x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|
|
|
EXCHANGE ACT OF 1934
|
|
|
For the quarterly period ended March 31, 2018
|
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or
|
|
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TRANSITION REPORT PURSUANT TO SECTION 13
|
|
|
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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¨
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For the transition period from __________ to __________
|
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Zoetis Inc.
|
(Exact name of registrant as specified in its charter)
|
Delaware
|
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46-0696167
|
(State or other jurisdiction of
|
|
(I.R.S. Employer Identification No.)
|
incorporation or organization)
|
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|
10 Sylvan Way, Parsippany, New Jersey
|
|
07054
|
(Address of principal executive offices)
|
|
(Zip Code)
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(973) 822-7000
|
(Registrant’s telephone number, including area code)
|
Large accelerated filer
x
|
Accelerated filer
¨
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Non-accelerated filer
¨
|
Smaller reporting company
¨
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Emerging growth 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 Balance Sheets (Unaudited)
|
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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.
|
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Defaults Upon Senior Securities
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Item 4.
|
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Mine Safety Disclosures
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Item 5.
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Other Information
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Item 6.
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||
|
Item 1.
|
Financial Statements
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
|
|
2018
|
|
|
2017
|
|
||
Revenue
|
|
$
|
1,366
|
|
|
$
|
1,231
|
|
Costs and expenses:
|
|
|
|
|
||||
Cost of sales
|
|
447
|
|
|
443
|
|
||
Selling, general and administrative expenses
|
|
338
|
|
|
309
|
|
||
Research and development expenses
|
|
97
|
|
|
90
|
|
||
Amortization of intangible assets
|
|
23
|
|
|
22
|
|
||
Restructuring charges/(reversals) and certain acquisition-related costs
|
|
2
|
|
|
(1
|
)
|
||
Interest expense, net of capitalized interest
|
|
47
|
|
|
41
|
|
||
Other (income)/deductions—net
|
|
(5
|
)
|
|
(10
|
)
|
||
Income before provision for taxes on income
|
|
417
|
|
|
337
|
|
||
Provision for taxes on income
|
|
67
|
|
|
98
|
|
||
Net income before allocation to noncontrolling interests
|
|
350
|
|
|
239
|
|
||
Less: Net (loss)/income attributable to noncontrolling interests
|
|
(2
|
)
|
|
1
|
|
||
Net income attributable to Zoetis Inc.
|
|
$
|
352
|
|
|
$
|
238
|
|
Earnings per share attributable to Zoetis Inc. stockholders:
|
|
|
|
|
||||
Basic
|
|
$
|
0.72
|
|
|
$
|
0.48
|
|
Diluted
|
|
$
|
0.72
|
|
|
$
|
0.48
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
||||
Basic
|
|
485.9
|
|
|
492.4
|
|
||
Diluted
|
|
489.8
|
|
|
495.3
|
|
||
Dividends declared per common share
|
|
$
|
0.126
|
|
|
$
|
0.105
|
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Net income before allocation to noncontrolling interests
|
|
$
|
350
|
|
|
$
|
239
|
|
Other comprehensive income, net of taxes and reclassification adjustments:
|
|
|
|
|
||||
Foreign currency translation adjustments, net
|
|
77
|
|
|
44
|
|
||
Benefit plans: Actuarial gains, net
(a)
|
|
—
|
|
|
2
|
|
||
Total other comprehensive income, net of tax
|
|
77
|
|
|
46
|
|
||
Comprehensive income before allocation to noncontrolling interests
|
|
427
|
|
|
285
|
|
||
Less: Comprehensive (loss)/income attributable to noncontrolling interests
|
|
(1
|
)
|
|
1
|
|
||
Comprehensive income attributable to Zoetis Inc.
|
|
$
|
428
|
|
|
$
|
284
|
|
(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
Other (income)/deductions
,
beginning in the first quarter of 2018, and into
Cost of sales, Selling, general and administrative expenses,
and/or
Research and development expenses,
as appropriate, for periods prior to 2018, in the condensed consolidated statements of income.
|
|
|
March 31,
|
|
|
December 31,
|
|
||
|
|
2018
|
|
|
2017
|
|
||
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
|
|
(Unaudited)
|
|
|
|
|||
Assets
|
|
|
|
|
||||
Cash and cash equivalents
(a)
|
|
$
|
1,654
|
|
|
$
|
1,564
|
|
Accounts receivable, less allowance for doubtful accounts of $25 in 2018 and $25 in 2017
|
|
943
|
|
|
998
|
|
||
Inventories
|
|
1,441
|
|
|
1,427
|
|
||
Other current assets
|
|
229
|
|
|
228
|
|
||
Total current assets
|
|
4,267
|
|
|
4,217
|
|
||
Property, plant and equipment, less accumulated depreciation of $1,519 in 2018 and $1,471 in 2017
|
|
1,453
|
|
|
1,435
|
|
||
Goodwill
|
|
1,532
|
|
|
1,510
|
|
||
Identifiable intangible assets, less accumulated amortization
|
|
1,280
|
|
|
1,269
|
|
||
Noncurrent deferred tax assets
|
|
80
|
|
|
80
|
|
||
Other noncurrent assets
|
|
78
|
|
|
75
|
|
||
Total assets
|
|
$
|
8,690
|
|
|
$
|
8,586
|
|
|
|
|
|
|
||||
Liabilities and Equity
|
|
|
|
|
||||
Accounts payable
|
|
$
|
217
|
|
|
$
|
261
|
|
Dividends payable
|
|
61
|
|
|
61
|
|
||
Accrued expenses
|
|
419
|
|
|
432
|
|
||
Accrued compensation and related items
|
|
182
|
|
|
236
|
|
||
Income taxes payable
|
|
92
|
|
|
60
|
|
||
Other current liabilities
|
|
29
|
|
|
44
|
|
||
Total current liabilities
|
|
1,000
|
|
|
1,094
|
|
||
Long-term debt, net of discount and issuance costs
|
|
4,954
|
|
|
4,953
|
|
||
Noncurrent deferred tax liabilities
|
|
246
|
|
|
380
|
|
||
Other taxes payable
|
|
304
|
|
|
172
|
|
||
Other noncurrent liabilities
|
|
211
|
|
|
201
|
|
||
Total liabilities
|
|
6,715
|
|
|
6,800
|
|
||
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
||
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; 501,891,243 and 501,891,243 shares issued; 484,724,245 and 486,130,461 shares outstanding at March 31, 2018, and December 31, 2017, respectively
|
|
5
|
|
|
5
|
|
||
Treasury stock, at cost, 17,166,998 and 15,760,782 shares of common stock at March 31, 2018, and December 31, 2017, respectively
|
|
(1,005
|
)
|
|
(852
|
)
|
||
Additional paid-in capital
|
|
990
|
|
|
1,013
|
|
||
Retained earnings
|
|
2,399
|
|
|
2,109
|
|
||
Accumulated other comprehensive loss
|
|
(429
|
)
|
|
(505
|
)
|
||
Total Zoetis Inc. equity
|
|
1,960
|
|
|
1,770
|
|
||
Equity attributable to noncontrolling interests
|
|
15
|
|
|
16
|
|
||
Total equity
|
|
1,975
|
|
|
1,786
|
|
||
Total liabilities and equity
|
|
$
|
8,690
|
|
|
$
|
8,586
|
|
(a)
|
As of both
March 31, 2018
, and
December 31, 2017
, includes
$6 million
of restricted cash.
|
|
Zoetis
|
|
|
|
||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
||||||||||||
|
|
|
|
|
|
Additional
|
|
|
|
|
Other
|
|
|
Attributable to
|
|
|
|
|||||||||||
|
|
Common
|
|
|
Treasury
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Total
|
|
|||||||
(MILLIONS OF DOLLARS)
|
|
Stock
(a)
|
|
|
Stock
(a)
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Interests
|
|
|
Equity
|
|
|||||||
Balance, December 31, 2016
|
|
$
|
5
|
|
|
$
|
(421
|
)
|
|
$
|
1,024
|
|
|
$
|
1,477
|
|
|
$
|
(598
|
)
|
|
$
|
12
|
|
|
$
|
1,499
|
|
Three months ended April 2, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
238
|
|
|
—
|
|
|
1
|
|
|
239
|
|
|||||||
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46
|
|
|
—
|
|
|
46
|
|
|||||||
Consolidation of a noncontrolling interest
(b)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
13
|
|
|||||||
Share-based compensation awards
(c)
|
|
—
|
|
|
36
|
|
|
(10
|
)
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
14
|
|
|||||||
Treasury stock acquired
(d)
|
|
—
|
|
|
(125
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(125
|
)
|
|||||||
Employee benefit plan contribution from Pfizer Inc.
