Company Quick10K Filing
Covetrus
Price11.76 EPS-8
Shares112 P/E-1
MCap1,318 P/FCF44
Net Debt1,120 EBIT-940
TEV2,438 TEV/EBIT-3
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-10
10-Q 2020-06-30 Filed 2020-08-11
10-Q 2020-03-31 Filed 2020-05-14
10-K 2019-12-31 Filed 2020-03-03
10-Q 2019-09-30 Filed 2019-11-12
10-Q 2019-06-30 Filed 2019-08-13
10-Q 2019-03-31 Filed 2019-05-16
S-1 2019-02-07 Public Filing
10-K 2018-12-29 Filed 2019-03-29
8-K 2021-01-13 Earnings, Regulation FD, Exhibits
8-K 2020-11-17
8-K 2020-11-10
8-K 2020-09-09
8-K 2020-08-11
8-K 2020-06-25
8-K 2020-06-11
8-K 2020-06-09
8-K 2020-05-19
8-K 2020-05-14
8-K 2020-05-04
8-K 2020-04-30
8-K 2020-04-22
8-K 2020-04-06
8-K 2020-04-01
8-K 2020-03-12
8-K 2020-03-03
8-K 2020-01-21
8-K 2020-01-14
8-K 2019-12-11
8-K 2019-11-13
8-K 2019-11-12
8-K 2019-10-21
8-K 2019-09-04
8-K 2019-08-13
8-K 2019-05-15
8-K 2019-05-07
8-K 2019-05-03
8-K 2019-03-26
8-K 2019-02-27
8-K 2019-02-18
8-K 2019-02-06
8-K 2019-02-04

CVET 10Q Quarterly Report

Part I
Item 1. Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 cvet20200930exhibit101.htm
EX-31.1 cvet20200930exhibit311.htm
EX-31.2 cvet20200930exhibit312.htm
EX-32.1 cvet20200930exhibit321.htm
EX-32.2 cvet20200930exhibit322.htm

Covetrus Earnings 2020-09-30

Balance SheetIncome StatementCash Flow
4.23.42.51.70.80.02018201820192020
Assets, Equity
1.10.70.3-0.2-0.6-1.02018201820192020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12018201820192020
Ops, Inv, Fin

cvet-20200930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2020
or
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________ to _____________
Commission File Number: 001-38794

cvet-20200930_g1.gif
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)

    Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per shareCVETNasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated FilerAccelerated Filer
Non-accelerated FilerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The registrant had 127,516,179 shares of common stock outstanding as of November 6, 2020.




TABLE OF CONTENTS
Page

2

Table of Contents


PART I

Item 1. Condensed Consolidated Financial Statements

COVETRUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
September 30,
2020
December 31,
2019
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents$355 $130 
Accounts receivable, net of allowance of $6 and $8
498 426 
Inventories, net521 636 
Other receivables81 67 
Prepaid expenses and other45 30 
Assets held for sale  51 
Total current assets1,500 1,340 
Non-current assets:
Property and equipment, net of accumulated depreciation of $101 and $84
108 93 
Operating lease right-of-use assets, net (Note 5)118 84 
Goodwill1,154 1,154 
Other intangibles, net (Note 6)541 643 
Investments and other (Note 3)89 47 
Total assets$3,510 $3,361 
LIABILITIES, MEZZANINE EQUITY, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable$416 $520 
Current maturities of long-term debt and other borrowings (Note 7)46 62 
Accrued payroll and related liabilities73 44 
Accrued taxes41 18 
Other current liabilities155 164 
Liabilities held for sale  21 
Total current liabilities731 829 
Non-current liabilities:
Long-term debt and other borrowings, net (Note 7)1,082 1,125 
Deferred taxes39 47 
Other liabilities139 94 
Total liabilities1,991 2,095 
Commitments and contingencies (Note 10)
Mezzanine equity:
Redeemable non-controlling interests (Note 11)15 10 
Redeemable Series A convertible preferred stock, $0.01 par value per share, $1,000 per share liquidation preference, 250,000 shares authorized, and 90,632 outstanding as of September 30, 2020 (Note 12)
88  
Shareholders' equity:
Common stock, $0.01 par value per share, 675,000,000 shares authorized; 127,363,432 shares issued and outstanding as of September 30, 2020; 111,620,507 shares issued and outstanding as of December 31, 2019
1 1 
Accumulated other comprehensive loss (Note 13)(91)(86)
Additional paid-in capital2,567 2,381 
Accumulated deficit(1,061)(1,040)
Total shareholders’ equity1,416 1,256 
Total liabilities, mezzanine equity, and shareholders’ equity$3,510 $3,361 
See notes to condensed consolidated financial statements.
3

