x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2013
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or
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TRANSITION REPORT PURSUANT TO SECTION 13
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OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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¨
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For the transition period from __________ to __________
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Zoetis Inc.
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(Exact name of registrant as specified in its charter)
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Delaware
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46-0696167
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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100 Campus Drive, Florham Park, New Jersey
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07932
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(Address of principal executive offices)
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(Zip Code)
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(973) 822-7000
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(Registrant’s telephone number, including area code)
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Large accelerated filer
¨
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Accelerated filer
¨
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Non-accelerated filer
x
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Smaller reporting company
¨
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Page
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Item 1.
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Condensed Consolidated and Combined Statements of Income
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Condensed Consolidated and Combined Statements of Comprehensive Income
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Condensed Consolidated and Combined Balance Sheets
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Condensed Consolidated and Combined Statements of Equity
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Condensed Consolidated and Combined Statements of Cash Flows
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Notes to Condensed Consolidated and Combined Financial Statements
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Review Report of Independent Registered Public Accounting Firm
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Item 2.
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Item 3.
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Item 4.
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Item 1.
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Item 1A.
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Item 2.
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Item 3.
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Defaults Upon Senior Securities
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Item 4.
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Mine Safety Disclosures
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Item 5.
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Other Information
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Item 6.
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Item 1.
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Financial Statements
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Three Months Ended
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Six Months Ended
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||||||||||||
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June 30,
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July 1,
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June 30,
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July 1,
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||||
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
|
|
2013
|
|
|
2012
|
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2013
|
|
|
2012
|
|
||||
Revenue
|
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$
|
1,114
|
|
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$
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1,094
|
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$
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2,204
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$
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2,141
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Costs and expenses:
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||||||||
Cost of sales
(a)
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416
|
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378
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818
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771
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||||
Selling, general and administrative expenses
(a)
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399
|
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344
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756
|
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682
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||||
Research and development expenses
(a)
|
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95
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92
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185
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194
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||||
Amortization of intangible assets
(a)
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15
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|
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16
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30
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32
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||||
Restructuring charges and certain acquisition-related costs
|
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(20
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)
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24
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(13
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)
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49
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||||
Interest expense
|
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32
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|
8
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54
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16
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||||
Other (income)/deductions—net
|
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(10
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)
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(20
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)
|
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(5
|
)
|
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(26
|
)
|
||||
Income before provision for taxes on income
|
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187
|
|
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252
|
|
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379
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423
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||||
Provision for taxes on income
|
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59
|
|
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79
|
|
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111
|
|
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138
|
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||||
Net income before allocation to noncontrolling interests
|
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128
|
|
|
173
|
|
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268
|
|
|
285
|
|
||||
Less: Net income attributable to noncontrolling interests
|
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—
|
|
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—
|
|
|
—
|
|
|
1
|
|
||||
Net income attributable to Zoetis Inc.
|
|
$
|
128
|
|
|
$
|
173
|
|
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$
|
268
|
|
|
$
|
284
|
|
Earnings per share attributable to Zoetis Inc. stockholders:
|
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||||||||
Basic
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$
|
0.26
|
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$
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0.35
|
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$
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0.54
|
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$
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0.57
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Diluted
|
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$
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0.26
|
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$
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0.35
|
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$
|
0.54
|
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$
|
0.57
|
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Weighted-average common shares outstanding:
|
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||||||||
Basic
|
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500.000
|
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500.000
|
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500.000
|
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500.000
|
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||||
Diluted
|
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500.217
|
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500.000
|
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500.164
|
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500.000
|
|
||||
Dividends declared per common share
|
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$
|
0.065
|
|
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$
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—
|
|
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$
|
0.130
|
|
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$
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—
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(a)
|
Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in
Amortization of intangible assets
as these intangible assets benefit multiple business functions. Amortization expense related to finite-lived acquired intangible assets that are associated with a single function is included in
Cost of sales
,
Selling, general and administrative expenses
or
Research and development expenses
, as appropriate, in the condensed consolidated and combined statements of income.
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Three Months Ended
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Six Months Ended
|
||||||||||||
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June 30,
|
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July 1,
|
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June 30,
|
|
|
July 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
||||
Net income before allocation to noncontrolling interests
|
|
$
|
128
|
|
|
$
|
173
|
|
|
$
|
268
|
|
|
$
|
285
|
|
Other comprehensive income/(loss), net of taxes and reclassification adjustments
(a)
:
|
|
|
|
|
|
|
|
|
||||||||
Foreign currency translation adjustments, net
|
|
(33
|
)
|
|
(162
|
)
|
|
(17
|
)
|
|
(128
|
)
|
||||
Benefit plans: Actuarial losses, net
|
|
(1
|
)
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
||||
Total other comprehensive income/(loss), net of tax
|
|
(34
|
)
|
|
(162
|
)
|
|
(20
|
)
|
|
(128
|
)
|
||||
Comprehensive income before allocation to noncontrolling interests
|
|
94
|
|
|
11
|
|
|
248
|
|
|
157
|
|
||||
Less: Comprehensive income attributable to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||
Comprehensive income attributable to Zoetis Inc.
|
|
$
|
94
|
|
|
$
|
11
|
|
|
$
|
248
|
|
|
$
|
156
|
|
(a)
|
Presented net of reclassification adjustments and tax impacts, which are not significant in any period presented. Reclassification adjustments related to benefit plans are generally reclassified, as part of net periodic pension cost, into
Cost of sales, Selling, general and administrative expenses,
and/or
Research and development expenses,
as appropriate, in the condensed consolidated and combined statements of income.
|
|
|
June 30,
|
|
|
December 31,
|
|
||
|
|
2013
(a)
|
|
|
2012
(a)
|
|
||
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
|
|
(Unaudited)
|
|
|
|
|||
Assets
|
|
|
|
|
||||
Cash and cash equivalents
|
|
$
|
369
|
|
|
$
|
317
|
|
Accounts receivable, less allowance for doubtful accounts of $34 in 2013 and $49 in 2012
|
|
1,137
|
|
|
900
|
|
||
Inventories
|
|
1,257
|
|
|
1,345
|
|
||
Current deferred tax assets
|
|
92
|
|
|
101
|
|
||
Other current assets
|
|
227
|
|
|
201
|
|
||
Total current assets
|
|
3,082
|
|
|
2,864
|
|
||
Property, plant and equipment, less accumulated depreciation of $974 in 2013 and $1,011 in 2012
|
|
1,252
|
|
|
1,241
|
|
||
Goodwill
|
|
982
|
|
|
985
|
|
||
Identifiable intangible assets, less accumulated amortization
|
|
834
|
|
|
868
|
|
||
Noncurrent deferred tax assets
|
|
54
|
|
|
216
|
|
||
Other noncurrent assets
|
|
57
|
|
|
88
|
|
||
Total assets
|
|
$
|
6,261
|
|
|
$
|
6,262
|
|
|
|
|
|
|
||||
Liabilities and Equity
|
|
|
|
|
||||
Short-term borrowings, including current portion of allocated long-term debt in 2012
|
|
$
|
12
|
|
|
$
|
73
|
|
Accounts payable
|
|
587
|
|
|
319
|
|
||
Accrued compensation and related items
|
|
157
|
|
|
194
|
|
||
Income taxes payable
|
|
83
|
|
|
30
|
|
||
Dividends payable
|
|
33
|
|
|
—
|
|
||
Other current liabilities
|
|
449
|
|
|
507
|
|
||
Total current liabilities
|
|
1,321
|
|
|
1,123
|
|
||
Long-term debt
|
|
3,640
|
|
|
—
|
|
||
Allocated long-term debt
|
|
—
|
|
|
509
|
|
||
Noncurrent deferred tax liabilities
|
|
308
|
|
|
323
|
|
||
Other taxes payable
|
|
38
|
|
|
159
|
|
||
Other noncurrent liabilities
|
|
131
|
|
|
107
|
|
||
Total liabilities
|
|
5,438
|
|
|
2,221
|
|
||
Commitments and contingencies
|
|
|
|
|
||||
Business unit equity
|
|
—
|
|
|
4,183
|
|
||
Stockholders' equity:
|
|
|
|
|
||||
Common stock, $0.01 par value: 5,000 authorized, 500 issued and outstanding
|
|
5
|
|
|
—
|
|
||
Additional paid-in capital
|
|
869
|
|
|
—
|
|
||
Retained earnings
|
|
109
|
|
|
—
|
|
||
Accumulated other comprehensive loss
|
|
(183
|
)
|
|
(157
|
)
|
||
Total Zoetis Inc. equity
|
|
800
|
|
|
4,026
|
|
||
Equity attributable to noncontrolling interests
|
|
23
|
|
|
15
|
|
||
Total equity
|
|
823
|
|
|
4,041
|
|
||
Total liabilities and equity
|
|
$
|
6,261
|
|
|
$
|
6,262
|
|
|
|
Zoetis
|
|
|
|
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
||||||||||||
|
|
Business
|
|
|
|
|
Additional
|
|
|
|
|
Other
|
|
|
Attributable to
|
|
|
|
||||||||||
|
|
Unit
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Total
|
|
|||||||
(MILLIONS OF DOLLARS)
|
|
Equity
(a)
|
|
|
Stock
(b)
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Interests
|
|
|
Equity
|
|
|||||||
Balance, December 31, 2011
|
|
$
|
3,785
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(65
|
)
|
|
$
|
16
|
|
|
$
|
3,736
|
|
Six months ended July 1, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Comprehensive income
|
|
284
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(128
|
)
|
|
1
|
|
|
157
|
|
|||||||
Share-based compensation expense
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|||||||
Dividends declared and paid
|
|
(62
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(62
|
)
|
|||||||
Net transfers between Pfizer Inc. and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
noncontrolling interests
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|||||||
Net transfers—Pfizer Inc.
|
|
88
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
88
|
|
|||||||
Balance, July 1, 2012
|
|
$
|
4,108
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(193
|
)
|
|
$
|
16
|
|
|
$
|
3,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Balance, December 31, 2012
|
|
$
|
4,183
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(157
|
)
|
|
$
|
15
|
|
|
$
|
4,041
|
|
Six months ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Comprehensive income
|
|
94
|
|
|
—
|
|
|
—
|
|
|
174
|
|
|
(20
|
)
|
|
—
|
|
|
248
|
|
|||||||
Share-based compensation expense
|
|
3
|
|
|
—
|
|
|
28
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|||||||
Net transfers—Pfizer Inc.
|
|
(271
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(271
|
)
|
|||||||
Separation adjustments
(c)
|
|
414
|
|
|
—
|
|
|
34
|
|
|
—
|
|
|
(6
|
)
|
|
8
|
|
|
450
|
|
|||||||
Employee benefit plan contribution from Pfizer Inc.
(d)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||||
Reclassification of net liability due to Pfizer Inc.
(e)
|
|
(60
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(60
|
)
|
|||||||
Consideration paid to Pfizer Inc. in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
connection with the Separation
(f)
|
|
—
|
|
|
—
|
|
|
(3,551
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,551
|
)
|
|||||||
Issuance of common stock to Pfizer Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
in connection with the Separation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
reclassification of Business Unit Equity
(f)
|
|
(4,363
|
)
|
|
5
|
|
|
4,358
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||||
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(65
|
)
|
|
—
|
|
|
—
|
|
|
(65
|
)
|
|||||||
Balance, June 30, 2013
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
869
|
|
|
$
|
109
|
|
|
$
|
(183
|
)
|
|
$
|
23
|
|
|
$
|
823
|
|
(a)
|
All amounts associated with
Business Unit Equity
relate to periods prior to the Separation. See
Note 2A. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: The Separation.
|
(b)
|
As of
June 30, 2013
, there were
500,000,000
outstanding shares of common stock.
|
(c)
|
For additional information, see
Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation.
|
(d)
|
Represents contributed capital from Pfizer Inc. associated with service credit continuation for certain Zoetis Inc. employees in Pfizer Inc.'s U.S. qualified defined benefit and U.S. retiree medical plans.
See Note 12. Benefit Plans.
|
(e)
|
Represents the reclassification of the Receivable from Pfizer Inc. and the Payable to Pfizer Inc. from
Business Unit Equity
as of the Separation date. See
Note 2A. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: The Separation.
|
(f)
|
Reflects the Separation transaction. See
Note 2A. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: The Separation.
|
|
|
Six Months Ended
|
||||||
|
|
June 30,
|
|
|
July 1,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
||
Operating Activities
|
|
|
|
|
||||
Net income before allocation to noncontrolling interests
|
|
$
|
268
|
|
|
$
|
285
|
|
Adjustments to reconcile net income before noncontrolling interests to net cash
|
|
|
|
|
||||
provided by operating activities:
|
|
|
|
|
||||
Depreciation and amortization expense
|
|
102
|
|
|
102
|
|
||
Share-based compensation expense
|
|
31
|
|
|
12
|
|
||
Asset write-offs and asset impairments
|
|
3
|
|
|
6
|
|
||
Deferred taxes
|
|
(19
|
)
|
|
(26
|
)
|
||
Other non-cash adjustments
|
|
(1
|
)
|
|
(3
|
)
|
||
Other changes in assets and liabilities, net of acquisitions and divestitures and transfers with Pfizer Inc.
|
|
(115
|
)
|
|
(306
|
)
|
||
Net cash provided by operating activities
|
|
269
|
|
|
70
|
|
||
Investing Activities
|
|
|
|
|
||||
Purchases of property, plant and equipment
|
|
(80
|
)
|
|
(55
|
)
|
||
Acquisitions, net of cash acquired
|
|
—
|
|
|
(1
|
)
|
||
Cash proceeds from the sale of property, plant and equipment
|
|
6
|
|
|
—
|
|
||
Other investing activities
|
|
—
|
|
|
(3
|
)
|
||
Net cash used in investing activities
|
|
(74
|
)
|
|
(59
|
)
|
||
Financing Activities
|
|
|
|
|
||||
Increase in short-term borrowings, net
|
|
12
|
|
|
—
|
|
||
Proceeds from issuance of long-term debt—senior notes, net of discount and fees
|
|
2,624
|
|
|
—
|
|
||
Consideration paid to Pfizer Inc. in connection with the Separation
(a)
|
|
(2,559
|
)
|
|
—
|
|
||
Cash dividends paid
(b)
|
|
(33
|
)
|
|
(62
|
)
|
||
Other net financing activities with Pfizer Inc.
