Zoetis Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; comparisons are with Q3 2021. Year-to-date figures cover the nine months ended September 30. Amounts are in U.S. dollars unless stated otherwise.
Business context
Zoetis is a global animal-health company operating through U.S. and International segments. Its portfolio serves companion-animal and livestock markets through medicines, vaccines, diagnostics and related products.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $2.002B | $1.990B | $6.040B | $5.809B |
| Income before tax | $667M | $659M | $2.064B | $1.982B |
| Net income attributable to Zoetis | $529M | $552M | $1.653B | $1.623B |
| Diluted EPS | $1.13 | $1.16 | $3.51 | $3.40 |
| Operating cash flow | Not reported by quarter in this filing | — | $1.171B | $1.534B |
- Reported revenue rose 1% in Q3 and 4% year to date; operational growth excluding foreign exchange was 5% and 7%, respectively. Foreign exchange reduced reported growth by approximately 4 percentage points in Q3 and 3 points year to date.
- Q3 net income fell 4%, while nine-month net income increased 2%. Adjusted net income, a non-GAAP measure, was $566M for Q3, down 5%, and $1.758B year to date, essentially flat. Adjusted diluted EPS was $1.21 for Q3 and $3.73 year to date.
- Q3 cost of sales was 30.3% of revenue versus 29.4%; year-to-date it was 29.8% versus 29.3%. Higher manufacturing, freight, foreign-exchange and inventory-related costs were partly offset by product mix and pricing. Effective tax rates increased to 20.8% for Q3 and 20.0% year to date, from 16.2% and 18.2%, respectively.
- Companion-animal revenue grew 6% in Q3 and 11% year to date; livestock revenue declined 8% and 7%. International reported revenue was pressured by currency, while operational segment earnings grew 12% in Q3 and 11% year to date.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $1.171B, down 24%, principally reflecting inventory build-up and timing of receipts and payments. Capital expenditures were $415M; cash used in investing activities was $445M.
- Cash declined to $2.507B from $3.485B at year-end 2021. Working capital was $3.671B versus $5.133B; the current ratio was 2.27 versus 3.86.
- At September 30, total reported debt was approximately $6.56B, including $1.35B current debt due in 2023; cash was $2.507B. The $1.0B revolving credit facility was undrawn, and the company reported compliance with debt covenants.
- Nine-month financing cash use was $1.684B, including $1.189B of share repurchases and $460M of dividends paid. The company repurchased approximately 6.7 million shares year to date; about $3.0B remained under its $3.5B repurchase authorization.
Changes, outlook and risks
- Growth was led by companion-animal products, including parasiticides, dermatology and newer osteoarthritis monoclonal-antibody products. Livestock results faced generic competition, market pressures and, internationally, supply constraints and reduced exports to China.
- Zoetis completed its acquisition of Jurox on September 30, 2022, for net cash consideration of $215M. The Basepaws acquisition was completed in Q2 and did not significantly affect the financial statements.
- The filing provides no specific numeric full-year revenue or earnings guidance in the supplied text. Management said supply-chain challenges for certain products were expected to continue through the rest of 2022 and into 2023, and stated it expects available cash, operating cash flows and financing arrangements to meet cash needs for the next 12 months and beyond.
- Management identified foreign-exchange movements, inflation, supply-chain disruption, COVID-19, the war in Ukraine, competition and generic entry, animal disease outbreaks, weather, and regulatory and product risks as uncertainties. The company said it did not expect the Ukraine situation to materially adversely affect results or financial condition, while acknowledging uncertainty.
- Legal proceedings include ongoing Brazilian environmental claims and a Michigan feed-contamination matter; the Michigan Court of Appeals affirmed a ruling in Zoetis’s favor, but plaintiffs sought further review. The company said it could not estimate reasonably possible losses above accrued amounts for its contingencies. Uncertain tax positions were $179M, excluding related interest and penalties.
- The Inflation Reduction Act was enacted in August 2022; Zoetis did not then expect a material financial impact. The filing also reports a 1% U.S. excise tax on net stock repurchases effective for taxable years beginning after December 31, 2022.
Investor verification points
- Track whether reported sales growth and companion-animal strength continue to offset livestock declines and foreign-exchange pressure.
- Monitor operating cash conversion, inventory levels, manufacturing and freight costs, and the planned $1.35B 2023 debt maturity.
- Review progress and integration of Jurox, along with the pace and funding of share repurchases and dividends.
- Follow supply-chain developments, litigation and tax contingencies, and any changes to the company’s outlook or risk assessments.