(e)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|||||||
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(52
|
)
|
|
—
|
|
|
—
|
|
|
(52
|
)
|
|||||||
Balance, April 2, 2017
|
|
$
|
5
|
|
|
$
|
(510
|
)
|
|
$
|
1,015
|
|
|
$
|
1,651
|
|
|
$
|
(552
|
)
|
|
$
|
26
|
|
|
$
|
1,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Balance, December 31, 2017
|
|
$
|
5
|
|
|
$
|
(852
|
)
|
|
$
|
1,013
|
|
|
$
|
2,109
|
|
|
$
|
(505
|
)
|
|
$
|
16
|
|
|
$
|
1,786
|
|
Three months ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Net income/(loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
352
|
|
|
—
|
|
|
(2
|
)
|
|
350
|
|
|||||||
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
76
|
|
|
1
|
|
|
77
|
|
|||||||
Share-based compensation awards
(c)
|
|
—
|
|
|
37
|
|
|
(24
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
12
|
|
|||||||
Treasury stock acquired
(d)
|
|
—
|
|
|
(190
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(190
|
)
|
|||||||
Employee benefit plan contribution from Pfizer Inc.
(e)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|||||||
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(61
|
)
|
|
—
|
|
|
—
|
|
|
(61
|
)
|
|||||||
Balance, March 31, 2018
|
|
$
|
5
|
|
|
$
|
(1,005
|
)
|
|
$
|
990
|
|
|
$
|
2,399
|
|
|
$
|
(429
|
)
|
|
$
|
15
|
|
|
$
|
1,975
|
|
(a)
|
As of
March 31, 2018
, and
April 2, 2017
, there were
484,724,245
and
491,328,479
outstanding shares of common stock, respectively, and
17,166,998
and
10,562,764
shares of treasury stock, respectively. Treasury stock is recognized at the cost to reacquire the shares. For additional information, see
Note 13. Stockholders' Equity
.
|
(b)
|
Represents the consolidation of a European livestock monitoring company, a variable interest entity of which Zoetis is the primary beneficiary.
|
(c)
|
Includes the issuance of shares of Zoetis Inc. common stock and the reissuance of treasury stock in connection with the vesting of employee share-based awards. Upon reissuance of treasury stock, differences between the proceeds from reissuance and the cost of the treasury stock that result in gains are recorded in
Additional paid-in capital
. Losses are recorded in
Additional paid-in capital
to the extent that they can offset previously recorded gains. If no such credit exists, the differences are recorded in
Retained earnings
. Also includes the reacquisition of shares of treasury stock associated with the vesting of employee share-based awards to satisfy tax withholding requirements. For additional information, see
Note 12. Share-Based Payments
and
Note 13. Stockholders' Equity.
|
(d)
|
Reflects the acquisition of treasury shares in connection with the share repurchase program. For additional information, see
Note 13. Stockholders' Equity
.
|
(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 11. Benefit Plans.
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Operating Activities
|
|
|
|
|
||||
Net income before allocation to noncontrolling interests
|
|
$
|
350
|
|
|
$
|
239
|
|
Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities:
|
|
|
|
|
||||
Depreciation and amortization expense
|
|
60
|
|
|
62
|
|
||
Share-based compensation expense
|
|
11
|
|
|
11
|
|
||
Restructuring
|
|
2
|
|
|
(1
|
)
|
||
Asset write-offs and asset impairments
|
|
2
|
|
|
—
|
|
||
Provision for losses on inventory
|
|
16
|
|
|
16
|
|
||
Deferred taxes
(a)
|
|
(141
|
)
|
|
24
|
|
||
Employee benefit plan contribution from Pfizer Inc.
|
|
1
|
|
|
1
|
|
||
Other non-cash adjustments
|
|
3
|
|
|
4
|
|
||
Other changes in assets and liabilities, net of acquisitions and divestitures
|
|
|
|
|
||||
Accounts receivable
|
|
60
|
|
|
(22
|
)
|
||
Inventories
|
|
(33
|
)
|
|
(52
|
)
|
||
Other assets
|
|
(2
|
)
|
|
(13
|
)
|
||
Accounts payable
|
|
(46
|
)
|
|
(37
|
)
|
||
Other liabilities
|
|
(57
|
)
|
|
(147
|
)
|
||
Other tax accounts, net
(a)
|
|
163
|
|
|
34
|
|
||
Net cash provided by operating activities
|
|
389
|
|
|
119
|
|
||
Investing Activities
|
|
|
|
|
||||
Purchases of property, plant and equipment
|
|
(53
|
)
|
|
(42
|
)
|
||
Acquisitions
|
|
—
|
|
|
(3
|
)
|
||
Net proceeds from sales of assets
|
|
8
|
|
|
—
|
|
||
Other investing activities
|
|
—
|
|
|
(3
|
)
|
||
Net cash used in investing activities
|
|
(45
|
)
|
|
(48
|
)
|
||
Financing Activities
|
|
|
|
|
||||
Payment of contingent consideration related to previously acquired assets
|
|
(12
|
)
|
|
(5
|
)
|
||
Share-based compensation-related proceeds, net of taxes paid on withholding shares
|
|
2
|
|
|
6
|
|
||
Purchases of treasury stock
|
|
(190
|
)
|
|
(125
|
)
|
||
Cash dividends paid
|
|
(62
|
)
|
|
(52
|
)
|
||
Net cash used in financing activities
|
|
(262
|
)
|
|
(176
|
)
|
||
Effect of exchange-rate changes on cash and cash equivalents
|
|
8
|
|
|
7
|
|
||
Net increase/(decrease) in cash and cash equivalents
|
|
90
|
|
|
(98
|
)
|
||
Cash and cash equivalents at beginning of period
|
|
1,564
|
|
|
727
|
|
||
Cash and cash equivalents at end of period
|
|
$
|
1,654
|
|
|
$
|
629
|
|
|
|
|
|
|
||||
Supplemental cash flow information
|
|
|
|
|
||||
Cash paid during the period for:
|
|
|
|
|
||||
Income taxes
|
|
$
|
42
|
|
|
$
|
37
|
|
Interest, net of capitalized interest
|
|
70
|
|
|
56
|
|
||
Non-cash transactions:
|
|
|
|
|
||||
Purchases of property, plant and equipment
|
|
1
|
|
|
4
|
|
||
Contingent purchase price consideration
(b)
|
|
—
|
|
|
2
|
|
||
Dividends declared, not paid
|
|
61
|
|
|
52
|
|
(a)
|
Reflects the reclassification of the one-time mandatory deemed repatriation tax from
Noncurrent deferred tax liabilities
to
Income taxes payable
and
Other taxes payable
to properly reflect the liability, which became a fixed obligation in 2018 payable over eight years.
|
(b)
|
For 2017, relates primarily to the consolidation of a European livestock monitoring company a variable interest entity of which Zoetis is the primary beneficiary.
|
1.
|
Organization
|
2.
|
Basis of Presentation
|
3.
|
Accounting Standards
|
4.
|
Revenue
|
A.
|
Revenue from Product Sales
|
•
|
vaccines
: biological preparations that help prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce a specific immune response;
|
•
|
anti-infectives
: products that prevent, kill or slow the growth of bacteria, fungi or protozoa;
|
•
|
other pharmaceutical products
: allergy and dermatology, pain and sedation, antiemetic, reproductive, and oncology products;
|
•
|
parasiticides
: products that prevent or eliminate external and internal parasites such as fleas, ticks and worms; and
|
•
|
medicated feed additives
: products added to animal feed that provide medicines to livestock.
