x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|
|
|
EXCHANGE ACT OF 1934
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|
|
For the quarterly period ended September 28, 2014
|
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|
or
|
|
|
TRANSITION REPORT PURSUANT TO SECTION 13
|
|
|
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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|
|
¨
|
For the transition period from __________ to __________
|
|
Zoetis Inc.
|
(Exact name of registrant as specified in its charter)
|
Delaware
|
|
46-0696167
|
(State or other jurisdiction of
|
|
(I.R.S. Employer Identification No.)
|
incorporation or organization)
|
|
|
100 Campus Drive, Florham Park, New Jersey
|
|
07932
|
(Address of principal executive offices)
|
|
(Zip Code)
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(973) 822-7000
|
(Registrant’s telephone number, including area code)
|
Large accelerated filer
¨
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Accelerated filer
¨
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Non-accelerated filer
x
|
|
Smaller reporting company
¨
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Page
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||||
Item 1.
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||
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Condensed Consolidated Statements of Income (Unaudited)
|
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Condensed Consolidated Statements of Comprehensive Income (Unaudited)
|
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|
|
|
Condensed Consolidated (Unaudited) Balance Sheets
|
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Condensed Consolidated Statements of Equity (Unaudited)
|
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Condensed Consolidated Statements of Cash Flows (Unaudited)
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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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.
|
|
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.
|
Financial Statements
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
September 28,
|
|
|
September 29,
|
|
||||
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
||||
Revenue
|
|
$
|
1,210
|
|
|
$
|
1,103
|
|
|
$
|
3,465
|
|
|
$
|
3,307
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
||||||||
Cost of sales
(a)
|
|
434
|
|
|
385
|
|
|
1,226
|
|
|
1,203
|
|
||||
Selling, general and administrative expenses
(a)
|
|
394
|
|
|
399
|
|
|
1,146
|
|
|
1,155
|
|
||||
Research and development expenses
(a)
|
|
93
|
|
|
93
|
|
|
272
|
|
|
278
|
|
||||
Amortization of intangible assets
(a)
|
|
16
|
|
|
15
|
|
|
46
|
|
|
45
|
|
||||
Restructuring charges and certain acquisition-related costs
|
|
2
|
|
|
3
|
|
|
10
|
|
|
(10
|
)
|
||||
Interest expense, net of capitalized interest
|
|
29
|
|
|
29
|
|
|
87
|
|
|
83
|
|
||||
Other (income)/deductions—net
|
|
4
|
|
|
(6
|
)
|
|
13
|
|
|
(11
|
)
|
||||
Income before provision for taxes on income
|
|
238
|
|
|
185
|
|
|
665
|
|
|
564
|
|
||||
Provision for taxes on income
|
|
71
|
|
|
54
|
|
|
204
|
|
|
165
|
|
||||
Net income before allocation to noncontrolling interests
|
|
167
|
|
|
131
|
|
|
461
|
|
|
399
|
|
||||
Less: Net income attributable to noncontrolling interests
|
|
1
|
|
|
—
|
|
|
4
|
|
|
—
|
|
||||
Net income attributable to Zoetis Inc.
|
|
$
|
166
|
|
|
$
|
131
|
|
|
$
|
457
|
|
|
$
|
399
|
|
Earnings per share attributable to Zoetis Inc. stockholders:
|
|
|
|
|
|
|
|
|
||||||||
Basic
|
|
$
|
0.33
|
|
|
$
|
0.26
|
|
|
$
|
0.91
|
|
|
$
|
0.80
|
|
Diluted
|
|
$
|
0.33
|
|
|
$
|
0.26
|
|
|
$
|
0.91
|
|
|
$
|
0.80
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
||||||||
Basic
|
|
501.453
|
|
|
500.000
|
|
|
500.887
|
|
|
500.000
|
|
||||
Diluted
|
|
502.445
|
|
|
500.354
|
|
|
501.610
|
|
|
500.227
|
|
||||
Dividends declared per common share
|
|
$
|
0.072
|
|
|
$
|
0.065
|
|
|
$
|
0.144
|
|
|
$
|
0.195
|
|
(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 statements of income.
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
September 28,
|
|
|
September 29,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
||||
Net income before allocation to noncontrolling interests
|
|
$
|
167
|
|
|
$
|
131
|
|
|
$
|
461
|
|
|
$
|
399
|
|
Other comprehensive income/(loss), net of taxes and reclassification adjustments:
|
|
|
|
|
|
|
|
|
||||||||
Foreign currency translation adjustments, net
|
|
(38
|
)
|
|
(62
|
)
|
|
(20
|
)
|
|
(79
|
)
|
||||
Benefit plans: Actuarial losses, net
(a)
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
(3
|
)
|
||||
Plan settlement, net
(b)
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
||||
Total other comprehensive loss, net of tax
|
|
(39
|
)
|
|
(62
|
)
|
|
(18
|
)
|
|
(82
|
)
|
||||
Comprehensive income before allocation to noncontrolling interests
|
|
128
|
|
|
69
|
|
|
443
|
|
|
317
|
|
||||
Less: Comprehensive income attributable to noncontrolling interests
|
|
2
|
|
|
—
|
|
|
4
|
|
|
—
|
|
||||
Comprehensive income attributable to Zoetis Inc.
|
|
$
|
126
|
|
|
$
|
69
|
|
|
$
|
439
|
|
|
$
|
317
|
|
(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 statements of income.
|
|
|
September 28,
|
|
|
December 31,
|
|
||
|
|
2014
|
|
|
2013
|
|
||
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
|
|
(Unaudited)
|
|
|
|
|||
Assets
|
|
|
|
|
||||
Cash and cash equivalents
|
|
$
|
598
|
|
|
$
|
610
|
|
Accounts receivable, less allowance for doubtful accounts of $31 in 2014 and $31 in 2013
|
|
1,057
|
|
|
1,138
|
|
||
Inventories
|
|
1,388
|
|
|
1,293
|
|
||
Current deferred tax assets
|
|
106
|
|
|
97
|
|
||
Other current assets
|
|
204
|
|
|
219
|
|
||
Total current assets
|
|
3,353
|
|
|
3,357
|
|
||
Property, plant and equipment, less accumulated depreciation of $1,143 in 2014 and $1,028 in 2013
|
|
1,313
|
|
|
1,295
|
|
||
Goodwill
|
|
982
|
|
|
982
|
|
||
Identifiable intangible assets, less accumulated amortization
|
|
757
|
|
|
803
|
|
||
Noncurrent deferred tax assets
|
|
55
|
|
|
63
|
|
||
Other noncurrent assets
|
|
67
|
|
|
58
|
|
||
Total assets
|
|
$
|
6,527
|
|
|
$
|
6,558
|
|
|
|
|
|
|
||||
Liabilities and Equity
|
|
|
|
|
||||
Short-term borrowings
|
|
$
|
10
|
|
|
$
|
15
|
|
Accounts payable
|
|
259
|
|
|
506
|
|
||
Accrued compensation and related items
|
|
201
|
|
|
229
|
|
||
Income taxes payable
|
|
86
|
|
|
40
|
|
||
Dividends payable
|
|
—
|
|
|
36
|
|
||
Other current liabilities
|
|
442
|
|
|
589
|
|
||
Total current liabilities
|
|
998
|
|
|
1,415
|
|
||
Long-term debt
|
|
3,642
|
|
|
3,642
|
|
||
Noncurrent deferred tax liabilities
|
|
265
|
|
|
322
|
|
||
Other taxes payable
|
|
57
|
|
|
49
|
|
||
Other noncurrent liabilities
|
|
176
|
|
|
168
|
|
||
Total liabilities
|
|
5,138
|
|
|
5,596
|
|
||
Commitments and contingencies
|
|
|
|
|
||||
Stockholders' equity:
|
|
|
|
|
||||
Preferred stock, $0.01 par value: 1,000,000,000 authorized, none issued
|
|
—
|
|
|
—
|
|
||
Common stock, $0.01 par value: 6,000,000,000 authorized; 501,209,488 and 500,007,735 shares issued; 501,195,696 and 500,007,428 shares outstanding at September 28, 2014, and December 31, 2013, respectively
|
|
5
|
|
|
5
|
|
||
Treasury stock, at cost, 13,792 and 307 shares of common stock at September 28, 2014, and December 31, 2013,
respectively
|
|
—
|
|
|
—
|
|
||
Additional paid-in capital
|
|
938
|
|
|
878
|
|
||
Retained earnings
|
|
661
|
|
|
276
|
|
||
Accumulated other comprehensive loss
|
|
(240
|
)
|
|
(219
|
)
|
||
Total Zoetis Inc. equity
|
|
1,364
|
|
|
940
|
|
||
Equity attributable to noncontrolling interests
|
|
25
|
|
|
22
|
|
||
Total equity
|
|
1,389
|
|
|
962
|
|
||
Total liabilities and equity
|
|
$
|
6,527
|
|
|
$
|
6,558
|
|
|
Zoetis
|
|
|
|
||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
||||||||||||||
|
|
|
|
|
|
Business
|
|
|
Additional
|
|
|
|
|
Other
|
|
|
Attributable to
|
|
|
|
||||||||||||
|
|
Common
|
|
|
Treasury
|
|
|
Unit
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Total
|
|
||||||||
(MILLIONS OF DOLLARS)
|
|
Stock
(a)
|
|
|
Stock
(a)
|
|
|
Equity
(b)
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Interests
|
|
|
Equity
|
|
||||||||
Balance, December 31, 2012
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,183
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(157
|
)
|
|
$
|
15
|
|
|
$
|
4,041
|
|
Nine months ended September 29, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Net income
|
|
—
|
|
|
—
|
|
|
94
|
|
|
—
|
|
|
305
|
|
|
—
|
|
|
—
|
|
|
399
|
|
||||||||
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(82
|
)
|
|
—
|
|
|
(82
|
)
|
||||||||
Share-based compensation awards
(c)
|
|
—
|
|
|
—
|
|
|
3
|
|
|
34
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37
|
|
||||||||
Net transfers—Pfizer Inc.
|
|
—
|
|
|
—
|
|
|
(271
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(271
|
)
|
||||||||
Separation adjustments
(d)
|
|
—
|
|
|
—
|
|
|
414
|
|
|
34
|
|
|
—
|
|
|
(6
|
)
|
|
8
|
|
|
450
|
|
||||||||
Employee benefit plan contribution from Pfizer Inc.
