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Cash Flow Hedging Instruments

Three Months Ended
March 31, 2020

Amounts recognized in Other comprehensive loss, net of tax

Accumulated other comprehensive loss

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DEI - shares	3 Months Ended
DEI - shares	Mar. 31, 2020	May 08, 2020
Entity [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2020
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2020
Entity Registrant Name	COVETRUS, INC.
Entity Central Index Key	0001752836
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Emerging Growth Company	false
Entity Small Business	false
Entity Shell Company	false
Entity Current Reporting Status	Yes
Entity Common Stock, Shares Outstanding		111,947,324

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - USD ($) $ in Millions	Mar. 31, 2020	Dec. 31, 2019
Current assets:
Cash and cash equivalents	$ 205	$ 130
Accounts receivable, net of allowance of $8 and $8	525	426
Inventories, net	572	636
Other receivables	70	67
Prepaid expenses and other	40	30
Assets held for sale (Note 3)	48	51
Total current assets	1,460	1,340
Non-current assets:
Property and equipment, net of accumulated depreciation of $89 and $84	94	93
Operating lease right-of-use assets, net (Note 5)	123	84
Goodwill	1,154	1,154
Other intangibles, net (Note 6)	605	643
Investments and other	51	47
Total assets	3,487	3,361
Current liabilities:
Accounts payable	466	520
Current maturities of long-term debt and other borrowings (Note 7)	61	62
Accrued payroll and related liabilities	45	44
Accrued taxes	28	18
Other current liabilities	180	164
Liabilities held for sale (Note 3)	20	21
Total current liabilities	800	829
Non-current liabilities:
Long-term debt and other borrowings, net (Note 7)	1,298	1,125
Deferred taxes	46	47
Other liabilities	132	94
Total liabilities	2,276	2,095
Commitments and contingencies (Note 10)
Redeemable non-controlling interests (Note 11)	9	10
Shareholders' equity:
Common stock, $0.01 par value per share, 675,000,000 shares authorized; 111,854,439 shares issued and outstanding as of March 31, 2020; 111,620,507 shares issued and outstanding as of December 31, 2019	1	1
Accumulated other comprehensive loss (Note 12)	(116)	(86)
Additional paid-in capital	2,390	2,381
Accumulated deficit	(1,073)	(1,040)
Total shareholders’ equity	1,202	1,256
Total liabilities, redeemable non-controlling interests, and shareholders’ equity	$ 3,487	$ 3,361

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - Parenthetical - USD ($) $ in Millions	Mar. 31, 2020	Dec. 31, 2019
Statement of Financial Position [Abstract]
Accounts receivable, reserves	$ 8	$ 8
Property and equipment, accumulated depreciation	$ 89	$ 84
Common stock, par value (in usd per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	675,000,000	675,000,000
Common stock, shares issued (in shares)	111,854,439	111,620,507
Common stock, shares outstanding (in shares)	111,854,439	111,620,507

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($)
shares in Millions, $ in Millions

3 Months Ended

Mar. 31, 2020

Mar. 31, 2019

Income Statement [Abstract]

Net sales

$ 1,065

$ 941

Cost of sales

863

764

Gross profit

202

177

Operating expenses:

Selling, general and administrative

222

186

Operating loss

(20)

(9)

Other income (expense):

Interest income

Interest expense

(14)

(12)

Other, net

(1)

Loss before taxes and equity in earnings of affiliates

(35)

(18)

Less: Income tax benefit

Net loss

(33)

(14)

Less: net loss attributable to redeemable non-controlling interests

Net loss attributable to Covetrus

^[1]

$ (33)

$ (13)

Loss per share attributable to Covetrus: (Note 14)

Basic (in usd per share)

$ (0.30)

$ (0.14)

Diluted (in usd per share)

$ (0.30)

$ (0.14)

Weighted-average common shares outstanding:

Basic (in shares)

112

Diluted (in shares)

112

[1]	(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

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Statement of Comprehensive Income [Abstract]
Net loss	$ (33)	$ (14)
Other comprehensive (loss) income, net of tax:
Foreign currency translation (loss) gain	(22)	1
Unrealized loss on derivative instruments	(8)	0
Total other comprehensive (loss) income	(30)	1
Comprehensive loss	(63)	(13)
Comprehensive (income) loss attributable to redeemable non-controlling interests:
Net loss	0	1
Foreign currency translation gain	(1)	0
Comprehensive (income) loss attributable to redeemable non-controlling interests	(1)	1
Comprehensive loss attributable to Covetrus	$ (64)	$ (12)