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
United States
|
|
$
|
634
|
|
|
$
|
605
|
|
Australia
|
|
48
|
|
|
40
|
|
||
Brazil
|
|
70
|
|
|
66
|
|
||
Canada
|
|
40
|
|
|
34
|
|
||
China
|
|
64
|
|
|
52
|
|
||
France
|
|
33
|
|
|
29
|
|
||
Germany
|
|
38
|
|
|
28
|
|
||
Italy
|
|
27
|
|
|
22
|
|
||
Japan
|
|
41
|
|
|
34
|
|
||
Mexico
|
|
24
|
|
|
18
|
|
||
Spain
|
|
25
|
|
|
20
|
|
||
United Kingdom
|
|
52
|
|
|
43
|
|
||
Other developed markets
|
|
79
|
|
|
68
|
|
||
Other emerging markets
|
|
185
|
|
|
161
|
|
||
|
|
1,360
|
|
|
1,220
|
|
||
|
|
|
|
|
||||
Contract Manufacturing
|
|
6
|
|
|
11
|
|
||
|
|
|
|
|
||||
Total Revenue
|
|
$
|
1,366
|
|
|
$
|
1,231
|
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
U.S.
|
|
|
|
|
||||
Livestock
|
|
$
|
292
|
|
|
$
|
282
|
|
Companion Animal
|
|
342
|
|
|
323
|
|
||
|
|
634
|
|
|
605
|
|
||
International
|
|
|
|
|
||||
Livestock
|
|
478
|
|
|
421
|
|
||
Companion Animal
|
|
248
|
|
|
194
|
|
||
|
|
726
|
|
|
615
|
|
||
|
|
|
|
|
||||
Contract Manufacturing
|
|
6
|
|
|
11
|
|
||
|
|
|
|
|
||||
Total Revenue
|
|
$
|
1,366
|
|
|
$
|
1,231
|
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Livestock:
|
|
|
|
|
||||
Cattle
|
|
$
|
416
|
|
|
$
|
386
|
|
Swine
|
|
175
|
|
|
160
|
|
||
Poultry
|
|
136
|
|
|
116
|
|
||
Fish
|
|
22
|
|
|
21
|
|
||
Other
|
|
21
|
|
|
20
|
|
||
|
|
770
|
|
|
703
|
|
||
Companion Animal:
|
|
|
|
|
||||
Dogs and Cats
|
|
549
|
|
|
482
|
|
||
Horses
|
|
41
|
|
|
35
|
|
||
|
|
590
|
|
|
517
|
|
||
|
|
|
|
|
||||
Contract Manufacturing
|
|
6
|
|
|
11
|
|
||
|
|
|
|
|
||||
Total Revenue
|
|
$
|
1,366
|
|
|
$
|
1,231
|
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Vaccines
|
|
$
|
356
|
|
|
$
|
319
|
|
Anti-infectives
|
|
297
|
|
|
268
|
|
||
Other pharmaceuticals
|
|
319
|
|
|
272
|
|
||
Parasiticides
|
|
191
|
|
|
184
|
|
||
Medicated feed additives
|
|
137
|
|
|
123
|
|
||
Other non-pharmaceuticals
|
|
60
|
|
|
54
|
|
||
|
|
1,360
|
|
|
1,220
|
|
||
|
|
|
|
|
||||
Contract Manufacturing
|
|
6
|
|
|
11
|
|
||
|
|
|
|
|
||||
Total Revenue
|
|
$
|
1,366
|
|
|
$
|
1,231
|
|
•
|
for sales returns, we perform calculations in each market that incorporate the following, as appropriate: local returns policies and practices; historic returns as a percentage of revenue; estimated shelf life by product; an estimate of the amount of time between shipment and return or lag time; and any other factors that could impact the estimate of future returns, product recalls, discontinuation of products or a changing competitive environment; and
|
•
|
for revenue incentives, we use our historical experience with similar incentives programs to estimate the impact of such programs on revenue for the current period.
|
5.
|
Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Restructuring charges/(reversals) and certain acquisition-related costs:
|
|
|
|
|
||||
Integration costs
(a)
|
|
$
|
1
|
|
|
$
|
—
|
|
Restructuring charges/(reversals)
(b)(c)
:
|
|
|
|
|
||||
Employee termination costs/(reversals)
|
|
1
|
|
|
(1
|
)
|
||
Total
Restructuring charges/(reversals) and certain acquisition-related costs
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
(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/(reversals) for the three months ended
March 31, 2018
, primarily relate to the supply network strategy.
|
(c)
|
The restructuring charges/(reversals) are associated with the following:
|
•
|
For the
three months ended
March 31, 2018
, Manufacturing/research/corporate (
$1 million
).
|
•
|
For the
three months ended
April 2, 2017
, U.S. (
$1 million
) and International (
$2 million
reversal).
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Restructuring charges/(reversals) and certain acquisition-related costs:
|
|
|
|
|
||||
Operational efficiency initiative
|
|
|
|
|
||||
Employee termination costs
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
|
—
|
|
|
(1
|
)
|
||
Supply network strategy:
|
|
|
|
|
||||
Employee termination costs
|
|
1
|
|
|
—
|
|
||
|
|
1
|
|
|
—
|
|
||
|
|
|
|
|
||||
Total restructuring charges/(reversals) related to the operational efficiency initiative and supply network strategy
|
|
1
|
|
|
(1
|
)
|
||
|
|
|
|
|
||||
Other supply network strategy charges
|
|
|
|
|
||||
Cost of sales:
|
|
|
|
|
||||
Accelerated depreciation
|
|
—
|
|
|
1
|
|
||
Consulting fees
|
|
1
|
|
|
2
|
|
||
Total other supply network strategy charges
|
|
1
|
|
|
3
|
|
||
|
|
|
|
|
||||
Total charges associated with the operational efficiency initiative and supply network strategy
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
||
|
|
|
||
(MILLIONS OF DOLLARS)
|
|
Accrual
(a)
|
|
|
Balance, December 31, 2017
(b)
|
|
$
|
41
|
|
Provision
|
|
1
|
|
|
Utilization and other
(c)
|
|
(7
|
)
|
|
Balance, March 31
, 2018
(b)
|
|
$
|
35
|
|
(a)
|
Changes in our restructuring accruals represent employee termination costs.
|
(b)
|
At
March 31, 2018
, and
December 31, 2017
, included in Accrued expenses (
$14 million
and
$19 million
, respectively) and Other noncurrent liabilities (
$21 million
and
$22 million
, respectively).
|
(c)
|
Includes adjustments for foreign currency translation.
|
6.
|
Other (Income)/Deductions—Net
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Royalty-related income
|
|
$
|
(7
|
)
|
|
$
|
(7
|
)
|
Foreign currency loss
(a)
|
|
8
|
|
|
2
|
|
||
Other, net
(b)
|
|
(6
|
)
|
|
(5
|
)
|
||
Other (income)/deductions—net
|
|
$
|
(5
|
)
|
|
$
|
(10
|
)
|
(a)
|
Primarily driven by costs related to hedging and exposures to certain emerging market currencies.
|
(b)
|
For the
three months ended
March 31, 2018
, primarily includes interest income and other miscellaneous income. For the
three months ended
April 2, 2017
, primarily includes a settlement refund and reimbursement of legal fees related to costs incurred by Pharmaq prior to the acquisition in 2015, as well as interest income and other miscellaneous income.
|
7.
|
Income Taxes
|
A.
|
Taxes on Income
|
•
|
One-Time Mandatory Deemed Repatriation Tax: The one-time mandatory deemed repatriation tax is a tax on certain previously untaxed accumulated and current earnings and profits (E&P) of our foreign subsidiaries. We were able to reasonably estimate the one-time mandatory deemed repatriation tax and recorded an initial provisional tax obligation, with a corresponding adjustment to income tax expense for the year ended December 31, 2017. We are continuing to gather additional information to more precisely compute the amount of the one-time mandatory deemed repatriation tax, and our accounting for this item is not yet complete due to the fact that the non-U.S. subsidiaries are on a fiscal year ending November 30, and this tax liability will not become a fixed obligation until November 30, 2018. The estimated impact of the Tax Act is based on a preliminary review of the new law and projected future financial results and is subject to revision based upon further analysis and interpretation of the Tax Act and to the extent that future results differ from currently available projections. However, on the basis of revised E&P computations that were calculated during the reporting period, we recognized a measurement-period adjustment of
$2 million
as a decrease to the one-time mandatory deemed repatriation tax obligation, with a corresponding adjustment to income tax benefit during the period. The effect of the measurement-period adjustment to the first quarter 2018 effective tax rate was a reduction to the rate of approximately
0.6%
. In addition, we reclassified the one-time mandatory deemed repatriation tax from
Noncurrent deferred tax liabilities
to
Income taxes payable
and
Other taxes payable
. We expect to complete our accounting within the prescribed measurement period.
|
•
|
Reduction of U.S. Federal Corporate Tax Rate: The Tax Act reduced the corporate tax rate to
21%
, effective January 1, 2018. Consequently, we recorded a decrease related to deferred tax assets and liabilities with a corresponding net adjustment to deferred income tax benefit for the year ended December 31, 2017. We have not made any measurement-period adjustments related to this item during the first quarter of 2018. Since the company has recorded provisional amounts related to certain portions of the Tax Act, any corresponding deferred tax remeasurement is also provisional. However, we are continuing to gather additional information to complete our accounting for this item and expect to be completed within the prescribed measurement period.
|
•
|
Valuation Allowances: The company must assess whether its valuation allowance analyses are affected by the various aspects of the Tax Act (e.g., one-time mandatory deemed repatriation of deferred foreign income, global intangible low-taxed income inclusions, and new categories of foreign tax credits). We have not made any measurement-period adjustments related to this item during the first quarter of 2018. Since the company has recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional. However, we are continuing to gather additional information to complete our accounting for this item and expect to be completed within the prescribed measurement period.
