Zoetis Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Zoetis is a global animal-health company operating through U.S. and International segments. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $1.948B | $1.548B | $3.819B | $3.082B |
| Net income attributable to Zoetis | $512M | $377M | $1.071B | $800M |
| Diluted EPS | $1.07 | $0.79 | $2.24 | $1.67 |
| Adjusted net income, non-GAAP | $566M | $427M | $1.169B | $882M |
| Adjusted diluted EPS, non-GAAP | $1.19 | $0.89 | $2.45 | $1.84 |
- Q2 revenue rose 26% reported and 22% operationally; first-half revenue rose 24% reported and 22% operationally. Foreign exchange added about 4 percentage points to Q2 growth and 2 points to first-half growth.
- Reported net income increased 36% in Q2 and 34% in the first half. Adjusted net income increased 33% in both periods. Adjusted measures exclude purchase-accounting adjustments, acquisition-related costs and certain significant items.
- Q2 gross margin was approximately 70.8%, versus 70.9% a year earlier; first-half gross margin was approximately 70.8%, versus 70.5%. Q2 net margin was approximately 26.3%, versus 24.4%; first-half net margin was approximately 28.0%, versus 26.0%.
- Q2 U.S. revenue increased 22%; International revenue increased 31% reported and 22% operationally. Companion-animal revenue grew 39% globally, while livestock revenue grew 8% reported and 3% operationally.
- First-half operating cash flow was $881M, compared with $846M. Capital expenditures were $190M; operating cash flow less capital expenditures was approximately $691M.
- Cash and cash equivalents were $3.658B at June 30, 2021. Working capital was $4.957B and the current ratio was 3.37:1. Long-term debt, net of discounts and issuance costs, was $6.592B, with a further $600M current portion; principal debt outstanding was $7.250B. The revolving credit facility was undrawn and the company reported covenant compliance.
- Dividends declared were $0.25 per share in Q2 and $0.50 per share for the first half. Zoetis repurchased approximately 2.1M shares during the first half for $347M.
Material changes and drivers
- Growth was led by companion-animal products, including parasiticides, dermatology, vaccines and diagnostics. Management cited Simparica Trio and other parasiticide franchises, increased pet ownership and standards of care, and recovery from COVID-affected prior-year markets.
- Parasiticide revenue increased to $460M in Q2 from $307M; dermatology revenue rose to $285M from $227M. In the U.S., livestock revenue declined 8% in Q2, with pressure in cattle and poultry; generic competition and lower-cost alternatives also affected livestock sales.
- Q2 SG&A rose 26% to $495M, broadly in line with revenue growth; R&D rose 8% to $120M. Higher compensation, growth investments, freight/logistics and foreign exchange contributed to expense increases.
- Q2 restructuring and certain acquisition-related costs rose to $21M from $8M. 2021 charges included impairment related to consolidating manufacturing sites in China and employee termination costs. First-half other income/deductions was $12M of expense, versus $15M of income in 2020, partly reflecting a prior-year $17M gain associated with the sale of manufacturing sites.
Outlook, risks and contingencies
- The supplied filing text does not provide clear numerical 2021 guidance. It notes that COVID-19 effects remain uncertain and may affect customer demand, workforce availability, supply chains, manufacturing, transportation and R&D timelines.
- Other stated risks include foreign-exchange movements, animal disease outbreaks, weather and economic conditions, product safety or efficacy, generic competition, product development and launch execution, regulation, cybersecurity, and legal and tax matters. Approximately 45% of first-half revenue was denominated in foreign currencies; currency movements increased reported first-half revenue growth by about 2%.
- Management said cash, operating cash flows and available financing were expected to support future cash needs, while cautioning that economic or financial-market deterioration could affect liquidity or access to financing. $600M of senior notes were due in August 2021.
- Uncertain tax-position liabilities were $194M, plus $16M of related interest and penalties. The company said it could not estimate a range of reasonably possible legal losses beyond accrued amounts, but did not believe the disclosed matters would materially adversely affect its financial position.
- On August 4, 2021, Zoetis announced an agreement to acquire privately held Australian animal-health company Jurox, subject to customary closing conditions and regulatory requirements; expected completion was in the first half of 2022.
- KPMG performed a review of the interim financial information, not a full audit, and reported no material modifications were needed for U.S. GAAP conformity.
Important facts for investors to verify
- Whether companion-animal growth and the pace of livestock recovery persist, particularly given U.S. livestock declines and competitive pressure.
- How freight, manufacturing costs, foreign exchange and supply constraints affect margins and reported growth in subsequent periods.
- The refinancing or repayment of the $600M of notes due August 2021 and the implications of total debt relative to cash generation.
- Any subsequent changes to 2021 guidance, COVID-19 impacts, Jurox transaction timing or terms, and material tax or legal contingencies.
- Reconcile non-GAAP adjusted results to GAAP results and assess the recurring nature of excluded charges and gains.