x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES | |
EXCHANGE ACT OF 1934 | ||
For the quarterly period ended September 30, 2018 | ||
or | ||
TRANSITION REPORT PURSUANT TO SECTION 13 | ||
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
¨ | For the transition period from __________ to __________ |
Zoetis Inc. |
(Exact name of registrant as specified in its charter) |
Delaware | 46-0696167 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
10 Sylvan Way, Parsippany, New Jersey | 07054 | |
(Address of principal executive offices) | (Zip Code) |
(973) 822-7000 |
(Registrant’s telephone number, including area code) |
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | Emerging growth company ¨ |
Page | ||||
Item 1. | ||||
Condensed Consolidated Statements of Income (Unaudited) | ||||
Condensed Consolidated Statements of Comprehensive Income (Unaudited) | ||||
Condensed Consolidated Balance Sheets (Unaudited) | ||||
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. | ||||
Item 1. | Financial Statements |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenue | $ | 1,480 | $ | 1,347 | $ | 4,261 | $ | 3,847 | ||||||||
Costs and expenses: | ||||||||||||||||
Cost of sales | 473 | 435 | 1,367 | 1,318 | ||||||||||||
Selling, general and administrative expenses | 367 | 328 | 1,064 | 973 | ||||||||||||
Research and development expenses | 108 | 96 | 307 | 272 | ||||||||||||
Amortization of intangible assets | 32 | 23 | 78 | 68 | ||||||||||||
Restructuring charges/(reversals) and certain acquisition-related costs | 47 | 8 | 54 | 7 | ||||||||||||
Interest expense, net of capitalized interest | 54 | 43 | 147 | 125 | ||||||||||||
Other (income)/deductions—net | (19 | ) | 1 | (28 | ) | (11 | ) | |||||||||
Income before provision for taxes on income | 418 | 413 | 1,272 | 1,095 | ||||||||||||
Provision for taxes on income | 71 | 117 | 193 | 313 | ||||||||||||
Net income before allocation to noncontrolling interests | 347 | 296 | 1,079 | 782 | ||||||||||||
Less: Net loss attributable to noncontrolling interests | — | (2 | ) | (4 | ) | (1 | ) | |||||||||
Net income attributable to Zoetis Inc. | $ | 347 | $ | 298 | $ | 1,083 | $ | 783 | ||||||||
Earnings per share attributable to Zoetis Inc. stockholders: | ||||||||||||||||
Basic | $ | 0.72 | $ | 0.61 | $ | 2.24 | $ | 1.60 | ||||||||
Diluted | $ | 0.71 | $ | 0.61 | $ | 2.22 | $ | 1.59 | ||||||||
Weighted-average common shares outstanding: | ||||||||||||||||
Basic | 482.0 | 489.1 | 483.9 | 490.8 | ||||||||||||
Diluted | 485.8 | 492.4 | 487.7 | 493.9 | ||||||||||||
Dividends declared per common share | $ | — | $ | — | $ | 0.252 | $ | 0.210 |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
(MILLIONS OF DOLLARS) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income before allocation to noncontrolling interests | $ | 347 | $ | 296 | $ | 1,079 | $ | 782 | ||||||||
Other comprehensive (loss)/income, net of taxes and reclassification adjustments: | ||||||||||||||||
Unrealized losses on derivatives, net(a) | (1 | ) | (10 | ) | (1 | ) | (11 | ) | ||||||||
Foreign currency translation adjustments, net | (75 | ) | 98 | (113 | ) | 154 | ||||||||||
Benefit plans: Actuarial gains, net(a) | — | — | — | 1 | ||||||||||||
Total other comprehensive (loss)/income, net of tax | (76 | ) | 88 | (114 | ) | 144 | ||||||||||
Comprehensive income before allocation to noncontrolling interests | 271 | 384 | 965 | 926 | ||||||||||||
Less: Comprehensive (loss)/income attributable to noncontrolling interests | — | (1 | ) | (4 | ) | — | ||||||||||
Comprehensive income attributable to Zoetis Inc. | $ | 271 | $ | 385 | $ | 969 | $ | 926 |
(a) | Presented net of reclassification adjustments and tax impacts, which are not significant in any period presented. Reclassification adjustments related to benefit plans are generally reclassified, as part of net periodic pension cost, into Other (income)/deductions, beginning in the first quarter of 2018, and into Cost of sales, Selling, general and administrative expenses, and/or Research and development expenses, as appropriate, for periods prior to 2018, in the condensed consolidated statements of income. |
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA) | (Unaudited) | |||||||
Assets | ||||||||
Cash and cash equivalents(a) | $ | 1,286 | $ | 1,564 | ||||
Short term investments | 105 | — | ||||||
Accounts receivable, less allowance for doubtful accounts of $24 in 2018 and $25 in 2017 | 929 | 998 | ||||||
Inventories | 1,441 | 1,427 | ||||||
Other current assets | 315 | 228 | ||||||
Total current assets | 4,076 | 4,217 | ||||||
Property, plant and equipment, less accumulated depreciation of $1,559 in 2018 and $1,471 in 2017 | 1,556 | 1,435 | ||||||
Goodwill | 2,537 | 1,510 | ||||||
Identifiable intangible assets, less accumulated amortization | 2,120 | 1,269 | ||||||
Noncurrent deferred tax assets | 73 | 80 | ||||||
Other noncurrent assets | 97 | 75 | ||||||
Total assets | $ | 10,459 | $ | 8,586 | ||||
Liabilities and Equity | ||||||||
Accounts payable | $ | 238 | $ | 261 | ||||