|
|
(184
|
)
|
|
80
|
|
||
Net cash (used in)/provided by financing activities
|
|
(140
|
)
|
|
18
|
|
||
Effect of exchange-rate changes on cash and cash equivalents
|
|
(3
|
)
|
|
(2
|
)
|
||
Net increase in cash and cash equivalents
|
|
52
|
|
|
27
|
|
||
Cash and cash equivalents at beginning of period
|
|
317
|
|
|
79
|
|
||
Cash and cash equivalents at end of period
|
|
$
|
369
|
|
|
$
|
106
|
|
|
|
|
|
|
||||
Supplemental cash flow information
|
|
|
|
|
||||
Cash paid during the period for:
|
|
|
|
|
||||
Income taxes
|
|
$
|
26
|
|
|
$
|
147
|
|
Interest
|
|
—
|
|
|
23
|
|
||
Non-cash transactions:
|
|
|
|
|
||||
Dividends declared, not paid
|
|
$
|
33
|
|
|
$
|
—
|
|
Zoetis Inc. senior notes transferred to Pfizer Inc. in connection with the Separation
(c)
|
|
992
|
|
|
—
|
|
(a)
|
Reflects the Separation transaction. Amount is net of the non-cash portion. See
Note 2A. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: The Separation.
|
(b)
|
Payments to other non-Zoetis Pfizer Inc. entities for the
six months ended
July 1, 2012
.
|
(c)
|
Reflects the non-cash portion of the Separation transaction. See
Note 2A. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: The Separation.
|
1.
|
Organization
|
2.
|
The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer
|
A.
|
The Separation
|
B.
|
Adjustments Associated with the Separation
|
•
|
The removal of inventories (approximately $
74 million
), property, plant and equipment (approximately $
28 million
) and miscellaneous other net liabilities (approximately $
21 million
) associated with certain non-dedicated manufacturing sites that were retained by Pfizer;
|
•
|
The addition of property, plant and equipment (approximately $
56 million
) associated with a non-dedicated manufacturing site that was transferred to us by Pfizer (and then leased back to Pfizer under operating leases), and the removal of the inventory (approximately $
46 million
) and net other assets (approximately $
4 million
) at that site as these assets were retained by Pfizer;
|
•
|
The addition of net benefit plan liabilities (approximately $
25 million
);
|
•
|
The elimination of (i) noncurrent deferred tax assets (some of which were included within noncurrent deferred tax liabilities due to jurisdictional netting) related to net operating loss and tax credit carryforwards; (ii) net tax liabilities associated with uncertain tax positions; (iii) noncurrent deferred tax liabilities related to deferred income taxes on unremitted earnings; and (iv) other allocated net tax assets, all of which (approximately $
49 million
in net tax asset accounts) were retained by Pfizer;
|
•
|
The addition of (i) noncurrent deferred tax assets (approximately $
8 million
, some of which were included within noncurrent deferred tax liabilities due to jurisdictional netting) related to net benefit plan liabilities transferred to us by Pfizer; (ii) noncurrent deferred tax assets (approximately $
2 million
) related to net operating loss and tax credit carryforwards; and (iii) noncurrent deferred tax liabilities (approximately $
2 million
) related to property, plant and equipment transferred to us by Pfizer;
|
•
|
The elimination of allocated long-term debt (approximately $
582 million
), allocated accrued interest payable (approximately $
16 million
) and allocated unamortized deferred debt issuance costs (approximately $
2 million
) that were retained by Pfizer;
|
•
|
Certain net financial assets retained by Pfizer (approximately $
45 million
);
|
•
|
The removal of cash (approximately $
7 million
), inventories (approximately $
5 million
), property plant and equipment (approximately $
8 million
), miscellaneous other assets (approximately $
3 million
) and other miscellaneous liabilities (approximately $
2 million
) associated with non-U.S. Pfizer businesses that did not transfer to us from Pfizer;
|
•
|
The addition of net receivables from Pfizer (approximately $
5 million
) associated with certain foreign taxes directly resulting from certain aspects of the Separation that were the responsibility of Pfizer under the terms of the tax matters agreement, see
Note 7B. Income Taxes: Tax Matters Agreement
;
|
•
|
The addition of (i) inventory (approximately $
15 million
); (ii) net deferred tax assets (approximately $
1 million
); and (iii) miscellaneous other assets (approximately $
5 million
) transferred to us by Pfizer, and the removal of (i) property, plant and equipment (approximately $
2 million
); (ii) miscellaneous other liabilities (approximately $
57 million
), and (iii) the elimination of prepaid taxes (approximately $
4 million
) that were retained by Pfizer;
|
•
|
The addition of net benefit plan liabilities (approximately $
16 million
) associated with certain international plans that will be transferred from Pfizer to Zoetis in 2014. See
Note 12. Benefit Plans
.
|
C.
|
Senior Notes Offering
|
D.
|
Initial Public Offering (IPO)
|
E.
|
Exchange Offer
|
3.
|
Basis of Presentation
|
A.
|
Basis of Presentation Prior to the Separation
|
•
|
The condensed combined statements of income for the
three and six months ended
July 1, 2012
and the pre-Separation period in the condensed consolidated statement of income include allocations from certain support functions (Enabling Functions) that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, and, to a lesser extent, business development, public affairs and procurement, among others, as Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional allocation methods (e.g., using third-party sales, headcount, etc.), depending on the nature of the services.
|
•
|
The condensed combined statement of income for the
three and six months ended
July 1, 2012
and the pre-Separation period in the condensed consolidated statement of income include allocations of certain manufacturing and supply costs incurred by manufacturing plants that are shared with other Pfizer business units, Pfizer’s global external supply group and Pfizer’s global logistics and support group (collectively, Pfizer Global Supply, or PGS). These costs may include manufacturing variances and changes in the standard costs of inventory, among others, as Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional allocation methods, such as animal health identified manufacturing costs, depending on the nature of the costs.
|
•
|
The condensed combined statement of income for the
three and six months ended
July 1, 2012
and the pre-Separation period in the condensed consolidated statement of income also include allocations from the Enabling Functions and PGS for restructuring charges, integration costs, additional depreciation associated with asset restructuring and implementation costs, as Pfizer does not routinely allocate these costs to any of its business units. For additional information about allocations of restructuring charges and other costs associated with acquisitions and cost-reduction/productivity initiatives, see
Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
.
|
•
|
The condensed combined statement of income for the
three and six months ended
July 1, 2012
and the pre-Separation period in the condensed consolidated statement of income include an allocation of share-based compensation expense and certain other compensation expense items, such as certain fringe benefit expenses, maintained on a centralized basis within Pfizer, as Pfizer does not routinely allocate these costs to any of its business units. For additional information about allocations of share-based payments, see
Note 13. Share-Based Payments
.
|
•
|
The condensed combined balance sheet as of
December 31, 2012
reflects all of the assets and liabilities of Pfizer that are either specifically identifiable or are directly attributable to Zoetis and its operations. For benefit plans, the combined balance sheets only include the assets and liabilities of benefit plans dedicated to animal health employees. For debt, see below.
|
•
|
The condensed combined balance sheet as of
December 31, 2012
includes an allocation of long-term debt from Pfizer that was issued to partially finance the acquisition of Wyeth (including Fort Dodge Animal Health (FDAH)). The debt and associated interest-related expenses, including the effect of hedging activities, have been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. No other allocations of debt have been made as none are specifically related to our operations.
|
•
|
Enabling Functions operating expenses––
$11 million
in
2013
and
$152 million
in
2012
(
$1 million
in
Cost of sales
in
2012
;
$11 million
and
$123 million
in
Selling, general and administrative expenses
in
2013
and
2012
, respectively; and
$28 million
in
Research and development expenses
in
2012
).
|
•
|
PGS manufacturing costs—approximately
$12 million
in
2012
(in
Cost of sales).
|
•
|
Restructuring charges and certain acquisition-related costs—
$35 million
in
2012
(in
Restructuring charges and certain acquisition-related costs
).
|
•
|
Other costs associated with cost reduction/productivity initiatives—additional depreciation associated with asset restructuring—
$2 million
in
2013
(in
Selling, general and administrative expenses)
and
$9 million
in
2012
(in
Research and development expenses
).
|
•
|
Other costs associated with cost reduction/productivity initiatives—implementation costs—
$1 million
in
2013
and
$2 million
in
2012
(in
Selling, general and administrative expenses
).
|
•
|
Share-based compensation expense—approximately
$3 million
in
2013
and
$17 million
in
2012
(
$1 million
and
$3 million
in
Cost of sales
in
2013
and
2012
, respectively;
$2 million
and
$11 million
in
Selling, general and administrative expenses
in
2013
and
2012
, respectively; and
$3 million
in
Research and development expenses
in
2012
).
|
•
|
Compensation-related expenses—approximately
$1 million
in
2013
and
$11 million
in
2012
(
$3 million
in
Cost of sales
in
2012
;
$1 million
and
$5 million
in
Selling, general and administrative expenses
in
2013
and
2012
, respectively; and
$3 million
in
Research and development expenses
in
2012
).
|
•
|
Interest expense—approximately
$2 million
in
2013
and
$16 million
in
2012
.
|
B.
|
Basis of Presentation After the Separation
|
4.
|
Significant Accounting Policies
|
A.
|
New Accounting Standards
|
B.
|
Fair Value
|
•
|
Quoted prices for identical assets or liabilities in active markets (Level 1 inputs).
|
•
|
Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable (Level 2 inputs).
|
•
|
Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).
|
5.
|
Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
|
•
|
in connection with the cost-reduction/productivity initiatives, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems; and
|
•
|
in connection with our acquisition activity, we typically incur costs and charges associated with executing the transactions, integrating the acquired operations, which may include expenditures for consulting and the integration of systems and processes, and restructuring the consolidated company, which may include charges related to employees, assets and activities that will not continue in the consolidated company.
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
June 30,
|
|
|
July 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
||||
Restructuring charges and certain acquisition-related costs:
|
|
|
|
|
|
|
|
|
||||||||
Integration costs
(a)
|
|
$
|
10
|
|
|
$
|
5
|
|
|
$
|
14
|
|
|
$
|
9
|
|
Restructuring charges (benefits)
(b)
:
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Employee termination costs
|
|
(30
|
)
|
|
1
|
|
|
(27
|
)
|
|
3
|
|
||||
Asset impairment charges
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
||||
Exit costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||
Total direct
|
|
(20
|
)
|
|
7
|
|
|
(13
|
)
|
|
14
|
|
||||
Integration costs
(a)
|
|
—
|
|
|
7
|
|
|
—
|
|
|
12
|
|
||||
Restructuring charges
(b)
:
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Employee termination costs
|
|
—
|
|
|
9
|
|
|
—
|
|
|
14
|
|
||||
Asset impairment charges
|
|
—
|
|
|
1
|
|
|
—
|
|
|
8
|
|
||||
Exit costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||
Total allocated
|
|
—
|
|
|
17
|
|
|
—
|
|
|
35
|
|
||||
Total
Restructuring charges and certain acquisition-related costs
|
|
(20
|
)
|
|
24
|
|
|
(13
|
)
|
|
49
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Other costs associated with cost-reduction/productivity initiatives:
|
|
|
|
|
|
|
|
|
||||||||
Additional depreciation associated with asset restructuring––direct
(c)
|
|
1
|
|
|
2
|
|
|
1
|
|
|
5
|
|
||||
Additional depreciation associated with asset restructuring––allocated
(c)
|
|
—
|
|
|
—
|
|
|
2
|
|
|
9
|
|
||||
Implementation costs––allocated
(d)
|
|
—
|
|
|
1
|
|
|
1
|
|
|
2
|
|
||||
Total costs associated with acquisitions and cost-reduction/productivity initiatives
|
|
$
|
(19
|
)
|
|
$
|
27
|
|
|
$
|
(9
|
)
|
|
$
|
65
|
|
(a)
|
Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and the integration of systems and processes.
|
(b)
|
The restructuring benefit for the three and six months ended
June 30, 2013
is related to the reversal of certain employee termination expenses associated with our operations in Europe and the restructuring charges for the three and six months
July 1, 2012
are primarily related to the integration of FDAH and KAH.
|
•
|
For the
three months ended
June 30, 2013
— Manufacturing/research/corporate (
$30 million
income).
|
•
|
For the
six months ended
June 30, 2013
–– Manufacturing/research/corporate (
$27 million
income).
|
•
|
For the
three months ended
July 1, 2012
—U.S. (
$3 million
), EuAfME (
$1 million
), and manufacturing/research/corporate (
$2 million
income).
|
•
|
For the
six months ended
July 1, 2012
––U.S. (
$3 million
), EuAfME (
$1 million
income), CLAR (
$1 million
), and manufacturing/research/corporate (
$2 million
).
|
(c)
|
Additional depreciation associated with asset restructuring represents the impact of changes in the estimated lives of assets involved in restructuring actions. For the
three months ended
June 30, 2013
, included in
Cost of sales
(
$1 million
). For the
six months ended
June 30, 2013
, included in
Cost of sales
($
1 million
) and
Selling, general and administrative expenses
($
2 million
)
. For the
three months ended
July 1, 2012
, included in
Cost of sales
(
$2 million
). For the
six months ended
July 1, 2012
, included in
Cost of sales
(
$5 million
) and
Research and development expenses
(
$9 million
).
|
(d)
|
Implementation costs—allocated represent external, incremental costs directly related to implementing cost reduction/productivity initiatives, and primarily include expenditures related to system and process standardization and the expansion of shared services. Included in
Selling, general and administrative expenses
.
|
|
|
Employee
|
|
|
Asset
|
|
|
|
|
|
||||||
|
|
Termination
|
|
|
Impairment
|
|
|
Exit
|
|
|
|
|||||
(MILLIONS OF DOLLARS)
|
|
Costs
|
|
|
Charges
|
|
|
Costs
|
|
|
Accrual
|
|
||||
Balance, December 31, 2012
(a)
|
|
$
|
68
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
74
|
|
Provision/(Benefit)
|
|
(27
|
)
|
|
—
|
|
|
—
|
|
|
(27
|
)
|
||||
Utilization and other
(b)
|
|
(10
|
)
|
|
—
|
|
|
(5
|
)
|
|
(15
|
)
|
||||
Separation adjustment
(c)
|
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
||||
Balance, June 30, 2013
(a)
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
18
|
|
(a)
|
At
June 30, 2013
and
December 31, 2012
, included in
Other current liabilities
(
$9 million
and $
63 million
, respectively) and
Other noncurrent liabilities
(
$9 million
and $
11 million
, respectively).
