Zoetis-2013.6.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
| | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES | |
| EXCHANGE ACT OF 1934 | |
| For the quarterly period ended June 30, 2013 | |
| or | |
| TRANSITION REPORT PURSUANT TO SECTION 13 | |
| OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| | |
¨ | For the transition period from __________ to __________ | |
Commission File Number: 001-35797
|
|
Zoetis Inc. |
(Exact name of registrant as specified in its charter) |
|
| | |
Delaware | | 46-0696167 |
(State or other jurisdiction of | | (I.R.S. Employer Identification No.) |
incorporation or organization) | | |
100 Campus Drive, Florham Park, New Jersey | | 07932 |
(Address of principal executive offices) | | (Zip Code) |
|
|
(973) 822-7000 |
(Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | | | |
Large accelerated filer ¨ | | Accelerated filer ¨ | | Non-accelerated filer x | | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). ¨ Yes x No
At August 9, 2013, there were 500,000,000 shares of common stock outstanding.
TABLE OF CONTENTS
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| | | | Page |
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Item 1. | | | | |
| | Condensed Consolidated and Combined Statements of Income | | |
| | Condensed Consolidated and Combined Statements of Comprehensive Income | | |
| | Condensed Consolidated and Combined Balance Sheets | | |
| | Condensed Consolidated and Combined Statements of Equity | | |
| | Condensed Consolidated and Combined Statements of Cash Flows | | |
| | Notes to Condensed Consolidated and Combined Financial Statements | | |
| | Review Report of Independent Registered Public Accounting Firm | | |
Item 2. | | | | |
Item 3. | | | | |
Item 4. | | | | |
| | |
Item 1. | | | | |
Item 1A. | | | | |
Item 2. | | | | |
Item 3. | | Defaults Upon Senior Securities | | |
Item 4. | | Mine Safety Disclosures | | |
Item 5. | | Other Information | | |
Item 6. | | | | |
| | |
PART I – FINANCIAL INFORMATION
| |
Item 1. | Financial Statements |
ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, |
| | July 1, |
| | June 30, |
| | July 1, |
|
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA) | | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
Revenue | | $ | 1,114 |
| | $ | 1,094 |
| | $ | 2,204 |
| | $ | 2,141 |
|
Costs and expenses: | | | | | | | | |
Cost of sales(a) | | 416 |
| | 378 |
| | 818 |
| | 771 |
|
Selling, general and administrative expenses(a) | | 399 |
| | 344 |
| | 756 |
| | 682 |
|
Research and development expenses(a) | | 95 |
| | 92 |
| | 185 |
| | 194 |
|
Amortization of intangible assets(a) | | 15 |
| | 16 |
| | 30 |
| | 32 |
|
Restructuring charges and certain acquisition-related costs | | (20 | ) | | 24 |
| | (13 | ) | | 49 |
|
Interest expense | | 32 |
| | 8 |
| | 54 |
| | 16 |
|
Other (income)/deductions—net | | (10 | ) | | (20 | ) | | (5 | ) | | (26 | ) |
Income before provision for taxes on income | | 187 |
| | 252 |
| | 379 |
| | 423 |
|
Provision for taxes on income | | 59 |
| | 79 |
| | 111 |
| | 138 |
|
Net income before allocation to noncontrolling interests | | 128 |
| | 173 |
| | 268 |
| | 285 |
|
Less: Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | 1 |
|
Net income attributable to Zoetis Inc. | | $ | 128 |
| | $ | 173 |
| | $ | 268 |
| | $ | 284 |
|
Earnings per share attributable to Zoetis Inc. stockholders: | | | | | | | | |
Basic | | $ | 0.26 |
| | $ | 0.35 |
| | $ | 0.54 |
| | $ | 0.57 |
|
Diluted | | $ | 0.26 |
| | $ | 0.35 |
| | $ | 0.54 |
| | $ | 0.57 |
|
Weighted-average common shares outstanding: | | | | | | | | |
Basic | | 500.000 |
| | 500.000 |
| | 500.000 |
| | 500.000 |
|
Diluted | | 500.217 |
| | 500.000 |
| | 500.164 |
| | 500.000 |
|
Dividends declared per common share | | $ | 0.065 |
| | $ | — |
| | $ | 0.130 |
| | $ | — |
|
| |
(a) | Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as these intangible assets benefit multiple business functions. Amortization expense related to finite-lived acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, general and administrative expenses or Research and development expenses, as appropriate, in the condensed consolidated and combined statements of income. |
See notes to condensed consolidated and combined financial statements.
1 |
ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, |
| | July 1, |
| | June 30, |
| | July 1, |
|
(MILLIONS OF DOLLARS) | | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
Net income before allocation to noncontrolling interests | | $ | 128 |
| | $ | 173 |
| | $ | 268 |
| | $ | 285 |
|
Other comprehensive income/(loss), net of taxes and reclassification adjustments(a): | | | | | |
| |
|
Foreign currency translation adjustments, net | | (33 | ) | | (162 | ) | | (17 | ) | | (128 | ) |
Benefit plans: Actuarial losses, net | | (1 | ) | | — |
| | (3 | ) | | — |
|
Total other comprehensive income/(loss), net of tax | | (34 | ) | | (162 | ) | | (20 | ) | | (128 | ) |
Comprehensive income before allocation to noncontrolling interests | | 94 |
| | 11 |
| | 248 |
| | 157 |
|
Less: Comprehensive income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | 1 |
|
Comprehensive income attributable to Zoetis Inc. | | $ | 94 |
| | $ | 11 |
| | $ | 248 |
| | $ | 156 |
|
| |
(a) | Presented net of reclassification adjustments and tax impacts, which are not significant in any period presented. Reclassification adjustments related to benefit plans are generally reclassified, as part of net periodic pension cost, into Cost of sales, Selling, general and administrative expenses, and/or Research and development expenses, as appropriate, in the condensed consolidated and combined statements of income. |
See notes to condensed consolidated and combined financial statements.
2 |
ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
|
| | | | | | | | |
| | June 30, |
| | December 31, |
|
| | 2013(a) |
| | 2012(a) |
|
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA) | | (Unaudited) |
| | |
Assets | | | | |
Cash and cash equivalents | | $ | 369 |
| | $ | 317 |
|
Accounts receivable, less allowance for doubtful accounts of $34 in 2013 and $49 in 2012 | | 1,137 |
| | 900 |
|
Inventories | | 1,257 |
| | 1,345 |
|
Current deferred tax assets | | 92 |
| | 101 |
|
Other current assets | | 227 |
| | 201 |
|
Total current assets | | 3,082 |
| | 2,864 |
|
Property, plant and equipment, less accumulated depreciation of $974 in 2013 and $1,011 in 2012 | | 1,252 |
| | 1,241 |
|
Goodwill | | 982 |
| | 985 |
|
Identifiable intangible assets, less accumulated amortization | | 834 |
| | 868 |
|
Noncurrent deferred tax assets | | 54 |
| | 216 |
|
Other noncurrent assets | | 57 |
| | 88 |
|
Total assets | | $ | 6,261 |
| | $ | 6,262 |
|
| | | | |
Liabilities and Equity | | | | |
Short-term borrowings, including current portion of allocated long-term debt in 2012 | | $ | 12 |
| | $ | 73 |
|
Accounts payable | | 587 |
| | 319 |
|
Accrued compensation and related items | | 157 |
| | 194 |
|
Income taxes payable | | 83 |
| | 30 |
|
Dividends payable | | 33 |
| | — |
|
Other current liabilities | | 449 |
| | 507 |
|
Total current liabilities | | 1,321 |
| | 1,123 |
|
Long-term debt | | 3,640 |
| | — |
|
Allocated long-term debt | | — |
| | 509 |
|
Noncurrent deferred tax liabilities | | 308 |
| | 323 |
|
Other taxes payable | | 38 |
| | 159 |
|
Other noncurrent liabilities | | 131 |
| | 107 |
|
Total liabilities | | 5,438 |
| | 2,221 |
|
Commitments and contingencies | |
| |
|
Business unit equity | | — |
| | 4,183 |
|
Stockholders' equity: | | | | |
Common stock, $0.01 par value: 5,000 authorized, 500 issued and outstanding | | 5 |
| | — |
|
Additional paid-in capital | | 869 |
| | — |
|
Retained earnings | | 109 |
| | — |
|
Accumulated other comprehensive loss | | (183 | ) | | (157 | ) |
Total Zoetis Inc. equity | | 800 |
| | 4,026 |
|
Equity attributable to noncontrolling interests | | 23 |
| | 15 |
|
Total equity | | 823 |
| | 4,041 |
|
Total liabilities and equity | | $ | 6,261 |
| | $ | 6,262 |
|
(a) The condensed consolidated balance sheet as of June 30, 2013 has been prepared under a different basis of presentation than the condensed combined
balance sheet as of December 31, 2012, which significantly impacts comparability. See Note 3. Basis of Presentation.