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) - USD ($)
$ in Millions

Total

Common Stock

Additional Paid-in Capital

Accumulated Deficit

Accumulated Other Comprehensive Loss

Net Former Parent Investment

Beginning balance (in shares) at Dec. 29, 2018

Beginning balance at Dec. 29, 2018

$ 1,494

$ 0

$ (82)

$ 1,576

Increase (Decrease) in Stockholders' Equity [Roll Forward]

Net loss attributable to Covetrus

^[1]

(13)

(21)

Dividend to Former Parent

(1,153)

Issuance of shares at Separation (including share sale investors) (in shares)

71,693,426

Issuance of shares at Separation (including Share Sale investors)

$ 1

608

(609)

Issuance of shares in connection with the Acquisition (in shares)

39,742,089

Issuance of shares in connection with the Acquisition

1,772

Net increase in Former Parent investment

178

Issuance of shares in connection with share-based compensation plans (in shares)

140,828

Issuance of shares in connection with share-based compensation plans

Share-based compensation

Other comprehensive income

Ending balance (in shares) at Mar. 31, 2019

111,576,343

Ending balance at Mar. 31, 2019

$ 2,294

$ 1

2,395

(21)

(81)

$ 0

Beginning balance (in shares) at Dec. 31, 2019

111,620,507

Beginning balance at Dec. 31, 2019

$ 1,256

$ 1

2,381

(1,040)

(86)

Increase (Decrease) in Stockholders' Equity [Roll Forward]

Net loss attributable to Covetrus

^[1]

(33)

Issuance of shares in connection with share-based compensation plans (in shares)

233,932

Issuance of shares in connection with share-based compensation plans

Share-based compensation

Other comprehensive income

$ (30)

(30)

Ending balance (in shares) at Mar. 31, 2020

111,854,439

Ending balance at Mar. 31, 2020

$ 1,202

$ 1

$ 2,390

$ (1,073)

$ (116)

[1]	(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

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Cash flows from operating activities:
Net loss	$ (33)	$ (14)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization	40	30
Amortization of right-of-use assets	6	6
Gain on sale of property and equipment	(1)	0
Share-based compensation expense	9	15
Benefit for deferred income taxes	(5)	(2)
Amortization of debt issuance costs	1	1
Other	1	0
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net	(112)	(20)
Inventories, net	44	(19)
Other assets and liabilities	5	(59)
Accounts payable and accrued expenses	(31)	31
Net cash used for operating activities	(76)	(31)
Cash flows from investing activities:
Purchases of property and equipment	(11)	(10)
Payments related to equity investments and business acquisitions, net of cash acquired	0	(25)
Proceeds from sale of property and equipment	4	2
Net cash used for investing activities	(7)	(33)
Cash flows from financing activities:
Proceeds from revolving credit facility	190	0
Proceeds from issuance of debt	0	1,220
Principal payments of debt	(17)	(24)
Debt issuance and amendment costs	(5)	(24)
Dividend paid to Former Parent	0	(1,151)
Net transfers from Former Parent	0	165
Acquisition payment	(9)	0
Acquisitions of non-controlling interests in subsidiaries	0	(70)
Net cash provided by financing activities	159	116
Effect of exchange rate changes on cash and cash equivalents	(1)	(2)
Net change in cash and cash equivalents	75	50
Cash and cash equivalents, beginning of period	130	23
Cash and cash equivalents, end of period	205	73
Supplemental disclosures of cash flows information:
Interest	12	8
Income taxes	4	4
Amounts included in the measurement of operating lease liabilities	6	6
Right-of-use assets obtained in exchange for new operating lease liabilities	$ 46	$ 67

Business Overview and Significant Accounting Policies

3 Months Ended

Mar. 31, 2020

Accounting Policies [Abstract]

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 March 31, 2019 and Vets First Choice for the period from February 8, 2019 to March 31, 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 months ended March 31, 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 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 to conform to the presentation of the current period.

Accounting Pronouncements

Adopted

•

As of January 1, 2019, 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.

To be Adopted

•

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 a hard time 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 effective for all entities beginning March 12, 2020 through December 31, 2022. We are evaluating the anticipated impact of this standard on our condensed consolidated financial statements as well as timing of adoption.