|
(b)
|
Includes adjustments for foreign currency translation.
|
(c)
|
See
Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation.
|
6.
|
Other (Income)/Deductions—Net
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
June 30,
|
|
|
July 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
||||
Royalty-related income
|
|
$
|
(5
|
)
|
|
$
|
(7
|
)
|
|
$
|
(13
|
)
|
|
$
|
(13
|
)
|
Identifiable intangible asset impairment charges
|
|
—
|
|
|
3
|
|
|
1
|
|
|
3
|
|
||||
Net gain on sale of assets
(a)
|
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
||||
Certain legal matters, net
(b)
|
|
—
|
|
|
(19
|
)
|
|
—
|
|
|
(19
|
)
|
||||
Foreign currency loss
(c)
|
|
2
|
|
|
3
|
|
|
12
|
|
|
3
|
|
||||
Other, net
|
|
(1
|
)
|
|
—
|
|
|
1
|
|
|
—
|
|
||||
Other (income)/deductions—net
|
|
$
|
(10
|
)
|
|
$
|
(20
|
)
|
|
$
|
(5
|
)
|
|
$
|
(26
|
)
|
(a)
|
For the three and
six months ended
June 30, 2013
, represents the net gain on the government-mandated sale of certain product rights in Brazil that were acquired with the FDAH acquisition in
2009
.
|
(b)
|
For the three and
six months ended
July 1, 2012
, represents income from a favorable legal settlement related to an intellectual property matter ($
14 million
) and a change in estimate for an environmental-related reserve due to a favorable settlement ($
7 million
) partially offset by litigation-related charges ($
2 million
).
|
(c)
|
For the
six months ended
June 30, 2013
, primarily related to the Venezuela currency devaluation in February 2013.
|
7.
|
Income Taxes
|
A.
|
Taxes on Income
|
•
|
incentive tax rulings in Belgium, effective
December 31, 2012
, and Singapore, effective
October 29, 2012
, and
|
•
|
changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs.
|
•
|
the aforementioned incentive tax rulings and changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs, and
|
•
|
a $
2 million
discrete income tax benefit during the
first quarter
of
2013
related to the
2012
U.S. research and development tax credit which was retroactively extended on
January 3, 2013
;
|
•
|
the aforementioned impact of non-deductibility and jurisdictional mix of certain costs incurred during the
second quarter
related to becoming a standalone public company.
|
B.
|
Tax Matters Agreement
|
•
|
Pfizer will be responsible for any U.S. federal, state, local or foreign income taxes and any U.S. state or local non-income taxes (and any related interest, penalties or audit adjustments and including those taxes attributable to our business) reportable on a consolidated, combined or unitary return that includes Pfizer or any of its subsidiaries (and us and/or any of our subsidiaries) for any periods or portions thereof ending on or prior to December 31, 2012. We will be responsible for the portion of any such taxes for periods or
|
•
|
We will be responsible for any U.S. federal, state, local or foreign income taxes and any U.S. state or local non-income taxes (and any related interest, penalties or audit adjustments) that are reportable on returns that include only us and/or any of our subsidiaries, for all tax periods whether before or after the completion of the Separation.
|
•
|
Pfizer will be responsible for certain specified foreign taxes directly resulting from certain aspects of the Separation.
|
C.
|
Deferred Taxes
|
D.
|
Tax Contingencies
|
8.
|
Accumulated Other Comprehensive Loss
|
|
|
Currency Translation
|
|
|
|
|
Accumulated
|
|
||||
|
|
Adjustment
|
|
|
Benefit Plans
|
|
|
Other
|
|
|||
|
|
Net Unrealized
|
|
|
Actuarial
|
|
|
Comprehensive
|
|
|||
(MILLIONS OF DOLLARS)
|
|
Gains/(Losses)
|
|
|
Losses
|
|
|
Income/(Loss)
|
|
|||
Balance, December 31, 2012
|
|
$
|
(152
|
)
|
|
$
|
(5
|
)
|
|
$
|
(157
|
)
|
Other comprehensive income/(loss), net of tax
|
|
(17
|
)
|
|
(3
|
)
|
|
(20
|
)
|
|||
Separation adjustments
(a)
|
|
(7
|
)
|
|
1
|
|
|
(6
|
)
|
|||
Balance, June 30, 2013
|
|
$
|
(176
|
)
|
|
$
|
(7
|
)
|
|
$
|
(183
|
)
|
(a)
|
See
Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation.
|
9.
|
Financial Instruments
|
A.
|
Credit Facility
|
B.
|
Commercial Paper Program
|
C.
|
Short-Term Borrowings
|
D.
|
Senior Notes Offering
|
|
|
June 30,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
||
Allocated long-term debt
|
|
$
|
—
|
|
|
$
|
509
|
|
1.150% Senior Notes due 2016
|
|
400
|
|
|
—
|
|
||
1.875% Senior Notes due 2018
|
|
750
|
|
|
—
|
|
||
3.250% Senior Notes due 2023
|
|
1,350
|
|
|
—
|
|
||
4.700% Senior Notes due 2043
|
|
1,150
|
|
|
—
|
|
||
|
|
3,650
|
|
|
509
|
|
||
Unamortized debt discount
|
|
(10
|
)
|
|
—
|
|
||
Long-term debt / Allocated long-term debt
|
|
$
|
3,640
|
|
|
$
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|||||||||||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2018
|
|
|
Total
|
|
|||||||
Maturities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
400
|
|
|
$
|
—
|
|
|
$
|
750
|
|
|
$
|
2,500
|
|
|
$
|
3,650
|
|
E.
|
Derivative Financial Instruments
|
|
|
Fair Value of
|
|
|
(MILLIONS OF DOLLARS)
|
Balance Sheet Location
|
Derivatives
|
|
|
Foreign currency forward-exchange contracts
|
Other current assets
|
$
|
4
|
|
Foreign currency forward-exchange contracts
|
Other current liabilities
|
(1
|
)
|
|
Total foreign currency forward-exchange contracts
|
|
$
|
3
|
|
10.
|
Inventories
|
|
|
June 30,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
||
Finished goods
|
|
$
|
844
|
|
|
$
|
799
|
|
Work-in-process
|
|
227
|
|
|
332
|
|
||
Raw materials and supplies
|
|
186
|
|
|
214
|
|
||
Inventories
|
|
$
|
1,257
|
|
|
$
|
1,345
|
|
11.
|
Goodwill and Other Intangible Assets
|
A.
|
Goodwill
|
(MILLIONS OF DOLLARS)
|
|
U.S.
|
|
|
EuAfME
|
|
|
CLAR
|
|
|
APAC
|
|
|
Total
|
|
|||||
Balance, December 31, 2012
|
|
$
|
502
|
|
|
$
|
157
|
|
|
$
|
163
|
|
|
$
|
163
|
|
|
$
|
985
|
|
Other
(a)
|
|
(2
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|||||
Balance, June 30, 2013
|
|
$
|
500
|
|
|
$
|
156
|
|
|
$
|
163
|
|
|
$
|
163
|
|
|
$
|
982
|
|
(a)
|
Primarily reflects adjustments for foreign currency translation.
|
B.
|
Other Intangible Assets
|
|
|
As of June 30, 2013
|
|
As of December 31, 2012
|
||||||||||||||||||||
|
|
|
|
|
|
Identifiable
|
|
|
|
|
|
|
Identifiable
|
|
||||||||||
|
|
|
|
|
|
Intangible
|
|
|
|
|
|
|
Intangible
|
|
||||||||||
|
|
Gross
|
|
|
|
|
Assets, Less
|
|
|
Gross
|
|
|
|
|
Assets, Less
|
|
||||||||
|
|
Carrying
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Accumulated
|
|
||||||
(MILLIONS OF DOLLARS)
|
|
Amount
|
|
|
Amortization
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amortization
|
|
||||||
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Developed technology rights
|
|
$
|
764
|
|
|
$
|
(196
|
)
|
|
$
|
568
|
|
|
$
|
762
|
|
|
$
|
(173
|
)
|
|
$
|
589
|
|
Brands
|
|
216
|
|
|
(94
|
)
|
|
122
|
|
|
216
|
|
|
(88
|
)
|
|
128
|
|
||||||
Trademarks and trade names
|
|
53
|
|
|
(36
|
)
|
|
17
|
|
|
54
|
|
|
(36
|
)
|
|
18
|
|
||||||
Other
|
|
121
|
|
|
(115
|
)
|
|
6
|
|
|
122
|
|
|
(115
|
)
|
|
7
|
|
||||||
Total finite-lived intangible assets
|
|
1,154
|
|
|
(441
|
)
|
|
713
|
|
|
1,154
|
|
|
(412
|
)
|
|
742
|
|
||||||
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Brands
|
|
39
|
|
|
—
|
|
|
39
|
|
|
39
|
|
|
—
|
|
|
39
|
|
||||||
Trademarks and trade names
|
|
67
|
|
|
—
|
|
|
67
|
|
|
67
|
|
|
—
|
|
|
67
|
|
||||||
In-process research and development
|
|
15
|
|
|
—
|
|
|
15
|
|
|
20
|
|
|
—
|
|
|
20
|
|
||||||
Total indefinite-lived intangible assets
|
|
121
|
|
|
—
|
|
|
121
|
|
|
126
|
|
|
—
|
|
|
126
|
|
||||||
Identifiable intangible assets
|
|
$
|
1,275
|
|
|
$
|
(441
|
)
|
|
$
|
834
|
|
|
$
|
1,280
|
|
|
$
|
(412
|
)
|
|
$
|
868
|
|
C.
|
Amortization
|
12.
|
Benefit Plans
|
13.
|
Share-Based Payments
|
A.
|
Zoetis 2013 Equity and Incentive Plan
|
•
|
Stock Options.
Stock options represent the right to purchase shares of our common stock within a specified period of time at a specified price. The exercise price for a stock option will be not less than
100%
of the fair market value of the common stock on the date of grant. Stock options will have a contractual maximum term of
ten
years from the date of grant. Stock options granted may include those intended to be “incentive stock options” within the meaning of Section 422 of the Code.
|
•
|
Restricted Stock and Restricted Stock Units (RSUs).
Restricted stock is a share of our common stock that is subject to a risk of forfeiture or other restrictions that will lapse subject to the recipient's continued employment, the attainment of performance goals, or both. Restricted stock units represent the right to receive shares of our common stock in the future (or cash determined by reference to the value of our common stock), subject to the recipient's continued employment, the attainment of performance goals, or both.
|
•
|
Performance-Based Awards.
Performance awards will require satisfaction of pre-established performance goals, consisting of one or more business criteria and a targeted performance level with respect to such criteria as a condition of awards vesting or being settled. Performance may be measured over a period of any length specified but not less than one year.
|
•
|
Other Equity-Based or Cash-Based Awards
. Our Compensation Committee is authorized to grant awards in the form of other equity-based awards or other cash-based awards, as deemed to be consistent with the purposes of the Equity Plan. The maximum value of the aggregate payment to be paid to any participant with respect to cash-based awards under the Equity Plan in respect of an annual performance period will be
$10 million
.
|
B.
|
Share-Based Compensation Expense
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
June 30,
|
|
|
July 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
||||
Stock option expense
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
RSU expense
|
|
1
|
|
|
—
|
|
|
2
|
|
|
—
|
|
||||
Pfizer stock benefit plans—direct
|
|
17
|
|
|
6
|
|
|
25
|
|
|
12
|
|
||||
Share-based compensation expense—direct
|
|
20
|
|
|
6
|
|
|
31
|
|
|
12
|
|
||||
Share-based compensation expense—indirect
|
|
—
|
|
|
3
|
|
|
—
|
|
|
5
|
|
||||
Share-based compensation expense—total
|
|
$
|
20
|
|
|
$
|
9
|
|
|
$
|
31
|
|
|
$
|
17
|
|
C.
|
Stock Options
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
|
June 30, 2013
|
|
Expected dividend yield
(a)
|
|
1.0
|
%
|
Risk-free interest rate
(b)
|
|
1.29
|
%
|
Expected stock price volatility
(c)
|
|
28.2
|
%
|
Expected term
(d)
(years)
|
|
6.5
|
|
(a)
|
Determined using a constant dividend yield during the expected term of the Zoetis stock option.
|
(b)
|
Determined using the interpolated yield on U.S. Treasury zero-coupon issues.
|
(c)
|
Determined using implied volatility.
|
(d)
|
Determined using expected exercise and post-vesting termination patterns.