(e)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||||||
Reclassification of net liability due to Pfizer, Inc.
(f)
|
|
—
|
|
|
—
|
|
|
(60
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(60
|
)
|
||||||||
Consideration paid to Pfizer Inc. in connection with the Separation
(g)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,551
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,551
|
)
|
||||||||
Issuance of common stock to Pfizer Inc. in connection with the Separation and reclassification of Business Unit Equity
(g)
|
|
5
|
|
|
—
|
|
|
(4,363
|
)
|
|
4,358
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
||||||||
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(98
|
)
|
|
—
|
|
|
—
|
|
|
(98
|
)
|
||||||||
Balance, September 29, 2013
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
876
|
|
|
$
|
207
|
|
|
$
|
(245
|
)
|
|
$
|
23
|
|
|
$
|
866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Balance, December 31, 2013
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
878
|
|
|
$
|
276
|
|
|
$
|
(219
|
)
|
|
$
|
22
|
|
|
$
|
962
|
|
Nine months ended September 28, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
457
|
|
|
—
|
|
|
4
|
|
|
461
|
|
||||||||
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18
|
)
|
|
—
|
|
|
(18
|
)
|
||||||||
Share-based compensation awards
(c)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
||||||||
Defined contribution plan transactions
(h)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32
|
|
||||||||
Pension plan transfer from Pfizer Inc.
(i)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
||||||||
Employee benefit plan contribution from Pfizer Inc.
(e)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
||||||||
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(72
|
)
|
|
—
|
|
|
(1
|
)
|
|
(73
|
)
|
||||||||
Balance, September 28, 2014
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
938
|
|
|
$
|
661
|
|
|
$
|
(240
|
)
|
|
$
|
25
|
|
|
$
|
1,389
|
|
(a)
|
As of
September 28, 2014
, there were
501,195,696
outstanding shares of common stock and
13,792
shares of treasury stock. Treasury stock is recognized at the cost to reacquire the shares, which totaled
$0.4
million for the
nine months ended September 28, 2014
.
|
(b)
|
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.
|
(c)
|
The
nine months ended September 28, 2014
includes the issuance of
100,072
shares of Zoetis Inc. common stock and an increase of
13,485
shares of treasury stock associated with exercises of employee share-based awards. The
nine months ended September 29, 2013
includes the issuance of
7,080
shares of Zoetis Inc. common stock and the reacquisition of
247
treasury shares. Treasury shares are reacquired from employees for withholding tax purposes in connection with the vesting and exercise of awards under our equity compensation plan. For additional information regarding share-based compensation, see
Note 13. Share-Based Payments.
|
(d)
|
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.
|
(e)
|
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.
|
(f)
|
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.
|
(g)
|
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.
|
(h)
|
Reflects company matching and profit-sharing contributions funded through the issuance of
1,101,681
shares of Zoetis Inc. common stock.
|
(i)
|
Reflects the 2014 transfers of defined benefit pension plans from Pfizer Inc. and the associated reclassification from
Additional Paid in Capital
to
Accumulated Other Comprehensive Loss.
See
Note 12. Benefit Plans.
|
|
|
Nine Months Ended
|
||||||
|
|
September 28,
|
|
|
September 29,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
||
Operating Activities
|
|
|
|
|
||||
Net income before allocation to noncontrolling interests
|
|
$
|
461
|
|
|
$
|
399
|
|
Adjustments to reconcile net income before noncontrolling interests to net cash
|
|
|
|
|
||||
provided by operating activities:
|
|
|
|
|
||||
Depreciation and amortization expense
|
|
151
|
|
|
151
|
|
||
Share-based compensation expense
|
|
22
|
|
|
37
|
|
||
Asset write-offs and asset impairments
|
|
8
|
|
|
4
|
|
||
Deferred taxes
|
|
(60
|
)
|
|
(47
|
)
|
||
Employee benefit plan contribution from Pfizer Inc.
|
|
2
|
|
|
1
|
|
||
Other non-cash adjustments
|
|
(8
|
)
|
|
—
|
|
||
Other changes in assets and liabilities, net of acquisitions and divestitures and transfers with Pfizer Inc.
|
|
(337
|
)
|
|
(162
|
)
|
||
Net cash provided by operating activities
|
|
239
|
|
|
383
|
|
||
Investing Activities
|
|
|
|
|
||||
Purchases of property, plant and equipment
|
|
(129
|
)
|
|
(135
|
)
|
||
Milestone payment related to previously acquired intangibles
|
|
(15
|
)
|
|
—
|
|
||
Net proceeds from sales of assets
|
|
8
|
|
|
7
|
|
||
Other investing activities
|
|
(1
|
)
|
|
—
|
|
||
Net cash used in investing activities
|
|
(137
|
)
|
|
(128
|
)
|
||
Financing Activities
|
|
|
|
|
||||
(Decrease)/increase in short-term borrowings, net
|
|
(5
|
)
|
|
11
|
|
||
Proceeds from issuance of long-term debt—senior notes, net of discount and fees
|
|
—
|
|
|
2,625
|
|
||
Stock-based compensation-related proceeds and excess tax benefits
|
|
2
|
|
|
—
|
|
||
Consideration paid to Pfizer Inc. in connection with the Separation
(a)
|
|
—
|
|
|
(2,559
|
)
|
||
Cash dividends paid
|
|
(109
|
)
|
|
(65
|
)
|
||
Other net financing activities with Pfizer Inc.
|
|
—
|
|
|
(184
|
)
|
||
Net cash used in financing activities
|
|
(112
|
)
|
|
(172
|
)
|
||
Effect of exchange-rate changes on cash and cash equivalents
|
|
(2
|
)
|
|
(11
|
)
|
||
Net (decrease)/increase in cash and cash equivalents
|
|
(12
|
)
|
|
72
|
|
||
Cash and cash equivalents at beginning of period
|
|
610
|
|
|
317
|
|
||
Cash and cash equivalents at end of period
|
|
$
|
598
|
|
|
$
|
389
|
|
|
|
|
|
|
||||
Supplemental cash flow information
|
|
|
|
|
||||
Cash paid during the period for:
|
|
|
|
|
||||
Income taxes
|
|
$
|
210
|
|
|
$
|
77
|
|
Interest, net of capitalized interest
|
|
117
|
|
|
60
|
|
||
Non-cash transactions:
|
|
|
|
|
||||
Intangible asset acquisition
(b)
|
|
$
|
8
|
|
|
$
|
—
|
|
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)
|
Reflects the non-cash portion of the acquisition of product registration and application rights from Pfizer in the third quarter of 2014. See
Note 17. Transactions and Agreements with Pfizer.
|
(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
|
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 pre-Separation period included in the condensed consolidated statement of income for the
nine months ended
September 29, 2013
, includes allocations from certain support functions (Enabling Functions) that were 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 did not routinely allocate these costs to any of its business units. These allocations were 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 pre-Separation period included in the condensed consolidated statement of income for the
nine months ended
September 29, 2013
, includes allocations of certain manufacturing and supply costs incurred by manufacturing plants that were 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 did not routinely allocate these costs to any of its business units. These allocations were 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 pre-Separation period included in the condensed consolidated statement of income for the
nine months ended
September 29, 2013
, also includes allocations from the Enabling Functions and PGS for restructuring charges, integration costs, additional depreciation associated with asset restructuring and implementation costs, as Pfizer did 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 pre-Separation period included in the condensed consolidated statement of income for the
nine months ended
September 29, 2013
, includes 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
.
|
•
|
Enabling Functions operating expenses––approximately
$11 million
(in
Selling, general and administrative expenses
).
|
•
|
Other costs associated with cost reduction/productivity initiatives—additional depreciation associated with asset restructuring—approximately
$2 million
(in
Selling, general and administrative expenses)
.
|
•
|
Other costs associated with cost reduction/productivity initiatives—implementation costs—approximately
$1 million
(in
Selling, general and administrative expenses
).
|
•
|
Share-based compensation expense—approximately
$3 million
(
$1 million
in
Cost of sales
and
$2 million
in
Selling, general and administrative expenses
).
|
•
|
Compensation-related expenses—approximately
$1 million
(in
Selling, general and administrative expenses
).
|
•
|
Interest expense—approximately
$2 million
.
|
B.
|
Basis of Presentation After the Separation
|
4.
|
Significant Accounting Policies
|
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, product transfers 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
|
|
Nine Months Ended
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
September 28,
|
|
|
September 29,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
||||
Restructuring charges and certain acquisition-related costs:
|
|
|
|
|
|
|
|
|
||||||||
Integration costs
(a)
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
16
|
|
Restructuring charges
(b)
:
|
|
|
|
|
|
|
|
|
||||||||
Employee termination costs
|
|
1
|
|
|
—
|
|
|
4
|
|
|
(26
|
)
|
||||
Accelerated depreciation
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
||||
Total
Restructuring charges and certain acquisition-related costs
|
|
2
|
|
|
3
|
|
|
10
|
|
|
(10
|
)
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Other costs associated with cost-reduction/productivity initiatives:
|
|
|
|
|
|
|
|
|
||||||||
Additional depreciation associated with asset restructuring––direct
(c)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||
Additional depreciation associated with asset restructuring––allocated
(c)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
||||
Implementation costs––allocated
(d)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||
Total costs associated with acquisitions and cost-reduction/productivity initiatives
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
10
|
|
|
$
|
(6
|
)
|
(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, as well as product transfer costs.
|
(b)
|
The restructuring charges for the three and
nine months ended September 28, 2014
, include employee severance costs in EuAfME (
$1 million
and $
6 million
, respectively). Additionally, the
nine months ended September 28, 2014
, includes a reversal of a previously established reserve as a result of a change in estimate of severance costs ($
2 million
benefit), and accelerated depreciation related to the exiting of a research facility ($
1 million
). The restructuring benefit for the
nine months ended September 29, 2013
, is primarily related to the reversal of certain employee termination expenses associated with our operations in Europe.
|
•
|
For the
three months ended September 28, 2014
––EuAfME (
$1 million
).
|
•
|
For the
nine months ended
September 28, 2014
––EuAfME (
$6 million
) and Manufacturing/research/corporate (
$1 million
benefit).
|
•
|
For the
nine months ended
September 29, 2013
––Manufacturing/research/corporate (
$26 million
benefit).
|
(c)
|
Additional depreciation associated with asset restructuring represents the impact of changes in the estimated lives of assets involved in restructuring actions.