Table of Contents

COVETRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts) (Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net sales (Note 4)$1,126 $1,018 $3,217 $2,968 
Cost of sales929 827 2,625 2,407 
Gross profit197 191 592 561 
Operating expenses:
Selling, general and administrative224 210 642 594 
Goodwill impairment 939  939 
Operating loss(27)(958)(50)(972)
Other income (expense):
Interest income 1 1 4 
Interest expense(10)(16)(38)(42)
Other, net (Note 3)5 4 79 18 
Income (loss) before taxes and equity in earnings of affiliates(32)(969)(8)(992)
Income tax benefit (expense) (Note 14)(3)7 (6)7 
Net income (loss)(35)(962)(14)(985)
Net (income) loss attributable to redeemable non-controlling interests 3 (1)3 
Net income (loss) attributable to Covetrus$(35)$(959)$(15)$(982)
Earnings (loss) per share attributable to Covetrus: (Note 15)
Basic$(0.33)$(8.56)$(0.18)$(9.26)
Diluted$(0.33)$(8.56)$(0.18)$(9.26)
Weighted-average common shares outstanding:
Basic116112113106
Diluted116112113106

See notes to condensed consolidated financial statements.
4

Table of Contents

COVETRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions) (Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net income (loss)$(35)$(962)$(14)$(985)
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss) 14 (22)(2)(17)
Unrealized gain (loss) on derivative instruments(1)(2)(8)(2)
Total other comprehensive income (loss)13 (24)(10)(19)
 Comprehensive income (loss)(22)(986)(24)(1,004)
Comprehensive (income) loss attributable to redeemable non-controlling interests:
Net (income) loss 3 (1)3 
Foreign currency translation (gain) loss  (2)(1)
Comprehensive (income) loss attributable to redeemable non-controlling interests 3 (3)2 
Comprehensive income (loss) attributable to Covetrus$(22)$(983)$(27)$(1,002)
See notes to condensed consolidated financial statements.
5

Table of Contents

COVETRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions, except share amounts) (Unaudited)
Three Months Ended September 30, 2020
Common StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal Shareholders' Equity
SharesAmount
Balance at June 30, 2020112,674,657 $1 $2,404 $(1,022)$(107)$1,276 
Net income (loss) attributable to Covetrus— — — (35)— (35)
Change in fair value of redeemable securities— — (6)— — (6)
Issuance of shares in connection with share-based compensation plans331,297 — 2 — — 2 
Share-based compensation— — 11 — — 11 
Series A preferred stock dividend— — — (4)— (4)
Conversion of Series A preferred stock14,357,478 — 156 — — 156 
Other comprehensive income (loss)— — — — 16 16 
Balance at September 30, 2020127,363,432 $1 $2,567 $(1,061)$(91)$1,416 
Nine Months Ended September 30, 2020
Common StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal Shareholders' Equity
SharesAmount
Balance at December 31, 2019111,620,507 $1 $2,381 $(1,040)$(86)$1,256 
Net income (loss) attributable to Covetrus— — — (15)— (15)
Change in fair value of redeemable securities— — (6)— — (6)
Issuance of shares in connection with share-based compensation plans1,385,447 — 6 — — 6 
Share-based compensation— — 30 — — 30 
Series A preferred stock dividend— — — (6)— (6)
Conversion of Series A preferred stock14,357,478 — 156 — — 156 
Other comprehensive income (loss)— — — — (5)(5)
Balance at September 30, 2020127,363,432 $1 $2,567 $(1,061)$(91)$1,416 