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
||||
|
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|||
|
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
(a)
|
|
|||
|
|
Shares
|
|
|
Per Share
|
|
|
(Years)
|
|
|
(MILLIONS)
|
|
||
Outstanding, December 31, 2012
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|||
Granted
|
|
2,948,882
|
|
|
26.05
|
|
|
|
|
|
||||
Forfeited
|
|
(25,894
|
)
|
|
26.00
|
|
|
|
|
|
||||
Outstanding, June 30, 2013
|
|
2,922,988
|
|
|
$
|
26.05
|
|
|
9.6
|
|
|
$
|
14
|
|
Exercisable, June 30, 2013
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(a)
|
Market price of underlying Zoetis common stock less exercise price.
|
|
|
Six Months
|
|
|
|
|
Ended/As of
|
|
|
(MILLIONS OF DOLLARS, EXCEPT PER STOCK OPTION AMOUNTS)
|
|
June 30, 2013
|
|
|
Weighted-average grant date fair value per stock option
|
|
$
|
7.02
|
|
Total compensation cost related to nonvested stock options not yet recognized, pre-tax
|
|
$
|
16
|
|
Weighted-average period over which stock option compensation is expected to be recognized (years)
|
|
2.0
|
|
D.
|
Restricted Stock Units (RSUs)
|
|
|
|
|
Weighted-Average
|
|
||
|
|
|
|
Grant Date
|
|
||
|
|
|
|
Fair Value
|
|
||
|
|
Shares
|
|
|
Per Share
|
|
|
Nonvested, December 31, 2012
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
808,243
|
|
|
26.13
|
|
|
Forfeited
|
|
(7,226
|
)
|
|
26.00
|
|
|
Nonvested, June 30, 2013
|
|
801,017
|
|
|
$
|
26.13
|
|
|
|
Six Months
|
|
|
|
|
Ended/As of
|
|
|
(MILLIONS OF DOLLARS)
|
|
June 30, 2013
|
|
|
Total compensation cost related to nonvested RSU awards not yet recognized, pre-tax
|
|
$
|
19
|
|
Weighted-average period over which RSU cost is expected to be recognized (years)
|
|
2.6
|
|
E.
|
Treatment of Outstanding Pfizer Equity Awards
|
14.
|
Earnings per Share
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
June 30,
|
|
|
July 1,
|
|
||||
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
||||
Numerator
|
|
|
|
|
|
|
|
|
||||||||
Net income before allocation to noncontrolling interests
|
|
$
|
128
|
|
|
$
|
173
|
|
|
$
|
268
|
|
|
$
|
285
|
|
Less: net income attributable to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||
Net income attributable to Zoetis Inc.
|
|
$
|
128
|
|
|
$
|
173
|
|
|
$
|
268
|
|
|
$
|
284
|
|
Denominator
|
|
|
|
|
|
|
|
|
||||||||
Weighted-average common shares outstanding
|
|
500.000
|
|
|
500.000
|
|
|
500.000
|
|
|
500.000
|
|
||||
Common stock equivalents: stock options and RSUs
|
|
0.217
|
|
|
—
|
|
|
0.164
|
|
|
—
|
|
||||
Weighted-average common and potential dilutive shares outstanding
|
|
500.217
|
|
|
500.000
|
|
|
500.164
|
|
|
500.000
|
|
||||
Earnings per share attributable to Zoetis Inc. stockholders—basic
|
|
$
|
0.26
|
|
|
$
|
0.35
|
|
|
$
|
0.54
|
|
|
$
|
0.57
|
|
Earnings per share attributable to Zoetis Inc. stockholders—diluted
|
|
$
|
0.26
|
|
|
$
|
0.35
|
|
|
$
|
0.54
|
|
|
$
|
0.57
|
|
15.
|
Commitments and Contingencies
|
A.
|
Legal Proceedings
|
•
|
Product liability and other product-related litigation, which can include injury, consumer, off-label promotion, antitrust and breach of contract claims.
|
•
|
Commercial and other matters, which can include product-pricing claims and environmental claims and proceedings.
|
•
|
Patent litigation, which typically involves challenges to the coverage and/or validity of our patents or those of third parties on various products or processes.
|
•
|
Government investigations, which can involve regulation by national, state and local government agencies in the U.S. and in other countries.
|
B.
|
Guarantees and Indemnifications
|
16.
|
Segment and Other Revenue Information
|
A.
|
Segment Information
|
•
|
The United States (U.S.).
|
•
|
Europe/Africa/Middle East (EuAfME)—Includes, among others, the United Kingdom, Germany, France, Italy, Spain, Northern Europe and Central Europe as well as Russia, Turkey and South Africa.
|
•
|
Canada/Latin America (CLAR)––Includes Canada, Brazil, Mexico, Central America and Other South America.
|
•
|
Asia/Pacific (APAC)––Includes Australia, Japan, New Zealand, South Korea, India, China/Hong Kong, Northeast Asia, Southeast Asia and South Asia.
|
•
|
Research & development (R&D), which is generally responsible for research projects.
|
•
|
Corporate, which is responsible for platform functions such as business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, among others. These costs also include compensation costs and other miscellaneous operating expenses not charged to our operating segments, as well as interest income and expense.
|
•
|
Certain transactions and events such as (i) purchase accounting adjustments, where we incur expenses associated with the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment; (ii) acquisition-related activities, where we incur costs for restructuring and integration; and (iii) certain significant items, which include non-acquisition-related restructuring charges, certain asset impairment charges and costs associated with cost reduction/productivity initiatives.
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
|
||||||||||||||
|
|
Revenue
(a)
|
|
Earnings
(b)
|
|
Amortization
(c)
|
||||||||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
June 30,
|
|
|
July 1,
|
|
|
June 30,
|
|
|
July 1,
|
|
||||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
||||||
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
U.S.
|
|
$
|
437
|
|
|
$
|
421
|
|
|
$
|
254
|
|
|
$
|
227
|
|
|
$
|
8
|
|
|
$
|
8
|
|
EuAfME
|
|
278
|
|
|
283
|
|
|
91
|
|
|
88
|
|
|
6
|
|
|
6
|
|
||||||
CLAR
|
|
213
|
|
|
211
|
|
|
78
|
|
|
77
|
|
|
4
|
|
|
6
|
|
||||||
APAC
|
|
186
|
|
|
179
|
|
|
71
|
|
|
63
|
|
|
2
|
|
|
3
|
|
||||||
Total reportable segments
|
|
1,114
|
|
|
1,094
|
|
|
494
|
|
|
455
|
|
|
20
|
|
|
23
|
|
||||||
Other business activities
(d)
|
|
—
|
|
|
—
|
|
|
(74
|
)
|
|
(61
|
)
|
|
6
|
|
|
5
|
|
||||||
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Corporate
(e)
|
|
—
|
|
|
—
|
|
|
(137
|
)
|
|
(104
|
)
|
|
13
|
|
|
11
|
|
||||||
Purchase accounting adjustments
(f)
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
|
(13
|
)
|
|
13
|
|
|
13
|
|
||||||
Acquisition-related costs
(g)
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
(15
|
)
|
|
—
|
|
|
2
|
|
||||||
Certain significant items
(h)
|
|
—
|
|
|
—
|
|
|
(43
|
)
|
|
14
|
|
|
—
|
|
|
—
|
|
||||||
Other unallocated
(i)
|
|
—
|
|
|
—
|
|
|
(31
|
)
|
|
(24
|
)
|
|
(1
|
)
|
|
—
|
|
||||||
|
|
$
|
1,114
|
|
|
$
|
1,094
|
|
|
$
|
187
|
|
|
$
|
252
|
|
|
$
|
51
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
U.S.
|
|
$
|
891
|
|
|
$
|
846
|
|
|
$
|
488
|
|
|
$
|
444
|
|
|
$
|
22
|
|
|
$
|
15
|
|
EuAfME
|
|
568
|
|
|
558
|
|
|
208
|
|
|
192
|
|
|
12
|
|
|
12
|
|
||||||
CLAR
|
|
384
|
|
|
384
|
|
|
130
|
|
|
131
|
|
|
9
|
|
|
12
|
|
||||||
APAC
|
|
361
|
|
|
353
|
|
|
146
|
|
|
134
|
|
|
6
|
|
|
7
|
|
||||||
Total reportable segments
|
|
2,204
|
|
|
2,141
|
|
|
972
|
|
|
901
|
|
|
49
|
|
|
46
|
|
||||||
Other business activities
(d)
|
|
—
|
|
|
—
|
|
|
(148
|
)
|
|
(126
|
)
|
|
13
|
|
|
8
|
|
||||||
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Corporate
(e)
|
|
—
|
|
|
—
|
|
|
(253
|
)
|
|
(233
|
)
|
|
15
|
|
|
17
|
|
||||||
Purchase accounting adjustments
(f)
|
|
—
|
|
|
—
|
|
|
(25
|
)
|
|
(26
|
)
|
|
25
|
|
|
26
|
|
||||||
Acquisition-related costs
(g)
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
|
(29
|
)
|
|
—
|
|
|
5
|
|
||||||
Certain significant items
(h)
|
|
—
|
|
|
—
|
|
|
(85
|
)
|
|
(17
|
)
|
|
—
|
|
|
—
|
|
||||||
Other unallocated
(i)
|
|
—
|
|
|
—
|
|
|
(67
|
)
|
|
(47
|
)
|
|
—
|
|
|
—
|
|
||||||
|
|
$
|
2,204
|
|
|
$
|
2,141
|
|
|
$
|
379
|
|
|
$
|
423
|
|
|
$
|
102
|
|
|
$
|
102
|
|
(a)
|
Revenue denominated in euros were
$166 million
and
$334 million
in the three and six months ended June 30, 2013, respectively and
$158 million
and
$322 million
in the three and six months ended July 1, 2012, respectively.
|
(b)
|
Defined as income before provision for taxes on income.
|
(c)
|
Certain production facilities are shared. Depreciation and amortization is allocated to the reportable operating segments based on estimates of where the benefits of the related assets are realized.
|
(d)
|
Other business activities reflect the research and development costs managed by our Research and Development organization.
|
(e)
|
Corporate includes, among other things, administration expenses, interest expense, certain compensation and other costs not charged to our operating segments.
|
(f)
|
Purchase accounting adjustments include certain charges related to the fair value adjustments to inventory, intangible assets and property, plant and equipment not charged to our operating segments.
|
(g)
|
Acquisition-related costs can include costs associated with acquiring, integrating and restructuring acquired businesses, such as allocated transaction costs, integration costs, restructuring charges and additional depreciation associated with asset restructuring. See
Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
, for additional information.
|
(h)
|
Certain significant items are substantive, unusual items that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis. Such items primarily include restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition, the impact of divestiture-related gains and losses and certain costs related to becoming a standalone public company. See
Note 5. Restructuring Charges and Other Costs Associated with Acquisition and Cost-Reduction/Productivity Initiatives
, for additional information.
|
•
|
In the
second quarter
of
2013
, certain significant items primarily includes: (i)
$27 million
income related to a reversal of certain employee termination expenses; (ii) Zoetis stand-up costs of
$77 million
; and (iii)
$6 million
income on the government-mandated sale of certain product rights in Brazil that were acquired with the FDAH acquisition in
2009
. Stand-up costs include certain nonrecurring costs related to becoming a standalone public company, such as new branding (including changes to the manufacturing process for required new packaging), the creation of standalone systems and
|
•
|
In the
second quarter
of
2012
, certain significant items includes: (i)
$14 million
income related to a favorable legal settlement for an intellectual property matter; (ii)
$6 million
income due to a change in estimate related to transitional manufacturing purchase agreements associated with divestitures; (iii)
$12 million
restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition; and (iv)
$6 million
income of other.
|
•
|
In the
six months ended June 30, 2013
, certain significant items primarily includes: (i) additional depreciation associated with asset restructuring of
$3 million
, (ii)
$27 million
income related to a reversal of certain employee termination expenses; (iii) Zoetis stand-up costs of
$111 million
; and (iv)
$6 million
income on the government-mandated sale of certain product rights in Brazil that were acquired with the FDAH acquisition in
2009
.
|
•
|
In the
six months ended July 1, 2012
, certain significant items includes: (i)
$14 million
income related to a favorable legal settlement for an intellectual property matter; (ii)
$5 million
income due to a change in estimate related to transitional manufacturing purchase agreements associated with divestitures; and (iii)
$36 million
for restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition.
|
(i)
|
Includes overhead expenses associated with our manufacturing operations.
|
B.
|
Other Revenue Information
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
June 30,
|
|
|
July 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
||||
Livestock:
|
|
|
|
|
|
|
|
|
||||||||
Cattle
|
|
$
|
356
|
|
|
$
|
371
|
|
|
$
|
746
|
|
|
$
|
771
|
|
Swine
|
|
152
|
|
|
142
|
|
|
310
|
|
|
285
|
|
||||
Poultry
|
|
137
|
|
|
129
|
|
|
270
|
|
|
250
|
|
||||
Other
|
|
25
|
|
|
23
|
|
|
50
|
|
|
50
|
|
||||
|
|
670
|
|
|
665
|
|
|
1,376
|
|
|
1,356
|
|
||||
Companion Animal:
|
|
|
|
|
|
|
|
|
||||||||
Horses
|
|
45
|
|
|
50
|
|
|
87
|
|
|
95
|
|
||||
Dogs and Cats
|
|
399
|
|
|
379
|
|
|
741
|
|
|
690
|
|
||||
|
|
444
|
|
|
429
|
|
|
828
|
|
|
785
|
|
||||
Total revenue
|
|
$
|
1,114
|
|
|
$
|
1,094
|
|
|
$
|
2,204
|
|
|
$
|
2,141
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
June 30,
|
|
|
July 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
||||
Anti-infectives
|
|
$
|
280
|
|
|
$
|
283
|
|
|
$
|
587
|
|
|
$
|
583
|
|
Vaccines
|
|
301
|
|
|
281
|
|
|
579
|
|
|
546
|
|
||||
Parasiticides
|
|
208
|
|
|
216
|
|
|
377
|
|
|
377
|
|
||||
Medicated feed additives
|
|
97
|
|
|
94
|
|
|
201
|
|
|
193
|
|
||||
Other pharmaceuticals
|
|
193
|
|
|
187
|
|
|
381
|
|
|
364
|
|
||||
Other non-pharmaceuticals
|
|
35
|
|
|
33
|
|
|
79
|
|
|
78
|
|
||||
Total revenue
|
|
$
|
1,114
|
|
|
$
|
1,094
|
|
|
$
|
2,204
|
|
|
$
|
2,141
|
|
17.
|
Transactions and Agreements with Pfizer
|
A.
|
Pre-Separation Period
|
B.
|
Agreements with Pfizer
|
•
|
Global separation agreement. This agreement governs the relationship between Pfizer and us following the IPO and includes provisions related to the allocation of assets and liabilities, indemnification, delayed transfers and further assurances, mutual releases, insurance and certain covenants.
|
•
|
Transitional services agreement. This agreement grants us the right to continue to use certain of Pfizer's services and resources related to our corporate functions, such as business technology, facilities, finance, human resources, public affairs and procurement, in exchange for mutually agreed-upon fees based on Pfizer's costs of providing these services.
|
•
|
Tax matters agreement. This agreement governs ours and Pfizer's respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes. Pursuant to this agreement, we have also agreed to certain covenants that contain restrictions intended to preserve the tax-free status of certain transactions, and we have agreed to indemnify Pfizer and its affiliates against any and all tax-related liabilities incurred by them relating to these transactions to the extent caused by an acquisition of our stock or assets or by any other action undertaken by us.
|
•
|
Research and development collaboration and license agreement. This agreement permits certain of our employees to be able to review a Pfizer database to identify compounds that may be of interest to the animal health field. Pfizer has granted to us an option to enter into a license agreement subject to certain restrictions and requirements and we will make payments to Pfizer.
