Zoetis Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022, compared with the three months ended March 31, 2021. Zoetis is a global animal-health company operating through U.S. and International segments.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $1.986 billion | $1.871 billion | +6% reported; +9% operational |
| Income before taxes | $727 million | $687 million | +6% |
| Net income attributable to Zoetis | $595 million | $559 million | +6% |
| Diluted EPS | $1.26 | $1.17 | +8% |
| Adjusted net income (non-GAAP) | $625 million | $603 million | +4% |
| Adjusted diluted EPS (non-GAAP) | $1.32 | $1.26 | +5% |
| Operating cash flow | $309 million | $400 million | −23% |
Revenue growth was driven by new-product volume (about 5%), price (about 3%) and in-line product volume (about 1%), partly offset by a 3% foreign-exchange headwind. Companion-animal revenue rose 17% to $1.263 billion; livestock revenue fell 9% to $705 million. Parasiticides and dermatology grew to $459 million and $311 million, respectively; anti-infectives and vaccines declined to $285 million and $405 million.
Cost of sales was 28.7% of revenue versus 29.3%, supporting improved gross margins. The filing reports segment gross margins of 81.9% for the U.S. and 72.0% for International, compared with 80.3% and 69.4%. SG&A increased 14% to $465 million (23% of revenue, versus 22%); R&D increased 3% to $122 million. The effective tax rate declined to 18.3% from 18.8%.
Cash, debt and liquidity
Cash and cash equivalents were $3.135 billion at March 31, down $350 million from year-end. Working capital was $3.803 billion versus $5.133 billion, and the current ratio was 2.25:1 versus 3.86:1. Operating cash flow fell mainly because of timing of receipts and payments and inventory investment; inventories increased to $2.057 billion. Capital expenditures were $115 million.
Debt carrying value was $6.578 billion, comprising $1.350 billion current and $5.228 billion long-term; principal outstanding was $6.650 billion. The $1.350 billion of 3.25% notes due in 2023 was reclassified as current. No amounts were drawn on the $1.0 billion revolving credit facility or commercial-paper program, and the company reported compliance with credit-facility covenants. Q1 financing cash use included $361 million of share repurchases and $154 million of dividends paid. Dividends declared were $0.325 per share, up from $0.250.
Material changes and management commentary
- U.S. revenue grew 9%, led by companion-animal products, including Simparica Trio and dermatology. Livestock sales weakened, including from generic competition for Draxxin and pressure in cattle and poultry markets.
- International revenue increased 3% reported and 8% operationally; foreign exchange reduced growth by about 5%. Companion-animal products drove operational growth, while livestock was weaker, notably swine sales amid lower pork prices in China.
- Management cited favorable product mix, pricing and foreign exchange in the lower cost-of-sales ratio, partly offset by manufacturing, freight and import costs. Higher SG&A reflected added headcount, travel, growth investment, bad-debt reserves and logistics costs.
- Zoetis said isolated supply-chain challenges were being managed, with some expected to continue during 2022. It reported that Russia and Ukraine were not among its top 12 international markets and did not expect the conflict to have a material adverse effect on results or financial condition, while expecting sales in affected regions to be impacted.
Outlook, risks and contingencies
The filing discusses 2022 financial guidance as a forward-looking topic but does not provide a clear numerical guidance range in the supplied filing text. Management said available cash, operating cash flows and financing arrangements were expected to support needs for the next 12 months and beyond, subject to economic conditions. Zoetis expected to complete its planned Jurox acquisition in 2022, subject to customary closing conditions and regulatory requirements.
Key risks include ongoing COVID-19 effects, supply-chain disruption, inflation and geopolitical uncertainty; foreign-exchange movements (about 44% of Q1 revenue was denominated in foreign currencies); animal-disease outbreaks, including avian flu; generic competition; and product, regulatory, cybersecurity and litigation risks. The company disclosed significant uncertain tax positions of $187 million, excluding related interest and penalties, and said outcomes and timing may be uncertain. It believes disclosed non-tax legal matters will not materially affect its financial position, but could affect results or cash flows when resolved; it could not estimate reasonably possible losses above accruals. Phase II environmental testing in the Ulianopolis, Brazil matter was anticipated to begin later in 2022. The Belgium excess-profit-tax matter remained unresolved.
Investor verification priorities
- Confirm the complete 2022 guidance and any subsequent revisions; the supplied filing text provides no clear numerical range.
- Track whether inventory growth converts to sales and cash flow, and whether operating cash flow recovers from the Q1 working-capital outflow.
- Assess the 2023 debt maturity and refinancing plans, alongside the decline in working capital and current ratio.
- Monitor companion-animal growth against livestock weakness, generic competition, disease conditions and product-supply constraints.
- Review currency effects, Russia/Ukraine exposure, tax contingencies and developments in the disclosed legal matters.