See notes to condensed consolidated and combined financial statements.
3 |
ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Zoetis | | | | |
| | | | | | | | | | Accumulated |
| | Equity |
| | |
| | Business |
| | | | Additional |
| | | | Other |
| | Attributable to |
| | |
| | Unit |
| | Common |
| | Paid-in |
| | Retained |
| | Comprehensive |
| | Noncontrolling |
| | Total |
|
(MILLIONS OF DOLLARS) | | Equity(a) |
| | Stock(b) |
| | Capital |
| | Earnings |
| | Loss |
| | Interests |
| | Equity |
|
Balance, December 31, 2011 | | $ | 3,785 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (65 | ) | | $ | 16 |
| | $ | 3,736 |
|
Six months ended July 1, 2012 | | | | | | | | | | | | | | |
Comprehensive income | | 284 |
| | — |
| | — |
| | — |
| | (128 | ) | | 1 |
| | 157 |
|
Share-based compensation expense | | 12 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12 |
|
Dividends declared and paid | | (62 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (62 | ) |
Net transfers between Pfizer Inc. and | | | | | | | | | | | | | | |
noncontrolling interests | | 1 |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
|
Net transfers—Pfizer Inc. | | 88 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 88 |
|
Balance, July 1, 2012 | | $ | 4,108 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (193 | ) | | $ | 16 |
| | $ | 3,931 |
|
| | | | | | | | | | | | | | |
Balance, December 31, 2012 | | $ | 4,183 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (157 | ) | | $ | 15 |
| | $ | 4,041 |
|
Six months ended June 30, 2013 | | | | | | | | | | | | | | |
Comprehensive income | | 94 |
| | — |
| | — |
| | 174 |
| | (20 | ) | | — |
| | 248 |
|
Share-based compensation expense | | 3 |
| | — |
| | 28 |
| | — |
| | — |
| | — |
| | 31 |
|
Net transfers—Pfizer Inc. | | (271 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (271 | ) |
Separation adjustments(c) | | 414 |
| | — |
| | 34 |
| | — |
| | (6 | ) | | 8 |
| | 450 |
|
Employee benefit plan contribution from Pfizer Inc.(d) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Reclassification of net liability due to Pfizer Inc.(e) | | (60 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (60 | ) |
Consideration paid to Pfizer Inc. in | | | | | | | | | | | | | | |
connection with the Separation(f) | | — |
| | — |
| | (3,551 | ) | | — |
| | — |
| | — |
| | (3,551 | ) |
Issuance of common stock to Pfizer Inc. | | | | | | | | | | | | | |
|
in connection with the Separation and | | | | | | | | | | | | | | |
reclassification of Business Unit Equity(f) | | (4,363 | ) | | 5 |
| | 4,358 |
| | — |
| | — |
| | — |
| | — |
|
Dividends declared | | — |
| | — |
| | — |
| | (65 | ) | | — |
| | — |
| | (65 | ) |
Balance, June 30, 2013 | | $ | — |
| | $ | 5 |
| | $ | 869 |
| | $ | 109 |
| | $ | (183 | ) | | $ | 23 |
| | $ | 823 |
|
| |
(a) | All amounts associated with Business Unit Equity relate to periods prior to the Separation. See Note 2A. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: The Separation. |
| |
(b) | As of June 30, 2013, there were 500,000,000 outstanding shares of common stock. |
| |
(c) | For additional information, see Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation. |
| |
(d) | Represents contributed capital from Pfizer Inc. associated with service credit continuation for certain Zoetis Inc. employees in Pfizer Inc.'s U.S. qualified defined benefit and U.S. retiree medical plans. See Note 12. Benefit Plans. |
| |
(e) | Represents the reclassification of the Receivable from Pfizer Inc. and the Payable to Pfizer Inc. from Business Unit Equity as of the Separation date. See Note 2A. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: The Separation. |
| |
(f) | Reflects the Separation transaction. See Note 2A. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: The Separation. |
See notes to condensed consolidated and combined financial statements.
4 |
ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| | | | | | | | |
| | Six Months Ended |
| | June 30, |
| | July 1, |
|
(MILLIONS OF DOLLARS) | | 2013 |
| | 2012 |
|
Operating Activities | | | | |
Net income before allocation to noncontrolling interests | | $ | 268 |
| | $ | 285 |
|
Adjustments to reconcile net income before noncontrolling interests to net cash | | | | |
provided by operating activities: | | | | |
Depreciation and amortization expense | | 102 |
| | 102 |
|
Share-based compensation expense | | 31 |
| | 12 |
|
Asset write-offs and asset impairments | | 3 |
| | 6 |
|
Deferred taxes | | (19 | ) | | (26 | ) |
Other non-cash adjustments | | (1 | ) | | (3 | ) |
Other changes in assets and liabilities, net of acquisitions and divestitures and transfers with Pfizer Inc. | | (115 | ) | | (306 | ) |
Net cash provided by operating activities | | 269 |
| | 70 |
|
Investing Activities | | | | |
Purchases of property, plant and equipment | | (80 | ) | | (55 | ) |
Acquisitions, net of cash acquired | | — |
| | (1 | ) |
Cash proceeds from the sale of property, plant and equipment | | 6 |
| | — |
|
Other investing activities | | — |
| | (3 | ) |
Net cash used in investing activities | | (74 | ) | | (59 | ) |
Financing Activities | | | | |
Increase in short-term borrowings, net | | 12 |
| | — |
|
Proceeds from issuance of long-term debt—senior notes, net of discount and fees | | 2,624 |
| | — |
|
Consideration paid to Pfizer Inc. in connection with the Separation(a) | | (2,559 | ) | | — |
|
Cash dividends paid(b) | | (33 | ) | | (62 | ) |
Other net financing activities with Pfizer Inc. | | (184 | ) | | 80 |
|
Net cash (used in)/provided by financing activities | | (140 | ) | | 18 |
|
Effect of exchange-rate changes on cash and cash equivalents | | (3 | ) | | (2 | ) |
Net increase in cash and cash equivalents | | 52 |
| | 27 |
|
Cash and cash equivalents at beginning of period | | 317 |
| | 79 |
|
Cash and cash equivalents at end of period | | $ | 369 |
| | $ | 106 |
|
| | | | |
Supplemental cash flow information | | | | |
Cash paid during the period for: | | | | |
Income taxes | | $ | 26 |
| | $ | 147 |
|
Interest | | — |
| | 23 |
|
Non-cash transactions: | | | | |
Dividends declared, not paid | | $ | 33 |
| | $ | — |
|
Zoetis Inc. senior notes transferred to Pfizer Inc. in connection with the Separation(c) | | 992 |
| | — |
|
| |
(a) | Reflects the Separation transaction. Amount is net of the non-cash portion. See Note 2A. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: The Separation. |
| |
(b) | Payments to other non-Zoetis Pfizer Inc. entities for the six months ended July 1, 2012. |
| |
(c) | Reflects the non-cash portion of the Separation transaction. See Note 2A. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: The Separation. |
See notes to condensed consolidated and combined financial statements.
5 |
ZOETIS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
Zoetis Inc. (collectively, Zoetis, the company, we, us or our) is a global leader in the discovery, development, manufacture and commercialization of animal health medicines and vaccines, with a focus on both livestock and companion animals. We organize and operate our business in four geographic regions: the United States (U.S.); Europe/Africa/Middle East (EuAfME); Canada/Latin America (CLAR); and Asia/Pacific (APAC).
We market our products in more than 120 countries, including developed markets and emerging markets. Our revenues are mostly generated in the U.S. and EuAfME. We have a diversified business, marketing products across eight core species: cattle, swine, poultry, sheep and fish (collectively, livestock) and dogs, cats and horses (collectively, companion animals); and within five major product categories (anti-infectives, vaccines, parasiticides, medicated feed additives and other pharmaceuticals).
| |
2. | The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer |
Pfizer Inc. (Pfizer) formed Zoetis to acquire, own and operate the animal health business of Pfizer. On June 24, 2013, Pfizer completed an exchange offer resulting in the full separation of Zoetis from Pfizer. For additional information see E. Exchange Offer.
