Zoetis Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Zoetis develops, manufactures and sells animal-health medicines, vaccines and diagnostics across U.S. and International segments. The interim financial statements were reviewed by KPMG, not audited.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $1.534 billion | $1.455 billion | +5% reported; +7% operational |
| Income before taxes | $497 million | $381 million | +30% |
| Net income | $423 million | $312 million | +36% |
| Diluted EPS | $0.88 | $0.65 | +35% |
| Adjusted net income (non-GAAP) | $455 million | $424 million | +7% |
| Operating cash flow | $408 million | $389 million | +5% |
| Capital expenditures | $94 million | $63 million | Increased |
- Cost of sales fell to $459 million from $518 million; cost of sales was 29.9% of revenue versus 35.6%. Management attributed the improvement primarily to a prior-year inventory-costing adjustment, price increases and favorable foreign exchange, partly offset by mix and acquisitions.
- Effective tax rate was 14.9%, down from 18.1%, primarily reflecting share-based-payment tax benefits and a deferred-tax remeasurement benefit.
- Cash and cash equivalents were $1.951 billion at quarter-end. Working capital was $3.051 billion and the current ratio was 2.77:1.
- Debt carrying value comprised $500 million current and $5.963 billion long-term. No amounts were drawn on the $1.0 billion revolving facility; the company reported compliance with debt covenants. A $500 million note maturity is due in November 2020.
- Dividends declared were $0.20 per share, compared with $0.164 a year earlier. The company repurchased approximately 1.8 million shares under its public authorization during the quarter.
Material changes and business drivers
- U.S. revenue rose 9% to $786 million; International revenue increased 1% reported and 4% operational to $728 million. Foreign exchange reduced International revenue by about 3% and total revenue growth by about 2%.
- Companion-animal revenue increased 9% to $797 million, led by dermatology and parasiticides. Livestock revenue rose 1% to $717 million; strength in swine, poultry and fish partly offset cattle weakness.
- Dermatology revenue grew to $197 million from $159 million; parasiticide revenue increased to $255 million from $231 million. Vaccine revenue declined to $349 million from $358 million.
- Operating cash flow increased modestly, while investing cash outflow rose to $57 million from $23 million, primarily reflecting higher capital expenditures. Financing cash outflow was $328 million, mainly due to $250 million of treasury-share purchases and $95 million of dividends paid.
Outlook, risks and unusual items
- COVID-19 had no significant effect on Q1 results, but management expected a more significant impact in Q2, potentially continuing into Q3 or beyond. It cited possible weaker demand from livestock and veterinary customers, supply-chain or workforce disruptions, and delays to research and product approvals. The ultimate effects could not be reliably predicted.
- The filing provides no clear quantified 2020 outlook or updated earnings guidance. Management said current results might not indicate future trends and that it was monitoring the pandemic and liquidity.
- Management said existing cash, operating cash flows and financing arrangements were expected to support future needs, while noting economic and capital-market conditions could affect liquidity. Share repurchases were temporarily suspended beginning in Q2 2020.
- Q1 included a $17 million gain related to proceeds from the 2016 sale of U.S. manufacturing sites, partly offset by CEO transition costs. Reported earnings also benefited from the comparison with a $68 million prior-year inventory-costing estimate change. These items affect comparability with adjusted results.
- Risks include COVID-19 effects on customers, suppliers, manufacturing and demand; foreign-exchange movements; animal-disease outbreaks; product safety or supply issues; competition and generic entry; regulatory and R&D delays; and litigation. The company said it could not estimate reasonably possible legal losses beyond amounts accrued. It did not believe the disclosed matters would materially affect financial position, but adverse developments could affect results or cash flows.
Important facts for investors to verify
- Whether COVID-19 caused the anticipated Q2 and subsequent demand, supply-chain, workforce or clinical-development impacts, and whether management later quantified or revised guidance.
- How much earnings growth reflected recurring operations versus tax benefits, the site-sale gain and the favorable comparison with the 2019 inventory adjustment; review the non-GAAP reconciliation.
- Ability to refinance or repay the $500 million note due in November 2020, and any changes in debt, liquidity or credit-facility usage.
- Progress in companion-animal growth and the trajectory of livestock and diagnostic sales, including the effects of foreign exchange and customer conditions.
- Developments in disclosed legal and tax contingencies, including the Belgian tax investigations and litigation matters.