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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Zoetis Inc | NYSE:ZTS | NYSE | Common Stock |
Price Change | % Change | Share Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|
4.41 | 2.61% | 173.28 | 174.99 | 170.635 | 170.84 | 2,585,648 | 23:57:01 |
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|
|
|
EXCHANGE ACT OF 1934
|
|
|
For the quarterly period ended July 2, 2017
|
|
|
or
|
|
|
TRANSITION REPORT PURSUANT TO SECTION 13
|
|
|
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
|
¨
|
For the transition period from __________ to __________
|
|
Zoetis Inc.
|
(Exact name of registrant as specified in its charter)
|
Delaware
|
|
46-0696167
|
(State or other jurisdiction of
|
|
(I.R.S. Employer Identification No.)
|
incorporation or organization)
|
|
|
10 Sylvan Way, Parsippany, New Jersey
|
|
07054
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(973) 822-7000
|
(Registrant’s telephone number, including area code)
|
Large accelerated filer
x
|
Accelerated filer
¨
|
Non-accelerated filer
¨
|
Smaller reporting company
¨
|
Emerging growth company
¨
|
|
|
|
|
Page
|
|
||||
Item 1.
|
|
|
||
|
|
Condensed Consolidated Statements of Income (Unaudited)
|
|
|
|
|
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
|
|
|
|
|
Condensed Consolidated Balance Sheets (Unaudited)
|
|
|
|
|
Condensed Consolidated Statements of Equity (Unaudited)
|
|
|
|
|
Condensed Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
|
|
|
|
Review Report of Independent Registered Public Accounting Firm
|
|
|
Item 2.
|
|
|
||
Item 3.
|
|
|
||
Item 4.
|
|
|
||
|
||||
Item 1.
|
|
|
||
Item 1A.
|
|
|
||
Item 2.
|
|
|
||
Item 3.
|
|
Defaults Upon Senior Securities
|
|
|
Item 4.
|
|
Mine Safety Disclosures
|
|
|
Item 5.
|
|
Other Information
|
|
|
Item 6.
|
|
|
||
|
Item 1.
|
Financial Statements
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Revenue
|
|
$
|
1,269
|
|
|
$
|
1,208
|
|
|
$
|
2,500
|
|
|
$
|
2,370
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
||||||||
Cost of sales
(a)
|
|
440
|
|
|
399
|
|
|
883
|
|
|
788
|
|
||||
Selling, general and administrative expenses
(a)
|
|
336
|
|
|
343
|
|
|
645
|
|
|
658
|
|
||||
Research and development expenses
(a)
|
|
86
|
|
|
88
|
|
|
176
|
|
|
178
|
|
||||
Amortization of intangible assets
(a)
|
|
23
|
|
|
22
|
|
|
45
|
|
|
43
|
|
||||
Restructuring charges/(reversals) and certain acquisition-related costs
|
|
—
|
|
|
(21
|
)
|
|
(1
|
)
|
|
(19
|
)
|
||||
Interest expense, net of capitalized interest
|
|
41
|
|
|
41
|
|
|
82
|
|
|
84
|
|
||||
Other (income)/deductions—net
|
|
(2
|
)
|
|
4
|
|
|
(12
|
)
|
|
(26
|
)
|
||||
Income before provision for taxes on income
|
|
345
|
|
|
332
|
|
|
682
|
|
|
664
|
|
||||
Provision for taxes on income
|
|
98
|
|
|
108
|
|
|
196
|
|
|
236
|
|
||||
Net income before allocation to noncontrolling interests
|
|
247
|
|
|
224
|
|
|
486
|
|
|
428
|
|
||||
Less: Net income attributable to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
||||
Net income attributable to Zoetis Inc.