Novel Coronavirus Disease ("COVID-19")

3 Months Ended

Mar. 31, 2020

Commitments and Contingencies Disclosure [Abstract]

Novel Coronavirus Disease (COVID-19)

Novel Coronavirus Disease 2019 (“COVID-19”)

The COVID-19 pandemic has resulted in social distancing and other preventative measures that were instituted in various localities around the world. These measures led to the temporary closure of non-essential businesses throughout many of the regions in which we conduct operations. However, veterinary care has been deemed an essential business in most of these regions, and we currently 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 through new social distancing guidelines which, depending on local regulations, can include telehealth and video conferencing. As a result, through March 31, 2020, we experienced limited disruption to our results of operations from the COVID-19 pandemic.

We believe our allowance for credit losses related to our accounts receivable remains adequate as of March 31, 2020, due to the essential nature of our customers' business, as noted above, as well as the historic behavior of our large customer base. Although we anticipate that there could be an increase in the aging of our accounts receivable, we do not anticipate a significant increase in defaults.

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 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 took the following actions, some of which were initiated in the second quarter, to help ensure that our business has flexibility to mitigate potential effects from continued global economic pressure:


•	We borrowed funds under our revolving line of credit to increase our cash position. See Note 7 - Long-term Debt and Other Borrowings, Net,


•	We reduced our non-critical near-term planned capital expenditures,


•	We initiated negotiations for extended payment terms on certain contracts,


•	We managed our inventory levels in line with current market conditions, and


•	We instituted executive, board, and other senior-level employee compensation reductions, employee furloughs in certain European countries, certain shift eliminations, a hiring freeze, discretionary spending deferrals, and deferred payroll taxes as available under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and suspended our 401(k)-employer match.

Risk and Uncertainties

The duration and severity of COVID-19-related potential disruptions and the actions we have taken, and may in the future take, 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.

Commitments and Contingencies

We are involved in various legal proceedings that arise in the ordinary course of business. Substantial judgment is required in predicting the outcome of these legal proceedings, many of which take years to adjudicate. We accrue estimated costs for a contingency when we believe that a loss is probable and can be reasonably estimated. No material accrued loss contingencies were recorded as of March 31, 2020.

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 Company, our Former Parent, our former Chief Executive Officer and President, and our former Chief Financial Officer (collectively the “Defendants”). The complaint alleges that the Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), by making allegedly false and misleading statements, and omissions, primarily regarding the Company’s financial prospects and the integration costs relating to the business combination involving the Animal Health Business and Vets First Choice. The suit seeks unspecified damages, fees, interest, and costs. We intend to defend the matter vigorously. Given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, class certification and success on the merits, we cannot estimate the reasonably possible loss or range of loss that may result from this action.

Purchase Obligations

We are party to an exclusive supply arrangement for certain products within the U.S. market. We amended this arrangement in February 2020 to extend the purchase obligations until 2025 which include unconditional purchase obligations totaling $44 million over this period.

In 2019, we engaged a third-party for services over a three-year period ending December 31, 2022. The fixed portion of the contract is capped at $14 million while the variable portion of the contract is capped at $39 million over the term of the engagement. We consider the contract to be of a “take-or-pay” nature due to the termination fees embedded in the contract: fixed termination fees of $10 million until mid-May 2020, $12 million until mid-November 2020, and $14 million thereafter, plus any variable performance fees through termination. During the three months ended March 31, 2020, we incurred $3 million in variable fees and $1 million in fixed fees under this arrangement, leaving a remaining potential commitment of $47 million.

Held for Sale

3 Months Ended

Mar. 31, 2020

Discontinued Operations and Disposal Groups [Abstract]

Held for Sale

In January 2020, we entered into a definitive agreement to sell our scil animal-care business (“scil”) to Heska Corporation (“Heska”) for a purchase price of $125 million in cash, subject to customary closing adjustments.

On April 1, 2020, we completed the divestiture of scil to Heska. The transaction closed under an amended purchase agreement which reduced the total consideration paid to us from $125 million to $110 million, or approximately $100 million net of deal-related fees and other transaction items. In conjunction with the price adjustment, an approximate $10 million escrow fund that was to be funded by Heska and used as collateral for a period of up to 18 months for any potential claims tied to the transaction was eliminated.

scil's major classes of assets and liabilities were as follows:



	March 31, 2020		December 31, 2019
Current assets	$	23	$	24
Property and equipment, net	16		15
Goodwill	2		2
Other intangibles, net	4		4
Investments and other	3		3
Assets held for sale	$	48	$	48

Current liabilities	$	17	$	18
Other liabilities	3		3
Liabilities held for sale	$	20	$	21

The sale of scil resulted in a gain of approximately $74 million which will be recognized in the quarter ending June 30, 2020.