For the
nine months ended September 29, 2013
, included in
Cost of Sales
(
$1 million
) and
Selling, general and administrative expenses
(
$2 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
|
|
|
|
|
|
|
|
|||||||
|
|
Termination
|
|
|
Accelerated
|
|
|
Exit
|
|
|
|
|||||
(MILLIONS OF DOLLARS)
|
|
Costs
|
|
|
Depreciation
|
|
|
Costs
|
|
|
Accrual
|
|
||||
Balance, December 31, 2013
(a)
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
21
|
|
Provision
|
|
4
|
|
|
1
|
|
|
—
|
|
|
5
|
|
||||
Utilization and other
(b)
|
|
(7
|
)
|
|
(1
|
)
|
|
(3
|
)
|
|
(11
|
)
|
||||
Balance, September 28, 2014
(a)
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
15
|
|
(a)
|
At
September 28, 2014
, and
December 31, 2013
, included in
Other current liabilities
(
$7 million
and $
13 million
, respectively) and
Other noncurrent liabilities
(
$7 million
and $
8 million
, respectively).
|
(b)
|
Includes adjustments for foreign currency translation.
|
6.
|
Other (Income)/Deductions—Net
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
September 28,
|
|
|
September 29,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
||||
Royalty-related income
|
|
$
|
(7
|
)
|
|
$
|
(8
|
)
|
|
$
|
(21
|
)
|
|
$
|
(21
|
)
|
Identifiable intangible asset impairment charges
(a)
|
|
6
|
|
|
—
|
|
|
6
|
|
|
1
|
|
||||
Net gain on sale of assets
(b)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
||||
Certain legal and other matters, net
(c)
|
|
(1
|
)
|
|
1
|
|
|
10
|
|
|
1
|
|
||||
Foreign currency loss
(d)
|
|
7
|
|
|
—
|
|
|
23
|
|
|
12
|
|
||||
Other, net
(e)
|
|
(1
|
)
|
|
1
|
|
|
1
|
|
|
2
|
|
||||
Other (income)/deductions—net
|
|
$
|
4
|
|
|
$
|
(6
|
)
|
|
$
|
13
|
|
|
$
|
(11
|
)
|
(a)
|
For the three and
nine months ended September 28, 2014
, reflects the impairment of IPR&D assets, related to a pharmaceutical product for dogs acquired with the FDAH acquisition in 2009, as a result of the termination of the development program due to a re-assessment of economic viability.
|
(b)
|
For the
nine months ended September 28, 2014
, represents the net gain on sale of land in our Taiwan joint venture. For the
nine months ended September 29, 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.
|
(c)
|
In July 2014, we reached a commercial settlement with several large poultry customers in Mexico associated with specific lots of a Zoetis poultry vaccine. Although there have been no quality or efficacy issues with the manufacturing of this vaccine, certain shipments from several lots in Mexico may have experienced an issue in storage with a third party in Mexico that could have impacted their efficacy. We issued a recall of these lots in July 2014 and the product is currently unavailable in Mexico. The
nine months ended September 28, 2014
, includes a
$13 million
charge recorded in the second quarter of 2014, which was partially offset by a
$1 million
insurance recovery recorded in the third quarter of 2014. We do not expect any significant additional charges related to this issue. The
nine months ended September 28, 2014
, also includes an insurance recovery of other litigation-related charges.
|
(d)
|
For the three and
nine months ended
September 28, 2014
, primarily driven by costs related to hedging and exposures to certain emerging market currencies. The
nine months ended
September 28, 2014
, also includes losses related to the depreciation of the Argentine peso in the first quarter of 2014. For the
nine months ended September 29, 2013
, primarily related to the Venezuela currency devaluation in February 2013.
|
(e)
|
For the
nine months ended
September 28, 2014
, includes a pension plan settlement charge related to the sale of a manufacturing plant, partially offset by interest income and other miscellaneous income.
|
7.
|
Income Taxes
|
A.
|
Taxes on Income
|
•
|
an
$8 million
discrete tax expense during the first quarter of 2014 related to a prior period intercompany inventory adjustment;
|
•
|
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.
|
B.
|
Tax Matters Agreement
|
•
|
Pfizer is 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 are responsible for the portion of any such taxes for periods or portions thereof beginning on or after January 1, 2013, as would be applicable to us if we filed the relevant tax returns on a standalone basis.
|
•
|
We are 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 is 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, Excluding Noncontrolling Interests
|
|
|
Currency Translation
|
|
|
|
|
|
|||||
|
|
Adjustment
|
|
|
Benefit Plans
|
|
|
Accumulated Other
|
|
|||
|
|
Net Unrealized
|
|
|
Actuarial
|
|
|
Comprehensive
|
|
|||
(MILLIONS OF DOLLARS)
|
|
Gains/(Losses)
|
|
|
Gains/(Losses)
|
|
|
Loss
|
|
|||
Balance, December 31, 2013
|
|
$
|
(212
|
)
|
|
$
|
(7
|
)
|
|
$
|
(219
|
)
|
Other comprehensive income (loss), net of tax
|
|
(20
|
)
|
|
2
|
|
(a)
|
(18
|
)
|
|||
Pension plan transfers from Pfizer Inc.
(b)
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|||
Balance, September 28, 2014
|
|
$
|
(232
|
)
|
|
$
|
(8
|
)
|
|
$
|
(240
|
)
|
(a)
|
Includes the first quarter 2014 settlement charge associated with the 2012 sale of our Netherlands manufacturing facility. See
Note 12. Benefit Plans.
|
(b)
|
Reflects the 2014 transfers of defined benefit pension plans from Pfizer Inc. and the associated reclassification from
Additional Paid in Capital
to
Accumulated other Comprehensive Loss
.
See
Note 12 Benefit Plans
.
|
9.
|
Financial Instruments
|
A.
|
Debt
|
|
|
September 28,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
||
Lines of credit, due 2016-2017
|
|
$
|
2
|
|
|
$
|
2
|
|
1.150% Senior Notes due 2016
|
|
400
|
|
|
400
|
|
||
1.875% Senior Notes due 2018
|
|
750
|
|
|
750
|
|
||
3.250% Senior Notes due 2023
|
|
1,350
|
|
|
1,350
|
|
||
4.700% Senior Notes due 2043
|
|
1,150
|
|
|
1,150
|
|
||
|
|
3,652
|
|
|
3,652
|
|
||
Unamortized debt discount
|
|
(10
|
)
|
|
(10
|
)
|
||
Long-term debt
|
|
$
|
3,642
|
|
|
$
|
3,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|||||||||||||
(MILLIONS OF DOLLARS)
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
Total
|
|
|||||||
Maturities
|
|
$
|
—
|
|
|
$
|
401
|
|
|
$
|
1
|
|
|
$
|
750
|
|
|
$
|
—
|
|
|
$
|
2,500
|
|
|
$
|
3,652
|
|
B.
|
Derivative Financial Instruments
|
|
|
Fair Value of Derivatives
|
||||||
|
|
September 28,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
Balance Sheet Location
|
2014
|
|
|
2013
|
|
||
Foreign currency forward-exchange contracts
|
Other current assets
|
$
|
4
|
|
|
$
|
10
|
|
Foreign currency forward-exchange contracts
|
Other current liabilities
|
(4
|
)
|
|
(5
|
)
|
||
Total foreign currency forward-exchange contracts
|
|
$
|
—
|
|
|
$
|
5
|
|
10.
|
Inventories
|
|
|
September 28,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
||
Finished goods
|
|
$
|
829
|
|
|
$
|
862
|
|
Work-in-process
|
|
277
|
|
|
218
|
|
||
Raw materials and supplies
|
|
282
|
|
|
213
|
|
||
Inventories
|
|
$
|
1,388
|
|
|
$
|
1,293
|
|
11.
|
Goodwill and Other Intangible Assets
|
A.
|
Goodwill
|
(MILLIONS OF DOLLARS)
|
|
U.S.
|
|
|
EuAfME
|
|
|
CLAR
|
|
|
APAC
|
|
|
Total
|
|
|||||
Balance, December 31, 2013
|
|
$
|
501
|
|
|
$
|
157
|
|
|
$
|
162
|
|
|
$
|
162
|
|
|
$
|
982
|
|
Other
(a)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
1
|
|
|
—
|
|
|||||
Balance, September 28, 2014
|
|
$
|
501
|
|
|
$
|
156
|
|
|
$
|
162
|
|
|
$
|
163
|
|
|
$
|
982
|
|
(a)
|
Primarily reflects adjustments for foreign currency translation.
|
B.
|
Other Intangible Assets
|
|
|
As of September 28, 2014
|
|
As of December 31, 2013
|
||||||||||||||||||||
|
|
|
|
|
|
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
|
|
$
|
762
|
|
|
$
|
(253
|
)
|
|
$
|
509
|
|
|
$
|
762
|
|
|
$
|
(219
|
)
|
|
$
|
543
|
|
Brands
|
|
216
|
|
|
(108
|
)
|
|
108
|
|
|
216
|
|
|
(100
|
)
|
|
116
|
|
||||||
Trademarks and trade names
|
|
60
|
|
|
(40
|
)
|
|
20
|
|
|
59
|
|
|
(38
|
)
|
|
21
|
|
||||||
Other
|
|
120
|
|
|
(117
|
)
|
|
3
|
|
|
121
|
|
|
(116
|
)
|
|
5
|
|
||||||
Total finite-lived intangible assets
|
|
1,158
|
|
|
(518
|
)
|
|
640
|
|
|
1,158
|
|
|
(473
|
)
|
|
685
|
|
||||||
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Brands
|
|
39
|
|
|
—
|
|
|
39
|
|
|
39
|
|
|
—
|
|
|
39
|
|
||||||
Trademarks and trade names
|
|
67
|
|
|
—
|
|
|
67
|
|
|
67
|
|
|
—
|
|
|
67
|
|
||||||
In-process research and development
(a)
|
|
3
|
|
|
—
|
|
|
3
|
|
|
12
|
|
|
—
|
|
|
12
|
|
||||||
Product rights
(b)
|
|
8
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
||||||
Total indefinite-lived intangible assets
|
|
117
|
|
|
—
|
|
|
117
|
|
|
118
|
|
|
—
|
|
|
118
|
|
||||||
Identifiable intangible assets
|
|
$
|
1,275
|
|
|
$
|
(518
|
)
|
|
$
|
757
|
|
|
$
|
1,276
|
|
|
$
|
(473
|
)
|
|
$
|
803
|
|
(b)
|
Product registration and application rights which were acquired from Pfizer in the third quarter of 2014. See
Note 17. Transactions and Agreements with Pfizer.