|
|
$
|
247
|
|
|
$
|
224
|
|
|
$
|
485
|
|
|
$
|
428
|
|
Earnings per share attributable to Zoetis Inc. stockholders:
|
|
|
|
|
|
|
|
|
||||||||
Basic
|
|
$
|
0.50
|
|
|
$
|
0.45
|
|
|
$
|
0.99
|
|
|
$
|
0.86
|
|
Diluted
|
|
$
|
0.50
|
|
|
$
|
0.45
|
|
|
$
|
0.98
|
|
|
$
|
0.86
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
||||||||
Basic
|
|
490.8
|
|
|
496.3
|
|
|
491.6
|
|
|
496.9
|
|
||||
Diluted
|
|
494.0
|
|
|
498.8
|
|
|
494.6
|
|
|
499.2
|
|
||||
Dividends declared per common share
|
|
$
|
0.105
|
|
|
$
|
0.095
|
|
|
$
|
0.210
|
|
|
$
|
0.190
|
|
(a)
|
Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in
Amortization of intangible assets
as these intangible assets benefit multiple business functions. Amortization expense related to finite-lived acquired intangible assets that are associated with a single function is included in
Cost of sales
,
Selling, general and administrative expenses
or
Research and development expenses
, as appropriate, in the condensed consolidated statements of income.
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Net income before allocation to noncontrolling interests
|
|
$
|
247
|
|
|
$
|
224
|
|
|
$
|
486
|
|
|
$
|
428
|
|
Other comprehensive income/(loss), net of taxes and reclassification adjustments:
|
|
|
|
|
|
|
|
|
||||||||
Unrealized losses on derivatives, net
(a)
|
|
(1
|
)
|
|
(3
|
)
|
|
(1
|
)
|
|
(3
|
)
|
||||
Foreign currency translation adjustments, net
|
|
12
|
|
|
63
|
|
|
56
|
|
|
65
|
|
||||
Benefit plans: Actuarial (losses)/gains, net
(a)
|
|
(1
|
)
|
|
2
|
|
|
1
|
|
|
3
|
|
||||
Total other comprehensive income/(loss), net of tax
|
|
10
|
|
|
62
|
|
|
56
|
|
|
65
|
|
||||
Comprehensive income before allocation to noncontrolling interests
|
|
257
|
|
|
286
|
|
|
542
|
|
|
493
|
|
||||
Less: Comprehensive income/(loss) attributable to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
||||
Comprehensive income attributable to Zoetis Inc.
|
|
$
|
257
|
|
|
$
|
286
|
|
|
$
|
541
|
|
|
$
|
494
|
|
(a)
|
Presented net of reclassification adjustments and tax impacts, which are not significant in any period presented. Reclassification adjustments related to benefit plans are generally reclassified, as part of net periodic pension cost, into
Cost of sales, Selling, general and administrative expenses,
and/or
Research and development expenses,
as appropriate, in the condensed consolidated statements of income.
|
|
|
July 2,
|
|
|
December 31,
|
|
||
|
|
2017
|
|
|
2016
|
|
||
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
|
|
(Unaudited)
|
|
|
|
|||
Assets
|
|
|
|
|
||||
Cash and cash equivalents
(a)
|
|
$
|
705
|
|
|
$
|
727
|
|
Accounts receivable, less allowance for doubtful accounts of $31 in 2017 and $30 in 2016
|
|
975
|
|
|
913
|
|
||
Inventories
|
|
1,498
|
|
|
1,502
|
|
||
Assets held for sale
|
|
53
|
|
|
—
|
|
||
Other current assets
|
|
353
|
|
|
248
|
|
||
Total current assets
|
|
3,584
|
|
|
3,390
|
|
||
Property, plant and equipment, less accumulated depreciation of $1,397 in 2017 and $1,358 in 2016
|
|
1,355
|
|
|
1,381
|
|
||
Goodwill
|
|
1,495
|
|
|
1,481
|
|
||
