Share-based Compensation and Other Employee Benefits

Share-based Compensation Plan

In connection with the Separation, Distribution, and Acquisition, all outstanding restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and stock options of Henry Schein and Vets First Choice were exchanged for economically equivalent awards of Covetrus. RSAs and RSUs totaling 327,447 and stock options of 3,914,694 were issued in connection with the exchange.

On February 7, 2019, we adopted the 2019 Omnibus Incentive Compensation Plan (the “Plan”) which authorizes Covetrus' Compensation Committee of the Board of Directors to grant stock options, stock awards, stock units, stock appreciation rights, other share-based awards, and cash awards. Awards may be granted to employees, consultants, advisors, and non-employee Directors of Covetrus and our subsidiaries. Awards issued under the Plan may not have a term greater than 10 years from the date of grant, generally vest ratably over a three-year period, and must be issued at a price of not less than 100% of the fair market value at the date of grant.

We reserved 11,527,675 shares of our common stock for issuance under the Plan. In addition, to the extent that awards outstanding under the Plan are cancelled, forfeited, or otherwise terminated without being exercised, the number of shares underlying such awards will be available for future grant under the Plan.

We recognized pre-tax share-based compensation expense of $46 million ($40 million after-tax) in 2019, $7 million ($6 million after-tax) in 2018, and $7 million ($4 million after-tax) in 2017. No share-based compensation cost was capitalized as part of an asset.

Stock Options

We grant stock options at an exercise price equal to the closing market price of our stock on the grant date. We use the Black-Scholes pricing model to determine the fair value of options granted and have elected the accrual method for recognizing compensation costs. The fair value of share-based payment awards calculated using the Black-Scholes model varies based on share price, award exercise price, stock volatility, expected term, risk free interest rate, expected dividends, and the assumptions used in determining these variables. No stock options were granted during 2017 and 2018.

The following table summarizes our stock option activity under the Plan for the year ended December 31, 2019:



	Stock Options
	Number of Shares		Weighted- average Exercise Price Per Share		Weighted- average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at beginning of year	—		$	—
Granted	5		14.03
Exercised	(1	)	5.14
Forfeited	—		18.66
Outstanding at end of year	4		$	15.29	6.9 years	$	16
Exercisable at end of year	2		$	9.25	5.2 years	$	12

The following table provides the weighted-average grant-date fair value and related valuation assumptions for these awards granted during the year ended December 31, 2019:



Weighted-average grant-date fair value	$	14.03
Valuation assumptions:
Expected term	6.0 years
Risk-free interest rate	1.8		%
Expected volatility	29.9		%
Expected dividend rate	—		%

We received cash from option exercises of $4 million during 2019.

RSAs/RSUs

We grant RSAs and RSUs at an exercise price equal to the closing market price of our stock on the grant date.

The following table summarizes our RSA/RSU activity under the Plan for the year ended December 31, 2019:



	Restricted Stock Awards/Restricted Stock Units
	Number of Shares	Weighted- average Grant Date Fair Value Per Share		Weighted- average Remaining Contractual Term	Aggregate Intrinsic Value
Nonvested at beginning of year	—	$	76.86
Granted	2	27.83
Vested	—	66.84
Forfeited	—	36.11
Nonvested at end of year	2	$	25.69	1.6 years	$	22

The weighted-average grant-date fair values for these awards granted during each of the last three years were as follows:



	December 31, 2019		December 29, 2018		December 30, 2017
Weighted-average grant-date fair value	$	27.83	$	65.26	$	85.90

Additional Information

As of December 31, 2019, there was $75 million in unrecognized compensation expense related to nonvested share-based awards that is expected to be recognized over a weighted-average period of 2.4 years.

The following table provides further information related to our share-based awards for the last three years:



	December 31, 2019		December 29, 2018		December 30, 2017
Intrinsic value of stock options exercised	$	15	$	—	$	—
Fair value of RSA/RSU shares vested	$	3	$	2	$	—

Employee Stock Purchase Plan

On February 7, 2019, we adopted the Employee Stock Purchase Plan (the “ESPP”) and approved 2,223,864 shares for issuance under this plan. The share reserve will increase automatically on the first trading day of January of each calendar year beginning January 1, 2020. The ESPP is administered by the Compensation Committee.

The ESPP provides for the issuance of shares of our common stock to participating employees. At the end of each designated offering period, which occurs every six months on May 31 and November 30, employees can elect to purchase shares of our common stock with contributions of up to 15% of their base pay, accumulated via payroll deductions, at an amount equal to 85% of the lower of our stock price on (i) the first day of the offering period, or (ii) the last day of the offering period. For the year ended December 31, 2019, activity under the ESPP was not material.

Annual Incentive Plan

Our Compensation Committee adopted the Annual Incentive Plan (the “AIP”) on February 7, 2019. The AIP provides pay for performance incentive compensation to our employees, including our named executive officers, rewarding them for their contributions to us with incentive compensation based on attainment of predetermined corporate performance goals, as applicable.

Our Compensation Committee designates participants in the AIP for each performance period and may establish corporate performance goals and individual performance goals for our named executive officers under the AIP. The Compensation Committee may subsequently adjust the performance goals to consider such unanticipated circumstances or significant events as our Compensation Committee determines.

Our Compensation Committee is responsible for administering the AIP and has full discretionary authority under the AIP and the authority to take any actions it deems necessary or advisable in carrying out its duties thereunder, including delegating their authority under the AIP.

For the year ended December 31, 2019, we recorded compensation expense of $7 million associated with the AIP.

401(k) Plan

Covetrus maintains a qualified 401(k) plan covering eligible employees of certain of the U.S. entities as well as certain other defined contribution plans. Matching contributions and administrative expenses related to these plans were $9 million in 2019, $6 million in 2018, and $6 million in 2017.