|
•
|
Employee matters agreement. This agreement governs ours and Pfizer's respective rights, responsibilities and obligations with respect to the following matters: employees and former employees (and their respective dependents and beneficiaries) who are or were associated with Pfizer, us or the parties' respective subsidiaries or affiliates; the allocation of assets and liabilities generally relating to employees, employment or service-related matters and employee benefit plans; and other human resources, employment and employee benefits matters.
|
•
|
Master manufacturing and supply agreements. These two agreements govern our manufacturing and supply arrangements with Pfizer. Under one of these agreements, Pfizer will manufacture and supply us with animal health products. Under this agreement, our manufacturing and supply chain leadership will have oversight responsibility over product quality and other key aspects of the manufacturing process with respect to the Pfizer-supplied products. Under the other agreement, we will manufacture and supply certain human health products to Pfizer.
|
•
|
Environmental matters agreement. This agreement governs the performance of remedial actions for liabilities allocated to each party under the global separation agreement; addresses our substitution for Pfizer with respect to animal health assets and remedial actions allocated to us (including substitution related to, for example, permits, financial assurances and consent orders); allows our conditional use of Pfizer's consultants and contractors to assist in the conduct of remedial actions; and addresses the exchange of related information between the parties. The agreement also sets forth standards of conduct for remedial activities at the co-located facilities: Guarulhos, Brazil; Catania, Italy; Hsinchu, Taiwan; and Kalamazoo, Michigan in the U.S. In addition, the agreement sets forth site-specific terms to govern conduct at several of these co-located facilities.
|
•
|
Screening services agreement. This agreement requires us to provide certain high throughput screening services to Pfizer's R&D organization for which Pfizer pays to us agreed-upon fees.
|
•
|
Intellectual property license agreements. Under these agreements (i) Pfizer and certain of its affiliates licensed to us and certain of our affiliates the right to use certain intellectual property rights in the animal health field; (ii) we licensed to Pfizer and certain of its
|
•
|
Intellectual Property
. As part of the Separation, Pfizer assigned to us ownership of certain animal health related patents, pending patent applications, and trademark applications and registrations. In addition, Pfizer licensed to us the right to use certain intellectual property rights in the animal health field. We licensed to Pfizer the right to use certain of our trademarks and substantially all of our other intellectual property rights in the human health field and all other fields outside of animal health. In addition, Pfizer granted us a transitional license to use certain of Pfizer's trademarks and we granted Pfizer a transitional license to use certain of our trademarks for a period of time following the completion of the IPO.
|
•
|
Manufacturing Facilities
. Our global manufacturing network consists of
13
“anchor” manufacturing sites and
16
“satellite” manufacturing sites. Ownership of, or the existing leasehold interest in, these facilities were conveyed to us by Pfizer as part of the Separation. Among these
29
manufacturing sites is our facility in Guarulhos, Brazil, which we leased back to Pfizer. Certain of our products are currently manufactured at
14
manufacturing sites that were retained by Pfizer. The products manufactured by Pfizer at these sites and at our Guarulhos, Brazil facility continues to be supplied to us under the terms of a manufacturing and supply agreement we entered into with Pfizer.
|
•
|
R&D Facilities
. We have R&D operations co-located with certain of our manufacturing sites in Australia, Belgium, Brazil, Canada, China, Spain and the United States to facilitate the efficient transfer of production processes from our laboratories to manufacturing sites. In addition, we maintain R&D operations at non-manufacturing locations in Belgium, Brazil, India and the United States. As part of the Separation, Pfizer conveyed to us its interest in each of these R&D facilities, with the exception of our Mumbai, India facility, which we expect Pfizer to transfer to us for agreed upon cash consideration after the completion of the Separation, and, in the interim, we are leasing this facility from Pfizer.
|
•
|
Employees
. In general, as part of the Separation, employees of Pfizer who were substantially dedicated to the animal health business became our employees. However, labor and employment laws or other business considerations in some jurisdictions delayed Pfizer from transferring to us employees who are substantially dedicated to the animal health business. In those instances, to the extent permissible under applicable law, we and Pfizer entered into mutually-acceptable arrangements to provide for continued operation of the business until such time as the employees in those jurisdictions can be transferred to us.
|
|
|
Three Months
|
|
|
Six months
|
|
||
|
|
Ended
|
|
|
Ended
|
|
||
(MILLIONS OF DOLLARS)
|
|
June 30, 2013
|
|
|
June 30, 2013
|
|
||
Transitional services agreement
|
|
$
|
31
|
|
|
$
|
58
|
|
Master manufacturing and supply agreements
|
|
65
|
|
|
122
|
|
||
Employee matters agreement
|
|
51
|
|
|
99
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
||||
Revenues
|
|
$
|
1,114
|
|
|
$
|
1,094
|
|
|
2
|
|
|
$
|
2,204
|
|
|
$
|
2,141
|
|
|
3
|
|
Net income attributable to Zoetis
|
|
128
|
|
|
173
|
|
|
(26
|
)
|
|
268
|
|
|
284
|
|
|
(6
|
)
|
||||
Adjusted net income
(a)
|
|
178
|
|
|
176
|
|
|
1
|
|
|
357
|
|
|
328
|
|
|
9
|
|
(a)
|
Adjusted net income is a non-GAAP financial measure, see the "Adjusted net income" section of this MD&A for more information.
|
•
|
human population growth and increasing standards of living, particularly in many emerging markets;
|
•
|
increasing demand for improved nutrition, particularly animal protein;
|
•
|
natural resource constraints, such as scarcity of arable land, fresh water and increased competition for cultivated land, resulting in fewer resources that will be available to meet this increased demand for animal protein; and
|
•
|
increased focus on food safety.
|
•
|
economic development and related increases in disposable income, particularly in many emerging markets;
|
•
|
increasing pet ownership; and
|
•
|
companion animals living longer, increasing medical treatment of companion animals and advances in companion animal medicines and vaccines.
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
||||
Revenues
|
|
$
|
1,114
|
|
|
$
|
1,094
|
|
|
2
|
|
|
$
|
2,204
|
|
|
$
|
2,141
|
|
|
3
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Cost of sales
(a)
|
|
416
|
|
|
378
|
|
|
10
|
|
|
818
|
|
|
771
|
|
|
6
|
|
||||
% of revenues
|
|
37
|
%
|
|
35
|
%
|
|
|
|
37
|
%
|
|
36
|
%
|
|
|
||||||
Selling, general and administrative expenses
(a)
|
|
399
|
|
|
344
|
|
|
16
|
|
|
756
|
|
|
682
|
|
|
11
|
|
||||
% of revenues
|
|
36
|
%
|
|
31
|
%
|
|
|
|
34
|
%
|
|
32
|
%
|
|
|
||||||
Research and development expenses
(a)
|
|
95
|
|
|
92
|
|
|
3
|
|
|
185
|
|
|
194
|
|
|
(5
|
)
|
||||
% of revenues
|
|
9
|
%
|
|
8
|
%
|
|
|
|
8
|
%
|
|
9
|
%
|
|
|
||||||
Amortization of intangible assets
(a)
|
|
15
|
|
|
16
|
|
|
(6
|
)
|
|
30
|
|
|
32
|
|
|
(6
|
)
|
||||
Restructuring charges and certain acquisition-related
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
costs
|
|
(20
|
)
|
|
24
|
|
|
*
|
|
|
(13
|
)
|
|
49
|
|
|
*
|
|
||||
Interest expense
|
|
32
|
|
|
8
|
|
|
*
|
|
|
54
|
|
|
16
|
|
|
*
|
|
||||
Other (income)/deductions—net
|
|
(10
|
)
|
|
(20
|
)
|
|
(50
|
)
|
|
(5
|
)
|
|
(26
|
)
|
|
(81
|
)
|
||||
Income before provision for taxes on income
|
|
187
|
|
|
252
|
|
|
(26
|
)
|
|
379
|
|
|
423
|
|
|
(10
|
)
|
||||
% of revenues
|
|
17
|
%
|
|
23
|
%
|
|
|
|
17
|
%
|
|
20
|
%
|
|
|
||||||
Provision for taxes on income
|
|
59
|
|
|
79
|
|
|
(25
|
)
|
|
111
|
|
|
138
|
|
|
(20
|
)
|
||||
Effective tax rate
|
|
31.6
|
%
|
|
31.3
|
%
|
|
|
|
29.3
|
%
|
|
32.6
|
%
|
|
|
||||||
Net income before allocation to noncontrolling interests
|
|
128
|
|
|
173
|
|
|
(26
|
)
|
|
268
|
|
|
285
|
|
|
(6
|
)
|
||||
Less: Net income attributable to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
(100
|
)
|
||||
Net income attributable to Zoetis
|
|
$
|
128
|
|
|
$
|
173
|
|
|
(26
|
)
|
|
$
|
268
|
|
|
$
|
284
|
|
|
(6
|
)
|
% of revenues
|
|
11
|
%
|
|
16
|
%
|
|
|
|
12
|
%
|
|
13
|
%
|
|
|
(a)
|
Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in
Amortization of intangible assets
as these intangible assets benefit multiple business functions. Amortization expense related to acquired intangible assets that are associated with a single function is included in
Cost of sales
,
Selling, general and administrative expenses
or
Research and development expenses
, as appropriate.
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
||||
Cost of sales
(a)
|
|
$
|
416
|
|
|
$
|
378
|
|
|
10
|
%
|
|
$
|
818
|
|
|
$
|
771
|
|
|
6
|
%
|
% of revenue
|
|
37.3
|
%
|
|
34.6
|
%
|
|
|
|
37.1
|
%
|
|
36.0
|
%
|
|
|
(a)
|
Allocation of corporate enabling functions were $3 million in the first quarter of 2013. There were no allocated expenses in the second quarter of 2013. Allocation of corporate enabling functions were $0 million and $1 million in the three and six months ended July 1, 2012, respectively.
|
•
|
revenue growth and product mix;
|
•
|
additional one-time costs of $13 million related to becoming a standalone public company, including expense of $2 million due to the accelerated vesting of certain Pfizer equity awards and associated cash payments, as a result of the Separation; and
|
•
|
higher costs associated with certain manufacturing agreements related to government-mandated divestitures from prior acquisitions,
|
•
|
operational efficiencies and related savings.
|
•
|
revenue growth;
|
•
|
additional one-time costs of $15 million related to becoming a standalone public company, including expense of $2 million due to the accelerated vesting of certain Pfizer equity awards and associated cash payments, as a result of the Separation; and
|
•
|
higher costs associated with certain manufacturing agreements related to government-mandated divestitures from prior acquisitions,
|
•
|
operational efficiencies and related savings; and
|
•
|
lower employee benefit costs due to the termination of the defined benefit pension plan for U.S. employees.
|
(a)
|
Allocation of corporate enabling functions were $24 million in the first quarter of 2013. There were no allocated expenses in the second quarter of 2013. Allocation of corporate enabling functions were $60 million and $123 million in the three and six months ended July 1, 2012, respectively.
|
•
|
additional one-time costs of $60 million related to becoming a standalone public company, including expense of $25 million due to the accelerated vesting of certain Pfizer equity awards and associated cash payments, as a result of the Separation; and
|
•
|
the cost of initiatives to increase sales in certain emerging markets,
|
•
|
lower employee benefit costs due to the termination of the defined benefit pension plan for U.S. employees; and
|
•
|
favorable foreign exchange.
|
•
|
additional one-time costs of $92 million related to becoming a standalone public company, including expense of $25 million due to the accelerated vesting of certain Pfizer equity awards and associated cash payments, as a result of the Separation; and
|
•
|
the cost of initiatives to increase sales in certain emerging markets,
|
•
|
lower employee benefit costs due to the termination of the defined benefit pension plan for U.S. employees; and
|
•
|
favorable foreign exchange.
|
(a)
|
Allocation of corporate enabling functions were $13 million and $28 million in the three and six months ended July 1, 2012, respectively.
|
•
|
additional one-time costs of $4 million due to the accelerated vesting of certain Pfizer equity awards and associated cash payments, as a result of the Separation,
|
•
|
lower employee benefit costs due to the termination of the defined benefit pension plan for U.S. employees.
|
•
|
the nonrecurrence of depreciation expense incurred in 2012 related to the closing of an R&D facility in the U.K.; and
|
•
|
lower employee benefit costs due to the termination of the defined benefit pension plan for U.S. employees,
|
•
|
additional one-time costs of $4 million due to the accelerated vesting of certain Pfizer equity awards and associated cash payments, as a result of the Separation.
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
||||
Amortization of intangible assets
|
|
$
|
15
|
|
|
$
|
16
|
|
|
(6
|
)%
|
|
$
|
30
|
|
|
$
|
32
|
|
|
(6
|
)%
|
(a)
|
Allocation of
Restructuring charges and certain acquisition-related costs
were $17 million and $35 million in the three and six months ended July 1, 2012, respectively.
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
2013
|
|
|
2012
|
|
|
Change
|
||||
Interest Expense
|
|
$
|
32
|
|
|
$
|
8
|
|
|
*
|
|
$
|
54
|
|
|
$
|
16
|
|
|
*
|
Other (income)/deductions—net
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
||||
Other (income)/deductions—net
|
|
$
|
(10
|
)
|
|
$
|
(20
|
)
|
|
(50
|
)%
|
|
$
|
(5
|
)
|
|
$
|
(26
|
)
|
|
(81
|
)%
|
•
|
the nonrecurrence of income from a favorable legal settlement related to an intellectual property matter of $14 million and a change in estimate for an environmental-related reserve due to a favorable settlement of $7 million in the second quarter of 2012,
|
•
|
a net gain of $6 million on asset disposals associated with government-mandated divestitures.
|
•
|
the nonrecurrence of income from a favorable legal settlement related to an intellectual property matter of $14 million and a change in estimate for an environmental-related reserve due to a favorable settlement of $7 million; and
|
•
|
foreign currency loss of $9 million related to the Venezuela currency devaluation in February 2013,
|
•
|
a net gain of $6 million on asset disposals associated with government-mandated divestitures.
|
Provision for taxes on income
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
||||
Provision for taxes on income
|
|
$
|
59
|
|
|
$
|
79
|
|
|
(25
|
)%
|
|
$
|
111
|
|
|
$
|
138
|
|
|
(20
|
)%
|
Effective tax rate
|
|
31.6
|
%
|
|
31.3
|
%
|
|
|
|
29.3
|
%
|
|
32.6
|
%
|
|
|
•
|
incentive tax rulings in Belgium, effective December 1, 2012, and Singapore, effective October 29, 2012, and
|
•
|
changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs.
|
•
|
the aforementioned incentive tax rulings and changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs, and
|
•
|
a $2 million discrete income tax benefit during the first quarter of 2013 related to the 2012 U.S. research and development tax credit which was retroactively extended on January 3, 2013;
|
•
|
the aforementioned impact of non-deductibility and jurisdictional mix of certain costs incurred during the second quarter related to becoming a standalone public company.
|
|
|
|
|
% Change
|
|||||||||||||
|
|
Three Months Ended
|
|
|
|
Related to
|
|||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
|
|
Foreign
|
|
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Total
|
|
|
exchange
|
|
|
Operational
|
|
||
U.S.