Identifiable intangible assets, less accumulated amortization
|
|
1,210
|
|
|
1,228
|
|
||
Deferred tax assets
|
|
93
|
|
|
96
|
|
||
Other noncurrent assets
|
|
65
|
|
|
73
|
|
||
Total assets
|
|
$
|
7,802
|
|
|
$
|
7,649
|
|
|
|
|
|
|
||||
Liabilities and Equity
|
|
|
|
|
||||
Short-term borrowings
|
|
$
|
100
|
|
|
$
|
—
|
|
Current portion of long-term debt
|
|
750
|
|
|
$
|
—
|
|
|
Accounts payable
|
|
199
|
|
|
265
|
|
||
Dividends payable
|
|
52
|
|
|
52
|
|
||
Accrued expenses
|
|
406
|
|
|
464
|
|
||
Accrued compensation and related items
|
|
163
|
|
|
224
|
|
||
Income taxes payable
|
|
82
|
|
|
71
|
|
||
Liabilities associated with assets held for sale
|
|
4
|
|
|
—
|
|
||
Other current liabilities
|
|
28
|
|
|
41
|
|
||
Total current liabilities
|
|
1,784
|
|
|
1,117
|
|
||
Long-term debt, net of discount and issuance costs
|
|
3,719
|
|
|
4,468
|
|
||
Deferred tax liabilities
|
|
261
|
|
|
244
|
|
||
Other taxes payable
|
|
83
|
|
|
73
|
|
||
Other noncurrent liabilities
|
|
209
|
|
|
248
|
|
||
Total liabilities
|
|
6,056
|
|
|
6,150
|
|
||
Commitments and contingencies
|
|
|
|
|
||||
Stockholders' equity:
|
|
|
|
|
||||
Preferred stock, $0.01 par value: 1,000,000,000 authorized, none issued
|
|
—
|
|
|
—
|
|
||
Common stock, $0.01 par value: 6,000,000,000 authorized; 501,891,243 and 501,891,243 shares issued; 489,659,511 and 492,855,297 shares outstanding at July 2, 2017, and December 31, 2016, respectively
|
|
5
|
|
|
5
|
|
||
Treasury stock, at cost, 12,231,732 and 9,035,946 shares of common stock at July 2, 2017, and December 31, 2016, respectively
|
|
(615
|
)
|
|
(421
|
)
|
||
Additional paid-in capital
|
|
1,024
|
|
|
1,024
|
|
||
Retained earnings
|
|
1,843
|
|
|
1,477
|
|
||
Accumulated other comprehensive loss
|
|
(542
|
)
|
|
(598
|
)
|
||
Total Zoetis Inc. equity
|
|
1,715
|
|
|
1,487
|
|
||
Equity attributable to noncontrolling interests
|
|
31
|
|
|
12
|
|
||
Total equity
|
|
1,746
|
|
|
1,499
|
|
||
Total liabilities and equity
|
|
$
|
7,802
|
|
|
$
|
7,649
|
|
(a)
|
As of July 2, 2017, includes
$7 million
of restricted cash.
|
|
Zoetis
|
|
|
|
||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
||||||||||||
|
|
|
|
|
|
Additional
|
|
|
|
|
Other
|
|
|
Attributable to
|
|
|
|
|||||||||||
|
|
Common
|
|
|
Treasury
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Total
|
|
|||||||
(MILLIONS OF DOLLARS)
|
|
Stock
(a)
|
|
|
Stock
(a)
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Interests
|
|
|
Equity
|
|
|||||||
Balance, December 31, 2015
|
|
$
|
5
|
|
|
$
|
(203
|
)
|
|
$
|
1,012
|
|
|
$
|
876
|
|
|
$
|
(622
|
)
|
|
$
|
23
|
|
|
$
|
1,091
|
|
Six months ended July 3, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
428
|
|
|
—
|
|
|
—
|
|
|
428
|
|
|||||||
Other comprehensive income/(loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
66
|
|
|
(1
|
)
|
|
65
|
|
|||||||
Share-based compensation awards
(b)
|
|
—
|
|
|
60
|
|
|
(3
|
)
|
|
(20
|
)
|
|
—
|
|
|
—
|
|
|
37
|
|
|||||||
Treasury stock acquired
(c)
|
|
—
|
|
|
(151
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(151
|
)
|
|||||||
Employee benefit plan contribution from Pfizer Inc.
