Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
%
|
|
June 30,
|
|
%
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Cost of sales
|
|
$
|
465
|
|
|
$
|
447
|
|
|
4
|
|
$
|
983
|
|
|
$
|
894
|
|
|
10
|
% of revenue
|
|
30.1
|
%
|
|
31.6
|
%
|
|
|
|
32.7
|
%
|
|
32.1
|
%
|
|
|
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019
vs.
three months ended June 30, 2018
Cost of sales as a percentage of revenue
decreased
from
31.6%
to
30.1%
in the
three months ended June 30, 2019
, compared with the
three months ended June 30, 2018
, primarily as a result of:
|
|
•
|
favorable foreign exchange;
|
|
|
•
|
continued cost improvements and efficiencies in our manufacturing network,
|
partially offset by:
|
|
•
|
the inclusion of Abaxis.
|
Six months ended June 30, 2019
vs.
six months ended June 30, 2018
Cost of sales as a percentage of revenue
increased
from
32.1%
to
32.7%
in the
six months ended June 30, 2019
, compared with the
six months ended June 30, 2018
, primarily as a result of:
|
|
•
|
a change in estimate related to inventory costing; and
|
|
|
•
|
the inclusion of Abaxis,
|
partially offset by:
|
|
•
|
favorable foreign exchange;
|
|
|
•
|
favorable product mix; and
|
|
|
•
|
continued cost improvements and efficiencies in our manufacturing network.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
%
|
|
June 30,
|
|
%
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Selling, general and administrative expenses
|
|
$
|
406
|
|
|
$
|
359
|
|
|
13
|
|
$
|
775
|
|
|
$
|
697
|
|
|
11
|
% of revenue
|
|
26
|
%
|
|
25
|
%
|
|
|
|
26
|
%
|
|
25
|
%
|
|
|
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019
vs.
three months ended June 30, 2018
Selling, general & administrative (SG&A) expenses
increased
by
$47 million
, or
13%
, in the
three months ended June 30, 2019
, compared with the
three months ended June 30, 2018
, primarily as a result of:
|
|
•
|
the inclusion of Abaxis; and
|
|
|
•
|
an increase in certain compensation-related expenses,
|
partially offset by:
|
|
•
|
favorable foreign exchange.
|
Six months ended June 30, 2019
vs.
six months ended June 30, 2018
Selling, general & administrative (SG&A) expenses
increased
by $
78 million
, or
11%
, in the
six months ended June 30, 2019
, compared with the
six months ended June 30, 2018
, primarily as a result of:
|
|
•
|
the inclusion of Abaxis; and
|
|
|
•
|
an increase in certain compensation-related expenses,
|
partially offset by:
|
|
•
|
favorable foreign exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
%
|
|
June 30,
|
|
%
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Research and development expenses
|
|
$
|
111
|
|
|
$
|
102
|
|
|
9
|
|
$
|
213
|
|
|
$
|
199
|
|
|
7
|
% of revenue
|
|
7
|
%
|
|
7
|
%
|
|
|
|
7
|
%
|
|
7
|
%
|
|
|
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019
vs.
three months ended June 30, 2018
R&D expenses
increased
by
$9 million
, or
9%
, in the
three months ended June 30, 2019
, compared with the
three months ended June 30, 2018
, primarily as a result of:
|
|
•
|
increased spending driven by project investments;
|
|
|
•
|
the inclusion of Abaxis; and
|
|
|
•
|
an increase in certain compensation-related expenses,
|
partially offset by:
|
|
•
|
favorable foreign exchange.
|
Six months ended June 30, 2019
vs.
six months ended June 30, 2018
R&D expenses
increased
by
$14 million
, or
7%
, in the
six months ended June 30, 2019
, compared with the
six months ended June 30, 2018
, primarily as a result of:
|
|
•
|
increased spending driven by project investments;
|
|
|
•
|
the inclusion of Abaxis; and
|
|
|
•
|
an increase in certain compensation-related expenses,
|
partially offset by:
|
|
•
|
favorable foreign exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
%
|
|
June 30,
|
|
%
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Amortization of intangible assets
|
|
$
|
39
|
|
|
$
|
23
|
|
|
70
|
|
$
|
77
|
|
|
$
|
46
|
|
|
67
|
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019
vs.
three months ended June 30, 2018
Amortization of intangible assets
increased
by
$16 million
, or
70%
, in the
three months ended June 30, 2019
, compared with the
three months ended June 30, 2018
as a result of
certain intangible assets acquired in July 2018 as part of the acquisition of Abaxis.
Six months ended June 30, 2019
vs.
six months ended June 30, 2018
Amortization of intangible assets
increased
by
$31 million
, or
67%
, in the
six months ended June 30, 2019
, compared with the
six months ended June 30, 2018
as a result of
certain intangible assets acquired in July 2018 as part of the acquisition of Abaxis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges and certain acquisition-related costs
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
%
|
|
June 30,
|
|
%
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Restructuring charges and certain acquisition-related costs
|
|
$
|
22
|
|
|
$
|
5
|
|
|
*
|
|
$
|
27
|
|
|
$
|
7
|
|
|
*
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Our acquisition-related costs primarily relate to restructuring charges for employees, assets and activities that will not continue in the future, as well as integration costs. The majority of these net restructuring charges are related to termination costs, but we also exited a number of distributor and other contracts and performed certain facility rationalization efforts. Our integration costs are generally comprised of consulting costs related to the integration of systems and processes, as well as product transfer costs.
For additional information regarding restructuring charges and acquisition-related costs, see Notes to Condensed Consolidated Financial Statements—
Note 6. Restructuring Charges and Other Costs Associated with Acquisitions, Cost-Reduction and Productivity Initiatives
.
Three months ended June 30, 2019
vs.
three months ended June 30, 2018
Restructuring charges and certain acquisition-related costs increased by
$17 million
in the
three months ended June 30, 2019
compared with the
three months ended June 30, 2018
, primarily due to integration costs and employee termination costs incurred in the
three months ended June 30, 2019
, as a result of the acquisition of Abaxis in the third quarter of 2018.
Six months ended June 30, 2019
vs.
six months ended June 30, 2018
Restructuring charges and certain acquisition-related costs increased by
$20 million
in the
six months ended June 30, 2019
compared with the
six months ended June 30, 2018
, primarily due to integration costs and employee termination costs incurred in the
six months ended June 30, 2019
, as a result of the acquisition of Abaxis in the third quarter of 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of capitalized interest
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
%
|
|
June 30,
|
|
%
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Interest expense, net of capitalized interest
|
|
$
|
55
|
|
|
$
|
46
|
|
|
20
|
|
$
|
111
|
|
|
$
|
93
|
|
|
19
|
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019
vs.
three months ended June 30, 2018
Interest expense, net of capitalized interest,
increased
by
$9 million
, or
20%
in the
three months ended June 30, 2019
, compared with the
three months ended June 30, 2018
, as a result of the issuance of
$1.5 billion
aggregate principal amount of our senior notes in August 2018.