|
•
|
Global Intangible Low-Taxed Income (GILTI) Policy Election: The GILTI provisions of the Tax Act do not apply to the company until 2019, due to the fact that the non-U.S. subsidiaries are on a fiscal year ending November 30, and we are still evaluating its impact. The FASB allows companies to adopt an accounting policy to either recognize deferred taxes for GILTI or treat such tax cost as a current-period expense when incurred. We have not yet determined our accounting policy because determining the impact of the GILTI provisions requires analysis of our existing legal entity structure, the reversal of our U.S. GAAP and U.S. tax basis differences in the assets and liabilities of our foreign subsidiaries, and our ability to offset any tax with foreign tax credits. As such, we have not made a policy decision whether to record deferred taxes on GILTI or treat such tax cost as a current-period expense.
|
•
|
the reduction of the U.S. federal corporate income tax rate from
35%
to
21%
, effective January 1, 2018, pursuant to the Tax Act;
|
•
|
changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items;
|
•
|
an
$8 million
and
$5 million
discrete tax benefit recorded in the first quarter of 2018 and 2017, respectively, related to the excess tax benefits for share-based payments;
|
•
|
an
$8 million
and
$3 million
discrete tax benefit recorded in the first quarter of 2018 and 2017, respectively, related to a remeasurement of deferred taxes as a result of a change in non-U.S. statutory tax rates; and
|
•
|
a
$2 million
net discrete tax benefit recorded in the first quarter of 2018, associated with a measurement-period adjustment related to the provisional one-time mandatory deemed repatriation tax on the company's undistributed non-U.S. earnings pursuant to the Tax Act enacted on December 22, 2017.
|
B.
|
Deferred Taxes
|
C.
|
Tax Contingencies
|
8.
|
Financial Instruments
|
A.
|
Debt
|
|
|
March 31,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
3.450% 2015 senior notes due 2020
|
|
$
|
500
|
|
|
$
|
500
|
|
3.250% 2013 senior notes due 2023
|
|
1,350
|
|
|
1,350
|
|
||
4.500% 2015 senior notes due 2025
|
|
750
|
|
|
750
|
|
||
3.000% 2017 senior notes due 2027
|
|
750
|
|
|
750
|
|
||
4.700% 2013 senior notes due 2043
|
|
1,150
|
|
|
1,150
|
|
||
3.950% 2017 senior notes due 2047
|
|
500
|
|
|
500
|
|
||
|
|
5,000
|
|
|
5,000
|
|
||
Unamortized debt discount / debt issuance costs
|
|
(46
|
)
|
|
(47
|
)
|
||
Long-term debt, net of discount and issuance costs
|
|
$
|
4,954
|
|
|
$
|
4,953
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|||||||||||
(MILLIONS OF DOLLARS)
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2022
|
|
|
Total
|
|
||||||
Maturities
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,500
|
|
|
$
|
5,000
|
|
B.
|
Derivative Financial Instruments
|
|
|
Fair Value of Derivatives
|
||||||
|
|
March 31,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
Balance Sheet Location
|
2018
|
|
|
2017
|
|
||
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
||||
Foreign currency forward-exchange contracts
|
Other current assets
|
$
|
11
|
|
|
$
|
10
|
|
Foreign currency forward-exchange contracts
|
Other current liabilities
|
(11
|
)
|
|
(9
|
)
|
||
Total derivatives not designated as hedging instruments
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Foreign currency forward-exchange contracts
|
|
$
|
10
|
|
|
$
|
29
|
|
9.
|
Inventories
|
|
|
March 31,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Finished goods
|
|
$
|
770
|
|
|
$
|
788
|
|
Work-in-process
|
|
541
|
|
|
484
|
|
||
Raw materials and supplies
|
|
130
|
|
|
155
|
|
||
Inventories
|
|
$
|
1,441
|
|
|
$
|
1,427
|
|
10.
|
Goodwill and Other Intangible Assets
|
A.
|
Goodwill
|
(MILLIONS OF DOLLARS)
|
|
U.S.
|
|
|
International
|
|
|
Total
|
|
|||
Balance, December 31, 2017
|
|
$
|
671
|
|
|
$
|
839
|
|
|
$
|
1,510
|
|
Other
(a)
|
|
—
|
|
|
22
|
|
|
22
|
|
|||
Balance, March 31, 2018
|
|
$
|
671
|
|
|
$
|
861
|
|
|
$
|
1,532
|
|
(a)
|
Includes adjustments for foreign currency translation.
|
B.
|
Other Intangible Assets
|
|
|
As of March 31, 2018
|
|
As of December 31, 2017
|
||||||||||||||||||||
|
|
|
|
|
|
Identifiable
|
|
|
|
|
|
|
Identifiable
|
|
||||||||||
|
|
Gross
|
|
|
|
|
Intangible Assets
|
|
|
Gross
|
|
|
|
|
Intangible Assets
|
|
||||||||
|
|
Carrying
|
|
|
Accumulated
|
|
|
Less Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Less Accumulated
|
|
||||||
(MILLIONS OF DOLLARS)
|
|
Amount
|
|
|
Amortization
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amortization
|
|
||||||
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Developed technology rights
|
|
$
|
1,216
|
|
|
$
|
(454
|
)
|
|
$
|
762
|
|
|
$
|
1,185
|
|
|
$
|
(428
|
)
|
|
$
|
757
|
|
Brands
|
|
213
|
|
|
(146
|
)
|
|
67
|
|
|
213
|
|
|
(143
|
)
|
|
70
|
|
||||||
Trademarks and trade names
|
|
63
|
|
|
(48
|
)
|
|
15
|
|
|
62
|
|
|
(47
|
)
|
|
15
|
|
||||||
Other
|
|
239
|
|
|
(146
|
)
|
|
93
|
|
|
234
|
|
|
(143
|
)
|
|
91
|
|
||||||
Total finite-lived intangible assets
|
|
1,731
|
|
|
(794
|
)
|
|
937
|
|
|
1,694
|
|
|
(761
|
)
|
|
933
|
|
||||||
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Brands
|
|
37
|
|
|
—
|
|
|
37
|
|
|
37
|
|
|
—
|
|
|
37
|
|
||||||
Trademarks and trade names
|
|
67
|
|
|
—
|
|
|
67
|
|
|
67
|
|
|
—
|
|
|
67
|
|
||||||
In-process research and development
|
|
231
|
|
|
—
|
|
|
231
|
|
|
224
|
|
|
—
|
|
|
224
|
|
||||||
Product rights
|
|
8
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
—
|
|
|
8
|
|
||||||
Total indefinite-lived intangible assets
|
|
343
|
|
|
—
|
|
|
343
|
|
|
336
|
|
|
—
|
|
|
336
|
|
||||||
Identifiable intangible assets
|
|
$
|
2,074
|
|
|
$
|
(794
|
)
|
|
$
|
1,280
|
|
|
$
|
2,030
|
|
|
$
|
(761
|
)
|
|
$
|
1,269
|
|
C.
|
Amortization
|
11.
|
Benefit Plans
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Service cost
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
|
1
|
|
|
1
|
|
||
Expected return on plan assets
|
|
(1
|
)
|
|
(1
|
)
|
||
Curtailment and settlement loss
|
|
—
|
|
|
1
|
|
||
Net periodic benefit cost
|
|
$
|
2
|
|
|
$
|
3
|
|
12.
|
Share-Based Payments
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Stock options / stock appreciation rights
|
|
$
|
2
|
|
|
$
|
3
|
|
RSUs / DSUs
|
|
7
|
|
|
6
|
|
||
PSUs
|
|
2
|
|
|
2
|
|
||
Share-based compensation expense—total
(a)
|
|
$
|
11
|
|
|
$
|
11
|
|
(a)
|
For the
three months ended
March 31, 2018
, and
April 2, 2017
, amounts capitalized to inventory were insignificant.
|
13.
|
Stockholders' Equity
|
(a)
|
Shares may not add due to rounding.
|
(b)
|
Includes the issuance of shares of common stock and the reissuance of shares from treasury stock in connection with the vesting of employee share-based awards. Treasury stock also includes the reacquisition of shares associated with the vesting of employee share-based awards to satisfy tax withholding requirements. For additional information regarding share-based compensation, see
Note 12. Share-Based Payments
.
