, 2019
Dollars in millions	North America		Europe		APAC & Emerging Markets		Total
Net sales	$	497	$	361	$	86	$	944
Eliminations							(3		)
Total net sales							$	941
Operating income	7		11		3		21
Operating income related to Corporate							(30		)
Total operting income							$	(9	)
Total assets	4,059		1,799		190		6,048
Eliminations							(4,542		)
Total assets related to Corporate							2,763
Total assets							$	4,269

	Three Months Ended March 31, 2018
Dollars in millions	North America		Europe		APAC & Emerging Markets		Total
Net sales	$	480	$	369	$	98	$	947
Operating income	29		12		4		45
Operating income related to Corporate							(13		)
Total operting income							$	32
Total assets	1,326		780		192		$	2,298



	Three Months Ended					Change
Dollars in millions	43555			43190		$			%
Net sales	$	941		$	947	$	(6	)	(1	)%
Cost of sales	761			771		(10		)	(1	)
Gross profit	180			176		4			2
Operating expenses:
Selling, general and administrative	189			143		46			32
Restructuring costs	—			1		(1		)	(91	)
Operating income (expense)	$	(9	)	$	32	(42		)	(129	)%

Net income (loss)	$	(14	)	$	28	(42		)	(150	)%
Net income (loss) attributable to Covetrus, Inc.	(13		)	23		(36		)	(159	)%



	Three Months Ended March 31,
Dollars in millions	2019			2018
Net cash (used in) provided by:
Operating activities	$	(33	)	$	(30	)
Investing activities	(29		)	(14		)
Financing activities	117			47
Total	$	55		$	3



		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	Date	Number
2.1	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	1/15/2019	2.6

3.1	Amended and Restated Certificate of Incorporation of Covetrus, Inc.	8-K	2/7/2019	3.1

3.2	Amended and Restated By-laws of Covetrus, Inc.	8-K	2/7/2019	3.2

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	2/7/2019	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	2/7/2019	10.2

10.3	Transition Services Agreement, dated as of February 7, 2019, by and between Henry Schein, Inc. and Covetrus, Inc.	8-K	2/7/2019	10.4

10.4	Letter Agreement to Transition Services Agreement, dated as of February 7, 2019, by and between Covetrus, Inc. and Henry Schein, Inc.	8-K	2/7/2017	10.5

10.5	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	1/8/2019	10.3

10.6	Escrow Agreement, dated as of February 7, 2019, by and among Henry Schein, Inc., Covetrus, Inc., Shareholder Representative Services LLC and Continental Stock Transfer & Trust Company	8-K	2/7/2019	10.3

10.7†	Form of Indemnification Agreement between Covetrus, Inc. and each of its directors and executive officers	S-4	12/26/2018	10.5

10.8†	Covetrus 2019 Omnibus Incentive Compensation Plan	S-4	12/26/2018	10.9

10.9†	Covetrus Employee Stock Purchase Plan	8-K	2/7/2019	10.15

10.10†	Covetrus Annual Incentive Plan	S-4/A	1/8/2019	10.11

10.11†	Employment Agreement, dated as of February 7, 2019, by and between Covetrus, Inc. and Benjamin Shaw	8-K	2/7/2019	10.8

10.12†	Employment Agreement, dated as of February 7, 2019, by and between Covetrus, Inc. and Christine Komola	8-K	2/7/2019	10.9

10.13†	Employment Agreement, dated as of February 7, 2019, by and between Covetrus, Inc. and Francis Dirksmeier	8-K	2/7/2019	10.10

10.14†	Employment Agreement, dated as of February 7, 2019, by and between Covetrus, Inc. and David Christopher Dollar	8-K	2/7/2019	10.11

10.15†	Employment Agreement, dated as of February 7, 2019, by and between Covetrus, Inc. and Georgina Wraight	8-K	2/7/2019	10.12

10.16	Form of Restricted Stock Unit Agreement	8-K	3/5/2019	10.1

10.17	Form of Incentive Stock Option Grant Agreement	8-K	3/5/2019	10.2

10.18	Form of Nonqualified Stock Option Grant Agreement	8-K	3/5/2019	10.3

10.19	Form of Restricted Stock Unit Agreement for Non-U.S. Participants	8-K	3/5/2019	10.4

10.20	Form of Restricted Stock Grant Agreement	8-K	3/5/2019	10.5