6

Table of Contents

COVETRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions, except share amounts) (Unaudited) (Continued)
Three Months Ended September 30, 2019
Common StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive LossNet Former Parent InvestmentTotal Shareholders' Equity
SharesAmount
Balance at June 30, 2019111,932,491 $1 $2,357 $(33)$(77)$ $2,248 
Net income (loss) attributable to Covetrus— — — (959)—  (959)
Issuance of shares in connection with share-based compensation plans121,782 — 1 — — — 1 
Share-based compensation— — 10 — — — 10 
Other comprehensive income (loss)— — — — (24)— (24)
Balance at September 30, 2019112,054,273 $1 $2,368 $(992)$(101)$ $1,276 
Nine Months Ended September 30, 2019
Common StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive LossNet Former Parent InvestmentTotal Shareholders' Equity
SharesAmount
Balance at December 29, 2018 $ $ $ $(82)$1,576 $1,494 
Net income (loss) attributable to Covetrus (a)
— — — (992)— 10 (982)
Dividend to Former Parent— — (21)— — (1,153)(1,174)
Issuance of shares at Separation (including Share Sale investors)71,693,426 1 609 — — (609)1 
Issuance of shares in connection with the Acquisition39,742,089 — 1,772 — — — 1,772 
Shares held in escrow expected to be canceled— — (30)— — — (30)
Net increase in Former Parent investment— — — — — 176 176 
Issuance of shares in connection with share-based compensation plans618,758 — 3 — — — 3 
Share-based compensation— — 35 — — — 35 
Other comprehensive income (loss)— — — — (19)— (19)
Balance at September 30, 2019112,054,273 $1 $2,368 $(992)$(101)$ $1,276 
(a) Net income earned from January 1, 2019 through February 7, 2019 is attributed to the Former Parent as it was the sole shareholder prior to February 7, 2019.
See notes to condensed consolidated financial statements.

7

Table of Contents

COVETRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
Nine Months Ended September 30,
20202019
Cash flows from operating activities:
Net income (loss)$(14)$(985)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization124 113 
Amortization of right-of-use assets18 16 
Goodwill impairment 939 
Operating lease right-of-use asset impairment8  
Gain on divestiture of a business(72) 
Share-based compensation expense30 35 
Benefit for deferred income taxes(7)(19)
Amortization of debt issuance costs4  
Loss on managed exit of a business8  
Other1 (2)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net(77)(25)
Inventories, net99 (23)
Other assets and liabilities(42)(36)
Accounts payable and accrued expenses(69)21 
Net cash provided by operating activities11 34 
Cash flows from investing activities:
Purchases of property and equipment(40)(30)
Payments related to equity investments and business acquisitions, net of cash acquired(13)(26)
Proceeds from divestiture of a business, net104  
Proceeds from sale of property and equipment4  
Net cash provided by (used for) investing activities55 (56)
Cash flows from financing activities:
Proceeds from revolving credit facility190  
Repayment of revolving credit facility(190) 
Proceeds from issuance of debt 1,220 
Principal payments of debt(62)(43)
Debt issuance and amendment costs(5)(24)
Issuance of common shares in connection with share-based compensation plans6 3 
Dividend paid to Former Parent (1,174)
Net transfers from Former Parent 165 
Proceeds from issuance of Series A preferred stock250  
Series A preferred stock issuance costs(6) 
Series A preferred stock dividend(6) 
Acquisition payment(17)(9)
Acquisitions of non-controlling interests in subsidiaries (74)
Net cash provided by financing activities160 64 
Effect of exchange rate changes on cash and cash equivalents(1)3 
Net change in cash and cash equivalents225 45 
Cash and cash equivalents, beginning of period130 23 
Cash and cash equivalents, end of period$355 $68 
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COVETRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited) (Continued)
Nine Months Ended September 30,
20202019
Supplemental disclosure of cash paid for:
Interest$32 $35 
Income taxes$17 $16 
Amounts included in the measurement of operating lease liabilities$20 $18 
Supplemental disclosures of non-cash investing and financing activities:
Conversion of Series A preferred stock$156 $ 
Right-of-use assets obtained in exchange for new operating lease liabilities$60 $91 
Deconsolidation of a subsidiary$15 $ 
See notes to condensed consolidated financial statements.
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COVETRUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions) (Unaudited)

1. Business Overview and Significant Accounting Policies

Business

Covetrus, Inc. (“Covetrus,” “Company,” “we,” “our,” “us,” or “ourselves”) is a global animal-health technology and services company dedicated to supporting the companion, equine, and large-animal veterinary markets. On February 7, 2019, Covetrus became an independent company through the consummation of the spin-off by Henry Schein (“Former Parent”) of its animal-health business (“Animal Health Business”) and the completion of its acquisition of Direct Vet Marketing, Inc. (d/b/a Vets First Choice) (“Vets First Choice”). On February 8, 2019, Covetrus began trading on the Nasdaq Stock Market. Accordingly, results provided in accordance with generally accepted accounting principles in the United States of America (“GAAP”) reflect the operations of the Animal Health Business from January 1, 2019 to September 30, 2019 and Vets First Choice for the period from February 8, 2019 to September 30, 2019.

