Zoetis-2015.3.29-10Q 1Q
Table of Contents




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 March 29, 2015
 
 
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 x
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
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 May 1, 2015, there were 499,964,316 shares of common stock outstanding.




Table of Contents

TABLE OF CONTENTS
 
 
 
 
Page
 
Item 1.
 
 
 
 
Condensed Consolidated Statements of Income (Unaudited)
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
 
 
Condensed Consolidated (Unaudited) Balance Sheets
 
 
 
Condensed Consolidated Statements of Equity (Unaudited)
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
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.
 
 
 




Table of Contents

PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements

ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

 
 
Three Months Ended
 
 
March 29,

 
March 30,

(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
 
2015

 
2014

Revenue
 
$
1,102

 
$
1,097

Costs and expenses:
 
 
 
 
Cost of sales(a)
 
394

 
379

Selling, general and administrative expenses(a)
 
354

 
356

Research and development expenses(a)
 
80

 
87

Amortization of intangible assets(a)
 
15

 
15

Restructuring charges and certain acquisition-related costs
 
1

 
3

Interest expense, net of capitalized interest
 
28

 
29

Other (income)/deductions—net
 

 
1

Income before provision for taxes on income
 
230

 
227

Provision for taxes on income
 
65

 
72

Net income before allocation to noncontrolling interests
 
165

 
155

Less: Net income attributable to noncontrolling interests
 

 

Net income attributable to Zoetis Inc.
 
$
165

 
$
155

Earnings per share attributable to Zoetis Inc. stockholders:
 
 
 
 
 Basic
 
$
0.33

 
$
0.31

 Diluted
 
$
0.33

 
$
0.31

Weighted-average common shares outstanding:
 
 
 
 
 Basic
 
501.146

 
500.231

 Diluted
 
503.224

 
500.702

Dividends declared per common share
 
$
0.083

 
$
0.072

(a) 
Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as these intangible assets benefit multiple business functions. Amortization expense related to finite-lived acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, general and administrative expenses or Research and development expenses, as appropriate, in the condensed consolidated statements of income.

See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

 
 
Three Months Ended
 
 
March 29,

 
March 30,

(MILLIONS OF DOLLARS)
 
2015

 
2014

Net income before allocation to noncontrolling interests
 
$
165

 
$
155

Other comprehensive income/(loss), net of taxes and reclassification adjustments:
 
 
 
 
Foreign currency translation adjustments, net
 
(118
)
 
(11
)
Benefit plans: Actuarial gains, net(a)
 
1

 

                       Plan settlement, net(b)
 

 
3

Total other comprehensive loss, net of tax
 
(117
)
 
(8
)
Comprehensive income before allocation to noncontrolling interests
 
48

 
147

Less: Comprehensive income attributable to noncontrolling interests
 
1

 

Comprehensive income attributable to Zoetis Inc.
 
$
47

 
$
147

(a) 
Presented net of reclassification adjustments and tax impacts, which are not significant in any period presented. Reclassification adjustments related to benefit plans are generally reclassified, as part of net periodic pension cost, into Cost of sales, Selling, general and administrative expenses, and/or Research and development expenses, as appropriate, in the condensed consolidated statements of income.
(b) Reflects the 2014 settlement charge associated with the 2012 sale of our Netherlands manufacturing facility which was recorded to Other (income)/deductions—net. See Note 12. Benefit Plans for additional information.
 

See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 
 
March 29,

 
December 31,

 
 
2015

 
2014

(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
 
(Unaudited)

 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
559

 
$
882

Accounts receivable, less allowance for doubtful accounts of $31 in 2015 and $32 in 2014
 
905

 
980

Inventories
 
1,346

 
1,289

Current deferred tax assets
 
87

 
109

Other current assets
 
213

 
205

Total current assets
 
3,110

 
3,465

Property, plant and equipment, less accumulated depreciation of $1,155 in 2015 and $1,145 in 2014
 
1,301

 
1,318

Goodwill
 
1,169

 
976

Identifiable intangible assets, less accumulated amortization
 
735

 
727

Noncurrent deferred tax assets
 
57

 
54

Other noncurrent assets
 
58

 
67

Total assets
 
$
6,430

 
$
6,607

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Short-term borrowings
 
$
2

 
$
7

Current portion of long-term debt
 
400

 

Accounts payable
 
256

 
290

Dividends payable
 
42

 
42

Accrued expenses
 
426

 
475

Accrued compensation and related items
 
173

 
238

Income taxes payable
 
41

 
26

Other current liabilities
 
30

 
8

Total current liabilities
 
1,370

 
1,086

Long-term debt
 
3,243

 
3,643

Noncurrent deferred tax liabilities
 
256

 
277

Other taxes payable
 
57

 
57

Other noncurrent liabilities
 
199

 
207

Total liabilities
 
5,125

 
5,270

Commitments and contingencies
 

 

Stockholders' equity:
 
 
 
 
Preferred stock, $0.01 par value: 1,000,000,000 authorized, none issued
 

 

Common stock, $0.01 par value: 6,000,000,000 authorized; 501,454,917 and 501,342,267 shares issued; 500,367,604 and 501,327,524 shares outstanding at March 29, 2015, and December 31, 2014, respectively
 
5

 
5

Treasury stock, at cost, 1,087,313 and 14,743 shares of common stock at March 29, 2015, and December 31, 2014,
respectively
 
(49
)
 

Additional paid-in capital
 
969

 
958

Retained earnings
 
832

 
709

Accumulated other comprehensive loss
 
(479
)
 
(361
)
Total Zoetis Inc. equity
 
1,278

 
1,311

Equity attributable to noncontrolling interests
 
27

 
26

Total equity
 
1,305

 
1,337

Total liabilities and equity
 
$
6,430

 
$
6,607

 

See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)

 
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, 2013
 
$
5

 
$

 
$
878

 
$
276

 
$
(219
)
 
$
22

 
$
962

Three months ended March 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
155

 

 

 
155

Other comprehensive loss
 

 

 

 

 
(8
)
 

 
(8
)
Share-based compensation awards(b)
 

 

 
5

 

 

 

 
5

Defined contribution plans transactions(c)
 

 

 
21

 

 

 

 
21

Pension plan transfer from Pfizer Inc.(d) 
 

 

 
2

 

 
(2
)
 

 

Employee benefit plan contribution from Pfizer Inc.(e)
 

 

 

 

 

 

 

Dividends declared
 

 

 

 
(36
)
 

 

 
(36
)
Balance, March 30, 2014
 
$
5

 
$

 
$
906

 
$
395

 
$
(229
)
 
$
22

 
$
1,099

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
 
$
5

 
$

 
$
958

 
$
709

 
$
(361
)
 
$
26

 
$
1,337

Three months ended March 29, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
165

 

 

 
165

Other comprehensive loss
 

 

 

 

 
(118
)
 
1

 
(117
)
Share-based compensation awards (b)
 

 
(2
)
 
10

 

 

 

 
8

Treasury stock acquired(f)
 

 
(47
)
 

 

 

 

 
(47
)
Employee benefit plan contribution from Pfizer Inc.(e)
 

 

 
1

 

 

 

 
1

Dividends declared
 

 

 

 
(42
)
 

 

 
(42
)
Balance, March 29, 2015
 
$
5

 
$
(49
)
 
$
969

 
$
832

 
$
(479
)
 
$
27

 
$
1,305

(a) 
As of March 29, 2015, and March 30, 2014, there were 500,367,604 and 500,738,620 outstanding shares of common stock, respectively, and 1,087,313 and 6,763 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) 
Includes the issuance of shares of Zoetis Inc. common stock and the reacquisition of shares of treasury stock associated with the vesting of employee share-based awards. For additional information, see Note 13. Share-Based Payments and Note. 14. Stockholders' Equity.
(c) 
Reflects company matching and profit-sharing contributions funded through the issuance of shares of Zoetis Inc. common stock. For additional information, see Note 14. Stockholders' Equity.
(d) 
Reflects the 2014 transfers of defined benefit pension plans from Pfizer Inc. and the associated reclassification from Additional Paid in Capital to Accumulated Other Comprehensive Loss. See Note 12. Benefit Plans.
(e) 
Represents contributed capital from Pfizer Inc. associated with service credit continuation for certain Zoetis Inc. employees in Pfizer Inc.'s U.S. qualified defined benefit and U.S. retiree medical plans. See Note 12. Benefit Plans.
(f) 
Reflects the acquisition of treasury shares in connection with the Share Repurchase Program. For additional information, see Note 14. Stockholders' Equity.