(d)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|||||||
Divestitures
(e)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
(8
|
)
|
|
(6
|
)
|
|||||||
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(94
|
)
|
|
—
|
|
|
—
|
|
|
(94
|
)
|
|||||||
Balance, July 3, 2016
|
|
$
|
5
|
|
|
$
|
(294
|
)
|
|
$
|
1,010
|
|
|
$
|
1,190
|
|
|
$
|
(554
|
)
|
|
$
|
14
|
|
|
$
|
1,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Balance, December 31, 2016
|
|
$
|
5
|
|
|
$
|
(421
|
)
|
|
$
|
1,024
|
|
|
$
|
1,477
|
|
|
$
|
(598
|
)
|
|
$
|
12
|
|
|
$
|
1,499
|
|
Six months ended July 2, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
485
|
|
|
—
|
|
|
1
|
|
|
486
|
|
|||||||
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
56
|
|
|
—
|
|
|
56
|
|
|||||||
Consolidation of a noncontrolling interest
(f)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
18
|
|
|||||||
Share-based compensation awards
(b)
|
|
—
|
|
|
56
|
|
|
(1
|
)
|
|
(16
|
)
|
|
—
|
|
|
—
|
|
|
39
|
|
|||||||
Treasury stock acquired
(c)
|
|
—
|
|
|
(250
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(250
|
)
|
|||||||
Employee benefit plan contribution from Pfizer Inc.
(d)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|||||||
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(103
|
)
|
|
—
|
|
|
—
|
|
|
(103
|
)
|
|||||||
Balance, July 2, 2017
|
|
$
|
5
|
|
|
$
|
(615
|
)
|
|
$
|
1,024
|
|
|
$
|
1,843
|
|
|
$
|
(542
|
)
|
|
$
|
31
|
|
|
$
|
1,746
|
|
(a)
|
As of
July 2, 2017
, and
July 3, 2016
, there were
489,659,511
and
495,389,702
outstanding shares of common stock, respectively, and
12,231,732
and
6,501,541
shares of treasury stock, respectively. Treasury stock is recognized at the cost to reacquire the shares. For additional information, see
Note 13. Stockholders' Equity
.
|
(b)
|
Includes the issuance of shares of Zoetis Inc. common stock and the reissuance of treasury stock in connection with the vesting of employee share-based awards. Upon reissuance of treasury stock, differences between the proceeds from reissuance and the cost of the treasury stock that result in gains are recorded in
Additional paid-in capital
. Losses are recorded in
Additional paid-in capital
to the extent that they can offset previously recorded gains. If no such credit exists, the differences are recorded in
Retained earnings
. Also includes the reacquisition of shares of treasury stock associated with the vesting of employee share-based awards to satisfy tax withholding requirements. For additional information, see
Note 12. Share-Based Payments
and
Note. 13. Stockholders' Equity.
|
(c)
|
Reflects the acquisition of treasury shares in connection with the share repurchase program. For additional information, see
Note 13. Stockholders' Equity
.
|
(d)
|
Represents contributed capital from Pfizer Inc. associated with service credit continuation for certain Zoetis Inc. employees in Pfizer Inc.'s U.S. qualified defined benefit and U.S. retiree medical plans. See
Note 11. Benefit Plans.
|
(e)
|
Reflects the divestiture of our share of our Taiwan joint venture. See
Note 4. Acquisitions and Divestitures: Divestitures
.
|
(f)
|
Represents the consolidation of a European livestock monitoring company, a variable interest entity of which Zoetis is the primary beneficiary.
