Introduction
Our MD&A is provided in addition to the accompanying condensed consolidated and combined 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:
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Section
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Description
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Page
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Overview of our business
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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 2012 Annual Report on Form 10-K.
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Our operating environment
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Information regarding the animal health industry and factors that affect our company.
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Comparability of historical results and our relationship with Pfizer
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Information about the limitations of the predictive value of the condensed consolidated and combined financial statements.
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Analysis of the condensed consolidated and combined statements of income
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Consists of the following for all periods presented:
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Revenues:
An analysis of our revenues in total.
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Costs and expenses
: A discussion about the drivers of our costs and expenses.
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Operating segment results
: A discussion of our revenues by operating segment and species and items impacting our earnings before income tax.
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Adjusted net income
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A discussion of adjusted net income, an alternative view of performance used by management. Adjusted net income is a non-GAAP financial measure.
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Our financial guidance for 2013
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A discussion of our 2013 financial guidance.
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Analysis of the condensed consolidated and combined statements of comprehensive income
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An analysis of the components of comprehensive income for all periods presented.
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Analysis of the condensed consolidated and combined balance sheets
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A discussion of changes in certain balance sheet accounts for all balance sheets presented.
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Analysis of the condensed consolidated and combined statements of cash flows
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An analysis of the drivers of our operating, investing and financing cash flows for all periods presented.
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Analysis of financial condition, liquidity and capital resources
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An analysis of our ability to meet our short-term and long-term financing needs.
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New accounting standards
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Accounting standards that we have recently adopted, as well as those that recently have been issued, but not yet adopted.
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Forward-looking statements and factors that may affect future results
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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.
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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 a standalone 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 and Combined Financial Statements—
Note 16. 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 Latin 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 medicines and vaccines business as measured by revenues 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 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.
A summary of our 2013 performance compared to the comparable 2012 period follows:
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Three Months Ended
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Six Months Ended
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June 30,
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July 1,
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%
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June 30,
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July 1,
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%
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(MILLIONS OF DOLLARS)
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2013
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2012
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Change
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2013
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2012
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Change
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Revenues
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$
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1,114
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$
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1,094
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2
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$
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2,204
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$
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2,141
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3
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Net income attributable to Zoetis
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128
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173
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(26
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268
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284
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(6
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Adjusted net income
(a)
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178
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176
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1
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357
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328
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9
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(a)
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Adjusted net income is a non-GAAP financial measure, see the "Adjusted net income" section of this MD&A for more information.
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Our ownership
On February 6, 2013, an initial public offering (IPO) of our Class A common stock was completed, which represented approximately 19.8% of our total outstanding shares. Following the IPO, Pfizer owned 100% of our outstanding Class B common stock and no shares of our Class A common stock, giving Pfizer 80.2% of the economic interest and the combined voting power in shares of our outstanding common stock other than with respect to the election of directors and 97.6% of the combined voting power of our outstanding common stock with respect to the election of directors. On February 1, 2013, our Class A common stock began trading on the New York Stock Exchange under the symbol “ZTS.” Prior to and in connection with the IPO, we completed a $3.65 billion senior notes offering and Pfizer transferred to us substantially all of the assets and liabilities of their animal health business. We refer to the transactions to separate our business from Pfizer as described here and elsewhere in this quarterly report as the Separation.
On May 22, 2013, Pfizer announced an exchange offer whereby Pfizer shareholders could exchange a portion of Pfizer common stock for Zoetis common stock. The exchange offer was completed on June 24, 2013, resulting in the full separation of Zoetis and the disposal of Pfizer's entire ownership and voting interest. Following the exchange offer, there are no shares of our Class B common stock outstanding.
Our operating environment
Industry
The animal health industry, which focuses on both livestock and companion animals, is a growing industry that impacts billions of people worldwide. The primary livestock species for the production of animal protein are cattle (both beef and dairy), swine, poultry, sheep and fish. Livestock health and production are essential to meeting the growing demand for animal protein of a global population. Factors influencing growth in demand for livestock medicines and vaccines include:
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human population growth and increasing standards of living, particularly in many emerging markets;
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increasing demand for improved nutrition, particularly animal protein;
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natural resource constraints, such as scarcity of arable land, fresh water and increased competition for cultivated land, resulting in fewer resources that will be available to meet this increased demand for animal protein; and
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increased focus on food safety.
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The primary companion animal species are dogs, cats and horses. Health professionals indicate that companion animals improve the physical and emotional well-being of pet owners. Factors influencing growth in demand for companion animal medicines and vaccines include:
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economic development and related increases in disposable income, particularly in many emerging markets;
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increasing pet ownership; and
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companion animals living longer, increasing medical treatment of companion animals and advances in companion animal medicines and vaccines.
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Product development initiatives
Our future success depends on both our existing product portfolio and our pipeline of new products, including new products that we may develop through joint ventures and products that we are able to obtain through license or acquisition. We believe we are an industry leader in animal health R&D, with a track record of generating new products and brand lifecycle developments. The majority of our R&D programs focus on brand lifecycle development, which is defined as R&D programs that leverage existing animal health products by adding new species or claims, achieving approvals in new markets or creating new combinations and reformulations.
Perceptions of product quality, safety and reliability
We believe that animal health medicines and vaccines customers value high-quality manufacturing and reliability of supply. The importance of quality and safety concerns to pet owners, veterinarians and livestock producers also contributes to animal health brand loyalty, which we believe often continues after the loss of patent-based and regulatory exclusivity. We depend on positive perceptions of the safety and quality of our products, and animal health products generally, by our customers, veterinarians and end-users.
The issue of the potential transfer of increased antibacterial resistance in bacteria from food-producing animals to human pathogens, and the causality of that transfer, are the subject of global scientific and regulatory discussion. In some countries, this issue has led to government restrictions and bans on the use of specific antibacterials in some food-producing animals, regardless of the route of administration (topical, oral, intramuscular/subcutaneous injections, or intravenous). These restrictions are more prevalent in countries where animal protein is plentiful and governments are willing to take restrictive actions even when there is scientific uncertainty. Historically, antibacterials for livestock have represented a significant portion of our revenues. We cannot predict whether antibacterial resistance concerns will result in additional restrictions or bans, expanded regulations or public pressure to discontinue or reduce use of antibacterials in food-producing animals.
The overall economic environment
In addition to industry-specific factors, we, like other businesses, continue to face the effects of the current challenging economic environment. Growth in both the livestock and companion animal sectors is driven by overall economic development and related growth, particularly in many emerging markets. Certain of our customers and suppliers have been affected directly by the economic downturn, which decreases the demand for our products and hinders our ability to collect amounts due from customers.
The cost of medicines and vaccines to our livestock producer customers is small relative to other production costs, including feed, and the use of these products are intended to improve livestock producers’ economic outcomes. As a result, historically demand for our products has often been more stable than demand for other production inputs. Similarly, industry sources have reported that pet owners indicated a preference for reducing spending on other aspects of their lifestyle, including entertainment, clothing and household goods, before reducing spending on pet care. While these factors have mitigated the impacts of the challenging economic environment, the impact of difficult macroeconomic conditions increases over time.
Competition
The animal health industry is competitive. Although our business is the largest by revenues in the animal health medicines and vaccines industry, we face competition in the regions and sectors in which we compete. Principal methods of competition vary depending on the particular region, species, product category or individual product. Some of these methods include new product development, quality, price, service and promotion to veterinary professionals, pet owners and livestock producers. Our competitors include the animal health businesses of large pharmaceutical companies and specialty animal health businesses. In addition to competition from established market participants, there could be new entrants to the animal health medicines and vaccines industry in the future. In certain markets, we also compete with companies that produce generic products, but the level of competition from generic products varies from market to market. For example, the level of generic competition is higher in Europe and certain emerging markets than in the U.S.
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.
Weather conditions and the availability of natural resources
The animal health industry and demand for many of our animal health products in a particular region are affected by weather conditions, as usage of our products follows varying weather patterns and weather-related pressures from pests, such as ticks. As a result, we may experience regional and seasonal fluctuations in our results of operations.
In addition, livestock producers depend on the availability of natural resources, including large supplies of fresh water. Their animals’ health and their ability to operate could be adversely affected if they experience a shortage of fresh water due to human population growth or floods, droughts or other weather conditions. In the event of adverse weather conditions or a shortage of fresh water, livestock producers may purchase less of our products.
For example, drought conditions could negatively impact, among other things, the supply of corn and the availability of grazing pastures. A decrease in harvested corn results in higher corn prices, which could negatively impact the profitability of livestock producers of cattle, pork and poultry. Higher corn prices and reduced availability of grazing pastures contributes to reductions in herd or flock sizes that in turn results in less spending on animal health products. As such, a prolonged drought could have a material adverse impact on our operating results and financial condition. Factors influencing the magnitude and timing of effects of a drought on our performance include, but may not be limited to, weather patterns and herd management decisions. The drought which has impacted parts of the U.S. over the past two years, is considered the worst in many years and affected our performance in the U.S. market in 2012 and in the first six months of 2013, and may continue to affect our performance, especially in cattle products, during the remainder of 2013.
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, in 2012, we successfully launched a vaccine for horses against the deadly Hendra virus in Australia.
In 2013, there have been several reported cases of the H7N9 avian influenza virus in China. In late March 2013, the Chinese government reported the first case of the H7N9 avian influenza virus. Since that time, over 100 cases have been detected. We are closely monitoring the developments as this situation unfolds and currently believe the impact on our 2013 global revenue will not be significant. While China continues to represent a growth opportunity for us, sales in this country represented less than 2% of our total revenue in 2012 and the majority were generated by our swine business.
In addition, in the
second quarter
of
2013
some producers in the U.S. are experiencing an outbreak of the Porcine Epidemic Diarrhea Virus or PEDV. It is important to note that the virus, which affects piglets, does not create a food safety issue. We are committed to supporting U.S. pork producers in understanding and controlling PEDV, and we are partnering with the stakeholders, including various academic institutions such as the University of Minnesota. The outbreak to date has been limited in nature and we currently believe the impact on our
2013
revenue will not be significant.
Foreign exchange rates
Significant portions of our revenues and costs are exposed to changes in foreign exchange rates. Our products are sold in more than 120 countries and, as a result, our revenues are influenced by changes in foreign exchange rates. For the
six months ended
June 30, 2013
, approximately
54%
of our revenues were denominated in foreign currencies. Prior to the IPO, as a business unit of Pfizer and under Pfizer's global cash management system, our foreign exchange risk was managed through Pfizer. Following the Separation, we seek to manage our foreign exchange risk, in part, through operational means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. As we operate in multiple foreign currencies, including the euro, the Brazilian real, the Australian dollar and other currencies, changes in those currencies relative to the U.S. dollar will impact our revenues 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 six months ended
June 30, 2013
, approximately
46%
of our total revenues were in U.S. dollars, and our year-over-year revenue growth was unfavorably impacted by
1%
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. We incurred a foreign currency loss of $9 million immediately on the devaluation as a result of remeasuring the local assets and liabilities, which is included in
Other (income)/deductions—net
for the six months ended
June 30, 2013
. We will experience ongoing adverse impacts to earnings as our revenues, costs and expenses will be translated into U.S. dollars at lower rates. These impacts are not expected to be significant to our financial condition or results of operations.
