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cvet-20220630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2022


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

For the transition period from ____________ to _____________

Commission File Number: 001-38794

COVETRUS, INC.

(Exact Name of Registrant as Specified in its Charter)


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

7 Custom House Street

Portland, ME 04101

Tel: (888) 280-2221

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

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

☒

☐

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

Yes

☒

☐

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

Large accelerated Filer

☒

Accelerated Filer

☐

Non-accelerated Filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

☐

☒

The registrant had 139,970,837 shares of common stock outstanding as of July 29, 2022.

Table of Contents

TABLE OF CONTENTS


			Page
Glossary of Defined Terms and Abbreviations for our Form 10-Q			3
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Balance Sheets			4
Statements of Operations			5
Statements of Comprehensive Income (Loss)			6
Statements of Shareholders' Equity			7
Statements of Cash Flows			8
Notes to Condensed Consolidated Financial Statements
Note 1: Business Overview and Significant Accounting Policies			9
Note 2: Segment Data			10
Note 3: Revenue from Contracts with Customers			12
Note 4: Earnings (Loss) Per Share			13
Note 5: Commitments and Contingencies			13

Note 6: Derivatives and Fair Value Disclosures			14


Note 7: Business Acquisitions			15
Note 8: Accumulated Other Comprehensive Income (Loss)			16



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			34
Item 4. Controls and Procedures			35

PART II - OTHER INFORMATION
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Securities and Use of Proceeds			36

Item 6. Exhibits			36
Signatures			37


Covetrus, Inc. 2022 Q2 Form 10-Q			2

Table of Contents

Glossary of Defined Terms and Abbreviations used in our Form 10-Q





Adjusted EBITDA*			Adjusted EBITDA is the segment measure of profit or loss reported to the CODM. Adjusted EBITDA excludes share-based compensation, strategic consulting, transaction costs, formation of Covetrus expenses, separation programs and executive severance, certain IT infrastructure expenses necessary to establish ourselves as a newly public company, goodwill impairment charges, capital structure-related fees, other impairments, the proportionate share of the adjustments of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100%, and other income and expense items, net. Non-GAAP Adjusted EBITDA on a total segment basis is reconciled in Note 2 - Segment Data as required by ASC 280


Animal Health Business*			Former Parent's spun-off animal-health business
Animal Owners*			Clients of our Customers
APAC			Asia Pacific
AppointMaster*			AppointMaster, LLC

ASC			Accounting Standards Codification
ASU			Accounting Standards Update

B/(W)			Better/(Worse)

CEO			Chief Executive Officer



CFO			Chief Financial Officer

CODM			Chief Operating Decision Maker
Corgi Bidco, Inc.			Subsidiary of investment funds managed by Clayton Dubilier & Rice, LLC and TPG Global, LLC
Corgi Merger Sub, Inc.			Subsidiary of investment funds managed by Clayton Dubilier & Rice, LLC and TPG Global, LLC
COVID-19			Novel Coronavirus Disease 2019

Credit Facilities*			On February 7, 2019, we entered into a $1.5 billion syndicated credit agreement, comprised of $1.2 billion term loan facility and $300 million revolving line of credit, with a group of lenders for a five-year term
Customers*			Veterinarians and animal-health practitioners



Defendants*			The Company, our Former Parent, our former Chief Executive Officer and President, and our former Chief Financial Officer, collectively


EBITDA			Earnings Before Interest, Taxes, Depreciation, and Amortization





EPS			Earnings (loss) per common share



Euro			Currency of the European Union
Exchange Act			Securities Exchange Act of 1934, as amended





Form 10-K			Audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021
Form 10-Q or Report			Quarterly Report on Form 10-Q
Former Parent*			Henry Schein, Inc.