See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 
 
Three Months Ended
 
 
March 29,

 
March 30,

(MILLIONS OF DOLLARS)
 
2015

 
2014

Operating Activities
 
 
 
 
Net income before allocation to noncontrolling interests
 
$
165

 
$
155

Adjustments to reconcile net income before noncontrolling interests to net cash provided by/(used in) operating activities:
 
 
 
 
Depreciation and amortization expense
 
48

 
50

Share-based compensation expense
 
10

 
5

Asset write-offs and asset impairments
 
1

 

Deferred taxes
 
(3
)
 
2

Employee benefit plan contribution from Pfizer Inc.
 
1

 

Other non-cash adjustments
 
3

 
3

Other changes in assets and liabilities, net of acquisitions and divestitures
 
(165
)
 
(238
)
Net cash provided by/(used in) operating activities
 
60

 
(23
)
Investing Activities
 
 
 
 
Purchases of property, plant and equipment
 
(45
)
 
(45
)
Asset acquisition(a)
 
(230
)
 

Net proceeds from sales of assets
 
1

 

Net cash used in investing activities
 
(274
)
 
(45
)
Financing Activities
 
 
 
 
Increase/(decrease) in short-term borrowings, net
 
(5
)
 
1

Stock-based compensation-related proceeds and excess tax benefits
 
1

 

Purchases of treasury stock
 
(48
)
 

Cash dividends paid
 
(42
)
 
(36
)
Net cash used in financing activities
 
(94
)
 
(35
)
Effect of exchange-rate changes on cash and cash equivalents
 
(15
)
 
(1
)
Net decrease in cash and cash equivalents
 
(323
)
 
(104
)
Cash and cash equivalents at beginning of period
 
882

 
610

Cash and cash equivalents at end of period
 
$
559

 
$
506

 
 
 
 
 
Supplemental cash flow information
 
 
 
 
Cash paid during the period for:
 
 
 
 
  Income taxes
 
$
52

 
$
13

  Interest, net of capitalized interest
 
58

 
59

Non-cash transactions:
 
 
 
 
     Purchases of property, plant and equipment
 
$
10

 
$

     Contingent purchase price consideration(a)
 
22

 

  Dividends declared, not paid
 
42

 
36

(a) 
Reflects the acquisition of certain assets of Abbott Animal Health. See Note 5. Acquisitions for additional information.




See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Organization
Zoetis Inc. (including its subsidiaries, 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 directly market our products in approximately 70 countries across North America, Europe, Africa, Asia, Australia and South America, and our products are sold in more than 120 countries, including developed markets and emerging markets. Our revenue is 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 and Transactions and Agreements with Pfizer
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 (the Exchange Offer) resulting in the full separation of Zoetis from Pfizer and the disposal of Pfizer's entire ownership and voting interest in Zoetis.
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. After the Separation, an initial public offering (IPO) of our common stock was completed. Pfizer retained the net proceeds from the IPO.
Zoetis had related party transactions with Pfizer through the completion of the Exchange Offer. As of the completion of the Exchange Offer, Pfizer is no longer a related party. In connection with the IPO, we entered into certain agreements that provide a framework for an ongoing relationship with Pfizer. For additional information regarding activities while Pfizer was a related party, as well as our ongoing agreements with Pfizer, see Note 19. Transactions and Agreements with Pfizer in our 2014 Annual Report on Form 10-K.
At March 29, 2015, and December 31, 2014, $22 million and $24 million, respectively, was included in Accounts receivable as receivable from Pfizer, and $40 million and $42 million, respectively, was included in Accounts payable as payable to Pfizer.
3.
Basis of Presentation
The accompanying unaudited condensed consolidated 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 United States are as of and for the three-month periods ended February 22, 2015, and February 23, 2014.
Revenue, 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 financial statements included in this Form 10-Q. The condensed consolidated 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 financial statements and accompanying notes included in our 2014 Annual Report on Form 10-K.
4.
Significant Accounting Policies
New Accounting Standards
In April 2015, the Financial Accounting Standards Board (FASB) issued an accounting standards update that requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, rather than as a deferred charge (i.e., an asset). The provisions of the new standard are effective beginning January 1, 2016, for annual and interim reporting periods. The guidance requires all prior period balance sheets to be adjusted retrospectively and early adoption is permitted. As of March 29, 2015, we had approximately $18 million of debt issuance costs recorded within Other noncurrent assets. We are currently assessing whether or not to early adopt this guidance.
In February 2015, the FASB issued an accounting standards update that provides revised guidance on whether to consolidate certain legal entities, such as limited partnerships, limited liability corporations and securitization structures. The provisions of the new standard are effective

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beginning January 1, 2016, for annual and interim reporting periods. Early adoption is permitted. We are currently assessing the potential impact that the adoption of this guidance will have on our consolidated financial statements, as well as whether or not to early adopt this guidance.
In May 2014, the FASB issued an accounting standards update that outlines a new, single comprehensive model for companies to use in accounting for revenue arising from contracts with customers. This update supersedes most current revenue recognition guidance under U.S. GAAP. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance includes a five-step model for determining how, when and how much revenue should be recognized. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The provisions of the new standard are effective beginning January 1, 2017, for annual and interim reporting periods. Early adoption is not permitted. The new standard allows for either full retrospective or modified retrospective transition upon adoption. We continue to assess the transition method we will elect for adoption as well as the potential impact that adopting this new guidance will have on our consolidated financial statements.
5.
Acquisitions
Acquisition of Abbott Animal Health
On February 10, 2015, we completed the purchase of certain assets of Abbott Animal Health (AAH), a subsidiary of Abbott Laboratories (Abbott). AAH is a companion animal health business focused on the veterinary surgical suite. The purchase expands our companion animal product portfolio to include veterinarian solutions for anesthesia, pain management, and the diagnosis of diabetes.
The $255 million purchase price included cash of $230 million and an additional contingent payment of $25 million which is due to Abbott within one year of the acquisition date, subject to certain deductions in the event of sales disruptions due to supply issues. The range of undiscounted amounts that Zoetis could pay pursuant to this contingent consideration arrangement is between zero and $25 million, with an acquisition date fair value of $22 million. The fair value of the contingent consideration recognized as of the acquisition date was determined using a probability weighted discounted cash flow analysis that considered significant estimates and assumptions not available in the market (Level 3 inputs).
The transaction was accounted for as a business combination, with the net assets acquired measured at their respective acquisition date fair values. Preliminary amounts recorded include $14 million of inventory, $8 million of in-process research and development (IPR&D) associated with oncology and osteoarthritis projects, $4 million of trade names related to diabetes and pain management products, $11 million of developed technology assets associated with pain management and surgical products, $15 million of other intangible assets including a favorable supply agreement and product exclusivity rights and property, plant and equipment of less than $1 million. Trade names and developed technology assets will be amortized over 15 years while other intangible assets acquired have a weighted average useful life of 5 years.
Goodwill of $200 million, representing the excess of consideration transferred over the fair value of assets acquired, was allocated across our reportable segments and is predominantly attributable to synergies expected to be realized through the integration of AAH operations into the existing Zoetis business. The goodwill recorded is expected to be deductible for tax purposes.
All amounts recorded are subject to final valuation, however any difference between such amounts and the final fair value determination for net assets acquired is not expected to be material to our condensed consolidated financial statements.
Acquisition-related costs of the transaction were expensed as incurred and are not material to our condensed consolidated statements of income. AAH revenue and earnings occurring subsequent to the acquisition date have been included in our quarterly financial results but are not material to the condensed consolidated statements of income.
6.
Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
In connection with our 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. In connection with our acquisition activity, we typically incur costs and charges associated with executing the transactions, integrating the acquired operations, which may include expenditures for consulting and the integration of systems and processes, product transfers and restructuring the consolidated company, which may include charges related to employees, assets and activities that will not continue in the consolidated company. All operating functions can be impacted by these actions, including sales and marketing, manufacturing and research and development (R&D), as well as functions such as business technology, shared services and corporate operations.
In the first quarter of 2014, we recorded restructuring charges of $2 million related to employee severance costs in EuAfME as a result of initiatives to reduce costs and better align our organizational structure.