Comparability of historical results and our relationship with Pfizer
During the periods covered by the combined financial statements prior to our IPO, we operated solely as a business unit of Pfizer. The combined financial statements have been derived from the consolidated financial statements and accounting records of Pfizer and include allocations for direct costs and indirect costs attributable to the operations of the animal health business of Pfizer. The combined financial statements do not purport to reflect what the results of operations, comprehensive income/(loss), financial position, equity or cash flows would have been had we operated as a standalone public company during these periods. In addition, the historical combined financial statements may not be reflective of what our results of operations, comprehensive income/(loss), financial position, equity or cash flows might be in the future as a standalone public company.
For a detailed description of the basis of presentation and an understanding of the limitations of the predictive value of the historical combined financial statements, see Notes to Condensed Consolidated and Combined Financial Statements—
Note 3. Basis of Presentation.
The historical balance sheets may not be comparable to the balance sheet of the standalone company, which reflects the transfer by Pfizer of substantially all of its animal health business to us. Non-comparable elements include, for example, the allocation of Pfizer debt which was not transferred, cash and cash equivalents which were transferred at a predetermined amount, and other assets and liabilities which were not transferred due to legal restrictions and other decisions taken by Pfizer.
Our historical expenses are not necessarily indicative of the expenses we may incur in the future as a standalone public company. With respect to support functions, for example, our historical combined financial statements include expense allocations for certain support functions that are provided on a centralized basis within Pfizer, such as expenses for business technology, facilities, legal, finance, human resources, and, to a lesser extent, business development, public affairs and procurement, among others. As part of the Separation, pursuant to agreements with Pfizer, Pfizer provides us with some of the services related to these functions on a transitional basis in exchange for agreed-upon fees, and we are incurring other costs to replace the services and resources that will not be provided by Pfizer. As a standalone public company, our total costs related to such support functions may differ from the costs that were historically allocated to us from Pfizer.
We also expect to incur certain nonrecurring costs related largely to becoming a standalone public company, including new branding (which includes changes to the manufacturing process for required new packaging), the creation of a standalone infrastructure, the implementation of a
new ERP system, the accelerated vesting of Pfizer equity awards, site separation and certain legal registration and patent assignment costs. In the second quarter of 2013, these costs were offset by the reversal of certain employee termination expenses. In addition, we will also incur certain costs related to the completion of FDAH integration activities. We expect all of the aforementioned nonrecurring costs to range between approximately $200 million to $240 million in 2013 and an additional $100 million to $140 million in 2014. These estimates exclude the impact of any depreciation or amortization of capitalized separation expenditures.
Following the IPO, the equity awards previously granted to our employees by Pfizer continued to vest, and service with Zoetis counted as service with Pfizer for all purposes. On
June 24, 2013
, Pfizer completed the exchange offer whereby it disposed of all of the shares of common stock of Zoetis owned by Pfizer. Pfizer accelerated the vesting of, and in some cases the settlement of, on a pro-rated basis, outstanding Pfizer RSUs, TSRUs and PSAs, subject, in each case, to the requirements of Section 409A of the U.S. Internal Revenue Code, the terms of the 2004 Stock Plan and the applicable award agreements and any outstanding deferral elections. In addition, unvested stock options granted by Pfizer accelerated in full and, generally, employees have the ability to exercise the stock options until the earlier of (i) June 23, 2016 (three years from when Pfizer completed the exchange offer), (ii) termination of employee from Zoetis, or (iii) the expiration date of the stock option. Stock options held by employees who were retirement eligible as of June 24, 2013 will have the full term of the stock option to exercise.
The accelerated vesting of the outstanding Pfizer stock options, and the settlement, on a pro-rata basis, of other Pfizer equity awards, resulted in the recognition of additional expense for the
three and six months ended
June 30, 2013
of $
9 million
and is included in stock-based compensation. The unvested portion of Pfizer RSUs, TSRUs and PSAs were forfeited as of the completion of the exchange offer. Zoetis will make a cash payment of approximately $
20 million
in the
third quarter
of
2013
, to certain non-executive Zoetis employees, based on the value of the employees' forfeited Pfizer RSUs, TSRUs and PSAs (as applicable). This amount was accrued as of
June 30, 2013
and is included in the condensed consolidated statements of income as additional compensation expense for the
three and six months ended
June 30, 2013
. Members of the Zoetis Executive Team will not receive a cash payment, but will instead be granted Zoetis RSUs, subject to vesting, equivalent in value to the value of the member's forfeited Pfizer RSUs, TSRUs and PSAs.
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 a standalone public company. As a result, we are incurring additional costs, including internal audit, investor relations, stock administration and regulatory compliance costs.
Recent significant 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.
Delays in establishing new operating subsidiaries
Due to local regulatory and operational requirements in certain non-U.S. jurisdictions, the transfer to us of certain assets and liabilities of Pfizer's animal health business had not yet legally occurred as of the IPO Date. These assets and liabilities were not material to our consolidated financial statements, individually or in the aggregate. As of June 30, 2013, all expected subsidiaries have been established.
Agreements with Pfizer
On February 6, 2013, we entered into a transitional services agreement with Pfizer whereby Pfizer agreed to provide us with various corporate support services. This agreement has a service commencement date of January 1, 2013 in the United States and December 1, 2012 for our international locations. In addition, we also entered into a master manufacturing and supply agreement with Pfizer on October 1, 2012, whereby we and Pfizer agreed to manufacture and supply products to each other commencing January 1, 2013. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 17B. Transactions and Agreements with Pfizer: Agreements with Pfizer
for more information related to these and other agreements, including the related costs.
Analysis of the condensed consolidated and combined statements of income
The following discussion and analysis of our statements of income should be read along with our consolidated and combined financial statements and the notes thereto included elsewhere in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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Three Months Ended
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Six Months Ended
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June 30,
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July 1,
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%
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June 30,
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July 1,
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%
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(MILLIONS OF DOLLARS)
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2013
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2012
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Change
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2013
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2012
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Change
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Revenues
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$
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1,114
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$
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1,094
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2
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$
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2,204
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$
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2,141
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3
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Costs and expenses:
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Cost of sales
(a)
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416
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378
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10
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818
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|
771
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6
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% of revenues
|
|
37
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%
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|
35
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%
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|
37
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%
|
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36
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%
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|
Selling, general and administrative expenses
(a)
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|
399
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|
344
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|
16
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|
756
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|
|
682
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11
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% of revenues
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36
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%
|
|
31
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%
|
|
|
|
34
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%
|
|
32
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%
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|
|
Research and development expenses
(a)
|
|
95
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|
|
92
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|
|
3
|
|
|
185
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|
|
194
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|
(5
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)
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% of revenues
|
|
9
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%
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|
8
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%
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|
8
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%
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|
9
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%
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|
Amortization of intangible assets
(a)
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15
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|
16
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(6
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)
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30
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32
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(6
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)
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Restructuring charges and certain acquisition-related
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costs
|
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(20
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)
|
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24
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|
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*
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|
|
(13
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)
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49
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*
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Interest expense
|
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32
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|
8
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*
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54
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16
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*
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Other (income)/deductions—net
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(10
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)
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(20
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)
|
|
(50
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)
|
|
(5
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)
|
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(26
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)
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|
(81
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)
|
Income before provision for taxes on income
|
|
187
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|
|
252
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|
(26
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)
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|
379
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|
|
423
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|
|
(10
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)
|
% of revenues
|
|
17
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%
|
|
23
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%
|
|
|
|
17
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%
|
|
20
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%
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|
Provision for taxes on income
|
|
59
|
|
|
79
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|
|
(25
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)
|
|
111
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|
|
138
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|
|
(20
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)
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Effective tax rate
|
|
31.6
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%
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|
31.3
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%
|
|
|
|
29.3
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%
|
|
32.6
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%
|
|
|
Net income before allocation to noncontrolling interests
|
|
128
|
|
|
173
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|
|
(26
|
)
|
|
268
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|
285
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|
|
(6
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)
|
Less: Net income attributable to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
(100
|
)
|
Net income attributable to Zoetis
|
|
$
|
128
|
|
|
$
|
173
|
|
|
(26
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)
|
|
$
|
268
|
|
|
$
|
284
|
|
|
(6
|
)
|
% of revenues
|
|
11
|
%
|
|
16
|
%
|
|
|
|
12
|
%
|
|
13
|
%
|
|
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
|
|
(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 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.
|
Revenue
Three months ended June 30, 2013 vs. three months ended July 1, 2012
Total revenues
increased
by $
20 million
, or
2%
, in the second quarter of 2013 compared to the second quarter of 2012, reflecting higher operational revenue of $
39 million
or
4%
, partially offset by the
unfavorable
impact of foreign exchange, which decreased revenue by approximately $
19 million
, or
2%
. We experienced operational growth led by the increased revenue in the U.S. segment.
Six months ended June 30, 2013 vs. six months ended July 1, 2012
Total revenue
increased
by $
63 million
, or
3%
, in the first six months of 2013 compared to the same period in 2012, reflecting higher operational revenue of $
90 million
or
4%
, partially offset by the
unfavorable
impact of foreign exchange, which decreased revenue by approximately $
27 million
, or
1%
. We experienced operational growth across each of our regional segments, led by the increased revenue in the U.S. segment.
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
Cost of sales
(a)
|
|
$
|
416
|
|
|
$
|
378
|
|
|
10
|
%
|
|
$
|
818
|
|
|
$
|
771
|
|
|
6
|
%
|
% of revenue
|
|
37.3
|
%
|
|
34.6
|
%
|
|
|
|
37.1
|
%
|
|
36.0
|
%
|
|
|
Certain amounts and percentages may reflect rounding adjustments.
|
|
(a)
|
Allocation of corporate enabling functions were $3 million in the first quarter of 2013. There were no allocated expenses in the second quarter of 2013. Allocation of corporate enabling functions were $0 million and $1 million in the three and six months ended July 1, 2012, respectively.
|
Three months ended June 30, 2013 vs. three months ended July 1, 2012
Cost of sales
increased
by $
38 million
, or
10%
, in the second quarter of 2013 compared to the second quarter of 2012, primarily as a result of:
|
|
•
|
revenue growth and product mix;
|
|
|
•
|
additional one-time costs of $13 million related to becoming a standalone public company, including expense of $2 million due to the accelerated vesting of certain Pfizer equity awards and associated cash payments, as a result of the Separation; and
|
|
|
•
|
higher costs associated with certain manufacturing agreements related to government-mandated divestitures from prior acquisitions,
|
partially offset by:
|
|
•
|
operational efficiencies and related savings.
|
Six months ended June 30, 2013 vs. six months ended July 1, 2012
Cost of sales
increased
by $
47 million
, or
6%
, in the first six months of 2013 compared to the first six months of 2012, primarily as a result of:
|
|
•
|
additional one-time costs of $15 million related to becoming a standalone public company, including expense of $2 million due to the accelerated vesting of certain Pfizer equity awards and associated cash payments, as a result of the Separation; and
|
|
|
•
|
higher costs associated with certain manufacturing agreements related to government-mandated divestitures from prior acquisitions,
|
partially offset by:
|
|
•
|
operational efficiencies and related savings; and
|
|
|
•
|
lower employee benefit costs due to the termination of the defined benefit pension plan for U.S. employees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
Selling, general and administrative expenses
(a)
|
|
$
|
399
|
|
|
$
|
344
|
|
|
16
|
%
|
|
$
|
756
|
|
|
$
|
682
|
|
|
11
|
%
|
% of revenue
|
|
36
|
%
|
|
31
|
%
|
|
|
|
34
|
%
|
|
32
|
%
|
|
|
Certain amounts and percentages may reflect rounding adjustments.