GAAP			Generally Accepted Accounting Principles in the United States of America




Great Pet Care			We acquired 100% of Metamorphosis Partners, LLC ("Meta") on March 8, 2022. Included in Meta's portfolio of assets is Great Pet Care, a leading resource destination and content engagement platform that is used to strengthen the relationship between pet parents and their pet’s health providers



LIBOR			London Interbank Offered Rate
Merger Agreement			Agreement and Plan of Merger by and among the Company, Corgi Bidco, Inc., and Corgi Merger Sub, Inc. providing for the acquisition of the Company by Corgi Bidco, Inc.
Merger			Transaction whereby Corgi Merger Sub, Inc. will merge with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Corgi Bidco, Inc.
Next2Vet AB*			A veterinary distributor specializing in consumables, instruments, and medical equipment
NM			Not Meaningful





PSU			Performance Stock Unit
RSA			Restricted Stock Award
RSU			Restricted Stock Unit


SEC			Securities and Exchange Commission


SG&A			Selling, general and administrative expenses





TSA			Transition Service Agreements
U.K.			United Kingdom
U.S.			United States
USD			U.S. Dollar

VCP*			Veterinary Care Plans
Vets First Choice*			Direct Vet Marketing, Inc. (d/b/a Vets First Choice)

Covetrus, Company, we, us, our, or ourselves			Covetrus, Inc. and its consolidated subsidiaries, collectively
XBRL			eXtensible Business Reporting Language
*Defined term or abbreviation is specific to Covetrus


Covetrus, Inc. 2022 Q2 Form 10-Q			3

Table of Contents

PART I

Item 1. Condensed Consolidated Financial Statements

COVETRUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share amounts)


	June 30, 2022		December 31, 2021
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	87	$	183
Accounts receivable, net of allowance of $4 and $4	550		480
Inventories, net	587		583
Other receivables	106		75
Prepaid expenses and other	48		30
Total current assets	1,378		1,351
Non-current assets:
Property and equipment, net of accumulated depreciation of $148 and $135	156		144
Operating lease right-of-use assets, net	131		137
Goodwill	1,268		1,247
Other intangibles, net of accumulated amortization of $503 and $451	380		439
Investments	45		49
Other non-current assets	40		43
Total assets	$	3,398	$	3,410
LIABILITIES, MEZZANINE EQUITY, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	446	$	442
Current maturities of long-term debt and other borrowings	66		32
Accrued payroll and related liabilities	58		63
Accrued taxes	18		24
Accrued expenses and other current liabilities	145		137
Total current liabilities	733		698
Non-current liabilities:
Long-term debt and other borrowings, net	983		1,014
Deferred income taxes	11		13
Other liabilities	144		151
Total liabilities	1,871		1,876
Commitments and contingencies (Note 5)
Mezzanine equity:
Redeemable non-controlling interests	22		23
Shareholders' equity:
Common stock	1		1
Accumulated other comprehensive loss (Note 8)	(110)		(79)
Additional paid-in capital	2,701		2,670
Accumulated deficit	(1,087)		(1,081)
Total shareholders’ equity	1,505		1,511
Total liabilities, mezzanine equity, and shareholders’ equity	$	3,398	$	3,410
Common shares authorized, par value of $0.01	675,000,000		675,000,000
Common shares issued and outstanding	139,839,264		138,011,969

See notes to unaudited condensed consolidated financial statements.


Covetrus, Inc. 2022 Q2 Form 10-Q			4

Table of Contents

COVETRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net sales (Note 3)	$	1,217	$	1,189	$	2,365	$	2,291
Cost of sales	988		969		1,911		1,861
Gross profit	229		220		454		430
Operating expenses:
Selling, general and administrative	225		229		444		442


Operating income (loss)	4		(9)		10		(12)
Other income (expense):
Interest expense, net	(7)		(9)		(14)		(18)


Other, net	—		—		2		—
Income (loss) before taxes	(3)		(18)		(2)		(30)
Income tax benefit (expense)	(1)		(13)		(4)		(17)

Net income (loss)	(4)		(31)		(6)		(47)
Net (income) loss attributable to non-controlling interests	—		—		—		—
Net income (loss) attributable to Covetrus	$	(4)	$	(31)	$	(6)	$	(47)

Earnings (loss) per share: (Note 4)
Basic	$	(0.03)	$	(0.23)	$	(0.04)	$	(0.34)
Diluted	$	(0.03)	$	(0.23)	$	(0.04)	$	(0.34)
Weighted-average common shares outstanding:
Basic	140		137		139		137
Diluted	140		137		139		137

See notes to unaudited condensed consolidated financial statements.