Dividends payable | — | 61 | ||||||
Accrued expenses | 425 | 432 | ||||||
Accrued compensation and related items | 226 | 236 | ||||||
Income taxes payable | 75 | 60 | ||||||
Other current liabilities | 39 | 44 | ||||||
Total current liabilities | 1,003 | 1,094 | ||||||
Long-term debt, net of discount and issuance costs | 6,441 | 4,953 | ||||||
Noncurrent deferred tax liabilities | 446 | 380 | ||||||
Other taxes payable | 250 | 172 | ||||||
Other noncurrent liabilities | 201 | 201 | ||||||
Total liabilities | 8,341 | 6,800 | ||||||
Commitments and contingencies (Note 16) | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, $0.01 par value: 1,000,000,000 authorized, none issued | — | — | ||||||
Common stock, $0.01 par value: 6,000,000,000 authorized; 501,891,243 and 501,891,243 shares issued; 480,980,372 and 486,130,461 shares outstanding at September 30, 2018, and December 31, 2017, respectively | 5 | 5 | ||||||
Treasury stock, at cost, 20,910,871 and 15,760,782 shares of common stock at September 30, 2018, and December 31, 2017, respectively | (1,345 | ) | (852 | ) | ||||
Additional paid-in capital | 1,010 | 1,013 | ||||||
Retained earnings | 3,067 | 2,109 | ||||||
Accumulated other comprehensive loss | (619 | ) | (505 | ) | ||||
Total Zoetis Inc. equity | 2,118 | 1,770 | ||||||
Equity attributable to noncontrolling interests | — | 16 | ||||||
Total equity | 2,118 | 1,786 | ||||||
Total liabilities and equity | $ | 10,459 | $ | 8,586 |
(a) | As of September 30, 2018, and December 31, 2017, includes $5 million and $6 million, respectively, of restricted cash. |
Zoetis | ||||||||||||||||||||||||||||
Accumulated | Equity | |||||||||||||||||||||||||||
Additional | Other | Attributable to | ||||||||||||||||||||||||||
Common | Treasury | Paid-in | Retained | Comprehensive | Noncontrolling | Total | ||||||||||||||||||||||
(MILLIONS OF DOLLARS) | Stock(a) | Stock(a) | Capital | Earnings | Loss | Interests | Equity | |||||||||||||||||||||
Balance, December 31, 2016 | $ | 5 | $ | (421 | ) | $ | 1,024 | $ | 1,477 | $ | (598 | ) | $ | 12 | $ | 1,499 | ||||||||||||
Nine months ended October 1, 2017 | ||||||||||||||||||||||||||||
Net income | — | — | — | 783 | — | (1 | ) | 782 | ||||||||||||||||||||
Other comprehensive income | — | — | — | — | 143 | 1 | 144 | |||||||||||||||||||||
Consolidation of a noncontrolling interest(b) | — | — | — | — | — | 18 | 18 | |||||||||||||||||||||
Share-based compensation awards(c) | — | 63 | 6 | (17 | ) | — | — | 52 | ||||||||||||||||||||
Treasury stock acquired(d) | — | (375 | ) | — | — | — | — | (375 | ) | |||||||||||||||||||
Employee benefit plan contribution from Pfizer Inc.(e) | — | — | 2 | — | — | — | 2 | |||||||||||||||||||||
Dividends declared | — | — | — | (103 | ) | — | — | (103 | ) | |||||||||||||||||||
Balance, October 1, 2017 | $ | 5 | $ | (733 | ) | $ | 1,032 | $ | 2,140 | $ | (455 | ) | $ | 30 | $ | 2,019 | ||||||||||||
Balance, December 31, 2017 | $ | 5 | $ | (852 | ) | $ | 1,013 | $ | 2,109 | $ | (505 | ) | $ | 16 | $ | 1,786 | ||||||||||||
Nine months ended September 30, 2018 | ||||||||||||||||||||||||||||
Net income/(loss) | — | — | — | 1,083 | — | (4 | ) | 1,079 | ||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (114 | ) | — | (114 | ) | |||||||||||||||||||
Acquisition of a noncontrolling interest(b) | — | — | (14 | ) | — | — | (12 | ) | (26 | ) | ||||||||||||||||||
Share-based compensation awards (c) | — | 55 | 9 | (3 | ) | — | — | 61 | ||||||||||||||||||||
Treasury stock acquired(d) | — | (548 | ) | — | — | — | — | (548 | ) | |||||||||||||||||||
Employee benefit plan contribution from Pfizer Inc.(e) | — | — | 2 | — | — | — | 2 | |||||||||||||||||||||
Dividends declared | — | — | — | (122 | ) | — | — | (122 | ) | |||||||||||||||||||
Balance, September 30, 2018 | $ | 5 | $ | (1,345 | ) | $ | 1,010 | $ | 3,067 | $ | (619 | ) | $ | — | $ | 2,118 |
(a) | As of September 30, 2018, and October 1, 2017, there were 480,980,372 and 487,832,003 outstanding shares of common stock, respectively, and 20,910,871 and 14,059,240 shares of treasury stock, respectively. Treasury stock is recognized at the cost to reacquire the shares. For additional information, see Note 14. Stockholders' Equity. |
(b) | For the nine months ended October 1, 2017, represents the consolidation of a European livestock monitoring company. For the nine months ended September 30, 2018, represents the acquisition of the noncontrolling interest of a European livestock monitoring company. |
(c) | Includes the issuance of shares of Zoetis Inc. common stock and the reissuance of treasury stock in connection with the vesting of employee share-based awards. Upon reissuance of treasury stock, differences between the proceeds from reissuance and the cost of the treasury stock that result in gains are recorded in Additional paid-in capital. Losses are recorded in Additional paid-in capital to the extent that they can offset previously recorded gains. If no such credit exists, the differences are recorded in Retained earnings. Also includes the reacquisition of shares of treasury stock associated with the vesting of employee share-based awards to satisfy tax withholding requirements.and the acquisition date fair value of replacement awards issued in conjunction with the acquisition of Abaxis in 2018 attributable to pre-combination services. For additional information, see Note 5. Acquisitions and Divestitures,. |