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
$
|
204
|
|
|
$
|
192
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Companion animal
|
|
233
|
|
|
229
|
|
|
2
|
|
|
—
|
|
|
2
|
|
||
|
|
437
|
|
|
421
|
|
|
4
|
|
|
—
|
|
|
4
|
|
||
EuAfME
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
184
|
|
|
193
|
|
|
(5
|
)
|
|
(3
|
)
|
|
(2
|
)
|
||
Companion animal
|
|
94
|
|
|
90
|
|
|
4
|
|
|
(2
|
)
|
|
6
|
|
||
|
|
278
|
|
|
283
|
|
|
(2
|
)
|
|
(3
|
)
|
|
1
|
|
||
CLAR
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
153
|
|
|
154
|
|
|
(1
|
)
|
|
(5
|
)
|
|
4
|
|
||
Companion animal
|
|
60
|
|
|
57
|
|
|
5
|
|
|
(1
|
)
|
|
6
|
|
||
|
|
213
|
|
|
211
|
|
|
1
|
|
|
(3
|
)
|
|
4
|
|
||
APAC
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
129
|
|
|
126
|
|
|
2
|
|
|
(3
|
)
|
|
5
|
|
||
Companion animal
|
|
57
|
|
|
53
|
|
|
8
|
|
|
(5
|
)
|
|
13
|
|
||
|
|
186
|
|
|
179
|
|
|
4
|
|
|
(3
|
)
|
|
7
|
|
||
Total
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
670
|
|
|
665
|
|
|
1
|
|
|
(2
|
)
|
|
3
|
|
||
Companion animal
|
|
444
|
|
|
429
|
|
|
3
|
|
|
(2
|
)
|
|
5
|
|
||
|
|
$
|
1,114
|
|
|
$
|
1,094
|
|
|
2
|
|
|
(2
|
)
|
|
4
|
|
|
|
|
|
% Change
|
|||||||||||
|
|
Six Months Ended
|
|
|
|
Related to
|
|||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
|
|
Foreign
|
|
|
|
||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Total
|
|
exchange
|
|
|
Operational
|
||
U.S.
|
|
|
|
|
|
|
|
|
|
|
|||||
Livestock
|
|
$
|
449
|
|
|
$
|
432
|
|
|
4
|
|
—
|
|
|
4
|
Companion animal
|
|
442
|
|
|
414
|
|
|
7
|
|
—
|
|
|
7
|
||
|
|
891
|
|
|
846
|
|
|
5
|
|
—
|
|
|
5
|
||
EuAfME
|
|
|
|
|
|
|
|
|
|
|
|||||
Livestock
|
|
379
|
|
|
380
|
|
|
—
|
|
(1
|
)
|
|
1
|
||
Companion animal
|
|
189
|
|
|
178
|
|
|
6
|
|
—
|
|
|
6
|
||
|
|
568
|
|
|
558
|
|
|
2
|
|
—
|
|
|
2
|
||
CLAR
|
|
|
|
|
|
|
|
|
|
|
|||||
Livestock
|
|
292
|
|
|
292
|
|
|
—
|
|
(5
|
)
|
|
5
|
||
Companion animal
|
|
92
|
|
|
92
|
|
|
—
|
|
(3
|
)
|
|
3
|
||
|
|
384
|
|
|
384
|
|
|
—
|
|
(4
|
)
|
|
4
|
||
APAC
|
|
|
|
|
|
|
|
|
|
|
|||||
Livestock
|
|
256
|
|
|
252
|
|
|
2
|
|
(1
|
)
|
|
3
|
||
Companion animal
|
|
105
|
|
|
101
|
|
|
4
|
|
(4
|
)
|
|
8
|
||
|
|
361
|
|
|
353
|
|
|
2
|
|
(3
|
)
|
|
5
|
||
Total
|
|
|
|
|
|
|
|
|
|
|
|||||
Livestock
|
|
1,376
|
|
|
1,356
|
|
|
1
|
|
(2
|
)
|
|
3
|
||
Companion animal
|
|
828
|
|
|
785
|
|
|
5
|
|
(1
|
)
|
|
6
|
||
|
|
$
|
2,204
|
|
|
$
|
2,141
|
|
|
3
|
|
(1
|
)
|
|
4
|
|
|
|
|
% Change
|
||||||||||||
|
|
Three Months Ended
|
|
|
|
Related to
|
||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
|
|
Foreign
|
|
|
|
|||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Total
|
|
|
exchange
|
|
|
Operational
|
||
U.S.
|
|
$
|
254
|
|
|
$
|
227
|
|
|
12
|
|
|
—
|
|
|
12
|
EuAfME
|
|
91
|
|
|
88
|
|
|
3
|
|
|
2
|
|
|
1
|
||
CLAR
|
|
78
|
|
|
77
|
|
|
1
|
|
|
(6
|
)
|
|
7
|
||
APAC
|
|
71
|
|
|
63
|
|
|
13
|
|
|
2
|
|
|
11
|
||
Total reportable segments
|
|
494
|
|
|
455
|
|
|
9
|
|
|
—
|
|
|
9
|
||
Other business activities
|
|
(74
|
)
|
|
(61
|
)
|
|
21
|
|
|
|
|
|
|||
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate
|
|
(137
|
)
|
|
(104
|
)
|
|
32
|
|
|
|
|
|
|||
Purchase accounting adjustments
|
|
(13
|
)
|
|
(13
|
)
|
|
—
|
|
|
|
|
|
|||
Acquisition-related costs
|
|
(9
|
)
|
|
(15
|
)
|
|
(40
|
)
|
|
|
|
|
|||
Certain significant items
|
|
(43
|
)
|
|
14
|
|
|
*
|
|
|
|
|
|
|||
Other unallocated
|
|
(31
|
)
|
|
(24
|
)
|
|
29
|
|
|
|
|
|
|||
Income before income taxes
|
|
$
|
187
|
|
|
$
|
252
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
% Change
|
||||||||||||
|
|
Six Months Ended
|
|
|
|
Related to
|
||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
|
|
Foreign
|
|
|
|
|||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Total
|
|
|
exchange
|
|
|
Operational
|
||
U.S.
|
|
$
|
488
|
|
|
$
|
444
|
|
|
10
|
|
|
—
|
|
|
10
|
EuAfME
|
|
208
|
|
|
192
|
|
|
8
|
|
|
(2
|
)
|
|
10
|
||
CLAR
|
|
130
|
|
|
131
|
|
|
(1
|
)
|
|
(9
|
)
|
|
8
|
||
APAC
|
|
146
|
|
|
134
|
|
|
9
|
|
|
—
|
|
|
9
|
||
Total reportable segments
|
|
972
|
|
|
901
|
|
|
8
|
|
|
(1
|
)
|
|
9
|
||
Other business activities
|
|
(148
|
)
|
|
(126
|
)
|
|
17
|
|
|
|
|
|
|||
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate
|
|
(253
|
)
|
|
(233
|
)
|
|
9
|
|
|
|
|
|
|||
Purchase accounting adjustments
|
|
(25
|
)
|
|
(26
|
)
|
|
(4
|
)
|
|
|
|
|
|||
Acquisition-related costs
|
|
(15
|
)
|
|
(29
|
)
|
|
(48
|
)
|
|
|
|
|
|||
Certain significant items
|
|
(85
|
)
|
|
(17
|
)
|
|
*
|
|
|
|
|
|
|||
Other unallocated
|
|
(67
|
)
|
|
(47
|
)
|
|
43
|
|
|
|
|
|
|||
Income before income taxes
|
|
$
|
379
|
|
|
$
|
423
|
|
|
(10
|
)
|
|
|
|
|
•
|
Livestock revenue growth was achieved in all species with contributions from cattle, swine and poultry products. Sales of cattle products returned to growth this quarter, primarily based on the favorable impact of annual price increases taken in the first quarter of 2013, while volume was relatively flat reflecting the continued impact of last year's drought. Sales of swine and poultry products grew at faster rates than cattle due largely to continued customer acceptance of new products and targeted marketing programs.
|
•
|
Companion animal revenue growth was driven by solid growth in small animal products reflecting strong market dynamics and price increases. Results were partially offset by a decline in equine sales and a competitor supply issue that has now been resolved.
|
•
|
Livestock revenue was negatively impacted by a decline in cattle growth due to cold weather conditions in Western and Northern Europe. Continuing adverse macroeconomic conditions throughout Western Europe also continue to impact demand for products. Partially offsetting this decrease was continued growth in sales of swine and poultry products. Additionally, growth in swine was favorably impacted by the launch of a new swine vaccine (that prevents porcine circovirus type 2) across many markets in the region and strong sales growth in poultry products in the European Union and Eastern Europe.
|
•
|
Companion animal revenue growth was favorably impacted by increased sales of products that are related to certain third party manufacturing agreements. Excluding these sales, companion animal sales were relatively flat as a result of continued adverse macroeconomic conditions throughout Western Europe. While we have experienced growth in Southern Europe, we continue to see challenging economic conditions which impacts the disposable income of pet owners. Additionally, the unseasonably cold weather across much of Europe has impacted the start of the parasiticide season, which normally begins early in the second quarter.
|
•
|
Livestock revenue was positively impacted by growth in poultry revenues driven by increased sales of medicated feed additives. Additionally, swine vaccines benefited from continued demand in South America particularly for Improvac/Improvest, a product that reduces boar taint without the need for surgical castration. This was offset by a decline in cattle growth related to weak market conditions in most countries, primarily Brazil, as a result of drought conditions, product supply issues and generic competition.
|
•
|
Companion animal growth was favorably impacted by increased demand for pet care products in Brazil and successful marketing programs in Brazil and Mexico. Gains were partially offset by the equine business portfolio as a result of a reduced number of horses in Canada. Revenue also declined slightly due to a competitor supply issue in Canada that benefited the second quarter of 2012, as well as weather patterns.
|
•
|
Livestock revenue growth was driven primarily by higher sales of swine products, particularly in our porcine circovirus type 2 vaccine, which was launched in several new markets in Southeast Asia, Taiwan and Korea. Positive growth in swine products was tempered by challenging market conditions for pork producers in Southeast and Northeast Asia, with some impact in China. Growth in the poultry portfolio also positively contributed to livestock performance to a lesser extent, despite challenging market conditions in China. The increase in livestock revenue was partially offset by the prolonged drought conditions in Australia which has reduced the number of cattle.
|
•
|
Companion animal revenue growth was primarily due to increased penetration of key brands, as well as targeted marketing campaigns and the successful launch of a new product in Japan.
|
•
|
Livestock revenue growth was driven by increased marketing programs across swine, poultry and cattle products and a new portfolio pricing structure implemented late in 2012. Growth in cattle continues to be tempered by herd reductions due to the impact of the U.S. drought conditions.
|
•
|
Companion animal revenue growth was driven by solid growth in small animal products reflecting strong promotional support and price increases. Results were partially offset by a decrease in equine sales reflecting the continuing contraction of the market.
|
•
|
Livestock revenue growth was driven primarily by growth in the swine and poultry portfolios. The launch of a new swine vaccine (that prevents porcine circovirus type 2) across many markets in the region contributed to this growth. Additionally, the poultry product portfolio had strong sales growth in the European Union and Eastern Europe. Results were partially offset by a decline in cattle growth due to cold weather conditions in Western and Northern Europe which limits the opportunity for our products, and the continuing adverse economic conditions throughout Western Europe.
|
•
|
Companion animal revenue growth was favorably impacted by increased sales of products that are related to certain third party manufacturing agreements as well as price increases in Western Europe. Results were partially offset by the unseasonably cold weather across much of Europe, impacting the start of the parasiticide season which normally begins early in the second quarter.
|
•
|
Livestock revenue was favorably impacted by growth in swine and poultry products in Brazil. Swine vaccines benefited from continued demand in South America across several product lines, including Improvac/Improvest, a product that reduces boar taint without the need for surgical castration. Growth in poultry revenue was driven by increased sales of medicated feed additives. Cattle revenues in Canada benefited from a strong fall calf season in the first quarter of 2013, while in other countries revenues were negatively impacted by a decline in cattle growth related to weak market conditions as a result of drought conditions, product supply issues and generic competition.
|
•
|
Companion animal revenue was favorably impacted by increased demand for pet care products in Brazil and marketing programs in Brazil and Mexico. Gains were partially offset by the equine business as a result of a reduced number of horses in Canada. Revenues also declined slightly due to a competitor supply issue in Canada that benefited the first half of 2012, as well as weather patterns.
|
•
|
Livestock revenue growth was driven primarily by higher sales of swine products, particularly in our porcine circovirus type 2 vaccine, which was launched in several new markets in Southeast Asia, Taiwan and Korea. Positive growth in swine products was tempered by challenging market conditions for pork producers in Southeast and Northeast Asia, with some impact in China. Growth in the poultry portfolio also positively contributed to livestock performance to a lesser extent, despite challenging market conditions in China. The increase in livestock revenue was partially offset by the prolonged drought conditions in Australia which has reduced the number of cattle.
|
•
|
Companion animal revenue growth was primarily due to increased penetration of key brands, as well as targeted marketing campaigns and the successful launch of a new product in Japan.
|
•
|
senior management receives a monthly analysis of our operating results that is prepared on an adjusted net income basis;
|
•
|
our annual budgets are prepared on an adjusted net income basis; and
|
•
|
other goal setting and performance measurements.