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The components of costs incurred in connection with restructuring initiatives, acquisitions and cost-reduction/productivity initiatives follow:
 
 
Three Months Ended
 
 
March 29,

 
March 30,

(MILLIONS OF DOLLARS)
 
2015

 
2014

Restructuring charges and certain acquisition-related costs:
 
 
 
 
Integration costs(a)
 
$
1

 
$
2

Restructuring charges(b):
 

 
1

Total Restructuring charges and certain acquisition-related costs
 
$
1

 
$
3

(a) 
Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and the integration of systems and processes, as well as product transfer costs. For the first quarter of 2015, integration costs primarily relate to the purchase of certain assets of Abbott Animal Health.
(b) 
The restructuring charges for the three months ended March 30, 2014, include employee severance costs in EuAfME ($2 million), a reversal of a previously established reserve as a result of a change in estimate of severance costs ($2 million benefit), and accelerated depreciation related to the exiting of a research facility ($1 million).
For the three months ended March 30, 2014, the restructuring charges are associated with the following: EuAfME ($2 million) and Manufacturing/research/corporate ($1 million benefit).
The components of and changes in our restructuring accruals follow:
 
 
Employee

 
 
 
 
 
 
Termination

 
Exit

 
 
(MILLIONS OF DOLLARS)
 
Costs

 
Costs

 
Accrual

Balance, December 31, 2014(a)
 
$
18

 
$
1

 
$
19

Provision
 

 

 

Utilization and other(b)
 
(8
)
 

 
(8
)
Balance, March 29, 2015(a)
 
$
10

 
$
1

 
$
11

(a) 
At March 29, 2015, and December 31, 2014, included in Other current liabilities ($6 million and $13 million, respectively) and Other noncurrent liabilities ($5 million and $6 million, respectively).
(b) 
Includes adjustments for foreign currency translation.
7.
Other (Income)/Deductions—Net
The components of Other (income)/deductions—net follow:
 
 
Three Months Ended
 
 
March 29,

 
March 30,

(MILLIONS OF DOLLARS)
 
2015

 
2014

Royalty-related income
 
$
(7
)
 
$
(8
)
Certain legal and other matters, net(a)
 

 
(2
)
Foreign currency loss(b)
 
8

 
9

Other, net(c)
 
(1
)
 
2

Other (income)/deductions—net
 
$

 
$
1

(a) 
For the three months ended March 30, 2014, represents an insurance recovery of litigation-related charges.
(b) 
For the three months ended March 29, 2015, primarily driven by costs related to hedging and exposures to certain emerging market currencies. For the three months ended March 30, 2014, primarily driven by losses related to the depreciation of the Argentine peso in the first quarter of 2014.
(c) 
For the three months ended March 30, 2014, represents a pension plan settlement charge related to the sale of a manufacturing plant, partially offset by interest income and other miscellaneous income.
8.
Income Taxes
A.
Taxes on Income
The effective tax rate was 28.3% for the first quarter of 2015, compared with 31.7% for the first quarter of 2014. The lower effective tax rate for the first quarter of 2015 compared with the first quarter of 2014 was primarily attributable to a $9 million discrete tax benefit recorded in the first quarter of 2015 related to a revaluation of deferred taxes as a result of a change in tax rates, an $8 million discrete tax expense during the first quarter of 2014 related to a prior period intercompany inventory adjustment, and changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs.
B.
Deferred Taxes
As of March 29, 2015, the total net deferred income tax liability of $121 million is included in Current deferred tax assets ($87 million), Noncurrent deferred tax assets ($57 million), Other current liabilities ($9 million) and Noncurrent deferred tax liabilities ($256 million).

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As of December 31, 2014, the total net deferred income tax liability of $125 million is included in Current deferred tax assets ($109 million), Noncurrent deferred tax assets ($54 million), Other current liabilities ($11 million) and Noncurrent deferred tax liabilities ($277 million).
C.
Tax Contingencies
As of March 29, 2015, the tax liabilities associated with uncertain tax positions of $54 million (exclusive of interest and penalties related to uncertain tax positions of $8 million) are included in Noncurrent deferred tax assets ($6 million) and Other taxes payable ($48 million).
As of December 31, 2014, the tax liabilities associated with uncertain tax positions of $54 million (exclusive of interest and penalties related to uncertain tax positions of $8 million) are included in Noncurrent deferred tax assets ($6 million) and Other taxes payable ($48 million).
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.
9.
Financial Instruments
A.
Debt
Credit Facilities
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. Subject to certain conditions, we have the right to increase the credit facility to up to $1.5 billion. 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 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. We were in compliance with all financial covenants as of March 29, 2015, and December 31, 2014. There were no amounts drawn under the credit facility as of March 29, 2015, or December 31, 2014.
We have additional lines of credit and other credit arrangements with a group of banks and other financial intermediaries for general corporate purposes. We maintain cash and cash equivalent balances in excess of our outstanding short-term borrowings. As of March 29, 2015, we had access to $68 million of lines of credit which expire at various times through 2017. Short-term borrowings outstanding related to these facilities were $2 million and $7 million as of March 29, 2015, and December 31, 2014, respectively. Long-term borrowings outstanding related to these facilities were $2 million and $3 million as of March 29, 2015, and December 31, 2014, respectively.
Commercial Paper Program
In February 2013, we entered into a commercial paper program with a capacity of up to $1.0 billion. As of March 29, 2015, and December 31, 2014, there was no commercial paper issued under this program.
Short-Term Borrowings
There were short-term borrowings related to credit facilities of $2 million and $7 million as of March 29, 2015, and December 31, 2014, respectively (see Credit Facilities). The weighted-average interest rate on the short-term borrowings outstanding related to credit facilities was 9.7% and 7.8% for the periods ended March 29, 2015, and December 31, 2014, respectively.
Senior Notes Offering and Other Long-Term Debt
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.
The current portion of long-term debt was $400 million as of March 29, 2015, with a weighted-average interest rate of 1.150%. There was no current portion of long-term debt as of December 31, 2014.
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.

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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 repurchase all of the outstanding 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:
 
 
March 29,

 
December 31,

(MILLIONS OF DOLLARS)
 
2015

 
2014

Lines of credit, due 2016-2018
 
$
2

 
$
3

1.150% Senior Notes due 2016
 
400

 
400

1.875% Senior Notes due 2018
 
750

 
750

3.250% Senior Notes due 2023
 
1,350

 
1,350

4.700% Senior Notes due 2043
 
1,150

 
1,150

 
 
3,652

 
3,653

Unamortized debt discount
 
(9
)
 
(10
)
Less current portion of long-term debt
 
(400
)
 

Long-term debt
 
$
3,243

 
$
3,643

The fair value of our long-term debt, including the current portion of long-term debt, was $3,703 million and $3,690 million as of March 29, 2015, and December 31, 2014, respectively, 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).
The principal amount of long-term debt outstanding, including the current portion of long-term debt, as of March 29, 2015, matures in the following years:
 
 
 
 
 
 
 
 
 
 
 
 
After

 
 
(MILLIONS OF DOLLARS)
 
2016

 
2017

 
2018

 
2019

 
2020

 
2020

 
Total

Maturities
 
$
401

 
$

 
$
751

 
$

 
$

 
$
2,500

 
$
3,652

Interest Expense
Interest expense, net of capitalized interest, was $28 million and $29 million for the three months ended March 29, 2015, and March 30, 2014, respectively. Capitalized interest was $1 million for both the three months ended March 29, 2015, and March 30, 2014.
B.
Derivative Financial Instruments
Foreign Exchange Risk
A significant portion of our revenue, earnings and net investment in foreign affiliates is exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk, in part, through operational means, including managing same-currency revenue 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. The aggregate notional amount of foreign exchange derivative financial instruments offsetting foreign currency exposures was $1.4 billion and $1.1 billion, as of March 29, 2015, and December 31, 2014, respectively. The derivative financial instruments primarily offset exposures in the euro, U.K. pound, and Japanese Yen. 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.