(d) | Reflects the acquisition of treasury shares in connection with the share repurchase program. For additional information, see Note 14. Stockholders' Equity. |
(e) | Represents contributed capital from Pfizer Inc. associated with service credit continuation for certain Zoetis Inc. employees in Pfizer Inc.'s U.S. qualified defined benefit and U.S. retiree medical plans. See Note 12. Benefit Plans. |
Nine Months Ended | ||||||||
September 30, | October 1, | |||||||
(MILLIONS OF DOLLARS) | 2018 | 2017 | ||||||
Operating Activities | ||||||||
Net income before allocation to noncontrolling interests | $ | 1,079 | $ | 782 | ||||
Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities: | ||||||||
Depreciation and amortization expense | 207 | 179 | ||||||
Share-based compensation expense | 36 | 33 | ||||||
Asset write-offs and asset impairments | 4 | 1 | ||||||
Net loss on sale of assets | — | 2 | ||||||
Provision for losses on inventory | 37 | 46 | ||||||
Deferred taxes(a) | (155 | ) | (3 | ) | ||||
Employee benefit plan contribution from Pfizer Inc. | 2 | 2 | ||||||
Other non-cash adjustments | (17 | ) | 11 | |||||
Other changes in assets and liabilities, net of acquisitions and divestitures | ||||||||
Accounts receivable | 37 | (58 | ) | |||||
Inventories | 29 | (35 | ) | |||||
Other assets | (77 | ) | (132 | ) | ||||
Accounts payable | (39 | ) | (56 | ) | ||||
Other liabilities | (31 | ) | (107 | ) | ||||
Other tax accounts, net(a) | 94 | 73 | ||||||
Net cash provided by operating activities | 1,206 | 738 | ||||||
Investing Activities | ||||||||
Purchases of property, plant and equipment | (200 | ) | (141 | ) | ||||
Acquisition of Abaxis, net of cash acquired | (1,884 | ) | — | |||||
Other acquisitions | (108 | ) | (82 | ) | ||||
Net proceeds from sales of assets | 8 | 1 | ||||||
Other investing activities | (1 | ) | 6 | |||||
Net cash used in investing activities | (2,185 | ) | (216 | ) | ||||
Financing Activities | ||||||||
Proceeds from issuance of long-term debt—senior notes, net of discount and fees | 1,485 | 1,231 | ||||||
Payment of contingent consideration related to previously acquired assets | (12 | ) | (5 | ) | ||||
Acquisition of a noncontrolling interest | (26 | ) | — | |||||
Share-based compensation-related proceeds, net of taxes paid on withholding shares | 14 | 20 | ||||||
Purchases of treasury stock | (548 | ) | (375 | ) | ||||
Cash dividends paid | (183 | ) | (155 | ) | ||||
Net cash provided by financing activities | 730 | 716 | ||||||
Effect of exchange-rate changes on cash and cash equivalents | (29 | ) | 16 | |||||
Net increase/(decrease) in cash and cash equivalents | (278 | ) | 1,254 | |||||
Cash and cash equivalents at beginning of period | 1,564 | 727 | ||||||
Cash and cash equivalents at end of period | $ | 1,286 | $ | 1,981 | ||||
Supplemental cash flow information | ||||||||
Cash paid during the period for: | ||||||||
Income taxes | $ | 290 | $ | 366 | ||||
Interest, net of capitalized interest | 166 | 138 | ||||||
Non-cash transactions: | ||||||||
Purchases of property, plant and equipment | 3 | 6 |
(a) | Reflects the reclassification of the one-time mandatory deemed repatriation tax from Noncurrent deferred tax liabilities to Income taxes payable and Other taxes payable to properly reflect the liability, which became a fixed obligation in 2018 payable over eight years. |
1. | Organization |
2. | Basis of Presentation |
3. | Accounting Standards |
4. | Revenue |
A. | Revenue from Product Sales |
• | vaccines: biological preparations that help prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce a specific immune response; |
• | anti-infectives: products that prevent, kill or slow the growth of bacteria, fungi or protozoa; |
• | other pharmaceutical products: allergy and dermatology, pain and sedation, antiemetic, reproductive, and oncology products; |
• | parasiticides: products that prevent or eliminate external and internal parasites such as fleas, ticks and worms; |
• | medicated feed additives: products added to animal feed that provide medicines to livestock; and |
• | animal health diagnostics: portable blood and urine analysis systems and point-of-care diagnostic products, including instruments |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
(MILLIONS OF DOLLARS) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
United States | $ | 757 | $ | 680 | $ | 2,068 | $ | 1,908 | ||||||||
Australia | 53 | 51 | 152 | 134 | ||||||||||||
Brazil | 72 | 66 | 210 | 205 | ||||||||||||
Canada | 42 | 40 | 138 | 123 | ||||||||||||
China | 46 | 40 | 170 | 137 | ||||||||||||
France | 29 | 30 | 92 | 85 | ||||||||||||
Germany | 36 | 35 | 112 | 96 | ||||||||||||
Italy | 27 | 22 | 80 | 65 | ||||||||||||