|
C.
|
Amortization
|
12.
|
Benefit Plans
|
13.
|
Share-Based Payments
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
September 28,
|
|
|
September 29,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
||||
Stock options / stock appreciation rights
|
|
$
|
5
|
|
|
$
|
3
|
|
|
$
|
12
|
|
|
$
|
7
|
|
RSUs / DSUs
|
|
4
|
|
|
3
|
|
|
10
|
|
|
5
|
|
||||
Pfizer stock benefit plans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
||||
Share-based compensation expense—total
|
|
$
|
9
|
|
|
$
|
6
|
|
|
$
|
22
|
|
|
$
|
37
|
|
14.
|
Earnings per Share
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
September 28,
|
|
|
September 29,
|
|
||||
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
||||
Numerator
|
|
|
|
|
|
|
|
|
||||||||
Net income before allocation to noncontrolling interests
|
|
$
|
167
|
|
|
$
|
131
|
|
|
$
|
461
|
|
|
$
|
399
|
|
Less: net income attributable to noncontrolling interests
|
|
1
|
|
|
—
|
|
|
4
|
|
|
—
|
|
||||
Net income attributable to Zoetis Inc.
|
|
$
|
166
|
|
|
$
|
131
|
|
|
$
|
457
|
|
|
$
|
399
|
|
Denominator
|
|
|
|
|
|
|
|
|
||||||||
Weighted-average common shares outstanding
|
|
501.453
|
|
|
500.000
|
|
|
500.887
|
|
|
500.000
|
|
||||
Common stock equivalents: stock options, RSUs and DSUs
|
|
0.992
|
|
|
0.354
|
|
|
0.723
|
|
|
0.227
|
|
||||
Weighted-average common and potential dilutive shares outstanding
|
|
502.445
|
|
|
500.354
|
|
|
501.610
|
|
|
500.227
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Earnings per share attributable to Zoetis Inc. stockholders—basic
|
|
$
|
0.33
|
|
|
$
|
0.26
|
|
|
$
|
0.91
|
|
|
$
|
0.80
|
|
Earnings per share attributable to Zoetis Inc. stockholders—diluted
|
|
$
|
0.33
|
|
|
$
|
0.26
|
|
|
$
|
0.91
|
|
|
$
|
0.80
|
|
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 United States and in other countries.
|
B.
|
Guarantees and Indemnifications
|
16.
|
Segment and Other Revenue Information
|
A.
|
Segment Information
|
•
|
The U.S.
|
•
|
EuAfME—Includes, among others, the United Kingdom, Germany, France, Italy, Spain, Northern Europe and Central Europe as well as Russia, Turkey and South Africa.
|
•
|
CLAR––Includes Canada, Brazil, Mexico, Central America and other South American countries.
|
•
|
APAC––Includes Australia, Japan, New Zealand, South Korea, India, China/Hong Kong, Northeast Asia, Southeast Asia and South Asia.
|
•
|
Other business activities
includes our CSS contract manufacturing results, as well as expenses associated with our dedicated veterinary medicine research and development organization, research alliances, U.S. regulatory affairs and other operations focused on
|
•
|
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 includes non-acquisition-related restructuring charges, certain asset impairment charges, stand-up costs and costs associated with cost reduction/productivity initiatives.
|
•
|
Other unallocated
includes certain overhead expenses associated with our global manufacturing operations not charged to our operating segments. Effective January 1, 2014,
Other unallocated
also includes certain costs associated with business technology and finance that specifically support our global manufacturing operations. These costs were previously reported in
Corporate
. Also, beginning in the first quarter of 2014, certain supply chain and global logistics costs that were previously reported in the four reportable segments are reported in
Other unallocated
. This presentation better reflects how we measure the performance of the global manufacturing organization.
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
|
||||||||||||||
|
|
Revenue
(a)
|
|
Earnings
(b)
|
|
Amortization
(c)
|
||||||||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
September 28,
|
|
|
September 29,
|
|
|
September 28,
|
|
|
September 29,
|
|
||||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
||||||
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
U.S.
|
|
$
|
532
|
|
|
$
|
495
|
|
|
$
|
313
|
|
|
$
|
285
|
|
|
$
|
7
|
|
|
$
|
11
|
|
EuAfME
|
|
293
|
|
|
256
|
|
|
116
|
|
|
90
|
|
|
5
|
|
|
5
|
|
||||||
CLAR
|
|
194
|
|
|
171
|
|
|
68
|
|
|
56
|
|
|
4
|
|
|
5
|
|
||||||
APAC
|
|
179
|
|
|
167
|
|
|
71
|
|
|
57
|
|
|
4
|
|
|
4
|
|
||||||
Total reportable segments
|
|
1,198
|
|
|
1,089
|
|
|
568
|
|
|
488
|
|
|
20
|
|
|
25
|
|
||||||
Other business activities
(d)
|
|
12
|
|
|
14
|
|
|
(75
|
)
|
|
(78
|
)
|
|
7
|
|
|
6
|
|
||||||
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Corporate
(e)
|
|
—
|
|
|
—
|
|
|
(145
|
)
|
|
(139
|
)
|
|
7
|
|
|
4
|
|
||||||
Purchase accounting adjustments
(f)
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
|
(12
|
)
|
|
13
|
|
|
12
|
|
||||||
Acquisition-related costs
(g)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
||||||
Certain significant items
(h)
|
|
—
|
|
|
—
|
|
|
(38
|
)
|
|
(46
|
)
|
|
1
|
|
|
—
|
|
||||||
Other unallocated
(i)
|
|
—
|
|
|
—
|
|
|
(58
|
)
|
|
(27
|
)
|
|
2
|
|
|
2
|
|
||||||
|
|
$
|
1,210
|
|
|
$
|
1,103
|
|
|
$
|
238
|
|
|
$
|
185
|
|
|
$
|
50
|
|
|
$
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
U.S.
|
|
$
|
1,470
|
|
|
$
|
1,386
|
|
|
$
|
849
|
|
|
$
|
773
|
|
|
$
|
24
|
|
|
$
|
33
|
|
EuAfME
|
|
847
|
|
|
801
|
|
|
331
|
|
|
297
|
|
|
15
|
|
|
15
|
|
||||||
CLAR
|
|
576
|
|
|
555
|
|
|
220
|
|
|
186
|
|
|
10
|
|
|
14
|
|
||||||
APAC
|
|
533
|
|
|
528
|
|
|
209
|
|
|
203
|
|
|
13
|
|
|
10
|
|
||||||
Total reportable segments
|
|
3,426
|
|
|
3,270
|
|
|
1,609
|
|
|
1,459
|
|
|
62
|
|
|
72
|
|
||||||
Other business activities
(d)
|
|
39
|
|
|
37
|
|
|
(221
|
)
|
|
(225
|
)
|
|
21
|
|
|
21
|
|
||||||
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Corporate
(e)
|
|
—
|
|
|
—
|
|
|
(398
|
)
|
|
(392
|
)
|
|
21
|
|
|
16
|
|
||||||
Purchase accounting adjustments
(f)
|
|
—
|
|
|
—
|
|
|
(38
|
)
|
|
(37
|
)
|
|
38
|
|
|
37
|
|
||||||
Acquisition-related costs
(g)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
(17
|
)
|
|
—
|
|
|
—
|
|
||||||
Certain significant items
(h)
|
|
—
|
|
|
—
|
|
|
(127
|
)
|
|
(130
|
)
|
|
4
|
|
|
—
|
|
||||||
Other unallocated
(i)
|
|
—
|
|
|
—
|
|
|
(155
|
)
|
|
(94
|
)
|
|
5
|
|
|
5
|
|
||||||
|
|
$
|
3,465
|
|
|
$
|
3,307
|
|
|
$
|
665
|
|
|
$
|
564
|
|
|
$
|
151
|
|
|
$
|
151
|
|
(a)
|
Revenue denominated in euros was
$175 million
and
$525 million
for the three and
nine months ended
September 28, 2014
, respectively, and
$159 million
and
$493 million
for the three and
nine months ended
September 29, 2013
, 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
reflects the research and development costs managed by our Research and Development organization, as well as our contract manufacturing business.
|
(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
includes certain charges related to 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. For additional information, see
Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
.
|
(h)
|
Certain significant items
includes 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 certain costs related to becoming an independent public company, restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition, certain legal and commercial settlements and the impact of divestiture-related gains and losses. For additional information, see
Note 5. Restructuring Charges and Other Costs Associated with Acquisition and Cost-Reduction/Productivity Initiatives
.
|
•
|
In the
third quarter
of
2014
,
Certain significant items
primarily includes: (i) Zoetis stand-up costs of
$32 million
; (ii) intangible asset impairment charges related to an IPR&D project acquired with the FDAH acquisition in 2009 of
$6 million
; and (iii) restructuring charges of
$1 million
related to
|
•
|
In the
third quarter
of
2013
,
Certain significant items
primarily
includes: (i) Zoetis stand-up costs of
$41 million
; and (ii) litigation-related charges of
$5 million
.
|
•
|
In the
nine months ended September 28, 2014
,
Certain significant items
primarily
includes: (i) Zoetis stand-up costs of
$106 million
; (ii) charges related to a commercial settlement in Mexico of
$13 million
, partially offset by the insurance recovery of
$1 million
income; (iii) restructuring charges of
$6 million
related to employee severance costs in EuAfME, partially offset by $
2 million
income related to a reversal of a previously established reserve as a result of a change in estimate of severance costs; (iv) intangible asset impairment charges related to an IPR&D project acquired with the FDAH acquisition in 2009 of
$6 million
; (v) the Zoetis portion of a net gain on the sale of land by our Taiwan joint venture of
$3 million
; (vi) additional depreciation associated with asset restructuring of
$1 million
; (vii) a pension plan settlement charge related to the divestiture of a manufacturing plant of
$4 million
; and (viii) an insurance recovery of litigation related charges of
$2 million
income.
|
•
|
In the
nine months ended September 29, 2013
,
Certain significant items
primarily
includes: (i) Zoetis stand-up costs of
$152 million
; (ii)
$26 million
income related to the reversal of certain employee termination expenses; (iii)
$6 million
income on the government-mandated sale of certain product rights in Brazil that were acquired with the FDAH acquisition in 2009; (iv) additional depreciation associated with asset restructuring of
$3 million
; and (v) litigation-related charges of
$5 million
.