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Fair Value of Derivative Instruments
The location and fair values of derivative instruments not designated as hedging instruments are as follows:
 
 
Fair Value of Derivatives
 
 
March 29,

 
December 31,

(MILLIONS OF DOLLARS)
Balance Sheet Location
2015

 
2014

Foreign currency forward-exchange contracts
Other current assets
$
16

 
$
9

Foreign currency forward-exchange contracts
Other current liabilities 
(6
)
 
(4
)
Total foreign currency forward-exchange contracts
 
$
10

 
$
5

We use a market approach in valuing financial instruments on a recurring basis. Our derivative financial instruments are measured at fair value on a recurring basis using Level 2 inputs in the calculation of fair value.
The net gains incurred on foreign currency forward-exchange contracts not designated as hedging instruments were $7 million and $12 million for the three months ended March 29, 2015, and March 30, 2014, respectively, and are recorded in Other (income)/deductions—net. These amounts were substantially offset in Other (income)/deductions—net by the effect of changing exchange rates on the underlying foreign currency exposures.
10.
Inventories
The components of inventory follow:
 
 
March 29,

 
December 31,

(MILLIONS OF DOLLARS)
 
2015

 
2014

Finished goods
 
$
715

 
$
688

Work-in-process
 
354

 
340

Raw materials and supplies
 
277

 
261

Inventories
 
$
1,346

 
$
1,289

11.
Goodwill and Other Intangible Assets
A.
Goodwill
The components of, and changes in, the carrying amount of goodwill follow:
(MILLIONS OF DOLLARS)
 
U.S.

 
EuAfME

 
CLAR

 
APAC

 
Total

Balance, December 31, 2014
 
$
501

 
$
153

 
$
161

 
$
161

 
$
976

Additions(a)
 
162

 
26

 
5

 
7

 
200

Other(b)
 

 
(5
)
 
(1
)
 
(1
)
 
(7
)
Balance, March 29, 2015
 
$
663

 
$
174

 
$
165

 
$
167

 
$
1,169

(a) 
Reflects the allocation across reportable segments of goodwill associated with the acquisition of certain assets of Abbott Animal Health (amounts recorded are preliminary and subject to final valuation). For additional information, see Note 5. Acquisitions.
(b) 
Reflects adjustments for foreign currency translation.
The gross goodwill balance was $1,705 million and $1,512 million as of March 29, 2015, and December 31, 2014, respectively. Accumulated goodwill impairment losses (generated entirely in fiscal 2002) were $536 million as of March 29, 2015, and December 31, 2014.

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B.
Other Intangible Assets
The components of identifiable intangible assets follow:
 
 
As of March 29, 2015
 
As of December 31, 2014
 
 
 
 
 
 
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)
 
$
735

 
$
(264
)
 
$
471

 
$
744

 
$
(259
)
 
$
485

Brands
 
216

 
(114
)
 
102

 
216

 
(111
)
 
105

Trademarks and trade names(a)
 
63

 
(41
)
 
22

 
60

 
(41
)
 
19

Other(a)
 
133

 
(116
)
 
17

 
119

 
(116
)
 
3

Total finite-lived intangible assets
 
1,147

 
(535
)
 
612

 
1,139

 
(527
)
 
612

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Brands
 
38

 

 
38

 
38

 

 
38

Trademarks and trade names
 
67

 

 
67

 
67

 

 
67

In-process research and development(a)
 
10

 

 
10

 
2

 

 
2

Product rights
 
8

 

 
8

 
8

 

 
8

Total indefinite-lived intangible assets
 
123

 

 
123

 
115

 

 
115

Identifiable intangible assets
 
$
1,270

 
$
(535
)
 
$
735

 
$
1,254

 
$
(527
)
 
$
727

(a) Includes the acquisition of intangible assets associated with the purchase of certain assets of Abbott Animal Health in the first quarter of 2015 (amounts recorded are preliminary and subject to final valuation), as well as the impact of foreign exchange. For additional information, see Note 5. Acquisitions.
C.
Amortization
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 $15 million for both the three months ended March 29, 2015, and March 30, 2014.
12.
Benefit Plans
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. Pension and postretirement benefit expense associated with the extended service for certain employees in the U.S. plans totaled approximately $2 million in each three-month period ended March 29, 2015, and March 30, 2014, respectively.
As part of the Separation (see Note 2. The Separation and Transactions and Agreements with Pfizer), certain separation adjustments were made to transfer the assets and liabilities of certain international defined benefit pension plans from Pfizer to Zoetis. During the first quarter of 2014, our pension plan in Japan was transferred to us from Pfizer. The net pension obligation (approximately $2 million) and the related accumulated other comprehensive loss (approximately $2 million, net of tax) associated with this plan were recorded. During the remainder of 2014, our pension plans in Australia, Belgium and Switzerland were transferred to us. Prior to the Separation and transfer, these benefit plans were accounted for as multi-employer plans. There were no transfers during the first quarter of 2015. As of March 29, 2015, there existed a net liability of $1 million for the expected transfer of the Philippines pension plan which is expected to occur in 2015.
The following table provides the net periodic benefit cost associated with dedicated pension plans (including those transferred to us):
 
 
Three months ended,
(MILLIONS OF DOLLARS)
 
March 29, 2015

 
March 30, 2014

Service cost
 
$
2

 
$
1

Interest cost
 
1

 
1

Expected return on plan assets
 

 

Amortization of net actuarial loss
 

 

Settlement loss(a)
 

 
4

Net periodic benefit cost
 
$
3

 
$
6

(a) 
Includes the first quarter 2014 settlement charge of approximately $4 million ($3 million, net of tax) associated with the 2012 sale of our Netherlands manufacturing facility.

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For the three months ended March 29, 2015, and March 30, 2014, the company contributed $2 million and $2 million, respectively, to the dedicated international pension plans. We expect to contribute a total of approximately $7 million to these plans in 2015.
Pension expense associated with international benefit plans accounted for as multi-employer plans was approximately $1 million for the three months ended March 30, 2014. Contributions to these plans were approximately $1 million for the three months ended March 30, 2014. There were no plans accounted for as multi-employer plans in 2015.
13.
Share-Based Payments
The company may grant a variety of share-based payments under the Zoetis 2013 Equity and Incentive Plan (Equity Plan) to employees and non-employee directors. The principal types of share-based awards available under the Equity Plan may include, but are not limited to, stock options, restricted stock and restricted stock units (RSUs), deferred stock unit awards (DSUs), performance share unit awards (PSUs) and other equity-based or cash-based awards.
The components of share-based compensation expense follow:
 
 
Three Months Ended
 
 
March 29,

 
March 30,

(MILLIONS OF DOLLARS)
 
2015

 
2014

Stock options / stock appreciation rights
 
$
6

 
$
3

RSUs / DSUs
 
4

 
2

PSUs(a)
 

 

Share-based compensation expense—total
 
$
10

 
$
5

(a) Share-based compensation expense related to PSUs was $0.3 million for the three months ended March 29, 2015.
During the three months ended March 29, 2015, the company granted 856,105 stock options with a weighted-average exercise price of $45.92 per stock option and a weighted-average fair value of $11.72 per option. 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. The expected volatility assumption required for the Black-Scholes-Merton model for the 2015 grant was calculated using a 2-year historical volatility of the Zoetis stock price and weighting it equally against the implied volatility. Prior to 2015, the company had used an implied volatility. The selection of the blended historical and implied volatility approach was based on our assessment that this calculation of expected volatility is more representative of future stock price trends. The weighted-average fair value was estimated based on the following assumptions: risk-free interest rate of 1.78%; expected dividend yield of 0.72%; expected stock price volatility of 24.04%; and expected term of 6.5 years. 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.
During the three months ended March 29, 2015, the company granted 701,281 RSUs with a weighted-average grant date fair value of $46.06 per RSU. 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, RSUs vest after three years of continuous service from the grant date and the values 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.
During the three months ended March 29, 2015, the company granted 157,130 PSUs with a weighted-average grant date fair value of $63.14 per PSU. PSUs are accounted for using a Monte Carlo simulation model. The units underlying the PSUs will be earned and vested over a three-year performance period, based upon total shareholder return of the company in comparison to the total shareholder return of a select benchmark group of companies (Relative TSR). The weighted-average fair value was estimated based on volatility assumptions of Zoetis common stock and an average of peer companies, which were 21.8% and 23.5%, respectively. Depending on the company’s Relative TSR performance at the end of the performance period, the recipient may earn up to 200% of the target number of units. Vested units are settled in shares of the company’s common stock. PSU values 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.