Japan | 34 | 31 | 114 | 101 | ||||||||||||
Mexico | 24 | 21 | 74 | 60 | ||||||||||||
Spain | 28 | 24 | 83 | 67 | ||||||||||||
United Kingdom | 47 | 36 | 135 | 105 | ||||||||||||
Other developed markets | 98 | 96 | 266 | 240 | ||||||||||||
Other emerging markets | 173 | 162 | 537 | 485 | ||||||||||||
1,466 | 1,334 | 4,231 | 3,811 | |||||||||||||
Contract manufacturing & human health diagnostics | 14 | 13 | 30 | 36 | ||||||||||||
Total Revenue | $ | 1,480 | $ | 1,347 | $ | 4,261 | $ | 3,847 |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
(MILLIONS OF DOLLARS) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
U.S. | ||||||||||||||||
Livestock | $ | 322 | $ | 319 | $ | 885 | $ | 870 | ||||||||
Companion animal | 435 | 361 | 1,183 | 1,038 | ||||||||||||
757 | 680 | 2,068 | 1,908 | |||||||||||||
International | ||||||||||||||||
Livestock | 456 | 435 | 1,397 | 1,276 | ||||||||||||
Companion animal | 253 | 219 | 766 | 627 | ||||||||||||
709 | 654 | 2,163 | 1,903 | |||||||||||||
Contract manufacturing & human health diagnostics | 14 | 13 | 30 | 36 | ||||||||||||
Total Revenue | $ | 1,480 | $ | 1,347 | $ | 4,261 | $ | 3,847 |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
(MILLIONS OF DOLLARS) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Livestock: | ||||||||||||||||
Cattle | $ | 417 | $ | 424 | $ | 1,229 | $ | 1,192 | ||||||||
Swine | 160 | 147 | 500 | 455 | ||||||||||||
Poultry | 130 | 119 | 395 | 357 | ||||||||||||
Fish | 46 | 39 | 92 | 79 | ||||||||||||
Other | 25 | 25 | 66 | 63 | ||||||||||||
778 | 754 | 2,282 | 2,146 | |||||||||||||
Companion Animal: | ||||||||||||||||
Dogs and Cats | 653 | 546 | 1,832 | 1,561 | ||||||||||||
Horses | 35 | 34 | 117 | 104 | ||||||||||||
688 | 580 | 1,949 | 1,665 | |||||||||||||
Contract manufacturing & human health diagnostics | 14 | 13 | 30 | 36 | ||||||||||||
Total Revenue | $ | 1,480 | $ | 1,347 | $ | 4,261 | $ | 3,847 |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
(MILLIONS OF DOLLARS) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Vaccines | $ | 382 | $ | 363 | $ | 1,109 | $ | 1,006 | ||||||||
Anti-infectives | 323 | 324 | 906 | 870 | ||||||||||||
Other pharmaceuticals | 361 | 304 | 1,017 | 858 | ||||||||||||
Parasiticides | 203 | 191 | 639 | 581 | ||||||||||||
Medicated feed additives | 111 | 107 | 362 | 351 | ||||||||||||
Animal health diagnostics | 46 | 11 | 69 | 32 | ||||||||||||
Other non-pharmaceuticals | 40 | 34 | 129 | 113 | ||||||||||||
1,466 | 1,334 | 4,231 | 3,811 | |||||||||||||
Contract manufacturing & human health diagnostics | 14 | 13 | 30 | 36 | ||||||||||||
Total Revenue | $ | 1,480 | $ | 1,347 | $ | 4,261 | $ | 3,847 |
• | for sales returns, we perform calculations in each market that incorporate the following, as appropriate: local returns policies and practices; historic returns as a percentage of revenue; estimated shelf life by product; an estimate of the amount of time between shipment and return or lag time; and any other factors that could impact the estimate of future returns, product recalls, discontinuation of products or a changing competitive environment; and |
• | for revenue incentives, we use our historical experience with similar incentives programs to estimate the impact of such programs on revenue for the current period. |
5. | Acquisitions and Divestitures |
(MILLIONS OF DOLLARS) | Amounts | ||
Cash paid to Abaxis' shareholders(a) | $ | 1,898 | |
Cash paid for equity awards attributable for pre-merger services(b) | 54 | ||
Fair value of Zoetis equity awards issued in exchange for outstanding Abaxis equity awards pertaining to pre-merger service(c) | 10 | ||
Total consideration | $ | 1,962 |
(a) | Represents cash paid for cancellation and conversion of each outstanding share of Abaxis' common stock at the acquisition date. |
(b) | Represents cash paid for cancellation and settlement of restricted stock awards that fully vested in July 2018 as a result of service or pre-existing change-in-control provisions and termination provisions. Includes certain awards that will be settled in cash during 2019, reflected in Other current liabilities within the condensed consolidated balance sheet. |
(c) | Represents the fair value of replacement awards issued for Abaxis equity awards outstanding immediately before the acquisition and attributable to the service period prior to the acquisition. The previous Abaxis equity awards were converted into the Zoetis equity awards at an exchange ratio based on the closing prices of shares of Zoetis Common Stock and Abaxis Common Stock for ten full trading days before the closing of the acquisition. |
(MILLIONS OF DOLLARS) | Amounts | ||
Cash and cash equivalents | $ | 64 | |
Short term investments(a) | 107 | ||
Accounts receivable(b) | 30 | ||
Inventories(c) | 79 | ||
Other current assets | 6 | ||
Property, plant and equipment(d) | 49 | ||
Identifiable intangible assets(e) | 898 | ||
Other noncurrent assets | 29 | ||
Accounts payable | (21) | ||
Accrued compensation and related items | (10) | ||
Other current liabilities | (26) | ||
