falsedesktopCVET2020-09-30000175283620000204{"tbl_sim": "https://q10k.com/tbl-sim", "search": "https://q10k.com/search"}{"q10k_tbl_0": "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.\tYes\t☒\tNo\t☐\nIndicate 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).\tYes\t☒\tNo\t☐\n", "q10k_tbl_1": "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.\t\t\t\nLarge accelerated Filer\t☐\tAccelerated Filer\t☐\nNon-accelerated Filer\t☒\tSmaller reporting company\t☐\n\t\tEmerging growth company\t☐\n", "q10k_tbl_2": "\tPage\nPART I - FINANCIAL INFORMATION\t\nItem 1. Condensed Consolidated Financial Statements (Unaudited)\t\nBalance Sheets\t3\nStatements of Operations\t4\nStatements of Comprehensive Income (Loss)\t5\nStatements of Shareholders' Equity\t6\nStatements of Cash Flows\t8\nNotes to Condensed Consolidated Financial Statements\t10\nItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations\t27\nItem 3. Quantitative and Qualitative Disclosures About Market Risk\t39\nItem 4. Controls and Procedures\t41\nPART II - OTHER INFORMATION\t\nItem 1. Legal Proceedings\t43\nItem 1A. Risk Factors\t43\nItem 2. Unregistered Sales of Securities and Use of Proceeds\t45\nItem 6. Exhibits\t46\nSignatures\t47\n", "q10k_tbl_3": "\tSeptember 30 2020\tDecember 31 2019\n\t(Unaudited)\t\nASSETS\t\t\nCurrent assets:\t\t\nCash and cash equivalents\t355\t130\nAccounts receivable net of allowance of $6 and $8\t498\t426\nInventories net\t521\t636\nOther receivables\t81\t67\nPrepaid expenses and other\t45\t30\nAssets held for sale\t0\t51\nTotal current assets\t1500\t1340\nNon-current assets:\t\t\nProperty and equipment net of accumulated depreciation of $101 and $84\t108\t93\nOperating lease right-of-use assets net (Note 5)\t118\t84\nGoodwill\t1154\t1154\nOther intangibles net (Note 6)\t541\t643\nInvestments and other (Note 3)\t89\t47\nTotal assets\t3510\t3361\nLIABILITIES MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY\t\t\nCurrent liabilities:\t\t\nAccounts payable\t416\t520\nCurrent maturities of long-term debt and other borrowings (Note 7)\t46\t62\nAccrued payroll and related liabilities\t73\t44\nAccrued taxes\t41\t18\nOther current liabilities\t155\t164\nLiabilities held for sale\t0\t21\nTotal current liabilities\t731\t829\nNon-current liabilities:\t\t\nLong-term debt and other borrowings net (Note 7)\t1082\t1125\nDeferred taxes\t39\t47\nOther liabilities\t139\t94\nTotal liabilities\t1991\t2095\nCommitments and contingencies (Note 10)\t\t\nMezzanine equity:\t\t\nRedeemable non-controlling interests (Note 11)\t15\t10\nRedeemable Series A convertible preferred stock $0.01 par value per share $1000 per share liquidation preference 250000 shares authorized and 90632 outstanding as of September 30 2020 (Note 12)\t88\t0\nShareholders' equity:\t\t\nCommon stock $0.01 par value per share 675000000 shares authorized; 127363432 shares issued and outstanding as of September 30 2020; 111620507 shares issued and outstanding as of December 31 2019\t1\t1\nAccumulated other comprehensive loss (Note 13)\t(91)\t(86)\nAdditional paid-in capital\t2567\t2381\nAccumulated deficit\t(1061)\t(1040)\nTotal shareholders' equity\t1416\t1256\nTotal liabilities mezzanine equity and shareholders' equity\t3510\t3361\n", "q10k_tbl_4": "\tThree Months Ended September 30\t\tNine Months Ended September 30\t\n\t2020\t2019\t2020\t2019\nNet sales (Note 4)\t1126\t1018\t3217\t2968\nCost of sales\t929\t827\t2625\t2407\nGross profit\t197\t191\t592\t561\nOperating expenses:\t\t\t\t\nSelling general and administrative\t224\t210\t642\t594\nGoodwill impairment\t0\t939\t0\t939\nOperating loss\t(27)\t(958)\t(50)\t(972)\nOther income (expense):\t\t\t\t\nInterest income\t0\t1\t1\t4\nInterest expense\t(10)\t(16)\t(38)\t(42)\nOther net (Note 3)\t5\t4\t79\t18\nIncome (loss) before taxes and equity in earnings of affiliates\t(32)\t(969)\t(8)\t(992)\nIncome tax benefit (expense) (Note 14)\t(3)\t7\t(6)\t7\nNet income (loss)\t(35)\t(962)\t(14)\t(985)\nNet (income) loss attributable to