Zoetis Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Zoetis is a global animal-health company operating in U.S. and International segments.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1.990B | $1.786B | $5.809B | $4.868B |
| Income before taxes | $659M | $597M | $1.982B | $1.576B |
| Net income attributable to Zoetis | $552M | $479M | $1.623B | $1.279B |
| Diluted EPS | $1.16 | $1.00 | $3.40 | $2.67 |
| Operating cash flow | Not separately provided | Not separately provided | $1.534B | $1.408B |
- Q3 revenue rose 11% (10% operational, excluding foreign exchange); nine-month revenue increased 19% (17% operational). Growth reflected new and in-line product volumes and pricing.
- Q3 gross margin was approximately 70.6%, versus 69.4% in 2020; nine-month gross margin was approximately 70.7%, versus 70.1%. These percentages are calculated from reported revenue and cost of sales.
- Q3 net income attributable to Zoetis increased 15%; nine-month net income increased 27%. Non-GAAP adjusted net income was $597M for Q3 (+14%) and $1.766B for nine months (+26%); adjusted diluted EPS was $1.25 and $3.70, respectively.
- Nine-month capital expenditures were $309M. Operating cash flow less capital expenditures was approximately $1.225B, calculated from reported figures.
Balance sheet and liquidity
- At September 30, 2021, cash and cash equivalents were $3.274B, total current assets $6.682B and current liabilities $1.471B. Working capital was $5.211B; the current ratio was 4.54:1.
- Long-term debt, net of discount and issuance costs, was $6.592B; principal debt outstanding was $6.650B. There were no short-term borrowings or revolver draws. The company repaid $600M of notes at maturity in August.
- Cash declined $330M from year-end 2020. Financing used $1.548B, including $545M of share repurchases, $357M of dividends paid and $600M of debt repayment. The company reported compliance with credit-facility covenants.
Material changes and business drivers
- Companion-animal revenue was a major growth driver: Q3 U.S. companion-animal revenue rose 17%, and International companion-animal revenue rose 29%. Parasiticides and dermatology products contributed to growth; new monoclonal antibody therapies also contributed internationally.
- Livestock results were mixed. U.S. livestock revenue fell 13% in Q3 amid generic competition, lower poultry disease pressure and pricing pressure. International livestock revenue rose 9%, supported by cattle, fish, swine and poultry sales.
- U.S. segment revenue increased 7% in Q3 and International revenue increased 18%. Q3 segment earnings were $683M in the U.S. and $483M International.
- SG&A and R&D expenses increased 19% and 18%, respectively, in Q3, reflecting compensation, growth investments, project spending and higher freight/logistics costs. Cost of sales as a share of revenue improved, aided by product mix and lower inventory charges, partly offset by manufacturing and freight costs.
Outlook, risks and unusual items
- The supplied filing text does not provide clear numerical 2021 guidance. Management said it continued to monitor COVID-19 effects on demand, supply chains, customers and operations, and stated that cash, operating cash flow and financing arrangements were expected to support foreseeable needs, subject to economic conditions.
- Risks highlighted include COVID-19-related supply or demand disruption; generic competition and patent expirations; foreign-exchange movements; animal-disease outbreaks; manufacturing, regulatory and product-safety issues; and legal and tax uncertainties.
- Zoetis agreed to acquire Australian animal-health company Jurox, subject to customary and regulatory conditions, with completion expected in the first half of 2022. The transaction had not closed at quarter-end.
- Nine-month restructuring and certain acquisition-related costs were $39M, including employee termination costs and manufacturing-site impairment charges. A $4M discrete tax benefit was recorded in the quarter. Uncertain tax-position liabilities were $191M, excluding related interest and penalties.
- Legal matters include environmental proceedings in Brazil, an appeal in the Michigan feed-contamination litigation and the Belgium excess-profit tax case. Management said it could not estimate the reasonably possible loss above accrued amounts for legal contingencies; it did not expect the matters to materially affect financial position, though outcomes could affect future-period earnings or cash flows.
- The company had temporarily suspended repurchases in 2020 and resumed them in January 2021. It repurchased approximately 3.1M shares during the first nine months of 2021; $879M remained under the authorization at September 30.
Important facts for investors to verify
- Whether companion-animal growth can continue to offset U.S. livestock weakness and increasing generic competition.
- Whether higher freight, manufacturing and operating costs affect future margins, and whether supply-chain disruptions persist.
- Updated full-year guidance, which is not clearly stated in the supplied filing text, and the assumptions underlying management’s outlook.
- Jurox closing timing, regulatory conditions and expected financial contribution.
- Developments in COVID-19 impacts, product-related and environmental litigation, tax contingencies and patent expirations.
- Debt maturities, capital allocation and the pace of repurchases and dividends relative to operating cash generation.