|
|
|
|
|
Currency Translation
|
|
|
|
|
|
|||||||
|
|
Derivatives
|
|
|
Adjustment
|
|
|
Benefit Plans
|
|
|
Accumulated Other
|
|
||||
|
|
Net Unrealized
|
|
|
Net Unrealized
|
|
|
Actuarial
|
|
|
Comprehensive
|
|
||||
(MILLIONS OF DOLLARS)
|
|
Gains/(Losses)
|
|
|
Gains/(Losses)
|
|
|
Gains/(Losses)
|
|
|
Loss
|
|
||||
Balance, December 31, 2016
|
|
$
|
8
|
|
|
$
|
(583
|
)
|
|
$
|
(23
|
)
|
|
$
|
(598
|
)
|
Other comprehensive income, net of tax
|
|
—
|
|
|
44
|
|
|
2
|
|
|
46
|
|
||||
Balance, April 2, 2017
|
|
$
|
8
|
|
|
$
|
(539
|
)
|
|
$
|
(21
|
)
|
|
$
|
(552
|
)
|
|
|
|
|
|
|
|
|
|
||||||||
Balance, December 31, 2017
|
|
$
|
(3
|
)
|
|
$
|
(487
|
)
|
|
$
|
(15
|
)
|
|
$
|
(505
|
)
|
Other comprehensive income, net of tax
|
|
—
|
|
|
76
|
|
|
—
|
|
|
76
|
|
||||
Balance, March 31, 2018
|
|
$
|
(3
|
)
|
|
$
|
(411
|
)
|
|
$
|
(15
|
)
|
|
$
|
(429
|
)
|
14.
|
Earnings per Share
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
|
|
2018
|
|
|
2017
|
|
||
Numerator
|
|
|
|
|
||||
Net income before allocation to noncontrolling interests
|
|
$
|
350
|
|
|
$
|
239
|
|
Less: Net (loss)/income attributable to noncontrolling interests
|
|
(2
|
)
|
|
1
|
|
||
Net income attributable to Zoetis Inc.
|
|
$
|
352
|
|
|
$
|
238
|
|
Denominator
|
|
|
|
|
||||
Weighted-average common shares outstanding
|
|
485.9
|
|
|
492.4
|
|
||
Common stock equivalents: stock options, RSUs, PSUs and DSUs
|
|
3.9
|
|
|
2.9
|
|
||
Weighted-average common and potential dilutive shares outstanding
|
|
489.8
|
|
|
495.3
|
|
||
|
|
|
|
|
||||
Earnings per share attributable to Zoetis Inc. stockholders—basic
|
|
$
|
0.72
|
|
|
$
|
0.48
|
|
Earnings per share attributable to Zoetis Inc. stockholders—diluted
|
|
$
|
0.72
|
|
|
$
|
0.48
|
|
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 Information
|
•
|
Other business activities
includes our Client Supply Services (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 the development of our products. Other R&D-related costs associated with our aquaculture business and non-U.S. market and regulatory activities are generally included in the international commercial segment.
|
•
|
Corporate
, which is responsible for platform functions such as business technology, facilities, legal, finance, human resources, business development, and communications, among others. These costs also include compensation costs, certain procurement 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 associated with acquiring and integrating newly acquired businesses, such as transaction costs and integration costs; and (iii)
Certain significant items
, which comprise 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 as 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 asset impairment charges, certain legal and commercial settlements and the impact of divestiture-related gains and losses.
|
•
|
Other unallocated
includes (i) certain overhead expenses associated with our global manufacturing operations not charged to our operating segments; (ii) certain costs associated with business technology and finance that specifically support our global manufacturing operations; (iii) certain supply chain and global logistics costs; and (iv) certain procurement costs.
|
|
|
Earnings
|
|
Depreciation and Amortization
(a)
|
||||||||||||
|
|
Three Months Ended
|
|
Three Months Ended
|
||||||||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
March 31,
|
|
|
April 2,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
U.S.
|
|
|
|
|
|
|
|
|
||||||||
Revenue
|
|
$
|
634
|
|
|
$
|
605
|
|
|
|
|
|
||||
Cost of sales
|
|
140
|
|
|
137
|
|
|
|
|
|
||||||
Gross profit
|
|
494
|
|
|
468
|
|
|
|
|
|
||||||
Gross margin
|
|
77.9
|
%
|
|
77.4
|
%
|
|
|
|
|
||||||
Operating expenses
|
|
96
|
|
|
96
|
|
|
|
|
|
||||||
Other (income)/deductions
|
|
—
|
|
|
—
|
|
|
|
|
|
||||||
U.S. Earnings
|
|
398
|
|
|
372
|
|
|
$
|
8
|
|
|
$
|
7
|
|
||
|
|
|
|
|
|
|
|
|
||||||||
International
|
|
|
|
|
|
|
|
|
||||||||
Revenue
(b)
|
|
726
|
|
|
615
|
|
|
|
|
|
||||||
Cost of sales
|
|
234
|
|
|
213
|
|
|
|
|
|
||||||
Gross profit
|
|
492
|
|
|
402
|
|
|
|
|
|
||||||
Gross margin
|
|
67.8
|
%
|
|
65.4
|
%
|
|
|
|
|
||||||
Operating expenses
|
|
133
|
|
|
114
|
|
|
|
|
|
||||||
Other (income)/deductions
|
|
1
|
|
|
(3
|
)
|
|
|
|
|
||||||
International Earnings
|
|
358
|
|
|
291
|
|
|
11
|
|
|
11
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total operating segments
|
|
756
|
|
|
663
|
|
|
19
|
|
|
18
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Other business activities
|
|
(81
|
)
|
|
(74
|
)
|
|
5
|
|
|
6
|
|
||||
Reconciling Items:
|
|
|
|
|
|
|
|
|
||||||||
Corporate
|
|
(153
|
)
|
|
(143
|
)
|
|
13
|
|
|
12
|
|
||||
Purchase accounting adjustments
|
|
(23
|
)
|
|
(22
|
)
|
|
23
|
|
|
22
|
|
||||
Acquisition-related costs
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
||||
Certain significant items
(c)
|
|
(3
|
)
|
|
(4
|
)
|
|
—
|
|
|
2
|
|
||||
Other unallocated
|
|
(78
|
)
|
|
(83
|
)
|
|
—
|
|
|
2
|
|
||||
Total Earnings
(d)
|
|
$
|
417
|
|
|
$
|
337
|
|
|
$
|
60
|
|
|
$
|
62
|
|
(a)
|
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.
|
(b)
|
Revenue denominated in euros was
$184 million
and
$148 million
for the
three months ended
March 31, 2018
, and
April 2, 2017
, respectively
.
|
(c)
|
For the
three months ended
March 31, 2018
,
Certain significant items
primarily includes: (i) employee termination costs of
$1 million
, and consulting fees of
$1 million
, related to our supply network strategy, and (ii) a charge of
$1 million
related to the implementation of new accounting guidance as a result of the enactment of the Tax Act.
|
|
For the
three months ended
April 2, 2017
,
Certain significant items
primarily includes: (i) a
$1 million
reversal of previously accrued employee termination costs, accelerated depreciation charges of
$1 million
, and consulting fees of
$2 million
, related to our operational efficiency initiative and supply network strategy, and (ii) charges of
$2 million
associated with changes to our operating model.
|
(d)
|
Defined as income before provision for taxes on income.
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
|
|
|
|
% Change
|
|||||||||||
|
|
Three Months Ended
|
|
|
|
Related to
|
|||||||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
|
|
Foreign
|
|
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Total
|
|
|
Exchange
|
|
|
Operational
(a)
|
|
||
Revenue
|
|
$
|
1,366
|
|
|
$
|
1,231
|
|
|
11
|
|
|
4
|
|
|
7
|
|
Net income attributable to Zoetis
|
|
352
|
|
|
238
|
|
|
48
|
|
|
8
|
|
|
40
|
|
||
Adjusted net income
(a)
|
|
365
|
|
|
261
|
|
|
40
|
|
|
6
|
|
|
34
|
|
(a)
|
Operational growth and adjusted net income are non-GAAP financial measures. See the
Non-GAAP financial measures
section of this Management's Discussion and Analysis (MD&A) for more information.
|
|
|
Three Months Ended
|
|
|
|||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
%
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
||
Revenue
|
|
$
|
1,366
|
|
|
$
|
1,231
|
|
|
11
|
|
Costs and expenses:
|
|
|
|
|
|
|
|||||
Cost of sales
(a)
|
|
447
|
|
|
443
|
|
|
1
|
|
||
% of revenue
|
|
32.7
|
%
|
|
36.0
|
%
|
|
|
|||
Selling, general and administrative expenses
(a)
|
|
338
|
|
|
309
|
|
|
9
|
|
||
% of revenue
|
|
25
|
%
|
|
25
|
%
|
|
|
|||
Research and development expenses
(a)
|
|
97
|
|
|
90
|
|
|
8
|
|
||
% of revenue
|
|
7
|
%
|
|
7
|
%
|
|
|
|||
Amortization of intangible assets
(a)
|
|
23
|
|
|
22
|
|
|
5
|
|
||
Restructuring charges/(reversals) and certain acquisition-related costs
|
|
2
|
|
|
(1
|
)
|
|
*
|
|
||
Interest expense, net of capitalized interest
|
|
47
|
|
|
41
|
|
|
15
|
|
||
Other (income)/deductions—net
|
|
(5
|
)
|
|
(10
|
)
|
|
(50
|
)
|
||
Income before provision for taxes on income
|
|
417
|
|
|
337
|
|
|
24
|
|
||
% of revenue
|
|
31
|
%
|
|
27
|
%
|
|
|
|||
Provision for taxes on income
|
|
67
|
|
|
98
|
|
|
(32
|
)
|
||
Effective tax rate
|
|
16.1
|
%
|
|
29.1
|
%
|
|
|
|||
Net income before allocation to noncontrolling interests
|
|
350
|
|
|
239
|
|
|
46
|
|
||
Less: Net income attributable to noncontrolling interests
|
|
(2
|
)
|
|
1
|
|
|
*
|
|
||
Net income attributable to Zoetis
|
|
$
|
352
|
|
|
$
|
238
|
|
|
48
|
|
% of revenue
|
|
26
|
%
|
|
19
|
%
|
|
|
(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.