Six months ended June 30, 2019
vs.
six months ended June 30, 2018
Interest expense, net of capitalized interest,
increased
by
$18 million
, or
19%
in the
six months ended June 30, 2019
, compared with the
six months ended June 30, 2018
, as a result of the issuance of
$1.5 billion
aggregate principal amount of our senior notes in August 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income)/deductions—net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
%
|
|
June 30,
|
|
%
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Other (income)/deductions—net
|
|
$
|
(6
|
)
|
|
$
|
(4
|
)
|
|
50
|
|
$
|
(20
|
)
|
|
$
|
(9
|
)
|
|
*
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019
vs.
three months ended June 30, 2018
The change in
Other (income)/deductions—net
from income of
$4 million
in the
three months ended June 30, 2018
, to income of
$6 million
in the
three months ended June 30, 2019
, is primarily a result of higher interest income due to higher short-term interest rates and higher cash balances for the
three months ended June 30, 2019
.
Six months ended June 30, 2019
vs.
six months ended June 30, 2018
The change in
Other (income)/deductions—net
from income of
$9 million
in the
six months ended June 30, 2018
, to income of
$20 million
in the
six months ended June 30, 2019
, is primarily a result of higher interest income due to higher short-term interest rates and higher cash balances for the
six months ended June 30, 2019
, as well as higher foreign currency losses for the
six months ended June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for taxes on income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
%
|
|
June 30,
|
|
%
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Provision for taxes on income
|
|
$
|
84
|
|
|
$
|
55
|
|
|
53
|
|
$
|
153
|
|
|
$
|
122
|
|
|
25
|
Effective tax rate
|
|
18.5
|
%
|
|
12.6
|
%
|
|
|
|
18.3
|
%
|
|
14.3
|
%
|
|
|
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019
vs.
three months ended June 30, 2018
Our effective tax rate was
18.5%
for the
three months ended June 30, 2019
, compared with
12.6%
for the
three months ended June 30, 2018
. The higher effective tax rate for the
three months ended June 30, 2019
, was primarily attributable to:
|
|
•
|
a
$33 million
net discrete tax benefit recorded in the second quarter of 2018, associated with a measurement-period adjustment related to the provisional one-time mandatory deemed repatriation tax on the company's undistributed non-U.S. earnings pursuant to the Tax Act enacted on December 22, 2017;
|
|
|
•
|
the impact of the GILTI tax, a new provision of the Tax Act, which became effective for the company in the first quarter of
2019
; and
|
|
|
•
|
changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items,
|
partially offset by:
|
|
•
|
an
$8 million
net discrete tax benefit recorded in the
second quarter
of
2019
; and
|
|
|
•
|
a
$2 million
and
$1 million
discrete tax benefit recorded in the
second quarter
of
2019
and
2018
, respectively, related to the excess tax benefits for share-based payments.
|
Six months ended June 30, 2019
vs.
six months ended June 30, 2018
Our effective tax rate was
18.3%
for the
six months ended June 30, 2019
, compared with
14.3%
for the
six months ended June 30, 2018
. The higher effective tax rate for the
six months ended June 30, 2019
, was primarily attributable to:
|
|
•
|
a
$35 million
net discrete tax benefit recorded in the first half of 2018, associated with a measurement-period adjustment related to the provisional one-time mandatory deemed repatriation tax on the company's undistributed non-U.S. earnings pursuant to the Tax Act enacted on December 22, 2017;
|
|
|
•
|
the impact of the GILTI tax, a new provision of the Tax Act, which became effective for the company in the first quarter of
2019
;
|
|
|
•
|
changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items; and
|
|
|
•
|
a
$4 million
and
$8 million
discrete tax benefit recorded in the
first half
of
2019
and
2018
, respectively, related to a remeasurement of deferred taxes as a result of a change in non-U.S. statutory tax rates,
|
partially offset by:
|
|
•
|
a
$16 million
net discrete tax benefit recorded in the
first half
of
2019
; and
|
|
|
•
|
a
$15 million
and
$8 million
discrete tax benefit recorded in the
first half
of
2019
and
2018
, respectively, related to the excess tax benefits for share-based payments.
|
Operating Segment Results
On a global basis, the mix of revenue between livestock and companion animal products was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
Three Months Ended
|
|
|
|
Related to
|
|
|
June 30,
|
|
|
|
Foreign
|
|
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Total
|
|
Exchange
|
|
Operational
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
$
|
280
|
|
|
$
|
271
|
|
|
3
|
|
|
—
|
|
|
3
|
Companion animal
|
|
500
|
|
|
406
|
|
|
23
|
|
|
—
|
|
|
23
|
|
|
780
|
|
|
677
|
|
|
15
|
|
|
—
|
|
|
15
|
International
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
444
|
|
|
463
|
|
|
(4
|
)
|
|
(8
|
)
|
|
4
|
Companion animal
|
|
298
|
|
|
265
|
|
|
12
|
|
|
(9
|
)
|
|
21
|
|
|
742
|
|
|
728
|
|
|
2
|
|
|
(8
|
)
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
724
|
|
|
734
|
|
|
(1
|
)
|
|
(4
|
)
|
|
3
|
Companion animal
|
|
798
|
|
|
671
|
|
|
19
|
|
|
(3
|
)
|
|
22
|
Contract manufacturing & human health diagnostics
|
|
25
|
|
|
10
|
|
|
*
|
|
|
*
|
|
|
*
|
|
|
$
|
1,547
|
|
|
$
|
1,415
|
|
|
9
|
|
|
(5
|
)
|
|
14
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
Six Months Ended
|
|
|
|
Related to
|
|
|
June 30,
|
|
|
|
Foreign
|
|
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Total
|
|
Exchange
|
|
Operational
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
$
|
553
|
|
|
$
|
563