Revenue from Contracts with Customers

3 Months Ended

Mar. 31, 2020

Revenue from Contract with Customer [Abstract]

Revenue from Contracts with Customers

Disaggregation of Revenue

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



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

	Three Months Ended March 31, 2019
	Supply Chain Services			Software Solutions		Prescription Management		Eliminations			Total
North America	$	442		$	22	$	34	$	(1	)	$	497
Europe	362			2		—		(3		)	361
APAC & Emerging Markets	84			2		—		—			86
Eliminations	(3		)	—		—		—			(3		)
Total Net sales	$	885		$	26	$	34	$	(4	)	$	941

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 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 regard to 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 a number of 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 expected to 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 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 March 31, 2020 and December 31, 2019 were not material.

Contract Liabilities

Contract liabilities are comprised of advance payments and deferred revenue amounts. Contract liabilities are transferred to revenue once the performance obligation has been satisfied. Current contract liabilities are included in 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 $37 million at March 31, 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 long-term contracts with unsatisfied performance obligations as of March 31, 2020 were not material.

Leases	3 Months Ended
Leases	Mar. 31, 2020
Leases [Abstract]
Leases	Leases During the three months ended March 31, 2020, the new lease for our compounding facility and office space in Arizona commenced, 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.

Other Intangibles, Net

3 Months Ended

Mar. 31, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

Other Intangibles, Net

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

The following table presents the balances within the condensed consolidated balance sheets as of:



	March 31, 2020			December 31, 2019
Gross definite-lived intangible assets	$	990		$	1,001
Less: Accumulated amortization	(385		)	(358		)
Other intangibles, net	$	605		$	643

The following table presents our amortization expense:



	Three Months Ended March 31,
Location	2020		2019
Cost of sales	$	1	$	1
Selling, general and administrative	33		24
Total amortization expense	$	34	$	25

Long-term Debt and Other Borrowings, Net

3 Months Ended

Mar. 31, 2020

Debt Disclosure [Abstract]

Long-term Debt and Other Borrowings, Net

As of March 31, 2020, our Long-term debt and other borrowings, net consisted of the following:



	Commencement Date	Maturity Date	March 31, 2020			December 31, 2019
Revolving line of credit	February 2019	February 2024	$	190		$	—
Term loan payable in quarterly installments of $15 million beginning March 31, 2020	February 2019	February 2024	1,185			1,200
Loan payable with balloon payment due at maturity	February 2019	March 2023	5			6
Finance lease obligations			1			1
Total			1,381			1,207
Less: current maturities			(61		)	(62		)
Total Long-term debt and other borrowings			1,320			1,145
Less: unamortized debt discount			(22		)	(20		)
Total Long-term debt and other borrowings, net			$	1,298		$	1,125

The amount available for borrowing under the revolving line of credit as of March 31, 2020, was $100 million, subject to covenant restrictions. See Note 16 - Subsequent Events.

In February 2020, our credit facility was amended primarily to delay the step down of our leverage covenant from 5.50x to 5.00x until our second quarter ending June 30, 2021.

On April 10, 2020, we used $45 million in proceeds from the sale of scil (see Note 3 - Held for Sale) to prepay our remaining quarterly principal amortization term loan payments for 2020. Following this prepayment, the next quarterly principal amortization term loan payment of $15 million is due on March 31, 2021.

Derivatives and Financial Instruments

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Financial Instruments

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

In 2019, we executed interest rate swap contracts with notional amounts aggregating $500 million that are designated as cash flow hedges to manage interest rate risk on our floating rate debt. These interest rate swap contracts adjust the amount of our total debt that is subject to variable interest rates by effectively fixing the borrowing rates on a portion of our floating rate debt discussed in Note 7 - Long-term Debt and Other Borrowings, Net.