Other noncurrent liabilities | (11) | ||
Noncurrent deferred tax liabilities(f) | (215) | ||
Total net assets acquired | 979 | ||
Goodwill(g) | 983 | ||
Total consideration | $ | 1,962 |
(a) | Short term investments include investments in debt securities that are classified as available-for-sale and measured at fair value. |
(b) | The fair value approximates the gross contractual amount of accounts receivable. The contractual amount not expected to be collected is immaterial. |
(c) | Acquired inventory is comprised of finished goods, work in process and raw materials. The preliminary estimate of fair value of finished goods was determined based on net realizable value adjusted for the costs of the selling effort, a reasonable profit allowance for the selling effort, and estimated holding costs. The preliminary estimate of fair value of work in process was determined based on net realizable value adjusted for costs to complete the manufacturing process, costs of the selling effort, a reasonable profit allowance for the remaining manufacturing and selling effort, and an estimate of holding costs. The fair value of raw materials was determined to approximate book value. |
(d) | Property, plant and equipment is comprised of machinery and equipment, furniture and fixtures, computer equipment, leasehold improvements and construction in progress. The preliminary estimated fair value was primarily determined using a reproduction/replacement cost approach which measures the value of an asset by estimating the cost to acquire or construct comparable assets adjusted for age and condition of the asset. |
(e) | Identifiable intangible assets primarily consist of developed technology rights, customer relationships, and trademarks and tradenames. The preliminary estimate of fair value of identifiable intangible assets is determined using the income approach, which includes a forecast of expected future cash flows. For additional information regarding identifiable intangible assets, see Note 11. Goodwill and Other Intangible Assets. |
(f) | The acquisition was structured as a stock purchase and therefore we assumed the historical tax basis of Abaxis' assets and liabilities. The preliminary estimate of deferred tax effects resulting from the acquisition include the expected federal, state, and foreign tax consequences associated with temporary differences between the preliminary fair values of the assets acquired and liabilities assumed and the respective tax basis. The components of the Abaxis net deferred tax liability are included within amounts reported in Note 8. Income Taxes. |
(g) | Goodwill represents the excess of consideration transferred over the preliminary estimate of fair values of the assets acquired and liabilities assumed. It is allocated to our existing reportable segments and is primarily attributable to the future potential of the technology platforms, as well as cost and revenue synergies including market share capture, elimination of cost redundancies and gain of cost efficiencies, and intangible assets such as assembled workforce which are not separately recognizable. The primary strategic purpose of the acquisition was to enhance the company’s existing product portfolio by strengthening Zoetis’ presence in veterinary diagnostics. The goodwill recorded is not deductible for tax purposes. The allocation of goodwill to the reporting units is preliminary and will be completed as the company obtains the information necessary to complete the analysis, but no later than one year from the date of the acquisition. |
(MILLIONS OF DOLLARS) | July 31 - September 30, 2018 | ||
Revenue | $ | 42 | |
Net loss attributable to Zoetis Inc.(a) | 32 |
(a) | Included in the net loss are (i) $7 million of cost of goods sold related to the preliminary fair value adjustment for acquisition date inventory estimated to have been sold during the period ended September 30, 2018, (ii) $20 million of amortization expense related to the preliminary fair value of identifiable intangible assets recognized at the acquisition date, (iii) $10 million of severance costs directly related to the acquisition, and (iv) the applicable tax impact of above adjustments based on the statutory tax rates in the various jurisdictions where the adjustments are expected to be incurred. |
Three Months Ended | Nine Months Ended | ||||||||||||
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) | September 30, | October 1, | September 30, | October 1, | |||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||
Revenue | $ | 1,500 | $ | 1,406 | $ | 4,416 | $ | 4,022 | |||||
Net income attributable to Zoetis Inc. | 348 | 267 | 1,024 | 665 | |||||||||
Net income per common share - basic | 0.72 | 0.55 | 2.12 | 1.35 | |||||||||
Net income per common share - diluted | 0.72 | 0.54 | 2.10 | 1.35 |
• | Acquisition related costs incurred by Zoetis and Abaxis of $57 million and $60 million have been removed for each of the three and nine months ended September 30, 2018, respectively. Acquisition related costs of $0 million and $38 million are assumed to be have been incurred during the three and nine months ended October 1, 2017, respectively. |