|
|
(a)
|
Allocation of corporate enabling functions were $24 million in the first quarter of 2013. There were no allocated expenses in the second quarter of 2013. Allocation of corporate enabling functions were $60 million and $123 million in the three and six months ended July 1, 2012, respectively.
|
Three months ended June 30, 2013 vs. three months ended July 1, 2012
Selling, general & administrative (SG&A) expenses
increased
by $
55 million
, or
16%
, in the second quarter of 2013 compared to the second quarter of 2012, primarily as a result of:
|
|
•
|
additional one-time costs of $60 million related to becoming a standalone public company, including expense of $25 million due to the accelerated vesting of certain Pfizer equity awards and associated cash payments, as a result of the Separation; and
|
|
|
•
|
the cost of initiatives to increase sales in certain emerging markets,
|
partially offset by:
|
|
•
|
lower employee benefit costs due to the termination of the defined benefit pension plan for U.S. employees; and
|
|
|
•
|
favorable foreign exchange.
|
Six months ended June 30, 2013 vs. six months ended July 1, 2012
SG&A expenses
increased
by $
74 million
, or
11%
, in the first six months of 2013 compared to the first six months of 2012, primarily as a result of:
|
|
•
|
additional one-time costs of $92 million related to becoming a standalone public company, including expense of $25 million due to the accelerated vesting of certain Pfizer equity awards and associated cash payments, as a result of the Separation; and
|
|
|
•
|
the cost of initiatives to increase sales in certain emerging markets,
|
partially offset by:
|
|
•
|
lower employee benefit costs due to the termination of the defined benefit pension plan for U.S. employees; and
|
|
|
•
|
favorable foreign exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
Research and development expenses
(a)
|
|
$
|
95
|
|
|
$
|
92
|
|
|
3
|
%
|
|
$
|
185
|
|
|
$
|
194
|
|
|
(5
|
)%
|
% of revenue
|
|
9
|
%
|
|
8
|
%
|
|
|
|
8
|
%
|
|
9
|
%
|
|
|
Certain amounts and percentages may reflect rounding adjustments.
|
|
(a)
|
Allocation of corporate enabling functions were $13 million and $28 million in the three and six months ended July 1, 2012, respectively.
|
Three months ended June 30, 2013 vs. three months ended July 1, 2012
R&D expenses
increased
by $
3 million
, or
3%
, in the second quarter of 2013 compared to the second quarter of 2012, primarily as a result of:
|
|
•
|
additional one-time costs of $4 million due to the accelerated vesting of certain Pfizer equity awards and associated cash payments, as a result of the Separation,
|
partially offset by:
|
|
•
|
lower employee benefit costs due to the termination of the defined benefit pension plan for U.S. employees.
|
Six months ended June 30, 2013 vs. six months ended July 1, 2012
R&D expenses
decreased
by $
9 million
, or
5%
, in the first six months of 2013 compared to the first six months of 2012, primarily as a result of:
|
|
•
|
the nonrecurrence of depreciation expense incurred in 2012 related to the closing of an R&D facility in the U.K.; and
|
|
|
•
|
lower employee benefit costs due to the termination of the defined benefit pension plan for U.S. employees,
|
partially offset by:
|
|
•
|
additional one-time costs of $4 million due to the accelerated vesting of certain Pfizer equity awards and associated cash payments, as a result of the Separation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
Amortization of intangible assets
|
|
$
|
15
|
|
|
$
|
16
|
|
|
(6
|
)%
|
|
$
|
30
|
|
|
$
|
32
|
|
|
(6
|
)%
|
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2013 vs. three months ended July 1, 2012
Amortization of intangible assets
decreased
by $
1 million
, or
6%
, in the second quarter of 2013 compared to the second quarter of 2012.
Six months ended June 30, 2013 vs. six months ended July 1, 2012
Amortization of intangible assets
decreased
by $
2 million
, or
6%
, in the first six months of 2013 compared to the first six months of 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges and certain acquisition-related costs
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
2013
|
|
|
2012
|
|
|
Change
|
Restructuring charges and certain acquisition-
|
|
|
|
|
|
|
|
|
|
|
|
|
related costs
(a)
|
|
$
|
(20
|
)
|
|
$
|
24
|
|
|
*
|
|
$
|
(13
|
)
|
|
$
|
49
|
|
|
*
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
|
|
(a)
|
Allocation of
Restructuring charges and certain acquisition-related costs
were $17 million and $35 million in the three and six months ended July 1, 2012, respectively.
|
Our acquisition-related costs primarily related to restructuring charges for employees, assets and activities that will not continue in the combined company. The majority of these charges, or reversals, are related to termination costs, but we also exited a number of distributor and other contracts and performed some facility rationalization efforts. Our integration costs are generally comprised of consulting costs related to the integration of systems and processes.
The costs associated with our cost reduction/productivity initiatives are predominantly termination costs associated with plant closings initiated by Pfizer's manufacturing division, as well as termination costs associated with reorganization of our commercial operations in Europe. These cost reduction/productivity initiatives are ongoing.
For additional information regarding restructuring charges and acquisition-related costs, see Notes to Condensed Consolidated and Combined Financial Statements—
Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
.
Three months ended June 30, 2013 vs. three months ended July 1, 2012
Restructuring charges and certain acquisition-related costs
decreased
by $
44 million
, primarily as a result of a $27 million decrease in employee termination costs relating to the reversal of a previously established termination reserve related to our operations in Europe, and the nonrecurrence of allocated charges from Pfizer.
The aforementioned termination reserve was established when we were a business unit of Pfizer. As a result of becoming a standalone public company (no longer being a majority owned subsidiary of Pfizer) and related economic consideration, we revisited this restructuring action and decided to no longer implement this restructuring plan. As such, we reversed the existing reserve and will record a new restructuring charge when a revised plan is completed and communicated to the affected employees. Our current expectation is that the new restructuring charge will be significantly less than the original plan and will be estimable prior to the end of the current year.
Six months ended June 30, 2013 vs. six months ended July 1, 2012
Restructuring charges and certain acquisition-related costs
decreased
by $
62 million
, or
127%
, primarily as a result of a $27 million decrease in employee termination expenses related to the reversal of a previously established termination reserve related to our operations in Europe, as described above, and the nonrecurrence of allocated charges from Pfizer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
2013
|
|
|
2012
|
|
|
Change
|
Interest Expense
|
|
$
|
32
|
|
|
$
|
8
|
|
|
*
|
|
$
|
54
|
|
|
$
|
16
|
|
|
*
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2013 vs. three months ended July 1, 2012
Interest expense
increased
by $
24 million
in the second quarter of 2013 compared to the second quarter of 2012, primarily due to the issuance of our senior notes on January 28, 2013. Interest expense related to allocated debt was $
8 million
for the three months ended
July 1, 2012
, respectively. Interest expense related to our senior notes offering in January 2013, including amortization of debt discount and fees, was $
32 million
for the three months ended June 30, 2013.
Six months ended June 30, 2013 vs. six months ended July 1, 2012
Interest expense
increased
by $
38 million
in the first six months of 2013 compared to the first quarter of 2012, primarily due to the issuance of our senior notes on January 28, 2013. Interest expense related to allocated debt was $
2 million
and $
16 million
for the six months ended
June 30, 2013
and
July 1, 2012
, respectively. Interest expense related to our senior notes offering in January 2013, including amortization of debt discount and fees, was $
52 million
in first six months of 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income)/deductions—net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
Other (income)/deductions—net
|
|
$
|
(10
|
)
|
|
$
|
(20
|
)
|
|
(50
|
)%
|
|
$
|
(5
|
)
|
|
$
|
(26
|
)
|
|
(81
|
)%
|
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2013 vs. three months ended July 1, 2012
The change in
Other (income)/deductions—net
reflects
an unfavorable
impact of $
10 million
on income attributable to Zoetis in the second quarter of 2013 compared to the second quarter of 2012, primarily as a result of:
|
|
•
|
the nonrecurrence of income from a favorable legal settlement related to an intellectual property matter of $14 million and a change in estimate for an environmental-related reserve due to a favorable settlement of $7 million in the second quarter of 2012,
|
partially offset by:
|
|
•
|
a net gain of $6 million on asset disposals associated with government-mandated divestitures.
|
Six months ended June 30, 2013 vs. six months ended July 1, 2012
The change in
Other (income)/deductions—net
reflects
an unfavorable
impact of $
21 million
on income attributable to Zoetis in the first six months of 2013 compared to the first six months of 2012, primarily as a result of
|
|
•
|
the nonrecurrence of income from a favorable legal settlement related to an intellectual property matter of $14 million and a change in estimate for an environmental-related reserve due to a favorable settlement of $7 million; and
|
|
|
•
|
foreign currency loss of $9 million related to the Venezuela currency devaluation in February 2013,
|
partially offset by:
|
|
•
|
a net gain of $6 million on asset disposals associated with government-mandated divestitures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for taxes on income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
Provision for taxes on income
|
|
$
|
59
|
|
|
$
|
79
|
|
|
(25
|
)%
|
|
$
|
111
|
|
|
$
|
138
|
|
|
(20
|
)%
|
Effective tax rate
|
|
31.6
|
%
|
|
31.3
|
%
|
|
|
|
29.3
|
%
|
|
32.6
|
%
|
|
|
Certain amounts and percentages may reflect rounding adjustments.
The effective tax rate was
31.6%
for the second quarter of 2013, compared to
31.3%
for the second quarter of 2012. The higher effective tax rate for the second quarter of 2013 compared to the second quarter of 2012 was primarily due to the impact of the non-deductibility and jurisdictional mix of certain costs incurred during the quarter related to becoming a standalone public company, partially offset by:
|
|
•
|
incentive tax rulings in Belgium, effective December 1, 2012, and Singapore, effective October 29, 2012, and
|
|
|
•
|
changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs.
|
The effective tax rate was
29.3%
for the first six months of 2013, compared to
32.6%
for the first six months of 2012. The lower effective tax is primarily due to:
|
|
•
|
the aforementioned incentive tax rulings and changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs, and
|
|
|
•
|
a $2 million discrete income tax benefit during the first quarter of 2013 related to the 2012 U.S. research and development tax credit which was retroactively extended on January 3, 2013;
|
partially offset by:
|
|
•
|
the aforementioned impact of non-deductibility and jurisdictional mix of certain costs incurred during the second quarter related to becoming a standalone public company.
|
Operating Segment Results
We believe that it is important to not only understand overall revenue and earnings growth, but also “operational growth.” Operational growth is defined as revenue or earnings growth excluding the impact of foreign exchange.