In the first quarter of 2013, through a series of steps (collectively, the Separation), Pfizer transferred to us its subsidiaries holding substantially all of the assets and liabilities of its animal health business. In exchange, we transferred to Pfizer: (i) all of the issued and outstanding shares of our Class A common stock; (ii) all of the issued and outstanding shares of our Class B common stock; (iii) $1.0 billion in senior notes (see "Senior Notes Offering" below); and (iv) an amount of cash equal to substantially all of the net proceeds received in the senior notes offering (approximately $2.5 billion).
| |
B. | Adjustments Associated with the Separation |
In connection with the Separation, certain animal health assets and liabilities included in the pre-Separation balance sheet were retained by Pfizer and certain non-animal health assets and liabilities (not included in the pre-Separation balance sheet) were transferred to Zoetis. The adjustments to the historical balance sheet of Zoetis (collectively, the Separation Adjustments) representing approximately $450 million of net liabilities retained by Pfizer, were primarily related to the following:
| |
• | The removal of inventories (approximately $74 million), property, plant and equipment (approximately $28 million) and miscellaneous other net liabilities (approximately $21 million) associated with certain non-dedicated manufacturing sites that were retained by Pfizer; |
| |
• | The addition of property, plant and equipment (approximately $56 million) associated with a non-dedicated manufacturing site that was transferred to us by Pfizer (and then leased back to Pfizer under operating leases), and the removal of the inventory (approximately $46 million) and net other assets (approximately $4 million) at that site as these assets were retained by Pfizer; |
| |
• | The addition of net benefit plan liabilities (approximately $25 million); |
| |
• | The elimination of (i) noncurrent deferred tax assets (some of which were included within noncurrent deferred tax liabilities due to jurisdictional netting) related to net operating loss and tax credit carryforwards; (ii) net tax liabilities associated with uncertain tax positions; (iii) noncurrent deferred tax liabilities related to deferred income taxes on unremitted earnings; and (iv) other allocated net tax assets, all of which (approximately $49 million in net tax asset accounts) were retained by Pfizer; |
| |
• | The addition of (i) noncurrent deferred tax assets (approximately $8 million, some of which were included within noncurrent deferred tax liabilities due to jurisdictional netting) related to net benefit plan liabilities transferred to us by Pfizer; (ii) noncurrent deferred tax assets (approximately $2 million) related to net operating loss and tax credit carryforwards; and (iii) noncurrent deferred tax liabilities (approximately $2 million) related to property, plant and equipment transferred to us by Pfizer; |
| |
• | The elimination of allocated long-term debt (approximately $582 million), allocated accrued interest payable (approximately $16 million) and allocated unamortized deferred debt issuance costs (approximately $2 million) that were retained by Pfizer; |
| |
• | Certain net financial assets retained by Pfizer (approximately $45 million); |
| |
• | The removal of cash (approximately $7 million), inventories (approximately $5 million), property plant and equipment (approximately $8 million), miscellaneous other assets (approximately $3 million) and other miscellaneous liabilities (approximately $2 million) associated with non-U.S. Pfizer businesses that did not transfer to us from Pfizer; |
| |
• | The addition of net receivables from Pfizer (approximately $5 million) associated with certain foreign taxes directly resulting from certain aspects of the Separation that were the responsibility of Pfizer under the terms of the tax matters agreement, see Note 7B. Income Taxes: Tax Matters Agreement; |
| |
• | The addition of (i) inventory (approximately $15 million); (ii) net deferred tax assets (approximately $1 million); and (iii) miscellaneous other assets (approximately $5 million) transferred to us by Pfizer, and the removal of (i) property, plant and equipment (approximately $2 million); (ii) miscellaneous other liabilities (approximately $57 million), and (iii) the elimination of prepaid taxes (approximately $4 million) that were retained by Pfizer; |
| |
• | The addition of net benefit plan liabilities (approximately $16 million) associated with certain international plans that will be transferred from Pfizer to Zoetis in 2014. See Note 12. Benefit Plans. |
The Separation Adjustment associated with Accumulated Other Comprehensive Income reflects the accumulated currency translation adjustment based on the actual legal entity structure of Zoetis.
In connection with the Separation, on January 28, 2013, we issued $3.65 billion aggregate principal amount of our senior notes (the senior notes offering) in a private placement, with an original issue discount of $10 million. For additional information, see Note 9D. Financial Instruments: Senior Notes Offering.
| |
D. | Initial Public Offering (IPO) |
After the Separation, on February 6, 2013, an IPO of 99,015,000 shares of our Class A common stock (including the exercise of the underwriters' over-allotment option) at a price of $26.00 per share was completed. Pfizer retained the net proceeds from the IPO.
Immediately following the IPO, there were 99,015,000 outstanding shares of Class A common stock and 400,985,000 outstanding shares of Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Following the IPO, Pfizer owned all of the outstanding shares of our Class B Common Stock, all of which was converted to Class A common stock in connection with the Exchange Offer. See E. Exchange Offer. There are no longer any shares of our Class B Common Stock outstanding.
In connection with the IPO, we entered into certain agreements that provide a framework for an ongoing relationship with Pfizer. For additional information, see Note 17B. Transactions and Agreements with Pfizer: Agreements with Pfizer.
On May 22, 2013, Pfizer announced an exchange offer whereby Pfizer shareholders could exchange a portion of Pfizer common stock for Zoetis common stock. The exchange offer was completed on June 24, 2013, resulting in the full separation of Zoetis and the disposal of Pfizer's entire ownership and voting interest in Zoetis.
The accompanying unaudited condensed consolidated and combined financial statements were prepared following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted. Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the three and six-month periods ended May 26, 2013 and May 27, 2012.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be representative of those for the full year.
We are responsible for the unaudited condensed consolidated and combined financial statements included in this Form 10-Q. The condensed consolidated and combined financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. The information included in this interim report should be read in conjunction with the combined financial statements and accompanying notes included in the Company’s 2012 Annual Report on Form 10-K.
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A. | Basis of Presentation Prior to the Separation |
Prior to the Separation, the combined financial statements were derived from the consolidated financial statements and accounting records of Pfizer and included allocations for direct costs and indirect costs attributable to the operations of the animal health business of Pfizer. The pre-Separation financial statements and activities do not purport to reflect what the results of operations, comprehensive income/(loss), financial position, equity or cash flows would have been had we operated as a standalone public company during the period presented.
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• | The condensed combined statements of income for the three and six months ended July 1, 2012 and the pre-Separation period in the condensed consolidated statement of income include allocations from certain support functions (Enabling Functions) that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, and, to a lesser extent, business development, public affairs and procurement, among others, as Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional allocation methods (e.g., using third-party sales, headcount, etc.), depending on the nature of the services. |
Costs associated with business technology, facilities and human resources were allocated primarily using proportional allocation methods and, for legal and finance, primarily using specific identification. In all cases, for support function costs where proportional allocation methods were used, we determined whether the costs are primarily influenced by headcount (such as a significant majority of facilities and human resources costs) or by the size of the business (such as most business technology costs), and we also
determined whether the associated scope of those services provided are global, regional or local. Based on those analyses, the costs were allocated based on our share of worldwide revenues, domestic revenues, international revenues, regional revenues, country revenues, worldwide headcount, country headcount or site headcount, as appropriate.
As a result, costs associated with business technology and legal that were not specifically identified were mostly allocated based on revenue drivers and, to a lesser extent, based on headcount drivers; costs associated with finance that were not specifically identified were all allocated based on revenue drivers; and costs associated with facilities and human resources that were not specifically identified were predominantly allocated based on headcount drivers.