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Companion animal
|
|
945
|
|
|
748
|
|
|
26
|
|
|
—
|
|
|
26
|
|
|
|
1,498
|
|
|
1,311
|
|
|
14
|
|
|
—
|
|
|
14
|
|
International
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
878
|
|
|
941
|
|
|
(7
|
)
|
|
(8
|
)
|
|
1
|
|
Companion animal
|
|
582
|
|
|
513
|
|
|
13
|
|
|
(9
|
)
|
|
22
|
|
|
|
1,460
|
|
|
1,454
|
|
|
—
|
|
|
(8
|
)
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Livestock
|
|
1,431
|
|
|
1,504
|
|
|
(5
|
)
|
|
(5
|
)
|
|
—
|
|
Companion animal
|
|
1,527
|
|
|
1,261
|
|
|
21
|
|
|
(4
|
)
|
|
25
|
|
Contract manufacturing & human health diagnostics
|
|
44
|
|
|
16
|
|
|
*
|
|
|
*
|
|
|
*
|
|
|
|
$
|
3,002
|
|
|
$
|
2,781
|
|
|
8
|
|
|
(4
|
)
|
|
12
|
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Earnings by segment and the operational and foreign exchange changes versus the comparable prior year period were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
Three Months Ended
|
|
|
|
Related to
|
|
|
June 30,
|
|
|
|
Foreign
|
|
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Total
|
|
Exchange
|
|
Operational
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
780
|
|
|
$
|
677
|
|
|
15
|
|
|
—
|
|
|
15
|
Cost of Sales
|
|
158
|
|
|
140
|
|
|
13
|
|
|
—
|
|
|
13
|
Gross Profit
|
|
622
|
|
|
537
|
|
|
16
|
|
|
—
|
|
|
16
|
Gross Margin
|
|
79.7
|
%
|
|
79.3
|
%
|
|
|
|
|
|
|
Operating Expenses
|
|
127
|
|
|
116
|
|
|
9
|
|
|
—
|
|
|
9
|
Other (income)/deductions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
U.S. Earnings
|
|
495
|
|
|
421
|
|
|
18
|
|
|
—
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
742
|
|
|
728
|
|
|
2
|
|
|
(8
|
)
|
|
10
|
Cost of Sales
|
|
218
|
|
|
229
|
|
|
(5
|
)
|
|
(13
|
)
|
|
8
|
Gross Profit
|
|
524
|
|
|
499
|
|
|
5
|
|
|
(6
|
)
|
|
11
|
Gross Margin
|
|
70.6
|
%
|
|
68.5
|
%
|
|
|
|
|
|
|
Operating Expenses
|
|
146
|
|
|
147
|
|
|
(1
|
)
|
|
(10
|
)
|
|
9
|
Other (income)/deductions
|
|
—
|
|
|
2
|
|
|
*
|
|
|
*
|
|
|
*
|
International Earnings
|
|
378
|
|
|
350
|
|
|
8
|
|
|
(4
|
)
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
Total operating segments
|
|
873
|
|
|
771
|
|
|
13
|
|
|
(2
|
)
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
Other business activities
|
|
(79
|
)
|
|
(82
|
)
|
|
(4
|
)
|
|
|
|
|
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
(178
|
)
|
|
(139
|
)
|
|
28
|
|
|
|
|
|
Purchase accounting adjustments
|
|
(58
|
)
|
|
(23
|
)
|
|
*
|
|
|
|
|
|
Acquisition-related costs
|
|
(22
|
)
|
|
—
|
|
|
*
|
|
|
|
|
|
Certain significant items
|
|
(3
|
)
|
|
(7
|
)
|
|
(57
|
)
|
|
|
|
|
Other unallocated
|
|
(78
|
)
|
|
(83
|
)
|
|
(6
|
)
|
|
|
|
|
Income before provision for taxes on income
|
|
$
|
455
|
|
|
$
|
437
|
|
|
4
|
|
|
|
|
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
Six Months Ended
|
|
|
|
Related to
|
|
|
June 30,
|
|
|
|
Foreign
|
|
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Total
|
|
Exchange
|
|
Operational
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,498
|
|
|
$
|
1,311
|
|
|
14
|
|
|
—
|
|
|
14
|
Cost of Sales
|
|
305
|
|
|
280
|
|
|
9
|
|
|
—
|
|
|
9
|
Gross Profit
|
|
1,193
|
|
|
1,031
|
|
|
16
|
|
|
—
|
|
|
16
|
Gross Margin
|
|
79.6
|
%
|
|
78.6
|
%
|
|
|
|
|
|
|
Operating Expenses
|
|
237
|
|
|
212
|
|
|
12
|
|
|
—
|
|
|
12
|
Other (income)/deductions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
U.S. Earnings
|
|
956
|
|
|
819
|
|
|
17
|
|
|
—
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
1,460
|
|
|
1,454
|
|
|
—
|
|
|
(8
|
)
|
|
8
|
Cost of Sales
|
|
428
|
|
|
463
|
|
|
(8
|
)
|
|
(12
|
)
|
|
4
|
Gross Profit
|
|
1,032
|
|
|
991
|
|
|
4
|
|
|
(7
|
)
|
|
11
|
Gross Margin
|
|
70.7
|
%
|
|
68.2
|
%
|
|
|
|
|
|
|
Operating Expenses
|
|
278
|
|
|
280
|
|
|
(1
|
)
|
|
(10
|
)
|
|
9
|
Other (income)/deductions
|
|
—
|
|
|
3
|
|
|
*
|
|
|
*
|
|
|
*
|
International Earnings
|
|
754
|
|
|
708
|
|
|
6
|
|
|
(5
|
)
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
Total operating segments
|
|
1,710
|
|
|
1,527
|
|
|
12
|
|
|
(2
|
)
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
Other business activities
|
|
(159
|
)
|
|
(163
|
)
|
|
(2
|
)
|
|
|
|
|
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
(340
|
)
|
|
(292
|
)
|
|
16
|
|
|
|
|
|
Purchase accounting adjustments
|
|
(124
|
)
|
|
(46
|
)
|
|
*
|
|
|
|
|
|
Acquisition-related costs
|
|
(27
|
)
|
|
(1
|
)
|
|
*
|
|
|
|
|
|
Certain significant items
|
|
(73
|
)
|
|
(10
|
)
|
|
*
|
|
|
|
|
|
Other unallocated
|
|
(151
|
)
|
|
(161
|
)
|
|
(6
|
)
|
|
|
|
|
Income before provision for taxes on income
|
|
$
|
836
|
|
|
$
|
854
|
|
|
(2
|
)
|
|
|
|
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019
vs.
three months ended June 30, 2018
U.S. operating segment
U.S. segment revenue
increased
by $
103 million
, or
15%
, in the
three months ended June 30, 2019
, compared with the
three months ended June 30, 2018
, reflecting
growth
of approximately $
94 million
in companion animal products and
growth
of approximately $
9 million
in livestock products.
|
|
•
|
Companion animal revenue growth was driven primarily by the inclusion of Abaxis, the key dermatology portfolio, and a number of in-line products including Simparica
®
,
Clavamox
®
, Cerenia
®
and ProHeart 6
®
.
|
|
|
•
|
Livestock revenue increased primarily due to growth in sales of poultry products, driven by increased sales of alternatives to antibiotic medicated feed additive products. Swine product sales grew as a result of promotional activity, offset by a decline in sales of cattle products.
|
U.S. segment earnings
increased
by $
74 million
, or
18%
, in the
three months ended June 30, 2019
, compared with the
three months ended June 30, 2018
, primarily due to revenue growth and improved gross margins, partially offset by higher operating expenses.