redeemable non-controlling interests\t0\t3\t(1)\t3\nNet income (loss) attributable to Covetrus\t(35)\t(959)\t(15)\t(982)\nEarnings (loss) per share attributable to Covetrus: (Note 15)\t\t\t\t\nBasic\t(0.33)\t(8.56)\t(0.18)\t(9.26)\nDiluted\t(0.33)\t(8.56)\t(0.18)\t(9.26)\nWeighted-average common shares outstanding:\t\t\t\t\nBasic\t116\t112\t113\t106\nDiluted\t116\t112\t113\t106\n", "q10k_tbl_5": "\tThree Months Ended September 30\t\tNine Months Ended September 30\t\n\t2020\t2019\t2020\t2019\nNet income (loss)\t(35)\t(962)\t(14)\t(985)\nOther comprehensive income (loss) net of tax:\t\t\t\t\nForeign currency translation gain (loss)\t14\t(22)\t(2)\t(17)\nUnrealized gain (loss) on derivative instruments\t(1)\t(2)\t(8)\t(2)\nTotal other comprehensive income (loss)\t13\t(24)\t(10)\t(19)\nComprehensive income (loss)\t(22)\t(986)\t(24)\t(1004)\nComprehensive (income) loss attributable to redeemable non-controlling interests:\t\t\t\t\nNet (income) loss\t0\t3\t(1)\t3\nForeign currency translation (gain) loss\t0\t0\t(2)\t(1)\nComprehensive (income) loss attributable to redeemable non-controlling interests\t0\t3\t(3)\t2\nComprehensive income (loss) attributable to Covetrus\t(22)\t(983)\t(27)\t(1002)\n", "q10k_tbl_6": "\tThree Months Ended September 30 2020\t\t\t\t\t\n\tCommon Stock\t\tAdditional Paid-in Capital\tAccumulated Deficit\tAccumulated Other Comprehensive Loss\tTotal Shareholders' Equity\n\tShares\tAmount\nBalance at June 30 2020\t112674657\t1\t2404\t(1022)\t(107)\t1276\nNet income (loss) attributable to Covetrus\t0\t0\t0\t(35)\t0\t(35)\nChange in fair value of redeemable securities\t0\t0\t(6)\t0\t0\t(6)\nIssuance of shares in connection with share-based compensation plans\t331297\t0\t2\t0\t0\t2\nShare-based compensation\t0\t0\t11\t0\t0\t11\nSeries A preferred stock dividend\t0\t0\t0\t(4)\t0\t(4)\nConversion of Series A preferred stock\t14357478\t0\t156\t0\t0\t156\nOther comprehensive income (loss)\t0\t0\t0\t0\t16\t16\nBalance at September 30 2020\t127363432\t1\t2567\t(1061)\t(91)\t1416\n\tNine Months Ended September 30 2020\t\t\t\t\t\n\tCommon Stock\t\tAdditional Paid-in Capital\tAccumulated Deficit\tAccumulated Other Comprehensive Loss\tTotal Shareholders' Equity\n\tShares\tAmount\nBalance at December 31 2019\t111620507\t1\t2381\t(1040)\t(86)\t1256\nNet income (loss) attributable to Covetrus\t0\t0\t0\t(15)\t0\t(15)\nChange in fair value of redeemable securities\t0\t0\t(6)\t0\t0\t(6)\nIssuance of shares in connection with share-based compensation plans\t1385447\t0\t6\t0\t0\t6\nShare-based compensation\t0\t0\t30\t0\t0\t30\nSeries A preferred stock dividend\t0\t0\t0\t(6)\t0\t(6)\nConversion of Series A preferred stock\t14357478\t0\t156\t0\t0\t156\nOther comprehensive income (loss)\t0\t0\t0\t0\t(5)\t(5)\nBalance at September 30 2020\t127363432\t1\t2567\t(1061)\t(91)\t1416\n", "q10k_tbl_7": "\tThree Months Ended September 30 2019\t\t\t\t\t\t\n\tCommon Stock\t\tAdditional Paid-in Capital\tAccumulated Deficit\tAccumulated Other Comprehensive Loss\tNet Former Parent Investment\tTotal Shareholders' Equity\n\tShares\tAmount\nBalance at June 30 2019\t111932491\t1\t2357\t(33)\t(77)\t0\t2248\nNet income (loss) attributable to Covetrus\t0\t0\t0\t(959)\t0\t0\t(959)\nIssuance of shares in connection with share-based compensation plans\t121782\t0\t1\t0\t0\t0\t1\nShare-based compensation\t0\t0\t10\t0\t0\t0\t10\nOther comprehensive income (loss)\t0\t0\t0\t0\t(24)\t0\t(24)\nBalance at September 30 2019\t112054273\t1\t2368\t(992)\t(101)\t0\t1276\n\tNine Months Ended September 30 2019\t\t\t\t\t\t\n\tCommon Stock\t\tAdditional Paid-in Capital\tAccumulated Deficit\tAccumulated Other Comprehensive Loss\tNet Former Parent Investment\tTotal Shareholders' Equity\n\tShares\tAmount\nBalance at December 29 2018\t0\t0\t0\t0\t(82)\t1576\t1494\nNet income (loss) attributable to Covetrus (a)\t0\t0\t0\t(992)\t0\t10\t(982)\nDividend to Former Parent\t0\t0\t(21)\t0\t0\t(1153)\t(1174)\nIssuance of shares at Separation (including Share Sale