Business context and reporting period
Zoetis Inc. is a global animal-health medicines and vaccines company serving livestock and companion-animal markets. This unaudited Form 10-Q covers the three months ended March 30, 2014, compared with the three months ended March 31, 2013. The 2013 comparison includes pre-separation results and allocations from Pfizer, so it may not be fully comparable with Zoetis as an independent company.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $1.097 billion | $1.090 billion | +1% reported; +4% operational |
| Income before taxes | $227 million | $192 million | +18% |
| Net income attributable to Zoetis | $155 million | $140 million | +11% |
| Diluted EPS | $0.31 | $0.28 | +11% |
| Adjusted net income (non-GAAP) | $191 million | $179 million | +7% |
| Operating cash flow | $(23) million | $281 million | Down $304 million |
Operational revenue growth reflected 3% volume and 1% price growth, partly offset by a roughly 3% foreign-exchange headwind. Cost of sales declined 6% to $379 million; gross margin was approximately 65.5%, compared with 63.1%. Net margin was approximately 14.1%, versus 12.8%. SG&A was essentially flat at $356 million, R&D declined to $87 million from $90 million, and interest expense rose to $29 million from $22 million. The effective tax rate increased to 31.7% from 27.1%.
By region, U.S. revenue rose 6%, EuAfME fell 3%, CLAR fell 2% reported but grew 10% operationally, and APAC fell 3% reported but grew 4% operationally. Livestock revenue was $706 million and companion-animal revenue was $380 million. Anti-infectives grew to $322 million; parasiticides declined to $151 million.
Financial position, liquidity and cash flow
At March 30, 2014, cash and equivalents were $506 million, down from $610 million at year-end. Current assets were $3.222 billion and current liabilities $1.127 billion; working capital was $2.095 billion and the current ratio 2.86:1. Long-term debt was $3.642 billion, with $16 million of short-term borrowings. The $1.0 billion revolving facility had no borrowings outstanding; the company reported compliance with its covenants. Capital expenditures were $45 million, and dividends paid were $36 million.
Operating cash flow turned negative primarily because of changes in operating assets and liabilities, including lower accounts payable and accrued liabilities and higher inventory. Inventory increased to $1.316 billion, partly reflecting safety-stock buildup and anticipated production transfers. Management said available cash, operating cash flows and financing arrangements were expected to support future cash needs, while noting economic and financing-market uncertainty.
Material changes, outlook and risks
- Management maintained 2014 guidance: revenue of $4.65–$4.75 billion; adjusted diluted EPS of $1.48–$1.54; and reported diluted EPS of $1.15–$1.21. It expected $165–$185 million of significant and acquisition-related costs, including standalone-company costs.
- Q1 included $33 million of standalone-company costs, a roughly $4 million pension settlement charge related to a divested Netherlands facility, and an $8 million discrete tax expense. Management noted possible further restructuring costs during 2014.
- Management cited product launches, emerging-market performance and improved U.S. livestock conditions as growth drivers. Apoquel contributed to companion-animal growth. U.S. clinic visits were affected by severe weather; APAC results faced competition, mix and currency pressures.
- Key risks include foreign-exchange movements and currency controls, further restrictions on medically important antibacterials in animal feed, animal disease outbreaks (including PEDv), weather and resource constraints, competition, regulation, and the success of R&D and product launches. Management said it did not expect material 2014 revenue effects from PEDv or the cited U.S. FDA guidance, but continued to monitor both.
- Disclosed legal matters include remaining PregSure-related claims, patent litigation concerning Advocin, and environmental claims in Brazil. The Roxarsone claimant actions were dismissed with prejudice in January 2014. Management stated it could not estimate reasonably possible losses above accrued amounts for its contingencies.
Important facts for investors to verify
- Whether full-year revenue and EPS guidance remains achievable, including the expected standalone and restructuring costs.
- Whether negative quarterly operating cash flow reverses, and how inventory, receivables and payables affect cash conversion.
- Revenue and earnings trends by region and product, separating operational growth from foreign-exchange effects.
- Debt-service capacity, covenant headroom and refinancing exposure, particularly the 2016 and 2018 note maturities.
- Developments in antibacterial regulation, PEDv and other disease risks, foreign-exchange controls, and material litigation or tax contingencies.
- The assumptions and exclusions in adjusted net income and adjusted EPS, which are non-GAAP measures.