International operating segment
International segment revenue
increased
by
$14 million
, or
2%
, in the
three months ended June 30, 2019
, compared with the
three months ended June 30, 2018
. Operational revenue
increased
by
$73 million
, or
10%
, driven by
growth
of approximately $
56 million
in companion animal products and
increases
of approximately $
17 million
in livestock products.
|
|
•
|
Companion animal operational revenue growth resulted primarily from increased sales of the key dermatology portfolio across multiple international markets, growth of parasiticide products, including Simparica
®
and Stronghold Plus
®
,
and the inclusion of Abaxis.
|
|
|
•
|
Livestock operational revenue increased, driven by growth in poultry products due to sales of vaccines and medicated feed additives, and growth in cattle products driven by the prior year impact of the national trucking strike in Brazil. Swine products were flat despite the negative impact of African Swine Fever in China.
|
Additionally, International segment revenue was
unfavorably
impacted by foreign exchange, which decreased revenue by approximately
$59 million
, or
8%
, primarily driven by the depreciation of the euro, Brazilian real, Argentine peso, Australian dollar, Chinese renminbi and Turkish lira.
International segment earnings
increased
by $
28 million
, or
8%
, in the
three months ended June 30, 2019
, compared with the
three months ended June 30, 2018
. Operational earnings growth was
$44 million
, or
12%
, primarily due to higher revenue and improved gross margin, partially offset by higher operating expenses.
Six months ended June 30, 2019
vs.
six months ended June 30, 2018
U.S. operating segment
U.S. segment revenue
increased
by $
187 million
, or
14%
, in the
six months ended June 30, 2019
, compared with the
six months ended June 30, 2018
, reflecting
growth
of approximately $
197 million
in companion animal products and
declines
of approximately $
10 million
in livestock products.
|
|
•
|
Companion animal revenue growth was driven primarily by the inclusion of Abaxis, increased sales of the key dermatology portfolio and a number of in-line products including Simparica
®
, Revolution
®
/Revolution Plus, Cerenia
®
and Proheart 6
®
.
|
|
|
•
|
Livestock revenue declined due to decreased sales of cattle and swine products, offset by increases in poultry products. Cattle and swine products were both impacted by the timing of distributor purchasing patterns for medicated feed additive products. For poultry, growth was driven by increased sales of alternatives to antibiotic medicated feed additive products.
|
U.S. segment earnings
increased
by $
137 million
, or
17%
, in the
six months ended June 30, 2019
, compared with the
six months ended June 30, 2018
, primarily due to revenue growth and improved gross margins, partially offset by higher operating expenses.
International operating segment
International segment revenue
increased
by
$6 million
, in the
six months ended June 30, 2019
, compared with the
six months ended June 30, 2018
. Operational revenue
increased
by
$123 million
, or
8%
, driven by
growth
of approximately $
112 million
in companion animal products and
growth
of approximately $
11 million
in livestock products.
|
|
•
|
Companion animal operational revenue growth resulted primarily from increased sales of the key dermatology portfolio across multiple international markets, growth of parasiticide products, including Simparica
®
and Stronghold Plus
®
,
and the inclusion of Abaxis.
|
|
|
•
|
Livestock operational revenue growth was driven by increased sales in poultry and cattle. Poultry products increased due to sales of vaccines and medicated feed additives. Cattle products also contributed to growth driven by the prior year impact of the national trucking strike in Brazil, partially offset by a reduction in customer inventory in Brazil. Swine products declined due to the negative impact of African Swine Fever in China.
|
Additionally, International segment revenue was
unfavorably
impacted by foreign exchange, which decreased revenue by approximately
$117 million
, or
8%
, primarily driven by the depreciation of the euro, Brazilian real, Argentine peso, Turkish lira, Australian dollar and U.K. pound.
International segment earnings
increased
by $
46 million
, or
6%
, in the
six months ended June 30, 2019
, compared with the
six months ended June 30, 2018
. Operational earnings growth was
$81 million
, or
11%
, primarily due to higher revenue and improved gross margin, partially offset by higher operating expenses.
Other business activities
Other business activities includes our Client Supply Services (CSS) contract manufacturing results, our human health diagnostics business and expenses associated with our dedicated veterinary medicine research and development organization, research alliances, U.S. regulatory affairs and other operations focused on the development of our products. Other R&D-related costs associated with non-U.S. market and regulatory activities are generally included in the International segment.
Three months ended June 30, 2019
vs.
three months ended June 30, 2018
Other business activities net loss
decreased
by
$3 million
, or
4%
, in the
three months ended June 30, 2019
, compared with the
three months ended June 30, 2018
, reflecting revenue from the acquired Abaxis human health diagnostic business, partially offset by an increase in R&D costs due to an increase in project investments, the inclusion of Abaxis expenses and compensation-related costs.
Six months ended June 30, 2019
vs.
six months ended June 30, 2018
Other business activities net loss
decreased
by
$4 million
, or
2%
, in the
six months ended June 30, 2019
, compared with the
six months ended June 30, 2018
, reflecting revenue from the acquired Abaxis human health diagnostic business, partially offset by an increase in R&D costs due to an increase in project investments, the inclusion of Abaxis expenses and compensation-related costs.
Reconciling items
Reconciling items include certain costs that are not allocated to our operating segments results, such as costs associated with the following:
|
|
•
|
Corporate,
which includes certain costs associated with business technology, facilities, legal, finance, human resources, business development and communications, among others. These costs also include certain compensation costs, certain procurement costs, and other miscellaneous operating expenses that are not charged to our operating segments, as well as interest income and expense;
|
|
|
•
|
Certain transactions and events such as (i)
Purchase accounting adjustments
, which includes expenses associated with the amortization of fair value adjustments to inventory, intangible assets, and property, plant and equipment; (ii)
Acquisition-related activities
, which includes costs for acquisition and integration; and (iii)
Certain significant items
, which includes non-acquisition-related restructuring charges, certain asset impairment charges, certain legal and commercial settlements, and costs associated with cost reduction/productivity initiatives; and
|
|
|
•
|
Other unallocated
, which includes (i) certain overhead expenses associated with our global manufacturing operations not charged to our operating segments; (ii) certain costs associated with business technology and finance that specifically support our global manufacturing operations; (iii) certain supply chain and global logistics costs; and (iv) certain procurement costs.
|
Three months ended June 30, 2019
vs.
three months ended June 30, 2018
Corporate expenses
increased
by $
39 million
, or
28%
, in the
three months ended June 30, 2019
, compared with the
three months ended June 30, 2018
, primarily due to higher interest expense, net of capitalized interest, associated with the additional debt issued in August 2018, an increase in certain compensation costs not allocated to our operating segments and consulting charges, partially offset by favorable foreign exchange.
Other unallocated expenses
declined
by
$5 million
, or
6%
, in the
three months ended June 30, 2019
, compared with the
three months ended June 30, 2018
, primarily due to the favorable impact of foreign exchange, partially offset by inventory charges and the inclusion of Abaxis expenses.
Six months ended June 30, 2019
vs.
six months ended June 30, 2018
Corporate expenses
increased
by $
48 million
, or
16%
, in the
six months ended June 30, 2019
, compared with the
six months ended June 30, 2018
, primarily due to higher interest expense, net of capitalized interest, associated with the additional debt issued in August 2018, consulting charges, and an increase in certain compensation costs not allocated to our operating segments, partially offset by favorable foreign exchange.