Covetrus, Inc. 2022 Q2 Form 10-Q			5

Table of Contents

COVETRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions) (Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net income (loss)	$	(4)	$	(31)	$	(6)	$	(47)
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)	(29)		7		(31)		(4)

Gain (loss) on derivative instruments	—		2		—		4

Total other comprehensive income (loss)	(29)		9		(31)		—
Comprehensive income (loss)	(33)		(22)		(37)		(47)
Comprehensive (income) loss attributable to non-controlling interests:
Net (income) loss	—		—		—		—
Foreign currency translation (gain) loss	—		1		—		—
Comprehensive (income) loss attributable to non-controlling interests	—		1		—		—
Comprehensive income (loss) attributable to Covetrus	$	(33)	$	(21)	$	(37)	$	(47)

See notes to unaudited condensed consolidated financial statements.


Covetrus, Inc. 2022 Q2 Form 10-Q			6

Table of Contents

COVETRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In millions, except share amounts) (Unaudited)



	Three Months Ended June 30, 2022
	Common Stock			Accumulated Other Comprehensive Income (Loss)		Additional Paid-in Capital		Accumulated Deficit		Total Shareholders' Equity
	Shares	Amount
Balance at March 31, 2022	139,143,360	$	1	$	(81)	$	2,691	$	(1,083)	$	1,528
Net income (loss) attributable to Covetrus	—	—		—		—		(4)		(4)




Issuance of shares in connection with share-based compensation plans, net of shares withheld for taxes	695,904	—		—		—		—		—

Share-based compensation	—	—		—		10		—		10



Other comprehensive income (loss)	—	—		(29)		—		—		(29)
Balance at June 30, 2022	139,839,264	$	1	$	(110)	$	2,701	$	(1,087)	$	1,505

	Six Months Ended June 30, 2022
	Common Stock			Accumulated Other Comprehensive Income (Loss)		Additional Paid-in Capital		Accumulated Deficit		Total Shareholders' Equity
	Shares	Amount
Balance at December 31, 2021	138,011,969	$	1	$	(79)	$	2,670	$	(1,081)	$	1,511
Net income (loss) attributable to Covetrus	—	—		—		—		(6)		(6)


Issuance of shares in connection with acquisitions	573,365	—		—		10		—		10

Issuance of shares in connection with share-based compensation plans, net of shares withheld for taxes	1,253,930	—		—		(2)		—		(2)
Share-based compensation	—	—		—		23		—		23




Other comprehensive income (loss)	—	—		(31)		—		—		(31)
Balance at June 30, 2022	139,839,264	$	1	$	(110)	$	2,701	$	(1,087)	$	1,505



	Three Months Ended June 30, 2021
	Common Stock			Accumulated Other Comprehensive Income (Loss)		Additional Paid-in Capital		Accumulated Deficit		Total Shareholders' Equity
	Shares	Amount
Balance at March 31, 2021	136,342,036	$	1	$	(75)	$	2,637	$	(1,043)	$	1,520
Net income (loss) attributable to Covetrus	—	—		—		—		(31)		(31)



Redeemable non-controlling interest redemption value adjustment	—	—		—		(2)		—		(2)

Issuance of shares in connection with share-based compensation plans, net of shares withheld for taxes	1,017,668	—		—		(8)		—		(8)
Share-based compensation	—	—		—		14		—		14



Other comprehensive income (loss)	—	—		9		—		—		9

Balance at June 30, 2021	137,359,704	$	1	$	(66)	$	2,641	$	(1,074)	$	1,502

	Six Months Ended June 30, 2021
	Common Stock			Accumulated Other Comprehensive Income (Loss)		Additional Paid-in Capital		Accumulated Deficit		Total Shareholders' Equity
	Shares	Amount
Balance at December 31, 2020	136,017,964	$	1	$	(66)	$	2,629	$	(1,027)	$	1,537
Net income (loss) attributable to Covetrus	—	—		—		—		(47)		(47)
Redeemable non-controlling interest redemption value adjustment	—	—		—		(2)		—		(2)
Issuance of shares in connection with share-based compensation plans, net of shares withheld for taxes	1,341,740	—		—		(11)		—		(11)
Share-based compensation	—	—		—		25		—		25
Other comprehensive income (loss)	—	—		—		—		—		—
Balance at June 30, 2021	137,359,704	$	1	$	(66)	$	2,641	$	(1,074)	$	1,502

See notes to unaudited condensed consolidated financial statements.