|
|
|
Six Months Ended
|
||||||
|
|
July 2,
|
|
|
July 3,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
||
Operating Activities
|
|
|
|
|
||||
Net income before allocation to noncontrolling interests
|
|
$
|
486
|
|
|
$
|
428
|
|
Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities:
|
|
|
|
|
||||
Depreciation and amortization expense
|
|
121
|
|
|
117
|
|
||
Share-based compensation expense
|
|
22
|
|
|
19
|
|
||
Restructuring
|
|
(1
|
)
|
|
(19
|
)
|
||
Net loss/(gain) on sale of assets
|
|
2
|
|
|
(27
|
)
|
||
Provision for losses on inventory
|
|
40
|
|
|
35
|
|
||
Deferred taxes
|
|
13
|
|
|
17
|
|
||
Employee benefit plan contribution from Pfizer Inc.
|
|
1
|
|
|
1
|
|
||
Other non-cash adjustments
|
|
—
|
|
|
9
|
|
||
Other changes in assets and liabilities, net of acquisitions and divestitures
|
|
|
|
|
||||
Accounts receivable
|
|
(41
|
)
|
|
53
|
|
||
Inventories
|
|
(46
|
)
|
|
(87
|
)
|
||
Other assets
|
|
(106
|
)
|
|
(72
|
)
|
||
Accounts payable
|
|
(66
|
)
|
|
(71
|
)
|
||
Other liabilities
|
|
(147
|
)
|
|
(254
|
)
|
||
Other tax accounts, net
|
|
21
|
|
|
39
|
|
||
Net cash provided by operating activities
|
|
299
|
|
|
188
|
|
||
Investing Activities
|
|
|
|
|
||||
Purchases of property, plant and equipment
|
|
(93
|
)
|
|
(99
|
)
|
||
Acquisitions
|
|
(3
|
)
|
|
(20
|
)
|
||
Net proceeds from sales of assets
|
|
1
|
|
|
88
|
|
||
Other investing activities
|
|
7
|
|
|
—
|
|
||
Net cash used in investing activities
|
|
(88
|
)
|
|
(31
|
)
|
||
Financing Activities
|
|
|
|
|
||||
Decrease in short-term borrowings, net
|
|
—
|
|
|
(1
|
)
|
||
Issuance of commercial paper
|
|
100
|
|
|
—
|
|
||
Principal payments on long-term debt
|
|
—
|
|
|
(400
|
)
|
||
Payment of contingent consideration related to previously acquired assets
|
|
(5
|
)
|
|
(22
|
)
|
||
Share-based compensation-related proceeds, net of taxes paid on withholding shares
|
|
18
|
|
|
17
|
|
||
Purchases of treasury stock
(a)
|
|
(250
|
)
|
|
(151
|
)
|
||
Cash dividends paid
|
|
(103
|
)
|
|
(94
|
)
|
||
Net cash used in financing activities
|
|
(240
|
)
|
|
(651
|
)
|
||
Effect of exchange-rate changes on cash and cash equivalents
|
|
7
|
|
|
(2
|
)
|
||
Net decrease in cash and cash equivalents
|
|
(22
|
)
|
|
(496
|
)
|
||
Cash and cash equivalents at beginning of period
|
|
727
|
|
|
1,154
|
|
||
Cash and cash equivalents at end of period
|
|
$
|
705
|
|
|
$
|
658
|
|
|
|
|
|
|
||||
Supplemental cash flow information
|
|
|
|
|
||||
Cash paid during the period for:
|
|
|
|
|
||||
Income taxes
|
|
$
|
256
|
|
|
$
|
215
|
|
Interest, net of capitalized interest
|
|
82
|
|
|
84
|
|
||
Non-cash transactions:
|
|
|
|
|
||||
Purchases of property, plant and equipment
|
|
3
|
|
|
6
|
|
||
Contingent purchase price consideration
(b)
|
|
—
|
|
|
27
|
|
||
Dividends declared, not paid
|
|
52
|
|
|
47
|
|
(a)
|
Reflects the acquisition of treasury shares in connection with the share repurchase programs. For additional information, see
Note 13. Stockholders' Equity
.