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• | The condensed combined statement of income for the three and six months ended July 1, 2012 and the pre-Separation period in the condensed consolidated statement of income include allocations of certain manufacturing and supply costs incurred by manufacturing plants that are shared with other Pfizer business units, Pfizer’s global external supply group and Pfizer’s global logistics and support group (collectively, Pfizer Global Supply, or PGS). These costs may include manufacturing variances and changes in the standard costs of inventory, among others, as Pfizer does not routinely allocate these costs to any of its business units. These allocations are based on either a specific identification basis or, when specific identification is not practicable, proportional allocation methods, such as animal health identified manufacturing costs, depending on the nature of the costs. |
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• | The condensed combined statement of income for the three and six months ended July 1, 2012 and the pre-Separation period in the condensed consolidated statement of income also include allocations from the Enabling Functions and PGS for restructuring charges, integration costs, additional depreciation associated with asset restructuring and implementation costs, as Pfizer does not routinely allocate these costs to any of its business units. For additional information about allocations of restructuring charges and other costs associated with acquisitions and cost-reduction/productivity initiatives, see Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives. |
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• | The condensed combined statement of income for the three and six months ended July 1, 2012 and the pre-Separation period in the condensed consolidated statement of income include an allocation of share-based compensation expense and certain other compensation expense items, such as certain fringe benefit expenses, maintained on a centralized basis within Pfizer, as Pfizer does not routinely allocate these costs to any of its business units. For additional information about allocations of share-based payments, see Note 13. Share-Based Payments. |
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• | The condensed combined balance sheet as of December 31, 2012 reflects all of the assets and liabilities of Pfizer that are either specifically identifiable or are directly attributable to Zoetis and its operations. For benefit plans, the combined balance sheets only include the assets and liabilities of benefit plans dedicated to animal health employees. For debt, see below. |
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• | The condensed combined balance sheet as of December 31, 2012 includes an allocation of long-term debt from Pfizer that was issued to partially finance the acquisition of Wyeth (including Fort Dodge Animal Health (FDAH)). The debt and associated interest-related expenses, including the effect of hedging activities, have been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. No other allocations of debt have been made as none are specifically related to our operations. |
The allocated expenses from Pfizer include the items noted below for the pre-Separation period in 2013 and the first six months of 2012.
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• | Enabling Functions operating expenses––$11 million in 2013 and $152 million in 2012 ($1 million in Cost of sales in 2012; $11 million and $123 million in Selling, general and administrative expenses in 2013 and 2012, respectively; and $28 million in Research and development expenses in 2012). |
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• | PGS manufacturing costs—approximately $12 million in 2012 (in Cost of sales). |
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• | Restructuring charges and certain acquisition-related costs—$35 million in 2012 (in Restructuring charges and certain acquisition-related costs). |
| |
• | Other costs associated with cost reduction/productivity initiatives—additional depreciation associated with asset restructuring—$2 million in 2013 (in Selling, general and administrative expenses) and $9 million in 2012 (in Research and development expenses). |
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• | Other costs associated with cost reduction/productivity initiatives—implementation costs—$1 million in 2013 and $2 million in 2012 (in Selling, general and administrative expenses). |
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• | Share-based compensation expense—approximately $3 million in 2013 and $17 million in 2012 ($1 million and $3 million in Cost of sales in 2013 and 2012, respectively; $2 million and $11 million in Selling, general and administrative expenses in 2013 and 2012, respectively; and $3 million in Research and development expenses in 2012). |
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• | Compensation-related expenses—approximately $1 million in 2013 and $11 million in 2012 ($3 million in Cost of sales in 2012; $1 million and $5 million in Selling, general and administrative expenses in 2013 and 2012, respectively; and $3 million in Research and development expenses in 2012). |
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• | Interest expense—approximately $2 million in 2013 and $16 million in 2012. |
The income tax provision in the condensed combined statement of income was calculated as if Zoetis filed a separate return.
Management believes that the allocations are a reasonable reflection of the services received or the costs incurred on behalf of Zoetis and its operations and that the condensed combined statement of income for the three and six months ended ended July 1, 2012 and the pre-Separation period in the condensed consolidated statement of income for the six months ended June 30, 2013.
Prior to the Separation, we participated in Pfizer's centralized cash management system and generally all excess cash was transferred to Pfizer on a daily basis. Cash disbursements for operations and/or investing activities were funded as needed by Pfizer. We had also participated in Pfizer's centralized hedging and offsetting programs. As such, in the combined statement of income for the three and six months ended July 1, 2012, we include the impact of Pfizer's derivative financial instruments used for offsetting changes in foreign currency rates, net of the related foreign exchange gains and losses for the portion that is deemed to be associated with the animal health operations. Such gains and losses were not material to the combined financial statement for the periods presented.
As of December 31, 2012, all balances and transactions among Zoetis and Pfizer and its subsidiaries, which can include dividends as well as other activities, are shown in Business unit equity in the combined balance sheet. As the books and records of Zoetis were not kept on a separate company basis, the determination of the average net balance due to or from Pfizer is not practicable.
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B. | Basis of Presentation After the Separation |
The unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2013 comprise the following: (i) the results of operations, comprehensive income, and cash flow amounts for the period prior to the Separation (see above), which includes allocations for direct costs and indirect costs attributable to the operations of the animal health business; and (ii) the amounts for the period after the Separation, which reflect the results of operations, comprehensive income, financial position, equity and cash flows resulting from our operation as a standalone public company.
The income tax provision prepared after the Separation is based on the actual legal entity structure of Zoetis, with certain accommodations pursuant to a tax matters agreement. For additional information, see Note 17B. Transactions and Agreements with Pfizer: Agreements with Pfizer.
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4. | Significant Accounting Policies |
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A. | New Accounting Standards |
There were no new accounting standards adopted during the first half of 2013.
Our fair value methodologies depend on the following types of inputs:
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• | Quoted prices for identical assets or liabilities in active markets (Level 1 inputs). |
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• | Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable (Level 2 inputs). |
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• | Unobservable inputs that reflect estimates and assumptions (Level 3 inputs). |
A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions.
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5. | Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives |
We incurred significant costs in connection with Pfizer’s cost-reduction initiatives (several programs initiated since 2005), and the acquisitions of Fort Dodge Animal Health (FDAH) on October 15, 2009 and King Animal Health (KAH) on January 31, 2011.
For example:
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• | in connection with the cost-reduction/productivity initiatives, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems; and |
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• | in connection with our acquisition activity, we typically incur costs and charges associated with executing the transactions, integrating the acquired operations, which may include expenditures for consulting and the integration of systems and processes, and restructuring the consolidated company, which may include charges related to employees, assets and activities that will not continue in the consolidated company. |
All operating functions can be impacted by these actions, including sales and marketing, manufacturing and research and development, as well as functions such as business technology, shared services and corporate operations.
In the fourth quarter of 2012, when we were a business unit of Pfizer, we announced a restructuring plan related to our operations in Europe. In connection with these actions, we recorded a pre-tax charge of $27 million to recognize employee termination costs. As a result of becoming a standalone public company (no longer being a majority owned subsidiary of Pfizer) and related economic consideration, we revisited this restructuring action and decided to no longer implement this restructuring plan. As such, we reversed the existing reserve of $27 million in the second quarter of 2013.