|
•
|
increased volume from our in-line products contributed approximately 3%, including 2% from our key dermatology products;
|
•
|
volume growth from new products contributed approximately 2%; and
|
•
|
price comprised 2%.
|
Cost of sales
|
|
|
|
|
|
|
||||
|
|
Three Months Ended
|
|
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
%
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
||
Cost of sales
|
|
$
|
447
|
|
|
$
|
443
|
|
|
1
|
% of revenue
|
|
32.7
|
%
|
|
36.0
|
%
|
|
|
•
|
continued cost improvements and efficiencies in our manufacturing network,
|
•
|
unfavorable foreign exchange.
|
Selling, general and administrative expenses
|
|
|
|
|
||||||
|
|
Three Months Ended
|
|
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
%
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
||
Selling, general and administrative expenses
|
|
$
|
338
|
|
|
$
|
309
|
|
|
9
|
% of revenue
|
|
25
|
%
|
|
25
|
%
|
|
|
•
|
an increase in certain compensation-related expenses;
|
•
|
unfavorable foreign exchange;
|
•
|
higher professional services and consulting charges; and
|
•
|
higher advertising and promotional spending associated with new products.
|
Research and development expenses
|
|
|
|
|
|
|
||||
|
|
Three Months Ended
|
|
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
%
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
||
Research and development expenses
|
|
$
|
97
|
|
|
$
|
90
|
|
|
8
|
% of revenue
|
|
7
|
%
|
|
7
|
%
|
|
|
•
|
unfavorable foreign exchange;
|
•
|
increased headcount driven by project investments;
|
•
|
an increase in certain compensation-related expenses; and
|
•
|
the inclusion of the Irish biologic therapeutics business acquired in 2017.
|
Amortization of intangible assets
|
|
|
|
|
|
|
||||
|
|
Three Months Ended
|
|
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
%
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
||
Amortization of intangible assets
|
|
$
|
23
|
|
|
$
|
22
|
|
|
5
|
Interest expense, net of capitalized interest
|
|
|
|
|
|
|||||
|
|
Three Months Ended
|
|
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
%
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
||
Interest expense, net of capitalized interest
|
|
$
|
47
|
|
|
$
|
41
|
|
|
15
|
Other (income)/deductions—net
|
|
|
|
|
|
|
|||||
|
|
Three Months Ended
|
|
|
|||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
%
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
||
Other (income)/deductions—net
|
|
$
|
(5
|
)
|
|
$
|
(10
|
)
|
|
(50
|
)
|
Provision for taxes on income
|
|
|
|
|
|
|
|||||
|
|
Three Months Ended
|
|
|
|||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
%
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
||
Provision for taxes on income
|
|
$
|
67
|
|
|
$
|
98
|
|
|
(32
|
)
|
Effective tax rate
|
|
16.1
|
%
|
|
29.1
|
%
|
|
|
•
|
reduction of the U.S. federal corporate income tax rate, effective January 1, 2018, pursuant to the Tax Act;
|
•
|
changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items;
|
•
|
a
$8 million
and
$5 million
discrete tax benefit recorded in the first quarter of 2018 and 2017, respectively, related to the excess tax benefits for share-based payments;
|
•
|
a
$8 million
and
$3 million
discrete tax benefit recorded in the first quarter of 2018 and 2017, respectively, related to a remeasurement of deferred taxes as a result of a change in non-U.S. statutory tax rates; and
|
•
|
a
$2 million
net discrete tax benefit recorded in the first quarter of 2018, associated with a measurement-period adjustment related to the provisional one-time mandatory deemed repatriation tax on the company's undistributed non-U.S. earnings pursuant to the Tax Act enacted on December 22, 2017.
|
|
|
|
|
% Change
|
||||||||||||
|
|
Three Months Ended
|
|
|
|
Related to
|
||||||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
|
|
Foreign
|
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Total
|
|
|
Exchange
|
|
Operational
|
|
||
U.S.
|
|
|
|
|
|
|
|
|
|
|
||||||
Livestock
|
|
$
|
292
|
|
|
$
|
282
|
|
|
4
|
|
|
—
|
|
4
|
|
Companion animal
|
|
342
|
|
|
323
|
|
|
6
|
|
|
—
|
|
6
|
|
||
|
|
634
|
|
|
605
|
|
|
5
|
|
|
—
|
|
5
|
|
||
International
|
|
|
|
|
|
|
|
|
|
|
||||||
Livestock
|
|
478
|
|
|
421
|
|
|
14
|
|
|
7
|
|
7
|
|
||
Companion animal
|
|
248
|
|
|
194
|
|
|
28
|
|
|
9
|
|
19
|
|
||
|
|
726
|
|
|
615
|
|
|
18
|
|
|
7
|
|
11
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||||||
Total
|
|
|
|
|
|
|
|
|
|
|
||||||
Livestock
|
|
770
|
|
|
703
|
|
|
10
|
|
|
4
|
|
6
|
|
||
Companion animal
|
|
590
|
|
|
517
|
|
|
14
|
|
|
3
|
|
11
|
|
||
Contract manufacturing
|
|
6
|
|
|
11
|
|
|
(45
|
)
|
|
10
|
|
(55
|
)
|
||
|
|
$
|
1,366
|
|
|
$
|
1,231
|
|
|
11
|
|
|
4
|
|
7
|
|
|
|
|
|
% Change
|
|||||||||||
|
|
Three Months Ended
|
|
|
|
Related to
|
|||||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
|
|
Foreign
|
|
|
|||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Total
|
|
|
Exchange
|
|
Operational
|
||
U.S.
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenue
|
|
$
|
634
|
|
|
$
|
605
|
|
|
5
|
|
|
—
|
|
5
|
Cost of Sales
|
|
140
|
|
|
137
|
|
|
2
|
|
|
—
|
|
2
|
||
Gross Profit
|
|
494
|
|
|
468
|
|
|
6
|
|
|
—
|
|
6
|
||
Gross Margin
|
|
77.9
|
%
|
|
77.4
|
%
|
|
|
|
|
|
|
|||
Operating Expenses
|
|
96
|
|
|
96
|
|
|
—
|
|
|
—
|
|
—
|
||
Other (income)/deductions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
||
U.S. Earnings
|
|
398
|
|
|
372
|
|
|
7
|
|
|
—
|
|
7
|
||
|
|
|
|
|
|
|
|
|
|
|
|||||
International
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenue
|
|
726
|
|
|
615
|
|
|
18
|
|
|
7
|
|
11
|
||
Cost of Sales
|
|
234
|
|
|
213
|
|
|
10
|
|
|
6
|
|
4
|
||
Gross Profit
|
|
492
|
|
|
402
|
|
|
22
|
|
|
8
|
|
14
|
||
Gross Margin
|
|
67.8
|
%
|
|
65.4
|
%
|
|
|
|
|
|
|
|||
Operating Expenses
|
|
133
|
|
|
114
|
|
|
17
|
|
|
8
|
|
9
|
||
Other (income)/deductions
|
|
1
|
|
|
(3
|
)
|
|
*
|
|
|
*
|
|
*
|
||
International Earnings
|
|
358
|
|
|
291
|
|
|
23
|
|
|
8
|
|
15
|
||
|
|
|
|
|
|
|
|
|
|
|
|||||
Total operating segments
|
|
756
|
|
|
663
|
|
|
14
|
|
|
3
|
|
11
|
||
|
|
|
|
|
|
|
|
|
|
|
|||||
Other business activities
|
|
(81
|
)
|
|
(74
|
)
|
|
9
|
|
|
|
|
|
||
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate
|
|
(153
|
)
|
|
(143
|
)
|
|
7
|
|
|
|
|
|
||
Purchase accounting adjustments
|
|
(23
|
)
|
|
(22
|
)
|
|
5
|
|
|
|
|
|
||
Acquisition-related costs
|
|
(1
|
)
|
|
—
|
|
|
*
|
|
|
|
|
|
||
Certain significant items
|
|
(3
|
)
|
|
(4
|
)
|
|
(25
|
)
|
|
|
|
|
||
Other unallocated
|
|
(78
|
)
|
|
(83
|
)
|
|
(6
|
)
|
|
|
|
|
||
Income before provision for taxes on income
|
|
$
|
417
|
|
|
$
|
337
|
|
|
24
|
|
|
|
|
|
•
|
Companion animal revenue growth was driven primarily by increased sales in our dermatology portfolio, as well as new products. Growth was tempered by lower sales of certain in-line products due to expected competition
.