Basis of Presentation and Principles of Consolidation

The accompanying balance sheet as of December 31, 2019, which was derived from audited financial statements, and the unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2020, have been prepared in accordance with applicable rules and regulations of the Securities and Exchange Commission (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 audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 (“Form 10-K”) filed with the SEC on March 3, 2020.

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.

During the three months ended December 31, 2019, we recorded a revision to our deferred tax assets due to a reassessment of our judgment on the realizability of deferred tax assets as of the third quarter ended September 30, 2019. In the aggregate, the revisions to our tax valuation allowance, including a revision for a deferred tax calculation error that predates the Separation, Distribution and Acquisition, were $53 million. We have concluded that this adjustment was not material to any previously issued financial statements or to our full fiscal year 2019 results. See Note 14 - Income Taxes.

Certain other immaterial prior period amounts were reclassified or rounded to conform to the presentation of the current period.

Accounting Pronouncements

Adopted

As of January 1, 2020, we adopted Accounting Standards Codification Topic 326, Credit Losses (“Topic 326”) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including accounts receivable. Topic 326 is effective for interim and annual reporting periods beginning after December 15, 2019 and is required to be adopted using the modified retrospective basis, with a cumulative-effect adjustment to Retained earnings (Accumulated deficit) as of the beginning of the first reporting period in which the guidance of Topic 326 is effective. The adoption of Topic 326 did not have a material impact on the results of our condensed consolidated financial statements.

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COVETRUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions) (Unaudited)
To be Adopted

Accounting Standards Update ("ASU") 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” removes specific technical exceptions to general principles found in Topic 740, items that often produce information that investors have difficulty understanding and simplifies the accounting for income taxes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are evaluating the anticipated impact of this standard on our condensed consolidated financial statements as well as timing of adoption.

ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting for contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”). The standard is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. We are evaluating the impact of the LIBOR transition and this optional relief guidance on our condensed consolidated financial statements.

ASU 2020-06, "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity," simplifies the accounting for certain convertible instruments, amends guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. The adoption of this standard will have no impact on our diluted earnings per share. We are evaluating the impact of the remaining provisions on our condensed consolidated financial statements, which will largely depend on the composition and terms of the financial instruments at the time of adoption.

2. Novel Coronavirus Disease 2019 (“COVID-19”)

The COVID-19 pandemic developed throughout 2020 and in response to the pandemic, measures were and continue to be instituted, including phased temporary closures of non-essential businesses throughout many of the regions in which we conduct operations. The temporary closures, on a local, state, or country level, may be extended or more widespread in response to a rising number of reported cases. However, veterinary care has been deemed an essential business in most of these regions and we continue to deliver products and services to our customers and their animal-owner clients. In addition, most of our customers are generally able to continue their operations by following new social distancing guidelines which, depending on local regulations, can include telehealth and animal curbside check-in and drop-off at clinics. To date, we continue to experience limited disruption to our results of operations from the COVID-19 pandemic. However, the COVID-19 pandemic continues to create volatility and unpredictability to our business, including shifts in timing and channel mix, inventory replenishment, reduced travel and entertainment expenses due to travel restrictions, expected extension of our workforce working from home based on the local regulations in areas where we operate, as well as other changes.

We believe our allowance for credit losses related to our accounts receivable is adequate as of September 30, 2020, due to the essential nature of our customers' businesses, as noted above, as well as the historic behavior of our large customer base. As the COVID-19 pandemic continues, there could be an increase in the aging of our accounts receivable, however, we do not anticipate a significant increase in defaults for such accounts receivable.

During the first quarter ended March 31, 2020, we experienced a sustained decline in our share price and a resulting decrease in our market capitalization due to the overall macroeconomic effects of the COVID-19 pandemic. Due to this overall market decline and the uncertainty surrounding COVID-19, we concluded that a triggering event occurred and conducted an interim impairment review of our goodwill as of March 31, 2020. We tested for goodwill impairment by quantitatively comparing the fair value of our North America reporting unit (the only reporting unit currently bearing goodwill) to its carrying amount. Using the income-based approach, fair value exceeded the carrying amount as of March 31, 2020. We did not experience triggering events during the second quarter ended June 30, 2020 or third quarter ended September 30, 2020.