Covetrus, Inc. 2022 Q2 Form 10-Q			7

Table of Contents

COVETRUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions) (Unaudited)


	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net income (loss)	$	(6)	$	(47)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization	81		86
Amortization of right-of-use assets	15		14




Share-based compensation expense	23		25

Benefit for deferred income taxes	1		(11)



Amortization of debt issuance costs	3		3

Other	(2)		3
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net	(85)		(12)
Inventories, net	(19)		(30)
Other assets and liabilities	(63)		(33)
Accounts payable and accrued expenses	13		5
Net cash provided by (used for) operating activities	(39)		3
Cash flows from investing activities:
Investments in property, equipment, and software	(26)		(28)
Payments related to equity investments and business acquisitions, net of cash acquired	(18)		—


Net cash provided by (used for) investing activities	(44)		(28)
Cash flows from financing activities:
Proceeds from revolving line of credit	227		—
Repayment of revolving line of credit	(227)		—





Proceeds from share-based awards	5		3

Tax payments related to share-based awards	(7)		(13)





Distributions to non-controlling shareholders	—		(1)
Deferred payments related to equity investments and business acquisitions	(1)		(13)
Payments related to the buy-out of non-controlling interests in subsidiaries of Covetrus	(3)		(10)
Net cash provided by (used for) financing activities	(6)		(34)
Effect of exchange rate changes on cash and cash equivalents	(7)		(1)
Net change in cash and cash equivalents	(96)		(60)
Cash and cash equivalents, beginning of period	183		290
Cash and cash equivalents, end of period	$	87	$	230

Supplemental disclosures of non-cash investing and financing activities:

Right-of-use assets obtained in exchange for new operating lease liabilities	$	9	$	5


Common stock issued in business acquisition	$	10	$	—

See notes to unaudited condensed consolidated financial statements.


Covetrus, Inc. 2022 Q2 Form 10-Q			8

Table of Contents

COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)

1. BUSINESS OVERVIEW AND SIGNIFICANT ACCOUNTING POLICIES

Business

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

Proposed Merger

On May 24, 2022, we entered into the Merger Agreement providing for the acquisition of the Company by Corgi Bidco, Inc. The Merger Agreement provides that, among other things, upon the terms and subject to the conditions set forth in the Merger Agreement, Corgi Merger Sub, Inc. will merge with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Corgi Bidco, Inc.

Pursuant to the Merger Agreement, each share of common stock, par value $0.01 per share, of the Company (collectively, “Shares”) issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than Shares owned by (i) Corgi Bidco, Inc., Corgi Merger Sub, Inc. or any of their respective subsidiaries (including the Shares to be transferred by CD&R VFC Holdings, L.P., a Cayman Islands exempted limited partnership and an affiliate of CD&R, directly or indirectly, to Corgi Bidco Inc. immediately prior to the Effective Time), (ii) the Company as treasury stock, and (iii) the shareholders of the Company who have perfected and not withdrawn a demand for appraisal rights in accordance with Section 262 of the Delaware General Corporation Law) will be converted into the right to receive $21.00 per Share in cash, without interest thereon.

The parties’ obligations to consummate the Merger are subject to the satisfaction or waiver of customary conditions set forth in the Merger Agreement, including, among others: (i) the adoption of the Merger Agreement by the holders of a majority of the outstanding Shares, (ii) the receipt of certain consents and approvals from governmental entities, (iii) the absence of any law or governmental order prohibiting the Merger, (iv) no Company Material Adverse Effect (as defined in the Merger Agreement) having occurred since the signing of the Merger Agreement and (v) certain other customary conditions relating to the parties’ representations and warranties in the Merger Agreement and the performance of their respective obligations. The Merger is currently expected to close in the second half of 2022, subject to the satisfaction or waiver of the closing conditions.