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
||||
Reported net income attributable to Zoetis
|
|
$
|
128
|
|
|
$
|
173
|
|
|
(26
|
)
|
|
$
|
268
|
|
|
$
|
284
|
|
|
(6
|
)
|
Purchase accounting adjustments—net of tax
|
|
9
|
|
|
8
|
|
|
13
|
|
|
17
|
|
|
17
|
|
|
—
|
|
||||
Acquisition-related costs—net of tax
|
|
6
|
|
|
10
|
|
|
(40
|
)
|
|
10
|
|
|
19
|
|
|
(47
|
)
|
||||
Certain significant items—net of tax
|
|
35
|
|
|
(15
|
)
|
|
*
|
|
|
62
|
|
|
8
|
|
|
*
|
|
||||
Adjusted net income
(a)
|
|
$
|
178
|
|
|
$
|
176
|
|
|
1
|
|
|
$
|
357
|
|
|
$
|
328
|
|
|
9
|
|
(a)
|
The effective tax rate on adjusted pretax income is
29.4%
and
33.8%
for the second quarter of 2013 and 2012, respectively, and
29.2%
and
33.5%
for the first six months of 2013 and 2012, respectively. The
lower
effective tax rate in 2013 compared to 2012 is due to incentive tax rulings in Belgium, effective December 1, 2012, and Singapore, effective October 29, 2012, as well as changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs. In addition, we recognized a $2 million discrete income tax provision benefit during the first quarter of 2013 related to the 2012 U.S research and development tax credit which was retroactively extended on January 3, 2013.
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
||||
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
||||
Earnings per share—diluted
(a)(b)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
GAAP Reported net income attributable to Zoetis
|
|
$
|
0.26
|
|
|
$
|
0.35
|
|
|
(26
|
)
|
|
$
|
0.54
|
|
|
$
|
0.57
|
|
|
(5
|
)
|
Purchase accounting adjustments—net of tax
|
|
0.02
|
|
|
0.02
|
|
|
—
|
|
|
0.03
|
|
|
0.03
|
|
|
—
|
|
||||
Acquisition-related costs—net of tax
|
|
0.01
|
|
|
0.02
|
|
|
(50
|
)
|
|
0.02
|
|
|
0.04
|
|
|
(50
|
)
|
||||
Certain significant items—net of tax
|
|
0.07
|
|
|
(0.03
|
)
|
|
*
|
|
|
0.12
|
|
|
0.02
|
|
|
*
|
|
||||
Non-GAAP adjusted net income
|
|
$
|
0.36
|
|
|
$
|
0.35
|
|
|
3
|
|
|
$
|
0.71
|
|
|
$
|
0.66
|
|
|
8
|
|
(a)
|
The weighted-average shares outstanding for diluted earnings per share for the period prior to the IPO was calculated using an aggregate of 500 million shares of Class A and Class B common stock outstanding, which was the number of Zoetis Inc. shares outstanding immediately prior to the IPO. For the
six months ended
June 30, 2013
, diluted earnings per share was computed using the weighted-average common shares outstanding during the period plus the common stock equivalents related to stock options and RSUs.
|
(b)
|
EPS amounts may not add due to rounding.
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
June 30,
|
|
|
July 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
||||
Interest
|
|
$
|
32
|
|
|
$
|
8
|
|
|
$
|
54
|
|
|
$
|
16
|
|
Taxes
|
|
74
|
|
|
90
|
|
|
147
|
|
|
166
|
|
||||
Depreciation
|
|
34
|
|
|
33
|
|
|
69
|
|
|
52
|
|
||||
Amortization
|
|
4
|
|
|
6
|
|
|
8
|
|
|
10
|
|
|
|
Three Months Ended
|
Six Months Ended
|
||||||||||||
|
|
June 30,
|
|
|
July 1,
|
|
June 30,
|
|
|
July 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
2013
|
|
|
2012
|
|
||||
Purchase accounting adjustments:
|
|
|
|
|
|
|
|
||||||||
Amortization and depreciation
(a)
|
|
$
|
12
|
|
|
$
|
12
|
|
$
|
23
|
|
|
$
|
24
|
|
Cost of sales
(b)
|
|
1
|
|
|
1
|
|
2
|
|
|
2
|
|
||||
Total purchase accounting adjustments—pre-tax
|
|
13
|
|
|
13
|
|
25
|
|
|
26
|
|
||||
Income taxes
(c)
|
|
4
|
|
|
5
|
|
8
|
|
|
9
|
|
||||
Total purchase accounting adjustments—net of tax
|
|
9
|
|
|
8
|
|
17
|
|
|
17
|
|
||||
Acquisition-related costs
(d)
:
|
|
|
|
|
|
|
|
||||||||
Integration costs
(e)
|
|
10
|
|
|
12
|
|
14
|
|
|
21
|
|
||||
Restructuring costs
(f)
|
|
(1
|
)
|
|
1
|
|
1
|
|
|
3
|
|
||||
Additional depreciation—asset restructuring
(g)
|
|
—
|
|
|
2
|
|
—
|
|
|
5
|
|
||||
Total acquisition-related costs—pre-tax
|
|
9
|
|
|
15
|
|
15
|
|
|
29
|
|
||||
Income taxes
(c)
|
|
3
|
|
|
5
|
|
5
|
|
|
10
|
|
||||
Total acquisition-related costs—net of tax
|
|
6
|
|
|
10
|
|
10
|
|
|
19
|
|
||||
Certain significant items
(h)
:
|
|
|
|
|
|
|
|
||||||||
Restructuring charges
(i)
|
|
(27
|
)
|
|
11
|
|
(26
|
)
|
|
25
|
|
||||
Implementation costs and additional depreciation—asset restructuring
(g)
|
|
1
|
|
|
1
|
|
3
|
|
|
11
|
|
||||
Certain asset impairment charges
(j)
|
|
—
|
|
|
—
|
|
1
|
|
|
—
|
|
||||
Net gains on sale of assets
(k)
|
|
(6
|
)
|
|
—
|
|
(6
|
)
|
|
—
|
|
||||
Stand-up costs
(l)
|
|
77
|
|
|
—
|
|
111
|
|
|
—
|
|
||||
Other
(m)
|
|
(2
|
)
|
|
(26
|
)
|
2
|
|
|
(19
|
)
|
||||
Total significant items—pre-tax
|
|
43
|
|
|
(14
|
)
|
85
|
|
|
17
|
|
||||
Income taxes
(c)
|
|
8
|
|
|
1
|
|
23
|
|
|
9
|
|
||||
Total significant items—net of tax
|
|
35
|
|
|
(15
|
)
|
62
|
|
|
8
|
|
||||
Total purchase accounting adjustments, acquisition-related costs,
|
|
|
|
|
|
|
|
||||||||
and certain significant items—net of tax
|
|
$
|
50
|
|
|
$
|
3
|
|
$
|
89
|
|
|
$
|
44
|
|
(a)
|
Amortization and depreciation expense related to purchase accounting adjustments with respect to identifiable intangible assets and property, plant and equipment were distributed as follows: $12 million and $23 million in the three and six months ended June 30, 2013, respectively, and $13 million and $25 million in the three and six months ended July 1, 2012, respectively, included in
Amortization of intangible assets
, and $1 million income in the three and six months ended July 1, 2012, included in
Selling, general and administrative expenses.
|
(b)
|
Depreciation expense included in
Cost of sales.
|
(c)
|
Included in
Provision for taxes on income
.
|
(d)
|
Acquisition-related costs were distributed as follows: $2 million in the three and six months ended June 30, 2013 and $2 million and $5 million in the three and six months ended July 1, 2012, respectively, included in
Cost of sales
; $7 million and $13 million in the three and six months ended June 30, 2013 and $13 million and $24 million in the three and six months ended July 1, 2012, respectively, included in
Restructuring charges and certain acquisition-related costs
.
|
(e)
|
Integration costs were distributed as follows: $2 million in the three and six months ended June 30, 2013 included in
Cost of sales
, and $8 million
and $12 million in the three and six months ended June 30, 2013, respectively, and $12 million and $21 million in the three and six months ended July 1, 2012, respectively, included in
Restructuring charges and certain acquisition-related costs
.
|
(f)
|
Included in
Restructuring charges and certain acquisition-related costs
. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.
|
(g)
|
Amounts primarily relate to our cost-reduction/productivity initiatives. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 5.
Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
.
|
(h)
|
Certain significant items were distributed as follows: $13 million and $16 million in the three and six months ended June 30, 2013, respectively, and $7 million income and $6 million income in the three and six months ended July 1, 2012, respectively, included in
Cost of sales
; $60 million and $95 million in the three and six months ended June 30, 2013, respectively, and $6 million income and $1 million in the three and six months ended July 1, 2012, respectively, included in
Selling, general and administrative expenses
; $4 million in the three and six months ended June 30, 2013 and $1 million and $10 million in the three and six months ended July 1, 2012, respectively, included in
Research and development expenses
; $27 million income and $26 million income in the three and six months ended June 30, 2013, respectively, and $11 million and $25 million in the three and six months ended July 1, 2012, respectively, included in
Restructuring charges and certain acquisition-related costs
; and $7 million income and $4 million income in the three and six months ended June 30, 2013, respectively, and $13 million income in the three and six months ended July 1, 2012, included in
Other (Income)/Deductions—Net.
|
(i)
|
Represents restructuring charges incurred for our cost-reduction/productivity initiatives. Included in
Restructuring charges and certain acquisition-related costs
. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 5.
Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
.
|
(j)
|
Included in
Other (income)/deductions—net
. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 6. Other (Income)/Deductions—Net
for more information.
|
(k)
|
R
epresents the net gain on the government-mandated sale of certain product rights in Brazil that were acquired with the FDAH acquisition in 2009. Included in
Other (income)/deductions—net
. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 6. Other (Income)/Deductions—Net
for more information.
|
(l)
|
Certain nonrecurring costs related to becoming a standalone public company, such as new branding (including changes to the manufacturing process for required new packaging), the creation of standalone systems and infrastructure, site separation, accelerated vesting and associated cash payment related to certain Pfizer equity awards, and certain legal registration and patent assignment costs which were distributed as follows: $13 million and $15 million in the three and six months ended June 30, 2013, respectively, included in
Cost of sales
; $60 million and $92 million in the three and six months ended June 30, 2013, respectively, included in
Selling, general and administrative expenses
, and $4 million in the three and six months ended June 30, 2013 included in
Research and development expenses
.
|
(m)
|
For the three and six months ended June 30, 2012, primarily relates to income related to a favorable legal settlement for an intellectual property matter ($14 million) and income due to a change in estimate related to transitional manufacturing purchase agreements associated with divestitures ($5 million).
|
Selected Line Items
|
|
|
Revenue
|
|
$4,425 to $4,525 million
|
Adjusted cost of sales as a percentage of revenue
(a)
|
|
35% to 36%
|
Adjusted SG&A expenses
(a)
|
|
$1,385 to $1,435 million
|
Adjusted R&D expenses
(a)
|
|
$385 to $415 million
|
Adjusted interest expense
(a)
|
|
Approximately $115 million
|
Adjusted other (income)/deductions
(a)
|
|
Approximately $20 million income
|
Effective tax rate on adjusted net income
(a)
|
|
Approximately 29.5%
|
Reported diluted EPS
|
|
$1.00 to $1.06
|
Adjusted diluted EPS
(a)
|
|
$1.36 to $1.42
|
Certain significant items
(b)
and acquisition-related costs
|
|
$200 to $240 million
|
(a)
|
For an understanding of adjusted net income and its components, see the “Adjusted net income” section of this MD&A.
|
(b)
|
Includes certain nonrecurring costs related to becoming a standalone public company, such as new branding (including changes to the manufacturing process for required new packaging), the creation of standalone systems and infrastructure, site separation and certain legal registration and patent assignment costs.
|
|
|
Full-Year 2013 Guidance
|
||
(MILLION OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
|
|
Net Income
|
|
Diluted EPS
|
Adjusted net income/diluted EPS
(a)
guidance
|
|
~$680 - $710
|
|
~$1.36 - $1.42
|
Purchase accounting adjustments
|
|
(35)
|
|
(0.07)
|
Certain significant items
(b)
and acquisition-related costs
|
|
(130 - 160)
|
|
(0.26 - 0.32)
|
Reported net income attributable to Zoetis Inc./diluted EPS guidance
|
|
~$500 - $530
|
|
~$1.00 - $1.06
|
(a)
|
For an understanding of adjusted net income, see the “Adjusted net income” section of this MD&A.
|
(b)
|
Includes certain nonrecurring costs related to becoming a standalone public company, such as new branding (including changes to the manufacturing process for required new packaging), the creation of standalone systems and infrastructure, site separation and certain legal registration and patent assignment costs.
|
|
|
Six Months Ended
|
|
|
|||||||
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
||
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
||
Net cash provided by (used in):
|
|
|
|
|
|
|
|||||
Operating activities
|
|
$
|
269
|
|
|
$
|
70
|
|
|
*
|
|
Investing activities
|
|
(74
|
)
|
|
(59
|
)
|
|
25
|
%
|
||
Financing activities
|
|
(140
|
)
|
|
18
|
|
|
*
|
|
||
Effect of exchange-rate changes on cash and cash equivalents
|
|
(3
|
)
|
|
(2
|
)
|
|
50
|
%
|
||
Net increase in cash and cash equivalents
|
|
$
|
52
|
|
|
$
|
27
|
|
|
93
|
%
|
|
June 30,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
2013
|
|
|
2012
|
|
||
Cash and cash equivalents
(a)
|
$
|
369
|
|
|
$
|
317
|
|
Accounts receivable, net
(b)
|
1,137
|
|
|
900
|
|
||
Short-term borrowings, including current portion of allocated long-term debt in 2012
(c)
|
12
|
|
|
73
|
|
||
Allocated long-term debt
(c)
|
—
|
|
|
509
|
|
||
Long-term debt
(d)
|
3,640
|
|
|
—
|
|
||
Working capital
|
1,761
|
|
|
1,741
|
|
||
Ratio of current assets to current liabilities
|
2.33:1
|
|
|
2.55.1
|
|
(a)
|
Prior to our IPO, we participated in Pfizer's centralized cash management system, and generally all of our excess cash was transferred to Pfizer on a daily basis. Cash disbursements for operations and/or investing activities were funded, as needed, by Pfizer.
|
(b)
|
Accounts receivable are usually collected over a period of 60 to 90 days
.