On a global basis, the mix of our revenue between livestock and companion animal products are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
Three Months Ended
|
|
|
|
Related to
|
|
|
June 30,
|
|
|
July 1,
|
|
|
|
|
Foreign
|
|
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Total
|
|
|
exchange
|
|
|
Operational
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
$
|
204
|
|
|
$
|
192
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Companion animal
|
|
233
|
|
|
229
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
|
437
|
|
|
421
|
|
|
4
|
|
|
—
|
|
|
4
|
|
EuAfME
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
184
|
|
|
193
|
|
|
(5
|
)
|
|
(3
|
)
|
|
(2
|
)
|
Companion animal
|
|
94
|
|
|
90
|
|
|
4
|
|
|
(2
|
)
|
|
6
|
|
|
|
278
|
|
|
283
|
|
|
(2
|
)
|
|
(3
|
)
|
|
1
|
|
CLAR
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
153
|
|
|
154
|
|
|
(1
|
)
|
|
(5
|
)
|
|
4
|
|
Companion animal
|
|
60
|
|
|
57
|
|
|
5
|
|
|
(1
|
)
|
|
6
|
|
|
|
213
|
|
|
211
|
|
|
1
|
|
|
(3
|
)
|
|
4
|
|
APAC
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
129
|
|
|
126
|
|
|
2
|
|
|
(3
|
)
|
|
5
|
|
Companion animal
|
|
57
|
|
|
53
|
|
|
8
|
|
|
(5
|
)
|
|
13
|
|
|
|
186
|
|
|
179
|
|
|
4
|
|
|
(3
|
)
|
|
7
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
670
|
|
|
665
|
|
|
1
|
|
|
(2
|
)
|
|
3
|
|
Companion animal
|
|
444
|
|
|
429
|
|
|
3
|
|
|
(2
|
)
|
|
5
|
|
|
|
$
|
1,114
|
|
|
$
|
1,094
|
|
|
2
|
|
|
(2
|
)
|
|
4
|
|
Certain amounts and percentages may reflect rounding adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
Six Months Ended
|
|
|
|
Related to
|
|
|
June 30,
|
|
|
July 1,
|
|
|
|
|
Foreign
|
|
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Total
|
|
exchange
|
|
|
Operational
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
$
|
449
|
|
|
$
|
432
|
|
|
4
|
|
—
|
|
|
4
|
Companion animal
|
|
442
|
|
|
414
|
|
|
7
|
|
—
|
|
|
7
|
|
|
891
|
|
|
846
|
|
|
5
|
|
—
|
|
|
5
|
EuAfME
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
379
|
|
|
380
|
|
|
—
|
|
(1
|
)
|
|
1
|
Companion animal
|
|
189
|
|
|
178
|
|
|
6
|
|
—
|
|
|
6
|
|
|
568
|
|
|
558
|
|
|
2
|
|
—
|
|
|
2
|
CLAR
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
292
|
|
|
292
|
|
|
—
|
|
(5
|
)
|
|
5
|
Companion animal
|
|
92
|
|
|
92
|
|
|
—
|
|
(3
|
)
|
|
3
|
|
|
384
|
|
|
384
|
|
|
—
|
|
(4
|
)
|
|
4
|
APAC
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
256
|
|
|
252
|
|
|
2
|
|
(1
|
)
|
|
3
|
Companion animal
|
|
105
|
|
|
101
|
|
|
4
|
|
(4
|
)
|
|
8
|
|
|
361
|
|
|
353
|
|
|
2
|
|
(3
|
)
|
|
5
|
Total
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
1,376
|
|
|
1,356
|
|
|
1
|
|
(2
|
)
|
|
3
|
Companion animal
|
|
828
|
|
|
785
|
|
|
5
|
|
(1
|
)
|
|
6
|
|
|
$
|
2,204
|
|
|
$
|
2,141
|
|
|
3
|
|
(1
|
)
|
|
4
|
Certain amounts and percentages may reflect rounding adjustments.
Earnings information by segment and the operational and foreign exchange changes versus the comparable prior year period are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
Three Months Ended
|
|
|
|
Related to
|
|
|
June 30,
|
|
|
July 1,
|
|
|
|
|
Foreign
|
|
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Total
|
|
|
exchange
|
|
|
Operational
|
U.S.
|
|
$
|
254
|
|
|
$
|
227
|
|
|
12
|
|
|
—
|
|
|
12
|
EuAfME
|
|
91
|
|
|
88
|
|
|
3
|
|
|
2
|
|
|
1
|
CLAR
|
|
78
|
|
|
77
|
|
|
1
|
|
|
(6
|
)
|
|
7
|
APAC
|
|
71
|
|
|
63
|
|
|
13
|
|
|
2
|
|
|
11
|
Total reportable segments
|
|
494
|
|
|
455
|
|
|
9
|
|
|
—
|
|
|
9
|
Other business activities
|
|
(74
|
)
|
|
(61
|
)
|
|
21
|
|
|
|
|
|
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
(137
|
)
|
|
(104
|
)
|
|
32
|
|
|
|
|
|
Purchase accounting adjustments
|
|
(13
|
)
|
|
(13
|
)
|
|
—
|
|
|
|
|
|
Acquisition-related costs
|
|
(9
|
)
|
|
(15
|
)
|
|
(40
|
)
|
|
|
|
|
Certain significant items
|
|
(43
|
)
|
|
14
|
|
|
*
|
|
|
|
|
|
Other unallocated
|
|
(31
|
)
|
|
(24
|
)
|
|
29
|
|
|
|
|
|
Income before income taxes
|
|
$
|
187
|
|
|
$
|
252
|
|
|
(26
|
)
|
|
|
|
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
Six Months Ended
|
|
|
|
Related to
|
|
|
June 30,
|
|
|
July 1,
|
|
|
|
|
Foreign
|
|
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Total
|
|
|
exchange
|
|
|
Operational
|
U.S.
|
|
$
|
488
|
|
|
$
|
444
|
|
|
10
|
|
|
—
|
|
|
10
|
EuAfME
|
|
208
|
|
|
192
|
|
|
8
|
|
|
(2
|
)
|
|
10
|
CLAR
|
|
130
|
|
|
131
|
|
|
(1
|
)
|
|
(9
|
)
|
|
8
|
APAC
|
|
146
|
|
|
134
|
|
|
9
|
|
|
—
|
|
|
9
|
Total reportable segments
|
|
972
|
|
|
901
|
|
|
8
|
|
|
(1
|
)
|
|
9
|
Other business activities
|
|
(148
|
)
|
|
(126
|
)
|
|
17
|
|
|
|
|
|
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
(253
|
)
|
|
(233
|
)
|
|
9
|
|
|
|
|
|
Purchase accounting adjustments
|
|
(25
|
)
|
|
(26
|
)
|
|
(4
|
)
|
|
|
|
|
Acquisition-related costs
|
|
(15
|
)
|
|
(29
|
)
|
|
(48
|
)
|
|
|
|
|
Certain significant items
|
|
(85
|
)
|
|
(17
|
)
|
|
*
|
|
|
|
|
|
Other unallocated
|
|
(67
|
)
|
|
(47
|
)
|
|
43
|
|
|
|
|
|
Income before income taxes
|
|
$
|
379
|
|
|
$
|
423
|
|
|
(10
|
)
|
|
|
|
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2013 vs. three months ended July 1, 2012
U.S. operating segment
U.S. segment revenue
increased
by $
16 million
, or
4%
, in the second quarter of 2013 compared to the second quarter of 2012, of which approximately $
12 million
resulted from
growth
in livestock products and approximately $
4 million
resulted from
growth
in companion animal products.
|
|
•
|
Livestock revenue growth was achieved in all species with contributions from cattle, swine and poultry products. Sales of cattle products returned to growth this quarter, primarily based on the favorable impact of annual price increases taken in the first quarter of 2013, while volume was relatively flat reflecting the continued impact of last year's drought. Sales of swine and poultry products grew at faster rates than cattle due largely to continued customer acceptance of new products and targeted marketing programs.
|
|
|
•
|
Companion animal revenue growth was driven by solid growth in small animal products reflecting strong market dynamics and price increases. Results were partially offset by a decline in equine sales and a competitor supply issue that has now been resolved.
|
U.S. segment earnings
increased
by $
27 million
, or
12%
, in the second quarter of 2013 compared to the second quarter of 2012 due to revenue growth, favorable product mix and phasing of certain promotional spending.
EuAfME operating segment
EuAfME segment revenue
decreased
by $
5 million
, or
2%
, in the second quarter of 2013 compared to the second quarter of 2012. Operational revenue growth was $
2 million
, or
1%
, of which approximately $
5 million
resulted from
growth
in companion animal products, offset by approximately $
3 million
in
declines
from livestock products.
|
|
•
|
Livestock revenue was negatively impacted by a decline in cattle growth due to cold weather conditions in Western and Northern Europe. Continuing adverse macroeconomic conditions throughout Western Europe also continue to impact demand for products. Partially offsetting this decrease was continued growth in sales of swine and poultry products. Additionally, growth in swine was favorably impacted by the launch of a new swine vaccine (that prevents porcine circovirus type 2) across many markets in the region and strong sales growth in poultry products in the European Union and Eastern Europe.
|
|
|
•
|
Companion animal revenue growth was favorably impacted by increased sales of products that are related to certain third party manufacturing agreements. Excluding these sales, companion animal sales were relatively flat as a result of continued adverse macroeconomic conditions throughout Western Europe. While we have experienced growth in Southern Europe, we continue to see challenging economic conditions which impacts the disposable income of pet owners. Additionally, the unseasonably cold weather across much of Europe has impacted the start of the parasiticide season, which normally begins early in the second quarter.
|
Additionally, segment revenue were
unfavorably
impacted by foreign exchange, which decreased revenue by approximately $
7 million
, or
3%
.
EuAfME segment earnings
increased
by $
3 million
, or
3%
, in the second quarter of 2013 compared to the second quarter of 2012, primarily due to lower promotional expenses. Segment earnings were
favorably
impacted by foreign exchange of approximately
2%
in the second quarter of 2013.
CLAR operating segment
CLAR segment revenue
increased
by $
2 million
, or
1%
, in the second quarter of 2013 compared to the second quarter of 2012. Operational revenue growth was $
9 million
, or
4%
, of which approximately $
6 million
resulted from
growth
in livestock products and $
3 million
resulted from
growth
in companion animal product sales.
|
|
•
|
Livestock revenue was positively impacted by growth in poultry revenues driven by increased sales of medicated feed additives. Additionally, swine vaccines benefited from continued demand in South America particularly for Improvac/Improvest, a product that reduces boar taint without the need for surgical castration. This was offset by a decline in cattle growth related to weak market conditions in most countries, primarily Brazil, as a result of drought conditions, product supply issues and generic competition.
|
|
|
•
|
Companion animal growth was favorably impacted by increased demand for pet care products in Brazil and successful marketing programs in Brazil and Mexico. Gains were partially offset by the equine business portfolio as a result of a reduced number of horses in Canada. Revenue also declined slightly due to a competitor supply issue in Canada that benefited the second quarter of 2012, as well as weather patterns.
|
Additionally, segment revenue was
unfavorably
impacted by foreign exchange, which decreased revenue by approximately $
7 million
, or
3%
.
CLAR segment earnings
increased
by $
1 million
, or
1%
, in the second quarter of 2013 compared to the second quarter of 2012. Operational earnings growth was $
5 million
, or
7%
, in the second quarter of 2013 compared to the second quarter of 2012.
APAC operating segment
APAC segment revenue
increased
by $
7 million
, or
4%
, in the second quarter of 2013 compared to the second quarter of 2012. Operational revenue growth was $
12 million
, or
7%
, of which approximately $
6 million
resulted from
growth
in livestock products and approximately $
6 million
resulted from
growth
in companion animal products. Emerging markets had strong performance with 16% operational growth and the established markets delivered 3% operational growth.
|
|
•
|
Livestock revenue growth was driven primarily by higher sales of swine products, particularly in our porcine circovirus type 2 vaccine, which was launched in several new markets in Southeast Asia, Taiwan and Korea. Positive growth in swine products was tempered by challenging market conditions for pork producers in Southeast and Northeast Asia, with some impact in China. Growth in the poultry portfolio also positively contributed to livestock performance to a lesser extent, despite challenging market conditions in China. The increase in livestock revenue was partially offset by the prolonged drought conditions in Australia which has reduced the number of cattle.
|
|
|
•
|
Companion animal revenue growth was primarily due to increased penetration of key brands, as well as targeted marketing campaigns and the successful launch of a new product in Japan.
|
Additionally, segment revenue was
unfavorably
impacted by foreign exchange, which decreased revenues by approximately $
5 million
, or
3%
.