|
(i)
|
Includes overhead expenses associated with our manufacturing operations.
|
B.
|
Other Revenue Information
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
September 28,
|
|
|
September 29,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
||||
Livestock:
|
|
|
|
|
|
|
|
|
||||||||
Cattle
|
|
$
|
437
|
|
|
$
|
387
|
|
|
$
|
1,207
|
|
|
$
|
1,132
|
|
Swine
|
|
179
|
|
|
154
|
|
|
496
|
|
|
463
|
|
||||
Poultry
|
|
147
|
|
|
137
|
|
|
428
|
|
|
412
|
|
||||
Other
|
|
27
|
|
|
24
|
|
|
68
|
|
|
65
|
|
||||
|
|
790
|
|
|
702
|
|
|
2,199
|
|
|
2,072
|
|
||||
Companion Animal:
|
|
|
|
|
|
|
|
|
||||||||
Horses
|
|
38
|
|
|
37
|
|
|
127
|
|
|
124
|
|
||||
Dogs and Cats
|
|
370
|
|
|
350
|
|
|
1,100
|
|
|
1,074
|
|
||||
|
|
408
|
|
|
387
|
|
|
1,227
|
|
|
1,198
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Contract Manufacturing
|
|
$
|
12
|
|
|
$
|
14
|
|
|
$
|
39
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
||||||||
Total revenue
|
|
$
|
1,210
|
|
|
$
|
1,103
|
|
|
$
|
3,465
|
|
|
$
|
3,307
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
September 28,
|
|
|
September 29,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
||||
Anti-infectives
|
|
$
|
356
|
|
|
$
|
333
|
|
|
$
|
965
|
|
|
$
|
920
|
|
Vaccines
|
|
308
|
|
|
296
|
|
|
886
|
|
|
867
|
|
||||
Parasiticides
|
|
178
|
|
|
156
|
|
|
528
|
|
|
519
|
|
||||
Medicated feed additives
|
|
124
|
|
|
94
|
|
|
337
|
|
|
295
|
|
||||
Other pharmaceuticals
|
|
200
|
|
|
175
|
|
|
598
|
|
|
555
|
|
||||
Other non-pharmaceuticals
|
|
32
|
|
|
35
|
|
|
112
|
|
|
114
|
|
||||
Contract manufacturing
|
|
12
|
|
|
14
|
|
|
39
|
|
|
37
|
|
||||
Total revenue
|
|
$
|
1,210
|
|
|
$
|
1,103
|
|
|
$
|
3,465
|
|
|
$
|
3,307
|
|
17.
|
Transactions and 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 United States. 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 affiliates certain rights to intellectual property in all fields outside of the animal health field; and (iii) Pfizer granted us rights with respect to certain trademarks and copyrighted works.
|
•
|
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
14
“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
27
manufacturing sites is our facility in Guarulhos, Brazil, which we leased back to Pfizer. Certain of our products are currently manufactured at
13
manufacturing sites that were retained by Pfizer. The products manufactured by Pfizer at
|
•
|
R&D Facilities
. We have R&D operations co-located with certain of our manufacturing sites in Australia, Belgium, Brazil, 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 after the completion of the Separation for cash consideration to be agreed upon, 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.
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
||||
Revenue
|
|
$
|
1,210
|
|
|
$
|
1,103
|
|
|
10
|
|
$
|
3,465
|
|
|
$
|
3,307
|
|
|
5
|
|
Net income attributable to Zoetis
|
|
$
|
166
|
|
|
$
|
131
|
|
|
27
|
|
$
|
457
|
|
|
$
|
399
|
|
|
15
|
|
Adjusted net income
(a)
|
|
$
|
207
|
|
|
$
|
172
|
|
|
20
|
|
$
|
587
|
|
|
$
|
529
|
|
|
11
|
|
(a)
|
Adjusted net income is a non-GAAP financial measure. See the "Adjusted net income" section of this MD&A for more information.
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
||||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
||||
Revenue
|
|
$
|
1,210
|
|
|
$
|
1,103
|
|
|
10
|
|
|
$
|
3,465
|
|
|
$
|
3,307
|
|
|
5
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Cost of sales
(a)
|
|
434
|
|
|
385
|
|
|
13
|
|
|
1,226
|
|
|
1,203
|
|
|
2
|
|
||||
% of revenue
|
|
36
|
%
|
|
35
|
%
|
|
|
|
35
|
%
|
|
36
|
%
|
|
|
||||||
Selling, general and administrative expenses
(a)
|
|
394
|
|
|
399
|
|
|
(1
|
)
|
|
1,146
|
|
|
1,155
|
|
|
(1
|
)
|
||||
% of revenue
|
|
33
|
%
|
|
36
|
%
|
|
|
|
33
|
%
|
|
35
|
%
|
|
|
||||||
Research and development expenses
(a)
|
|
93
|
|
|
93
|
|
|
—
|
|
|
272
|
|
|
278
|
|
|
(2
|
)
|
||||
% of revenue
|
|
8
|
%
|
|
8
|
%
|
|
|
|
8
|
%
|
|
8
|
%
|
|
|
||||||
Amortization of intangible assets
(a)
|
|
16
|
|
|
15
|
|
|
7
|
|
|
46
|
|
|
45
|
|
|
2
|
|
||||
Restructuring charges and certain acquisition-related costs
|
|
2
|
|
|
3
|
|
|
(33
|
)
|
|
10
|
|
|
(10
|
)
|
|
*
|
|
||||
Interest expense, net of capitalized interest
|
|
29
|
|
|
29
|
|
|
—
|
|
|
87
|
|
|
83
|
|
|
5
|
|
||||
Other (income)/deductions—net
|
|
4
|
|
|
(6
|
)
|
|
*
|
|
|
13
|
|
|
(11
|
)
|
|
*
|
|
||||
Income before provision for taxes on income
|
|
238
|
|
|
185
|
|
|
29
|
|
|
665
|
|
|
564
|
|
|
18
|
|
||||
% of revenue
|
|
20
|
%
|
|
17
|
%
|
|
|
|
19
|
%
|
|
17
|
%
|
|
|
||||||
Provision for taxes on income
|
|
71
|
|
|
54
|
|
|
31
|
|
|
204
|
|
|
165
|
|
|
24
|
|
||||
Effective tax rate
|
|
29.8
|
%
|
|
29.2
|
%
|
|
|
|
30.7
|
%
|
|
29.3
|
%
|
|
|
||||||
Net income before allocation to noncontrolling interests
|
|
167
|
|
|
131
|
|
|
27
|
|
|
461
|
|
|
399
|
|
|
16
|
|
||||
Less: Net income attributable to noncontrolling interests
|
|
1
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
||||
Net income attributable to Zoetis
|
|
$
|
166
|
|
|
$
|
131
|
|
|
27
|
|
|
$
|
457
|
|
|
$
|
399
|
|
|
15
|
|
% of revenue
|
|
14
|
%
|
|
12
|
%
|
|
|
|
13
|
%
|
|
12
|
%
|
|
|
(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
|
|
|
|
Nine Months Ended
|
|
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
2014
|
|
|
2013
|
|
|
Change
|
||||
Cost of sales
(a)
|
|
$
|
434
|
|
|
$
|
385
|
|
|
13
|
|
$
|
1,226
|
|
|
$
|
1,203
|
|
|
2
|
% of revenue
|
|
35.9
|
%
|
|
34.9
|
%
|
|
|
|
35.4
|
%
|
|
36.4
|
%
|
|
|
(a)
|
Allocations from Pfizer of corporate enabling functions for the pre-Separation period were $3 million for the nine months ended September 29, 2013.
|
•
|
an increase in sales volume;
|
•
|
incremental global manufacturing and supply spending associated with the build-up of our operations in 2013, which is now reflected in our 2014 results; and
|
•
|
an increase in inventory obsolescence, scrap and other charges;
|
•
|
favorable foreign exchange.
|
•
|
incremental global manufacturing and supply spending associated with the build-up of our operations in 2013, which is now reflected in our 2014 results;
|
•
|
an increase in sales volume; and
|
•
|
an increase in inventory obsolescence, scrap and other charges;
|
•
|
favorable foreign exchange.
|
(a)
|
Allocations from Pfizer of corporate enabling functions for the pre-Separation period were $24 million for the nine months ended September 29, 2013.
|
•
|
a reduction in the amount of one-time costs related to becoming an independent public company; and
|
•
|
a reduction in the amount of direct marketing spending, primarily due to timing;
|
•
|
increased field selling and distribution expenses in certain regions due to higher sales; and
|
•
|
additional costs due to the build-up of our supply chain and logistics organization and enabling functions and related costs post-separation from Pfizer.
|
•
|
a reduction in the amount of one-time costs related to becoming an independent public company, including the nonrecurrence of additional one-time costs in 2013 due to the accelerated vesting of stock options and associated expenses related to certain Pfizer equity awards as a result of the Separation; and
|
•
|
favorable foreign exchange;
|
•
|
increased field selling and distribution expenses in certain regions due to higher sales and increased temperature-controlled supply chain costs; and
|
•
|
additional costs due to the build-up of our supply chain and logistics organization and enabling functions and related costs post-separation from Pfizer.
|
•
|
a decrease in direct project spending; and
|
•
|
savings associated with the closure of two R&D sites;
|
•
|
higher salary-related expenses.
|
•
|
the nonrecurrence of additional one-time costs in 2013 due to the accelerated vesting of stock options and associated expenses related to certain Pfizer equity awards as a result of the Separation;
|
•
|
a decrease in direct project spending;
|
•
|
savings associated with the closure of two R&D sites; and
|
•
|
favorable foreign exchange;
|
•
|
higher salary-related expenses.