|
(b)
|
For 2016, relates primarily to the non-cash portion of the acquisition of a livestock business in South America.
|
1.
|
Organization
|
2.
|
Basis of Presentation
|
3.
|
Significant Accounting Policies
|
4.
|
Acquisitions and Divestitures
|
|
|
July 2,
|
|
|
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
Assets held for sale
|
|
|
||
Inventories
|
|
$
|
12
|
|
Property, plant and equipment
|
|
26
|
|
|
Deferred tax assets
|
|
4
|
|
|
Other current assets
|
|
8
|
|
|
Goodwill
|
|
3
|
|
|
Total
|
|
$
|
53
|
|
|
|
|
||
Liabilities associated with assets held for sale
|
|
|
||
Accounts payable
|
|
$
|
3
|
|
Other current liabilities
|
|
1
|
|
|
Total
|
|
$
|
4
|
|
5.
|
Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Restructuring charges/(reversals) and certain acquisition-related costs:
|
|
|
|
|
|
|
|
|
||||||||
Integration costs
(a)
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Restructuring charges/(reversals)
(b)
:
|
|
|
|
|
|
|
|
|
||||||||
Employee termination costs
|
|
(3
|
)
|
|
(24
|
)
|
|
(4
|
)
|
|
(23
|
)
|
||||
Exit costs
|
|
1
|
|
|
1
|
|
|
1
|
|
|
2
|
|
||||
Total
Restructuring charges/(reversals) and certain acquisition-related costs
|
|
$
|
—
|
|
|
$
|
(21
|
)
|
|
$
|
(1
|
)
|
|
$
|
(19
|
)
|
(a)
|
Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and the integration of systems and processes, as well as product transfer costs.
|
(b)
|
The restructuring charges/(reversals) for the
three months ended
July 2, 2017
, are associated with the following: U.S. (
$1 million
reversal), International (
$1 million
) and Manufacturing/research/corporate (
$2 million
reversal).
|
|
The restructuring charges/(reversals) for the
six months ended
July 2, 2017
, are associated with the following: International (
$1 million
reversal) and Manufacturing/research/corporate (
$2 million
reversal).
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Restructuring charges/(reversals) and certain acquisition-related costs:
|
|
|
|
|
|
|
|
|
||||||||
Operational efficiency initiative
|
|
|
|
|
|
|
|
|
||||||||
Employee termination costs
(a)
|
|
$
|
2
|
|
|
$
|
(30
|
)
|
|
$
|
1
|
|
|
$
|
(29
|
)
|
Exit costs
|
|
1
|
|
|
2
|
|
|
1
|
|
|
3
|
|
||||
|
|
3
|
|
|
(28
|
)
|
|
2
|
|
|
(26
|
)
|
||||
Supply network strategy:
|
|
|
|
|
|
|
|
|
||||||||
Employee termination costs
|
|
(5
|
)
|
|
6
|
|
|
(5
|
)
|
|
6
|
|
||||
|
|
(5
|
)
|
|
6
|
|
|
(5
|
)
|
|
6
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total restructuring charges/(reversals) related to the operational efficiency initiative and supply network strategy
|
|
(2
|
)
|
|
(22
|
)
|
|
(3
|
)
|
|
(20
|
)
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Other operational efficiency initiative charges
|
|
|
|
|
|
|
|
|
||||||||
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
||||||||
Accelerated depreciation
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
||||
Consulting fees
|
|
1
|
|
|
4
|
|
|
1
|
|
|
7
|
|
||||
Other (income)/deductions—net:
|
|
|
|
|
|
|
|
|
||||||||
Net loss/(gain) on sale of assets
(b)
|
|
2
|
|
|
6
|
|
|
2
|
|
|
(27
|
)
|
||||
Total other operational efficiency initiative charges
|
|
3
|
|
|
11
|
|
|
3
|
|
|
(19
|
)
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Other supply network strategy charges
|
|
|
|
|
|
|
|
|
||||||||
Cost of sales:
|
|
|
|
|
|
|
|
|
||||||||
Accelerated depreciation
|
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
||||
Consulting fees
|
|
—
|
|
|
1
|
|
|
2
|
|
|
3
|
|
||||
Total other supply network strategy charges
|
|
1
|
|
|
2
|
|
|
4
|
|
|
5
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total charges associated with the operational efficiency initiative and supply network strategy
|
|
$
|
2
|
|
|
$
|
(9
|
)
|
|
$
|
4
|
|
|
$
|
(34
|
)
|
(a)
|
For the three and six months ended July 3, 2016, includes a reduction in employee termination accruals primarily as a result of higher than expected voluntary attrition rates experienced in the first half of 2016.