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14.
Stockholders' Equity
Zoetis is authorized to issue 6,000,000,000 shares of common stock and 1,000,000,000 shares of preferred stock.
Changes in common shares and treasury stock were as follows:
(MILLIONS OF DOLLARS AND SHARES)
 
Common Shares Issued

 
Treasury Stock(a)

 
Cost of Treasury Stock

Balance, December 31, 2013
 
500.008

 

 
$

Stock-based compensation(b)
 
0.033

 
0.007

 
0.2

Defined contribution plan
 
0.704

 

 

Balance, March 30, 2014
 
500.745

 
0.007

 
$
0.2

 
 
 
 
 
 
 
Balance, December 31, 2014
 
501.342

 
0.015

 
$
0.5

Stock-based compensation(b)
 
0.113

 
0.020

 
0.9

Share repurchase program(c)
 

 
1.053

 
47.4

Balance, March 29, 2015
 
501.455

 
1.087

 
$
48.8

(a) 
Shares may not add due to rounding.
(a) 
Treasury shares associated with stock-based compensation are reacquired from employees to satisfy tax withholding requirements on the vesting of restricted shares from equity-based awards. For additional information regarding share-based compensation, see Note 13. Share-Based Payments.
(b) 
In November 2014, the company's Board of Directors authorized a $500 million share repurchase program. Purchases of Zoetis shares may be made at the discretion of management, depending on market conditions and business needs. As of March 29, 2015, there was approximately $453 million remaining under this authorization.
Changes, net of tax, in accumulated other comprehensive loss, excluding noncontrolling interest, follow:
 
 
Currency Translation

 
 
 
 
 
 
Adjustment

 
Benefit Plans

 
Accumulated Other

 
 
Net Unrealized

 
Actuarial

 
Comprehensive

(MILLIONS OF DOLLARS)
 
Gains/(Losses)

 
Gains/(Losses)

 
Loss

Balance, December 31, 2014
 
$
(336
)
 
$
(25
)
 
$
(361
)
Other comprehensive income (loss), net of tax
 
(119
)
 
1


(118
)
Balance, March 29, 2015
 
$
(455
)
 
$
(24
)
 
$
(479
)
15.
Earnings per Share
The following table presents the calculation of basic and diluted earnings per share:
 
 
Three Months Ended
 
 
March 29,

 
March 30,

(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
 
2015

 
2014

Numerator
 
 
 
 
Net income before allocation to noncontrolling interests
 
$
165

 
$
155

Less: net income attributable to noncontrolling interests
 

 

Net income attributable to Zoetis Inc.
 
$
165

 
$
155

Denominator
 
 
 
 
Weighted-average common shares outstanding
 
501.146

 
500.231

Common stock equivalents: stock options, RSUs, PSUs and DSUs
 
2.078

 
0.471

Weighted-average common and potential dilutive shares outstanding
 
503.224

 
500.702

 
 
 
 
 
Earnings per share attributable to Zoetis Inc. stockholders—basic
 
$
0.33

 
$
0.31

Earnings per share attributable to Zoetis Inc. stockholders—diluted
 
$
0.33

 
$
0.31

There were approximately 1 million and 5 million stock options outstanding as of March 29, 2015, and March 30, 2014, respectively, and approximately 1 million RSUs outstanding as of March 29, 2015, under the company’s Equity Plan that were excluded from the computation of diluted earnings per share, as the effect would have been antidilutive.

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16.
Commitments and Contingencies
We and certain of our subsidiaries are subject to numerous contingencies arising in the ordinary course of business. For a discussion of our tax contingencies, see Note 8. Income Taxes.
A.
Legal Proceedings
Our non-tax contingencies include, among others, the following:
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.
Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial.
We believe that we have strong defenses in these types of matters, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations or cash flows in the period in which the amounts are paid.
We have accrued for losses that are both probable and reasonably estimable. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies heavily on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.
Amounts recorded for legal and environmental contingencies can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions.
The principal matters to which we are a party are discussed below. In determining whether a pending matter is significant for financial reporting and disclosure purposes, we consider both quantitative and qualitative factors in order to assess materiality, such as, among other things, the amount of damages and the nature of any other relief sought in the proceeding, if such damages and other relief are specified; our view of the merits of the claims and of the strength of our defenses; whether the action purports to be a class action and our view of the likelihood that a class will be certified by the court; the jurisdiction in which the proceeding is pending; any experience that we or, to our knowledge, other companies have had in similar proceedings; whether disclosure of the action would be important to a reader of our financial statements, including whether disclosure might change a reader’s judgment about our financial statements in light of all of the information about the company that is available to the reader; the potential impact of the proceeding on our reputation; and the extent of public interest in the matter. In addition, with respect to patent matters, we consider, among other things, the financial significance of the product protected by the patent.
PregSure®
We have received in total approximately 240 claims in Europe and New Zealand seeking damages related to calves claimed to have died of Bovine Neonatal Pancytopenia (BNP) on farms where PregSure BVD, a vaccine against Bovine Virus Diarrhea (BVD), was used. BNP is a rare syndrome that first emerged in cattle in Europe in 2006. Studies of BNP suggest a potential association between the administration of PregSure and the development of BNP, although no causal connection has been established. The cause of BNP is not known.
In 2010, we voluntarily stopped sales of PregSure BVD in Europe, and recalled the product at wholesalers while investigations into possible causes of BNP continued. In 2011, after incidences of BNP were reported in New Zealand, we voluntarily withdrew the marketing authorization for PregSure throughout the world.
We have settled more than half of these claims for amounts that are not material individually or in the aggregate. Investigations into possible causes of BNP continue and these settlements may not be representative of any future claims resolutions.
Ulianopolis, Brazil
In February 2012, the Municipality of Ulianopolis (State of Para, Brazil) filed a complaint against Fort Dodge Saúde Animal Ltda. (FDSAL) and five other large companies alleging that waste sent to a local waste incineration facility for destruction, but that was not ultimately destroyed as the facility lost its operating permit, caused environmental impacts requiring cleanup.
The Municipality is seeking recovery of cleanup costs purportedly related to FDSAL's share of all waste accumulated at the incineration facility awaiting destruction, and compensatory damages to be allocated among the six defendants. We believe we have strong arguments against the claim, including defense strategies against any claim of joint and several liability.