The Company has incurred and will incur certain significant costs relating to the Merger, such as legal, accounting, financial advisory, and other professional services fees. In the event that the Merger Agreement is terminated under certain circumstances, the Company may also be required to pay a cash termination fee to Corgi Bidco, Inc. of $88 million. If the Merger Agreement is terminated under certain other circumstances, including because of a failure of Corgi Bidco, Inc. to consummate the Merger when required to or its uncured breach of the Merger Agreement, Corgi Bidco, Inc. may be required to pay or cause to be paid to the Company a cash termination fee of $198 million.

Additional information about the Merger is set forth in our Current Report on Form 8-K filed with the SEC on May 25, 2022, and our preliminary proxy statement filed with the SEC on June 30, 2022.

Basis of Presentation and Principles of Consolidation

The unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2022, have been prepared in accordance with applicable rules and regulations of the SEC for interim financial reporting. Pursuant to those rules and regulations, we omitted certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP.

In our opinion, the accompanying unaudited 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 unaudited condensed consolidated financial statements and notes should be read in conjunction with the Form 10-K filed with the SEC on February 28, 2022.


Covetrus, Inc. 2022 Q2 Form 10-Q			9

Table of Contents

COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)

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. Intercompany transactions and balances are eliminated in consolidation. Investments in unconsolidated affiliates, which are 20% to 50% owned, or investments of less than 20% in which we could influence the operating or financial decisions, are accounted for under the equity method.

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

Accounting Pronouncements

•ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting for contracts, hedging relationships, and other transactions that reference LIBOR. The standard is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. Our debt agreements that utilize LIBOR have not yet discontinued the use of LIBOR and, therefore, this ASU is not yet effective for us. The banking syndicate associated with our Credit Facilities ceased using the 1-week and 2-month USD LIBOR at the end of 2021, and the other USD Tenors will cease June 30, 2023. We will continue to monitor, and, to the extent our Credit Facilities require amendment to reflect a replacement rate prior to December 31, 2022, we will evaluate the benefits of adopting this ASU.

2. SEGMENT DATA

We are organized based upon geographic region and focus on delivering our platform of products and services to our customers on a geographical basis which reflect how the CODM reviews financial information and makes operating decisions. Our three reportable segments are (i) North America, (ii) Europe, and (iii) APAC & Emerging Markets. Our major product groups that we disaggregate within our reportable segments are (i) supply chain services, (ii) prescription management, and (iii) software services. See Note 3 - Revenue from Contracts with Customers for our third-party, net revenue disaggregated by major product category and reportable segment. We do not allocate expenses managed at the corporate level to our segments, such as corporate wages and related benefits, corporate occupancy costs, professional services utilized at the corporate level, and non-recurring expenses. All intersegment balances and transactions have been eliminated in consolidation.

The following table reflects net sales based on geographic location:


(In millions)	Three Months Ended June 30,				Six Months Ended June 30,
Net Sales	2022		2021		2022		2021
North America	$	783	$	713	$	1,479	$	1,348
Europe	327		366		671		727
APAC & Emerging Markets	109		114		221		226
Eliminations	(2)		(4)		(6)		(10)
Total net sales	$	1,217	$	1,189	$	2,365	$	2,291

The following tables reflect adjusted EBITDA by geographic location and a reconciliation of Net Income (Loss) Attributable to Covetrus to Non-GAAP Adjusted EBITDA:


(In millions)	Three Months Ended June 30,				Six Months Ended June 30,
Adjusted EBITDA	2022		2021		2022		2021
North America	$	63	$	59	$	120	$	111
Europe	17		20		35		41
APAC & Emerging Markets	8		9		18		19
Corporate	(22)		(22)		(44)		(48)

Total Adjusted EBITDA	$	66	$	66	$	129	$	123


Covetrus, Inc. 2022 Q2 Form 10-Q			10

Table of Contents

COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2022		2021		2022		2021
Reconciliation of Net Income (Loss) Attributable to Covetrus to Non-GAAP Adjusted EBITDA
Net income (loss) attributable to Covetrus	$	(4)	$	(31)	$	(6)	$	(47)
Plus: Depreciation and amortization	41		43		81		86
Plus: Interest expense, net	7		9		14		18
Plus: Income tax (benefit) expense	1		13		4		17
Earnings (loss) before interest, taxes, depreciation, and amortization	45		34		93		74
Plus: Share-based compensation	10		14		23		25
Plus: Strategic consulting	—		12		—		14
Plus: Transaction costs	7		1		8		2
Plus: Formation of Covetrus	—		—		—		2
Plus: Separation programs and executive severance	2		2		2		2
Plus: Equity method investments and non-consolidated affiliates	1		—		2		1
Plus: Other impairments	—		—		—		1
Plus: Other items, net	1		3		1		2
Non-GAAP Adjusted EBITDA	$	66	$	66	$	129	$	123

Below is a listing of adjustments to EBITDA included in the reconciliation above:

Share-based compensation - Share-based compensation is a non-cash expense.