APAC segment earnings
increased
by $
8 million
, or
13%
, in the second quarter of 2013 compared to the second quarter of 2012 driven by revenue growth and operating efficiencies offset, in part, by increased cost of goods sold related to product mix.
Six months ended June 30, 2013 vs. six months ended July 1, 2012
U.S. operating segment
U.S. segment revenues
increased
by $
45 million
, or
5%
, in the first six months of 2013 compared to the first six months of 2012, of which approximately $
17 million
resulted from
growth
in livestock products and approximately $
28 million
resulted from
growth
in companion animal products.
|
|
•
|
Livestock revenue growth was driven by increased marketing programs across swine, poultry and cattle products and a new portfolio pricing structure implemented late in 2012. Growth in cattle continues to be tempered by herd reductions due to the impact of the U.S. drought conditions.
|
|
|
•
|
Companion animal revenue growth was driven by solid growth in small animal products reflecting strong promotional support and price increases. Results were partially offset by a decrease in equine sales reflecting the continuing contraction of the market.
|
U.S. segment earnings
increased
by $
44 million
, or
10%
, in the first six months of 2013 compared to the first six months of 2012, as a result of revenue growth and favorable product mix.
EuAfME operating segment
EuAfME segment revenue
increased
by $
10 million
, or
2%
, in the first six months of 2013 compared to the first six months of 2012. Operational revenue growth was $
13 million
, or
2%
, of which approximately $
3 million
resulted from
growth
in livestock products and approximately $
10 million
resulted from
growth
in companion animal products.
|
|
•
|
Livestock revenue growth was driven primarily by growth in the swine and poultry portfolios. The launch of a new swine vaccine (that prevents porcine circovirus type 2) across many markets in the region contributed to this growth. Additionally, the poultry product portfolio had strong sales growth in the European Union and Eastern Europe. Results were partially offset by a decline in cattle growth due to cold weather conditions in Western and Northern Europe which limits the opportunity for our products, and the continuing adverse economic conditions throughout Western Europe.
|
|
|
•
|
Companion animal revenue growth was favorably impacted by increased sales of products that are related to certain third party manufacturing agreements as well as price increases in Western Europe. Results were partially offset by the unseasonably cold weather across much of Europe, impacting the start of the parasiticide season which normally begins early in the second quarter.
|
Additionally, segment revenue was
unfavorably
impacted by foreign exchange, which decreased revenues by approximately $
3 million
.
EuAfME segment earnings
increased
by $
16 million
, or
8%
, in the first six months of 2013 compared to the first six months of 2012, primarily due to higher gross margins as a result of increased sales associated with third party manufacturing agreements. Segment earnings were
unfavorably
impacted by foreign exchange of approximately
2%
in the second quarter of 2013.
CLAR operating segment
CLAR segment revenue remained flat in the first six months of 2013 compared to the first six months of 2012. Operational revenue growth was $
16 million
, or
4%
, of which approximately $
13 million
resulted from
growth
in livestock products, and approximately $
3 million
resulted from
growth
in companion animal product sales.
|
|
•
|
Livestock revenue was favorably impacted by growth in swine and poultry products in Brazil. Swine vaccines benefited from continued demand in South America across several product lines, including Improvac/Improvest, a product that reduces boar taint without the need for surgical castration. Growth in poultry revenue was driven by increased sales of medicated feed additives. Cattle revenues in Canada benefited from a strong fall calf season in the first quarter of 2013, while in other countries revenues were negatively impacted by a decline in cattle growth related to weak market conditions as a result of drought conditions, product supply issues and generic competition.
|
|
|
•
|
Companion animal revenue was favorably impacted by increased demand for pet care products in Brazil and marketing programs in Brazil and Mexico. Gains were partially offset by the equine business as a result of a reduced number of horses in Canada. Revenues also declined slightly due to a competitor supply issue in Canada that benefited the first half of 2012, as well as weather patterns.
|
Additionally, segment revenue was
unfavorably
impacted by foreign exchange, which decreased revenues by approximately $
16 million
, or
4%
.
CLAR segment earnings
decreased
by $
1 million
, or
1%
, in the first six months of 2013 compared to the first six months of 2012. Operational earnings growth was $
10 million
, or
8%
, in the first six months of 2013 compared to the first six months of 2012. The increase was driven by improvements in product mix. This performance was offset by the continued impact of the Venezuela currency devaluation in February 2013, which unfavorably impacted earnings by
$13 million
.
APAC operating segment
APAC segment revenue
increased
by $
8 million
, or
2%
, in the first six months of 2013 compared to the first six months of 2012. Operational revenue growth was $
16 million
, or
5%
, of which approximately $
8 million
resulted from
growth
in livestock products and approximately $
8 million
resulted from
growth
in companion animal products.
|
|
•
|
Livestock revenue growth was driven primarily by higher sales of swine products, particularly in our porcine circovirus type 2 vaccine, which was launched in several new markets in Southeast Asia, Taiwan and Korea. Positive growth in swine products was tempered by challenging market conditions for pork producers in Southeast and Northeast Asia, with some impact in China. Growth in the poultry portfolio also positively contributed to livestock performance to a lesser extent, despite challenging market conditions in China. The increase in livestock revenue was partially offset by the prolonged drought conditions in Australia which has reduced the number of cattle.
|
|
|
•
|
Companion animal revenue growth was primarily due to increased penetration of key brands, as well as targeted marketing campaigns and the successful launch of a new product in Japan.
|
Additionally, segment revenue was
unfavorably
impacted by foreign exchange, which decreased revenues by approximately $
8 million
, or
3%
.
APAC segment earnings
increased
by $
12 million
, or
9%
, in the first six months of 2013 compared to the first six months of 2012 driven by revenue growth and operating efficiencies offset, in part, by increased cost of goods sold related to product mix.
Other business activities
Reflects the R&D activity managed by our centralized Research and Development Organization.
Three months ended June 30, 2013 vs. three months ended July 1, 2012
Our centralized spending on R&D
increased
by $
13 million
, or
21%
, in the second quarter of 2013 compared to the second quarter of 2012, primarily due to $8 million in comparable R&D expense for the second quarter of 2012 included in the Corporate segment related to operations now managed by the Research and Development Organization.
Six months ended June 30, 2013 vs. six months ended July 1, 2012
Our centralized spending on R&D
increased
by $
22 million
, or
17%
, in the first six months of 2013 compared to the first six months of 2012, primarily due to $18 million in comparable R&D expense for the first half of 2012 included in the Corporate segment related to operations now managed by the Research and Development Organization.
Reconciling items
See Notes to Condensed Consolidated and Combined Financial Statements—
Note 16. Segment and Other Revenue Information
for more information.
Adjusted net income
General description of adjusted net income (a non-GAAP financial measure)
Adjusted net income is an alternative view of performance used by management, and we believe that investors’ understanding of our performance is enhanced by disclosing this performance measure. We report adjusted net income to portray the results of our major operations, the discovery, development, manufacture and commercialization of animal health medicine and vaccine products, prior to considering certain income statement elements. We have defined adjusted net income as net income attributable to Zoetis before the impact of purchase accounting adjustments, acquisition-related costs and certain significant items. The adjusted net income measure is not, and should not be viewed as, a substitute for U.S. GAAP reported net income attributable to Zoetis.
The adjusted net income measure is an important internal measurement for us. We measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how the adjusted net income measure is utilized:
|
|
•
|
senior management receives a monthly analysis of our operating results that is prepared on an adjusted net income basis;
|
|
|
•
|
our annual budgets are prepared on an adjusted net income basis; and
|
|
|
•
|
other goal setting and performance measurements.
|
Despite the importance of this measure to management in goal setting and performance measurement, adjusted net income is a non-GAAP financial measure that has no standardized meaning prescribed by U.S. GAAP and, therefore, has limits in its usefulness to investors. Because of its non-standardized definition, adjusted net income, unlike U.S. GAAP net income, may not be comparable to the calculation of similar measures of other companies. Adjusted net income is presented to permit investors to more fully understand how management assesses performance.
We also recognize that, as an internal measure of performance, the adjusted net income measure has limitations, and we do not restrict our performance management process solely to this metric. A limitation of the adjusted net income measure is that it provides a view of our operations without including all events during a period, such as the effects of an acquisition or amortization of purchased intangibles, and does not provide a comparable view of our performance to other companies. We also use other specifically tailored tools designed to achieve the highest levels of performance.
Purchase accounting adjustments
Adjusted net income is calculated prior to considering certain significant purchase accounting impacts that result from business combinations and net asset acquisitions. These impacts, primarily associated with the Pharmacia Animal Health business (acquired in 2003), Fort Dodge Animal Health (FDAH) (acquired in 2009) and King Animal Health (KAH) (acquired in 2011), include the incremental charge to cost of sales from the sale of acquired inventory that was written up to fair value, amortization related to the increase in fair value of the acquired finite-lived intangible assets and depreciation related to the increase/decrease to fair value of the acquired fixed assets. Therefore, the adjusted net income measure includes the revenues earned upon the sale of the acquired products without considering the aforementioned significant charges.
While certain purchase accounting adjustments can occur through 20 or more years, this presentation provides an alternative view of our performance that is used by management to internally assess business performance. We believe the elimination of amortization attributable to acquired intangible assets provides management and investors an alternative view of our business results by providing a degree of parity to internally developed intangible assets for which R&D costs previously have been expensed.
A completely accurate comparison of internally developed intangible assets and acquired intangible assets cannot be achieved through adjusted net income. These components of adjusted net income are derived solely from the impact of the items listed above. We have not factored in the impact of any other differences in experience that might have occurred if we had discovered and developed those intangible assets on our own, and this approach does not intend to be representative of the results that would have occurred in those circumstances. For example, our R&D costs in total, and in the periods presented, may have been different; our speed to commercialization and resulting revenues, if any, may have been different; or our costs to manufacture may have been different. In addition, our marketing efforts may have been received differently by our customers. As such, in total, there can be no assurance that our adjusted net income amounts would have been the same as presented had we discovered and developed the acquired intangible assets.
Acquisition-related costs
Adjusted net income is calculated prior to considering transaction, integration, restructuring and additional depreciation costs associated with significant business combinations or net-asset acquisitions because these costs are unique to each transaction and represent costs that were incurred to restructure and integrate certain businesses as a result of the acquisition decision. We have made no adjustments for the resulting synergies.
We believe that viewing income prior to considering these charges provides investors with a useful additional perspective because the significant costs incurred in a business combination result primarily from the need to eliminate duplicate assets, activities or employees––a natural result of acquiring a fully integrated set of activities. For this reason, we believe that the costs incurred to convert disparate systems, to close duplicative facilities or to eliminate duplicate positions (for example, in the context of a business combination) can be viewed differently from those costs incurred in the ordinary course of business.
The integration and restructuring costs associated with a business combination may occur over several years, with the more significant impacts ending within three years of the transaction. Because of the need for certain external approvals for some actions, the span of time needed to achieve certain restructuring and integration activities can be lengthy. For example, due to the regulated nature of the animal health medicines and vaccines business, the closure of excess facilities can take several years, as all manufacturing changes are subject to extensive validation and testing and must be approved by the Food and Drug Administration and/or other regulatory authorities.