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

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



	Liability Derivatives
Cash Flow Hedging Instruments	Balance Sheet Location	March 31, 2020		December 31, 2019
Interest rate swap contracts	Other liabilities	$	9	$	1

At inception of the hedging contract, we used statistical regression to assess the effectiveness of the interest rate hedges. The hedging contracts were deemed highly effective and are expected to be highly effective throughout the hedge period. Therefore, we perform a qualitative assessment of the hedge effectiveness at each subsequent quarterly reporting date. As of March 31, 2020, derivative gains and losses were reported as a component of Other comprehensive loss and will subsequently be recorded in the condensed consolidated statements of operations when the hedged transaction is recognized in earnings.

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

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

Fair Value

3 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

Fair Value

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

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


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


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


•	Level 3 - Unobservable inputs for the asset or liability

There were no changes in valuation approaches or techniques during the three months ended March 31, 2020. See Note 10 - Fair Value in our Form 10-K for a description of our valuation techniques.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Derivative Contracts

Our derivatives at March 31, 2020 consisted of five interest rate swap contracts which are over-the-counter and not traded through an exchange.

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



	Level	March 31, 2020		December 31, 2019
Liabilities:
Interest rate swap contracts	2	$	9	$	1

See Note 8 - Derivatives and Financial Instruments.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets that are measured at fair value on a nonrecurring basis primarily relate to Property and equipment, net, Operating lease right-of-use assets, net, Goodwill, and Other intangible, net. We do not periodically adjust carrying value to fair value for these assets; rather, the carrying value of the asset is reduced to its fair value when we determine that impairment has occurred. We did not have any assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2020, or the year ended December 31, 2019.

Assets and Liabilities not Measured at Fair Value

Financial Assets and Liabilities

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

Investments in Affiliates

There are no quoted market prices available for investments in affiliates, however, we believe the carrying amounts are a reasonable estimate of fair value.

Long-term Debt

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

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

Commitments and Contingencies

3 Months Ended

Mar. 31, 2020

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Novel Coronavirus Disease 2019 (“COVID-19”)


•	We borrowed funds under our revolving line of credit to increase our cash position. See Note 7 - Long-term Debt and Other Borrowings, Net,


•	We reduced our non-critical near-term planned capital expenditures,


•	We initiated negotiations for extended payment terms on certain contracts,


•	We managed our inventory levels in line with current market conditions, and


•	We instituted executive, board, and other senior-level employee compensation reductions, employee furloughs in certain European countries, certain shift eliminations, a hiring freeze, discretionary spending deferrals, and deferred payroll taxes as available under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and suspended our 401(k)-employer match.

Risk and Uncertainties

Commitments and Contingencies

Securities Litigation Matter

Purchase Obligations

Redeemable Non-controlling Interests

3 Months Ended

Mar. 31, 2020

Noncontrolling Interest [Abstract]

Redeemable Non-controlling Interests

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

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



	Three Months Ended March 31, 2020			Year Ended December 31, 2019
Balance at beginning of period	$	10		$	92
Decrease due to redemptions	—			(74		)
Net loss attributable to redeemable non-controlling interests	—			(3		)
Effect of foreign currency translation (gain) loss attributable to redeemable non-controlling interests	(1		)	1
Change to redemption value	—			(6		)
Balance at end of period	$	9		$	10

Accumulated Other Comprehensive Income (Loss)

3 Months Ended

Mar. 31, 2020

Equity [Abstract]

Accumulated Other Comprehensive Income (Loss)

Comprehensive income (loss) includes certain gains and losses that are excluded from net income (loss) under GAAP as these amounts are recorded directly as an adjustment to total equity.

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



	Derivative Loss			Foreign Currency Translation Loss			Total
Balance at December 29, 2018	$	—		$	(82	)	$	(82	)
Other comprehensive loss before reclassifications	(1		)	(4		)	(5		)
Gain reclassified from Accumulated other comprehensive loss to earnings	1			—			1
Balance at December 31, 2019	—			(86		)	(86		)
Other comprehensive loss before reclassifications	(8		)	(22		)	(30		)
Balance at March 31, 2020	$	(8	)	$	(108	)	$	(116	)

We recognized foreign currency translation losses as a component of comprehensive income (loss) due to changes in foreign exchange rates from the beginning of the period to the end of the period. The condensed consolidated financial statements are denominated in the U.S. dollar currency. Fluctuations in the value of foreign currencies as compared to the U.S. dollar may have a significant impact on Comprehensive income (loss).

The tax effect on accumulated unrealized losses on derivative instruments was not material for the periods presented.

See Note 8 - Derivatives and Financial Instruments.

