Zoetis Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. Zoetis became fully independent from Pfizer in June 2013. FY2013 results include both pre- and post-separation periods, while 2012 comparatives reflect the animal-health business as part of Pfizer, limiting direct comparability.
Business context
Zoetis develops, manufactures and sells animal medicines and vaccines for livestock and companion animals in more than 120 countries. Livestock provided 64% of 2013 revenue and companion animals 36%. The U.S. was the largest segment; emerging markets generated 26% of revenue.
Financial results and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $4.561 billion | $4.336 billion |
| Net income attributable to Zoetis | $504 million | $436 million |
| Diluted EPS | $1.01 | $0.87 |
| Adjusted net income (non-GAAP) | $709 million | $539 million |
| Operating cash flow | $681 million | $454 million |
- Revenue increased 5%; operational growth was 7% (5% volume and 2% price), partly offset by a 2% adverse foreign-exchange effect. Companion-animal revenue rose 7% and livestock revenue 4%.
- Gross profit was approximately $2.892 billion, a gross margin of 63.4%, versus 63.9% in 2012. Net margin was approximately 11.1%, versus 10.1%. R&D expense was $399 million, or 9% of revenue.
- Income before tax was $690 million, down from $710 million; the effective tax rate fell to 27.1% from 38.6%. Net income growth despite lower pretax income reflected the lower tax rate and other changes.
- Investing cash outflow was $179 million, including $184 million of capital spending. Operating cash flow less capital spending was approximately $497 million. Financing cash outflow was $200 million.
- Cash was $610 million; working capital was $1.942 billion and the current ratio 2.37. Long-term debt was $3.642 billion, primarily senior notes; short-term borrowings were $15 million. The $1 billion revolving facility was undrawn, and the company reported compliance with debt covenants.
- Debt issuance materially increased interest expense to $113 million from $31 million. The $3.65 billion senior notes carry rates from 1.15% to 4.70%, with maturities from 2016 to 2043.
Material changes and unusual items
- 2013 was Zoetis’s first year as a public company and its separation from Pfizer was completed in June. The IPO proceeds went to Pfizer; substantially all net proceeds from the senior-notes offering were also paid to Pfizer.
- The company incurred $262 million of separation and public-company stand-up costs in 2013. Adjusted net income excludes these and other specified items; it is a non-GAAP measure and should not replace reported results.
- Other notable 2013 items included $24 million of inventory and intercompany-account write-offs associated with the separation, a $9 million foreign-currency loss related to Venezuela’s devaluation, and a $6 million gain on a mandated sale of Brazilian product rights.
- Fourth-quarter 2013 revenue was $1.254 billion and net income attributable to Zoetis was $105 million, compared with $1.176 billion revenue and a $10 million net loss in fourth-quarter 2012. The filing attributes part of the fourth-quarter comparison to seasonal costs and an unusually elevated 2012 tax provision.
- All four geographic segments grew revenue in 2013. U.S. revenue rose 7%, Europe/Africa/Middle East 7%, Canada/Latin America 1% (including a 5% adverse FX impact), and Asia/Pacific 3% (including a 4% adverse FX impact).
Outlook, commentary and risks
- 2014 guidance: revenue of $4.65–$4.75 billion; adjusted diluted EPS of $1.48–$1.54; reported diluted EPS of $1.15–$1.21; and $165–$185 million of certain significant items and acquisition-related costs. Guidance assumes late-January 2014 exchange rates.
- Management cited customer relationships, emerging-market growth, product launches and lifecycle development, and manufacturing efficiency as strategic priorities. Apoquel launched in selected markets in January 2014.
- Antibacterial resistance and regulation are key exposures: livestock antibacterials accounted for approximately $1.2 billion of revenue and medicated feed additives for $446 million. The FDA announced a voluntary three-year phaseout of medically important antibacterials for growth promotion in U.S. food animals; treatment and certain other uses remain permitted under veterinary supervision.
- Other material risks include animal-disease outbreaks (including PEDv), drought and feed-cost pressure, foreign-exchange volatility, generic competition and patent expirations, changing companion-animal sales channels, product safety or regulatory actions, and manufacturing or supplier interruptions.
- Legal matters include product-related claims and patent litigation; management said it could not estimate reasonably possible losses beyond amounts accrued. The EU procedure concerning Suvaxyn PCV concluded in January 2014 with its marketing authorization maintained. PregSure-related claims and the Advocin patent case remained relevant disclosed matters.
- Environmental remediation and compliance are ongoing exposures. 2013 environmental-related capital expenditures were $0.5 million and other environmental expenditures were $9 million; management said it had no reason to expect a material adverse effect, while noting liabilities may not all have been identified.
Investor facts to verify
- Reconcile reported and adjusted earnings, especially the $262 million of stand-up costs and the assumptions behind 2014 guidance.
- Assess debt-service capacity, refinancing and covenant headroom, and cash accessibility across jurisdictions.
- Track organic growth, pricing, volume and FX separately by segment and species, particularly in Latin America and Asia/Pacific.
- Monitor FDA antibiotic-use changes and any further regulation, as well as revenue concentration in livestock antibacterials and medicated feed additives.
- Review status and potential financial exposure of product-liability, patent, environmental and tax matters; also assess the comparability limitations created by the Pfizer separation.