The components of costs incurred in connection with our acquisitions and restructuring initiatives follow:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, |
| | July 1, |
| | June 30, |
| | July 1, |
|
(MILLIONS OF DOLLARS) | | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
Restructuring charges and certain acquisition-related costs: | | | | | | | | |
Integration costs(a) | | $ | 10 |
| | $ | 5 |
| | $ | 14 |
| | $ | 9 |
|
Restructuring charges (benefits)(b): | |
| |
|
| |
|
| |
|
|
Employee termination costs | | (30 | ) | | 1 |
| | (27 | ) | | 3 |
|
Asset impairment charges | | — |
| | 1 |
| | — |
| | 1 |
|
Exit costs | | — |
| | — |
| | — |
| | 1 |
|
Total direct | | (20 | ) | | 7 |
| | (13 | ) | | 14 |
|
Integration costs(a) | | — |
| | 7 |
| | — |
| | 12 |
|
Restructuring charges(b): | |
| |
|
| |
|
| |
|
|
Employee termination costs | | — |
| | 9 |
| | — |
| | 14 |
|
Asset impairment charges | | — |
| | 1 |
| | — |
| | 8 |
|
Exit costs | | — |
| | — |
| | — |
| | 1 |
|
Total allocated | | — |
| | 17 |
| | — |
| | 35 |
|
Total Restructuring charges and certain acquisition-related costs | | (20 | ) | | 24 |
| | (13 | ) | | 49 |
|
| | | | | | | | |
Other costs associated with cost-reduction/productivity initiatives: | | | | | | | | |
Additional depreciation associated with asset restructuring––direct(c) | | 1 |
| | 2 |
| | 1 |
| | 5 |
|
Additional depreciation associated with asset restructuring––allocated(c) | | — |
| | — |
| | 2 |
| | 9 |
|
Implementation costs––allocated(d) | | — |
| | 1 |
| | 1 |
| | 2 |
|
Total costs associated with acquisitions and cost-reduction/productivity initiatives | | $ | (19 | ) | | $ | 27 |
| | $ | (9 | ) | | $ | 65 |
|
| |
(a) | Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and the integration of systems and processes. |
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(b) | The restructuring benefit for the three and six months ended June 30, 2013 is related to the reversal of certain employee termination expenses associated with our operations in Europe and the restructuring charges for the three and six months July 1, 2012 are primarily related to the integration of FDAH and KAH. |
The direct charges are associated with the following:
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• | For the three months ended June 30, 2013— Manufacturing/research/corporate ($30 million income). |
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• | For the six months ended June 30, 2013–– Manufacturing/research/corporate ($27 million income). |
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• | For the three months ended July 1, 2012—U.S. ($3 million), EuAfME ($1 million), and manufacturing/research/corporate ($2 million income). |
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• | For the six months ended July 1, 2012––U.S. ($3 million), EuAfME ($1 million income), CLAR ($1 million), and manufacturing/research/corporate ($2 million). |
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(c) | Additional depreciation associated with asset restructuring represents the impact of changes in the estimated lives of assets involved in restructuring actions. For the three months ended June 30, 2013, included in Cost of sales ($1 million). For the six months ended June 30, 2013, included in Cost of sales ($1 million) and Selling, general and administrative expenses ($2 million). For the three months ended July 1, 2012, included in Cost of sales ($2 million). For the six months ended July 1, 2012, included in Cost of sales ($5 million) and Research and development expenses ($9 million). |
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(d) | Implementation costs—allocated represent external, incremental costs directly related to implementing cost reduction/productivity initiatives, and primarily include expenditures related to system and process standardization and the expansion of shared services. Included in Selling, general and administrative expenses. |
The components of and changes in our direct restructuring accruals follow:
|
| | | | | | | | | | | | | | | | |
| | Employee |
| | Asset |
| | | | |
| | Termination |
| | Impairment |
| | Exit |
| | |
(MILLIONS OF DOLLARS) | | Costs |
| | Charges |
| | Costs |
| | Accrual |
|
Balance, December 31, 2012(a) | | $ | 68 |
| | $ | — |
| | $ | 6 |
| | $ | 74 |
|
Provision/(Benefit) | | (27 | ) | | — |
| | — |
| | (27 | ) |
Utilization and other(b) | | (10 | ) | | — |
| | (5 | ) | | (15 | ) |
Separation adjustment(c) | | (14 | ) | | — |
| | — |
| | (14 | ) |
Balance, June 30, 2013(a) | | $ | 17 |
| | $ | — |
| | $ | 1 |
| | $ | 18 |
|
| |
(a) | At June 30, 2013 and December 31, 2012, included in Other current liabilities ($9 million and $63 million, respectively) and Other noncurrent liabilities ($9 million and $11 million, respectively). |
| |
(b) | Includes adjustments for foreign currency translation. |
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(c) | See Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation. |
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6. | Other (Income)/Deductions—Net |
The components of Other (income)/deductions—net follow:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, |
| | July 1, |
| | June 30, |
| | July 1, |
|
(MILLIONS OF DOLLARS) | | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
Royalty-related income | | $ | (5 | ) | | $ | (7 | ) | | $ | (13 | ) | | $ | (13 | ) |
Identifiable intangible asset impairment charges | | — |
| | 3 |
| | 1 |
| | 3 |
|
Net gain on sale of assets(a) | | (6 | ) | | — |
| | (6 | ) | | — |
|
Certain legal matters, net(b) | | — |
| | (19 | ) | | — |
| | (19 | ) |
Foreign currency loss(c) | | 2 |
| | 3 |
| | 12 |
| | 3 |
|
Other, net | | (1 | ) | | — |
| | 1 |
| | — |
|
Other (income)/deductions—net | | $ | (10 | ) | | $ | (20 | ) | | $ | (5 | ) | | $ | (26 | ) |
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(a) | For the three and six months ended June 30, 2013, represents the net gain on the government-mandated sale of certain product rights in Brazil that were acquired with the FDAH acquisition in 2009. |
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(b) | For the three and six months ended July 1, 2012, represents income from a favorable legal settlement related to an intellectual property matter ($14 million) and a change in estimate for an environmental-related reserve due to a favorable settlement ($7 million) partially offset by litigation-related charges ($2 million). |
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(c) | For the six months ended June 30, 2013, primarily related to the Venezuela currency devaluation in February 2013. |
The effective tax rate was 31.6% for the second quarter of 2013, compared to 31.3% for the second quarter of 2012. The higher effective tax rate was primarily due to the impact of the non-deductibility and jurisdictional mix of certain costs incurred during the quarter related to becoming a standalone public company, partially offset by:
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• | incentive tax rulings in Belgium, effective December 31, 2012, and Singapore, effective October 29, 2012, and |
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• | changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs. |
The effective tax rate was 29.3% for the first six months of 2013, compared to 32.6% for the first six months of 2012. The lower effective tax rate was primarily attributable to:
| |
• | the aforementioned incentive tax rulings and changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs, and |
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• | a $2 million discrete income tax benefit during the first quarter of 2013 related to the 2012 U.S. research and development tax credit which was retroactively extended on January 3, 2013; |
partially offset by:
| |
• | the aforementioned impact of non-deductibility and jurisdictional mix of certain costs incurred during the second quarter related to becoming a standalone public company. |
As of the Separation date, we operate under a new standalone legal entity structure. In connection with the Separation, adjustments have been made to the income tax accounts. See Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation.
In connection with the Separation, we entered into a tax matters agreement with Pfizer that governs the parties' respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes. For additional information, see below and Note 17B. Transactions and Agreements with Pfizer: Agreements with Pfizer.
In connection with this agreement and the Separation, the activity in our income tax accounts reflects Separation Adjustments, including significant adjustments to the deferred income tax asset and liability accounts and the tax liabilities associated with uncertain tax positions. For additional information, see below and Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation.
In general, under the agreement:
| |
• | Pfizer will be responsible for any U.S. federal, state, local or foreign income taxes and any U.S. state or local non-income taxes (and any related interest, penalties or audit adjustments and including those taxes attributable to our business) reportable on a consolidated, combined or unitary return that includes Pfizer or any of its subsidiaries (and us and/or any of our subsidiaries) for any periods or portions thereof ending on or prior to December 31, 2012. We will be responsible for the portion of any such taxes for periods or |
portions thereof beginning on or after January 1, 2013, as would be applicable to us if we filed the relevant tax returns on a standalone basis.
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• | We will be responsible for any U.S. federal, state, local or foreign income taxes and any U.S. state or local non-income taxes (and any related interest, penalties or audit adjustments) that are reportable on returns that include only us and/or any of our subsidiaries, for all tax periods whether before or after the completion of the Separation. |
| |
• | Pfizer will be responsible for certain specified foreign taxes directly resulting from certain aspects of the Separation. |
We will not generally be entitled to receive payment from Pfizer in respect of any of our tax attributes or tax benefits or any reduction of taxes of Pfizer. Neither party's obligations under the agreement will be limited in amount or subject to any cap. The agreement also assigns responsibilities for administrative matters, such as the filing of returns, payment of taxes due, retention of records and conduct of audits, examinations or similar proceedings. In addition, the agreement provides for cooperation and information sharing with respect to tax matters.
Pfizer will be primarily responsible for preparing and filing any tax return with respect to the Pfizer affiliated group for U.S. federal income tax purposes and with respect to any consolidated, combined, unitary or similar group for U.S. state or local or foreign income tax purposes or U.S. state or local non-income tax purposes that includes Pfizer or any of its subsidiaries, including those that also include us and/or any of our subsidiaries. We will generally be responsible for preparing and filing any tax returns that include only us and/or any of our subsidiaries.
The party responsible for preparing and filing a given tax return will generally have exclusive authority to control tax contests related to any such tax return.
As of June 30, 2013, the total net deferred income tax liability of $165 million is included in Current deferred tax assets ($92 million), Noncurrent deferred tax assets ($54 million), Other current liabilities ($3 million) and Noncurrent deferred tax liabilities ($308 million).
As of December 31, 2012, the total net deferred income tax liability of $8 million is included in Current deferred tax assets ($101 million), Noncurrent deferred tax assets ($216 million), Other current liabilities ($2 million) and Noncurrent deferred tax liabilities ($323 million).
The significant increase in the total net deferred tax liability from December 31, 2012 to June 30, 2013 is primarily attributable to the Separation Adjustments, predominantly related to deferred tax assets associated with net operating loss/credit carry forwards and deferred tax liabilities associated with unremitted earnings that were retained by Pfizer. See Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation.
As of June 30, 2013, the tax liabilities associated with uncertain tax positions of $35 million (exclusive of interest related to uncertain tax positions of $9 million) were included in Noncurrent deferred tax assets ($6 million) and Other taxes payable ($29 million).