investors)\t71693426\t1\t609\t0\t0\t(609)\t1\nIssuance of shares in connection with the Acquisition\t39742089\t0\t1772\t0\t0\t0\t1772\nShares held in escrow expected to be canceled\t0\t0\t(30)\t0\t0\t0\t(30)\nNet increase in Former Parent investment\t0\t0\t0\t0\t0\t176\t176\nIssuance of shares in connection with share-based compensation plans\t618758\t0\t3\t0\t0\t0\t3\nShare-based compensation\t0\t0\t35\t0\t0\t0\t35\nOther comprehensive income (loss)\t0\t0\t0\t0\t(19)\t0\t(19)\nBalance at September 30 2019\t112054273\t1\t2368\t(992)\t(101)\t0\t1276\n", "q10k_tbl_8": "\tNine Months Ended September 30\t\n\t2020\t2019\nCash flows from operating activities:\t\t\nNet income (loss)\t(14)\t(985)\nAdjustments to reconcile net income (loss) to net cash provided by operating activities:\t\t\nDepreciation and amortization\t124\t113\nAmortization of right-of-use assets\t18\t16\nGoodwill impairment\t0\t939\nOperating lease right-of-use asset impairment\t8\t0\nGain on divestiture of a business\t(72)\t0\nShare-based compensation expense\t30\t35\nBenefit for deferred income taxes\t(7)\t(19)\nAmortization of debt issuance costs\t4\t0\nLoss on managed exit of a business\t8\t0\nOther\t1\t(2)\nChanges in operating assets and liabilities net of acquisitions:\t\t\nAccounts receivable net\t(77)\t(25)\nInventories net\t99\t(23)\nOther assets and liabilities\t(42)\t(36)\nAccounts payable and accrued expenses\t(69)\t21\nNet cash provided by operating activities\t11\t34\nCash flows from investing activities:\t\t\nPurchases of property and equipment\t(40)\t(30)\nPayments related to equity investments and business acquisitions net of cash acquired\t(13)\t(26)\nProceeds from divestiture of a business net\t104\t0\nProceeds from sale of property and equipment\t4\t0\nNet cash provided by (used for) investing activities\t55\t(56)\nCash flows from financing activities:\t\t\nProceeds from revolving credit facility\t190\t0\nRepayment of revolving credit facility\t(190)\t0\nProceeds from issuance of debt\t0\t1220\nPrincipal payments of debt\t(62)\t(43)\nDebt issuance and amendment costs\t(5)\t(24)\nIssuance of common shares in connection with share-based compensation plans\t6\t3\nDividend paid to Former Parent\t0\t(1174)\nNet transfers from Former Parent\t0\t165\nProceeds from issuance of Series A preferred stock\t250\t0\nSeries A preferred stock issuance costs\t(6)\t0\nSeries A preferred stock dividend\t(6)\t0\nAcquisition payment\t(17)\t(9)\nAcquisitions of non-controlling interests in subsidiaries\t0\t(74)\nNet cash provided by financing activities\t160\t64\nEffect of exchange rate changes on cash and cash equivalents\t(1)\t3\nNet change in cash and cash equivalents\t225\t45\nCash and cash equivalents beginning of period\t130\t23\nCash and cash equivalents end of period\t355\t68\n", "q10k_tbl_9": "COVETRUS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited) (Continued)\t\t\n\tNine Months Ended September 30\t\n\t2020\t2019\nSupplemental disclosure of cash paid for:\t\t\nInterest\t32\t35\nIncome taxes\t17\t16\nAmounts included in the measurement of operating lease liabilities\t20\t18\nSupplemental disclosures of non-cash investing and financing activities:\t\t\nConversion of Series A preferred stock\t156\t0\nRight-of-use assets obtained in exchange for new operating lease liabilities\t60\t91\nDeconsolidation of a subsidiary\t15\t0\n", "q10k_tbl_10": "\tThree Months Ended September 30 2020\t\t\t\t\n\tSupply Chain Services\tSoftware Solutions\tPrescription Management\tEliminations\tTotal\nNorth America\t512\t20\t104\t(18)\t618\nEurope\t404\t2\t0\t(3)\t403\nAPAC & Emerging Markets\t106\t2\t0\t0\t108\nEliminations\t(3)\t0\t0\t0\t(3)\nTotal Net sales\t1019\t24\t104\t(21)\t1126\n\tThree Months Ended September 30 2019\t\t\t\t\n\tSupply Chain Services\tSoftware Solutions\tPrescription Management\tEliminations\tTotal\nNorth America\t464\t20\t72\t(13)\t543\nEurope\t385\t2\t0\t(3)\t384\nAPAC & Emerging Markets\t92\t2\t0\t0\t94\nEliminations\t(3)\t0\t0\t0\t(3)\nTotal Net sales\t938\t24\t72\t(16)\t1018\n\tNine