Other unallocated expenses
declined
by
$10 million
, or
6%
, in the
six months ended June 30, 2019
, compared with the
six months ended June 30, 2018
, primarily due to the favorable impact of foreign exchange, partially offset by the inclusion of Abaxis expenses and inventory charges.
See Notes to Condensed Consolidated Financial Statements—
Note 17. Segment Information
for further 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. The adjusted net income measure is an important internal measurement for us. Additionally, 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.
|
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 acquisition of Abaxis (acquired in July 2018), the Pharmaq business (acquired in November 2015), certain assets of Abbott Animal Health (acquired in February 2015), King Animal Health (KAH) (acquired in 2011), Fort Dodge Animal Health (FDAH) (acquired in 2009), and Pharmacia Animal Health business (acquired in 2003), include 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 revenue 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 revenue, 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 and integration 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 acquire 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 costs associated with a business combination may occur over several years, with the more significant impacts generally 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 FDA and/or other regulatory authorities.
Certain significant items
Adjusted net income is calculated excluding 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 costs related to 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; adjustments related to the resolution of certain tax positions; significant currency devaluation; the impact of adopting certain significant, event-driven tax legislation; or charges related to legal matters. See Notes to Condensed Consolidated Financial Statements—
Note 16. 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,
|
|
%
|
|
|
June 30,
|
|
%
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Change
|
|
|
2019
|
|
2018
|
|
Change
|
GAAP reported net income attributable to Zoetis
|
|
$
|
371
|
|
|
$
|
384
|
|
|
(3
|
)
|
|
$
|
683
|
|
|
$
|
736
|
|
|
(7
|
)
|
Purchase accounting adjustments—net of tax
|
|
45
|
|
|
19
|
|
|
*
|
|
|
91
|
|
|
31
|
|
|
*
|
|
Acquisition-related costs—net of tax
|
|
18
|
|
|
—
|
|
|
*
|
|
|
22
|
|
|
1
|
|
|
*
|
|
Certain significant items—net of tax
|
|
2
|
|
|
(28
|
)
|
|
*
|
|
|
64
|
|
|
(28
|
)
|
|
*
|
|
Non-GAAP adjusted net income
(a)
|
|
$
|
436
|
|
|
$
|
375
|
|
|
16
|
|
|
$
|
860
|
|
|
$
|
740
|
|
|
16
|
|
*Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
|
|
(a)
|
The effective tax rate on adjusted pretax income is
19.0%
and
20.1%
for the
three months ended June 30, 2019
, and
June 30, 2018
, respectively. The
lower
effective tax rate for the
three months ended June 30, 2019
, compared with the
three months ended June 30, 2018
, was primarily attributable to (i) changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs, (ii) an
$8 million
net discrete tax benefit recorded in the
second quarter
of
2019
, (iii) a
$2 million
and
$1 million
discrete tax benefit recorded in the
second quarter
of
2019
and
2018
, respectively,
|
related to the excess tax benefits for share-based payments; partially offset by the impact of the GILTI tax, a new provision to the Tax Act, which became effective for the company in the first quarter of 2019.
The effective tax rate on adjusted pretax income is
18.9%
and
19.2%
for the
six months ended June 30, 2019
, and
June 30, 2018
, respectively. The
lower
effective tax rate for the
six months ended June 30, 2019
, compared with the
six months ended June 30, 2018
, was primarily attributable to (i) changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs, (ii) a $9 million net discrete tax benefit recorded in the
first half
of
2019
, related to changes in other tax items, (iii) a
$15 million
and
$8 million
discrete tax benefit recorded in the
first half
of
2019
and
2018
, respectively, related to the excess tax benefits for share-based payments; partially offset by the impact of the GILTI tax, a new provision to the Tax Act, which became effective for the company in the first quarter of 2019.
A reconciliation of reported diluted earnings per share (EPS), as reported under U.S. GAAP, to non-GAAP adjusted diluted EPS follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
%
|
|
|
June 30,
|
|
%
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
|
2019
|
|
2018
|
|
Change
|
|
Earnings per share—diluted
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP reported EPS attributable to Zoetis—diluted
|
|
$
|
0.77
|
|
|
$
|
0.79
|
|
|
(3
|
)
|
|
$
|
1.41
|
|
|
$
|
1.51
|
|
|
(7
|
)
|
Purchase accounting adjustments—net of tax
|
|
0.09
|
|
|
0.04
|
|
|
*
|
|
|
0.19
|
|
|
0.06
|
|
|
*
|
|
Acquisition-related costs—net of tax
|
|
0.04
|
|
|
—
|
|
|
*
|
|
|
0.05
|
|
|
—
|
|
|
*
|
|
Certain significant items—net of tax
|
|
—
|
|
|
(0.06
|
)
|
|
*
|
|
|
0.13
|
|
|
(0.06
|
)
|
|
*
|
|
Non-GAAP adjusted EPS—diluted
|
|
$
|
0.90
|
|
|
$
|
0.77
|
|
|
17
|
|
|
$
|
1.78
|
|
|
$
|
1.51
|
|
|
18
|
|
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
|
|
(a)
|
Diluted earnings per share was computed using the weighted-average common shares outstanding during the period plus the common stock equivalents related to stock options, restricted stock units, performance-vesting restricted stock units and deferred stock units.
|
Adjusted net income includes the following charges for each of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Interest expense, net of capitalized interest
|
|
$
|
55
|
|
|
$
|
46
|
|
|
$
|
111
|
|
|
$
|
93
|
|
Interest income
|
|
9
|
|
|
8
|
|
|
19
|
|
|
14
|
|
Income taxes
|
|
102
|
|
|
94
|
|
|
200
|
|
|
175
|
|
Depreciation
|
|
37
|
|
|
37
|
|
|
75
|
|
|
70
|
|
Amortization
|
|
6
|
|
|
4
|
|
|
11
|
|
|
8
|
|
Adjusted net income, as shown above, excludes the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Purchase accounting adjustments:
|
|
|
|
|
|
|
|
|
Amortization and depreciation
(a)
|
|
$
|
52
|
|
|
$
|
21
|
|
|
$
|
104
|
|
|
$
|
42
|
|
Cost of sales
(b)
|
|
5
|
|
|
2
|
|
|
19
|
|
|
4
|
|
Research & development
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Total purchase accounting adjustments—pre-tax
|
|
58
|
|
|
23
|
|
|
124
|
|
|
46
|
|
Income taxes
(c)
|
|
13
|
|
|
4
|
|
|
33
|
|
|
15
|
|
Total purchase accounting adjustments—net of tax
|
|
45
|
|
|
19
|
|
|
91
|
|
|
31
|
|
Acquisition-related costs:
|
|
|
|
|
|
|
|
|
Integration costs
|
|
8
|
|
|
—
|
|
|
9
|
|
|
1
|
|
Restructuring costs
|
|
14
|
|
|
—
|
|
|
18
|
|
|
—
|
|
Total acquisition-related costs—pre-tax
|
|
22
|
|
|
—
|
|
|
27
|
|
|
1
|
|
Income taxes
|
|
4
|
|
|
—
|
|
|
5
|
|
|
—
|
|
Total acquisition-related costs—net of tax
|
|
18
|
|
|
—
|
|
|
22
|
|
|
1
|
|
Certain significant items:
|
|
|
|
|
|
|
|
|
Operational efficiency initiative
(d)
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Supply network strategy
(d)
|
|
3
|
|
|
3
|
|
|
5
|
|
|
5
|
|
Other restructuring charges and cost-reduction/productivity initiatives
(e)
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Other
(f)
|
|
—
|
|
|
—
|
|
|
68
|
|
|
1
|
|
Total certain significant items—pre-tax
|
|
3
|
|
|
7
|
|
|
73
|
|
|
10
|
|
Income taxes
(c)
|
|
1
|
|
|
35
|
|
|
9
|
|
|
38
|
|
Total certain significant items—net of tax
|
|
2
|
|
|
(28
|
)
|
|
64
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax
|
|
$
|
65
|
|
|
$
|
(9
|
)
|
|
$
|
177
|
|
|
$
|
4
|
|
Certain amounts may reflect rounding adjustments.