We have taken the following actions to help ensure that our business has flexibility to mitigate potential effects from continued global economic pressure:
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COVETRUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions) (Unaudited)

During the quarter ended March 31, 2020, we borrowed funds under our revolving line of credit to increase our cash position and provide flexibility. In May 2020, we issued 7.50% Series A Convertible Preferred Stock (“Series A Preferred Stock”), and we used a portion of the $244 million aggregate net proceeds to repay borrowings under our revolving line of credit. See Note 7 - Long-term Debt and Other Borrowings, Net and Note 12 - Redeemable Series A Convertible Preferred Stock
We reduced our non-critical, near-term planned capital expenditures
We negotiated for extended payment terms on certain contracts
We managed our inventory levels in line with expected demand
We instituted cost containment measures including temporary executive, board, and other senior-level employee compensation reductions, employee furloughs in certain European countries, certain shift eliminations, a temporary hiring freeze, discretionary spending deferrals, deferred payroll taxes as available under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and temporarily suspended our 401(k)-employer match

During the third quarter of 2020, we returned to pre-COVID-19 compensation levels and reinstated our 401(k)-employer match. We continue to monitor our business performance and intend to take a cautious yet balanced approach in managing our expenses in light of uncertainty created by the COVID-19 pandemic. Some of the measures we implement from an expense management perspective may continue as we transform our business; for example, we have recently reinstituted restrictions on hiring non -essential roles.

Risk and Uncertainties

The duration and severity of COVID-19-related potential disruptions and the actions we have taken, and may take in the future, in response thereto, involve risks and uncertainties, and it is not possible at this time to estimate the impact that COVID-19 could have on our business. The impact of COVID-19 on various business activities in affected countries could adversely affect our estimates, results of operations, and financial condition.

3. Divestiture and Equity Method Investment

Divestitures

On April 1, 2020, we completed the divestiture of our scil animal-care business (“scil”) to Heska Corporation for $110 million pursuant to an amended purchase agreement. For the nine months ended September 30, 2020, we recorded a pre-tax gain of $72 million, which reflects a $1 million foreign exchange adjustment for the finalization of the purchase price during the three months ended September 30, 2020.

During the three months ended September 30, 2020, we announced a managed exit of the operations of our French distribution business specializing in medicines, pet food, equipment and services for veterinary clinics. We accrued $7 million in severance costs based on French statutory requirements, and $1 million of other costs associated with this decision. We anticipate operations will predominantly be shut down by the end of the year.

Equity Method Investment

On April 30, 2020, we completed the previously announced combination of our subsidiary, Spain Animal Health Solutions S.L.U. (“SAHS”), with Distrivet, S.A. to form a leading animal-health provider on the Iberian Peninsula. We contributed SAHS by means of a contribution in kind of all the shares of SAHS in exchange for the transfer of shares from shareholders of Distrivet, S.A. (“Distrivet Shareholders”). In addition, at closing, we made a payment of $11 million, and we are obligated to make an additional payment of $11 million on the one-year anniversary of the closing of the combination. As a result of these transactions, we now own 50.01% of the new company, called Distrivet, a Covetrus company (“Distrivet”).

Based on Distrivet's governance structure, we do not have power over key financial and operating decisions that are made in the ordinary course of business. Accordingly, our investment in Distrivet is accounted for under the equity method and Distrivet is considered a related party. See Note 16 - Related Party Transactions.

The Investment and Shareholders Agreement of Distrivet, S.A. (“Agreement”) executed on January 13, 2020, contains put and call options on the shares owned by the Distrivet Shareholders, representing up to 49.99%, that are exercisable at fair market
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COVETRUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions) (Unaudited)
value based on floor and ceiling prices tied to Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) multiples as specified in the Agreement. See Note 9 - Fair Value.

During the three months ended June 30, 2020, we deconsolidated SAHS, remeasured our retained investment initially at a fair value of $45 million, which was included in Investments and other in our condensed consolidated balance sheets, and recognized a gain of $1 million, which was included in Other, net in our condensed consolidated statements of operations. The fair value was measured using third-party valuation models and was determined using both the market approach and income approach, which includes discounted expected cash flows. As of September 30, 2020, the carrying amount of our investment in Distrivet was $49 million.