Months Ended September 30 2020\t\t\t\t\n\tSupply Chain Services\tSoftware Solutions\tPrescription Management\tEliminations\tTotal\nNorth America\t1469\t60\t298\t(56)\t1771\nEurope\t1169\t6\t0\t(9)\t1166\nAPAC & Emerging Markets\t282\t6\t0\t0\t288\nEliminations\t(8)\t0\t0\t0\t(8)\nTotal Net sales\t2912\t72\t298\t(65)\t3217\n\tNine Months Ended September 30 2019\t\t\t\t\n\tSupply Chain Services\tSoftware Solutions\tPrescription Management\tEliminations\tTotal\nNorth America\t1379\t62\t172\t(21)\t1592\nEurope\t1117\t7\t0\t(10)\t1114\nAPAC & Emerging Markets\t264\t6\t0\t0\t270\nEliminations\t(8)\t0\t0\t0\t(8)\nTotal Net sales\t2752\t75\t172\t(31)\t2968\n", "q10k_tbl_11": "\tSeptember 30 2020\tDecember 31 2019\nGross definite-lived intangible assets\t997\t1001\nAccumulated amortization\t(456)\t(358)\nTotal Other intangibles net\t541\t643\n", "q10k_tbl_12": "\tThree Months Ended September 30\t\tNine Months Ended September 30\t\nLocation\t2020\t2019\t2020\t2019\nCost of sales\t1\t1\t3\t3\nSelling general and administrative\t33\t33\t98\t90\nTotal amortization expense\t34\t34\t101\t93\n", "q10k_tbl_13": "\tCommencement Date\tMaturity Date\tSeptember 30 2020\tDecember 31 2019\nRevolving line of credit\tFebruary 2019\tFebruary 2024\t0\t0\nTerm loan payable; quarterly installments of $15 million began March 31 2020 with remaining principal due at maturity\tFebruary 2019\tFebruary 2024\t1140\t1200\nLoan payable with principal due at maturity\tFebruary 2019\tMarch 2023\t6\t6\nFinance lease obligations\t\t\t1\t1\nTotal debt and other borrowings\t\t\t1147\t1207\nLess: current maturities\t\t\t(46)\t(62)\nTotal Long-term debt and other borrowings\t\t\t1101\t1145\nLess: unamortized debt discount\t\t\t(19)\t(20)\nTotal Long-term debt and other borrowings net\t\t\t1082\t1125\n", "q10k_tbl_14": "\t\tThree Months Ended September 30\t\tNine Months Ended September 30\t\nCash Flow Hedging Instruments\tLocation\t2020\t2019\t2020\t2019\nInterest rate swap contracts\tInterest (income) expense\t3\t0\t3\t0\n", "q10k_tbl_15": "Liabilities\tLevel\tSeptember 30 2020\tDecember 31 2019\nInterest rate swap contracts\t2\t6\t1\nDistrivet put option\t3\t5\t0\nTotal liabilities\t\t11\t1\n", "q10k_tbl_16": "\tNine Months Ended September 30 2020\tYear Ended December 31 2019\nBalance at beginning of period\t10\t92\nDecrease due to redemptions\t0\t(74)\nNet income (loss) attributable to redeemable non-controlling interests\t1\t(3)\nEffect of foreign currency translation (gain) loss attributable to redeemable non-controlling interests\t(2)\t1\nChange to redemption value\t6\t(6)\nBalance at end of period\t15\t10\n", "q10k_tbl_17": "\tGain (loss) on derivative instruments\tForeign currency translation gain (loss)\tTotal\nBalance at December 29 2018\t0\t(82)\t(82)\nOther comprehensive loss before reclassifications\t(1)\t(4)\t(5)\nReclassified from Accumulated other comprehensive loss to earnings\t1\t0\t1\nBalance at December 31 2019\t0\t(86)\t(86)\nOther comprehensive loss before reclassifications\t(8)\t(2)\t(10)\nReclassified from Accumulated other comprehensive loss to earnings\t3\t2\t5\nBalance at September 30 2020\t(5)\t(86)\t(91)\n", "q10k_tbl_18": "\tAs of September 30 2019\t\t\nCondensed Consolidated Balance Sheet\tPreviously Reported\tRevision\tAs Revised\nNon-current deferred income tax assets net (a)\t38\t(19)\t19\nTotal assets\t3328\t(19)\t3309\nDeferred income taxes\t11\t34\t45\nTotal liabilities\t1989\t34\t2023\nAccumulated deficit\t(939)\t(53)\t(992)\nTotal shareholders' equity\t1329\t(53)\t1276\nTotal liabilities redeemable non-controlling interests and shareholders' equity\t3328\t(19)\t3309\n(a) Included in Investments and other.