• | Additional amortization expense of $13 million and $78 million for each of the three and nine months ended September 30, 2018, respectively, and $33 million and $98 million for each of the three and nine months ended October 1, 2017, respectively, related to the preliminary fair value estimate of identified intangible assets acquired. |
• | Additional depreciation expense of $1 million for the nine months ended September 30, 2018, and $1 million for the nine months ended October 1, 2017, related to the preliminary estimate of fair value adjustments to property, plant and equipment acquired. |
• | Adjustments related to the preliminary estimate of the non-recurring fair value adjustment to acquisition date inventory estimated to have been sold, resulting in $7 million removed for each of the three and nine months ended September 30, 2018, respectively, and $11 million and $33 million added to the three and nine months ended October 1, 2017, respectively. |
• | Additional interest expense and amortization of debt issuance costs for the debt issuance to finance the acquisition, resulting in $8 million and $36 million added for the three and nine months ended September 30, 2018, respectively, and $14 million and $43 million added to the three and nine months ended October 1, 2017, respectively. |
• | Adjustments related to the post merger share-based compensation expense of the replacement awards are $0 million and $7 million for the three and nine months ended September 30, 2018, respectively, and $3 million and $10 million for the three and nine months ended October 1, 2017, respectively. |
• | Applicable tax impact of the above adjustments based on the statutory tax rates in the various jurisdictions where the adjustments are expected to be incurred. |
6. | Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
(MILLIONS OF DOLLARS) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Restructuring charges/(reversals) and certain acquisition-related costs: | ||||||||||||||||
Transaction costs(a) | $ | 21 | $ | — | $ | 21 | $ | — | ||||||||
Integration costs(b) | 9 | 2 | 10 | 4 | ||||||||||||
Restructuring charges/(reversals)(c)(d): | ||||||||||||||||
Employee termination costs | 17 | 7 | 22 | 3 | ||||||||||||
Exit costs | — | (1 | ) | 1 | — | |||||||||||
Total Restructuring charges/(reversals) and certain acquisition-related costs | $ | 47 | $ | 8 | $ | 54 | $ | 7 |
(a) | Transaction costs represent external costs directly related to acquiring businesses and primarily include expenditures for banking, legal, accounting and other similar services. |
(b) | Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and the integration of systems and processes, as well as product transfer costs. |
(c) | The restructuring charges for the three months ended September 30, 2018, are primarily related to: |
• | employee termination costs of $8 million in Europe as a result of initiatives to better align our organizational structure, and |
• | employee termination costs of $10 million related to the acquisition of Abaxis. |
• | employee termination costs of $11 million in Europe as a result of initiatives to better align our organizational structure, and |
• | employee termination costs of $10 million related to the acquisition of Abaxis. |
The restructuring charges/(reversals) for the three months ended October 1, 2017, are primarily related to: |
• | employee termination costs of $3 million related to the operational efficiency initiative and supply network strategy, and |
• | employee termination costs of $4 million related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017. |
• | employee termination costs of $4 million related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017. |
(d) | The restructuring charges/(reversals) are associated with the following: |
• | For the three months ended September 30, 2018, International of $8 million and Manufacturing/research/corporate of $9 million. |
• | For the nine months ended September 30, 2018, International of $12 million and Manufacturing/research/corporate of $11 million. |
• | For the three months ended October 1, 2017, International of ($1 million reversal) and Manufacturing/research/corporate of $7 million. |
• | For the nine months ended October 1, 2017, International of ($2 million reversal) and Manufacturing/research/corporate of $5 million. |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
(MILLIONS OF DOLLARS) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Restructuring charges/(reversals) and certain acquisition-related costs: | ||||||||||||||||
Operational efficiency initiative | ||||||||||||||||
Employee termination costs | $ | (1 | ) | $ | 1 | $ | — | $ | 2 | |||||||
Exit costs | — | (1 | ) | — | — | |||||||||||
(1 | ) | — | — | 2 | ||||||||||||
Supply network strategy: | ||||||||||||||||
Employee termination costs | — | 2 | 1 | (3 | ) | |||||||||||
Exit costs | — | — | 1 | — | ||||||||||||