Strategic consulting - Related to third-party consulting services. Included within this line item are variable performance fees earned for services rendered under a third-party consulting agreement.

Transaction costs - Includes legal, accounting, tax, and other professional fees incurred in connection with contemplated and completed acquisitions and divestitures. The completion of acquisitions and divestitures is often dependent on factors that may be outside of our control and unrelated to us or to the continuing operations of the acquired or divested business. In addition, the amount of acquisition-related costs is generally driven by the complexity inherent in the transaction and may not necessarily indicate the future costs of the acquired business. Excluding transaction costs allows for a better comparison of our historical performance. During the three and six months ended June 30, 2022, we incurred $6 million, and $7 million, respectively, related to the Merger.

Formation of Covetrus - Includes professional and consulting fees, duplicative costs associated with TSAs, and other costs incurred in connection with the separation from Former Parent and establishing Covetrus as an independent public company.

Equity method investment and non-consolidated affiliates - Includes the proportionate share of the adjustments to EBITDA of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100%.

Other impairments - Includes customer relationships intangible impairments as the asset groups were not recoverable due to a significant reduction in cash flows.


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COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Revenue

The tables below present our net revenue disaggregated by major product category and reportable segment. Effective for the first quarter of 2022, we are presenting our disaggregation of net revenue on a third-party basis, excluding intersegment sales. See Note 2 - Segment Data, for net revenue generated by our reportable segments, including inter-segment revenues, with eliminations shown as a separate row prior to consolidation.



	Three Months Ended June 30, 2022
(In millions)	Supply Chain Services		Prescription Management		Software Services		Total
North America	$	599	$	163	$	21	$	783
Europe	323		—		2		325
APAC & Emerging Markets	107		—		2		109
Total third-party net sales	$	1,029	$	163	$	25	$	1,217

	Three Months Ended June 30, 2021
	Supply Chain Services		Prescription Management		Software Services		Total
North America	$	562	$	131	$	20	$	713
Europe	360		—		2		362
APAC & Emerging Markets	112		—		2		114
Total third-party net sales	$	1,034	$	131	$	24	$	1,189

	Six Months Ended June 30, 2022
	Supply Chain Services		Prescription Management		Software Services		Total
North America	$	1,136	$	303	$	40	$	1,479
Europe	660		—		5		665
APAC & Emerging Markets	216		—		5		221
Total third-party net sales	$	2,012	$	303	$	50	$	2,365

	Six Months Ended June 30, 2021
	Supply Chain Services		Prescription Management		Software Services		Total
North America	$	1,065	$	243	$	40	$	1,348
Europe	712		—		5		717
APAC & Emerging Markets	221		—		5		226
Total third-party net sales	$	1,998	$	243	$	50	$	2,291

Contract Assets and Contract Liabilities

Contract asset balances as of June 30, 2022 and December 31, 2021 were not material. There have been no material changes in our current portion of contract liabilities since the end of fiscal year 2021, and the amounts related to non-current contract liabilities were not material as of June 30, 2022 and December 31, 2021. See Note 1 - Business Overview and Significant Accounting Policies and Note 3 - Revenue from Contracts with Customers of our Form 10-K.

Performance Obligations

Estimated future revenues expected to be generated from our long-term contracts with unsatisfied performance obligations as of June 30, 2022 were not material.