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At the request of the Municipal prosecutor, in April 2012, the lawsuit was suspended for one year. Since that time, the prosecutor has initiated investigations into the Municipality's actions in the matter as well as the efforts undertaken by the six defendants to remove and dispose of their individual waste from the incineration facility. On October 3, 2014, the Municipal prosecutor announced that the investigation remained ongoing and outlined the terms of a proposed Term of Reference (a document that establishes the minimum elements to be addressed in the preparation of an Environmental Impact Assessment), under which the companies would be liable to withdraw the waste and remediate the area. On March 5, 2015, we presented our response to the prosecutor’s proposed Term of Reference, arguing that the proposed terms were overly general in nature, and expressing our interest in discussing alternatives to address the matter. In response, the prosecutor suggested engaging a technical consultant to conduct an environmental diagnostic of the contaminated area. We have until May 29, 2015, to evaluate the engagement of an environmental diagnostic.
Other Matters
The European Commission published a decision on alleged competition law infringements by several human health pharmaceutical companies on June 19, 2013. One of the involved legal entities is Zoetis Products LLC, formerly having the name Alpharma Inc. Zoetis Products LLC's involvement is solely related to its human health activities prior to Pfizer's acquisition of King/Alpharma. Zoetis paid a fine in the amount of Euro 11 million (approximately $14 million) and was reimbursed by Pfizer in accordance with the Global Separation Agreement between Pfizer and Zoetis, which provides that Pfizer is obligated to indemnify Zoetis for any liabilities arising out of claims not related to its animal health assets. We filed an appeal of the decision on September 6, 2013.
In July 2014, we reached a commercial settlement with several large poultry customers in Mexico associated with specific lots of a Zoetis poultry vaccine. Although there have been no quality or efficacy issues with the manufacturing of this vaccine, certain shipments from several lots in Mexico may have experienced an issue in storage with a third party in Mexico that could have impacted their efficacy. We issued a recall of these lots in July 2014 and the product is currently unavailable in Mexico. We recorded a $13 million charge in Other (income)/deductions—net in the second quarter of 2014, and we do not expect any significant additional charges related to this issue. In the third quarter of 2014, we were notified of an insurance recovery of $1 million and have recorded this in Other (income)/deductions—net.
B.
Guarantees and Indemnifications
In the ordinary course of business and in connection with the sale of assets and businesses, we indemnify our counterparties against certain liabilities that may arise in connection with the transaction or related to activities prior to the transaction. These indemnifications typically pertain to environmental, tax, employee and/or product-related matters and patent-infringement claims. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications are generally subject to threshold amounts, specified claim periods and other restrictions and limitations. Historically, we have not paid significant amounts under these provisions and, as of March 29, 2015, recorded amounts for the estimated fair value of these indemnifications were not significant.
17.
Segment and Other Revenue Information
A.
Segment Information
The animal health medicines and vaccines industry is characterized by meaningful differences in customer needs across different regions. As a result of these differences, among other things, we manage our operations through four geographic regions. Each operating segment has responsibility for its commercial activities. Within each of these regional operating segments, we offer a diversified product portfolio, including vaccines, parasiticides, anti-infectives, medicated feed additives and other pharmaceuticals, for both livestock and companion animal customers.
Operating Segments
The U.S.
EuAfME—Includes, among others, the United Kingdom, Germany, France, Italy, Spain, Northern Europe and Central Europe as well as Russia, Turkey and South Africa.
CLAR––Includes Canada, Brazil, Mexico, Central America and other South American countries.
APAC––Includes Australia, Japan, New Zealand, South Korea, India, China/Hong Kong, Northeast Asia, Southeast Asia and South Asia.
Our chief operating decision maker uses the revenue and earnings of the four operating segments, among other factors, for performance evaluation and resource allocation.
Other Costs and Business Activities
Certain costs are not allocated to our operating segment results, such as costs associated with the following:
Other business activities includes our Client Supply Services (CSS) contract manufacturing results, as well as expenses associated with our dedicated veterinary medicine research and development organization, research alliances, U.S. regulatory affairs and other operations focused on the development of our products. Other R&D-related costs associated with non-U.S. market and regulatory activities are generally included in the respective regional segment.
Corporate, which is responsible for platform functions such as business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, among others. These costs also include compensation costs and other miscellaneous operating expenses not charged to our operating segments, as well as interest income and expense.

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Certain transactions and events such as (i) Purchase accounting adjustments, where we incur expenses associated with the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment; (ii) Acquisition-related activities, where we incur costs for restructuring and integration; and (iii) Certain significant items, which includes non-acquisition-related restructuring charges, certain asset impairment charges, stand-up costs and costs associated with cost reduction/productivity initiatives.
Other unallocated includes (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; and (iii) certain supply chain and global logistics costs.
Segment Assets
We manage our assets on a total company basis, not by operating segment. Therefore, our chief operating decision maker does not regularly review any asset information by operating segment and, accordingly, we do not report asset information by operating segment. Total assets were approximately $6.4 billion and $6.6 billion at March 29, 2015, and December 31, 2014, respectively.
Selected Statement of Income Information                                 
 
 
 
 
 
 
 
 
 
 
Depreciation and
 
 
Revenue(a)
 
Earnings(b)
 
Amortization(c)
 
 
March 29,

 
March 30,

 
March 29,

 
March 30,

 
March 29,

 
March 30,

(MILLIONS OF DOLLARS)
 
2015

 
2014

 
2015

 
2014

 
2015

 
2014

Three months ended
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
 
$
521

 
$
479

 
$
315

 
$
278

 
$
6

 
$
8

EuAfME
 
237

 
270

 
102

 
112

 
4

 
5

CLAR
 
173

 
168

 
66

 
64

 
3

 
3

APAC
 
161

 
169

 
62

 
66

 
4

 
5

Total operating segments
 
1,092

 
1,086

 
545

 
520

 
17

 
21

Other business activities(d)
 
10

 
11

 
(67
)
 
(72
)
 
7

 
7

Reconciling Items:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate(e)
 

 

 
(133
)
 
(125
)
 
9

 
6

Purchase accounting adjustments(f)
 

 

 
(13
)
 
(12
)
 
13

 
12

Acquisition-related costs(g)
 

 

 
(1
)
 
(2
)
 

 

Certain significant items(h)
 

 

 
(41
)
 
(36
)
 
1

 
2

Other unallocated(i)
 

 

 
(60
)
 
(46
)
 
1

 
2

 
 
$
1,102

 
$
1,097

 
$
230

 
$
227

 
$
48

 
$
50

(a) 
Revenue denominated in euros was $135 million and $168 million for the three months ended March 29, 2015, and March 30, 2014, respectively.
(b) 
Defined as income before provision for taxes on income.
(c) 
Certain production facilities are shared. Depreciation and amortization is allocated to the reportable operating segments based on estimates of where the benefits of the related assets are realized.
(d) 
Other business activities reflects the R&D costs managed by our Research and Development organization, as well as our contract manufacturing business.
(e) 
Corporate includes, among other things, administration expenses, interest expense, certain compensation and other costs not charged to our operating segments.
(f) 
Purchase accounting adjustments includes certain charges related to intangible assets and property, plant and equipment not charged to our operating segments.
(g) 
Acquisition-related costs can include costs associated with acquiring, integrating and restructuring acquired businesses, such as allocated transaction costs, integration costs, restructuring charges and additional depreciation associated with asset restructuring. For additional information, see Note 6. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.
(h) 
Certain significant items includes substantive, unusual items that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis. Such items primarily include certain costs related to becoming an independent public company, restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition, certain legal and commercial settlements and the impact of divestiture-related gains and losses.
For the three months ended March 29, 2015, Certain significant items primarily includes: (i) Zoetis stand-up costs of $23 million; (ii) consulting fees related to our operational efficiency initiative of $15 million; and (iii) charges due to unusual investor-related activities of $3 million. Stand-up costs include certain nonrecurring costs related to becoming an independent public company, such as new branding (including changes to the manufacturing process for required new packaging), the creation of standalone systems and infrastructure, site separation, and certain legal registration and patent assignment costs.
For the three months ended March 30, 2014, Certain significant items primarily includes: (i) Zoetis stand-up costs of $33 million; (ii) restructuring charges of $2 million related to employee severance costs in EuAfME, offset by a $2 million benefit related to a reversal of a previously established reserve as a result of a change in estimate of severance costs; (iii) additional depreciation associated with asset restructuring of $1 million; (iv) a pension plan settlement charge related to the divestiture of a manufacturing plant of $4 million; and (v) an insurance recovery of litigation-related charges of $2 million income.
(i) 
Includes overhead expenses associated with our manufacturing operations.

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B.
Other Revenue Information
Revenue by Species
Significant species revenue are as follows:
 
 
Three Months Ended
 
 
March 29,

 
March 30,

(MILLIONS OF DOLLARS)
 
2015

 
2014

Livestock:
 
 
 
 
Cattle
 
$
397

 
$
391

Swine
 
170

 
160

Poultry
 
129

 
135

Other
 
19

 
20

 
 
715

 
706

Companion Animal:
 
 
 
 
Horses
 
40

 
43

Dogs and Cats
 
337

 
337

 
 
377

 
380

 
 
 
 
 
Contract Manufacturing
 
$
10

 
$
11

 
 
 
 
 
Total revenue
 
$
1,102

 
$
1,097

Revenue by Major Product Category
Significant revenue by major product category are as follows:
 
 
Three Months Ended
 
 
March 29,

 
March 30,

(MILLIONS OF DOLLARS)
 
2015

 
2014

Anti-infectives
 
$
312

 
$
322

Vaccines
 
271

 
274

Parasiticides
 
153

 
151

Medicated feed additives
 
121

 
104

Other pharmaceuticals
 
187

 
191

Other non-pharmaceuticals
 
48

 
44

Contract manufacturing
 
10

 
11

Total revenue
 
$
1,102

 
$
1,097

18.
Subsequent Events
On May 5, 2015, we announced a comprehensive operational efficiency program. The program’s actions are focused on reducing complexity in our product portfolios through the elimination of approximately 5,000 product SKUs, changing our selling approach in certain markets and reducing our presence in certain countries, as well as planning to sell or exit ten manufacturing sites over the long term. We also plan to optimize our resource allocation and efficiency by reducing resources associated with non-customer facing commercial activities and operating more efficiently as a result of less internal complexity and more standardization of processes.
As part of this initiative, we expect to reduce certain positions through divestitures, normal attrition and involuntary terminations by approximately 2,000 to 2,500, subject to consultations with works councils and unions in certain countries, primarily over the next 12 to 18 months. We expect these actions to result in approximately $400 million to $500 million in pre-tax charges. We also expect to incur additional charges, primarily non-cash, associated with exiting the manufacturing sites and are currently evaluating whether we will divest or close those facilities and will have charges associated with accelerated depreciation, asset impairments and contract terminations.
Additionally, we are consolidating our current regional structure from four regions to two regions. As a result, we are evaluating our segment reporting and will likely recast our current segment reporting in the second quarter of 2015.