As of December 31, 2012, the tax liabilities associated with uncertain tax positions of $144 million (exclusive of interest related to uncertain tax positions of $17 million) were included in Noncurrent deferred tax assets ($6 million) and Other taxes payable ($138 million).
The significant decrease in the tax liabilities associated with uncertain tax positions from December 31, 2012 to June 30, 2013 is primarily attributable to the Separation Adjustments predominantly related to liabilities retained by Pfizer. See Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation.
Our tax liabilities for uncertain tax positions relate primarily to issues common among multinational corporations. Any settlements or statute of limitations expirations could result in a significant decrease in our uncertain tax positions. Substantially all of these unrecognized tax benefits, if recognized, would impact our effective income tax rate. We do not expect that within the next twelve months any of our uncertain tax positions could significantly decrease as a result of settlements with taxing authorities or the expiration of the statutes of limitations. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of uncertain tax positions and potential tax benefits may not be representative of actual outcomes, and any variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution. Finalizing audits with the relevant taxing authorities can include formal administrative and legal proceedings, and, as a result, it is difficult to estimate the timing and range of possible changes related to our uncertain tax positions, and such changes could be significant.
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8. | Accumulated Other Comprehensive Loss |
Changes, net of tax, in accumulated other comprehensive loss follow:
|
| | | | | | | | | | | | |
| | Currency Translation |
| | | | Accumulated |
|
| | Adjustment |
| | Benefit Plans |
| | Other |
|
| | Net Unrealized |
| | Actuarial |
| | Comprehensive |
|
(MILLIONS OF DOLLARS) | | Gains/(Losses) |
| | Losses |
| | Income/(Loss) |
|
Balance, December 31, 2012 | | $ | (152 | ) | | $ | (5 | ) | | $ | (157 | ) |
Other comprehensive income/(loss), net of tax | | (17 | ) | | (3 | ) | | (20 | ) |
Separation adjustments(a) | | (7 | ) | | 1 |
| | (6 | ) |
Balance, June 30, 2013 | | $ | (176 | ) | | $ | (7 | ) | | $ | (183 | ) |
| |
(a) | See Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation. |
In December 2012, we entered into a revolving credit agreement with a syndicate of banks providing for a five-year $1.0 billion senior unsecured revolving credit facility (the credit facility), which became effective in February 2013 upon the completion of the IPO and expires in December 2017. The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio (the ratio of consolidated net debt as of the end of the period to consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA) for such period) of 4.35:1 for fiscal year 2013, 3.95:1 for fiscal year 2014, 3.50:1 for fiscal year 2015 and 3.00:1 thereafter. The credit facility also contains a financial covenant requiring that we maintain a minimum interest coverage ratio (the ratio of EBITDA at the end of the period to interest expense for such period) of 3.50:1. In addition, the credit facility contains other customary covenants. Subject to certain conditions, we have the right to increase the credit facility to up to $1.5 billion. There are currently no borrowings outstanding.
| |
B. | Commercial Paper Program |
In February 2013, we entered into a commercial paper program with a capacity of up to $1.0 billion. As of June 30, 2013, no commercial paper has been issued under this program.
There were short-term borrowings of $12 million as of June 30, 2013. As of December 31, 2012 the current portion of allocated debt from Pfizer was $73 million. The weighted-average interest rate on short-term borrowings outstanding, including the current portion of allocated debt, was 4.6% and 3.7% as of June 30, 2013 and December 31, 2012, respectively.
On January 28, 2013, we issued $3.65 billion aggregate principal amount of our senior notes (the senior notes offering) in a private placement, with an original issue discount of $10 million. The senior notes are comprised of $400 million aggregate principal amount of our 1.150% senior notes due 2016, $750 million aggregate principal amount of our 1.875% Senior Notes due 2018, $1.35 billion aggregate principal amount of our 3.250% senior notes due 2023 and $1.15 billion aggregate principal amount of our 4.700% senior notes due 2043.
We sold $2.65 billion aggregate principal amount of our senior notes through the initial purchasers in the senior notes offering and Pfizer transferred $1.0 billion aggregate principal amount of our senior notes to certain of the initial purchasers, who sold such senior notes in the senior notes offering.
The senior notes are governed by an indenture and supplemental indenture (collectively, the indenture) between us and Deutsche Bank Trust Company Americas, as trustee. The indenture contains certain covenants, including limitations on our and certain of our subsidiaries' ability to incur liens or engage in sale-leaseback transactions. The indenture also contains restrictions on our ability to consolidate, merge or sell substantially all of our assets. In addition, the indenture contains other customary terms, including certain events of default, upon the occurrence of which the senior notes may be declared immediately due and payable.
Pursuant to the indenture, we are able to redeem the senior notes, in whole or in part, at any time by paying a “make whole” premium, plus accrued and unpaid interest to, but excluding, the date of redemption. Pursuant to our tax matters agreement with Pfizer, we will not be permitted to redeem the 2023 notes pursuant to this optional redemption provision, except under limited circumstances. Upon the occurrence of a change of control of us and a downgrade of the senior notes below an investment grade rating by each of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, we are, in certain circumstances, required to make an offer to purchase each of the senior notes at a price equal to 101% of the aggregate principal amount of the senior notes together with accrued and unpaid interest to, but excluding, the date of repurchase.
The components of our long-term debt follow:
|
| | | | | | | | |
| | June 30, |
| | December 31, |
|
(MILLIONS OF DOLLARS) | | 2013 |
| | 2012 |
|
Allocated long-term debt | | $ | — |
| | $ | 509 |
|
1.150% Senior Notes due 2016 | | 400 |
| | — |
|
1.875% Senior Notes due 2018 | | 750 |
| | — |
|
3.250% Senior Notes due 2023 | | 1,350 |
| | — |
|
4.700% Senior Notes due 2043 | | 1,150 |
| | — |
|
| | 3,650 |
| | 509 |
|
Unamortized debt discount | | (10 | ) | | — |
|
Long-term debt / Allocated long-term debt | | $ | 3,640 |
| | $ | 509 |
|
As of June 30, 2013, the fair value of our senior notes was $3,462 million and has been determined using a third-party matrix-pricing model that uses significant inputs derived from or corroborated by observable market data and Zoetis’s credit rating (Level 2 inputs). At December 31, 2012, the fair value of our allocated long-term debt was $732 million, and has been determined using a third-party matrix-pricing model that uses significant inputs derived from or corroborated by observable market data and Pfizer’s credit rating (Level 2 inputs). See Note 4B. Significant Accounting Policies: Fair Value. The fair value of the allocated long-term debt as of December 31, 2012 does not purport to reflect the fair value that might have been determined if Zoetis had operated as a standalone public company for the periods presented or if we had used Zoetis’s credit rating in the calculation.
The principal amount of long-term debt outstanding as of June 30, 2013 matures in the following years:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | After |
| | |
(MILLIONS OF DOLLARS) | | 2014 |
| | 2015 |
| | 2016 |
| | 2017 |
| | 2018 |
| | 2018 |
| | Total |
|
Maturities | | $ | — |
| | $ | — |
| | $ | 400 |
| | $ | — |
| | $ | 750 |
| | $ | 2,500 |
| | $ | 3,650 |
|
| |
E. | Derivative Financial Instruments |
Foreign Exchange Risk
A significant portion of our revenues, earnings and net investment in foreign affiliates is exposed to changes in foreign exchange rates. Prior to the IPO, as a business unit of Pfizer and under Pfizer's global cash management system, our foreign exchange risk was managed through Pfizer. Following the Separation, we seek to manage our foreign exchange risk, in part, through operational means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. Depending on market conditions, foreign exchange risk is also managed through the use of derivative financial instruments. These financial instruments serve to protect net income against the impact of the translation into U.S. dollars of certain foreign exchange-denominated transactions. As of June 30, 2013, the aggregate notional amount of foreign exchange derivative financial instruments offsetting foreign currency exposures was $1.3 billion. The derivative financial instruments primarily offset exposures in the euro, the Brazilian real and the Australian dollar. The vast majority of the foreign exchange derivative financial instruments mature within 60 days and all mature within 180 days.
All derivative contracts used to manage foreign currency risk are measured at fair value and are reported as assets or liabilities on the condensed consolidated balance sheet. The company has not designated the foreign currency forward-exchange contracts 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.