Income Taxes	3 Months Ended
Income Taxes	Mar. 31, 2020
Income Tax Disclosure [Abstract]
Income Taxes	Income Taxes Income tax benefit for the three months ended March 31, 2020 was $2 million on a loss before taxes and equity in earnings of affiliates of $35 million for a consolidated effective tax rate of 5.7%. The difference between our effective tax rate and the federal statutory tax rates for the jurisdictions in which we operate, for this period, primarily related to valuation allowances due to uncertainty regarding the realization of future tax benefits from deferred tax assets and non-deductible expenses associated with share-based compensation. Income tax benefit for the three months ended March 31, 2019 was $4 million on a loss before taxes and equity in earnings of affiliates of $18 million for a consolidated effective tax rate of 22.2%. The difference between our effective tax rate and the federal statutory tax rates for the jurisdictions in which we operate, for this period, primarily related to state and foreign income taxes and interest expense. The CARES Act On March 27, 2020, the President of the United States signed the CARES Act, a substantial tax-and-spending package intended to provide additional economic stimulus to address the impact of the COVID-19 pandemic. The CARES Act did not have a material impact to our condensed consolidated financial statements as of and for the quarter ended March 31, 2020.

Earnings (Loss) Per Share

3 Months Ended

Mar. 31, 2020

Earnings Per Share [Abstract]

Earnings (Loss) Per Share

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

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



	Three Months Ended March 31,
(In millions, except per share amounts)	2020			2019
Numerator:
Net loss attributable to Covetrus	$	(33	)	$	(13	)
Denominator:
Basic
Weighted-average common shares outstanding	112			95
Diluted shares
Effect of dilutive shares ^(a)	—			—
Diluted shares	112			95
Loss per share attributable to Covetrus:
Basic	$	(0.30	)	$	(0.14	)
Diluted	$	(0.30	)	$	(0.14	)

(a) Shares from share-based awards are not included for periods with a net loss because they would be anti-dilutive.

Segment Data

3 Months Ended

Mar. 31, 2020

Segment Reporting [Abstract]

Segment Data

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



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

Reconciliation of Net Loss Attributable to Covetrus to Adjusted EBITDA:
Net loss attributable to Covetrus													$	(33	)
Plus: Depreciation and amortization													40
Plus: Interest expense, net													14
Less: Income tax benefit													(2		)
Earnings before interest, taxes, depreciation, and amortization													19
Plus: Share-based compensation													9
Plus: Strategic consulting													4
Plus: Transaction costs ⁽¹⁾													7
Plus: Separation programs and executive severance													1
Plus: IT infrastructure													1
Plus: Formation of Covetrus ⁽²⁾													6
Plus: Capital structure													1
Adjusted EBITDA													$	48

(1) Includes legal, accounting, tax, and other professional fees incurred in connection with acquisitions and divestitures.
(2) 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.



	At and For the Three Months Ended March 31, 2019
	North America		Europe		APAC & Emerging Markets		Corporate			Eliminations			Total
Net sales	$	497	$	361	$	86	$	—		$	(3	)	$	941
Adjusted EBITDA	$	35	$	16	$	5	$	(4	)	$	—		$	52
Total assets	$	3,364	$	803	$	194	$	742		$	(834	)	$	4,269

Reconciliation of Net Loss Attributable to Covetrus to Adjusted EBITDA:
Net loss attributable to Covetrus													$	(13	)
Plus: Depreciation and amortization													30
Plus: Interest expense, net													10
Less: Income tax benefit													(4		)
Earnings before interest, taxes, depreciation, and amortization													23
Plus: Share-based compensation													15
Plus: Formation of Covetrus ⁽¹⁾													9
Plus: Carve-out operating expenses													5
Adjusted EBITDA													$	52

(1) Includes professional and consulting fees, duplicative costs associated with transition service agreements, and other costs incurred in connection with the separation from Former Parent and establishing Covetrus as an independent public company.

See Note 4 - Revenue from Contracts with Customers for our revenue disaggregated by major product category and reportable segment.