Certain significant items
Adjusted net income is calculated prior to considering certain significant items. Certain significant items represent substantive, unusual items that are evaluated on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual nature. Unusual, in this context, may represent items that are not part of our ongoing business; items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis; items that would be nonrecurring; or items that relate to products that we no longer sell. While not all-inclusive, examples of items that could be included as certain significant items would be a major non-acquisition-related restructuring charge and associated implementation costs for a program that is specific in nature with a defined term, such as those related to our non-acquisition-related cost-reduction and productivity initiatives; amounts related to disposals of products or facilities that do not qualify as discontinued operations as defined by U.S. GAAP; certain intangible asset impairments; costs related to becoming a standalone public company; adjustments related to the resolution of certain tax positions; the impact of adopting certain significant, event-driven tax legislation; or charges related to legal matters. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 15. Commitments and Contingencies
. Our normal, ongoing defense costs or settlements of and accruals on legal matters made in the normal course of our business would not be considered certain significant items.
Reconciliation
A reconciliation of net income attributable to Zoetis, as reported under U.S. GAAP, to adjusted net income follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
Reported net income attributable to Zoetis
|
|
$
|
128
|
|
|
$
|
173
|
|
|
(26
|
)
|
|
$
|
268
|
|
|
$
|
284
|
|
|
(6
|
)
|
Purchase accounting adjustments—net of tax
|
|
9
|
|
|
8
|
|
|
13
|
|
|
17
|
|
|
17
|
|
|
—
|
|
Acquisition-related costs—net of tax
|
|
6
|
|
|
10
|
|
|
(40
|
)
|
|
10
|
|
|
19
|
|
|
(47
|
)
|
Certain significant items—net of tax
|
|
35
|
|
|
(15
|
)
|
|
*
|
|
|
62
|
|
|
8
|
|
|
*
|
|
Adjusted net income
(a)
|
|
$
|
178
|
|
|
$
|
176
|
|
|
1
|
|
|
$
|
357
|
|
|
$
|
328
|
|
|
9
|
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
|
|
(a)
|
The effective tax rate on adjusted pretax income is
29.4%
and
33.8%
for the second quarter of 2013 and 2012, respectively, and
29.2%
and
33.5%
for the first six months of 2013 and 2012, respectively. The
lower
effective tax rate in 2013 compared to 2012 is due to incentive tax rulings in Belgium, effective December 1, 2012, and Singapore, effective October 29, 2012, as well as changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs. In addition, we recognized a $2 million discrete income tax provision benefit during the first quarter of 2013 related to the 2012 U.S research and development tax credit which was retroactively extended on January 3, 2013.
|
The following table provides a reconciliation of reported diluted earnings per share (EPS), as reported under U.S. GAAP, and non-GAAP adjusted diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
Earnings per share—diluted
(a)(b)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Reported net income attributable to Zoetis
|
|
$
|
0.26
|
|
|
$
|
0.35
|
|
|
(26
|
)
|
|
$
|
0.54
|
|
|
$
|
0.57
|
|
|
(5
|
)
|
Purchase accounting adjustments—net of tax
|
|
0.02
|
|
|
0.02
|
|
|
—
|
|
|
0.03
|
|
|
0.03
|
|
|
—
|
|
Acquisition-related costs—net of tax
|
|
0.01
|
|
|
0.02
|
|
|
(50
|
)
|
|
0.02
|
|
|
0.04
|
|
|
(50
|
)
|
Certain significant items—net of tax
|
|
0.07
|
|
|
(0.03
|
)
|
|
*
|
|
|
0.12
|
|
|
0.02
|
|
|
*
|
|
Non-GAAP adjusted net income
|
|
$
|
0.36
|
|
|
$
|
0.35
|
|
|
3
|
|
|
$
|
0.71
|
|
|
$
|
0.66
|
|
|
8
|
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
|
|
(a)
|
The weighted-average shares outstanding for diluted earnings per share for the period prior to the IPO was calculated using an aggregate of 500 million shares of Class A and Class B common stock outstanding, which was the number of Zoetis Inc. shares outstanding immediately prior to the IPO. For the
six months ended
June 30, 2013
, diluted earnings per share was computed using the weighted-average common shares outstanding during the period plus the common stock equivalents related to stock options and RSUs.
|
|
|
(b)
|
EPS amounts may not add due to rounding.
|
Adjusted net income includes the following charges for each of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
July 1,
|
|
|
June 30,
|
|
|
July 1,
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Interest
|
|
$
|
32
|
|
|
$
|
8
|
|
|
$
|
54
|
|
|
$
|
16
|
|
Taxes
|
|
74
|
|
|
90
|
|
|
147
|
|
|
166
|
|
Depreciation
|
|
34
|
|
|
33
|
|
|
69
|
|
|
52
|
|
Amortization
|
|
4
|
|
|
6
|
|
|
8
|
|
|
10
|
|
Adjusted net income, as shown above, excludes the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
|
June 30,
|
|
|
July 1,
|
|
June 30,
|
|
|
July 1,
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
2013
|
|
|
2012
|
|
Purchase accounting adjustments:
|
|
|
|
|
|
|
|
Amortization and depreciation
(a)
|
|
$
|
12
|
|
|
$
|
12
|
|
$
|
23
|
|
|
$
|
24
|
|
Cost of sales
(b)
|
|
1
|
|
|
1
|
|
2
|
|
|
2
|
|
Total purchase accounting adjustments—pre-tax
|
|
13
|
|
|
13
|
|
25
|
|
|
26
|
|
Income taxes
(c)
|
|
4
|
|
|
5
|
|
8
|
|
|
9
|
|
Total purchase accounting adjustments—net of tax
|
|
9
|
|
|
8
|
|
17
|
|
|
17
|
|
Acquisition-related costs
(d)
:
|
|
|
|
|
|
|
|
Integration costs
(e)
|
|
10
|
|
|
12
|
|
14
|
|
|
21
|
|
Restructuring costs
(f)
|
|
(1
|
)
|
|
1
|
|
1
|
|
|
3
|
|
Additional depreciation—asset restructuring
(g)
|
|
—
|
|
|
2
|
|
—
|
|
|
5
|
|
Total acquisition-related costs—pre-tax
|
|
9
|
|
|
15
|
|
15
|
|
|
29
|
|
Income taxes
(c)
|
|
3
|
|
|
5
|
|
5
|
|
|
10
|
|
Total acquisition-related costs—net of tax
|
|
6
|
|
|
10
|
|
10
|
|
|
19
|
|
Certain significant items
(h)
:
|
|
|
|
|
|
|
|
Restructuring charges
(i)
|
|
(27
|
)
|
|
11
|
|
(26
|
)
|
|
25
|
|
Implementation costs and additional depreciation—asset restructuring
(g)
|
|
1
|
|
|
1
|
|
3
|
|
|
11
|
|
Certain asset impairment charges
(j)
|
|
—
|
|
|
—
|
|
1
|
|
|
—
|
|
Net gains on sale of assets
(k)
|
|
(6
|
)
|
|
—
|
|
(6
|
)
|
|
—
|
|
Stand-up costs
(l)
|
|
77
|
|
|
—
|
|
111
|
|
|
—
|
|
Other
(m)
|
|
(2
|
)
|
|
(26
|
)
|
2
|
|
|
(19
|
)
|
Total significant items—pre-tax
|
|
43
|
|
|
(14
|
)
|
85
|
|
|
17
|
|
Income taxes
(c)
|
|
8
|
|
|
1
|
|
23
|
|
|
9
|
|
Total significant items—net of tax
|
|
35
|
|
|
(15
|
)
|
62
|
|
|
8
|
|
Total purchase accounting adjustments, acquisition-related costs,
|
|
|
|
|
|
|
|
and certain significant items—net of tax
|
|
$
|
50
|
|
|
$
|
3
|
|
$
|
89
|
|
|
$
|
44
|
|
Certain amounts may reflect rounding adjustments.
|
|
(a)
|
Amortization and depreciation expense related to purchase accounting adjustments with respect to identifiable intangible assets and property, plant and equipment were distributed as follows: $12 million and $23 million in the three and six months ended June 30, 2013, respectively, and $13 million and $25 million in the three and six months ended July 1, 2012, respectively, included in
Amortization of intangible assets
, and $1 million income in the three and six months ended July 1, 2012, included in
Selling, general and administrative expenses.
|
|
|
(b)
|
Depreciation expense included in
Cost of sales.
|
|
|
(c)
|
Included in
Provision for taxes on income
.
|
|
|
(d)
|
Acquisition-related costs were distributed as follows: $2 million in the three and six months ended June 30, 2013 and $2 million and $5 million in the three and six months ended July 1, 2012, respectively, included in
Cost of sales
; $7 million and $13 million in the three and six months ended June 30, 2013 and $13 million and $24 million in the three and six months ended July 1, 2012, respectively, included in
Restructuring charges and certain acquisition-related costs
.
|
|
|
(e)
|
Integration costs were distributed as follows: $2 million in the three and six months ended June 30, 2013 included in
Cost of sales
, and $8 million
and $12 million in the three and six months ended June 30, 2013, respectively, and $12 million and $21 million in the three and six months ended July 1, 2012, respectively, included in
Restructuring charges and certain acquisition-related costs
.
|
|
|
(f)
|
Included in
Restructuring charges and certain acquisition-related costs
. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.
|
|
|
(g)
|
Amounts primarily relate to our cost-reduction/productivity initiatives. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 5.
Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
.
|
|
|
(h)
|
Certain significant items were distributed as follows: $13 million and $16 million in the three and six months ended June 30, 2013, respectively, and $7 million income and $6 million income in the three and six months ended July 1, 2012, respectively, included in
Cost of sales
; $60 million and $95 million in the three and six months ended June 30, 2013, respectively, and $6 million income and $1 million in the three and six months ended July 1, 2012, respectively, included in
Selling, general and administrative expenses
; $4 million in the three and six months ended June 30, 2013 and $1 million and $10 million in the three and six months ended July 1, 2012, respectively, included in
Research and development expenses
; $27 million income and $26 million income in the three and six months ended June 30, 2013, respectively, and $11 million and $25 million in the three and six months ended July 1, 2012, respectively, included in
Restructuring charges and certain acquisition-related costs
; and $7 million income and $4 million income in the three and six months ended June 30, 2013, respectively, and $13 million income in the three and six months ended July 1, 2012, included in
Other (Income)/Deductions—Net.
|
|
|
(i)
|
Represents restructuring charges incurred for our cost-reduction/productivity initiatives. Included in
Restructuring charges and certain acquisition-related costs
. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 5.
Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
.
|
|
|
(j)
|
Included in
Other (income)/deductions—net
. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 6. Other (Income)/Deductions—Net
for more information.
|
|
|
(k)
|
R
epresents the net gain on the government-mandated sale of certain product rights in Brazil that were acquired with the FDAH acquisition in 2009. Included in
Other (income)/deductions—net
. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 6. Other (Income)/Deductions—Net
for more information.
|
|
|
(l)
|
Certain nonrecurring costs related to becoming a standalone 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, accelerated vesting and associated cash payment related to certain Pfizer equity awards, and certain legal registration and patent assignment costs which were distributed as follows: $13 million and $15 million in the three and six months ended June 30, 2013, respectively, included in
Cost of sales
; $60 million and $92 million in the three and six months ended June 30, 2013, respectively, included in
Selling, general and administrative expenses
, and $4 million in the three and six months ended June 30, 2013 included in
Research and development expenses
.
|
|
|
(m)
|
For the three and six months ended June 30, 2012, primarily relates to income related to a favorable legal settlement for an intellectual property matter ($14 million) and income due to a change in estimate related to transitional manufacturing purchase agreements associated with divestitures ($5 million).
|
Our financial guidance for 2013
Our 2013 financial guidance is summarized below:
|
|
|
|
Selected Line Items
|
|
|
Revenue
|
|
$4,425 to $4,525 million
|
Adjusted cost of sales as a percentage of revenue
(a)
|
|
35% to 36%
|
Adjusted SG&A expenses
(a)
|
|
$1,385 to $1,435 million
|
Adjusted R&D expenses
(a)
|
|
$385 to $415 million
|
Adjusted interest expense
(a)
|
|
Approximately $115 million
|
Adjusted other (income)/deductions
(a)
|
|
Approximately $20 million income
|
Effective tax rate on adjusted net income
(a)
|
|
Approximately 29.5%
|
Reported diluted EPS
|
|
$1.00 to $1.06
|
Adjusted diluted EPS
(a)
|
|
$1.36 to $1.42
|
Certain significant items
(b)
and acquisition-related costs
|
|
$200 to $240 million
|
|
|
(a)
|
For an understanding of adjusted net income and its components, see the “Adjusted net income” section of this MD&A.
|
|
|
(b)
|
Includes certain nonrecurring costs related to becoming a standalone 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.
|
The above table is a confirmation of the financial guidance provided on April 30, 2013, which assumed a blend of the actual exchange rates in effect during the first quarter of 2013 and a mid-April exchange rate for the remainder of the year. In reaffirming our guidance, we have considered current exchange rates and other factors.
A reconciliation of 2013 adjusted net income and adjusted diluted EPS guidance to 2013 reported net income attributable to Zoetis and reported diluted EPS attributable to Zoetis common shareholders guidance follows:
|
|
|
|
|
|
|
|
Full-Year 2013 Guidance
|
(MILLION OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
|
|
Net Income
|
|
Diluted EPS
|
Adjusted net income/diluted EPS
(a)
guidance
|
|
~$680 - $710
|
|
~$1.36 - $1.42
|
Purchase accounting adjustments
|
|
(35)
|
|
(0.07)
|
Certain significant items
(b)
and acquisition-related costs
|
|
(130 - 160)
|
|
(0.26 - 0.32)
|
Reported net income attributable to Zoetis Inc./diluted EPS guidance
|
|
~$500 - $530
|
|
~$1.00 - $1.06
|
|
|
(a)
|
For an understanding of adjusted net income, see the “Adjusted net income” section of this MD&A.
|
|
|
(b)
|
Includes certain nonrecurring costs related to becoming a standalone 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.
|
Our 2013 financial guidance is subject to a number of factors and uncertainties—as described in the “Forward-looking information and factors that may affect future results,” “Our operating environment” and “Our strategy” and in Part I, Item 1A. “Risk Factors” of our 2012 Annual Report on Form 10-K.
Analysis of the condensed consolidated and combined statements of comprehensive income
Virtually all changes in other comprehensive income for the periods presented are related to foreign currency translation adjustments. These changes result from the strengthening or weakening of the U.S. dollar as compared to the currencies in the countries in which we do business. The gains and losses associated with these changes are deferred on the balance sheet in
Accumulated other comprehensive loss
until realized.
Analysis of the condensed consolidated and combined balance sheets
June 30, 2013
vs. December 31, 2012
For a discussion about the changes in
Cash and cash equivalents
,
Short-term borrowing, including current portion of allocated long term debt
, and
Long-term debt
, see “Analysis of financial condition, liquidity and capital resources” below.
Accounts receivable, less allowance for doubtful accounts
increased as a result of operational increases due to higher net sales, as well as including receivables from Pfizer of $
212 million
. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation.
Inventories
decreased primarily as a result of Separation Adjustments. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation
and
Note 10. Inventories.
The net changes in
Current deferred tax assets
,
Noncurrent deferred tax assets
,
Noncurrent deferred tax liabilities
and
Other taxes payable
primarily reflect Separation Adjustments. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation
and
Note 7. Income Taxes.
Property, plant and equipment, less accumulated depreciation
was virtually unchanged as Separation Adjustments were offset by operational activity (depreciation and capital spending). See Notes to Condensed Consolidated and Combined Financial Statements—
Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation.
Accounts payable
increased due to including payables to Pfizer of $
297 million
.
Dividends payable
relates to the dividend declared on June 20, 2013.
Accrued Compensation and related items
declined primarily due to the payment of 2012 annual bonuses to eligible U.S.-based employees in the first half of 2013, partially offset by the accrual for cash payments to certain non-executive Zoetis employees associated with the forfeiture of Pfizer equity awards. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 13E. Share-Based Payments: Treatment of Outstanding Pfizer Equity Awards.
Long-term debt
reflects the senior notes offering. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 2C. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Senior Notes Offering
and
Note 9D. Financial Instruments: Senior Notes Offering.
Allocated long-term debt
decreased as a result of Separation Adjustments. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation.
Other noncurrent liabilities
increased as a result of Separation Adjustments. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 2B. The Separation, Adjustments Associated with the Separation, Senior Notes Offering, Initial Public Offering and Exchange Offer: Adjustments Associated with the Separation.
For an analysis of the changes in
Total Equity
, see the Condensed Consolidated and Combined Statements of Equity.
Analysis of the condensed consolidated and combined statements of cash flows
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|
|
|
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|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
July 1,
|
|
|
%
|
|
(MILLIONS OF DOLLARS)
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
269
|
|
|
$
|
70
|
|
|
*
|
|
Investing activities
|
|
(74
|
)
|
|
(59
|
)
|
|
25
|
%
|
Financing activities
|
|
(140
|
)
|
|
18
|
|
|
*
|
|
Effect of exchange-rate changes on cash and cash equivalents
|
|
(3
|
)
|
|
(2
|
)
|
|
50
|
%
|
Net increase in cash and cash equivalents
|
|
$
|
52
|
|
|
$
|
27
|
|
|
93
|
%
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Operating activities
Six months ended
June 30, 2013
vs. six months ended July 1, 2012
Our net cash
provided by
operating activities was $
269 million
in the first six months of 2013 compared to cash
provided by
operating activities of $
70 million
in the first six months of 2012. This
increase
in operating cash flows was primarily attributable to timing of receipts and payments in the ordinary course of business and operational reductions in inventory.
For the six months ended July 1, 2012, the line item "
Other changes in assets and liabilities, net of transfers with Pfizer Inc.
" primarily reflects the timing of production of certain products, which are produced only once a year.
Investing activities
Six months ended
June 30, 2013
vs. six months ended July 1, 2012
Our net cash
used in
investing activities was $
74 million
in the first six months of 2013 compared to cash
used in
investing activities of $
59 million
in the first six months of 2012.
Financing activities
Six months ended
June 30, 2013
vs. six months ended April 1, 2012
Our net cash
used in
financing activities was $
140 million
in the first six months of 2013 compared to cash
provided by
financing activities of $
18 million
in the first six months of 2012. The
decrease
in net cash provided by financing activities was attributable to the net transfers to Pfizer as a result of the Separation.
Analysis of financial condition, liquidity and capital resources
While we believe our cash and cash equivalents on hand, our operating cash flows and our existing financing arrangements will be sufficient to support our future cash needs, this may be subject to the environment in which we operate. Risks to our meeting future funding requirements include global economic conditions described in the following paragraph.
Over the last five years, the global financial markets have undergone and may continue to experience significant volatility and disruption. The timing and sustainability of an economic recovery is uncertain and additional macroeconomic, business and financial disruptions may arise. As markets change, we will continue to monitor our liquidity position, and there can be no assurance that the challenging economic environment or a further economic downturn would not impact our liquidity or our ability to obtain future financing.
Selected measures of liquidity and capital resources
Certain relevant measures of our liquidity and capital resources follow:
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|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(MILLIONS OF DOLLARS)
|
2013
|
|
|
2012
|
|
Cash and cash equivalents
(a)
|
$
|
369
|
|
|
$
|
317
|
|
Accounts receivable, net
(b)
|
1,137
|
|
|
900
|
|
Short-term borrowings, including current portion of allocated long-term debt in 2012
(c)
|
12
|
|
|
73
|
|
Allocated long-term debt
(c)
|
—
|
|
|
509
|
|
Long-term debt
(d)
|
3,640
|
|
|
—
|
|
Working capital
|
1,761
|
|
|
1,741
|
|
Ratio of current assets to current liabilities
|
2.33:1
|
|
|
2.55.1
|
|
|
|
(a)
|
Prior to our IPO, we participated in Pfizer's centralized cash management system, and generally all of our excess cash was transferred to Pfizer on a daily basis. Cash disbursements for operations and/or investing activities were funded, as needed, by Pfizer.
|
|
|
(b)
|
Accounts receivable are usually collected over a period of 60 to 90 days
.
For the six months ended
June 30, 2013
compared to December 31, 2012, the number of days that accounts receivables are outstanding remained approximately the same. We regularly monitor our accounts receivable for collectability, particularly in markets where economic conditions remain uncertain. We believe that our allowance for doubtful accounts is appropriate. Our assessment is based on such factors as past due history, historical and expected collection patterns, the financial condition of our customers, the robust nature of our credit and collection practices and the economic environment.
|
|
|
(c)
|
The combined financial statements for December 31, 2012 include an allocation of long-term debt from Pfizer that was issued to partially finance the acquisition of Wyeth (including FDAH). The debt has been allocated on a pro-rata basis using the deemed acquisition cost of FDAH as a percentage of the total acquisition cost of Wyeth. After the IPO, Pfizer retained the allocated debt.
|
|
|
(d)
|
Consists of
$3.65 billion
aggregate principal amount of our senior notes, 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.
|
For additional information about the sources and uses of our funds, see "Analysis of the condensed consolidated and combined balance sheets" and "Analysis of the condensed consolidated and combined statements of cash flows" sections of the MD&A.
Credit facility and other lines of credit
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, which became effective in February 2013 upon the completion of the IPO and expires in December 2017. The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio (the ratio of consolidated net debt as of the end of the period to consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA) for such period) of
4.35:1
for fiscal year 2013,
3.95:1
for fiscal year 2014,
3.50:1
for fiscal year 2015 and
3.00:1
thereafter. The credit facility also contains a financial covenant requiring that we maintain a minimum interest coverage ratio (the ratio of EBITDA at the end of the period to interest expense for such period) of
3.50:1
. In addition, the credit facility contains other customary covenants. Subject to certain conditions, we have the right to increase the credit facility to up to
$1.5 billion
. There are currently no borrowings outstanding.
We have additional lines of credit 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 June 30, 2013, we had access to
$100 million
of lines of credit which expire at various times through 2016. As of June 30, 2013 we had
$12 million
of short-term borrowings outstanding.
Domestic and international short-term funds
Many of our operations are conducted outside the U.S. As part of the Separation, we received significant portions of cash and cash equivalents held internationally. Approximately 60% of cash and cash equivalents transferred was held outside the U.S. Going forward, the amount of funds held in U.S. tax jurisdictions will fluctuate due to the timing of receipts and payments in the ordinary course of business and due to other reasons, such as business development activities. As part of our ongoing liquidity assessments, we regularly monitor the mix of domestic and international cash flows (both inflows and outflows). Repatriation of overseas funds can result in additional U.S. federal, state and local income tax payments. We record U.S. deferred tax liabilities for certain unremitted earnings, but when amounts earned overseas are expected to be indefinitely reinvested outside the U.S., no accrual for U.S. taxes is provided.