Fair Value of Derivative Instruments
The location and fair values of derivative instruments not designated as hedging instruments at June 30, 2013 are as follows:
|
| | | | |
| | Fair Value of |
|
(MILLIONS OF DOLLARS) | Balance Sheet Location | Derivatives |
|
Foreign currency forward-exchange contracts | Other current assets | $ | 4 |
|
Foreign currency forward-exchange contracts | Other current liabilities | (1 | ) |
Total foreign currency forward-exchange contracts |
| $ | 3 |
|
We use a market approach in valuing financial instruments on a recurring basis. Our derivative financial instruments measured at fair value on a recurring basis use Level 2 inputs in the calculation of fair value. See Note 4B. Significant Accounting Policies: Fair Value.
The net gains incurred on foreign currency forward-exchange contracts not designated as hedging instruments were $10 million and $19 million for the three and six months ended June 30, 2013, respectively, and are recorded in Other (income)/deductions—net.
The components of inventory follow:
|
| | | | | | | | |
| | June 30, |
| | December 31, |
|
(MILLIONS OF DOLLARS) | | 2013 |
| | 2012 |
|
Finished goods | | $ | 844 |
| | $ | 799 |
|
Work-in-process | | 227 |
| | 332 |
|
Raw materials and supplies | | 186 |
| | 214 |
|
Inventories | | $ | 1,257 |
| | $ | 1,345 |
|
| |
11. | Goodwill and Other Intangible Assets |
The components of and changes in the carrying amount of goodwill follow:
|
| | | | | | | | | | | | | | | | | | | | |
(MILLIONS OF DOLLARS) | | U.S. |
| | EuAfME |
| | CLAR |
| | APAC |
| | Total |
|
Balance, December 31, 2012 | | $ | 502 |
| | $ | 157 |
| | $ | 163 |
| | $ | 163 |
| | $ | 985 |
|
Other(a) | | (2 | ) | | (1 | ) | | — |
| | — |
| | (3 | ) |
Balance, June 30, 2013 | | $ | 500 |
| | $ | 156 |
| | $ | 163 |
| | $ | 163 |
| | $ | 982 |
|
| |
(a) | Primarily reflects adjustments for foreign currency translation. |
The gross goodwill balance was $1,518 million as of June 30, 2013 and $1,521 million as of December 31, 2012. Accumulated goodwill impairment losses (generated entirely in fiscal 2002) were $536 million as of June 30, 2013 and December 31, 2012.
| |
B. | Other Intangible Assets |
The components of identifiable intangible assets follow:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of June 30, 2013 | | As of December 31, 2012 |
| | | | | | Identifiable |
| | | | | | Identifiable |
|
| | | | | | Intangible |
| | | | | | Intangible |
|
| | Gross |
| | | | Assets, Less |
| | Gross |
| | | | Assets, Less |
|
| | Carrying |
| | Accumulated |
| | Accumulated |
| | Carrying |
| | Accumulated |
| | Accumulated |
|
(MILLIONS OF DOLLARS) | | Amount |
| | Amortization |
| | Amortization |
| | Amount |
| | Amortization |
| | Amortization |
|
Finite-lived intangible assets: | | | | | | | | | | | | |
Developed technology rights | | $ | 764 |
| | $ | (196 | ) | | $ | 568 |
| | $ | 762 |
| | $ | (173 | ) | | $ | 589 |
|
Brands | | 216 |
| | (94 | ) | | 122 |
| | 216 |
| | (88 | ) | | 128 |
|
Trademarks and trade names | | 53 |
| | (36 | ) | | 17 |
| | 54 |
| | (36 | ) | | 18 |
|
Other | | 121 |
| | (115 | ) | | 6 |
| | 122 |
| | (115 | ) | | 7 |
|
Total finite-lived intangible assets | | 1,154 |
| | (441 | ) | | 713 |
| | 1,154 |
| | (412 | ) | | 742 |
|
Indefinite-lived intangible assets: | | | | | | | | | | | | |
Brands | | 39 |
| | — |
| | 39 |
| | 39 |
| | — |
| | 39 |
|
Trademarks and trade names | | 67 |
| | — |
| | 67 |
| | 67 |
| | — |
| | 67 |
|
In-process research and development | | 15 |
| | — |
| | 15 |
| | 20 |
| | — |
| | 20 |
|
Total indefinite-lived intangible assets | | 121 |
| | — |
| | 121 |
| | 126 |
| | — |
| | 126 |
|
Identifiable intangible assets | | $ | 1,275 |
| | $ | (441 | ) | | $ | 834 |
| | $ | 1,280 |
| | $ | (412 | ) | | $ | 868 |
|
Amortization expense related to 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 it benefits multiple business functions. Amortization expense related to acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, general and administrative expenses or Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $16 million and $19 million for the three months ended June 30, 2013 and July 1, 2012, respectively, and $31 million and $35 million for the six months ended June 30, 2013 and July 1, 2012, respectively.
Prior to the Separation from Pfizer, employees who met certain eligibility requirements participated in various defined benefit pension plans and postretirement plans administered and sponsored by Pfizer. Effective December 31, 2012, our employees ceased to participate in the Pfizer U.S. qualified defined benefit and U.S. retiree medical plans, and liabilities associated with our employees under these plans were retained by Pfizer. Pfizer is continuing to credit certain employees' service with Zoetis generally through December 31, 2017 (or termination of employment from Zoetis, if earlier) for certain early retirement benefits with respect to Pfizer's U.S. defined benefit pension and retiree medical plans. In connection with the employee matters agreement, Zoetis will be responsible for payment of three-fifths of the total cost of the service credit continuation (approximately $38 million) for these plans and Pfizer will fund the remaining two-fifths of the total cost (approximately $25 million). The $25 million capital contribution from Pfizer and corresponding contra-equity account (which will be reduced as the service credit continuation is incurred), is included in Employee benefit plan contribution from Pfizer Inc. in the Condensed Consolidated and Combined Statements of Equity at June 30, 2013. The amount of the service cost continuation payment to be paid by Zoetis to Pfizer was determined and fixed based on an actuarial assessment of the value of the grow-in benefits and will be paid in equal installments over a period of ten years. Pension and postretirement benefit expense associated with the extended service for certain employees in the U.S. plans, totaled approximately $2 million and $4 million for the three and six months ended June 30, 2013, respectively.
Prior to the Separation from Pfizer, employees in the U.S. who met certain eligibility requirements participated in a supplemental (non-qualified) savings plan sponsored by Pfizer. In the second quarter of 2013, Pfizer transferred the supplemental savings plan liability of approximately $14 million, cash of $9 million and a deferred tax asset of $5 million associated with employees transferred to us.
As part of the Separation, certain Separation Adjustments (see Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation) were made to transfer the assets and liabilities of certain international defined benefit pension plans including Austria, France, Germany, Greece, Italy, Mexico, South Africa, Taiwan and Thailand, to Zoetis in the first quarter of 2013, and we assumed the liabilities allocable to employees transferring to us. Prior to the Separation, these benefit plans were accounted for as multi-employer plans. Also, as part of the Separation Adjustments, a benefit plan in Germany was retained by Pfizer. The net obligation of the transferred plans totaled $25 million. At June 30, 2013, the projected benefit obligation and fair value of plan assets of the dedicated international pension plans in the Netherlands, Germany, India and Korea, as well as those plans transferred in the first quarter of 2013, were $64 million and $35 million, respectively. In the second quarter of 2013, a net liability of approximately $16 million was recognized for the pension obligations less the fair value of plan assets associated with additional defined benefit pension plans in certain international locations that will be transferred to us in 2014, in accordance with the applicable local separation agreements.
Pension expense associated with dedicated international pension plans was approximately $1 million and $2 million for the three and six months ended June 30, 2013, respectively. Pension expense associated with international benefit plans accounted for as multi-employer plans was approximately $2 million and $5 million for the three and six months ended June 30, 2013, respectively.