|
•
|
Livestock revenue increased primarily due to higher sales of cattle and poultry products and a return to growth in our swine business. Growth of cattle products was driven by favorable market conditions in the beef market, including higher feedlot placements and variable weather conditions, which drove higher disease risk and incidence. Growth was partially offset by unfavorable market conditions in dairy, including declining producer profitability due to low milk prices. For poultry, growth was driven by increased sales of medicated feed additive products.
|
•
|
Companion animal revenue growth resulted primarily from increased sales across multiple international markets of our dermatology portfolio, and new products including Simparica
®
, as well as growth in
vaccines in China.
|
•
|
Livestock growth was driven primarily by strong performance in poultry and cattle products. Growth in poultry products was driven by increased sales of medicated feed additives, primarily in emerging markets. Cattle products grew due to the colder weather increasing treatments and strong demand for vaccines in Mexico. Strong demand in other emerging markets also contributed to growth.
|
•
|
Corporate,
which includes certain costs associated with business technology, facilities, legal, finance, human resources, business development and communications, among others. These costs also include certain compensation costs, certain procurement 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 acquisition 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 (i) certain overhead expenses associated with our global manufacturing operations not charged to our operating segments; (ii) certain costs associated with business technology and finance that specifically support our global manufacturing operations; (iii) certain supply chain and global logistics costs; and (iv) certain procurement costs.
|
•
|
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
|
|
|
|||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
%
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
||
GAAP reported net income attributable to Zoetis
|
|
$
|
352
|
|
|
$
|
238
|
|
|
48
|
|
Purchase accounting adjustments—net of tax
|
|
12
|
|
|
19
|
|
|
(37
|
)
|
||
Acquisition-related costs—net of tax
|
|
1
|
|
|
—
|
|
|
*
|
|
||
Certain significant items—net of tax
|
|
—
|
|
|
4
|
|
|
(100
|
)
|
||
Non-GAAP adjusted net income
(a)
|
|
$
|
365
|
|
|
$
|
261
|
|
|
40
|
|
(a)
|
The effective tax rate on adjusted pretax income is
18.2%
and
27.8%
for the
three months ended March 31, 2018
, and
April 2, 2017
, respectively. The
lower
effective tax rate for the
three months ended March 31, 2018
, compared with the
three months ended April 2, 2017
, was primarily attributable to (i) the reduction of the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018, pursuant to the Tax Act, (ii) changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs, (iii) a
$8 million
and
$5 million
discrete tax benefit recorded in the first quarter of 2018 and 2017, respectively, related to the excess tax benefits for share-based payments, and (iv) a $3 million discrete tax benefit recorded in the first quarter of 2018 related to a remeasurement of deferred taxes as a result of a change in non-U.S. statutory tax rates.
|
|
|
Three Months Ended
|
|
|
|||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
%
|
|
||
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
||
Earnings per share—diluted
(a)
:
|
|
|
|
|
|
|
|||||
GAAP reported EPS attributable to Zoetis—diluted
|
|
$
|
0.72
|
|
|
$
|
0.48
|
|
|
50
|
|
Purchase accounting adjustments—net of tax
|
|
0.03
|
|
|
0.04
|
|
|
(25
|
)
|
||
Acquisition-related costs—net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
||
Certain significant items—net of tax
|
|
—
|
|
|
0.01
|
|
|
(100
|
)
|
||
Non-GAAP adjusted EPS—diluted
|
|
$
|
0.75
|
|
|
$
|
0.53
|
|
|
42
|
|
(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, restricted stock units, performance-vesting restricted stock units and deferred stock units.
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Interest expense, net of capitalized interest
|
|
$
|
47
|
|
|
$
|
41
|
|
Interest income
|
|
6
|
|
|
2
|
|
||
Income taxes
|
|
81
|
|
|
101
|
|
||
Depreciation
|
|
33
|
|
|
34
|
|
||
Amortization
|
|
4
|
|
|
4
|
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Purchase accounting adjustments:
|
|
|
|
|
||||
Amortization and depreciation
(a)
|
|
$
|
21
|
|
|
$
|
20
|
|
Cost of sales
(a)
|
|
2
|
|
|
2
|
|
||
Total purchase accounting adjustments—pre-tax
|
|
23
|
|
|
22
|
|
||
Income taxes
(b)
|
|
11
|
|
|
3
|
|
||
Total purchase accounting adjustments—net of tax
|
|
12
|
|
|
19
|
|
||
Acquisition-related costs:
|
|
|
|
|
||||
Integration costs
|
|
1
|
|
|
—
|
|
||
Total acquisition-related costs—pre-tax
|
|
1
|
|
|
—
|
|
||
Income taxes
(b)
|
|
—
|
|
|
—
|
|
||
Total acquisition-related costs—net of tax
|
|
1
|
|
|
—
|
|
||
Certain significant items:
|
|
|
|
|
||||
Operational efficiency initiative
(c)
|
|
—
|
|
|
(1
|
)
|
||
Supply network strategy
(d)
|
|
2
|
|
|
3
|
|
||
Other
(e)
|
|
1
|
|
|
2
|
|
||
Total certain significant items—pre-tax
|
|
3
|
|
|
4
|
|
||
Income taxes
(b)
|
|
3
|
|
|
—
|
|
||
Total certain significant items—net of tax
|
|
—
|
|
|
4
|
|
||
|
|
|
|
|
||||
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax
|
|
$
|
13
|
|
|
$
|
23
|
|
(a)
|
Amortization and depreciation expenses related to
Purchase accounting adjustments
with respect to identifiable intangible assets and property, plant and equipment.
|
(b)
|
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
Purchase accounting adjustments
for the
three months ended
March 31, 2018
, also includes a tax benefit related to the remeasurement of deferred taxes as a result of a change in non-U.S. statutory tax rates. Income taxes in
Purchase accounting adjustments
for the
three months ended
April 2, 2017, also includes a tax benefit related to the remeasurement of deferred taxes as a result of a change in tax rates and a net tax charge related to prior period tax adjustments.
|
|
Income taxes in
Certain significant items
for the
three months ended
March 31, 2018
, includes a net tax benefit related to a measurement-period adjustment to the provisional one-time mandatory deemed repatriation tax on the company's undistributed non-U.S. earnings, pursuant to the Tax Act enacted on December 22, 2017. Income taxes in
Certain significant items
for the
three months ended
April 2, 2017
, also includes a net charge related to the revaluation of the company’s deferred tax assets and liabilities, using the rates expected to be in place at the time of the reversal.
|
(c)
|
For the three months ended April 2, 2017, represents a net reversal of previously accrued employee termination costs.
|
(d)
|
For the
three months ended March 31, 2018
, represents consulting fees of $1 million and employee termination costs of $1 million
.
For the three months ended
April 2, 2017
, represents accelerated depreciation charges of $1 million, and consulting fees of $2 million.
|
(e)
|
For the three months ended
March 31, 2018
, primarily represents charges related to the implementation of new accounting guidance as a result of the enactment of the Tax Act. For the three months ended April 2, 2017, represents costs associated with changes to our operating model.
