Zoetis Inc. — Q1 2023 Form 10-Q
Business and period: Global animal-health company operating through U.S. and International segments. This unaudited report covers the three months ended March 31, 2023; most international subsidiary results are through February 28.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $2.000 billion | $1.986 billion | +1% reported; +4% operational, excluding foreign exchange |
| Net income attributable to Zoetis | $552 million | $595 million | -7% |
| Diluted EPS | $1.19 | $1.26 | -6% |
| Adjusted net income (non-GAAP) | $607 million | $625 million | -3% |
| Adjusted diluted EPS (non-GAAP) | $1.31 | $1.32 | -1% |
| Operating cash flow | $549 million | $309 million | +$240 million |
Cost of sales was 29.4% of revenue versus 28.7% a year earlier, implying a consolidated gross margin of approximately 70.6% versus 71.3%. Management cited unfavorable manufacturing costs, product mix and inventory charges, partly offset by price increases and favorable foreign exchange. Selling, general and administrative expenses rose 9% to $505 million; research and development rose 16% to $142 million. Net income also reflected higher interest expense and taxes, partly offset by other income.
Revenue growth was driven by approximately 5% price growth and 1% volume growth from new products, offset by lower volume in key dermatology and other in-line products. Foreign exchange reduced reported revenue growth by about 3%. International revenue grew 10% operationally, while U.S. revenue declined 1%. Companion-animal revenue fell 3% globally; livestock revenue rose 8%. U.S. companion-animal sales were affected by distributor de-stocking and prior-quarter purchasing; international growth included Librela and Solensia launches and livestock gains.
Cash, debt and liquidity
- Cash and cash equivalents were $2.109 billion at March 31, down from $3.581 billion at year-end. Working capital was $4.354 billion; the current ratio was 3.27:1.
- Long-term debt, net of discounts and issuance costs, was $6.559 billion; there was no current portion at quarter-end. The company repaid $1.35 billion of notes at maturity in February, using proceeds from $1.35 billion of notes issued in November 2022. Interest expense increased 19% to $63 million.
- Operating cash flow was $549 million; capital expenditures were $223 million. Cash used in financing was $1.802 billion, mainly reflecting debt repayment, share repurchases and dividends.
- Zoetis repurchased 1.7 million shares for $283 million during the quarter and declared dividends of $0.375 per share. $2.3 billion remained under its $3.5 billion repurchase authorization.
Management commentary, outlook and risks
Management said operating cash flow, cash on hand and available financing are expected to support cash needs for the next 12 months and beyond, while noting that economic conditions could affect liquidity or access to financing. The filing provides no specific 2023 earnings or revenue guidance.
Management reported ongoing supply constraints for some products and components, despite improvement for others. Risks highlighted include foreign-exchange movements, inflation and macroeconomic conditions, disease outbreaks, distributor inventory fluctuations, competition and generics, product development and manufacturing execution, regulation, and litigation. The company reported compliance with its credit-facility covenants and no material changes to its previously disclosed risk factors.
Unusual items included $34 million of royalty-related income, predominantly from a settlement for underpaid royalties in prior periods; $33 million of interest income; and $20 million of employee-termination restructuring charges. The effective tax rate rose to 20.9% from 18.3%. Uncertain tax-position liabilities were $196 million, excluding $21 million of related interest and penalties. The company said it could not estimate the range of reasonably possible legal losses beyond amounts accrued. It reported no expected material adverse effect on financial position from the described legal matters, but outcomes could materially affect results or cash flows. A European Union case concerning Belgium’s excess-profit tax regime remained pending; no potential benefit was recorded.
Important facts for investors to verify
- Whether operational revenue growth persists as U.S. companion-animal sales recover from de-stocking and the comparison with prior-quarter purchasing effects.
- Whether cost inflation, product mix, inventory charges and supply constraints continue to pressure margins and working capital.
- How much of earnings depends on non-recurring royalty income, and whether higher interest expense and the tax rate persist.
- Future cash use for capital spending, debt service, dividends and share repurchases, and the implications of the $6.559 billion net carrying value of long-term debt.
- Developments in uncertain tax positions, the Belgium tax case and other legal contingencies, for which the filing does not provide a clear estimate of reasonably possible losses beyond accruals.