For the second quarter ended June 30, 2013, contributions to the dedicated international benefits plans and the international plans accounted for as multi-employer plans were $1 million and $3 million, respectively. For the six months ended June 30, 2013, contributions to the dedicated international benefits plans and the international plans accounted for as multi-employer plans were $1 million and $5 million, respectively. We expect to contribute approximately $8 million to these plans in 2013.
| |
A. | Zoetis 2013 Equity and Incentive Plan |
In January 2013, the Zoetis 2013 Equity and Incentive Plan (Equity Plan) became effective. The principal types of stock-based awards available under the Equity Plan may include, but are not limited to, the following:
| |
• | Stock Options. Stock options represent the right to purchase shares of our common stock within a specified period of time at a specified price. The exercise price for a stock option will be not less than 100% of the fair market value of the common stock on the date of grant. Stock options will have a contractual maximum term of ten years from the date of grant. Stock options granted may include those intended to be “incentive stock options” within the meaning of Section 422 of the Code. |
| |
• | Restricted Stock and Restricted Stock Units (RSUs). Restricted stock is a share of our common stock that is subject to a risk of forfeiture or other restrictions that will lapse subject to the recipient's continued employment, the attainment of performance goals, or both. Restricted stock units represent the right to receive shares of our common stock in the future (or cash determined by reference to the value of our common stock), subject to the recipient's continued employment, the attainment of performance goals, or both. |
| |
• | Performance-Based Awards. Performance awards will require satisfaction of pre-established performance goals, consisting of one or more business criteria and a targeted performance level with respect to such criteria as a condition of awards vesting or being settled. Performance may be measured over a period of any length specified but not less than one year. |
| |
• | Other Equity-Based or Cash-Based Awards. Our Compensation Committee is authorized to grant awards in the form of other equity-based awards or other cash-based awards, as deemed to be consistent with the purposes of the Equity Plan. The maximum value of the aggregate payment to be paid to any participant with respect to cash-based awards under the Equity Plan in respect of an annual performance period will be $10 million. |
In order to provide long-term incentives to, and facilitate the retention of, our employees, we granted stock options (or other awards as appropriate with respect to our employees in non-U.S. jurisdictions) and/or restricted stock units under the Equity Plan on January 31, 2013 and February 1, 2013, respectively, to 1,700 of our employees. These awards will vest on the applicable three year anniversary date.
| |
B. | Share-Based Compensation Expense |
The components of share-based compensation expense follow:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, |
| | July 1, |
| | June 30, |
| | July 1, |
|
(MILLIONS OF DOLLARS) | | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |
|
Stock option expense | | $ | 2 |
| | $ | — |
| | $ | 4 |
| | $ | — |
|
RSU expense | | 1 |
| | — |
| | 2 |
| | — |
|
Pfizer stock benefit plans—direct | | 17 |
| | 6 |
| | 25 |
| | 12 |
|
Share-based compensation expense—direct | | 20 |
| | 6 |
| | 31 |
| | 12 |
|
Share-based compensation expense—indirect | | — |
| | 3 |
| | — |
| | 5 |
|
Share-based compensation expense—total | | $ | 20 |
| | $ | 9 |
| | $ | 31 |
| | $ | 17 |
|
Stock options are accounted for using a fair-value-based method at the date of grant in the consolidated statement of income. The values determined through this fair-value-based method generally are amortized on a straight-line basis over the vesting term into Cost of sales, Selling, general and administrative expenses, or Research and development expenses, as appropriate.
Eligible employees may receive Zoetis stock option grants. Zoetis stock options granted vest after three years of continuous service from the grant date and have a contractual term of 10 years.
The fair-value-based method for valuing each Zoetis stock option grant on the grant date uses the Black-Scholes-Merton option-pricing model, which incorporates a number of valuation assumptions noted in the following table, shown at their weighted-average values:
|
| | | |
| | Six Months |
|
| | Ended |
|
| | June 30, 2013 |
|
Expected dividend yield(a) | | 1.0 | % |
Risk-free interest rate(b) | | 1.29 | % |
Expected stock price volatility(c) | | 28.2 | % |
Expected term(d) (years) | | 6.5 |
|
| |
(a) | Determined using a constant dividend yield during the expected term of the Zoetis stock option. |
| |
(b) | Determined using the interpolated yield on U.S. Treasury zero-coupon issues. |
| |
(c) | Determined using implied volatility. |
| |
(d) | Determined using expected exercise and post-vesting termination patterns. |
The following table provides an analysis of stock option activity for the six months ended June 30, 2013:
|
| | | | | | | | | | | | | | |
| | | |
|
| | Weighted-Average |
| | |
| | | | Weighted-Average |
| | Remaining |
| | Aggregate |
|
| | | | Exercise Price |
| | Contractual Term |
| | Intrinsic Value(a) |
|
| | Shares |
| | Per Share |
| | (Years) |
| | (MILLIONS) |
|
Outstanding, December 31, 2012 | | — |
| | $ | — |
| | | | |
Granted | | 2,948,882 |
| | 26.05 |
| | | | |
Forfeited | | (25,894 | ) | | 26.00 |
| | | | |
Outstanding, June 30, 2013 | | 2,922,988 |
| | $ | 26.05 |
| | 9.6 |
| | $ | 14 |
|
Exercisable, June 30, 2013 | | — |
| | — |
| | — |
| | — |
|
| |
(a) | Market price of underlying Zoetis common stock less exercise price. |
The following table summarizes data related to stock option activity:
|
| | | | |
| | Six Months |
|
| | Ended/As of |
|
(MILLIONS OF DOLLARS, EXCEPT PER STOCK OPTION AMOUNTS) | | June 30, 2013 |
|
Weighted-average grant date fair value per stock option | | $ | 7.02 |
|
Total compensation cost related to nonvested stock options not yet recognized, pre-tax | | $ | 16 |
|
Weighted-average period over which stock option compensation is expected to be recognized (years) | | 2.0 |
|
| |
D. | Restricted Stock Units (RSUs) |
RSUs are accounted for using a fair-value-based method that utilizes the closing price of Zoetis common stock on the date of grant. In general, the units vest after three years of continuous service from the grant date and the values determined using the fair-value-based method are amortized on a straight-line basis over the vesting term into Cost of sales, Selling, general and administrative expenses, or Research and development expenses, as appropriate.
|
| | | | | | | |
| | | | Weighted-Average |
|
| | | | Grant Date |
|
| | | | Fair Value |
|
| | Shares |
| | Per Share |
|
Nonvested, December 31, 2012 | | — |
| | $ | — |
|
Granted | | 808,243 |
| | 26.13 |
|
Forfeited | | (7,226 | ) | | 26.00 |
|
Nonvested, June 30, 2013 | | 801,017 |
| | $ | 26.13 |
|
The follow table provides data related to RSU activity:
|
| | | | |
| | Six Months |
|
| | Ended/As of |
|
(MILLIONS OF DOLLARS) | | June 30, 2013 |
|
Total compensation cost related to nonvested RSU awards not yet recognized, pre-tax | | $ | 19 |
|
Weighted-average period over which RSU cost is expected to be recognized (years) | | 2.6 |
|
| |
E. | Treatment of Outstanding Pfizer Equity Awards |
Following the IPO, the equity awards previously granted to our employees by Pfizer continued to vest, and service with Zoetis counted as service with Pfizer for all purposes. On June 24, 2013, Pfizer completed the exchange offer whereby it disposed of all of the shares of common stock of Zoetis owned by Pfizer. Pfizer accelerated the vesting of, and in some cases the settlement of, on a pro-rated basis, outstanding Pfizer RSUs, Total Shareholder Return Units (TSRUs) and Performance Share Awards (PSAs), subject, in each case, to the requirements of Section 409A of the U.S. Internal Revenue Code, the terms of the 2004 Pfizer Stock Plan and the applicable award agreements and any outstanding deferral elections. In addition, unvested Pfizer stock options accelerated in full and, employees generally have the ability to exercise the stock options until the earlier of (i) June 23, 2016 (three years from Pfizer's completion of the exchange offer), (ii) termination of employee from Zoetis, or (iii) the expiration date of the stock option. Stock options held by employees who were retirement eligible as of June 24, 2013 will have the full term of the stock option to exercise.
The accelerated vesting of the outstanding Pfizer stock options, and the settlement, on a pro-rata basis, of other Pfizer equity awards, resulted in the recognition of additional expense for the three and six months ended June 30, 2013 of $9 million and is included in stock-based compensation. The unvested portion of Pfizer RSUs, TSRUs and PSAs were forfeited as of the completion of the exchange offer. Zoetis will make a cash payment of approximately $20 million in the third quarter of 2013, to certain non-executive Zoetis employees, based on the value of the employees' forfeited Pfizer RSUs, TSRUs and PSAs (as applicable). This amount was accrued as of June 30, 2013 and is included in the condensed consolidated statements of income as additional compensation expense for the three and six months ended June 30, 2013. Members of the Zoetis Executive Team will not receive a cash payment, but will instead be granted Zoetis RSUs in the third quarter of 2013, subject to vesting, equivalent in value to the value of the member's forfeited Pfizer RSUs, TSRUs and PSAs.
The following table presents the calculation of basic and diluted earnings per share:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, |
| | July 1, |
| | June 30, |
| | July 1, |
|
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA) | | 2013 |
| | 2012 |
| | 2013 |
| | 2012 |