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COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)

4. EARNINGS (LOSS) PER SHARE

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


	Three Months Ended June 30,				Six Months Ended June 30,
(In millions, except per share amounts)	2022		2021		2022		2021
Numerator:





Net income (loss) available to common shareholders	$	(4)	$	(31)	$	(6)	$	(47)

Denominator:
Basic
Weighted-average common shares outstanding	140		137		139		137
Diluted
Effect of dilutive shares	—		—		—		—
Weighted-average common shares outstanding	140		137		139		137

Earnings (loss) per share:
Basic	$	(0.03)	$	(0.23)	$	(0.04)	$	(0.34)
Diluted	$	(0.03)	$	(0.23)	$	(0.04)	$	(0.34)

Potentially dilutive securities (a)	6		5		6		5

(a) Potentially dilutive securities include stock options, RSUs, RSAs, and PSUs which are excluded from the computation of diluted earnings per share because the securities would have had an antidilutive effect

5. COMMITMENTS AND CONTINGENCIES

We are involved in various legal proceedings that arise in the ordinary course of business. Substantial judgment is required in predicting the outcome of these legal proceedings, many of which may take years to adjudicate. We accrue estimated costs for a contingency when we believe that a loss is probable and can be reasonably estimated. No material loss contingencies were accrued as of June 30, 2022.

Securities Litigation Matter

On September 30, 2019, the City of Hollywood (Florida) Police Officers’ Retirement System filed a putative securities class action lawsuit in the United States District Court for the Eastern District of New York, purportedly on behalf of purchasers of Covetrus common stock from February 8, 2019 through August 12, 2019, against the Defendants. The complaint alleges that the Defendants violated Sections 10(b) and 20(a) of the Exchange Act, by making allegedly false and misleading statements and omissions, primarily regarding the Company’s financial prospects and the integration costs relating to the business combination involving the Animal Health Business and Vets First Choice. The suit seeks unspecified damages, fees, interest, and costs. On August 3, 2021, the Court issued an order granting in part and denying in part Defendants’ motions to dismiss. In particular, the Court dismissed, with prejudice, all claims asserted against our Former Chief Financial Officer, a director, and our Former Parent, as well as certain claims based on alleged misrepresentations attributed to the Company and our Former Chief Executive Officer. The Company has reached a settlement with plaintiffs in the City of Hollywood (Florida) Police Officers' Retirement System putative securities class action lawsuit, filed in the United States District Court for the Eastern District of New York on September 30, 2019. The settlement provides for a fully insured payment to the plaintiffs, in full satisfaction and release of all claims arising out of the lawsuit. The Court preliminarily approved the settlement on July 15th, 2022 and has scheduled a final settlement hearing for October 25, 2022. The Company is responsible for certain defense costs and expenses which have been accrued as of June 30, 2022.


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COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)

Merger Litigation Matters

Six actions (collectively, the “Actions”) have been filed in the United States District Court for the Southern District of New York (“S.D.N.Y.”) in connection with the transactions contemplated by the Merger Agreement: Shiva Stein v. Covetrus, Inc., et al., Case No. 1:22-cv-05737 (S.D.N.Y., filed July 6, 2022); Ryan O’Dell v. Covetrus, Inc., et al., Case No. 1:22-cv-05803 (S.D.N.Y., filed July 7, 2022); Joel Stanley v. Covetrus, Inc., et al., Case No. 1:22-cv-05818 (S.D.N.Y., filed July 8, 2022); Matthew Whitfield v. Covetrus, Inc., et al., Case No. 1:22-cv-05908 (S.D.N.Y., filed July 11, 2022); Jeffrey D. Justice, II. v. Covetrus, Inc., et al., Case No. 1:22-cv-05909 (S.D.N.Y., filed July 11, 2022), and Chris Rayfield v. Covetrus, Inc., et al., Case No. 1:22-cv-06298 (S.D.N.Y, filed July 25, 2022). Each of the Actions names Covetrus and its directors as defendants. The Actions assert claims under Section 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 14a-9 promulgated under the Exchange Act, and allege that the Proxy Statement filed by Covetrus with the Securities Exchange Commission on June 30, 2022 in connection with the Merger contains alleged material misstatements or omissions. The Actions seek, among other things, to enjoin the defendants from proceeding with, consummating or closing the Merger, rescissory damages should the Merger not be enjoined, and an award of attorneys’ and experts’ fees. The defendants believe that the allegations in the Actions are without merit. If additional similar complaints are filed, absent new or different allegations that are material, Covetrus will not necessarily announce such filings.