|
|
(a)
|
Amortization and depreciation expenses related to
Purchase accounting adjustments
with respect to identifiable intangible assets and property, plant and equipment.
|
|
|
(b)
|
Amortization and depreciation expense, as well as fair value adjustments to acquired inventory.
|
|
|
(c)
|
Income taxes include the tax effect of the associated pre-tax amounts, calculated by determining the jurisdictional location of the pre-tax amounts and applying that jurisdiction's applicable tax rate.
|
|
|
|
Income taxes in
Purchase accounting adjustments
also includes a tax benefit related to a remeasurement of deferred taxes as a result of a change in non-U.S. statutory tax rates, for both the
six months ended June 30, 2019
, and
June 30, 2018
.
|
Income taxes in
Certain significant items
also includes a net tax benefit related to a measurement-period adjustment to the provisional one-time mandatory deemed repatriation tax on the company's undistributed non-U.S. earnings, pursuant to the Tax Act, for the
three and six months ended
June 30, 2018
.
(d)
Represents consulting fees, product transfer costs, employee termination costs and exit costs related to cost-reduction and productivity initiatives.
(e)
For the
three and six months ended
June 30, 2018
, represents employee termination costs in Europe as a result of initiatives to better align our organizational structure.
|
|
(f)
|
For the
six months ended June 30, 2019
, primarily represents a change in estimate related to inventory costing.
|
The classification of the above items excluded from adjusted net income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cost of sales:
|
|
|
|
|
|
|
|
|
Purchase accounting adjustments
|
|
$
|
5
|
|
|
$
|
2
|
|
|
$
|
19
|
|
|
$
|
4
|
|
Consulting fees
|
|
3
|
|
|
2
|
|
|
5
|
|
|
3
|
|
Other
|
|
—
|
|
|
—
|
|
|
68
|
|
|
—
|
|
Total Cost of sales
|
|
8
|
|
|
4
|
|
|
92
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses:
|
|
|
|
|
|
|
|
|
Purchase accounting adjustments
|
|
18
|
|
|
2
|
|
|
36
|
|
|
3
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Total Selling, general & administrative expenses
|
|
18
|
|
|
2
|
|
|
36
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Research & development expenses:
|
|
|
|
|
|
|
|
|
Purchase accounting adjustments
|
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Total Research & development expenses
|
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets:
|
|
|
|
|
|
|
|
|
Purchase accounting adjustments
|
|
34
|
|
|
19
|
|
|
68
|
|
|
38
|
|
Total Amortization of intangible assets
|
|
34
|
|
|
19
|
|
|
68
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges/(reversals) and certain acquisition-related costs:
|
|
|
|
|
|
|
|
|
Integration costs
|
|
8
|
|
|
—
|
|
|
9
|
|
|
1
|
|
Employee termination costs
|
|
14
|
|
|
4
|
|
|
18
|
|
|
5
|
|
Exit costs
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total Restructuring charges/(reversals) and certain acquisition-related costs
|
|
22
|
|
|
5
|
|
|
27
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Provision for taxes on income
|
|
18
|
|
|
39
|
|
|
47
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax
|
|
$
|
65
|
|
|
$
|
(9
|
)
|
|
$
|
177
|
|
|
$
|
4
|
|
Certain amounts may reflect rounding adjustments.
Analysis of the condensed consolidated statements of comprehensive income
Substantially 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 balance sheets
June 30, 2019
vs.
December 31, 2018
For a discussion about the changes in
Cash and cash equivalents
,
Short-term borrowings,
and
Long-term debt, net of discount and issuance costs
, see “Analysis of financial condition, liquidity and capital resources” below.
Short-term investments
decreased as a result of maturities of debt securities.
Other current assets
increased primarily as a result of the timing of income tax payments.
The net change in
Operating lease right of use assets,
and
Operating lease liability
relates to the adoption of the new lease accounting standard, which became effective January 1, 2019. See Notes to Condensed Consolidated Financial Statements—
Note 3. Accounting Standards
and
Note 10. Leases
.
Identifiable intangible assets, less accumulated amortization
decreased due to amortization expense and the impact of foreign exchange.
Accounts payable
decreased as a result of the timing of payments.
Accrued expenses
decreased primarily as a result of payment of accrued expenses, including accrued interest and employee termination costs associated with the acquisition of Abaxis.
Accrued compensation and related items
decreased primarily due to payment of 2018 annual bonuses to eligible employees and 2018 employee savings plan contributions, partially offset by the pro rata accrual of similar items for 2019.
The net changes in
Noncurrent deferred tax assets, Noncurrent deferred tax liabilities, Income taxes payable
and
Other taxes payable
primarily reflect adjustments to the accrual for the income tax provision, and the impact of the remeasurement of deferred taxes as a result of a change in tax rates.
Other current liabilities
increased primarily due to short-term lease liabilities as a result of the adoption of the new lease accounting standard, which became effective January 1, 2019, partially offset by the payments of contingent consideration related to the 2016 acquisition of certain intangible assets related to our livestock product portfolio and the 2018 acquisition of a manufacturing business in Ireland. See Notes to Condensed Consolidated Financial Statements—
Note 3. Accounting Standards
and
Note 10. Leases
.
For an analysis of the changes in
Total Equity
, see the Condensed Consolidated Statements of Equity and Notes to Condensed Consolidated Financial Statements—
Note 14. Stockholders' Equity
.