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Review Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors
Zoetis Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of Zoetis Inc. and subsidiaries (the Company) as of March 29, 2015, and the related condensed consolidated statements of income, comprehensive income, equity and cash flows for the three-month periods ended March 29, 2015 and March 30, 2014. These condensed consolidated financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements as of March 29, 2015 and for the three-month periods ended March 29, 2015 and March 30, 2014 referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Zoetis Inc. and subsidiaries as of December 31, 2014, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year then ended (not presented herein); and in our report dated February 27, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2014, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP
New York, New York
May 7, 2015


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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
Introduction
Our MD&A is provided in addition to the accompanying condensed consolidated financial statements and notes to assist readers in understanding the results of operations, comprehensive income, financial condition and cash flows of Zoetis Inc. (Zoetis). This MD&A is organized as follows:
Section
Description
Page
Overview of our business
A general description of our business and the industry in which we operate. For more information regarding our business and the animal health industry, see Item 1. Business of our 2014 Annual Report on Form 10-K.
Our operating environment
Information regarding the animal health industry and factors that affect our company.
Recent developments
A discussion of recent developments.
Comparability of historical results and our relationship with Pfizer
Information about the limitations of the predictive value of the condensed consolidated financial statements.
Analysis of the condensed consolidated statements of income
Consists of the following for all periods presented:
 
Revenue: An analysis of our revenue in total, by operating segment and by species.
 Costs and expenses: A discussion about the drivers of our costs and expenses.
Operating segment results: A discussion of our revenue by operating segment and species and items impacting our earnings before income tax.
Adjusted net income
A discussion of adjusted net income, an alternative view of performance used by management. Adjusted net income is a non-GAAP financial measure.
Our financial guidance for 2015
A discussion of our 2015 financial guidance.
Analysis of the condensed consolidated statements of comprehensive income
An analysis of the components of comprehensive income for all periods presented.
Analysis of the condensed consolidated balance sheets
A discussion of changes in certain balance sheet accounts for balance sheets presented.
Analysis of the condensed consolidated statements of cash flows
An analysis of the drivers of our operating, investing and financing cash flows for all periods presented.
Analysis of financial condition, liquidity and capital resources
An analysis of our ability to meet our short-term and long-term financing needs.
New accounting standards
Accounting standards that we have recently adopted, as well as those that recently have been issued, but not yet adopted.
Forward-looking statements and factors that may affect future results
A description of the risks and uncertainties that could cause actual results to differ materially from those discussed in forward-looking statements set forth in this MD&A relating to our financial and operating performance, business plans and prospects, strategic review, capital allocation and business-development plans. Such forward-looking statements are based on management's current expectations about future events, which are inherently susceptible to uncertainty and changes in circumstances.
Overview of our business
We are 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. For more than 60 years, as a business unit of Pfizer Inc. (Pfizer) and now as an independent public company, we have been committed to enhancing the health of animals and bringing solutions to our customers who raise and care for them.
The animal health medicines and vaccines industry is characterized by meaningful differences in customer needs across different regions. As a result of these differences, among other things, we manage our operations through four geographic operating segments. Within each of these operating segments, we offer a diversified product portfolio for both livestock and companion animal customers in order to capitalize on local and regional trends and customer needs. Our four operating segments are the United States (U.S.), Europe/Africa/Middle East (EuAfME), Canada/Latin America (CLAR) and Asia/Pacific (APAC). See Notes to Condensed Consolidated Financial Statements—Note 17. Segment and Other Revenue Information.
We directly market our products to livestock producers and veterinarians located in approximately 70 countries across North America, Europe, Africa, Asia, Australia and South America, and are a market leader in nearly all of the major regions in which we operate. Through our efforts to establish an early and direct presence in many emerging markets, such as Brazil, China and India, we believe we are the largest animal health

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medicines and vaccines business as measured by revenue across emerging markets as a whole. In markets where we do not have a direct commercial presence, we generally contract with distributors that provide logistics and sales and marketing support for our products.
We believe our investments in the industry’s largest sales organization, including our extensive network of technical and veterinary operations specialists, our high-quality manufacturing and reliability of supply, and our long track record of developing products that meet customer needs, has led to enduring and valued relationships with our customers. Our research and development (R&D) efforts enable us to deliver innovative products to address unmet needs and evolve our product lines so they remain relevant for our customers. Additionally, our management team’s focus on improving operational and cost efficiencies increases the likelihood of achieving our core growth strategies and enhancing long-term value for our shareholders.
A summary of our 2015 performance compared with the comparable 2014 period follows:
 
 
Three Months Ended
 
 
 
 
March 29,

 
March 30,

 
%
(MILLIONS OF DOLLARS)
 
2015

 
2014

 
Change
Revenue
 
$
1,102

 
$
1,097

 
Net income attributable to Zoetis
 
$
165

 
$
155

 
6
Adjusted net income(a)
 
$
207

 
$
191

 
8
(a) 
Adjusted net income is a non-GAAP financial measure. See the "Adjusted net income" section of this MD&A for more information.
Our operating environment
For a description of our operating environment, including factors which could materially affect our business, financial condition, or future results, see "Our Operating Environment" in the MD&A of our 2014 Annual Report on Form 10-K. Set forth below are updates to certain of the factors disclosed in our 2014 Form 10-K.
Quarterly Variability of Financial Results
Our quarterly financial results are subject to variability related to a number of factors including but not limited to: weather patterns, herd management decisions, economic conditions, regulatory actions, competitive dynamics, disease outbreaks, product and geographic mix, timing of price increases and timing of investment decisions.
Disease outbreaks
Sales of our livestock products could be adversely affected by the outbreak of disease carried by animals. Outbreaks of disease may reduce regional or global sales of particular animal-derived food products or result in reduced exports of such products, either due to heightened export restrictions or import prohibitions, which may reduce demand for our products. Also, the outbreak of any highly contagious disease near our main production sites could require us to immediately halt production of our products at such sites or force us to incur substantial expenses in procuring raw materials or products elsewhere. Alternatively, sales of products that treat specific disease outbreaks may increase.
For example, since the second quarter of 2013 some producers in the United States have experienced an outbreak of the porcine epidemic diarrhea virus (PEDv). PEDv has existed in parts of Asia for many years. It is important to note that the virus, which affects piglets, does not create a food safety issue. We are committed to supporting pork producers in understanding and controlling PEDv and we are partnering with the key stakeholders, including various academic institutions such as the University of Minnesota and Iowa State University. In September 2014, the U.S. Department of Agriculture (USDA) granted us a conditional license for a vaccine to help fight PEDv. In order to receive the conditional license, we had to demonstrate the safety of the vaccine in a field study and provide a reasonable expectation of the vaccine’s efficacy. We began supplying the vaccine to veterinarians and pig farmers in September 2014, and we are working to complete the efficacy and potency studies necessary to obtain full licensure in the United States from the USDA. Since first reported in the United States in 2013, PEDv has spread and has now been reported in at least 33 U.S. states, as well as in Canada, Mexico, and parts of South America. According to recent reports, during 2014 the outbreak impacted up to 50% of the sows in the United States, and up to one-third of the sows in Mexico. Furthermore, during the first half of 2014, active cases of PEDv were reported in several new markets in Asia, including Japan, South Korea and Taiwan, and in the second half of 2014, active cases of the disease were confirmed in Spain and Portugal. Although many of the farms that were previously infected have since returned to normal production, the virus continues to pose a threat to the swine industry. We currently believe the impact of PEDv on our 2015 revenue will not be significant. However, we are closely monitoring the evolution of this on-going outbreak and its impact on the swine industry and on our 2015 revenue.
In addition, beginning in 2013, there have been several reported cases of the H7N9 avian influenza virus in China. In March 2013, the Chinese government reported the first case of the H7N9 avian influenza virus, and by the end of December 2014, approximately 450 cases had been detected. During the first quarter of 2015, approximately 160 additional cases of H7N9 avian influenza have been detected. We are closely monitoring the developments as this situation unfolds and currently believe the impact on our 2015 global revenue will not be significant. While China continues to represent a growth opportunity for us, sales in China represented approximately 2% of our total revenue in 2014 and the majority was generated by our swine business.