Purchase Obligations

We are party to an exclusive supply agreement with an unconditional commitment to purchase certain products within the U.S. market until 2025. As of June 30, 2022, there have been no material changes in our purchase obligations since fiscal year end 2021. See Note 8 - Commitments and Contingencies of our Form 10-K.

6. DERIVATIVES AND FAIR VALUE DISCLOSURES

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

Assets and Liabilities that are Non-designated Hedging Instruments

Foreign currency exchange rate forward contracts

From time to time, we enter into non-designated foreign currency exchange rate forward contracts to manage foreign currency balance sheet exposure risk. These forward agreements are related to foreign currency balance sheet exposure resulting from intercompany loans and provide economic hedges but were not designated as hedges for accounting purposes. The terms of these forward contracts are approximately one month and are expected to be settled in cash upon maturity. The following table presents the notional amounts in USD and fair value of our derivative instruments included in other receivables on our condensed consolidated balance sheets:


	June 30, 2022				December 31, 2021
(In millions)	Notional Amount		Asset		Notional Amount		Asset
Non-Designated Hedging Instruments
Foreign currency exchange rate forward contracts	$	65	$	2	$	56	$	—





Total contracts	$	65	$	2	$	56	$	—

The estimated fair value of our forward contracts is based on month-end spot rates adjusted by market-based current activity and are classified as level 2 instruments. The changes in the fair values of these foreign currency forward exchange contracts and the underlying hedged exposures are generally offsetting and recorded immediately in other, net on the condensed consolidated statement of operations. We recognized a gain of $5 million during the three and six months ended June 30, 2022 related to our forward contracts.

There were no changes in valuation approaches or techniques during the three and six months ended June 30, 2022. See Note 14 - Fair Value in our Form 10-K for a description of our valuation techniques.


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COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Other than our foreign currency contracts there were no additional assets or liabilities measured on a recurring basis as of June 30, 2022 and December 31, 2021.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities may be required to be measured at fair value on a nonrecurring basis. These assets and liabilities are recognized at amounts equal to the fair value determined at the date of acquisition or purchase. We do not periodically adjust carrying value to fair value for these assets or liabilities; rather, the carrying value of the asset is reduced to its fair value when there is evidence of impairment. We did not have any assets or liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2022.

Assets and Liabilities Not Measured at Fair Value

Financial Assets and Liabilities

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

Long-term Debt

Our long-term debt is classified as a level 2 instrument. The carrying amount of the term loan approximates fair value.

7. BUSINESS ACQUISITIONS

Great Pet Care

On March 8, 2022, we acquired 100% interest in Great Pet Care, for an aggregate contractual purchase price of $24 million, consisting of $14 million in cash and $10 million in common stock. We have accounted for $1.5 million of the common stock consideration as deferred compensation for continuing employees. Of the aggregate purchase price, $19 million was allocated to goodwill, which is not tax deductible. This acquisition advances our strategy to accelerate the unification of our consumer-oriented solutions, including prescription management, currently within North America, into one tool that empowers Customers and delivers a holistic health experience for Animal-Owners. The results of operations have been included in our North American segment since the acquisition date.

Other

On January 4, 2022, we acquired the remaining 90% interest in Next2Vet AB that we did not own for an aggregate purchase price of $4 million.

Both Great Pet Care and Next2Vet are immaterial individually and in the aggregate to our condensed consolidated financial statements. All related acquisition expenses incurred were not material.


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COVETRUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions) (Unaudited)

8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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



Three Months Ended June 30, 2022	Derivative Gain (Loss)		Foreign Currency Translation Gain (Loss)		Total
Balance at March 31, 2022	$	—	$	(81)	$	(81)
Other comprehensive loss before reclassifications	—		(29)		(29)
Reclassified from Accumulated other comprehensive loss to earnings	—		—		—
Period Change	—		(29)		(29)
Balance at June 30, 2022	$	—	$	(110)	$	(110)

Three Months Ended June 30, 2021
Balance at March 31, 2021	$	(1)	$	(74)	$	(75)
Other comprehensive gain before reclassifications	—		7		7
Reclassified from Accumulated other comprehensive loss to earnings	2