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
2014
|
|
|
2013
|
|
|
Change
|
||||
Amortization of intangible assets
|
|
$
|
16
|
|
|
$
|
15
|
|
|
7
|
|
$
|
46
|
|
|
$
|
45
|
|
|
2
|
Other (income)/deductions—net
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
2014
|
|
|
2013
|
|
|
Change
|
||||
Other (income)/deductions—net
|
|
$
|
4
|
|
|
$
|
(6
|
)
|
|
*
|
|
$
|
13
|
|
|
$
|
(11
|
)
|
|
*
|
•
|
an impairment charge related to IPR&D assets acquired with the FDAH acquisition in 2009, as a result of the termination of the development program due to a re-assessment of economic viability; and
|
•
|
higher foreign currency losses primarily driven by costs related to hedging and exposures to certain emerging market currencies;
|
•
|
an insurance recovery related to a commercial settlement and recall in Mexico.
|
•
|
a charge associated with a commercial settlement and recall in Mexico of $13 million, partially offset by an insurance recovery of $1 million;
|
•
|
higher foreign currency losses primarily driven by costs related to hedging and exposures to certain emerging market currencies;
|
•
|
an impairment charge related to IPR&D assets acquired with the FDAH acquisition in 2009, as a result of the termination of the development program due to a re-assessment of economic viability; and
|
•
|
a pension plan settlement charge related to the divestiture of a manufacturing facility;
|
•
|
an insurance recovery of litigation related charges.
|
Provision for taxes on income
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
2014
|
|
|
2013
|
|
|
Change
|
||||
Provision for taxes on income
|
|
$
|
71
|
|
|
$
|
54
|
|
|
31
|
|
$
|
204
|
|
|
$
|
165
|
|
|
24
|
Effective tax rate
|
|
29.8
|
%
|
|
29.2
|
%
|
|
|
|
30.7
|
%
|
|
29.3
|
%
|
|
|
•
|
an $8 million discrete tax expense during the first quarter of 2014 related to an intercompany inventory adjustment;
|
•
|
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.
|
|
|
|
|
% Change
|
|||||||||||||
|
|
Three Months Ended
|
|
|
|
Related to
|
|||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
|
|
Foreign
|
|
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
Total
|
|
|
Exchange
|
|
|
Operational
|
|
||
U.S.
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
$
|
308
|
|
|
$
|
275
|
|
|
12
|
|
|
—
|
|
|
12
|
|
Companion animal
|
|
224
|
|
|
220
|
|
|
2
|
|
|
—
|
|
|
2
|
|
||
|
|
532
|
|
|
495
|
|
|
7
|
|
|
—
|
|
|
7
|
|
||
EuAfME
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
199
|
|
|
174
|
|
|
14
|
|
|
1
|
|
|
13
|
|
||
Companion animal
|
|
94
|
|
|
82
|
|
|
15
|
|
|
4
|
|
|
11
|
|
||
|
|
293
|
|
|
256
|
|
|
14
|
|
|
2
|
|
|
12
|
|
||
CLAR
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
146
|
|
|
129
|
|
|
13
|
|
|
(3
|
)
|
|
16
|
|
||
Companion animal
|
|
48
|
|
|
42
|
|
|
14
|
|
|
(5
|
)
|
|
19
|
|
||
|
|
194
|
|
|
171
|
|
|
13
|
|
|
(4
|
)
|
|
17
|
|
||
APAC
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
137
|
|
|
124
|
|
|
10
|
|
|
1
|
|
|
9
|
|
||
Companion animal
|
|
42
|
|
|
43
|
|
|
(2
|
)
|
|
(2
|
)
|
|
—
|
|
||
|
|
179
|
|
|
167
|
|
|
7
|
|
|
—
|
|
|
7
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
790
|
|
|
702
|
|
|
13
|
|
|
—
|
|
|
13
|
|
||
Companion animal
|
|
408
|
|
|
387
|
|
|
5
|
|
|
—
|
|
|
5
|
|
||
Contract Manufacturing
|
|
12
|
|
|
14
|
|
|
(14
|
)
|
|
(3
|
)
|
|
(11
|
)
|
||
|
|
$
|
1,210
|
|
|
$
|
1,103
|
|
|
10
|
|
|
—
|
|
|
10
|
|
|
|
|
|
% Change
|
|||||||||||||
|
|
Nine Months Ended
|
|
|
|
Related to
|
|||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
|
|
Foreign
|
|
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
Total
|
|
|
Exchange
|
|
|
Operational
|
|
||
U.S.
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
$
|
795
|
|
|
$
|
724
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Companion animal
|
|
675
|
|
|
662
|
|
|
2
|
|
|
—
|
|
|
2
|
|
||
|
|
1,470
|
|
|
1,386
|
|
|
6
|
|
|
—
|
|
|
6
|
|
||
EuAfME
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
573
|
|
|
547
|
|
|
5
|
|
|
1
|
|
|
4
|
|
||
Companion animal
|
|
274
|
|
|
254
|
|
|
8
|
|
|
4
|
|
|
4
|
|
||
|
|
847
|
|
|
801
|
|
|
6
|
|
|
2
|
|
|
4
|
|
||
CLAR
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
437
|
|
|
421
|
|
|
4
|
|
|
(9
|
)
|
|
13
|
|
||
Companion animal
|
|
139
|
|
|
134
|
|
|
4
|
|
|
(8
|
)
|
|
12
|
|
||
|
|
576
|
|
|
555
|
|
|
4
|
|
|
(8
|
)
|
|
12
|
|
||
APAC
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
394
|
|
|
380
|
|
|
4
|
|
|
(3
|
)
|
|
7
|
|
||
Companion animal
|
|
139
|
|
|
148
|
|
|
(6
|
)
|
|
(5
|
)
|
|
(1
|
)
|
||
|
|
533
|
|
|
528
|
|
|
1
|
|
|
(4
|
)
|
|
5
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
2,199
|
|
|
2,072
|
|
|
6
|
|
|
(2
|
)
|
|
8
|
|
||
Companion animal
|
|
1,227
|
|
|
1,198
|
|
|
2
|
|
|
(1
|
)
|
|
3
|
|
||
Contract Manufacturing
|
|
39
|
|
|
37
|
|
|
5
|
|
|
3
|
|
|
2
|
|
||
|
|
$
|
3,465
|
|
|
$
|
3,307
|
|
|
5
|
|
|
(1
|
)
|
|
6
|
|
|
|
|
|
% Change
|
|||||||||||
|
|
Three Months Ended
|
|
|
|
Related to
|
|||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
|
|
Foreign
|
|
|
|||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
Total
|
|
|
Exchange
|
|
Operational
|
||
U.S.
|
|
$
|
313
|
|
|
$
|
285
|
|
|
10
|
|
|
—
|
|
10
|
EuAfME
|
|
116
|
|
|
90
|
|
|
29
|
|
|
1
|
|
28
|
||
CLAR
|
|
68
|
|
|
56
|
|
|
21
|
|
|
2
|
|
19
|
||
APAC
|
|
71
|
|
|
57
|
|
|
25
|
|
|
1
|
|
24
|
||
Total reportable segments
|
|
568
|
|
|
488
|
|
|
16
|
|
|
—
|
|
16
|
||
Other business activities
|
|
(75
|
)
|
|
(78
|
)
|
|
(4
|
)
|
|
|
|
|
||
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate
|
|
(145
|
)
|
|
(139
|
)
|
|
4
|
|
|
|
|
|
||
Purchase accounting adjustments
|
|
(13
|
)
|
|
(12
|
)
|
|
8
|
|
|
|
|
|
||
Acquisition-related costs
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
|
|
|
||
Certain significant items
|
|
(38
|
)
|
|
(46
|
)
|
|
(17
|
)
|
|
|
|
|
||
Other unallocated
|
|
(58
|
)
|
|
(27
|
)
|
|
*
|
|
|
|
|
|
||
Income before provision for taxes on income
|
|
$
|
238
|
|
|
$
|
185
|
|
|
29
|
|
|
|
|
|
|
|
|
|
% Change
|
||||||||||||
|
|
Nine Months Ended
|
|
|
|
Related to
|
||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
|
|
Foreign
|
|
|
|
|||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
Total
|
|
|
Exchange
|
|
|
Operational
|
||
U.S.
|
|
$
|
849
|
|
|
$
|
773
|
|
|
10
|
|
|
—
|
|
|
10
|
EuAfME
|
|
331
|
|
|
297
|
|
|
11
|
|
|
—
|
|
|
11
|
||
CLAR
|
|
220
|
|
|
186
|
|
|
18
|
|
|
3
|
|
|
15
|
||
APAC
|
|
209
|
|
|
203
|
|
|
3
|
|
|
(7
|
)
|
|
10
|
||
Total reportable segments
|
|
1,609
|
|
|
1,459
|
|
|
10
|
|
|
(1
|
)
|
|
11
|
||
Other business activities
|
|
(221
|
)
|
|
(225
|
)
|
|
(2
|
)
|
|
|
|
|
|||
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate
|
|
(398
|
)
|
|
(392
|
)
|
|
2
|
|
|
|
|
|
|||
Purchase accounting adjustments
|
|
(38
|
)
|
|
(37
|
)
|
|
3
|
|
|
|
|
|
|||
Acquisition-related costs
|
|
(5
|
)
|
|
(17
|
)
|
|
(71
|
)
|
|
|
|
|
|||
Certain significant items
|
|
(127
|
)
|
|
(130
|
)
|
|
(2
|
)
|
|
|
|
|
|||
Other unallocated
|
|
(155
|
)
|
|
(94
|
)
|
|
65
|
|
|
|
|
|
|||
Income before provision for taxes on income
|
|
$
|
665
|
|
|
$
|
564
|
|
|
18
|
|
|
|
|
|
•
|
Livestock revenue growth was driven by increased sales in cattle and swine. Strong growth in sales of cattle products was primarily due to higher demand for our premium products as a result of improved market conditions. Growth in swine sales was driven primarily by the successful launch of new products, which was slightly offset by the continued impact of PEDv.
|
•
|
Companion animal revenue growth was driven primarily by sales of Apoquel
®
and other key brands. Results were partially offset by competitive pressure in vaccines, pain products and parasiticides.
|
•
|
Livestock revenue growth was achieved in all species, led by cattle and poultry products, and was primarily driven by increased sales in France and the UK, as well as emerging markets. In France, we saw increased sales of anti-infectives as customers sought to buy product ahead of more restrictive legislative changes. Growth in the UK was driven by strong demand for cattle products.
|
•
|
Companion animal revenue growth was favorably impacted by the successful launch of Apoquel
®
in Germany and the UK, as well as growth in parasiticides.
|
•
|
Livestock revenue growth was driven by growth in Venezuela, Brazil, Argentina and Canada. Sales in Venezuela and Argentina grew significantly across all species, primarily driven by price increases. In Brazil, there was significant growth in the cattle portfolio, partially offset by a decline in poultry. Growth in Canada was driven by increases in the cattle and swine portfolios.
