Zoetis Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 29, 2013; comparable periods ended September 30, 2012. Zoetis is a global animal-health medicines and vaccines company serving livestock and companion-animal markets. Pfizer completed the company’s full separation on June 24, 2013. Because 2012 results and the pre-separation portion of 2013 include Pfizer allocations, standalone-period comparisons are not fully comparable.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1.103 billion | $1.019 billion | $3.307 billion | $3.160 billion |
| Net income attributable to Zoetis | $131 million | $162 million | $399 million | $446 million |
| Diluted EPS | $0.26 | $0.32 | $0.80 | $0.89 |
| Adjusted net income, non-GAAP | $172 million | $154 million | $529 million | $482 million |
| Adjusted diluted EPS, non-GAAP | $0.34 | $0.31 | $1.06 | $0.96 |
- Revenue increased 8% in Q3 and 5% year to date; operational growth was 9% and 6%, respectively, partly offset by a 1% foreign-exchange headwind in each period.
- GAAP net income fell 19% in Q3 and 11% year to date. Q3 net margin was approximately 11.9%, versus 15.9%; nine-month net margin was approximately 12.1%, versus 14.1%.
- Cost of sales was 34.9% of revenue in Q3 and 36.4% year to date, compared with 35.2% and 35.8%. SG&A rose 19% in Q3 and 14% year to date, reaching 36% and 35% of revenue, mainly reflecting standalone-company costs. R&D expense declined 1% in Q3 and 3% year to date.
- Interest expense increased to $29 million in Q3 and $83 million year to date, primarily due to the January 2013 senior-notes issuance. Effective tax rates were 29.2% for Q3 and 29.3% year to date.
- By region, Q3 revenue grew 10% in the U.S., 12% in EuAfME, 4% in CLAR, and 1% in APAC. Companion-animal revenue grew 10% in Q3; livestock revenue grew 7%.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $383 million, compared with $144 million in 2012; the increase was attributed mainly to timing of receipts and payments and lower inventory. Capital spending was $135 million, versus $81 million, and investing cash outflow was $128 million.
- Cash increased to $389 million from $317 million at year-end 2012. Working capital was $1.775 billion; the current ratio was 2.36, down from 2.55.
- Long-term debt was $3.642 billion, principally $3.65 billion of senior notes with maturities from 2016 to 2043 and coupon rates of 1.15% to 4.70%. The 2012 balance included $509 million of Pfizer-allocated debt, so balance-sheet comparisons are materially affected by the separation and financing changes.
- The $1.0 billion revolving credit facility had no borrowings outstanding; Zoetis also reported $10 million of short-term borrowings. The facility includes leverage and interest-coverage covenants. The company stated that cash, operating cash flow and financing arrangements were expected to meet future cash needs, subject to economic conditions.
- Cash dividends declared were $0.065 per share for Q3; the board declared a $0.065-per-share fourth-quarter dividend, payable December 2, 2013.
Material changes, outlook and risks
- Zoetis issued 2013 full-year guidance of revenue of $4.475–$4.525 billion, adjusted diluted EPS of $1.38–$1.42, and reported diluted EPS of $0.98–$1.02. It expected $220–$240 million of certain significant items and acquisition-related costs, principally standalone-company costs. Adjusted guidance is non-GAAP.
- Standalone “stand-up” costs were $41 million in Q3 and $152 million for the first nine months. Management expected total 2013 nonrecurring standalone costs of approximately $220–$240 million. Separately, subsequent to quarter-end, the company approved restructuring actions that could cost approximately $20 million.
- Growth drivers included U.S. price increases and field-force initiatives, new product launches, and companion-animal demand. Management cited challenging Western European conditions, drought effects on livestock markets, competitive pressure, product-supply issues, and currency volatility. Venezuela’s February devaluation produced a $9 million foreign-currency loss and reduced CLAR earnings by $14 million year to date.
- Risks include restrictions on antibacterials used in food-producing animals; product safety, quality or efficacy issues; disease outbreaks; adverse weather and economic conditions; foreign-exchange movements; competition; and the costs and execution risks of operating independently from Pfizer.
- Product and legal matters include claims involving Roxarsone, PregSure and Advocin, as well as environmental and other proceedings. Management did not expect the disclosed matters to materially affect financial position, but said litigation outcomes are uncertain and excess loss ranges could not be estimated. A Suvaxyn PCV batch recall followed elevated adverse reactions; the EMA committee issued a positive opinion on proposed manufacturing changes, with European Commission approval expected in November.
- The interim financial statements received an independent accountant’s review, not an audit. The accountant reported no material modifications needed for conformity with U.S. GAAP.
Investor verification priorities
- Track whether revenue and adjusted earnings guidance were achieved, and reconcile adjusted results to GAAP earnings and actual standalone costs.
- Assess whether higher SG&A, interest expense and public-company infrastructure costs persist after the separation transition.
- Monitor debt covenant headroom, debt-service capacity, cash generation and the effects of holding or repatriating international cash.
- Verify regional and species growth drivers, especially U.S. performance, drought exposure, emerging-market demand and foreign-exchange effects.
- Follow regulatory and product-safety developments, including Suvaxyn PCV, and changes in antibacterial-use restrictions or disclosed litigation contingencies.