Analysis of the condensed consolidated statements of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
%
|
|
(MILLIONS OF DOLLARS)
|
|
2019
|
|
2018
|
|
Change
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
707
|
|
|
$
|
656
|
|
|
8
|
|
Investing activities
|
|
(82
|
)
|
|
(121
|
)
|
|
(32
|
)
|
Financing activities
|
|
(469
|
)
|
|
(533
|
)
|
|
(12
|
)
|
Effect of exchange-rate changes on cash and cash equivalents
|
|
(3
|
)
|
|
(8
|
)
|
|
(63
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
153
|
|
|
$
|
(6
|
)
|
|
*
|
|
*Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Operating activities
Six months ended
June 30, 2019
vs.
six months ended
June 30, 2018
Net cash
provided by
operating activities was $
707 million
for the
six months ended June 30, 2019
, and
$656 million
for the
six months ended June 30, 2018
. The increase in net income after non-cash adjustments was partially offset by timing of payments in the ordinary course of business.
Investing activities
Six months ended
June 30, 2019
vs.
six months ended
June 30, 2018
Our net cash
used in
investing activities was $
82 million
for the
six months ended June 30, 2019
, compared with net cash
used in
investing activities of $
121 million
for the
six months ended June 30, 2018
. The net cash
used in
investing activities for 2019 was primarily due to purchases of property, plant and equipment, partially offset by proceeds from maturities of debt securities and proceeds from cross-currency interest rate swaps. The net cash
used in
investing activities for 2018 was primarily due to purchases of property, plant and equipment, partially offset by additional proceeds from the 2017 sale of our manufacturing site in Guarulhos, Brazil.
Financing activities
Six months ended
June 30, 2019
vs.
six months ended
June 30, 2018
Our net cash
used in
financing activities was $
469 million
for the
six months ended June 30, 2019
, compared with net cash
used in
financing activities of
$533 million
for the
six months ended June 30, 2018
. The net cash
used in
financing activities for 2019 was primarily attributable to the purchase of treasury shares, the payment of dividends, the payment of short-term borrowings, and the payments of contingent consideration related to the 2016 acquisition of certain intangible assets related to our livestock product portfolio and the 2018 acquisition of a manufacturing business in Ireland. The net cash
used in
financing activities for 2018 was primarily attributable to the purchase of treasury shares and the payment of dividends.
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 ability to meet future funding requirements include global economic conditions described in the following paragraph.
Global financial markets may be impacted by macroeconomic, business and financial volatility. As markets change, we will continue to monitor our liquidity position, but there can be no assurance that a challenging economic environment or an economic downturn will 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)
|
2019
|
|
2018
|
Cash and cash equivalents
|
$
|
1,755
|
|
|
$
|
1,602
|
|
Accounts receivable, net
(a)
|
994
|
|
|
1,036
|
|
Long-term debt, net of discount and issuance costs
|
6,446
|
|
|
6,443
|
|
Working capital
|
3,409
|
|
|
3,176
|
|
Ratio of current assets to current liabilities
|
4.17:1
|
|
|
3.60:1
|
|
|
|
(a)
|
Accounts receivable are usually collected over a period of 45 to 75 days
.
For the
six months ended
June 30, 2019
, compared with
December 31, 2018
, the number of days that accounts receivables are outstanding remained approximately the same. We regularly monitor our accounts receivable for collectability, particularly in markets where economic conditions remain uncertain. We believe that our allowance for doubtful accounts is appropriate. Our assessment is based on such factors as past due aging, historical and expected collection patterns, the financial condition of our customers, the robust nature of our credit and collection practices and the economic environment.
|
For additional information about the sources and uses of our funds, see the
Analysis of the condensed consolidated balance sheets
and
Analysis of the condensed consolidated statements of cash flows
sections of this MD&A.
Credit facility and other lines of credit
In
December 2016
, we entered into an amended and restated revolving credit agreement with a syndicate of banks providing for a multi-year
$1.0 billion
senior unsecured revolving credit facility (the credit facility). In December 2018, the maturity for the amended and restated credit facility was extended through December 2023. Subject to certain conditions, we have the right to increase the credit facility to up to
$1.5 billion
. The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio (the ratio of consolidated net debt as of the end of the period to consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA) for such period) of
3.50:1
. Upon entering into a material acquisition, the maximum total leverage ratio increases to
4.00:1
, and extends until the fourth full consecutive fiscal quarter ended immediately following the consummation of a material acquisition. The credit facility also contains a clause which adds back to Adjusted Consolidated EBITDA, any operational efficiency restructuring charge (defined as charges recorded by the company during the period commencing on October 1, 2016 and ending December 31, 2019, related to operational efficiency initiatives), provided that for any twelve-month period such charges added back to Adjusted Consolidated EBITDA shall not exceed
$100 million
in the aggregate.
The credit facility also contains a financial covenant requiring that we maintain a minimum interest coverage ratio (the ratio of EBITDA at the end of the period to interest expense for such period) of
3.50:1
. In addition, the credit facility contains other customary covenants.
We were in compliance with all financial covenants as of
June 30, 2019
and December 31, 2018. There were no amounts drawn under the credit facility as of
June 30, 2019
or
December 31, 2018
.
We have additional lines of credit and other credit arrangements with a group of banks and other financial intermediaries for general corporate purposes. We maintain cash and cash equivalent balances in excess of our outstanding short-term borrowings. As of
June 30, 2019
, we had access to
$73 million
of lines of credit which expire at various times through 2019, and are generally renewed annually. There were no borrowings outstanding related to these facilities as of
June 30, 2019
and
$9 million
of borrowings outstanding related to these facilities as of
December 31, 2018
.
Domestic and international short-term funds
Many of our operations are conducted outside the United States. The amount of funds held in the United States 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 U.S. and international cash flows (both inflows and outflows). Actual repatriation of overseas funds can result in additional U.S. and local income taxes, such as U.S. state income taxes, local withholding taxes, and taxes on currency gains and losses.
Global economic conditions
Challenging economic conditions in recent years have not had, nor do we anticipate that it will have, a significant impact on our liquidity. Due to our operating cash flows, financial assets, access to capital markets and available lines of credit and revolving credit agreements, we continue to believe that we have the ability to meet our liquidity needs for the foreseeable future. As markets change, we continue to monitor our liquidity position. There can be no assurance that a challenging economic environment or an economic downturn would not impact our ability to obtain financing in the future.
Debt
On August 20, 2018, we issued
$1.5 billion
aggregate principal amount of our senior notes (2018 senior notes), with an original issue discount of
$4 million
. These notes are comprised of
$300 million
aggregate principal amount of floating rate senior notes due 2021 (the "2018 floating rate senior notes"), and
$300 million
aggregate principal amount of
3.250%
senior notes due 2021,
$500 million
aggregate principal amount of
3.900%
senior notes due 2028 and
$400 million
aggregate principal amount of
4.450%
senior notes due 2048 (collectively, the "2018 fixed rate senior notes"). Net proceeds from this offering were partially used to pay down and terminate a revolving credit agreement and repay outstanding commercial paper, which were borrowed to finance a portion of the cash consideration for the acquisition of Abaxis (see Notes to
Condensed Consolidated Financial Statements—
Note 5. Acquisitions and Divestitures
). The remainder of the net proceeds will be used for general corporate purposes.