For the six months ended
June 30, 2013
compared to December 31, 2012, the number of days that accounts receivables are outstanding remained approximately the same. We regularly monitor our accounts receivable for collectability, particularly in markets where economic conditions remain uncertain. We believe that our allowance for doubtful accounts is appropriate. Our assessment is based on such factors as past due history, historical and expected collection patterns, the financial condition of our customers, the robust nature of our credit and collection practices and the economic environment.
|
(c)
|
The combined financial statements for December 31, 2012 include an allocation of long-term debt from Pfizer that was issued to partially finance the acquisition of Wyeth (including FDAH). The debt has been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. After the IPO, Pfizer retained the allocated debt.
|
(d)
|
Consists of
$3.65 billion
aggregate principal amount of our senior notes, with an original issue discount of
$10 million
. The senior notes are comprised of
$400 million
aggregate principal amount of our
1.150%
senior notes due 2016,
$750 million
aggregate principal amount of our
1.875%
senior notes due 2018,
$1.35 billion
aggregate principal amount of our
3.250%
Senior Notes due 2023 and
$1.15 billion
aggregate principal amount of our
4.700%
senior notes due 2043.
|
Description
|
Principal Amount
|
Interest Rate
|
Terms
|
2016 Senior Note
|
$400 million
|
1.150%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2016
|
2018 Senior Note
|
$750 million
|
1.875%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2018
|
2023 Senior Note
|
$1,350 million
|
3.250%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2023
|
2043 Senior Note
|
$1,150 million
|
4.700%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2043
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
Paper
|
|
Long-term Debt
|
|
Date of
|
||
Name of Rating Agency
|
|
Rating
|
|
Rating
|
|
Outlook
|
|
Last Action
|
Moody’s
|
|
P-2
|
|
Baa2
|
|
Stable
|
|
January 2013
|
S&P
|
|
A-3
|
|
BBB-
|
|
Stable
|
|
January 2013
|
•
|
emerging restrictions and bans on the use of antibacterials in food-producing animals;
|
•
|
perceived adverse effects on human health linked to the consumption of food derived from animals that utilize our products;
|
•
|
increased regulation or decreased governmental support relating to the raising, processing or consumption of food-producing animals;
|
•
|
changes in tax laws and regulation;
|
•
|
an outbreak of infectious disease carried by animals;
|
•
|
adverse weather conditions and the availability of natural resources;
|
•
|
adverse global economic conditions;
|
•
|
failure of our R&D, acquisition and licensing efforts to generate new products;
|
•
|
quarterly fluctuations in demand and costs;
|
•
|
failure to achieve the expected benefits of the Separation and the Exchange Offer, which include improved strategic and operational efficiency, the adoption of a capital structure and investment and dividend policies that are designed for our standalone company, the use of our equity to facilitate future acquisitions and improved alignment of employee incentives with our performance and growth objectives;
|
•
|
operation as a standalone public company without many of the resources previously available to us as a business unit of Pfizer;
|
•
|
actual or potential conflicts of interest as a result of the fact that one of our directors will simultaneously serve as employees of Pfizer; and
|
•
|
governmental laws and regulations affecting domestic and foreign operations, including without limitation, tax obligations and changes affecting the tax treatment by the U.S. of income earned outside the U.S. that may result from pending and possible future proposals.
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Item 4.
|
Controls and Procedures
|
Item 1.
|
Legal Proceedings
|
Item 1A.
|
Risk Factors
|
•
|
improving strategic and operational flexibility, increasing management focus and streamlining decision-making by providing the flexibility to implement our strategic plan and to respond more effectively to different customer needs and the changing economic environment;
|
•
|
allowing us to adopt the capital structure, investment policy and dividend policy best suited to our financial profile and business needs, without competing for capital with Pfizer's other businesses;
|
•
|
creating an independent equity structure that will facilitate our ability to effect future acquisitions utilizing our common stock; and
|
•
|
facilitating incentive compensation arrangements for employees more directly tied to the performance of our business, and enhancing employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives of our business.
|
•
|
Pfizer will retain ownership of, and license to us, the intellectual property that we develop under the R&D agreement. In many circumstances, the intellectual property we license from Pfizer will be non-exclusive as to Pfizer and third parties.
|
•
|
We are not assured access to Pfizer's newest programs.
|
•
|
Pfizer can prevent us from progressing pre-development compounds and, under certain circumstances, Pfizer may terminate our rights to a development stage compound by paying us the fair market value for such compound.
|
•
|
The R&D agreement may be terminated before the expiration of the seven year term in certain circumstances, including if we acquire an interest in or assets of a human pharmaceutical business, enters into a definitive agreement relating to or undergo a change of control, or Pfizer acquires, or is acquired by, an animal health business.
|
•
|
Our historical combined financial data does not reflect the Separation;
|
•
|
Our historical combined financial data (except for a portion of the 2013 first quarter data that was recorded since the date of the IPO) reflects expense allocations for certain support functions that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, as well as certain manufacturing and supply costs incurred by manufacturing sites that are shared with other Pfizer business units that may be higher or lower than the comparable expenses we would have actually incurred, or will incur, as a standalone company;
|
•
|
Our cost of debt and our capital structure will be different from that reflected in its historical combined financial statements;
|
•
|
Significant increases may occur in our cost structure as a result of our being a standalone public company, including costs related to public company reporting, investor relations and compliance with the Sarbanes-Oxley Act; and
|
•
|
Loss of economies of scale as a result of our no longer being a part of Pfizer.
|
•
|
our operating performance and the performance of our competitors;
|
•
|
our or our competitors' press releases, other public announcements and filings with the SEC regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments;
|
•
|
changes in earnings estimates or recommendations by securities analysts, if any, who cover our common stock;
|
•
|
changes in our investor base;
|
•
|
failures to meet external expectations or management guidance;
|
•
|
fluctuations in our financial results or the financial results of companies perceived to be similar to us;
|
•
|
changes in our capital structure or dividend policy, including as a result of the exchange offer, future issuances of securities, sales of large blocks of common stock by our stockholders or the incurrence of additional debt;
|
•
|
reputational issues;
|
•
|
changes in general economic and market conditions in any of the regions in which we conduct our business;
|
•
|
the arrival or departure of key personnel;
|
•
|
the actions of speculators and financial arbitrageurs (such as hedge funds) during and after the exchange offer;
|
•
|
changes in applicable laws, rules or regulations and other dynamics; and
|
•
|
other developments or changes affecting us, our industry or our competitors.
|
•
|
a Board of Directors that is divided into three classes with staggered terms;
|
•
|
a dual class equity structure;
|
•
|
rules regarding how our stockholders may present proposals or nominate directors for election at stockholder meetings;
|
•
|
the right of our Board of Directors to issue preferred stock without stockholder approval; and
|
•
|
limitations on the right of stockholders to remove directors.
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
Item 3.
|
Defaults Upon Senior Securities
|
Item 4.
|
Mine Safety Disclosures
|
Item 5.
|
Other Information
|
Item 6.
|
Exhibits
|
Exhibit 3.1
|
|
Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to
|
|
|
Zoetis Inc.'s Annual Report on Form 10-K 2012 filed on March 28, 2013)
|
Exhibit 3.2
|
|
Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to Zoetis Inc.'s Annual
|
|
|
Report on Form 10-K 2012 filed on March 28, 2013)
|
Exhibit 10.1
|
|
Zoetis Executive Severance Plan
|
Exhibit 12
|
|
Computation of Ratio of Earnings to Fixed Charges
|
Exhibit 15
|
|
Accountants' Acknowledgment
|
Exhibit 31.1
|
|
Chief Executive Officer–Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302
|
Exhibit 31.2
|
|
Chief Financial Officer–Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302
|
Exhibit 32.1
|
|
Chief Executive Officer–Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906
|
Exhibit 32.2
|
|
Chief Financial Officer–Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906
|
EX-101.INS
|
|
INSTANCE DOCUMENT
|
EX-101.SCH
|
|
SCHEMA DOCUMENT
|
EX-101.CAL
|
|
CALCULATION LINKBASE DOCUMENT
|
EX-101.LAB
|
|
LABELS LINKBASE DOCUMENT
|
EX-101.PRE
|
|
PRESENTATION LINKBASE DOCUMENT
|
EX-101.DEF
|
|
DEFINITION LINKBASE DOCUMENT
|
|
Zoetis Inc.
|
|
|
|
|
August 14, 2013
|
By:
|
/S/ JUAN RAMÓN ALAIX
|
|
|
Juan Ramón Alaix
|
|
|
Chief Executive Officer and Director
|
|
|
|
August 14, 2013
|
By:
|
/S/ RICHARD A. PASSOV
|
|
|
Richard A. Passov
|
|
|
Chief Financial Officer
|
|
Severance
(Base Salary) |
Severance Benefits
(Health and Life Insurance) |
Target Bonus
|
Section 3.1: Non-Change of Control Severance
|
18 months
|
12 months
|
150%
|
|
Severance
(Base Salary) |
Severance Benefits
(Health and Life Insurance) |
Target Bonus
|
Section 3.1: Non-Change of Control Severance
|
12 months
|
12 months
|
100%
|
|
Severance
(Base Salary) |
Severance Benefits
(Health and Life Insurance) |
Target Bonus
|
Section 3.2: Change of Control Severance
|
30 months
|
18 months
|
250%
|
|
Severance
(Base Salary) |
Severance Benefits
(Health and Life Insurance) |
Target Bonus
|
Section 3.2: Change of Control Severance
|
24 months
|
18 months
|
200%
|
Plan Name:
|
|
Zoetis Executive Severance Plan
|
|
|
|
Plan Sponsor/
|
|
Zoetis Inc.
|
Administrator:
|
|
c/o Zoetis Health and Welfare Plans Committee
|
|
|
100 Campus Drive
|
|
|
Florham Park, New Jersey 07932
|
|
|
|
Telephone No.:
|
|
973-822-7000
|
|
|
|
Employer I.D. No.:
|
|
46-0696167
|
|
|
|
Plan No.:
|
|
503
|
|
|
|
Plan Year:
|
|
January 1 through December 31
|
|
|
|
Effective Date:
|
|
June 24, 2013
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
June 30,
|
|
|
Year Ended December 31,
|
|||||||||||||||
(IN MILLIONS, EXCEPT RATIOS)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|||||
Determination of earnings:
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Income/(loss) before provision for taxes on income
|
|
|
|
|
|
|
|
|
|
|
||||||||||
and noncontrolling interests
|
|
$
|
379
|
|
|
$
|
710
|
|
|
$
|
394
|
|
|
$
|
178
|
|
|
$
|
(148
|
)
|
Less: Net income/(loss) attributable to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
3
|
|
|
1
|
|
|
(1
|
)
|
|||||
Income/(loss) attributable to Zoetis Inc.
|
|
379
|
|
|
710
|
|
|
391
|
|
|
177
|
|
|
(147
|
)
|
|||||
Add: fixed charges
|
|
60
|
|
|
37
|
|
|
43
|
|
|
43
|
|
|
32
|
|
|||||
Total earnings/(loss) as defined
|
|
$
|
439
|
|
|
$
|
747
|
|
|
$
|
434
|
|
|
$
|
220
|
|
|
$
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Fixed charges:
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest expense
(b)
|
|
$
|
54
|
|
|
$
|
31
|
|
|
$
|
36
|
|
|
$
|
37
|
|
|
$
|
26
|
|
Interest portion of rent expense
(c)
|
|
6
|
|
|
6
|
|
|
7
|
|
|
6
|
|
|
6
|
|
|||||
Fixed charges
|
|
60
|
|
|
37
|
|
|
43
|
|
|
43
|
|
|
32
|
|
|||||
Capitalized interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||
Total fixed charges
|
|
$
|
60
|
|
|
$
|
37
|
|
|
$
|
43
|
|
|
$
|
43
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Ratio of earning to fixed charges
(d)
|
|
7.3
|
|
|
20.2
|
|
|
10.1
|
|
|
5.1
|
|
|
|
(a)
|
Regulation S-K, Item 503(d) requires that the ratio be presented for each of the last five fiscal years and the latest interim period. However, certain information for 2008 is not available. Over the last five years, there have been significant changes in Pfizer’s corporate structure and a number of restructurings and personnel changes which have impacted our business. As such, it is not practicable for us to determine net income/(loss) for the year ended December 31, 2008, therefore we are not able to present the ratio for 2008.
|
(b)
|
Interest expense includes amortization of debt discount and fees. Interest expense does not include interest related to uncertain tax positions.
|
(c)
|
One-third of all rental expense is deemed to be interest, which we believe to be a conservative estimate of an interest factor in our leases.
|
(d)
|
Earnings were insufficient to cover fixed charges by $100 million for 2009.
|
•
|
Form S-8, dated February 1, 2013, (File No. 333-186367) and
|
•
|
Form S-8, dated June 25, 2013, (File No.
333-189573
).
|
1.
|
I have reviewed this Quarterly Report of Zoetis Inc. on Form 10-Q for the period ending
June 30, 2013
as filed with the Securities and Exchange Commission on the date hereof;
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
|
4.
|
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and have:
|
a)
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b)
|
paragraph omitted in accordance with the Exchange Act Rule 13a-14(a);
|
c)
|
evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d)
|
disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
|
5.
|
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of the registrant's board of directors:
|
a)
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|
b)
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
|
August 14, 2013
|
By:
|
/s/ JUAN RAMÓN ALAIX
|
|
|
Juan Ramón Alaix
|
|
|
Chief Executive Officer
|
1.
|
I have reviewed this Quarterly Report of Zoetis Inc. on Form 10-Q for the period ending
June 30, 2013
as filed with the Securities and Exchange Commission on the date hereof;
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
|
4.
|
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and have:
|
a)
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
b)
|
paragraph omitted in accordance with the Exchange Act Rule 13a-14(a);
|
c)
|
evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d)
|
disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
|
5.
|
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and to the audit committee of the registrant's board of directors:
|
a)
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|
b)
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
|
August 14, 2013
|
By:
|
/s/ RICHARD A. PASSOV
|
|
|
Richard A. Passov
|
|
|
Chief Financial Officer
|
August 14, 2013
|
By:
|
/s/ JUAN RAMÓN ALAIX
|
|
|
Juan Ramón Alaix
|
|
|
Chief Executive Officer
|
August 14, 2013
|
By:
|
/s/ RICHARD A. PASSOV
|
|
|
Richard A. Passov
|
|
|
Chief Financial Officer
|