|
•
|
Companion animal growth was favorably impacted by sales in Venezuela and Argentina as a result of price increases, as well as growth in Brazil and Canada.
|
•
|
Livestock revenue growth was driven primarily by increased sales of swine products in Southeast Asia and sales of cattle products in Australia.
|
•
|
Companion animal revenue was favorably impacted by an increase in sales of parasiticides across the region, equine vaccines in Australia, and increased sales of vaccines in China, however this growth was offset by a decrease in sales in Japan due to an inventory buyback related to the termination of a distributor agreement.
|
•
|
Livestock revenue growth was driven by increased sales across the cattle, poultry and swine portfolios. Strong growth in sales of cattle products was primarily due to improved market conditions, driven by higher cattle prices and lower costs of feed, compared with the first nine months of 2013. Sales of poultry products benefited from new vaccines and growth in medicated feed additives. Growth in swine products was due to the successful launch of new products, tempered by the effect of PEDv.
|
•
|
Companion animal revenue growth was driven by the introduction of Apoquel
®
. Results were partially offset by competitive pressure in our vaccine and pain portfolios and a reduced number of clinic visits due to extreme weather conditions across the United States early in the year.
|
•
|
Livestock revenue growth was primarily driven by higher sales in the cattle portfolio, particularly in emerging markets and France, where we are experiencing an increase in sales in advance of new legislation. Additionally, sales in the poultry portfolio increased due to improved market conditions in several Middle East markets.
|
•
|
Companion animal revenue growth was favorably impacted by the successful launch of Apoquel
®
in Germany and the UK.
|
•
|
Livestock revenue growth was driven by increased sales in the cattle, swine and poultry portfolios, primarily in Brazil. Livestock sales were also favorably impacted by price increases in high inflationary markets such as Venezuela and Argentina.
|
•
|
Companion animal growth was favorably impacted by increased sales in Venezuela and Brazil, as well as higher prices in Argentina and Canada.
|
•
|
Livestock revenue growth was driven primarily by increased sales of swine products in China and Japan. Additionally, there was growth in sales of cattle products in China and Australia.
|
•
|
The decrease in companion animal revenue was primarily due to a decrease in sales in Japan due to an inventory buyback related to the termination of a distributor agreement and unfavorable market conditions. Results were partially offset by an increase in equine product sales in Australia and an increase in small animal product sales in China.
|
•
|
Corporate,
which includes certain costs associated with business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, among others. These costs also include certain compensation costs and other miscellaneous operating expenses that are not charged to our operating segments, as well as interest income and expense;
|
•
|
Certain transactions and events such as (i)
Purchase accounting adjustments
, which includes expenses associated with the amortization of fair value adjustments to inventory, intangible assets, and property, plant and equipment; (ii)
Acquisition-related activities
, which includes costs for restructuring and integration; and (iii)
Certain significant items
, which includes non-acquisition-related restructuring charges, certain asset impairment charges, stand-up costs, certain legal and commercial settlements, and costs associated with cost reduction/productivity initiatives; and
|
•
|
Other unallocated
, which includes certain overhead expenses associated with our global manufacturing operations not charged to our operating segments. Effective January 1, 2014,
Other unallocated
also includes certain costs associated with business technology and finance that specifically support our global manufacturing operations. These costs were previously reported in
Corporate
. Also,
|
•
|
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
|
|
|
|
Nine Months Ended
|
|
|
||||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
||||
GAAP reported net income attributable to Zoetis
|
|
$
|
166
|
|
|
$
|
131
|
|
|
27
|
|
|
$
|
457
|
|
|
$
|
399
|
|
|
15
|
|
Purchase accounting adjustments—net of tax
|
|
9
|
|
|
8
|
|
|
13
|
|
|
25
|
|
|
25
|
|
|
—
|
|
||||
Acquisition-related costs—net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
11
|
|
|
(73
|
)
|
||||
Certain significant items—net of tax
|
|
32
|
|
|
33
|
|
|
(3
|
)
|
|
102
|
|
|
94
|
|
|
9
|
|
||||
Non-GAAP adjusted net income
(a)
|
|
$
|
207
|
|
|
$
|
172
|
|
|
20
|
|
|
$
|
587
|
|
|
$
|
529
|
|
|
11
|
|
(a)
|
The effective tax rate on adjusted pretax income is
28.3%
and
29.5%
for the
third quarter
of 2014 and 2013, respectively, and
29.2%
and
29.3%
for the
nine months ended September 28, 2014
, and
September 29, 2013
, respectively. The
lower
effective tax rate in the
third quarter
of 2014 compared with the
third quarter
of 2013 is due to changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs. The higher effective tax rate in the
nine months ended September 28, 2014
, compared with the
nine months ended September 29, 2013
, is due to an $8 million discrete tax expense during the first quarter of 2014 related to an intercompany inventory adjustment, 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
|
|
|
|
Nine Months Ended
|
|
|
|||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
|
||||
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
||||
Earnings per share—diluted
(a)(b)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
GAAP reported EPS attributable to Zoetis—diluted
|
|
$
|
0.33
|
|
|
$
|
0.26
|
|
|
27
|
|
$
|
0.91
|
|
|
$
|
0.80
|
|
|
14
|
|
Purchase accounting adjustments—net of tax
|
|
0.02
|
|
|
0.02
|
|
|
—
|
|
0.05
|
|
|
0.05
|
|
|
—
|
|
||||
Acquisition-related costs—net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
0.01
|
|
|
0.02
|
|
|
(50
|
)
|
||||
Certain significant items—net of tax
|
|
0.06
|
|
|
0.06
|
|
|
—
|
|
0.20
|
|
|
0.19
|
|
|
5
|
|
||||
Non-GAAP adjusted EPS—diluted
|
|
$
|
0.41
|
|
|
$
|
0.34
|
|
|
21
|
|
$
|
1.17
|
|
|
$
|
1.06
|
|
|
10
|
|
(a)
|
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, RSUs and DSUs.
|
(b)
|
EPS amounts may not add due to rounding.
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
September 28,
|
|
|
September 29,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
||||
Interest expense, net of capitalized interest
|
|
$
|
29
|
|
|
$
|
29
|
|
|
$
|
87
|
|
|
$
|
83
|
|
Interest income
|
|
2
|
|
|
1
|
|
|
4
|
|
|
2
|
|
||||
Income taxes
|
|
82
|
|
|
72
|
|
|
244
|
|
|
219
|
|
||||
Depreciation
|
|
32
|
|
|
32
|
|
|
96
|
|
|
100
|
|
||||
Amortization
|
|
3
|
|
|
5
|
|
|
12
|
|
|
13
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
September 28,
|
|
|
September 29,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
||||
Purchase accounting adjustments:
|
|
|
|
|
|
|
|
|
||||||||
Amortization and depreciation
(a)
|
|
$
|
11
|
|
|
$
|
12
|
|
|
$
|
35
|
|
|
$
|
35
|
|
Cost of sales
(b)
|
|
2
|
|
|
—
|
|
|
3
|
|
|
2
|
|
||||
Total purchase accounting adjustments—pre-tax
|
|
13
|
|
|
12
|
|
|
38
|
|
|
37
|
|
||||
Income taxes
(c)
|
|
4
|
|
|
4
|
|
|
13
|
|
|
12
|
|
||||
Total purchase accounting adjustments—net of tax
|
|
9
|
|
|
8
|
|
|
25
|
|
|
25
|
|
||||
Acquisition-related costs
(d)
:
|
|
|
|
|
|
|
|
|
||||||||
Integration costs
(e)
|
|
1
|
|
|
1
|
|
|
5
|
|
|
16
|
|
||||
Restructuring costs
(f)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||
Total acquisition-related costs—pre-tax
|
|
1
|
|
|
1
|
|
|
5
|
|
|
17
|
|
||||
Income taxes
(c)
|
|
1
|
|
|
1
|
|
|
2
|
|
|
6
|
|
||||
Total acquisition-related costs—net of tax
|
|
—
|
|
|
—
|
|
|
3
|
|
|
11
|
|
||||
Certain significant items
(g)
:
|
|
|
|
|
|
|
|
|
||||||||
Restructuring charges
(h)
|
|
1
|
|
|
—
|
|
|
4
|
|
|
(27
|
)
|
||||
Implementation costs and additional depreciation—asset restructuring
(i)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
3
|
|
||||
Certain asset impairment charges
(j)
|
|
6
|
|
|
—
|
|
|
6
|
|
|
1
|
|
||||
Net gains on sale of assets
(k)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(6
|
)
|
||||
Stand-up costs
(l)
|
|
32
|
|
|
41
|
|
|
106
|
|
|
152
|
|
||||
Other
(m)
|
|
(1
|
)
|
|
5
|
|
|
13
|
|
|
7
|
|
||||
Total significant items—pre-tax
|
|
38
|
|
|
46
|
|
|
127
|
|
|
130
|
|
||||
Income taxes
(c)
|
|
6
|
|
|
13
|
|
|
25
|
|
|
36
|
|
||||
Total significant items—net of tax
|
|
32
|
|
|
33
|
|
|
102
|
|
|
94
|
|
||||
Total purchase accounting adjustments, acquisition-related costs,
|
|
|
|
|
|
|
|
|
||||||||
and certain significant items—net of tax
|
|
$
|
41
|
|
|
$
|
41
|
|
|
$
|
130
|
|
|
$
|
130
|
|
(a)
|
Amortization and depreciation expenses related to
Purchase accounting adjustments
with respect to identifiable intangible assets and property, plant and equipment were distributed as follows: $1 million income in both the three and nine months ended
September 28, 2014
, included in
Selling, general and administrative expenses
; $1 million included in the
nine months ended
September 28, 2014
, and $1 million in both the three and
nine months ended
September 29, 2013
, respectively, included in
Research and development expenses
; and $12 million and $35 million in the three and
nine months ended
September 28, 2014
, respectively,
and $11 million and $34 million in the three and
nine months ended
September 29, 2013
, respectively, included in
Amortization of intangible assets
.
|
(b)
|
Depreciation expense included in
Cost of sales.
|
(c)
|
Included in
Provision for taxes on income
. Income taxes include the tax effect of the associated pre-tax amounts, calculated by determining the jurisdictional location of the pre-tax amounts and applying that jurisdiction's applicable tax rate. Income taxes in
Certain significant items
for the three and nine months ended September 28, 2014, included a $1 million charge associated with uncertain tax positions related to taxable years prior to separation from Pfizer.