On September 12, 2017, we issued $1.25 billion aggregate principal amount of our senior notes (2017 senior notes), with an original issue discount of
$7 million
. These notes are comprised of $750 million aggregate principal amount of 3.000% senior notes due 2027 and $500 million aggregate principal amount of 3.950% senior notes due 2047. Net proceeds from this offering were partially used in October 2017 to repay, prior to maturity, the aggregate principal amount of
$750 million
, and a make-whole amount and accrued interest of $4 million, of our 1.875% senior notes due 2018. The remainder of the net proceeds were used for general corporate purposes.
On November 13, 2015, we issued $1.25 billion aggregate principal amount of our senior notes (2015 senior notes), with an original issue discount of $2 million. On January 28, 2013, we issued
$3.65 billion
aggregate principal amount of our senior notes (2013 senior notes) in a private placement, with an original issue discount of
$10 million
.
The 2013, 2015, 2017 and 2018 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 lease-back 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 (if not cured or waived), the 2013, 2015, 2017 and 2018 senior notes may be declared immediately due and payable.
Pursuant to the indenture, we are able to redeem the 2013, 2015 and 2017 senior notes and the 2018 fixed rate 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 2013 senior notes due 2023 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 2013, 2015, 2017 and 2018 senior notes below an investment grade rating by each of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, we are, in certain circumstances, required to make an offer to repurchase all of the outstanding 2013, 2015, 2017 and 2018 senior notes at a price equal to
101%
of the aggregate principal amount of the 2013, 2015, 2017 and 2018 senior notes together with accrued and unpaid interest to, but excluding, the date of repurchase.
The components of our long-term debt follow:
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|
|
|
|
Description
|
Principal Amount
|
Interest Rate
|
Terms
|
2015 Senior Notes due 2020
|
$500 million
|
3.450%
|
Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2020
|
2018 Floating Rate Senior Notes due 2021
|
$300 million
|
Three-month USD LIBOR plus 0.44%
|
Interest due quarterly, not subject to amortization, aggregate principal due on August 20, 2021
|
2018 Senior Notes due 2021
|
$300 million
|
3.250%
|
Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2021
|
2013 Senior Notes due 2023
|
$1,350 million
|
3.250%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2023
|
2015 Senior Notes due 2025
|
$750 million
|
4.500%
|
Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2025
|
2017 Senior Notes due 2027
|
$750 million
|
3.000%
|
Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2027
|
2018 Senior Notes due 2028
|
$500 million
|
3.900%
|
Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2028
|
2013 Senior Notes due 2043
|
$1,150 million
|
4.700%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2043
|
2017 Senior Notes due 2047
|
$500 million
|
3.950%
|
Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2047
|
2018 Senior Notes due 2048
|
$400 million
|
4.450%
|
Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2048
|
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
|
|
Baa1
|
|
Stable
|
|
August 2017
|
S&P
|
|
A-2
|
|
BBB
|
|
Stable
|
|
December 2016
|
Share Repurchase Program
In December 2016, the company's Board of Directors authorized a
$1.5 billion
share repurchase program. As of
June 30, 2019
, there was approximately
$1 million
remaining under this authorization. In December 2018, the company's Board of Directors authorized an additional
$2.0 billion
share repurchase program, all of which is remaining under this authorization. Purchases of Zoetis shares may be made at the discretion of management, depending on market conditions and business needs. Share repurchases may be executed through various means, including open market or privately negotiated transactions. During the first six months of 2019, approximately
3 million
shares were repurchased.
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 are generally subject to threshold amounts, specified claim periods and other restrictions and limitations. Historically, we have not paid significant amounts under these provisions and, as of
June 30, 2019
, or
December 31, 2018
, recorded amounts for the estimated fair value of these indemnifications are not significant.
New accounting standards
Recently Issued Accounting Standards Not Adopted as of
June 30, 2019
A description of recently issued accounting standards is contained in
Note 3. Accounting Standards
of the Notes to Condensed 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,” “could,” “expect,” “intend,” “project,” “plan,” “predict,” “believe,” “seek,” “continue,” “outlook,” “objective,” “target,” “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 our
2019
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, anticipated timing of generic market entries, integration of acquired businesses, interest rates, tax rates, changes in tax regimes and laws, foreign exchange rates, growth in emerging markets, the outcome of contingencies, such as legal proceedings, plans related to share repurchases and dividends, 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 based on assumptions that could prove to be inaccurate. Among the factors that could cause actual results to differ materially from past results and future plans and projected future results are the following:
|
|
•
|
unanticipated safety, quality or efficacy concerns about our products;
|
|
|
•
|
issues with any of our top products;
|
|
|
•
|
failure of our R&D, acquisition and licensing efforts to generate new products and product lifecycle innovations;
|
|
|
•
|
the possible impact and timing of competing products, including generic alternatives, on our products and our ability to compete against such products;
|
|
|
•
|
disruptive innovations and advances in medical practices and technologies;
|
|
|
•
|
consolidation of our customers and distributors;
|
|
|
•
|
changes in the distribution channel for companion animal products;
|
|
|
•
|
failure to successfully acquire businesses, license rights or products, integrate businesses, form and manage alliances or divest businesses;
|
|
|
•
|
restrictions and bans on the use of and consumer preferences regarding antibacterials in food-producing animals;
|
|
|
•
|
perceived adverse effects on human health linked to the consumption of food derived from animals that utilize our products;
|
|
|
•
|
adverse global economic conditions;
|
|
|
•
|
increased regulation or decreased governmental support relating to the raising, processing or consumption of food-producing animals;
|
|
|
•
|
fluctuations in foreign exchange rates and potential currency controls;
|
|
|
•
|
changes in tax laws and regulations;
|
|
|
•
|
legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental concerns, commercial disputes and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products;
|
|
|
•
|
failure to protect our intellectual property rights or to operate our business without infringing the intellectual property rights of others;
|
|
|
•
|
product launch delays, inventory shortages, recalls or unanticipated costs caused by manufacturing problems and capacity imbalances;
|
|
|
•
|
an outbreak of infectious disease carried by animals;
|
|
|
•
|
adverse weather conditions and the availability of natural resources;
|
|
|
•
|
the economic, political, legal and business environment of the foreign jurisdictions in which we do business;
|
|
|
•
|
a cyber-attack, information security breach or other misappropriation of our data;
|
|
|
•
|
quarterly fluctuations in demand and costs;
|
|
|
•
|
governmental laws and regulations affecting domestic and foreign operations, including without limitation, tax obligations and changes affecting the tax treatment by the United States of income earned outside the United States that may result from pending and possible future proposals; and
|
|
|
•
|
governmental laws and regulations affecting our interactions with veterinary healthcare providers.
|
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, except as required by law or by the rules and regulations of the SEC. 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.