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.
We sold
$2.65 billion
aggregate principal amount of our senior notes through the initial purchasers in the senior notes offering and Pfizer transferred
$1.0 billion
aggregate principal amount of our senior notes to certain of the initial purchasers, who sold such senior notes through the initial purchasers in the senior notes offering. We paid an amount of cash equal to substantially all of the net proceeds that we received in the senior notes offering to Pfizer prior to the completion of the IPO.
The senior notes are governed by an indenture and supplemental indenture (collectively, the indenture) between us and Deutsche Bank Trust Company Americas, as trustee. The indenture contains certain covenants, including limitations on our and certain of our subsidiaries' ability to incur liens or engage in sale leaseback transactions. The indenture also contains restrictions on our ability to consolidate, merge or sell substantially all of our assets. In addition, the indenture contains other customary terms, including certain events of default, upon the occurrence of which the senior notes may be declared immediately due and payable.
Pursuant to the indenture, we are able to redeem the senior notes of any series, in whole or in part, at any time by paying a “make whole” premium, plus accrued and unpaid interest to, but excluding, the date of redemption. Pursuant to our tax matters agreement with Pfizer, we will not be permitted to redeem the 2023 notes pursuant to this optional redemption provision, except under limited circumstances. Upon the occurrence of a change of control of us and a downgrade of the senior notes below an investment grade rating by each of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, we are, in certain circumstances, required to make an offer to purchase each of the senior notes at a price equal to
101%
of the aggregate principal amount of the senior notes together with accrued and unpaid interest to, but excluding, the date of repurchase.
The components of our long-term debt follow:
|
|
|
|
|
Description
|
Principal Amount
|
Interest Rate
|
Terms
|
2016 Senior Note
|
$400 million
|
1.150%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2016
|
2018 Senior Note
|
$750 million
|
1.875%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2018
|
2023 Senior Note
|
$1,350 million
|
3.250%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2023
|
2043 Senior Note
|
$1,150 million
|
4.700%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2043
|
Credit Ratings
Two major corporate debt-rating organizations, Moody's and S&P, assign ratings to our short-term and long-term debt. A security rating is not a recommendation to buy, sell or hold securities and the rating is subject to revision or withdrawal at any time by the rating organization. Each rating should be evaluated independently of any other rating.
The following table provides the current ratings assigned by these rating agencies to our commercial paper and senior unsecured non-credit-enhanced long-term debt:
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|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
Paper
|
|
Long-term Debt
|
|
Date of
|
Name of Rating Agency
|
|
Rating
|
|
Rating
|
|
Outlook
|
|
Last Action
|
Moody’s
|
|
P-2
|
|
Baa2
|
|
Stable
|
|
January 2013
|
S&P
|
|
A-3
|
|
BBB-
|
|
Stable
|
|
January 2013
|
Pension Obligations
As part of the Separation, Pfizer transferred to us the net pension obligation of
$25 million
associated with certain international defined benefit plans in the first quarter of 2013. We expect to contribute approximately
$8 million
to the plans in 2013. In the second quarter of 2013, a net liability of approximately
$16 million
was recognized for the pension obligations less the fair value of plan assets associated with additional defined benefit pension plans in certain international locations that will be transferred to us in 2014, in accordance with the applicable local separation agreements.
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. As part of the Separation, Pfizer is continuing to credit certain employees' service with Zoetis generally through December 31, 2017 (or termination of employment from Zoetis, if earlier) for certain early retirement benefits with respect to Pfizer's U.S. defined benefit pension and retiree medical plans. In connection with the employee matters agreement, Zoetis will be responsible for payment of three-fifths of the total cost of the service credit continuation (approximately
$38 million
) for these plans. The amount of the service cost continuation payment to be paid by Zoetis to Pfizer was determined and fixed based on an actuarial assessment of the value of the grow-in benefits and will be paid in equal installments over a period of
10
years.
In the second quarter of 2013, Pfizer transferred to us, the U.S. supplemental savings plan liability of approximately
$14 million
, cash of
$9 million
and a deferred tax asset of
$5 million
associated with employees transferred to us as part of the Separation.
For additional information, see Notes to Condensed Consolidated and Combined Financial Statements—
Note 12. Benefit Plans.
Off-balance sheet arrangements
In the ordinary course of business and in connection with the sale of assets and businesses, we may indemnify our counterparties against certain liabilities that may arise in connection with a transaction or that are related to activities prior to a 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 generally are 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
June 30, 2013
or December 31, 2012, recorded amounts for the estimated fair value of these indemnifications are not significant.
New accounting standards
For discussion of our new accounting standards, see Notes to Condensed Consolidated and Combined Financial Statements—
Note 4A. Significant Accounting Policies: New Accounting Standards
.
Recently Issued Accounting Standards, Not Adopted as of
June 30, 2013
In July 2013, the Financial Accounting Standards Board (FASB) issued an accounting standards update regarding the presentation of an unrecognized tax benefit related to a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Under this new standard, this unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset if available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, the unrecognized tax benefit should be presented in the financial statements as a separate liability. The assessment is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date. The provisions of the new standard are effective January 1, 2014 for annual and interim reporting periods, but we do not expect the provisions of this standard to have a significant impact on our consolidated financial statements.
In March 2013, the Financial Accounting Standards Board (FASB) issued an accounting standards update regarding the accounting for cumulative translation adjustment (CTA) upon derecognition of assets or investment within a foreign entity. This new standard provides additional CTA accounting guidance on sales or transfers of foreign entity investments and assets as well as step acquisitions involving a foreign entity. The provisions of the new standard are effective January 1, 2014, but we do not expect the provisions of this standard to have a significant impact on our consolidated financial statements.
In February 2013, the FASB issued an accounting standards update regarding the measurement of obligations resulting from joint and several liability arrangements that may include debt agreements, other contractual obligations and settled litigation or judicial rulings. The provisions of this standard require that these obligations are measured at the amount representing the agreed upon obligation of the company as well as
additional liability amounts it expects to assume on behalf of other parties in the arrangement. The provisions of the new standard are effective January 1, 2014, but we do not expect the provisions of this standard to have a significant impact on our consolidated financial statements.
Forward-looking statements and factors that may affect future results
This report contains “forward-looking” statements. We generally identify forward-looking statements by using words such as “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” “predict,” “believe,” “seek,” “continue,” “outlook,” “may,” “might,” “will,” “should,” “can have,” “likely” or the negative version of these words or comparable words or by using future dates in connection with any discussion of future performance, actions or events.
In particular, forward-looking statements include statements relating to the Separation, our indebtedness, our ability to make interest and principal payments on our indebtedness, our ability to satisfy the covenants contained in our indebtedness, the redemption of the notes, new systems infrastructure stand-up, our 2013 financial guidance, future actions, business plans or prospects, prospective products, product approvals or products under development, product supply disruptions, R&D costs, timing and likelihood of success, future operating or financial performance, future results of current and anticipated products and services, strategies, sales efforts, expenses, production efficiencies, production margins, interest rates, foreign exchange rates, growth in emerging markets, the outcome of contingencies, such as legal proceedings, dividend plans, our agreements with Pfizer, government regulation and financial results. These statements are not guarantees of future performance, actions or events. Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, and are potentially inaccurate assumptions. Among the factors that could cause actual results to differ materially from past results and future plans and projected future results are the following:
|
|
•
|
emerging restrictions and bans on the use of antibacterials in food-producing animals;
|
|
|
•
|
perceived adverse effects on human health linked to the consumption of food derived from animals that utilize our products;
|
|
|
•
|
increased regulation or decreased governmental support relating to the raising, processing or consumption of food-producing animals;
|
|
|
•
|
changes in tax laws and regulation;
|
|
|
•
|
an outbreak of infectious disease carried by animals;
|
|
|
•
|
adverse weather conditions and the availability of natural resources;
|
|
|
•
|
adverse global economic conditions;
|
|
|
•
|
failure of our R&D, acquisition and licensing efforts to generate new products;
|
|
|
•
|
quarterly fluctuations in demand and costs;
|
|
|
•
|
failure to achieve the expected benefits of the Separation and the Exchange Offer, which include improved strategic and operational efficiency, the adoption of a capital structure and investment and dividend policies that are designed for our standalone company, the use of our equity to facilitate future acquisitions and improved alignment of employee incentives with our performance and growth objectives;
|
|
|
•
|
operation as a standalone public company without many of the resources previously available to us as a business unit of Pfizer;
|
|
|
•
|
actual or potential conflicts of interest as a result of the fact that one of our directors will simultaneously serve as employees of Pfizer; and
|
|
|
•
|
governmental laws and regulations affecting domestic and foreign operations, including without limitation, tax obligations and changes affecting the tax treatment by the U.S. of income earned outside the U.S. that may result from pending and possible future proposals.
|
However, there may also be other risks that we are unable to predict at this time. These risks or uncertainties may cause actual results to differ materially from those contemplated by a forward-looking statement. You should not put undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they are made. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q and 8-K reports and our other filings with the SEC. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the above to be a complete discussion of all potential risks or uncertainties.
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
A significant portion of our revenues and costs are exposed to changes in foreign exchange rates. In addition, our outstanding borrowings may be subject to risk from changes in interest rates and foreign exchange rates. The overall objective of our financial risk management program is to seek to minimize the impact of foreign exchange rate movements and interest rate movements on our earnings. We manage these financial exposures through operational means and by using certain financial instruments. These practices may change as economic conditions change.
Foreign exchange risk
Our primary net foreign currency translation exposures are the euro, Brazilian real and Australian dollar. Prior to the IPO, as a business unit of Pfizer and under Pfizer's global cash management system, our foreign exchange risk was managed through Pfizer. Following the Separation, we seek to manage our foreign exchange risk, in part, through operational means, including managing same-currency revenues in relation to same-currency costs and same-currency assets in relation to same-currency liabilities.
Foreign exchange risk is also managed through the use of foreign currency forward-exchange contracts. These contracts are used to offset the potential earnings effects from mostly intercompany short-term foreign currency assets and liabilities that arise from operations.
Our financial instrument holdings at June 30, 2013 were analyzed to determine their sensitivity to foreign exchange rate changes. The fair values of these instruments were determined using Level 2 inputs. For additional details, see Notes to Condensed Consolidated and Combined Financial Statements—
Note 4B. Significant Accounting Policies: Fair Value
. The sensitivity analysis of changes in the fair value of all foreign currency forward-exchange contracts at June 30, 2013 indicates that if the U.S. dollar were to appreciate against all other currencies by 10%, the fair value of these contracts would increase by $23 million, and if the U.S. dollar were to weaken against all other currencies by 10%, the fair value of these contracts would decrease by $23 million. For additional details, see Notes to Condensed Consolidated and Combined Financial Statements—
Note 9E. Financial Instruments: Derivative Financial Instruments
.
Interest rate risk
Our outstanding debt balances are fixed rate debt. While changes in interest rates will have no impact on the interest we pay on our fixed rate debt, interest on our revolving credit facility will be exposed to interest rate fluctuations. At
June 30, 2013
, we had no outstanding principal balance under our credit facility. See Notes to Condensed Consolidated and Combined Financial Statements—
Note 9. Financial Instruments
.
|
|
Item 4.
|
Controls and Procedures
|
Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the company's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation as of
June 30, 2013
, our Chief Executive Officer and Chief Financial Officer each concluded that, as of the end of such period, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported on a timely basis, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
This report does not include management's assessment regarding changes in internal control over financial reporting due to a transition period established by rules of the SEC for newly public companies.