|
(d)
|
Acquisition-related costs were distributed as follows: $2 million income for the three months ended
September 29, 2013
, included in
Cost of Sales
; and $1 million and $5 million in the three and
nine months ended
September 28, 2014
, respectively, and $3 million and $17 million in the three and
nine months ended
September 29, 2013
, respectively, included in
Restructuring charges and certain acquisition-related costs
.
|
(e)
|
Integration costs were distributed as follows: $2 million income for the three months ended
September 29, 2013
, included in
Cost of Sales
; and $1 million and $5 million in the three and
nine months ended
September 28, 2014
, respectively, and $3 million and $16 million in the three and
nine months ended
September 29, 2013
, 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 Financial Statements—
Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.
|
(g)
|
Certain significant items
were distributed as follows: $3 million and $14 million included in the three and
nine months ended
September 28, 2014
, respectively, and $4 million and $20 million included in the three and
nine months ended
September 29, 2013
, included in
Cost of sales
; $29 million and $90 million in the three and
nine months ended
September 28, 2014
, respectively, and $40 million and $135 million in the three and
nine months ended
September 29, 2013
, respectively, included in
Selling, general and administrative expenses
; $1 million and $5 million in the three and
nine months ended
September 29, 2013
, respectively, included in
Research and development expenses
; $1 million and $5 million in the three and
nine months ended
September 28, 2014
, respectively, and $27 million income in the
nine months ended
September 29, 2013
, included in
Restructuring charges and certain acquisition-related costs
; and $5 million and $18 million in the three and
nine months ended
September 28, 2014
, respectively, and $1 million and $3 million income in the three and
nine months ended
September 29, 2013
, respectively, included in
Other (income)/deductions—net.
|
(h)
|
Represents restructuring charges incurred for our cost-reduction/productivity initiatives. Included in
Restructuring charges and certain acquisition-related costs
. See Notes to Condensed Consolidated Financial Statements—
Note 5.
Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
.
|
(i)
|
Amounts primarily relate to our cost-reduction/productivity initiatives. See Notes to Condensed Consolidated Financial Statements—
Note 5.
Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
.
|
(j)
|
For the three and
nine months ended
September 28, 2014
, represents an impairment charge related to an IPR&D project acquired with the FDAH acquisition in 2009. Included in
Other (income)/deductions—net
.
|
(k)
|
For the
nine months ended
September 28, 2014
, represents the Zoetis portion of a net gain on the sale of land by our Taiwan joint venture. For the
nine months ended
September 29, 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. 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 an independent 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, which were distributed as follows: $3 million and $14 million in the three and
nine months ended
September 28, 2014
, respectively, and $3 million and $18 million in the three and
nine months ended
September 29, 2013
, respectively, included in
Cost of sales;
$29 million and $90 million in the three and
nine months ended
September 28, 2014
, respectively, and $38 million and $129 million in the three and
nine months ended
September 29, 2013
, respectively, included in
Selling, general and administrative expenses
; $5 million in the
nine months ended
September 29, 2013
, included in
Research and development expenses
; and $2 million in the
nine months ended
September 28, 2014
, included in
Other (income)/deductions—net
.
|
Selected Line Items
|
|
|
Revenue
|
|
$4,700 to $4,750 million
|
Adjusted cost of sales as a percentage of revenue
(a)
|
|
Approximately 35.5%
|
Adjusted SG&A expenses
(a)
|
|
$1,460 to $1,480 million
|
Adjusted R&D expenses
(a)
|
|
$385 to $395 million
|
Adjusted interest expense and other (income)/deductions
(a)
|
|
Approximately $110 million
|
Effective tax rate on adjusted income
(a)
|
|
Approximately 29%
|
Adjusted diluted EPS
(a)
|
|
$1.50 to $1.54
|
Certain significant items
(b)
and acquisition-related costs
|
|
$180 to $195 million
|
Reported diluted EPS
|
|
$1.16 to $1.20
|
(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 an independent 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, certain legal registration and patent assignment costs, as well as restructuring, certain legal and commercial settlements and other costs.
|
|
|
Full-Year 2014 Guidance
|
||
(MILLION OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
|
|
Net Income
|
|
Diluted EPS
|
Adjusted net income/diluted EPS
(a)
guidance
|
|
~$750 - $770
|
|
~$1.50 - $1.54
|
Purchase accounting adjustments
|
|
~(30)
|
|
~(0.06)
|
Certain significant items
(b)
and acquisition-related costs
|
|
~(135 - 145)
|
|
~(0.27 - 0.29)
|
Reported net income attributable to Zoetis Inc./diluted EPS guidance
|
|
~$580 - $600
|
|
~$1.16 - $1.20
|
(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 an independent 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, certain legal registration and patent assignment costs, as well as restructuring, certain legal and commercial settlements and other costs.
|
|
|
Nine Months Ended
|
|
|
|||||||
|
|
September 28,
|
|
|
September 29,
|
|
|
%
|
|
||
(MILLIONS OF DOLLARS)
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
||
Net cash provided by (used in):
|
|
|
|
|
|
|
|||||
Operating activities
|
|
$
|
239
|
|
|
$
|
383
|
|
|
(38
|
)
|
Investing activities
|
|
(137
|
)
|
|
(128
|
)
|
|
7
|
|
||
Financing activities
|
|
(112
|
)
|
|
(172
|
)
|
|
(35
|
)
|
||
Effect of exchange-rate changes on cash and cash equivalents
|
|
(2
|
)
|
|
(11
|
)
|
|
*
|
|
||
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(12
|
)
|
|
$
|
72
|
|
|
*
|
|
|
September 28,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
2014
|
|
|
2013
|
|
||
Cash and cash equivalents
|
$
|
598
|
|
|
$
|
610
|
|
Accounts receivable, net
(a)
|
1,057
|
|
|
1,138
|
|
||
Short-term borrowings
|
10
|
|
|
15
|
|
||
Long-term debt
(b)
|
3,642
|
|
|
3,642
|
|
||
Working capital
|
2,355
|
|
|
1,942
|
|
||
Ratio of current assets to current liabilities
|
3.36:1
|
|
|
2.37:1
|
|
(a)
|
Accounts receivable are usually collected over a period of 60 to 90 days
.
For the
nine months ended
September 28, 2014
, compared with
December 31, 2013
, 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.
|
(b)
|
Primarily 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
|
Lines of credit
|
$2 million
|
6.400%
|
Due 2016-2017
|
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;
|
•
|
fluctuations in foreign exchange rates and potential currency controls;
|
•
|
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; 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
|
•
|
the failure of us or any of our vendors or suppliers, including logistical service providers, to comply with applicable regulations and quality assurance guidelines;
|
•
|
construction delays;
|
•
|
equipment malfunctions;
|
•
|
shortages of materials;
|
•
|
labor problems;
|
•
|
natural disasters;
|
•
|
power outages;
|
•
|
criminal and terrorist activities;
|
•
|
changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, shipping distributions or physical limitations; and
|
•
|
the outbreak of any highly contagious diseases near our production sites.
|
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
|
|
Zoetis Inc.
|
|
|
|
|
November 10, 2014
|
By:
|
/S/ JUAN RAMÓN ALAIX
|
|
|
Juan Ramón Alaix
|
|
|
Chief Executive Officer and Director
|
|
|
|
November 10, 2014
|
By:
|
/S/ PAUL S. HERENDEEN
|
|
|
Paul S. Herendeen
|
|
|
Executive Vice President and
|
|
|
Chief Financial Officer
|
|
|
||
|
|
|
|
|
ZOETIS INC.
|
||
|
|
|
|
|
By:
|
/s/ Heidi C. Chen
|
|
|
|
Name: Heidi C. Chen
|
|
|
|
Title: Executive Vice President,
|
|
|
|
General Counsel and
|
|
|
|
Corporate Secretary
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
September 28,
|
|
|
Year Ended December 31,
|
|||||||||||||||
(IN MILLIONS, EXCEPT RATIOS)
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|||||
Determination of earnings:
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Income before provision for taxes on income
|
|
|
|
|
|
|
|
|
|
|
||||||||||
and noncontrolling interests
|
|
$
|
665
|
|
|
$
|
690
|
|
|
$
|
710
|
|
|
$
|
394
|
|
|
$
|
178
|
|
Less: Net income/(loss) attributable to noncontrolling interests
|
|
4
|
|
|
(1
|
)
|
|
—
|
|
|
3
|
|
|
1
|
|
|||||
Income attributable to Zoetis Inc.
|
|
661
|
|
|
691
|
|
|
710
|
|
|
391
|
|
|
177
|
|
|||||
Add: fixed charges
|
|
97
|
|
|
127
|
|
|
37
|
|
|
43
|
|
|
43
|
|
|||||
Total earnings as defined
|
|
$
|
758
|
|
|
$
|
818
|
|
|
$
|
747
|
|
|
$
|
434
|
|
|
$
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Fixed charges:
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Interest expense, net of capitalized interest
(a)
|
|
$
|
87
|
|
|
$
|
113
|
|
|
$
|
31
|
|
|
$
|
36
|
|
|
$
|
37
|
|
Capitalized interest
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|||||
Interest portion of rent expense
(b)
|
|
7
|
|
|
11
|
|
|
6
|
|
|
7
|
|
|
6
|
|
|||||
Fixed charges
|
|
97
|
|
|
127
|
|
|
37
|
|
|
43
|
|
|
43
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Ratio of earning to fixed charges
|
|
7.8
|
|
|
6.4
|
|
|
20.2
|
|
|
10.1
|
|
|
5.1
|
|
(a)
|
Interest expense includes amortization of debt discount and fees. Interest expense does not include interest related to uncertain tax positions.
|
(b)
|
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.
|
•
|
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
September 28, 2014
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)
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
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.
|
November 10, 2014
|
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
September 28, 2014
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)
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
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.
|
November 10, 2014
|
By:
|
/s/ PAUL S. HERENDEEN
|
|
|
Paul S. Herendeen
|
|
|
Executive Vice President and
|
|
|
Chief Financial Officer
|
November 10, 2014
|
By:
|
/s/ JUAN RAMÓN ALAIX
|
|
|
Juan Ramón Alaix
|
|
|
Chief Executive Officer
|
November 10, 2014
|
By:
|
/s/ PAUL S. HERENDEEN
|
|
|
Paul S. Herendeen
|
|
|
Executive Vice President and
|
|
|
Chief Financial Officer
|