— | 2 | 2 | (3 | ) | ||||||||||||
Total restructuring charges/(reversals) related to the operational efficiency initiative and supply network strategy | (1 | ) | 2 | 2 | (1 | ) | ||||||||||
Other operational efficiency initiative charges | ||||||||||||||||
Selling, general and administrative expenses: | ||||||||||||||||
Consulting fees | — | — | — | 1 | ||||||||||||
Other (income)/deductions—net: | ||||||||||||||||
Net (gain)/loss on sale of assets | — | (1 | ) | — | 1 | |||||||||||
Total other operational efficiency initiative charges | — | (1 | ) | — | 2 | |||||||||||
Other supply network strategy charges | ||||||||||||||||
Cost of sales: | ||||||||||||||||
Accelerated depreciation | — | — | — | 2 | ||||||||||||
Consulting fees and other costs | 1 | 1 | 4 | 3 | ||||||||||||
Other (income)/deductions—net: | ||||||||||||||||
Net loss on sale of assets(a) | 2 | 5 | 2 | 5 | ||||||||||||
Total other supply network strategy charges | 3 | 6 | 6 | 10 | ||||||||||||
Total charges associated with the operational efficiency initiative and supply network strategy | $ | 2 | $ | 7 | $ | 8 | $ | 11 |
(a) | For the three and nine months ended October 1, 2017, represents charges related to the agreement to sell a manufacturing site in Guarulhos, Brazil, which includes a $3 million charge to reduce the carrying value of the disposal group to an amount equal to fair value, less costs to sell, as well as $2 million of costs related to the anticipated disposal. |
Employee | ||||||||||||
Termination | Exit | |||||||||||
(MILLIONS OF DOLLARS) | Costs | Costs | Accrual | |||||||||
Balance, December 31, 2017(a) | $ | 41 | $ | — | $ | 41 | ||||||
Provision | 22 | 1 | 23 | |||||||||
Utilization and other(b) | (26 | ) | (1 | ) | (27 | ) | ||||||
Balance, September 30, 2018(a) | $ | 37 | $ | — | $ | 37 |
(a) | At September 30, 2018, and December 31, 2017, included in Accrued expenses ($15 million and $19 million, respectively) and Other noncurrent liabilities ($22 million and $22 million, respectively). |
(b) | Includes adjustments for foreign currency translation. |
7. | Other (Income)/Deductions—Net |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
(MILLIONS OF DOLLARS) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Royalty-related income | $ | (5 | ) | $ | (7 | ) | $ | (18 | ) | $ | (19 | ) | ||||
Interest income | (6 | ) | (3 | ) | (20 | ) | (8 | ) | ||||||||
Net (gain)/loss on sale of assets(a) | 2 | 4 | 2 | 6 | ||||||||||||
Certain legal and other matters, net(b) | — | — | — | (4 | ) | |||||||||||
Foreign currency loss(c) | 9 | 7 | 26 | 17 | ||||||||||||
Other, net(d) | (19 | ) | — | (18 | ) | (3 | ) | |||||||||
Other (income)/deductions—net | $ | (19 | ) | $ | 1 | $ | (28 | ) | $ | (11 | ) |
(a) | Represents net losses related to sales of certain manufacturing sites and products as part of our operational efficiency initiative and supply network strategy. |
(b) | For the nine months ended October 1, 2017, represents income associated with an insurance recovery related to commercial settlements in Mexico recorded in 2014 and 2016. |
(c) | Primarily driven by costs related to hedging and exposures to certain emerging market currencies. |
(d) | For the three and nine months ended September 30, 2018, primarily includes a net gain related to the relocation of a manufacturing site in China. For the nine months ended October 1, 2017, primarily includes a settlement refund and reimbursement of legal fees related to costs incurred by Pharmaq prior to the acquisition in 2015 and income associated with certain state business employment tax incentive credits. |
8. | Income Taxes |
A. | Taxes on Income |
• | One-Time Mandatory Deemed Repatriation Tax: The one-time mandatory deemed repatriation tax is imposed on previously untaxed accumulated and current earnings and profits (E&P) of our foreign subsidiaries. We were able to reasonably estimate the one-time mandatory deemed repatriation tax and recorded an initial provisional tax obligation, with a corresponding adjustment to income tax expense for the year ended December 31, 2017. We are continuing to gather additional information to more precisely compute the amount of the one-time mandatory deemed repatriation tax. Our accounting for this item is not yet complete due to the fact that the non-U.S. subsidiaries are on a fiscal year ending November 30, and this tax liability will not become a fixed obligation until November 30, 2018. The estimated impact of the Tax Act is based on a preliminary review of the new law and projected future financial results and is subject to revision based upon further analysis and interpretation of the Tax Act and to the extent that future results differ from currently available projections. However, on the basis of revised computations that were calculated during the reporting period, we recognized a measurement-period adjustment of $23 million and $58 million for the three and nine months ended September 30, 2018, respectively, as a decrease to the one-time mandatory deemed repatriation tax obligation, with a corresponding adjustment to income tax benefit during the period. The effect of the measurement-period adjustment to the three and nine months ended September 30, 2018 effective tax rate was a reduction to the rate of approximately 5.4% and 4.6%, respectively. In addition, we reclassified the one-time mandatory deemed repatriation tax from Noncurrent deferred tax liabilities to Income taxes payable and Other taxes payable. We expect to complete our accounting within the prescribed measurement period. |