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Foreign exchange rates
Significant portions of our revenue and costs are exposed to changes in foreign exchange rates. Our products are sold in more than 120 countries and, as a result, our revenue is influenced by changes in foreign exchange rates. For the three months ended March 29, 2015, approximately 48% of our revenue was denominated in foreign currencies. We seek to manage our foreign exchange risk, in part, through operational means, including managing same-currency revenue in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. As we operate in multiple foreign currencies, including the euro, Brazilian real, Canadian dollar, Australian dollar and other currencies, changes in those currencies relative to the U.S. dollar will impact our revenue, cost of goods and expenses, and consequently, net income. Exchange rate fluctuations may also have an impact beyond our reported financial results and directly impact operations. These fluctuations may affect the ability to buy and sell our goods and services between markets impacted by significant exchange rate variances. For the three months ended March 29, 2015, approximately 52% of our total revenue was in U.S. dollars. Our year-over-year revenue growth was unfavorably impacted by 6% from changes in foreign currency values relative to the U.S. dollar.
On February 13, 2013, the Venezuelan government devalued its currency from a rate of 4.3 to 6.3 Venezuelan bolivars per U.S. dollar. Our Venezuelan subsidiary's functional currency is the U.S. dollar because of the hyperinflationary status of the Venezuelan economy. In the first quarter of 2014, the Venezuelan government expanded its exchange mechanisms, resulting in three official rates of exchange for the Venezuelan bolivar.
On February 10, 2015, the Venezuelan government announced that they would continue to operate with a three-tier exchange rate system. In addition, they announced that the primary rate of 6.3 bolivars to the dollar would remain in place for imports that are deemed essential. A new free-floating rate (SIMADI) will replace the existing third-tier rate (SICAD II). As of March 29, 2015, the Venezuelan bolivar to U.S. dollar exchange rates were the CENCOEX rate of 6.3; the SICAD I rate of 12; and the SIMADI rate of 193. We continue to use the CENCOEX rate of 6.3 to report our Venezuela financial position, results of operations and cash flows.
We cannot predict whether there will be further devaluation of the Venezuelan bolivar or whether our use of the 6.3 rate will continue to be supported by evolving facts and circumstances.
We may experience adverse impacts to earnings as our revenue, costs and expenses may be translated into U.S. dollars at lower rates. As of February 22, 2015, we had net monetary assets denominated in local currency of $66 million (including $76 million in cash) in Venezuela and other consolidated entities had receivables from our Venezuela business of $46 million. For the three months ended February 22, 2015, our revenue from the Venezuelan market was approximately $21 million.
In February 2014, the Venezuelan government issued a Law on Fair Pricing, establishing a maximum profit margin of 30%. At the time of its issuance, there was uncertainty as to how the law would be interpreted and applied. The Venezuelan government also recently issued new regulations relating to the publication of these fair prices to consumers. While we believe we are currently fully compliant with this new law, it is uncertain how this law may be interpreted and enforced in the future.
The actions of the Venezuelan government described above relating to currency and to the interpretation and enforcement of the Law on Fair Pricing and associated regulations, as well as other potential actions by the Venezuelan government in response to economic uncertainties could impact the recoverability of our investment in Venezuela, which could result in a charge and, under extreme circumstances, could impact our ability to continue to operate in the country in the same manner as we have historically.
Based on all of the factors noted above, we have decided to reduce our sales in Venezuela for the rest of 2015. As a result, we expect our revenue for the year ended November 30, 2015, to decline, as compared with $77 million for the year ended November 30, 2014.
Recent developments
On May 5, 2015, we announced a comprehensive operational efficiency program. The program’s actions are focused on reducing complexity in our product portfolios through the elimination of approximately 5,000 product SKUs, changing our selling approach in certain markets and reducing our presence in certain countries, as well as planning to sell or exit ten manufacturing sites over the long term. We also plan on optimizing our resource allocation and efficiency by reducing resources associated with non-customer facing commercial activities and operating more efficiently as a result of less internal complexity and more standardization of processes.
The combination of these actions is expected to reduce revenue and gross profit by 2017 by approximately $280 million and $100 million, respectively. Additionally, we expect these actions to generate approximately $300 million in cost savings by 2017. As part of this initiative, we expect to reduce certain positions through divestitures, normal attrition and involuntary terminations by approximately 2,000 to 2,500, subject to consultations with works councils and unions in certain countries, primarily over the next 12 to 18 months. We expect these actions to result in approximately $400 million to $500 million in pre-tax charges. We also expect to incur additional charges, primarily non-cash, associated with exiting the manufacturing sites and are currently evaluating whether we will divest or close those facilities and will have charges associated with accelerated depreciation, asset impairments and contract terminations.
Additionally, we are consolidating our current regional structure from four regions to two regions. As a result, we are evaluating our segment reporting and will likely recast our current segment reporting in the second quarter of 2015.
Comparability of historical results and our relationship with Pfizer
Our historical expenses are not necessarily indicative of the expenses we may incur in the future as we continue to stand up as an independent public company. With respect to support functions, for example, our historical combined financial statements prior to the IPO have included expense allocations for certain support functions that were provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, and, to a lesser extent, business development, public affairs and procurement, among

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others. At the time of the IPO, we entered into a transitional services agreement with Pfizer whereby Pfizer agreed to provide us with various corporate support services. In addition, we entered into a master manufacturing and supply agreement with Pfizer, whereby we and Pfizer agreed to manufacture and supply products to each other. We are also incurring other costs to replace the services and resources that will not be provided by Pfizer. As an independent public company, our total costs related to such support functions may differ from the costs charged under these agreements with Pfizer, or that were historically allocated to us from Pfizer. For additional information regarding our ongoing agreements with Pfizer, see Note 19. Transactions and Agreements with Pfizer in our 2014 Annual Report on Form 10-K.
We have also incurred certain nonrecurring costs related to becoming an independent public company, including new branding (which includes changes to the manufacturing process for required new packaging), the creation of standalone systems and infrastructure, site separation and certain legal registration and patent assignment costs.
Public company expenses
As a result of the IPO, we became subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. We have established additional procedures and practices as an independent public company. As a result, we are incurring additional costs, including, but not limited to, internal audit, investor relations, stock administration and regulatory compliance costs.
Recent acquisitions and government-mandated divestitures
The assets, liabilities, operating results and cash flows of acquired businesses are included in our results commencing from their respective acquisition dates.
On February 10, 2015, we completed the purchase of certain assets of Abbott Animal Health, a subsidiary of Abbott Laboratories. For additional information, see Note 5. Acquisitions.
Analysis of the condensed consolidated statements of income
The following discussion and analysis of our statements of income should be read along with our condensed consolidated financial statements and the notes thereto included elsewhere in Part I, Item 1 of this Quarterly Report on Form 10-Q.
 
 
Three Months Ended
 
 
 
 
March 29,

 
March 30,

 
%

(MILLIONS OF DOLLARS)
 
2015

 
2014

 
Change

Revenue
 
$
1,102

 
$
1,097

 

Costs and expenses:
 
 
 
 
 
 
Cost of sales(a)
 
394

 
379

 
4

% of revenue