4. 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 September 30, 2020
Supply Chain ServicesSoftware
Solutions
Prescription ManagementEliminationsTotal
North America$512 $20 $104 $(18)$618 
Europe404 2  (3)403 
APAC & Emerging Markets106 2   108 
Eliminations(3)  — (3)
Total Net sales$1,019 $24 $104 $(21)$1,126 
Three Months Ended September 30, 2019
Supply Chain ServicesSoftware
Solutions
Prescription ManagementEliminationsTotal
North America$464 $20 $72 $(13)$543 
Europe385 2  (3)384 
APAC & Emerging Markets92 2   94 
Eliminations(3)  — (3)
Total Net sales$938 $24 $72 $(16)$1,018 
Nine Months Ended September 30, 2020
Supply Chain ServicesSoftware SolutionsPrescription ManagementEliminationsTotal
North America$1,469 $60 $298 $(56)$1,771 
Europe1,169 6  (9)1,166 
APAC & Emerging Markets282 6   288 
Eliminations(8)  — (8)
Total Net sales$2,912 $72 $298 $(65)$3,217 
Nine Months Ended September 30, 2019
Supply Chain ServicesSoftware SolutionsPrescription ManagementEliminationsTotal
North America$1,379 $62 $172 $(21)$1,592 
Europe1,117 7  (10)1,114 
APAC & Emerging Markets264 6   270 
Eliminations(8)  — (8)
Total Net sales$2,752 $75 $172 $(31)$2,968 
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COVETRUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions) (Unaudited)

Contract Balances

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

Accounts Receivable

Accounts receivable are recognized at the amount invoiced and the carrying amount is reduced in part by an allowance for credit losses. Our estimation of current expected credit losses, with respect to receivables and recognition of allowances that, when deducted from the balance of the receivables, represent the net amounts expected to be collected. We do not consider there to be significant concentrations of credit risk with trade receivables due to the short-term nature of our accounts, our large customer base, and strong historical experience collecting receivables. The allowance for credit losses is based on several factors which include reviewing delinquent accounts receivable, historical data, experience, customer types, creditworthiness, and economic trends. From time to time, we adjust our assumptions for anticipated changes in any of these or other factors that may affect collectability, and the allowance for credit losses is reviewed quarterly for any required adjustments. Accounts receivable are written off when it is probable that all contractual payments due will not be collected.

Contract Assets

Contract assets include amounts related to any conditional right to monetary consideration for work completed as of the reporting date and generally represent amounts owed to us by customers, but not yet billed. Contract assets are transferred to Accounts receivable when the right becomes unconditional. Current contract assets are included in Prepaid expenses and other and non-current contract assets are included in Investments and other within the condensed consolidated balance sheets. The contract assets primarily relate to the bundled arrangements for the sale of equipment and consumables and sales of term software licenses. Current and non-current contract asset balances as of September 30, 2020 and December 31, 2019 were not material.

Contract Liabilities

Contract liabilities are comprised of advance payments received and deferred revenue amounts. Contract liabilities are transferred to revenue once our performance obligation has been satisfied. Current contract liabilities are included in Other current liabilities and non-current contract liabilities are included in Other liabilities within the condensed consolidated balance sheets. The contract liabilities primarily relate to advance payments from customers and upfront payments for service arrangements provided over time. The current portion of contract liabilities of $15 million at September 30, 2020 and $37 million at December 31, 2019 were reported in Other current liabilities. Amounts related to non-current contract liabilities were not material.

Performance Obligations

Estimated future revenues expected to be generated from our long-term contracts with unsatisfied performance obligations as of September 30, 2020 were not material.

5. Leases

The lease for our compounding facility and office space in Arizona commenced on January 1, 2020, which increased our operating lease right-of-use assets and liabilities by $19 million. This facility has a lease term of 14 years. We also commenced or extended various other facility and equipment operating leases which, individually, were not material.

As of September 30, 2020, we determined that an operating lease right-of-use asset, a standalone asset group, within our North America segment was impaired. See Note 9 - Fair Value.

6. Other Intangibles, Net

Other intangibles, net includes customer relationships, trademarks, patents, product development, and non-compete arrangements.

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COVETRUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions) (Unaudited)
The following table presents the balances within the condensed consolidated balance sheets as of:
September 30, 2020December 31, 2019
Gross definite-lived intangible assets$997 $1,001 
Accumulated amortization(456)(358)
Total Other intangibles, net$541 $643 

The following table presents our amortization expense:
Three Months Ended September 30,Nine Months Ended September 30,
Location2020201920202019
Cost of sales$1 $