|
|
|
Three Months Ended
|
||||||
|
|
March 31,
|
|
|
April 2,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Cost of sales:
|
|
|
|
|
||||
Purchase accounting adjustments
|
|
$
|
2
|
|
|
$
|
2
|
|
Accelerated depreciation
|
|
—
|
|
|
1
|
|
||
Consulting fees
|
|
1
|
|
|
2
|
|
||
Total Cost of sales
|
|
3
|
|
|
5
|
|
||
|
|
|
|
|
||||
Selling, general & administrative expenses:
|
|
|
|
|
||||
Purchase accounting adjustments
|
|
1
|
|
|
1
|
|
||
Other
|
|
1
|
|
|
2
|
|
||
Total Selling, general & administrative expenses
|
|
2
|
|
|
3
|
|
||
|
|
|
|
|
||||
Research & development expenses:
|
|
|
|
|
||||
Purchase accounting adjustments
|
|
1
|
|
|
1
|
|
||
Total Research & development expenses
|
|
1
|
|
|
1
|
|
||
|
|
|
|
|
||||
Amortization of intangible assets:
|
|
|
|
|
||||
Purchase accounting adjustments
|
|
19
|
|
|
18
|
|
||
Total Amortization of intangible assets
|
|
19
|
|
|
18
|
|
||
|
|
|
|
|
||||
Restructuring (reversals)/ charges and certain acquisition-related costs:
|
|
|
|
|
||||
Integration costs
|
|
1
|
|
|
—
|
|
||
Employee termination costs
|
|
1
|
|
|
(1
|
)
|
||
Total Restructuring (reversals)/ charges and certain acquisition-related costs
|
|
2
|
|
|
(1
|
)
|
||
|
|
|
|
|
||||
Provision for taxes on income
|
|
14
|
|
|
3
|
|
||
|
|
|
|
|
||||
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax
|
|
$
|
13
|
|
|
$
|
23
|
|
|
|
Three Months Ended
|
|
|
|||||||
|
|
March 31,
|
|
|
April 2,
|
|
|
%
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
||
Net cash provided by (used in):
|
|
|
|
|
|
|
|||||
Operating activities
|
|
$
|
389
|
|
|
$
|
119
|
|
|
*
|
|
Investing activities
|
|
(45
|
)
|
|
(48
|
)
|
|
(6
|
)
|
||
Financing activities
|
|
(262
|
)
|
|
(176
|
)
|
|
49
|
|
||
Effect of exchange-rate changes on cash and cash equivalents
|
|
8
|
|
|
7
|
|
|
14
|
|
||
Net increase (decrease) in cash and cash equivalents
|
|
$
|
90
|
|
|
$
|
(98
|
)
|
|
*
|
|
|
March 31,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
2018
|
|
|
2017
|
|
||
Cash and cash equivalents
|
$
|
1,654
|
|
|
$
|
1,564
|
|
Accounts receivable, net
(a)
|
943
|
|
|
998
|
|
||
Long-term debt
|
4,954
|
|
|
4,953
|
|
||
Working capital
|
3,267
|
|
|
3,123
|
|
||
Ratio of current assets to current liabilities
|
4.27:1
|
|
|
3.85:1
|
|
(a)
|
Accounts receivable are usually collected over a period of 60 to 90 days
.
For the
three months ended
March 31, 2018
, compared with
December 31, 2017
, 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 aging, historical and expected collection patterns, the financial condition of our customers, the robust nature of our credit and collection practices and the economic environment.
|
Description
|
Principal Amount
|
Interest Rate
|
Terms
|
2015 Senior Note due 2020
|
$500 million
|
3.450%
|
Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2020
|
2013 Senior Note due 2023
|
$1,350 million
|
3.250%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2023
|
2015 Senior Note due 2025
|
$750 million
|
4.500%
|
Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2025
|
2017 Senior Note due 2027
|
$750 million
|
3.000%
|
Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2027
|
2013 Senior Note due 2043
|
$1,150 million
|
4.700%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2043
|
2017 Senior Note due 2047
|
$500 million
|
3.950%
|
Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2047
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
Paper
|
|
Long-term Debt
|
|
Date of
|
||
Name of Rating Agency
|
|
Rating
|
|
Rating
|
|
Outlook
|
|
Last Action
|
Moody’s
|
|
P-2
|
|
Baa1
|
|
Stable
|
|
August 2017
|
S&P
|
|
A-2
|
|
BBB
|
|
Stable
|
|
December 2016
|
•
|
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;
|
•
|
unanticipated safety, quality or efficacy concerns about 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 regulations;
|
•
|
legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental concerns, commercial disputes and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products;
|
•
|
failure to protect our intellectual property rights or to operate our business without infringing the intellectual property rights of others;
|
•
|
an outbreak of infectious disease carried by animals;
|
•
|
consolidation of our customers and distributors negatively affecting the pricing of our products;
|
•
|
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;
|
•
|
the possible impact of competing products, including generic alternatives, on our products and our ability to compete against such products;
|
•
|
quarterly fluctuations in demand and costs;
|
•
|
governmental laws and regulations affecting domestic and foreign operations, including without limitation, tax obligations and changes affecting the tax treatment by the United States of income earned outside the United States that may result from pending and possible future proposals; and
|
•
|
governmental laws and regulations affecting our interactions with veterinary healthcare providers.
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Item 4.
|
Controls and Procedures
|
Item 1.
|
Legal Proceedings
|
Item 1A.
|
Risk Factors
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
|
Issuer Purchases of Equity Securities
|
|||
|
Total Number of Shares Purchased
(a)
|
Average Price Paid Per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Programs
(b)
|
Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
|
January 1 - January 31, 2018
|
633,029
|
$75.50
|
631,875
|
$952,419,571
|
February 1- February 28, 2018
|
771,194
|
$76.82
|
596,977
|
$907,396,902
|
March 1 - March 31, 2018
|
1,191,009
|
$83.21
|
1,167,098
|
$810,241,428
|
|
2,595,232
|
$79.43
|
2,395,950
|
$810,241,428
|
(a)
|
The company repurchased 199,282 shares during the three-month period ended
March 31, 2018
, that were not part of the publicly announced share repurchase authorization. These shares were reacquired from employees to satisfy tax withholding requirements on the vesting of restricted shares from equity-based awards.
|
(b)
|
In December 2016, the company's Board of Directors authorized the repurchase of up to $1.5 billion of our outstanding common stock.
|
Item 3.
|
Defaults Upon Senior Securities
|
Item 4.
|
Mine Safety Disclosures
|
Item 5.
|
Other Information
|
Item 6.
|
Exhibits
|
|
Zoetis Inc.
|
|
|
|
|
May 2, 2018
|
By:
|
/S/ JUAN RAMÓN ALAIX
|
|
|
Juan Ramón Alaix
|
|
|
Chief Executive Officer and Director
|
|
|
|
May 2, 2018
|
By:
|
/S/ GLENN DAVID
|
|
|
Glenn David
|
|
|
Executive Vice President and
|
|
|
Chief Financial Officer
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
March 31,
|
|
|
Year Ended December 31,
|
||||||||||||||||||
(IN MILLIONS, EXCEPT RATIOS)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
2013
|
|
||||||
Determination of earnings:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Income before provision for taxes on income
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
and noncontrolling interests
|
|
$
|
417
|
|
|
$
|
1,525
|
|
|
$
|
1,228
|
|
|
$
|
545
|
|
|
$
|
820
|
|
$
|
690
|
|
Less: Net income/(loss) attributable to noncontrolling interests
|
|
(2
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
—
|
|
|
4
|
|
(1
|
)
|
||||||
Income attributable to Zoetis Inc.
|
|
419
|
|
|
1,527
|
|
|
1,230
|
|
|
545
|
|
|
816
|
|
691
|
|
||||||
Add: fixed charges
|
|
51
|
|
|
188
|
|
|
177
|
|
|
137
|
|
|
131
|
|
127
|
|
||||||
Total earnings as defined
|
|
$
|
470
|
|
|
$
|
1,715
|
|
|
$
|
1,407
|
|
|
$
|
682
|
|
|
$
|
947
|
|
$
|
818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Fixed charges:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Interest expense, net of capitalized interest
(a)
|
|
$
|
47
|
|
|
$
|
175
|
|
|
$
|
166
|
|
|
$
|
124
|
|
|
$
|
117
|
|
$
|
113
|
|
Capitalized interest
|
|
2
|
|
|
4
|
|
|
3
|
|
|
4
|
|
|
4
|
|
3
|
|
||||||
Interest portion of rent expense
(b)
|
|
2
|
|
|
9
|
|
|
8
|
|
|
9
|
|
|
10
|
|
11
|
|
||||||
Fixed charges
|
|
$
|
51
|
|
|
$
|
188
|
|
|
$
|
177
|
|
|
$
|
137
|
|
|
$
|
131
|
|
$
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Ratio of earnings to fixed charges
|
|
9.2
|
|
|
9.1
|
|
|
7.9
|
|
|
5.0
|
|
|
7.2
|
|
6.4
|
|
(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.
|
1.
|
I have reviewed this Quarterly Report of Zoetis Inc. on Form 10-Q for the period ending
March 31, 2018
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 registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant 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 registrant'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 change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) 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(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
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.
|
May 2, 2018
|
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
March 31, 2018
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 registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant 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 registrant'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 change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) 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(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
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.
|
May 2, 2018
|
By:
|
/s/ GLENN DAVID
|
|
|
Glenn David
|
|
|
Executive Vice President and
|
|
|
Chief Financial Officer
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May 2, 2018
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By:
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/s/ JUAN RAMÓN ALAIX
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Juan Ramón Alaix
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Chief Executive Officer
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May 2, 2018
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By:
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/s/ GLENN DAVID
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Glenn David
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Executive Vice President and
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Chief Financial Officer
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