Subsequent Events	3 Months Ended
Subsequent Events	Mar. 31, 2020
Subsequent Events [Abstract]
Subsequent Events	Subsequent Events Preferred Stock On April 30, 2020, we entered into an Investment Agreement (the “Investment Agreement”) with CD&R VFC Holdings, L.P. (the “Purchaser”), an affiliate of Clayton, Dubilier & Rice, LLC, pursuant to which we agreed to issue and sell to the Purchaser, and the Purchaser agreed to purchase from us, 250,000 shares of our 7.50% Series A Convertible Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), in a private placement for aggregate gross proceeds of $250 million (such transaction, the “Private Placement”). The Series A Preferred Stock, once issued, will be convertible into shares of our common stock at a conversion price and a conversion rate set forth in the Certificate of Designations classifying the Series A Preferred Stock, a form of which is attached as Annex I to the Investment Agreement, a copy of which is filed as an exhibit to this Quarterly Report on Form 10-Q. On an as-converted basis, together with the Purchaser's existing common shares of Covetrus, the Purchaser will own approximately 25% of pro forma common shares outstanding. However, the terms of the preferred stock limit the Purchaser's voting interest to 19.99% of our then-outstanding voting interests. Under the terms of the Investment Agreement, the Purchaser will have the right to appoint two designees to our board of directors. We expect to use the net proceeds from the Private Placement to repay a portion of our revolver borrowings, provide additional short-term liquidity, and support general corporate purposes. Other Transactions On April 30, 2020, we completed the previously announced combination of our subsidiary, Covetrus Espana, with Distrivet S.A. to form a leading animal-health provider on the Iberian Peninsula. 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. We now own 50.01% of the new company, called Distrivet, a Covetrus company. Also see Note 3 - Held for Sale for information on the April 1, 2020 closing of the sale of scil to Heska.

Business Overview and Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2020

Accounting Policies [Abstract]

Business

Basis of Presentation

Basis of Presentation and Principles of Consolidation

Principles of Consolidation

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

Accounting Pronouncements Adopted and Recently Issued Accounting Standards

Accounting Pronouncements

Adopted

•

To be Adopted

•

Contract Balances



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

	Three Months Ended March 31, 2019
	Supply Chain Services			Software Solutions		Prescription Management		Eliminations			Total
North America	$	442		$	22	$	34	$	(1	)	$	497
Europe	362			2		—		(3		)	361
APAC & Emerging Markets	84			2		—		—			86
Eliminations	(3		)	—		—		—			(3		)
Total Net sales	$	885		$	26	$	34	$	(4	)	$	941

Fair Value

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Derivative Contracts

Our derivatives at March 31, 2020 consisted of five interest rate swap contracts which are over-the-counter and not traded through an exchange.

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



	Level	March 31, 2020		December 31, 2019
Liabilities:
Interest rate swap contracts	2	$	9	$	1

See Note 8 - Derivatives and Financial Instruments.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets and Liabilities not Measured at Fair Value

Financial Assets and Liabilities

Investments in Affiliates

There are no quoted market prices available for investments in affiliates, however, we believe the carrying amounts are a reasonable estimate of fair value.

Long-term Debt

Held for Sale (Tables)

3 Months Ended

Mar. 31, 2020

Discontinued Operations and Disposal Groups [Abstract]

Held for Sale Major Classes of Assets and Liabilities

scil's major classes of assets and liabilities were as follows:



	March 31, 2020		December 31, 2019
Current assets	$	23	$	24
Property and equipment, net	16		15
Goodwill	2		2
Other intangibles, net	4		4
Investments and other	3		3
Assets held for sale	$	48	$	48

Current liabilities	$	17	$	18
Other liabilities	3		3
Liabilities held for sale	$	20	$	21

- Definition

Tabular disclosure of information related to a disposal group. Includes, but is not limited to, a discontinued operation, disposal classified as held-for-sale or disposed of by means other than sale or disposal of an individually significant component.

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+ Details

Revenue from Contracts with Customers (Tables)

3 Months Ended

Mar. 31, 2020

Revenue from Contract with Customer [Abstract]

Disaggregation of Revenue



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

	Three Months Ended March 31, 2019
	Supply Chain Services			Software Solutions		Prescription Management		Eliminations			Total
North America	$	442		$	22	$	34	$	(1	)	$	497
Europe	362			2		—		(3		)	361
APAC & Emerging Markets	84			2		—		—			86
Eliminations	(3		)	—		—		—			(3		)
Total Net sales	$	885		$	26	$	34	$	(4	)	$	941

Other Intangibles, Net (Tables)	3 Months Ended
Other Intangibles, Net (Tables)	Mar. 31, 2020
Goodwill and Intangible Assets Disclosure [Abstract]
Schedule of Finite-Lived Intangible Assets	The following table presents the balances within the condensed consolidated balance sheets as of: