x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2018
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or
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TRANSITION REPORT PURSUANT TO SECTION 13
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OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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¨
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For the transition period from __________ to __________
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Zoetis Inc.
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(Exact name of registrant as specified in its charter)
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Delaware
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46-0696167
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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10 Sylvan Way, Parsippany, New Jersey
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07054
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(Address of principal executive offices)
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(Zip Code)
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(973) 822-7000
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(Registrant’s telephone number, including area code)
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Large accelerated filer
x
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Accelerated filer
¨
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Non-accelerated filer
¨
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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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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.
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Financial Statements
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Three Months Ended
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Nine Months Ended
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||||||||||||
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September 30,
|
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October 1,
|
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September 30,
|
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October 1,
|
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||||
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Revenue
|
|
$
|
1,480
|
|
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$
|
1,347
|
|
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$
|
4,261
|
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$
|
3,847
|
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Costs and expenses:
|
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|
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||||||||
Cost of sales
|
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473
|
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435
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1,367
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1,318
|
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||||
Selling, general and administrative expenses
|
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367
|
|
|
328
|
|
|
1,064
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973
|
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||||
Research and development expenses
|
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108
|
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96
|
|
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307
|
|
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272
|
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||||
Amortization of intangible assets
|
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32
|
|
|
23
|
|
|
78
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|
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68
|
|
||||
Restructuring charges/(reversals) and certain acquisition-related costs
|
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47
|
|
|
8
|
|
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54
|
|
|
7
|
|
||||
Interest expense, net of capitalized interest
|
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54
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|
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43
|
|
|
147
|
|
|
125
|
|
||||
Other (income)/deductions—net
|
|
(19
|
)
|
|
1
|
|
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(28
|
)
|
|
(11
|
)
|
||||
Income before provision for taxes on income
|
|
418
|
|
|
413
|
|
|
1,272
|
|
|
1,095
|
|
||||
Provision for taxes on income
|
|
71
|
|
|
117
|
|
|
193
|
|
|
313
|
|
||||
Net income before allocation to noncontrolling interests
|
|
347
|
|
|
296
|
|
|
1,079
|
|
|
782
|
|
||||
Less: Net loss attributable to noncontrolling interests
|
|
—
|
|
|
(2
|
)
|
|
(4
|
)
|
|
(1
|
)
|
||||
Net income attributable to Zoetis Inc.
|
|
$
|
347
|
|
|
$
|
298
|
|
|
$
|
1,083
|
|
|
$
|
783
|
|
Earnings per share attributable to Zoetis Inc. stockholders:
|
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|
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|
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||||||||
Basic
|
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$
|
0.72
|
|
|
$
|
0.61
|
|
|
$
|
2.24
|
|
|
$
|
1.60
|
|
Diluted
|
|
$
|
0.71
|
|
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$
|
0.61
|
|
|
$
|
2.22
|
|
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$
|
1.59
|
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Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
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||||||||
Basic
|
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482.0
|
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|
489.1
|
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483.9
|
|
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490.8
|
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||||
Diluted
|
|
485.8
|
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|
492.4
|
|
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487.7
|
|
|
493.9
|
|
||||
Dividends declared per common share
|
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$
|
—
|
|
|
$
|
—
|
|
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$
|
0.252
|
|
|
$
|
0.210
|
|
|
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Three Months Ended
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Nine Months Ended
|
||||||||||||
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September 30,
|
|
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October 1,
|
|
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September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Net income before allocation to noncontrolling interests
|
|
$
|
347
|
|
|
$
|
296
|
|
|
$
|
1,079
|
|
|
$
|
782
|
|
Other comprehensive (loss)/income, net of taxes and reclassification adjustments:
|
|
|
|
|
|
|
|
|
||||||||
Unrealized losses on derivatives, net
(a)
|
|
(1
|
)
|
|
(10
|
)
|
|
(1
|
)
|
|
(11
|
)
|
||||
Foreign currency translation adjustments, net
|
|
(75
|
)
|
|
98
|
|
|
(113
|
)
|
|
154
|
|
||||
Benefit plans: Actuarial gains, net
(a)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||
Total other comprehensive (loss)/income, net of tax
|
|
(76
|
)
|
|
88
|
|
|
(114
|
)
|
|
144
|
|
||||
Comprehensive income before allocation to noncontrolling interests
|
|
271
|
|
|
384
|
|
|
965
|
|
|
926
|
|
||||
Less: Comprehensive (loss)/income attributable to noncontrolling interests
|
|
—
|
|
|
(1
|
)
|
|
(4
|
)
|
|
—
|
|
||||
Comprehensive income attributable to Zoetis Inc.
|
|
$
|
271
|
|
|
$
|
385
|
|
|
$
|
969
|
|
|
$
|
926
|
|
(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.
|
|
|
September 30,
|
|
|
December 31,
|
|
||
|
|
2018
|
|
|
2017
|
|
||
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
|
|
(Unaudited)
|
|
|
|
|||
Assets
|
|
|
|
|
||||
Cash and cash equivalents
(a)
|
|
$
|
1,286
|
|
|
$
|
1,564
|
|
Short term investments
|
|
105
|
|
|
—
|
|
||
Accounts receivable, less allowance for doubtful accounts of $24 in 2018 and $25 in 2017
|
|
929
|
|
|
998
|
|
||
Inventories
|
|
1,441
|
|
|
1,427
|
|
||
Other current assets
|
|
315
|
|
|
228
|
|
||
Total current assets
|
|
4,076
|
|
|
4,217
|
|
||
Property, plant and equipment, less accumulated depreciation of $1,559 in 2018 and $1,471 in 2017
|
|
1,556
|
|
|
1,435
|
|
||
Goodwill
|
|
2,537
|
|
|
1,510
|
|
||
Identifiable intangible assets, less accumulated amortization
|
|
2,120
|
|
|
1,269
|
|
||
Noncurrent deferred tax assets
|
|
73
|
|
|
80
|
|
||
Other noncurrent assets
|
|
97
|
|
|
75
|
|
||
Total assets
|
|
$
|
10,459
|
|
|
$
|
8,586
|
|
|
|
|
|
|
||||
Liabilities and Equity
|
|
|
|
|
||||
Accounts payable
|
|
$
|
238
|
|
|
$
|
261
|
|
Dividends payable
|
|
—
|
|
|
61
|
|
||
Accrued expenses
|
|
425
|
|
|
432
|
|
||
Accrued compensation and related items
|
|
226
|
|
|
236
|
|
||
Income taxes payable
|
|
75
|
|
|
60
|
|
||
Other current liabilities
|
|
39
|
|
|
44
|
|
||
Total current liabilities
|
|
1,003
|
|
|
1,094
|
|
||
Long-term debt, net of discount and issuance costs
|
|
6,441
|
|
|
4,953
|
|
||
Noncurrent deferred tax liabilities
|
|
446
|
|
|
380
|
|
||
Other taxes payable
|
|
250
|
|
|
172
|
|
||
Other noncurrent liabilities
|
|
201
|
|
|
201
|
|
||
Total liabilities
|
|
8,341
|
|
|
6,800
|
|
||
Commitments and contingencies (Note 16)
|
|
|
|
|
|
|
||
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; 480,980,372 and 486,130,461 shares outstanding at September 30, 2018, and December 31, 2017, respectively
|
|
5
|
|
|
5
|
|
||
Treasury stock, at cost, 20,910,871 and 15,760,782 shares of common stock at September 30, 2018, and December 31, 2017, respectively
|
|
(1,345
|
)
|
|
(852
|
)
|
||
Additional paid-in capital
|
|
1,010
|
|
|
1,013
|
|
||
Retained earnings
|
|
3,067
|
|
|
2,109
|
|
||
Accumulated other comprehensive loss
|
|
(619
|
)
|
|
(505
|
)
|
||
Total Zoetis Inc. equity
|
|
2,118
|
|
|
1,770
|
|
||
Equity attributable to noncontrolling interests
|
|
—
|
|
|
16
|
|
||
Total equity
|
|
2,118
|
|
|
1,786
|
|
||
Total liabilities and equity
|
|
$
|
10,459
|
|
|
$
|
8,586
|
|
(a)
|
As of
September 30, 2018
, and
December 31, 2017
, includes
$5 million
and
$6 million
, respectively, 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
|
|
Nine months ended October 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
783
|
|
|
—
|
|
|
(1
|
)
|
|
782
|
|
|||||||
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
143
|
|
|
1
|
|
|
144
|
|
|||||||
Consolidation of a noncontrolling interest
(b)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
18
|
|
|||||||
Share-based compensation awards
(c)
|
|
—
|
|
|
63
|
|
|
6
|
|
|
(17
|
)
|
|
—
|
|
|
—
|
|
|
52
|
|
|||||||
Treasury stock acquired
(d)
|
|
—
|
|
|
(375
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(375
|
)
|
|||||||
Employee benefit plan contribution from Pfizer Inc.
(e)
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|||||||
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(103
|
)
|
|
—
|
|
|
—
|
|
|
(103
|
)
|
|||||||
Balance, October 1, 2017
|
|
$
|
5
|
|
|
$
|
(733
|
)
|
|
$
|
1,032
|
|
|
$
|
2,140
|
|
|
$
|
(455
|
)
|
|
$
|
30
|
|
|
$
|
2,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Balance, December 31, 2017
|
|
$
|
5
|
|
|
$
|
(852
|
)
|
|
$
|
1,013
|
|
|
$
|
2,109
|
|
|
$
|
(505
|
)
|
|
$
|
16
|
|
|
$
|
1,786
|
|
Nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Net income/(loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,083
|
|
|
—
|
|
|
(4
|
)
|
|
1,079
|
|
|||||||
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(114
|
)
|
|
—
|
|
|
(114
|
)
|
|||||||
Acquisition of a noncontrolling interest
(b)
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
(12
|
)
|
|
(26
|
)
|
|||||||
Share-based compensation awards
(c)
|
|
—
|
|
|
55
|
|
|
9
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
61
|
|
|||||||
Treasury stock acquired
(d)
|
|
—
|
|
|
(548
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(548
|
)
|
|||||||
Employee benefit plan contribution from Pfizer Inc.
(e)
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|||||||
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(122
|
)
|
|
—
|
|
|
—
|
|
|
(122
|
)
|
|||||||
Balance, September 30, 2018
|
|
$
|
5
|
|
|
$
|
(1,345
|
)
|
|
$
|
1,010
|
|
|
$
|
3,067
|
|
|
$
|
(619
|
)
|
|
$
|
—
|
|
|
$
|
2,118
|
|
(a)
|
As of
September 30, 2018
, and
October 1, 2017
, there were
480,980,372
and
487,832,003
outstanding shares of common stock, respectively, and
20,910,871
and
14,059,240
shares of treasury stock, respectively. Treasury stock is recognized at the cost to reacquire the shares. For additional information, see
Note 14. Stockholders' Equity
.
|
(b)
|
For the nine months ended
October 1, 2017
, represents the consolidation of a European livestock monitoring company. For the nine months ended
September 30, 2018
, represents the acquisition of the noncontrolling interest of a European livestock monitoring company.
|
(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.and the acquisition date fair value of replacement awards issued in conjunction with the acquisition of Abaxis in 2018 attributable to pre-combination services. For additional information, see
Note 5. Acquisitions and Divestitures,
.
|
(d)
|
Reflects the acquisition of treasury shares in connection with the share repurchase program. For additional information, see
Note 14. 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 12. Benefit Plans.
|
|
|
Nine Months Ended
|
||||||
|
|
September 30,
|
|
|
October 1,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Operating Activities
|
|
|
|
|
||||
Net income before allocation to noncontrolling interests
|
|
$
|
1,079
|
|
|
$
|
782
|
|
Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities:
|
|
|
|
|
||||
Depreciation and amortization expense
|
|
207
|
|
|
179
|
|
||
Share-based compensation expense
|
|
36
|
|
|
33
|
|
||
Asset write-offs and asset impairments
|
|
4
|
|
|
1
|
|
||
Net loss on sale of assets
|
|
—
|
|
|
2
|
|
||
Provision for losses on inventory
|
|
37
|
|
|
46
|
|
||
Deferred taxes
(a)
|
|
(155
|
)
|
|
(3
|
)
|
||
Employee benefit plan contribution from Pfizer Inc.
|
|
2
|
|
|
2
|
|
||
Other non-cash adjustments
|
|
(17
|
)
|
|
11
|
|
||
Other changes in assets and liabilities, net of acquisitions and divestitures
|
|
|
|
|
||||
Accounts receivable
|
|
37
|
|
|
(58
|
)
|
||
Inventories
|
|
29
|
|
|
(35
|
)
|
||
Other assets
|
|
(77
|
)
|
|
(132
|
)
|
||
Accounts payable
|
|
(39
|
)
|
|
(56
|
)
|
||
Other liabilities
|
|
(31
|
)
|
|
(107
|
)
|
||
Other tax accounts, net
(a)
|
|
94
|
|
|
73
|
|
||
Net cash provided by operating activities
|
|
1,206
|
|
|
738
|
|
||
Investing Activities
|
|
|
|
|
||||
Purchases of property, plant and equipment
|
|
(200
|
)
|
|
(141
|
)
|
||
Acquisition of Abaxis, net of cash acquired
|
|
(1,884
|
)
|
|
—
|
|
||
Other acquisitions
|
|
(108
|
)
|
|
(82
|
)
|
||
Net proceeds from sales of assets
|
|
8
|
|
|
1
|
|
||
Other investing activities
|
|
(1
|
)
|
|
6
|
|
||
Net cash used in investing activities
|
|
(2,185
|
)
|
|
(216
|
)
|
||
Financing Activities
|
|
|
|
|
||||
Proceeds from issuance of long-term debt—senior notes, net of discount and fees
|
|
1,485
|
|
|
1,231
|
|
||
Payment of contingent consideration related to previously acquired assets
|
|
(12
|
)
|
|
(5
|
)
|
||
Acquisition of a noncontrolling interest
|
|
(26
|
)
|
|
—
|
|
||
Share-based compensation-related proceeds, net of taxes paid on withholding shares
|
|
14
|
|
|
20
|
|
||
Purchases of treasury stock
|
|
(548
|
)
|
|
(375
|
)
|
||
Cash dividends paid
|
|
(183
|
)
|
|
(155
|
)
|
||
Net cash provided by financing activities
|
|
730
|
|
|
716
|
|
||
Effect of exchange-rate changes on cash and cash equivalents
|
|
(29
|
)
|
|
16
|
|
||
Net increase/(decrease) in cash and cash equivalents
|
|
(278
|
)
|
|
1,254
|
|
||
Cash and cash equivalents at beginning of period
|
|
1,564
|
|
|
727
|
|
||
Cash and cash equivalents at end of period
|
|
$
|
1,286
|
|
|
$
|
1,981
|
|
|
|
|
|
|
||||
Supplemental cash flow information
|
|
|
|
|
||||
Cash paid during the period for:
|
|
|
|
|
||||
Income taxes
|
|
$
|
290
|
|
|
$
|
366
|
|
Interest, net of capitalized interest
|
|
166
|
|
|
138
|
|
||
Non-cash transactions:
|
|
|
|
|
||||
Purchases of property, plant and equipment
|
|
3
|
|
|
6
|
|
(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.
|
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;
|
•
|
medicated feed additives
: products added to animal feed that provide medicines to livestock; and
|
•
|
animal health diagnostics
: portable blood and urine analysis systems and point-of-care diagnostic products, including instruments
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
United States
|
|
$
|
757
|
|
|
$
|
680
|
|
|
$
|
2,068
|
|
|
$
|
1,908
|
|
Australia
|
|
53
|
|
|
51
|
|
|
152
|
|
|
134
|
|
||||
Brazil
|
|
72
|
|
|
66
|
|
|
210
|
|
|
205
|
|
||||
Canada
|
|
42
|
|
|
40
|
|
|
138
|
|
|
123
|
|
||||
China
|
|
46
|
|
|
40
|
|
|
170
|
|
|
137
|
|
||||
France
|
|
29
|
|
|
30
|
|
|
92
|
|
|
85
|
|
||||
Germany
|
|
36
|
|
|
35
|
|
|
112
|
|
|
96
|
|
||||
Italy
|
|
27
|
|
|
22
|
|
|
80
|
|
|
65
|
|
||||
Japan
|
|
34
|
|
|
31
|
|
|
114
|
|
|
101
|
|
||||
Mexico
|
|
24
|
|
|
21
|
|
|
74
|
|
|
60
|
|
||||
Spain
|
|
28
|
|
|
24
|
|
|
83
|
|
|
67
|
|
||||
United Kingdom
|
|
47
|
|
|
36
|
|
|
135
|
|
|
105
|
|
||||
Other developed markets
|
|
98
|
|
|
96
|
|
|
266
|
|
|
240
|
|
||||
Other emerging markets
|
|
173
|
|
|
162
|
|
|
537
|
|
|
485
|
|
||||
|
|
1,466
|
|
|
1,334
|
|
|
4,231
|
|
|
3,811
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Contract manufacturing & human health diagnostics
|
|
14
|
|
|
13
|
|
|
30
|
|
|
36
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total Revenue
|
|
$
|
1,480
|
|
|
$
|
1,347
|
|
|
$
|
4,261
|
|
|
$
|
3,847
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
U.S.
|
|
|
|
|
|
|
|
|
||||||||
Livestock
|
|
$
|
322
|
|
|
$
|
319
|
|
|
$
|
885
|
|
|
$
|
870
|
|
Companion animal
|
|
435
|
|
|
361
|
|
|
1,183
|
|
|
1,038
|
|
||||
|
|
757
|
|
|
680
|
|
|
2,068
|
|
|
1,908
|
|
||||
International
|
|
|
|
|
|
|
|
|
||||||||
Livestock
|
|
456
|
|
|
435
|
|
|
1,397
|
|
|
1,276
|
|
||||
Companion animal
|
|
253
|
|
|
219
|
|
|
766
|
|
|
627
|
|
||||
|
|
709
|
|
|
654
|
|
|
2,163
|
|
|
1,903
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Contract manufacturing & human health diagnostics
|
|
14
|
|
|
13
|
|
|
30
|
|
|
36
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total Revenue
|
|
$
|
1,480
|
|
|
$
|
1,347
|
|
|
$
|
4,261
|
|
|
$
|
3,847
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Livestock:
|
|
|
|
|
|
|
|
|
||||||||
Cattle
|
|
$
|
417
|
|
|
$
|
424
|
|
|
$
|
1,229
|
|
|
$
|
1,192
|
|
Swine
|
|
160
|
|
|
147
|
|
|
500
|
|
|
455
|
|
||||
Poultry
|
|
130
|
|
|
119
|
|
|
395
|
|
|
357
|
|
||||
Fish
|
|
46
|
|
|
39
|
|
|
92
|
|
|
79
|
|
||||
Other
|
|
25
|
|
|
25
|
|
|
66
|
|
|
63
|
|
||||
|
|
778
|
|
|
754
|
|
|
2,282
|
|
|
2,146
|
|
||||
Companion Animal:
|
|
|
|
|
|
|
|
|
||||||||
Dogs and Cats
|
|
653
|
|
|
546
|
|
|
1,832
|
|
|
1,561
|
|
||||
Horses
|
|
35
|
|
|
34
|
|
|
117
|
|
|
104
|
|
||||
|
|
688
|
|
|
580
|
|
|
1,949
|
|
|
1,665
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Contract manufacturing & human health diagnostics
|
|
14
|
|
|
13
|
|
|
30
|
|
|
36
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total Revenue
|
|
$
|
1,480
|
|
|
$
|
1,347
|
|
|
$
|
4,261
|
|
|
$
|
3,847
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Vaccines
|
|
$
|
382
|
|
|
$
|
363
|
|
|
$
|
1,109
|
|
|
$
|
1,006
|
|
Anti-infectives
|
|
323
|
|
|
324
|
|
|
906
|
|
|
870
|
|
||||
Other pharmaceuticals
|
|
361
|
|
|
304
|
|
|
1,017
|
|
|
858
|
|
||||
Parasiticides
|
|
203
|
|
|
191
|
|
|
639
|
|
|
581
|
|
||||
Medicated feed additives
|
|
111
|
|
|
107
|
|
|
362
|
|
|
351
|
|
||||
Animal health diagnostics
|
|
46
|
|
|
11
|
|
|
69
|
|
|
32
|
|
||||
Other non-pharmaceuticals
|
|
40
|
|
|
34
|
|
|
129
|
|
|
113
|
|
||||
|
|
1,466
|
|
|
1,334
|
|
|
4,231
|
|
|
3,811
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Contract manufacturing & human health diagnostics
|
|
14
|
|
|
13
|
|
|
30
|
|
|
36
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total Revenue
|
|
$
|
1,480
|
|
|
$
|
1,347
|
|
|
$
|
4,261
|
|
|
$
|
3,847
|
|
•
|
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.
|
Acquisitions and Divestitures
|
(MILLIONS OF DOLLARS)
|
Amounts
|
|
|
Cash paid to Abaxis' shareholders
(a)
|
$
|
1,898
|
|
Cash paid for equity awards attributable for pre-merger services
(b)
|
54
|
|
|
Fair value of Zoetis equity awards issued in exchange for outstanding Abaxis equity awards pertaining to pre-merger service
(c)
|
10
|
|
|
Total consideration
|
$
|
1,962
|
|
(a)
|
Represents cash paid for cancellation and conversion of each outstanding share of Abaxis' common stock at the acquisition date.
|
(b)
|
Represents cash paid for cancellation and settlement of restricted stock awards that fully vested in July 2018 as a result of service or pre-existing change-in-control provisions and termination provisions. Includes certain awards that will be settled in cash during 2019, reflected in
Other current liabilities
within the condensed consolidated balance sheet.
|
(c)
|
Represents the fair value of replacement awards issued for Abaxis equity awards outstanding immediately before the acquisition and attributable to the service period prior to the acquisition. The previous Abaxis equity awards were converted into the Zoetis equity awards at an exchange ratio based on the closing prices of shares of Zoetis Common Stock and Abaxis Common Stock for ten full trading days before the closing of the acquisition.
|
(MILLIONS OF DOLLARS)
|
Amounts
|
|
|
Cash and cash equivalents
|
$
|
64
|
|
Short term investments
(a)
|
107
|
|
|
Accounts receivable
(b)
|
30
|
|
|
Inventories
(c)
|
79
|
||
Other current assets
|
6
|
||
Property, plant and equipment
(d)
|
49
|
||
Identifiable intangible assets
(e)
|
898
|
||
Other noncurrent assets
|
29
|
||
Accounts payable
|
(21)
|
||
Accrued compensation and related items
|
(10)
|
||
Other current liabilities
|
(26)
|
||
Other noncurrent liabilities
|
(11)
|
||
Noncurrent deferred tax liabilities
(f)
|
(215)
|
||
Total net assets acquired
|
979
|
||
Goodwill
(g)
|
983
|
||
Total consideration
|
$
|
1,962
|
|
(a)
|
Short term investments include investments in debt securities that are classified as available-for-sale and measured at fair value.
|
(b)
|
The fair value approximates the gross contractual amount of accounts receivable. The contractual amount not expected to be collected is immaterial.
|
(c)
|
Acquired inventory is comprised of finished goods, work in process and raw materials. The preliminary estimate of fair value of finished goods was determined based on net realizable value adjusted for the costs of the selling effort, a reasonable profit allowance for the selling effort, and estimated holding costs. The preliminary estimate of fair value of work in process was determined based on net realizable value adjusted for costs to complete the manufacturing process, costs of the selling effort, a reasonable profit allowance for the remaining manufacturing and selling effort, and an estimate of holding costs. The fair value of raw materials was determined to approximate book value.
|
(d)
|
Property, plant and equipment is comprised of machinery and equipment, furniture and fixtures, computer equipment, leasehold improvements and construction in progress. The preliminary estimated fair value was primarily determined using a reproduction/replacement cost approach which measures the value of an asset by estimating the cost to acquire or construct comparable assets adjusted for age and condition of the asset.
|
(e)
|
Identifiable intangible assets primarily consist of developed technology rights, customer relationships, and trademarks and tradenames. The preliminary estimate of fair value of identifiable intangible assets is determined using the income approach, which includes a forecast of expected future cash flows. For additional information regarding identifiable intangible assets, see
Note 11. Goodwill and Other Intangible Assets
.
|
(f)
|
The acquisition was structured as a stock purchase and therefore we assumed the historical tax basis of Abaxis' assets and liabilities. The preliminary estimate of deferred tax effects resulting from the acquisition include the expected federal, state, and foreign tax consequences associated with temporary differences between the preliminary fair values of the assets acquired and liabilities assumed and the respective tax basis. The components of the Abaxis net deferred tax liability are included within amounts reported in
Note 8. Income Taxes
.
|
(g)
|
Goodwill represents the excess of consideration transferred over the preliminary estimate of fair values of the assets acquired and liabilities assumed. It is allocated to our existing reportable segments and is primarily attributable to the future potential of the technology platforms, as well as cost and revenue synergies including market share capture, elimination of cost redundancies and gain of cost efficiencies, and intangible assets such as assembled workforce which are not separately recognizable. The primary strategic purpose of the acquisition was to enhance the company’s existing product portfolio by strengthening Zoetis’ presence in veterinary diagnostics. The goodwill recorded is not deductible for tax purposes. The allocation of goodwill to the reporting units is preliminary and will be completed as the company obtains the information necessary to complete the analysis, but no later than one year from the date of the acquisition.
|
(MILLIONS OF DOLLARS)
|
July 31 - September 30,
2018
|
|
|
Revenue
|
$
|
42
|
|
Net loss attributable to Zoetis Inc.
(a)
|
32
|
|
(a)
|
Included in the net loss are (i)
$7 million
of cost of goods sold related to the preliminary fair value adjustment for acquisition date inventory estimated to have been sold during the period ended
September 30, 2018
, (ii)
$20 million
of amortization expense related to the preliminary fair value of identifiable intangible assets recognized at the acquisition date, (iii)
$10 million
of severance costs directly related to the acquisition, and (iv) the applicable tax impact of above adjustments based on the statutory tax rates in the various jurisdictions where the adjustments are expected to be incurred.
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
|
September 30,
|
|
October 1,
|
|
|
September 30,
|
|
October 1,
|
|
||||
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
|||||
Revenue
|
$
|
1,500
|
|
$
|
1,406
|
|
|
$
|
4,416
|
|
$
|
4,022
|
|
Net income attributable to Zoetis Inc.
|
348
|
|
267
|
|
|
1,024
|
|
665
|
|
||||
Net income per common share - basic
|
0.72
|
|
0.55
|
|
|
2.12
|
|
1.35
|
|
||||
Net income per common share - diluted
|
0.72
|
|
0.54
|
|
|
2.10
|
|
1.35
|
|
•
|
Acquisition related costs incurred by Zoetis and Abaxis of
$57 million
and
$60 million
have been removed for each of the
three and nine months ended
September 30, 2018
, respectively. Acquisition related costs of
$0 million
and
$38 million
are assumed to be have been incurred during the
three and nine months ended
October 1, 2017
, respectively.
|
•
|
Additional amortization expense of
$13 million
and
$78 million
for each of the
three and nine months ended
September 30, 2018
, respectively, and
$33 million
and
$98 million
for each of the
three and nine months ended
October 1, 2017
, respectively, related to the preliminary fair value estimate of identified intangible assets acquired.
|
•
|
Additional depreciation expense of
$1 million
for the
nine months ended
September 30, 2018
, and
$1 million
for the
nine months ended
October 1, 2017
, related to the preliminary estimate of fair value adjustments to property, plant and equipment acquired.
|
•
|
Adjustments related to the preliminary estimate of the non-recurring fair value adjustment to acquisition date inventory estimated to have been sold, resulting in
$7 million
removed for each of the
three and nine months ended
September 30, 2018
, respectively, and
$11 million
and
$33 million
added to the
three and nine months ended
October 1, 2017
, respectively.
|
•
|
Additional interest expense and amortization of debt issuance costs for the debt issuance to finance the acquisition, resulting in
$8 million
and
$36 million
added for the
three and nine months ended
September 30, 2018
, respectively, and
$14 million
and
$43 million
added to the
three and nine months ended
October 1, 2017
, respectively.
|
•
|
Adjustments related to the post merger share-based compensation expense of the replacement awards are
$0 million
and
$7 million
for the
three and nine months ended
September 30, 2018
, respectively, and
$3 million
and
$10 million
for the
three and nine months ended
October 1, 2017
, respectively.
|
•
|
Applicable tax impact of the above adjustments based on the statutory tax rates in the various jurisdictions where the adjustments are expected to be incurred.
|
6.
|
Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Restructuring charges/(reversals) and certain acquisition-related costs:
|
|
|
|
|
|
|
|
|
||||||||
Transaction costs
(a)
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
—
|
|
Integration costs
(b)
|
|
9
|
|
|
2
|
|
|
10
|
|
|
4
|
|
||||
Restructuring charges/(reversals)
(c)(d)
:
|
|
|
|
|
|
|
|
|
||||||||
Employee termination costs
|
|
17
|
|
|
7
|
|
|
22
|
|
|
3
|
|
||||
Exit costs
|
|
—
|
|
|
(1
|
)
|
|
1
|
|
|
—
|
|
||||
Total Restructuring charges/(reversals) and certain acquisition-related costs
|
|
$
|
47
|
|
|
$
|
8
|
|
|
$
|
54
|
|
|
$
|
7
|
|
(a)
|
Transaction costs represent external costs directly related to acquiring businesses and primarily include expenditures for banking, legal, accounting and other similar services.
|
(b)
|
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.
|
(c)
|
The restructuring charges for the
three months ended
September 30, 2018
, are primarily related to:
|
•
|
employee termination costs of
$8 million
in Europe as a result of initiatives to better align our organizational structure, and
|
•
|
employee termination costs of
$10 million
related to the acquisition of Abaxis.
|
•
|
employee termination costs of
$11 million
in Europe as a result of initiatives to better align our organizational structure, and
|
•
|
employee termination costs of
$10 million
related to the acquisition of Abaxis.
|
|
The restructuring charges/(reversals) for the
three months ended
October 1, 2017
, are primarily related to:
|
•
|
employee termination costs of
$3 million
related to the operational efficiency initiative and supply network strategy, and
|
•
|
employee termination costs of
$4 million
related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017.
|
•
|
employee termination costs of
$4 million
related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017.
|
(d)
|
The restructuring charges/(reversals) are associated with the following:
|
•
|
For the
three months ended
September 30, 2018
, International of
$8 million
and Manufacturing/research/corporate of
$9 million
.
|
•
|
For the
nine months ended
September 30, 2018
, International of
$12 million
and Manufacturing/research/corporate of
$11 million
.
|
•
|
For the
three months ended
October 1, 2017
, International of (
$1 million
reversal) and Manufacturing/research/corporate of
$7 million
.
|
•
|
For the
nine months ended
October 1, 2017
, International of (
$2 million
reversal) and Manufacturing/research/corporate of
$5 million
.
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Restructuring charges/(reversals) and certain acquisition-related costs:
|
|
|
|
|
|
|
|
|
||||||||
Operational efficiency initiative
|
|
|
|
|
|
|
|
|
||||||||
Employee termination costs
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Exit costs
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
||||
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
2
|
|
||||
Supply network strategy:
|
|
|
|
|
|
|
|
|
||||||||
Employee termination costs
|
|
—
|
|
|
2
|
|
|
1
|
|
|
(3
|
)
|
||||
Exit costs
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
||||
|
|
—
|
|
|
2
|
|
|
2
|
|
|
(3
|
)
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total restructuring charges/(reversals) related to the operational efficiency initiative and supply network strategy
|
|
(1
|
)
|
|
2
|
|
|
2
|
|
|
(1
|
)
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Other operational efficiency initiative charges
|
|
|
|
|
|
|
|
|
||||||||
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
||||||||
Consulting fees
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||
Other (income)/deductions—net:
|
|
|
|
|
|
|
|
|
||||||||
Net (gain)/loss on sale of assets
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
1
|
|
||||
Total other operational efficiency initiative charges
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
2
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Other supply network strategy charges
|
|
|
|
|
|
|
|
|
||||||||
Cost of sales:
|
|
|
|
|
|
|
|
|
||||||||
Accelerated depreciation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
||||
Consulting fees and other costs
|
|
1
|
|
|
1
|
|
|
4
|
|
|
3
|
|
||||
Other (income)/deductions—net:
|
|
|
|
|
|
|
|
|
||||||||
Net loss on sale of assets
(a)
|
|
2
|
|
|
5
|
|
|
2
|
|
|
5
|
|
||||
Total other supply network strategy charges
|
|
3
|
|
|
6
|
|
|
6
|
|
|
10
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total charges associated with the operational efficiency initiative and supply network strategy
|
|
$
|
2
|
|
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
11
|
|
(a)
|
For the
three and nine months ended
October 1, 2017
, represents charges related to the agreement to sell a manufacturing site in Guarulhos, Brazil, which includes a
$3 million
charge to reduce the carrying value of the disposal group to an amount equal to fair value, less costs to sell, as well as
$2 million
of costs related to the anticipated disposal.
|
|
|
Employee
|
|
|
|
|
|
|||||
|
|
Termination
|
|
|
Exit
|
|
|
|
||||
(MILLIONS OF DOLLARS)
|
|
Costs
|
|
|
Costs
|
|
|
Accrual
|
|
|||
Balance, December 31, 2017
(a)
|
|
$
|
41
|
|
|
$
|
—
|
|
|
$
|
41
|
|
Provision
|
|
22
|
|
|
1
|
|
|
23
|
|
|||
Utilization and other
(b)
|
|
(26
|
)
|
|
(1
|
)
|
|
(27
|
)
|
|||
Balance, September 30
, 2018
(a)
|
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
37
|
|
(a)
|
At
September 30, 2018
, and
December 31, 2017
, included in Accrued expenses (
$15 million
and
$19 million
, respectively) and Other noncurrent liabilities (
$22 million
and
$22 million
, respectively).
|
(b)
|
Includes adjustments for foreign currency translation.
|
7.
|
Other (Income)/Deductions—Net
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Royalty-related income
|
|
$
|
(5
|
)
|
|
$
|
(7
|
)
|
|
$
|
(18
|
)
|
|
$
|
(19
|
)
|
Interest income
|
|
(6
|
)
|
|
(3
|
)
|
|
(20
|
)
|
|
(8
|
)
|
||||
Net (gain)/loss on sale of assets
(a)
|
|
2
|
|
|
4
|
|
|
2
|
|
|
6
|
|
||||
Certain legal and other matters, net
(b)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
||||
Foreign currency loss
(c)
|
|
9
|
|
|
7
|
|
|
26
|
|
|
17
|
|
||||
Other, net
(d)
|
|
(19
|
)
|
|
—
|
|
|
(18
|
)
|
|
(3
|
)
|
||||
Other (income)/deductions—net
|
|
$
|
(19
|
)
|
|
$
|
1
|
|
|
$
|
(28
|
)
|
|
$
|
(11
|
)
|
(a)
|
Represents net losses related to sales of certain manufacturing sites and products as part of our operational efficiency initiative and supply network strategy.
|
(b)
|
For the
nine months ended
October 1, 2017
, represents income associated with an insurance recovery related to commercial settlements in Mexico recorded in 2014 and 2016.
|
(c)
|
Primarily driven by costs related to hedging and exposures to certain emerging market currencies.
|
(d)
|
For the
three and nine months ended
September 30, 2018
, primarily includes a net gain related to the relocation of a manufacturing site in China. For the
nine months ended
October 1, 2017
, primarily includes a settlement refund and reimbursement of legal fees related to costs incurred by Pharmaq prior to the acquisition in 2015 and income associated with certain state business employment tax incentive credits.
|
8.
|
Income Taxes
|
A.
|
Taxes on Income
|
•
|
One-Time Mandatory Deemed Repatriation Tax: The one-time mandatory deemed repatriation tax is imposed on 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. 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 computations that were calculated during the reporting period, we recognized a measurement-period adjustment of
$23 million
and
$58 million
for the
three and nine months ended
September 30, 2018
, respectively, 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
three and nine months ended
September 30, 2018
effective tax rate was a reduction to the rate of approximately
5.4%
and
4.6%
, respectively. 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 nine months of 2018. Since the company has recorded provisional amounts related to certain portions of the Tax Act, any
|
•
|
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 nine months 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;
|
•
|
a
$23 million
net tax benefit recorded in the
third 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;
|
•
|
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; and
|
•
|
a
$3 million
and
$1 million
discrete tax benefit recorded in the
third quarter
of 2018 and 2017, respectively, related to the excess tax benefits for share-based payments.
|
•
|
the reduction of the U.S. federal corporate income tax rate from
35%
to
21%
, effective January 1, 2018, pursuant to the Tax Act;
|
•
|
a
$58 million
net tax benefit recorded in the
nine months ended
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;
|
•
|
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
$12 million
and
$8 million
discrete tax benefit recorded in the
nine months ended
2018 and 2017, respectively, related to the excess tax benefits for share-based payments; and
|
•
|
an
$8 million
and
$3 million
discrete tax benefit recorded in the
nine months ended
2018 and 2017, respectively, related to a remeasurement of deferred taxes as a result of a change in non-U.S. statutory tax rates.
|
B.
|
Deferred Taxes
|
C.
|
Tax Contingencies
|
9.
|
Financial Instruments
|
A.
|
Debt
|
|
|
September 30,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
3.450% 2015 senior notes due 2020
|
|
$
|
500
|
|
|
$
|
500
|
|
2018 floating rate senior notes due 2021
|
|
300
|
|
|
—
|
|
||
3.250% 2018 senior notes due 2021
|
|
300
|
|
|
—
|
|
||
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
|
|
||
3.900% 2018 senior notes due 2028
|
|
500
|
|
|
—
|
|
||
4.700% 2013 senior notes due 2043
|
|
1,150
|
|
|
1,150
|
|
||
3.950% 2017 senior notes due 2047
|
|
500
|
|
|
500
|
|
||
4.450% 2018 senior notes due 2048
|
|
400
|
|
|
—
|
|
||
|
|
6,500
|
|
|
5,000
|
|
||
Unamortized debt discount / debt issuance costs
|
|
(59
|
)
|
|
(47
|
)
|
||
Long-term debt, net of discount and issuance costs
|
|
$
|
6,441
|
|
|
$
|
4,953
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|||||||||||
(MILLIONS OF DOLLARS)
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2022
|
|
|
Total
|
|
||||||
Maturities
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
600
|
|
|
$
|
—
|
|
|
$
|
5,400
|
|
|
$
|
6,500
|
|
|
|
Gross Unrealized
|
|
Maturities by Period
(a)
|
||||||||||||||||||||||||||||
(MILLIONS OF DOLLARS)
|
|
Amortized Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
Within 1 year
|
|
Over 1 to 5 years
|
|
Over 5 years
|
|
Total
|
||||||||||||||||
Available-for-sale debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Municipal Bonds
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Corporate Bonds
|
|
117
|
|
|
—
|
|
|
—
|
|
|
117
|
|
|
104
|
|
|
13
|
|
|
—
|
|
|
117
|
|
||||||||
Total debt securities
|
|
$
|
118
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
118
|
|
|
$
|
105
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
118
|
|
C.
|
Derivative Financial Instruments
|
•
|
For foreign exchange contracts not designated as hedging instruments, we recognize the gains and losses on forward-exchange contracts that are used to offset the same foreign currency assets or liabilities immediately into earnings along with the earnings impact of the items they generally offset. These contracts essentially take the opposite currency position of that reflected in the month-end balance sheet to counterbalance the effect of any currency movement.
|
•
|
For cross-currency interest rate swaps, which are designated as a hedge against our net investment in foreign operations, changes in the fair value are deferred as a component of cumulative translation adjustment within
Accumulated other comprehensive loss
and reclassified into earnings when the foreign investment is sold or substantially liquidated. Gains and losses excluded from the assessment of hedge effectiveness are recognized in earnings (
Interest expense—net of capitalized interest)
. The impact of the periodic exchange of interest payments is reflected within the operating section of our
condensed consolidated statement of cash flows.
|
|
|
Fair Value of Derivatives
|
||||||
|
|
September 30,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
Balance Sheet Location
|
2018
|
|
|
2017
|
|
||
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
||||
Foreign currency forward-exchange contracts
|
Other current assets
|
$
|
19
|
|
|
$
|
10
|
|
Foreign currency forward-exchange contracts
|
Other current liabilities
|
(6
|
)
|
|
(9
|
)
|
||
Total derivatives not designated as hedging instruments
|
|
$
|
13
|
|
|
$
|
1
|
|
|
|
|
|
|
||||
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
||||
Cross-currency interest rate swap contracts
|
Other current assets
|
$
|
3
|
|
|
$
|
—
|
|
Cross-currency interest rate swap contracts
|
Other non-current assets
|
1
|
|
|
—
|
|
||
Total derivatives designated as hedging instruments
|
|
4
|
|
|
—
|
|
||
|
|
|
|
|
||||
Total derivatives
|
|
$
|
17
|
|
|
$
|
1
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Foreign currency forward-exchange contracts
|
|
$
|
22
|
|
|
$
|
(17
|
)
|
|
$
|
22
|
|
|
$
|
(39
|
)
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
(10
|
)
|
|
$
|
—
|
|
|
$
|
(11
|
)
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Cross-currency interest rate swap contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Cross-currency interest rate swap contracts
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
10.
|
Inventories
|
|
|
September 30,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
||
Finished goods
|
|
$
|
785
|
|
|
$
|
788
|
|
Work-in-process
|
|
492
|
|
|
484
|
|
||
Raw materials and supplies
|
|
164
|
|
|
155
|
|
||
Inventories
|
|
$
|
1,441
|
|
|
$
|
1,427
|
|
11.
|
Goodwill and Other Intangible Assets
|
A.
|
Goodwill
|
(MILLIONS OF DOLLARS)
|
|
U.S.
|
|
|
International
|
|
|
Total
|
|
|||
Balance, December 31, 2017
|
|
$
|
671
|
|
|
$
|
839
|
|
|
$
|
1,510
|
|
Additions
(a)
|
|
598
|
|
|
433
|
|
|
1,031
|
|
|||
Other
(b)
|
|
—
|
|
|
(4
|
)
|
|
(4
|
)
|
|||
Balance, September 30, 2018
|
|
$
|
1,269
|
|
|
$
|
1,268
|
|
|
$
|
2,537
|
|
B.
|
Other Intangible Assets
|
|
|
As of September 30, 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
(a)(b)
|
|
$
|
1,849
|
|
|
$
|
(491
|
)
|
|
$
|
1,358
|
|
|
$
|
1,185
|
|
|
$
|
(428
|
)
|
|
$
|
757
|
|
Brands
|
|
213
|
|
|
(152
|
)
|
|
61
|
|
|
213
|
|
|
(143
|
)
|
|
70
|
|
||||||
Trademarks and trade names
(b)
|
|
166
|
|
|
(50
|
)
|
|
116
|
|
|
62
|
|
|
(47
|
)
|
|
15
|
|
||||||
Other
(b)
|
|
413
|
|
|
(158
|
)
|
|
255
|
|
|
234
|
|
|
(143
|
)
|
|
91
|
|
||||||
Total finite-lived intangible assets
|
|
2,641
|
|
|
(851
|
)
|
|
1,790
|
|
|
1,694
|
|
|
(761
|
)
|
|
933
|
|
||||||
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
In-process research and development
|
|
219
|
|
|
—
|
|
|
219
|
|
|
224
|
|
|
—
|
|
|
224
|
|
||||||
Brands
|
|
37
|
|
|
—
|
|
|
37
|
|
|
37
|
|
|
—
|
|
|
37
|
|
||||||
Trademarks and trade names
|
|
67
|
|
|
—
|
|
|
67
|
|
|
67
|
|
|
—
|
|
|
67
|
|
||||||
Product rights
|
|
7
|
|
|
—
|
|
|
7
|
|
|
8
|
|
|
—
|
|
|
8
|
|
||||||
Total indefinite-lived intangible assets
|
|
330
|
|
|
—
|
|
|
330
|
|
|
336
|
|
|
—
|
|
|
336
|
|
||||||
Identifiable intangible assets
|
|
$
|
2,971
|
|
|
$
|
(851
|
)
|
|
$
|
2,120
|
|
|
$
|
2,030
|
|
|
$
|
(761
|
)
|
|
$
|
1,269
|
|
|
|
Gross Carrying
|
|
|
Weighted-average
|
|
(MILLIONS OF DOLLARS)
|
|
Amount
|
|
|
Life (years)
|
|
Finite-lived intangible assets:
|
|
|
|
|
||
Developed technology rights
|
|
$
|
614
|
|
|
10
|
Trademarks and tradenames
|
|
104
|
|
|
20
|
|
Other
|
|
180
|
|
|
4
|
|
Total
|
|
$
|
898
|
|
|
|
C.
|
Amortization
|
12.
|
Benefit Plans
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Service cost
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
5
|
|
Interest cost
|
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
||||
Expected return on plan assets
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
(2
|
)
|
||||
Amortization of net actuarial loss
|
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
||||
Curtailment and settlement loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||
Net periodic benefit cost
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
7
|
|
13.
|
Share-Based Payments
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Stock options / stock appreciation rights
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
7
|
|
|
$
|
7
|
|
RSUs / DSUs
(a)
|
|
10
|
|
|
7
|
|
|
23
|
|
|
20
|
|
||||
PSUs
|
|
2
|
|
|
2
|
|
|
6
|
|
|
6
|
|
||||
Share-based compensation expense—total
(b)
|
|
$
|
14
|
|
|
$
|
11
|
|
|
$
|
36
|
|
|
$
|
33
|
|
(a)
|
For the
three and nine months ended
September 30, 2018
, includes share-based compensation expense of
$3 million
related to the acquisition of Abaxis, for the post-merger service period. For additional details see
Note 5. Acquisitions and Divestitures
.
|
(b)
|
For the
three and nine months ended
September 30, 2018
, and the three months ended
October 1, 2017
, amounts capitalized to inventory were insignificant. For the nine months ended October 1, 2017, we capitalized
$1 million
of share-based compensation expense to inventory.
|
14.
|
Stockholders' Equity
|
(a)
|
Shares may not add due to rounding.
|
(b)
|
Includes the reissuance of shares from treasury stock in connection with the vesting of employee share-based awards, and 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 13. 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 (loss)/income, net of tax
|
|
(11
|
)
|
|
153
|
|
|
1
|
|
|
143
|
|
||||
Balance, October 1, 2017
|
|
$
|
(3
|
)
|
|
$
|
(430
|
)
|
|
$
|
(22
|
)
|
|
$
|
(455
|
)
|
|
|
|
|
|
|
|
|
|
||||||||
Balance, December 31, 2017
|
|
$
|
(3
|
)
|
|
$
|
(487
|
)
|
|
$
|
(15
|
)
|
|
$
|
(505
|
)
|
Other comprehensive loss, net of tax
|
|
(1
|
)
|
|
(113
|
)
|
|
—
|
|
|
(114
|
)
|
||||
Balance, September 30, 2018
|
|
$
|
(4
|
)
|
|
$
|
(600
|
)
|
|
$
|
(15
|
)
|
|
$
|
(619
|
)
|
15.
|
Earnings per Share
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Numerator
|
|
|
|
|
|
|
|
|
||||||||
Net income before allocation to noncontrolling interests
|
|
$
|
347
|
|
|
$
|
296
|
|
|
$
|
1,079
|
|
|
$
|
782
|
|
Less: Net loss attributable to noncontrolling interests
|
|
—
|
|
|
(2
|
)
|
|
(4
|
)
|
|
(1
|
)
|
||||
Net income attributable to Zoetis Inc.
|
|
$
|
347
|
|
|
$
|
298
|
|
|
$
|
1,083
|
|
|
$
|
783
|
|
Denominator
|
|
|
|
|
|
|
|
|
||||||||
Weighted-average common shares outstanding
|
|
482.0
|
|
|
489.1
|
|
|
483.9
|
|
|
490.8
|
|
||||
Common stock equivalents: stock options, RSUs, PSUs and DSUs
|
|
3.8
|
|
|
3.3
|
|
|
3.8
|
|
|
3.1
|
|
||||
Weighted-average common and potential dilutive shares outstanding
|
|
485.8
|
|
|
492.4
|
|
|
487.7
|
|
|
493.9
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Earnings per share attributable to Zoetis Inc. stockholders—basic
|
|
$
|
0.72
|
|
|
$
|
0.61
|
|
|
$
|
2.24
|
|
|
$
|
1.60
|
|
Earnings per share attributable to Zoetis Inc. stockholders—diluted
|
|
$
|
0.71
|
|
|
$
|
0.61
|
|
|
$
|
2.22
|
|
|
$
|
1.59
|
|
16.
|
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
|
17.
|
Segment Information
|
•
|
Other business activities
includes our Client Supply Services (CSS) contract manufacturing results, our human health diagnostics business and 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
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
U.S.
|
|
|
|
|
|
|
|
|
||||||||
Revenue
|
|
$
|
757
|
|
|
$
|
680
|
|
|
|
|
|
||||
Cost of sales
|
|
151
|
|
|
141
|
|
|
|
|
|
||||||
Gross profit
|
|
606
|
|
|
539
|
|
|
|
|
|
||||||
Gross margin
|
|
80.1
|
%
|
|
79.3
|
%
|
|
|
|
|
||||||
Operating expenses
|
|
116
|
|
|
103
|
|
|
|
|
|
||||||
Other (income)/deductions
|
|
—
|
|
|
—
|
|
|
|
|
|
||||||
U.S. Earnings
|
|
490
|
|
|
436
|
|
|
$
|
9
|
|
|
$
|
7
|
|
||
|
|
|
|
|
|
|
|
|
||||||||
International
|
|
|
|
|
|
|
|
|
||||||||
Revenue
(b)
|
|
709
|
|
|
654
|
|
|
|
|
|
||||||
Cost of sales
|
|
226
|
|
|
213
|
|
|
|
|
|
||||||
Gross profit
|
|
483
|
|
|
441
|
|
|
|
|
|
||||||
Gross margin
|
|
68.1
|
%
|
|
67.4
|
%
|
|
|
|
|
||||||
Operating expenses
|
|
131
|
|
|
132
|
|
|
|
|
|
||||||
Other (income)/deductions
|
|
(1
|
)
|
|
—
|
|
|
|
|
|
||||||
International Earnings
|
|
353
|
|
|
309
|
|
|
11
|
|
|
10
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total operating segments
|
|
843
|
|
|
745
|
|
|
20
|
|
|
17
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Other business activities
|
|
(84
|
)
|
|
(77
|
)
|
|
6
|
|
|
5
|
|
||||
Reconciling Items:
|
|
|
|
|
|
|
|
|
||||||||
Corporate
|
|
(178
|
)
|
|
(143
|
)
|
|
15
|
|
|
13
|
|
||||
Purchase accounting adjustments
|
|
(49
|
)
|
|
(23
|
)
|
|
43
|
|
|
22
|
|
||||
Acquisition-related costs
|
|
(40
|
)
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
||||
Certain significant items
(c)
|
|
8
|
|
|
(7
|
)
|
|
—
|
|
|
(1
|
)
|
||||
Other unallocated
|
|
(82
|
)
|
|
(76
|
)
|
|
—
|
|
|
2
|
|
||||
Total Earnings
(d)
|
|
$
|
418
|
|
|
$
|
413
|
|
|
$
|
84
|
|
|
$
|
58
|
|
|
|
Earnings
|
|
Depreciation and Amortization
(a)
|
||||||||||||
|
|
Nine months ended
|
|
Nine months ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
U.S.
|
|
|
|
|
|
|
|
|
||||||||
Revenue
|
|
$
|
2,068
|
|
|
$
|
1,908
|
|
|
|
|
|
||||
Cost of sales
|
|
431
|
|
|
412
|
|
|
|
|
|
||||||
Gross profit
|
|
1,637
|
|
|
1,496
|
|
|
|
|
|
||||||
Gross margin
|
|
79.2
|
%
|
|
78.4
|
%
|
|
|
|
|
||||||
Operating expenses
|
|
328
|
|
|
312
|
|
|
|
|
|
||||||
Other (income)/deductions
|
|
—
|
|
|
—
|
|
|
|
|
|
||||||
U.S. Earnings
|
|
1,309
|
|
|
1,184
|
|
|
$
|
25
|
|
|
$
|
21
|
|
||
|
|
|
|
|
|
|
|
|
||||||||
International
|
|
|
|
|
|
|
|
|
||||||||
Revenue
(b)
|
|
2,163
|
|
|
1,903
|
|
|
|
|
|
||||||
Cost of sales
|
|
689
|
|
|
645
|
|
|
|
|
|
||||||
Gross profit
|
|
1,474
|
|
|
1,258
|
|
|
|
|
|
||||||
Gross margin
|
|
68.1
|
%
|
|
66.1
|
%
|
|
|
|
|
||||||
Operating expenses
|
|
411
|
|
|
372
|
|
|
|
|
|
||||||
Other (income)/deductions
|
|
2
|
|
|
(1
|
)
|
|
|
|
|
||||||
International Earnings
|
|
1,061
|
|
|
887
|
|
|
34
|
|
|
32
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total operating segments
|
|
2,370
|
|
|
2,071
|
|
|
59
|
|
|
53
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Other business activities
|
|
(247
|
)
|
|
(224
|
)
|
|
17
|
|
|
17
|
|
||||
Reconciling Items:
|
|
|
|
|
|
|
|
|
||||||||
Corporate
|
|
(470
|
)
|
|
(437
|
)
|
|
42
|
|
|
38
|
|
||||
Purchase accounting adjustments
|
|
(95
|
)
|
|
(66
|
)
|
|
88
|
|
|
65
|
|
||||
Acquisition-related costs
|
|
(41
|
)
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
||||
Certain significant items
(c)
|
|
(2
|
)
|
|
(10
|
)
|
|
—
|
|
|
1
|
|
||||
Other unallocated
|
|
(243
|
)
|
|
(231
|
)
|
|
1
|
|
|
5
|
|
||||
Total Earnings
(d)
|
|
$
|
1,272
|
|
|
$
|
1,095
|
|
|
$
|
207
|
|
|
$
|
179
|
|
(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
$180 million
and
$555 million
for the
three and nine months ended
September 30, 2018
, respectively, and
$169 million
and
$472 million
for the
three and nine months ended
October 1, 2017
, respectively.
|
(c)
|
For the
three months ended September 30, 2018
, primarily represents (i) employee termination costs of
$8 million
, and (ii) a net gain of
$18 million
related to the relocation of a manufacturing site in China and (iii) a loss of
$2 million
related to sales of certain manufacturing sites and products as a result of our supply network strategy.
|
(d)
|
Defined as income before provision for taxes on income.
|
18.
|
Subsequent Events
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
|
|
|
|
% Change
|
|||||||||
|
|
Three Months Ended
|
|
|
|
Related to
|
|||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
|
|
Foreign
|
|
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Total
|
|
Exchange
|
|
|
Operational
(a)
|
||
Revenue
|
|
$
|
1,480
|
|
|
$
|
1,347
|
|
|
10
|
|
(2
|
)
|
|
12
|
Net income attributable to Zoetis
|
|
347
|
|
|
298
|
|
|
16
|
|
(10
|
)
|
|
26
|
||
Adjusted net income
(a)
|
|
403
|
|
|
322
|
|
|
25
|
|
(7
|
)
|
|
32
|
|
|
|
|
|
|
% Change
|
||||||||
|
|
Nine Months Ended
|
|
|
|
Related to
|
||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
|
|
Foreign
|
|
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Total
|
|
Exchange
|
|
Operational
(a)
|
||
Revenue
|
|
$
|
4,261
|
|
|
$
|
3,847
|
|
|
11
|
|
2
|
|
9
|
Net income attributable to Zoetis
|
|
1,083
|
|
|
783
|
|
|
38
|
|
1
|
|
37
|
||
Adjusted net income
(a)
|
|
1,143
|
|
|
844
|
|
|
35
|
|
1
|
|
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
|
|
|
|
Nine Months Ended
|
|
|
||||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
||||
Revenue
|
|
$
|
1,480
|
|
|
$
|
1,347
|
|
|
10
|
|
|
$
|
4,261
|
|
|
$
|
3,847
|
|
|
11
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Cost of sales
(a)
|
|
473
|
|
|
435
|
|
|
9
|
|
|
1,367
|
|
|
1,318
|
|
|
4
|
|
||||
% of revenue
|
|
32.0
|
%
|
|
32.3
|
%
|
|
|
|
32.1
|
%
|
|
34.3
|
%
|
|
|
||||||
Selling, general and administrative expenses
(a)
|
|
367
|
|
|
328
|
|
|
12
|
|
|
1,064
|
|
|
973
|
|
|
9
|
|
||||
% of revenue
|
|
25
|
%
|
|
24
|
%
|
|
|
|
25
|
%
|
|
25
|
%
|
|
|
||||||
Research and development expenses
(a)
|
|
108
|
|
|
96
|
|
|
13
|
|
|
307
|
|
|
272
|
|
|
13
|
|
||||
% of revenue
|
|
7
|
%
|
|
7
|
%
|
|
|
|
7
|
%
|
|
7
|
%
|
|
|
||||||
Amortization of intangible assets
(a)
|
|
32
|
|
|
23
|
|
|
39
|
|
|
78
|
|
|
68
|
|
|
15
|
|
||||
Restructuring charges/(reversals) and certain acquisition-related costs
|
|
47
|
|
|
8
|
|
|
*
|
|
|
54
|
|
|
7
|
|
|
*
|
|
||||
Interest expense, net of capitalized interest
|
|
54
|
|
|
43
|
|
|
26
|
|
|
147
|
|
|
125
|
|
|
18
|
|
||||
Other (income)/deductions—net
|
|
(19
|
)
|
|
1
|
|
|
*
|
|
|
(28
|
)
|
|
(11
|
)
|
|
*
|
|
||||
Income before provision for taxes on income
|
|
418
|
|
|
413
|
|
|
1
|
|
|
1,272
|
|
|
1,095
|
|
|
16
|
|
||||
% of revenue
|
|
28
|
%
|
|
31
|
%
|
|
|
|
30
|
%
|
|
28
|
%
|
|
|
||||||
Provision for taxes on income
|
|
71
|
|
|
117
|
|
|
(39
|
)
|
|
193
|
|
|
313
|
|
|
(38
|
)
|
||||
Effective tax rate
|
|
17.0
|
%
|
|
28.3
|
%
|
|
|
|
15.2
|
%
|
|
28.6
|
%
|
|
|
||||||
Net income before allocation to noncontrolling interests
|
|
347
|
|
|
296
|
|
|
17
|
|
|
1,079
|
|
|
782
|
|
|
38
|
|
||||
Less: Net (loss)/income attributable to noncontrolling interests
|
|
—
|
|
|
(2
|
)
|
|
(100
|
)
|
|
(4
|
)
|
|
(1
|
)
|
|
*
|
|
||||
Net income attributable to Zoetis
|
|
$
|
347
|
|
|
$
|
298
|
|
|
16
|
|
|
$
|
1,083
|
|
|
$
|
783
|
|
|
38
|
|
% of revenue
|
|
23
|
%
|
|
22
|
%
|
|
|
|
25
|
%
|
|
20
|
%
|
|
|
(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.
|
•
|
price growth of approximately 4%;
|
•
|
increased volume from our key dermatology products of approximately 3%;
|
•
|
the acquisition of Abaxis which contributed approximately 3%; and
|
•
|
volume growth from new products of approximately 2%.
|
•
|
increased volume from in-line products of approximately 4%, including 3% from our key dermatology products;
|
•
|
price growth of approximately 2%;
|
•
|
volume growth from new products of approximately 2%; and
|
•
|
the acquisition of Abaxis which contributed approximately 1%.
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
2018
|
|
|
2017
|
|
|
Change
|
||||
Cost of sales
|
|
$
|
473
|
|
|
$
|
435
|
|
|
9
|
|
$
|
1,367
|
|
|
$
|
1,318
|
|
|
4
|
% of revenue
|
|
32.0
|
%
|
|
32.3
|
%
|
|
|
|
32.1
|
%
|
|
34.3
|
%
|
|
|
•
|
continued cost improvements and efficiencies in our manufacturing network,
|
•
|
unfavorable foreign exchange; and
|
•
|
the inclusion of Abaxis.
|
•
|
continued cost improvements and efficiencies in our manufacturing network; and
|
•
|
favorable foreign exchange,
|
•
|
the inclusion of Abaxis.
|
•
|
the inclusion of Abaxis;
|
•
|
an increase in certain compensation-related expenses; and
|
•
|
higher professional services and consulting charges,
|
•
|
favorable foreign exchange.
|
•
|
an increase in certain compensation-related expenses;
|
•
|
the inclusion of Abaxis;
|
•
|
higher professional services and consulting charges; and
|
•
|
unfavorable foreign exchange.
|
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
2018
|
|
|
2017
|
|
|
Change
|
||||
Research and development expenses
|
|
$
|
108
|
|
|
$
|
96
|
|
|
13
|
|
$
|
307
|
|
|
$
|
272
|
|
|
13
|
% of revenue
|
|
7
|
%
|
|
7
|
%
|
|
|
|
7
|
%
|
|
7
|
%
|
|
|
•
|
increased headcount and other spending driven by project investments; and
|
•
|
the inclusion of Abaxis.
|
•
|
increased headcount driven by project investments;
|
•
|
the inclusion of Abaxis;
|
•
|
unfavorable foreign exchange; and
|
•
|
an increase in certain compensation-related expenses.
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
2018
|
|
|
2017
|
|
|
Change
|
||||
Amortization of intangible assets
|
|
$
|
32
|
|
|
$
|
23
|
|
|
39
|
|
$
|
78
|
|
|
$
|
68
|
|
|
15
|
Other (income)/deductions—net
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
2018
|
|
|
2017
|
|
|
Change
|
||||
Other (income)/deductions—net
|
|
$
|
(19
|
)
|
|
$
|
1
|
|
|
*
|
|
$
|
(28
|
)
|
|
$
|
(11
|
)
|
|
*
|
•
|
a net gain of $18 million in the
three months ended September 30, 2018
related to the relocation of a manufacturing site in China; and
|
•
|
higher interest income in the
three months ended September 30, 2018
due to higher cash balances,
|
•
|
a loss of $2 million
three months ended September 30, 2018
related to divestitures as part of our supply network strategy; and
|
•
|
higher foreign currency losses in the
three months ended September 30, 2018
primarily driven by costs related to hedging and exposures to certain emerging market currencies.
|
•
|
a net gain of $18 million in the
nine months ended September 30, 2018
related to the relocation of a manufacturing site in China; and
|
•
|
higher interest income in the
nine months ended September 30, 2018
due to higher cash balances,
|
•
|
higher foreign currency losses in the
nine months ended September 30, 2018
primarily driven by costs related to hedging and exposures to certain emerging market currencies;
|
•
|
a loss of $2 million in the
nine months ended September 30, 2018
related to divestitures as part of our supply network strategy; and
|
•
|
income of $4 million in the
nine months ended October 1, 2017
related to an insurance recovery from commercial settlements in Mexico recorded in 2014 and 2016.
|
Provision for taxes on income
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
||||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
||||
Provision for taxes on income
|
|
$
|
71
|
|
|
$
|
117
|
|
|
(39
|
)
|
|
$
|
193
|
|
|
$
|
313
|
|
|
(38
|
)
|
Effective tax rate
|
|
17.0
|
%
|
|
28.3
|
%
|
|
|
|
15.2
|
%
|
|
28.6
|
%
|
|
|
•
|
the reduction of the U.S. federal corporate income tax rate, from
35%
to
21%
, effective January 1, 2018, pursuant to the Tax Act;
|
•
|
a
$23 million
net tax benefit recorded in the third 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;
|
•
|
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; and
|
•
|
a
$3 million
and
$1 million
discrete tax benefit recorded in the third quarter of 2018 and 2017, respectively, related to the excess tax benefits for share-based payments.
|
•
|
the reduction of the U.S. federal corporate income tax rate, from
35%
to
21%
, effective January 1, 2018, pursuant to the Tax Act;
|
•
|
a
$58 million
net tax benefit recorded in the nine months ended 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;
|
•
|
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
$12 million
and
$8 million
discrete tax benefit recorded in the nine months ended 2018 and 2017, respectively, related to the excess tax benefits for share-based payments; and
|
•
|
an
$8 million
and
$3 million
discrete tax benefit recorded in the nine months ended 2018 and 2017, respectively, related to a remeasurement of deferred taxes as a result of a change in non-U.S. statutory tax rates.
|
|
|
|
|
% Change
|
|||||||||||||
|
|
Three Months Ended
|
|
|
|
Related to
|
|||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
|
|
Foreign
|
|
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Total
|
|
|
Exchange
|
|
|
Operational
|
|
||
U.S.
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
$
|
322
|
|
|
$
|
319
|
|
|
1
|
%
|
|
—
|
%
|
|
1
|
%
|
Companion animal
|
|
435
|
|
|
361
|
|
|
20
|
%
|
|
—
|
%
|
|
20
|
%
|
||
|
|
757
|
|
|
680
|
|
|
11
|
%
|
|
—
|
%
|
|
11
|
%
|
||
International
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
456
|
|
|
435
|
|
|
5
|
%
|
|
(5
|
)%
|
|
10
|
%
|
||
Companion animal
|
|
253
|
|
|
219
|
|
|
16
|
%
|
|
(2
|
)%
|
|
18
|
%
|
||
|
|
709
|
|
|
654
|
|
|
8
|
%
|
|
(4
|
)%
|
|
12
|
%
|
||
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
778
|
|
|
754
|
|
|
3
|
%
|
|
(3
|
)%
|
|
6
|
%
|
||
Companion animal
|
|
688
|
|
|
580
|
|
|
19
|
%
|
|
—
|
%
|
|
19
|
%
|
||
Contract manufacturing & human health diagnostics
|
|
14
|
|
|
13
|
|
|
8
|
%
|
|
(3
|
)%
|
|
11
|
%
|
||
|
|
$
|
1,480
|
|
|
$
|
1,347
|
|
|
10
|
%
|
|
(2
|
)%
|
|
12
|
%
|
|
|
|
|
% Change
|
||||||||||||
|
|
Three Months Ended
|
|
|
|
Related to
|
||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
|
|
Foreign
|
|
|
|
|||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Total
|
|
|
Exchange
|
|
|
Operational
|
||
U.S.
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenue
|
|
$
|
757
|
|
|
$
|
680
|
|
|
11
|
|
|
—
|
|
|
11
|
Cost of Sales
|
|
151
|
|
|
141
|
|
|
7
|
|
|
—
|
|
|
7
|
||
Gross Profit
|
|
606
|
|
|
539
|
|
|
12
|
|
|
—
|
|
|
12
|
||
Gross Margin
|
|
80.1
|
%
|
|
79.3
|
%
|
|
|
|
|
|
|
||||
Operating Expenses
|
|
116
|
|
|
103
|
|
|
13
|
|
|
—
|
|
|
13
|
||
Other (income)/deductions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
||
U.S. Earnings
|
|
490
|
|
|
436
|
|
|
12
|
|
|
—
|
|
|
12
|
||
|
|
|
|
|
|
|
|
|
|
|
||||||
International
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenue
|
|
709
|
|
|
654
|
|
|
8
|
|
|
(4
|
)
|
|
12
|
||
Cost of Sales
|
|
226
|
|
|
213
|
|
|
6
|
|
|
(3
|
)
|
|
9
|
||
Gross Profit
|
|
483
|
|
|
441
|
|
|
10
|
|
|
(4
|
)
|
|
14
|
||
Gross Margin
|
|
68.1
|
%
|
|
67.4
|
%
|
|
|
|
|
|
|
||||
Operating Expenses
|
|
131
|
|
|
132
|
|
|
(1
|
)
|
|
(4
|
)
|
|
3
|
||
Other (income)/deductions
|
|
(1
|
)
|
|
—
|
|
|
*
|
|
|
*
|
|
|
*
|
||
International Earnings
|
|
353
|
|
|
309
|
|
|
14
|
|
|
(5
|
)
|
|
19
|
||
|
|
|
|
|
|
|
|
|
|
|
||||||
Total operating segments
|
|
843
|
|
|
745
|
|
|
13
|
|
|
(2
|
)
|
|
15
|
||
|
|
|
|
|
|
|
|
|
|
|
||||||
Other business activities
|
|
(84
|
)
|
|
(77
|
)
|
|
9
|
|
|
|
|
|
|||
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate
|
|
(178
|
)
|
|
(143
|
)
|
|
24
|
|
|
|
|
|
|||
Purchase accounting adjustments
|
|
(49
|
)
|
|
(23
|
)
|
|
*
|
|
|
|
|
|
|||
Acquisition-related costs
|
|
(40
|
)
|
|
(6
|
)
|
|
*
|
|
|
|
|
|
|||
Certain significant items
|
|
8
|
|
|
(7
|
)
|
|
*
|
|
|
|
|
|
|||
Other unallocated
|
|
(82
|
)
|
|
(76
|
)
|
|
8
|
|
|
|
|
|
|||
Income before provision for taxes on income
|
|
$
|
418
|
|
|
$
|
413
|
|
|
1
|
|
|
|
|
|
|
|
|
|
% Change
|
|||||||||||
|
|
Nine Months Ended
|
|
|
|
Related to
|
|||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
|
|
Foreign
|
|
|
|||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Total
|
|
|
Exchange
|
|
Operational
|
||
U.S.
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenue
|
|
$
|
2,068
|
|
|
$
|
1,908
|
|
|
8
|
|
|
—
|
|
8
|
Cost of Sales
|
|
431
|
|
|
412
|
|
|
5
|
|
|
—
|
|
5
|
||
Gross Profit
|
|
1,637
|
|
|
1,496
|
|
|
9
|
|
|
—
|
|
9
|
||
Gross Margin
|
|
79.2
|
%
|
|
78.4
|
%
|
|
|
|
|
|
|
|||
Operating Expenses
|
|
328
|
|
|
312
|
|
|
5
|
|
|
—
|
|
5
|
||
Other (income)/deductions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
||
U.S. Earnings
|
|
1,309
|
|
|
1,184
|
|
|
11
|
|
|
—
|
|
11
|
||
|
|
|
|
|
|
|
|
|
|
|
|||||
International
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenue
|
|
2,163
|
|
|
1,903
|
|
|
14
|
|
|
3
|
|
11
|
||
Cost of Sales
|
|
689
|
|
|
645
|
|
|
7
|
|
|
2
|
|
5
|
||
Gross Profit
|
|
1,474
|
|
|
1,258
|
|
|
17
|
|
|
3
|
|
14
|
||
Gross Margin
|
|
68.1
|
%
|
|
66.1
|
%
|
|
|
|
|
|
|
|||
Operating Expenses
|
|
411
|
|
|
372
|
|
|
10
|
|
|
2
|
|
8
|
||
Other (income)/deductions
|
|
2
|
|
|
(1
|
)
|
|
*
|
|
|
*
|
|
*
|
||
International Earnings
|
|
1,061
|
|
|
887
|
|
|
20
|
|
|
3
|
|
17
|
||
|
|
|
|
|
|
|
|
|
|
|
|||||
Total operating segments
|
|
2,370
|
|
|
2,071
|
|
|
14
|
|
|
1
|
|
13
|
||
|
|
|
|
|
|
|
|
|
|
|
|||||
Other business activities
|
|
(247
|
)
|
|
(224
|
)
|
|
10
|
|
|
|
|
|
||
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate
|
|
(470
|
)
|
|
(437
|
)
|
|
8
|
|
|
|
|
|
||
Purchase accounting adjustments
|
|
(95
|
)
|
|
(66
|
)
|
|
44
|
|
|
|
|
|
||
Acquisition-related costs
|
|
(41
|
)
|
|
(8
|
)
|
|
*
|
|
|
|
|
|
||
Certain significant items
|
|
(2
|
)
|
|
(10
|
)
|
|
(80
|
)
|
|
|
|
|
||
Other unallocated
|
|
(243
|
)
|
|
(231
|
)
|
|
5
|
|
|
|
|
|
||
Income before provision for taxes on income
|
|
$
|
1,272
|
|
|
$
|
1,095
|
|
|
16
|
|
|
|
|
|
•
|
Companion animal revenue growth was driven primarily by increased sales of the dermatology portfolio, the acquisition of Abaxis, and new products including Simparica
®
. Growth was tempered by lower sales of certain in-line products due to anticipated competition.
|
•
|
Livestock revenue increased primarily due to higher sales of poultry and swine products, offset by declines in the cattle business. For poultry, growth was driven by increased sales of alternatives to antibiotic medicated feed additive products. Swine growth was primarily due to promotional activities. Cattle sales declined due to competitor products returning to the market and unfavorable market conditions in dairy.
|
•
|
Companion animal revenue growth resulted primarily from increased sales across multiple international markets of the dermatology portfolio, and new products including Simparica
®
, as well as the acquisition of Abaxis.
|
•
|
Livestock growth was driven primarily by increased sales in our swine, cattle and poultry portfolios. Swine growth was primarily due to new vaccine products and timing of customer purchases in China. Cattle growth reflects the recovery of the previous quarter negative impact regarding the national trucking industry strike in Brazil.
|
•
|
Companion animal revenue growth was driven primarily by increased sales of the dermatology portfolio, as well as new products and the inclusion of Abaxis. Growth was tempered by lower sales of certain in-line products due to anticipated competition.
|
•
|
Livestock revenue increased primarily due to higher sales of poultry and swine products offset by declines in the cattle business. For poultry, growth was driven by increased sales of alternatives to antibiotic medicated feed additive products. Swine growth was primarily due to promotional activities and new product launches. The decline in cattle sales is due to unfavorable market conditions in dairy as well as competitor promotional activities.
|
•
|
Companion animal revenue growth resulted primarily from increased sales across multiple international markets of the dermatology portfolio, and new products including Simparica
®
, as well as growth in
vaccines in China.
|
•
|
Livestock growth was driven primarily by strong performance in cattle, swine and poultry products. Growth in cattle was due to anti-infective and biological products. Swine growth was primarily due to new vaccine products. Growth in poultry products was driven by increased sales of vaccines and medicated feed additives.
|
•
|
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
|
|
|
|
Nine Months Ended
|
|
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
2018
|
|
|
2017
|
|
|
Change
|
||||
GAAP reported net income attributable to Zoetis
|
|
$
|
347
|
|
|
$
|
298
|
|
|
16
|
|
$
|
1,083
|
|
|
$
|
783
|
|
|
38
|
Purchase accounting adjustments—net of tax
|
|
37
|
|
|
16
|
|
|
*
|
|
68
|
|
|
50
|
|
|
36
|
||||
Acquisition-related costs—net of tax
|
|
31
|
|
|
4
|
|
|
*
|
|
32
|
|
|
5
|
|
|
*
|
||||
Certain significant items—net of tax
|
|
(12
|
)
|
|
4
|
|
|
*
|
|
(40
|
)
|
|
6
|
|
|
*
|
||||
Non-GAAP adjusted net income
(a)
|
|
$
|
403
|
|
|
$
|
322
|
|
|
25
|
|
$
|
1,143
|
|
|
$
|
844
|
|
|
35
|
(a)
|
The effective tax rate on adjusted pretax income is
19.2%
and
28.7%
for the
three months ended September 30, 2018
, and
October 1, 2017
, respectively. The
lower
effective tax rate for the
three months ended September 30, 2018
, compared with the
three months ended October 1, 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, and (iii) a
$3 million
and
$1 million
discrete tax benefit recorded in the third quarter of 2018 and 2017, respectively, related to the excess tax benefits for share-based payments.
|
|
The effective tax rate on adjusted pretax income is
19.2%
and
28.5%
for the
nine months ended September 30, 2018
, and
October 1, 2017
, respectively. The
lower
effective tax rate for the
nine months ended September 30, 2018
, compared with the
nine months ended October 1, 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
$12 million
and
$8 million
discrete tax benefit recorded in the
nine months ended September 30, 2018
and
October 1, 2017
, respectively, related to the excess tax benefits for share-based payments, and (iv) an
$8 million
and
$3 million
discrete tax benefit recorded in the
nine months ended September 30, 2018
and
October 1, 2017
, respectively, related to a remeasurement of deferred taxes as a result of a change in non-U.S. statutory tax rates.
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
|
||||
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
||||
Earnings per share—diluted
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
GAAP reported EPS attributable to Zoetis—diluted
|
|
$
|
0.71
|
|
|
$
|
0.61
|
|
|
16
|
|
$
|
2.22
|
|
|
$
|
1.59
|
|
|
40
|
|
Purchase accounting adjustments—net of tax
|
|
0.08
|
|
|
0.02
|
|
|
*
|
|
0.14
|
|
|
0.10
|
|
|
40
|
|
||||
Acquisition-related costs—net of tax
|
|
0.06
|
|
|
0.01
|
|
|
*
|
|
0.06
|
|
|
0.01
|
|
|
*
|
|
||||
Certain significant items—net of tax
|
|
(0.02
|
)
|
|
0.01
|
|
|
*
|
|
(0.08
|
)
|
|
0.01
|
|
|
*
|
|
||||
Non-GAAP adjusted EPS—diluted
|
|
$
|
0.83
|
|
|
$
|
0.65
|
|
|
28
|
|
$
|
2.34
|
|
|
$
|
1.71
|
|
|
37
|
|
(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
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Interest expense, net of capitalized interest
|
|
$
|
54
|
|
|
$
|
43
|
|
|
$
|
147
|
|
|
$
|
125
|
|
Interest income
|
|
6
|
|
|
3
|
|
|
20
|
|
|
8
|
|
||||
Income taxes
|
|
96
|
|
|
129
|
|
|
271
|
|
|
336
|
|
||||
Depreciation
|
|
36
|
|
|
33
|
|
|
106
|
|
|
100
|
|
||||
Amortization
|
|
5
|
|
|
4
|
|
|
13
|
|
|
13
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Purchase accounting adjustments:
|
|
|
|
|
|
|
|
|
||||||||
Amortization and depreciation
(a)
|
|
$
|
29
|
|
|
$
|
21
|
|
|
$
|
67
|
|
|
$
|
61
|
|
Cost of sales
(b)
|
|
9
|
|
|
2
|
|
|
13
|
|
|
5
|
|
||||
Other
|
|
11
|
|
|
—
|
|
|
15
|
|
|
—
|
|
||||
Total purchase accounting adjustments—pre-tax
|
|
49
|
|
|
23
|
|
|
95
|
|
|
66
|
|
||||
Income taxes
(c)
|
|
12
|
|
|
7
|
|
|
27
|
|
|
16
|
|
||||
Total purchase accounting adjustments—net of tax
|
|
37
|
|
|
16
|
|
|
68
|
|
|
50
|
|
||||
Acquisition-related costs:
|
|
|
|
|
|
|
|
|
||||||||
Transaction costs
(d)
|
|
21
|
|
|
—
|
|
|
21
|
|
|
—
|
|
||||
Integration costs
(e)
|
|
9
|
|
|
2
|
|
|
10
|
|
|
4
|
|
||||
Restructuring costs
(f)
|
|
10
|
|
|
4
|
|
|
10
|
|
|
4
|
|
||||
Total acquisition-related costs—pre-tax
|
|
40
|
|
|
6
|
|
|
41
|
|
|
8
|
|
||||
Income taxes
(c)
|
|
9
|
|
|
2
|
|
|
9
|
|
|
3
|
|
||||
Total acquisition-related costs—net of tax
|
|
31
|
|
|
4
|
|
|
32
|
|
|
5
|
|
||||
Certain significant items:
|
|
|
|
|
|
|
|
|
||||||||
Operational efficiency initiative
(g)
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
4
|
|
||||
Supply network strategy
(g)
|
|
3
|
|
|
8
|
|
|
8
|
|
|
7
|
|
||||
Other restructuring charges and cost-reduction/productivity initiatives
|
|
8
|
|
|
—
|
|
|
11
|
|
|
—
|
|
||||
Other
(h)
|
|
(18
|
)
|
|
—
|
|
|
(17
|
)
|
|
(1
|
)
|
||||
Total certain significant items—pre-tax
|
|
(8
|
)
|
|
7
|
|
|
2
|
|
|
10
|
|
||||
Income taxes
(c)
|
|
4
|
|
|
3
|
|
|
42
|
|
|
4
|
|
||||
Total certain significant items—net of tax
|
|
(12
|
)
|
|
4
|
|
|
(40
|
)
|
|
6
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax
|
|
$
|
56
|
|
|
$
|
24
|
|
|
$
|
60
|
|
|
$
|
61
|
|
(a)
|
Amortization and depreciation expenses related to
Purchase accounting adjustments
with respect to identifiable intangible assets and property, plant and equipment.
|
(b)
|
Amortization and depreciation expense.
|
(c)
|
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 September 30, 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
nine months ended October 1, 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 and nine months ended
September 30, 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.
|
|
Income taxes in
Certain significant items
for the
nine months ended October 1, 2017
, also includes a net charge related to the remeasurement of the company’s deferred tax assets and liabilities, using the rates expected to be in place at the time of the reversal.
|
(d)
|
T
ransaction costs represent external costs directly related to acquiring businesses and primarily include expenditures for banking, legal, accounting and other similar services.
|
(f)
|
Represents employee termination costs related to the acquisition of Abaxis in the
third quarter
of
2018
and the acquisition of an Irish biologic therapeutics company in the
third quarter
of
2017
.
|
(g)
|
Represents employee termination costs, exit costs, consulting fees, product transfer costs and net (gains)/losses on sales of certain manufacturing sites and products related to cost-reduction and productivity initiatives.
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||||||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
||||
Cost of sales:
|
|
|
|
|
|
|
|
|
||||||||
Purchase accounting adjustments
|
|
$
|
9
|
|
|
$
|
2
|
|
|
$
|
13
|
|
|
$
|
5
|
|
Accelerated depreciation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
||||
Consulting fees
|
|
1
|
|
|
2
|
|
|
4
|
|
|
4
|
|
||||
Other
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
||||
Total Cost of sales
|
|
10
|
|
|
3
|
|
|
17
|
|
|
11
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Selling, general & administrative expenses:
|
|
|
|
|
|
|
|
|
||||||||
Purchase accounting adjustments
|
|
11
|
|
|
1
|
|
|
14
|
|
|
4
|
|
||||
Consulting fees
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||
Other
|
|
—
|
|
|
—
|
|
|
1
|
|
|
2
|
|
||||
Total Selling, general & administrative expenses
|
|
11
|
|
|
1
|
|
|
15
|
|
|
7
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Research & development expenses:
|
|
|
|
|
|
|
|
|
||||||||
Purchase accounting adjustments
|
|
—
|
|
|
1
|
|
|
1
|
|
|
2
|
|
||||
Total Research & development expenses
|
|
—
|
|
|
1
|
|
|
1
|
|
|
2
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Amortization of intangible assets:
|
|
|
|
|
|
|
|
|
||||||||
Purchase accounting adjustments
|
|
29
|
|
|
19
|
|
|
67
|
|
|
55
|
|
||||
Total Amortization of intangible assets
|
|
29
|
|
|
19
|
|
|
67
|
|
|
55
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Restructuring charges/(reversals) and certain acquisition-related costs:
|
|
|
|
|
|
|
|
|
||||||||
Transaction costs
|
|
21
|
|
|
—
|
|
|
21
|
|
|
—
|
|
||||
Integration costs
|
|
9
|
|
|
2
|
|
|
10
|
|
|
4
|
|
||||
Employee termination costs
|
|
17
|
|
|
7
|
|
|
22
|
|
|
3
|
|
||||
Exit costs
|
|
—
|
|
|
(1
|
)
|
|
1
|
|
|
—
|
|
||||
Total Restructuring charges/(reversals) and certain acquisition-related costs
|
|
47
|
|
|
8
|
|
|
54
|
|
|
7
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Other (income)/deductions—net:
|
|
|
|
|
|
|
|
|
||||||||
Net (gain)/loss on sale of assets
|
|
2
|
|
|
4
|
|
|
2
|
|
|
6
|
|
||||
Other
|
|
(18
|
)
|
|
—
|
|
|
(18
|
)
|
|
(4
|
)
|
||||
Total Other (income)/deductions—net
|
|
(16
|
)
|
|
4
|
|
|
(16
|
)
|
|
2
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Provision for taxes on income
|
|
25
|
|
|
12
|
|
|
78
|
|
|
23
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax
|
|
$
|
56
|
|
|
$
|
24
|
|
|
$
|
60
|
|
|
$
|
61
|
|
|
|
Nine Months Ended
|
|
|
||||||
|
|
September 30,
|
|
|
October 1,
|
|
|
%
|
||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2017
|
|
|
Change
|
||
Net cash provided by (used in):
|
|
|
|
|
|
|
||||
Operating activities
|
|
$
|
1,206
|
|
|
$
|
738
|
|
|
63
|
Investing activities
|
|
(2,185
|
)
|
|
(216
|
)
|
|
*
|
||
Financing activities
|
|
730
|
|
|
716
|
|
|
2
|
||
Effect of exchange-rate changes on cash and cash equivalents
|
|
(29
|
)
|
|
16
|
|
|
*
|
||
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(278
|
)
|
|
$
|
1,254
|
|
|
*
|
|
September 30,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
2018
|
|
|
2017
|
|
||
Cash and cash equivalents
|
$
|
1,286
|
|
|
$
|
1,564
|
|
Accounts receivable, net
(a)
|
929
|
|
|
998
|
|
||
Long-term debt,
net of discount and issuance costs
|
6,441
|
|
|
4,953
|
|
||
Working capital
|
3,073
|
|
|
3,123
|
|
||
Ratio of current assets to current liabilities
|
4.06:1
|
|
|
3.85:1
|
|
(a)
|
Accounts receivable are usually collected over a period of 45 to 75 days
.
For the
nine months ended
September 30, 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
|
2018 Floating Rate Senior Note due 2021
|
$300 million
|
Floating
|
Interest due quarterly, not subject to amortization, aggregate principal due on August 20, 2021
|
2018 Senior Note due 2021
|
$300 million
|
3.250%
|
Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2021
|
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
|
2018 Senior Note due 2028
|
$500 million
|
3.900%
|
Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2028
|
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
|
2018 Senior Note due 2048
|
$400 million
|
4.450%
|
Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2048
|
|
|
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
|
(MILLIONS OF DOLLARS)
|
|
Total
|
|
2018
|
|
2019 - 2020
|
|
2021- 2022
|
|
Thereafter
|
||||||||||
Operating lease commitments
|
|
$
|
26
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
6
|
|
|
$
|
11
|
|
Purchase obligations
|
|
25
|
|
|
3
|
|
|
22
|
|
|
—
|
|
|
—
|
|
•
|
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 or issues related to 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;
|
•
|
legal factors, including product liability claims, antitrust litigation and governmental investigations, 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;
|
•
|
changes in tax laws and regulations, in the United States and other countries, 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 potential future interpretative guidance related to the recently passed Tax Act or new legislative 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
|
•
|
making it more difficult for us to satisfy our obligations with respect to our debt;
|
•
|
limiting our ability to obtain additional financing to fund future working capital, capital expenditures, business development or other general corporate requirements, including dividends;
|
•
|
increasing our vulnerability to general adverse economic and industry conditions;
|
•
|
exposing us to the risk of increased interest rates as certain of our borrowings are and may in the future be at variable rates of interest;
|
•
|
limiting our flexibility in planning for and reacting to changes in the animal health industry;
|
•
|
placing us at a competitive disadvantage to other, less leveraged competitors;
|
•
|
impacting our effective tax rate; and
|
•
|
increasing our cost of borrowing.
|
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
|
July 1 - July 31, 2018
|
555,908
|
$85.49
|
555,059
|
$547,016,075
|
August 1 - August 31, 2018
|
561,240
|
$90.28
|
561,238
|
$496,348,315
|
September 1 - September 30, 2018
|
502,198
|
$89.38
|
502,060
|
$451,388,731
|
|
1,619,346
|
$88.36
|
1,618,357
|
$451,388,731
|
(a)
|
The company repurchased 989 shares during the three-month period ended
September 30, 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.
|
|
|
|
|
November 1, 2018
|
By:
|
/S/ JUAN RAMÓN ALAIX
|
|
|
Juan Ramón Alaix
|
|
|
Chief Executive Officer and Director
|
|
|
|
November 1, 2018
|
By:
|
/S/ GLENN DAVID
|
|
|
Glenn David
|
|
|
Executive Vice President and
|
|
|
Chief Financial Officer
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
September 30,
|
|
|
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
|
|
$
|
1,272
|
|
|
$
|
1,525
|
|
|
$
|
1,228
|
|
|
$
|
545
|
|
|
$
|
820
|
|
$
|
690
|
|
Less: Net income/(loss) attributable to noncontrolling interests
|
|
(4
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
—
|
|
|
4
|
|
(1
|
)
|
||||||
Income attributable to Zoetis Inc.
|
|
1,276
|
|
|
1,527
|
|
|
1,230
|
|
|
545
|
|
|
816
|
|
691
|
|
||||||
Add: fixed charges
|
|
160
|
|
|
188
|
|
|
177
|
|
|
137
|
|
|
131
|
|
127
|
|
||||||
Total earnings as defined
|
|
$
|
1,436
|
|
|
$
|
1,715
|
|
|
$
|
1,407
|
|
|
$
|
682
|
|
|
$
|
947
|
|
$
|
818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Fixed charges:
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Interest expense, net of capitalized interest
(a)
|
|
$
|
147
|
|
|
$
|
175
|
|
|
$
|
166
|
|
|
$
|
124
|
|
|
$
|
117
|
|
$
|
113
|
|
Capitalized interest
|
|
6
|
|
|
4
|
|
|
3
|
|
|
4
|
|
|
4
|
|
3
|
|
||||||
Interest portion of rent expense
(b)
|
|
7
|
|
|
9
|
|
|
8
|
|
|
9
|
|
|
10
|
|
11
|
|
||||||
Fixed charges
|
|
$
|
160
|
|
|
$
|
188
|
|
|
$
|
177
|
|
|
$
|
137
|
|
|
$
|
131
|
|
$
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Ratio of earnings to fixed charges
|
|
9.0
|
|
|
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
September 30, 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.
|
November 1, 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
September 30, 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.
|
November 1, 2018
|
By:
|
/s/ GLENN DAVID
|
|
|
Glenn David
|
|
|
Executive Vice President and
|
|
|
Chief Financial Officer
|
November 1, 2018
|
By:
|
/s/ JUAN RAMÓN ALAIX
|
|
|
Juan Ramón Alaix
|
|
|
Chief Executive Officer
|
November 1, 2018
|
By:
|
/s/ GLENN DAVID
|
|
|
Glenn David
|
|
|
Executive Vice President and
|
|
|
Chief Financial Officer
|