\t\t\t\n\tThree Months Ended September 30 2019\t\t\nCondensed Consolidated Statement of Operations\tPreviously Reported\tRevision\tAs Revised\nIncome tax benefit (expense)\t60\t(53)\t7\nNet income (loss)\t(909)\t(53)\t(962)\nNet income (loss) attributable to Covetrus\t(906)\t(53)\t(959)\nEarnings (loss) per share attributable to Covetrus:\t\t\t\nBasic\t(8.09)\t(0.47)\t(8.56)\nDiluted\t(8.09)\t(0.47)\t(8.56)\n\tNine Months Ended September 30 2019\t\t\nCondensed Consolidated Statement of Operations\tPreviously Reported\tRevision\tAs Revised\nIncome tax benefit (expense)\t60\t(53)\t7\nNet income (loss)\t(932)\t(53)\t(985)\nNet income (loss) attributable to Covetrus\t(929)\t(53)\t(982)\nEarnings (loss) per share attributable to Covetrus:\t\t\t\nBasic\t(8.76)\t(0.50)\t(9.26)\nDiluted\t(8.76)\t(0.50)\t(9.26)\n", "q10k_tbl_19": "\tThree Months Ended September 30\t\tNine Months Ended September 30\t\n(In millions except per share amounts)\t2020\t2019\t2020\t2019\nNumerator:\t\t\t\t\nNet income (loss) attributable to Covetrus\t(35)\t(959)\t(15)\t(982)\nAdjustment for:\t\t\t\t\nDividends declared on Series A preferred stock\t(4)\t0\t(6)\t0\nIncome (loss) available to common shareholders\t(39)\t(959)\t(21)\t(982)\nDenominator:\t\t\t\t\nBasic\t\t\t\t\nWeighted-average common shares outstanding\t116\t112\t113\t106\nDiluted\t\t\t\t\nEffect of dilutive shares\t0\t0\t0\t0\nWeighted-average common shares outstanding\t116\t112\t113\t106\nEarnings (loss) per share attributable to Covetrus:\t\t\t\t\nBasic\t(0.33)\t(8.56)\t(0.18)\t(9.26)\nDiluted\t(0.33)\t(8.56)\t(0.18)\t(9.26)\nPotentially dilutive securities (a)\t26\t6\t27\t4\n(a) Potentially dilutive securities attributable to outstanding convertible Series A Preferred Stock (approximately 73% of the total potentially dilutive securities for the three months ended September 30 2020 and approximately 74% of the total potentially dilutive securities for the nine months ended September 30 2020) 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.\t\t\t\t\n", "q10k_tbl_20": "\tAt and For the Three Months Ended September 30 2020\t\t\t\t\t\n\tNorth America\tEurope\tAPAC & Emerging Markets\tCorporate\tEliminations\tTotal\nNet sales\t618\t403\t108\t0\t(3)\t1126\nAdjusted EBITDA\t45\t19\t8\t(13)\t0\t59\nTotal assets\t3124\t700\t173\t1169\t(1656)\t3510\nReconciliation of Net income (loss) attributable to Covetrus to Adjusted EBITDA:\t\t\t\t\t\t\nNet income (loss) attributable to Covetrus\t\t\t\t\t\t(35)\nPlus: Depreciation and amortization\t\t\t\t\t\t41\nPlus: Interest expense net\t\t\t\t\t\t10\nPlus: Income tax (benefit) expense\t\t\t\t\t\t3\nEarnings before interest taxes depreciation and amortization\t\t\t\t\t\t19\nPlus: Share-based compensation\t\t\t\t\t\t11\nPlus: Strategic consulting\t\t\t\t\t\t3\nPlus: Transaction costs (a)\t\t\t\t\t\t1\nPlus: Separation programs and executive severance\t\t\t\t\t\t2\nPlus: IT infrastructure\t\t\t\t\t\t1\nPlus: Formation of Covetrus (a)\t\t\t\t\t\t4\nPlus: Equity method investment and non-consolidated affiliates (b)\t\t\t\t\t\t1\nPlus: Operating lease right-of-use asset impairment\t\t\t\t\t\t8\nPlus: France managed exit (c)\t\t\t\t\t\t8\nPlus: Other items net\t\t\t\t\t\t1\nAdjusted EBITDA\t\t\t\t\t\t59\n(a) 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.\t\t\t\t\t\t\n(b) Includes the proportionate share of the adjustments to EBITDA of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100%.\t\t\t\t\t\t\n(c) Includes $7 million of severance and $1 million of other costs. See Note 3 - Divestiture and Equity Method Investment for further discussion.\t\t\t\t\t\t\n", "q10k_tbl_21": "\tAt and For the Three Months Ended September 30 2019\t\t\t\t\t\n\tNorth America\tEurope\tAPAC & Emerging Markets\tCorporate\tEliminations\tTotal\nNet sales\t543\t384\t94\t0\t(3)\t1018\nAdjusted EBITDA\t39\t15\t5\t(10)\t0\t49\nTotal assets\t2829\t622\t121\t1108\t(1371)\t3309\nReconciliation of Net income (loss) attributable to Covetrus to Adjusted EBITDA:\t\t\t\t\t\t\nNet income (loss) attributable to Covetrus\t\t\t\t\t\t(959)\nPlus: Depreciation and amortization\t\t\t\t\t\t41\nPlus: Interest expense net\t\t\t\t\t\t16\nPlus: Income tax (benefit) expense\t\t\t\t\t\t(7)\nEarnings before interest taxes depreciation and amortization\t\t\t\t\t\t(909)\nPlus: Share-based compensation\t\t\t\t\t\t10\nPlus: Formation of Covetrus (a)\t\t\t\t\t\t13\nPlus: Separation programs and executive severance\t\t\t\t\t\t1\nPlus: IT infrastructure\t\t\t\t\t\t2\nPlus: Goodwill impairment\t\t\t\t\t\t939\nLess: Minority interest in goodwill impairment\t\t\t\t\t\t(3)\nLess: Other items net\t\t\t\t\t\t(4)\nAdjusted EBITDA\t\t\t\t\t\t49\n(a) 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.\t\t\t\t\t\t\n", "q10k_tbl_22": "\tFor the Nine Months Ended September 30 2020\t\t\t\t\t\n\tNorth America\tEurope\tAPAC & Emerging Markets\tCorporate\tEliminations\tTotal\nNet sales\t1771\t1166\t288\t0\t(8)\t3217\nAdjusted EBITDA\t141\t53\t20\t(44)\t0\t170\nReconciliation of Net income (loss) attributable to Covetrus to Adjusted EBITDA:\t\t\t\t\t\t\nNet income (loss) attributable to Covetrus\t\t\t\t\t\t(15)\nPlus: Depreciation and amortization\t\t\t\t\t\t124\nPlus: Interest expense net\t\t\t\t\t\t37\nPlus: Income tax (benefit) expense\t\t\t\t\t\t6\nEarnings before interest taxes depreciation and amortization\t\t\t\t\t\t152\nPlus: Share-based compensation\t\t\t\t\t\t30\nPlus: Strategic consulting\t\t\t\t\t\t13\nPlus: Transaction costs (a)\t\t\t\t\t\t8\nPlus: Separation programs and executive severance\t\t\t\t\t\t4\nPlus: IT infrastructure\t\t\t\t\t\t3\nPlus: Formation of Covetrus (b)\t\t\t\t\t\t17\nPlus: Capital structure\t\t\t\t\t\t2\nPlus: Equity method investment and non-consolidated affiliates (c)\t\t\t\t\t\t1\nPlus: Operating lease right-of-use asset impairment\t\t\t\t\t\t8\nPlus: France managed exit (d)\t\t\t\t\t\t8\nLess: Other items net (e)\t\t\t\t\t\t(76)\nAdjusted EBITDA\t\t\t\t\t\t170\n(a) Includes legal accounting tax and other professional fees incurred in connection with acquisitions and divestitures.\t\t\t\t\t\t\n(b) Includes professional and consulting fees duplicative costs associated with transition service agreements and other costs incurred in connection with the separation from Former Parent and establishing Covetrus as an independent public company.\t\t\t\t\t\t\n(c) Includes the proportionate share of the adjustments to EBITDA of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100%.\t\t\t\t\t\t\n(d) Includes $7 million of severance and $1 million of other costs. See Note 3 - Divestiture and Equity Method Investment for further discussion.\t\t\t\t\t\t\n(e) Includes a pre-tax gain of $72 million from the sale of scil and a $1 million gain on the deconsolidation of SAHS. See Note 3 - Divestiture and Equity Method Investment.\t\t\t\t\t\t\n", "q10k_tbl_23": "\tFor the Nine Months Ended September 30 2019\t\t\t\t\t\n\tNorth America\tEurope\tAPAC & Emerging Markets\tCorporate\tEliminations\tTotal\nNet sales\t1592\t1114\t270\t0\t(8)\t2968\nAdjusted EBITDA\t117\t50\t13\t(27)\t0\t153\nReconciliation of Net income (loss) attributable to Covetrus to Adjusted EBITDA:\t\t\t\t\t\t\nNet income (loss) attributable to Covetrus\t\t\t\t\t\t(982)\nPlus: Depreciation and amortization\t\t\t\t\t\t113\nPlus: Interest expense net\t\t\t\t\t\t41\nPlus: Income tax (benefit) expense\t\t\t\t\t\t(7)\nEarnings before interest taxes depreciation and amortization\t\t\t\t\t\t(835)\nPlus: Share-based compensation\t\t\t\t\t\t35\nPlus: Formation of Covetrus (a)\t\t\t\t\t\t26\nPlus: Separation programs and executive severance\t\t\t\t\t\t1\nPlus: Carve-out operating expenses\t\t\t\t\t\t5\nPlus: IT infrastructure\t\t\t\t\t\t4\nPlus: Goodwill impairment\t\t\t\t\t\t939\nLess: Minority interest in goodwill impairment\t\t\t\t\t\t(3)\nLess: Other items net\t\t\t\t\t\t(19)\nAdjusted EBITDA\t\t\t\t\t\t153\n(a) 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.\t\t\t\t\t\t\n", "q10k_tbl_24": "\tThree Months Ended\t\t\t\tNine Months Ended\t\t\t\n(In millions)\tSeptember 30 2020\tSeptember 30 2019\t Increase (Decrease)\t% Increase (Decrease)\tSeptember 30 2020\tSeptember 30 2019\t Increase (Decrease)\t% Increase (Decrease)\nNet sales\t1126\t1018\t108\t10.6%\t3217\t2968\t249\t8.4%\nCost of sales\t929\t827\t102\t12.3\t2625\t2407\t218\t9.1\nGross profit\t197\t191\t6\t3.1\t592\t561\t31\t5.5\nOperating expenses:\t\t\t\t\t\t\t\t\nSelling general and administrative\t224\t210\t14\t6.7\t642\t594\t48\t8.1\nGoodwill impairment\t0\t939\t(939)\t(100.0)\t0\t939\t(939)\t(100.0)\nOperating loss\t(27)\t(958)\t(931)\t(97.2)%\t(50)\t(972)\t(922)\t(94.9)%\nInterest expense net\t(10)\t(15)\t(5)\t(33.3)%\t(37)\t(38)\t(1)\t(2.6)%\nOther net (a)\t5\t4\t1\t25.0%\t79\t18\t61\t338.9%\nNet income (loss)\t(35)\t(962)\t(927)\t(96.4)%\t(14)\t(985)\t(971)\t(98.6)%\nNet income (loss) attributable to Covetrus\t(35)\t(959)\t(924)\t(96.4)%\t(15)\t(982)\t(967)\t(98.5)%\n(a) Includes a $72 million gain on the divestiture of scil and a $1 million gain on the deconsolidation of SAHS. See Note 3 - Divestiture and Equity Method Investment.\t\t\t\t\t\t\t\t\n", "q10k_tbl_25": "\tThree Months Ended\t\t\t\tNine Months Ended\t\t\t\n(In millions)\tSeptember 30 2020\tSeptember 30 2019\t Change\t% Change\tSeptember 30 2020\tSeptember 30 2019\t Change\t% Change\nNorth America\t618\t543\t75\t13.8%\t1771\t1592\t179\t11.2%\nEurope\t403\t384\t19\t4.9\t1166\t1114\t52\t4.7\nAPAC & Emerging Markets\t108\t94\t14\t14.9\t288\t270\t18\t6.7\nEliminations\t(3)\t(3)\t0\t0\t(8)\t(8)\t0\t0\nTotal Net sales\t1126\t1018\t108\t10.6%\t3217\t2968\t249\t8.4%\n", "q10k_tbl_26": "\tThree Months Ended\t\t\t\t\t\n(In millions)\tSeptember 30 2020\tGross Margin %\tSeptember 30 2019\tGross Margin %\t Change\tGross Profit % Change\nNorth America\t123\t19.9%\t116\t21.4%\t7\t6.0%\nEurope\t53\t13.2\t57\t14.8\t(4)\t(7.0)\nAPAC & Emerging Markets\t21\t19.4\t18\t19.1\t3\t16.7\nTotal Gross profit\t197\t17.5%\t191\t18.8%\t6\t3.1%\n", "q10k_tbl_27": "\tNine Months Ended\t\t\t\t\t\n(In millions)\tSeptember 30 2020\tGross Margin %\tSeptember 30 2019\tGross Margin %\t Change\tGross Profit % Change\nNorth America\t371\t20.9%\t340\t21.4%\t31\t9.1%\nEurope\t164\t14.1\t169\t15.2\t(5)\t(3.0)\nAPAC & Emerging Markets\t57\t19.8\t52\t19.3\t5\t9.6\nTotal Gross profit\t592\t18.4%\t561\t18.9%\t31\t5.5%\n", "q10k_tbl_28": "\tThree Months Ended\t\t\t\tNine Months Ended\t\t\t\n(In millions)\tSeptember 30 2020\tSeptember 30 2019\t Change\t% Change\tSeptember 30 2020\tSeptember 30 2019\t Change\t% Change\nNorth America\t129\t121\t8\t6.6%\t364\t347\t17\t4.9%\nEurope\t51\t46\t5\t10.9\t142\t135\t7\t5.2\nAPAC & Emerging Markets\t14\t15\t(1)\t(6.7)\t41\t43\t(2)\t(4.7)\nCorporate\t30\t28\t2\t7.1\t95\t69\t26\t37.7\nTotal SG&A\t224\t210\t14\t6.7%\t642\t594\t48\t8.1%\n", "q10k_tbl_29": "\tThree Months Ended\t\t\t\tNine Months Ended\t\t\t\n(In millions)\tSeptember 30 2020\tSeptember 30 2019\t Change\t% Change\tSeptember 30 2020\tSeptember 30 2019\t Change\t% Change\nNorth America\t45\t39\t6\t15.4%\t141\t117\t24\t20.5%\nEurope\t19\t15\t4\t26.7\t53\t50\t3\t6.0\nAPAC & Emerging Markets\t8\t5\t3\t60.0\t20\t13\t7\t53.8\nCorporate\t(13)\t(10)\t(3)\tNA\t(44)\t(27)\t(17)\tNA\nTotal Adjusted EBITDA\t59\t49\t10\t20.4%\t170\t153\t17\t11.1%\n", "q10k_tbl_30": "\tNine Months Ended\t\t\n(In millions)\tSeptember 30 2020\tSeptember 30 2019\t Change\nNet cash provided by operating activities\t11\t34\t(23)\nNet cash provided by (used for) investing activities\t55\t(56)\t111\nNet cash provided by financing activities\t160\t64\t96\nTotal net cash flows\t226\t42\t184\n", "q10k_tbl_31": "Period\tTotal Number of Shares Purchased (a)\tAverage Price Paid Per Share (a)\tTotal Number of Shares Purchased as Part of Publicly Announced Plans or Programs\tApproximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs\nJuly 2020\t7817\t20.55\t0\t0\nAugust 2020\t2497\t22.91\t0\t0\nSeptember 2020\t11510\t21.13\t0\t0\n\t21824\t21.13\t0\t0\n(a) Shares of common stock we purchased were solely for the cancellation of shares of stock withheld for related tax obligations that occurs upon vesting of restricted shares.\t\t\t\t\n", "q10k_tbl_32": "Exhibit Number\tExhibit Description\tForm\tDate\tNo.\n10.1†*\tAmended and Restated Employment Agreement effective as of November 9 2020 by and between the Company and Dustin Finer.\t\t\t\n31.1*\tCertification of the Chief Executive Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).\t\t\t\n31.2*\tCertification of the Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).\t\t\t\n32.1**\tCertification of the Chief Executive Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).\t\t\t\n32.2**\tCertification of the Chief Financial Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).\t\t\t\n101.INS*\tInline 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.\t\t\t\n101.SCH*\tInline XBRL Taxonomy Extension Schema Document.\t\t\t\n101.CAL*\tInline XBRL Taxonomy Extension Calculation Linkbase Document.\t\t\t\n101.DEF*\tInline XBRL Taxonomy Extension Definition Linkbase Document.\t\t\t\n101.LAB*\tInline XBRL Taxonomy Extension Label Linkbase Document.\t\t\t\n101.PRE*\tInline XBRL Taxonomy Extension Presentation Linkbase Document.\t\t\t\n104*\tCover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).\t\t\t\n"}{"bs": "q10k_tbl_3", "is": "q10k_tbl_4", "cf": "q10k_tbl_8"}None
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
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, ME04101
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 Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
CVET
Nasdaq 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 Filer
☐
Accelerated Filer
☐
Non-accelerated Filer
☒
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined 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.
Accounts receivable, net of allowance of $6 and $8
498
426
Inventories, net
521
636
Other receivables
81
67
Prepaid expenses and other
45
30
Assets held for sale
—
51
Total current assets
1,500
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
Goodwill
1,154
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 liabilities
73
44
Accrued taxes
41
18
Other current liabilities
155
164
Liabilities held for sale
—
21
Total current liabilities
731
829
Non-current liabilities:
Long-term debt and other borrowings, net (Note 7)
1,082
1,125
Deferred taxes
39
47
Other liabilities
139
94
Total liabilities
1,991
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 capital
2,567
2,381
Accumulated deficit
(1,061)
(1,040)
Total shareholders’ equity
1,416
1,256
Total liabilities, mezzanine equity, and shareholders’ equity
$
3,510
$
3,361
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions, except share amounts) (Unaudited) (Continued)
Three Months Ended September 30, 2019
Common Stock
Additional Paid-in Capital
Accumulated Deficit
Accumulated Other Comprehensive Loss
Net Former Parent Investment
Total Shareholders' Equity
Shares
Amount
Balance at June 30, 2019
111,932,491
$
1
$
2,357
$
(33)
$
(77)
$
—
$
2,248
Net income (loss) attributable to Covetrus
—
—
—
(959)
—
—
(959)
Issuance of shares in connection with share-based compensation plans
121,782
—
1
—
—
—
1
Share-based compensation
—
—
10
—
—
—
10
Other comprehensive income (loss)
—
—
—
—
(24)
—
(24)
Balance at September 30, 2019
112,054,273
$
1
$
2,368
$
(992)
$
(101)
$
—
$
1,276
Nine Months Ended September 30, 2019
Common Stock
Additional Paid-in Capital
Accumulated Deficit
Accumulated Other Comprehensive Loss
Net Former Parent Investment
Total Shareholders' Equity
Shares
Amount
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 Acquisition
39,742,089
—
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 plans
618,758
—
3
—
—
—
3
Share-based compensation
—
—
35
—
—
—
35
Other comprehensive income (loss)
—
—
—
—
(19)
—
(19)
Balance at September 30, 2019
112,054,273
$
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.
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.
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:
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
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.
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. SeeNote 9 - Fair Value.
6. Other Intangibles, Net
Other intangibles, net includes customer relationships, trademarks, patents, product development, and non-compete arrangements.