• | Reduction of U.S. Federal Corporate Tax Rate: The Tax Act reduced the corporate tax rate to 21%, effective January 1, 2018. Consequently, we recorded a decrease related to deferred tax assets and liabilities with a corresponding net adjustment to deferred income tax benefit for the year ended December 31, 2017. We have not made any measurement-period adjustments related to this item during the nine months of 2018. Since the company has recorded provisional amounts related to certain portions of the Tax Act, any |
• | Valuation Allowances: The company must assess whether its valuation allowance analyses are affected by the various aspects of the Tax Act (e.g., one-time mandatory deemed repatriation of deferred foreign income, global intangible low-taxed income inclusions, and new categories of foreign tax credits). We have not made any measurement-period adjustments related to this item during the nine months of 2018. Since the company has recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional. However, we are continuing to gather additional information to complete our accounting for this item and expect to be completed within the prescribed measurement period. |
• | Global Intangible Low-Taxed Income (GILTI) Policy Election: The GILTI provisions of the Tax Act do not apply to the company until 2019, due to the fact that the non-U.S. subsidiaries are on a fiscal year ending November 30, and we are still evaluating its impact. The FASB allows companies to adopt an accounting policy to either recognize deferred taxes for GILTI or treat such tax cost as a current-period expense when incurred. We have not yet determined our accounting policy because determining the impact of the GILTI provisions requires analysis of our existing legal entity structure, the reversal of our U.S. GAAP and U.S. tax basis differences in the assets and liabilities of our foreign subsidiaries, and our ability to offset any tax with foreign tax credits. As such, we have not made a policy decision whether to record deferred taxes on GILTI or treat such tax cost as a current-period expense. |
• | the reduction of the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018, pursuant to the Tax Act; |
• | a $23 million net tax benefit recorded in the third quarter of 2018, associated with a measurement-period adjustment related to the provisional one-time mandatory deemed repatriation tax on the company's undistributed non-U.S. earnings pursuant to the Tax Act enacted on December 22, 2017; |
• | changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items; and |
• | a $3 million and $1 million discrete tax benefit recorded in the third quarter of 2018 and 2017, respectively, related to the excess tax benefits for share-based payments. |
• | the reduction of the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018, pursuant to the Tax Act; |
• | a $58 million net tax benefit recorded in the nine months ended 2018, associated with a measurement-period adjustment related to the provisional one-time mandatory deemed repatriation tax on the company's undistributed non-U.S. earnings pursuant to the Tax Act enacted on December 22, 2017; |
• | changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items; |
• | a $12 million and $8 million discrete tax benefit recorded in the nine months ended 2018 and 2017, respectively, related to the excess tax benefits for share-based payments; and |
• | an $8 million and $3 million discrete tax benefit recorded in the nine months ended 2018 and 2017, respectively, related to a remeasurement of deferred taxes as a result of a change in non-U.S. statutory tax rates. |
B. | Deferred Taxes |
C. | Tax Contingencies |
9. | Financial Instruments |
A. | Debt |
September 30, | December 31, | |||||||
(MILLIONS OF DOLLARS) | 2018 | 2017 | ||||||
3.450% 2015 senior notes due 2020 | $ | 500 | $ | 500 | ||||
2018 floating rate senior notes due 2021 | 300 | — | ||||||
3.250% 2018 senior notes due 2021 | 300 | — | ||||||
3.250% 2013 senior notes due 2023 | 1,350 | 1,350 | ||||||
4.500% 2015 senior notes due 2025 | 750 | 750 | ||||||
3.000% 2017 senior notes due 2027 | 750 | 750 | ||||||
3.900% 2018 senior notes due 2028 | 500 | — | ||||||
4.700% 2013 senior notes due 2043 | 1,150 | 1,150 | ||||||
3.950% 2017 senior notes due 2047 | 500 | 500 | ||||||
4.450% 2018 senior notes due 2048 | 400 | — | ||||||
6,500 | 5,000 | |||||||
Unamortized debt discount / debt issuance costs | (59 | ) | (47 | ) | ||||
Long-term debt, net of discount and issuance costs | $ | 6,441 | $ | 4,953 |