|
(b)
|
For the three months ended July 3, 2016, primarily represents the net loss on the sale of our share of our Taiwan joint venture as part of our operational efficiency initiative. For the six months ended
July 3, 2016, represents the net gain on the sale of certain manufacturing sites and products, partially offset by the loss on the sale of our share of our Taiwan joint venture, as part of our operational efficiency initiative.
|
|
|
Employee
|
|
|
|
|
|
|||||
|
|
Termination
|
|
|
Exit
|
|
|
|
||||
(MILLIONS OF DOLLARS)
|
|
Costs
|
|
|
Costs
|
|
|
Accrual
(a)
|
|
|||
Balance, December 31, 2016
(a)
|
|
$
|
90
|
|
|
$
|
—
|
|
|
$
|
90
|
|
Provision
|
|
(4
|
)
|
|
1
|
|
|
(3
|
)
|
|||
Utilization and other
(b)
|
|
(36
|
)
|
|
(1
|
)
|
|
(37
|
)
|
|||
Balance, July
2, 2017
(a)
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
50
|
|
(a)
|
At
July 2, 2017
, and
December 31, 2016
, included in
Accrued expenses
(
$29 million
and
$61 million
, respectively) and
Other noncurrent liabilities
(
$21 million
and
$29 million
, respectively).
|
(b)
|
Includes adjustments for foreign currency translation.
|
6.
|
Other (Income)/Deductions—Net
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Royalty-related income
|
|
$
|
(5
|
)
|
|
$
|
(5
|
)
|
|
$
|
(12
|
)
|
|
$
|
(12
|
)
|
Net loss/(gain) on sale of assets
(a)
|
|
2
|
|
|
6
|
|
|
2
|
|
|
(27
|
)
|
||||
Certain legal and other matters, net
(b)
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
||||
Foreign currency loss
(c)
|
|
8
|
|
|
8
|
|
|
10
|
|
|
17
|
|
||||
Other, net
(d)
|
|
(3
|
)
|
|
(5
|
)
|
|
(8
|
)
|
|
(4
|
)
|
||||
Other (income)/deductions—net
|
|
$
|
(2
|
)
|
|
$
|
4
|
|
|
$
|
(12
|
)
|
|
$
|
(26
|
)
|
(a)
|
For the three and six months ended
July 2, 2017
, represents the net loss related to sales of certain manufacturing sites and products as part of our operational efficiency initiative.
|
(b)
|
For the three and six months ended
July 2, 2017
, represents income associated with an insurance recovery related to commercial settlements in Mexico recorded in 2014 and 2016.
|
(c)
|
Primarily driven by costs related to hedging and exposures to certain emerging market currencies.
|
(d)
|
Includes interest income and other miscellaneous income. For the six months ended July 2, 2017, also includes a settlement refund and reimbursement of legal fees related to costs incurred by Pharmaq prior to the acquisition in 2015. For the three and six months ended July 3, 2016, also includes income associated with certain state business employment tax incentive credits.
|
7.
|
Income Taxes
|
A.
|
Taxes on Income
|
•
|
changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items;
|
•
|
a
$2 million
discrete tax benefit related to the excess tax benefits for share-based payments recognized as a component of
Provision for taxes on income
; and
|
•
|
a
$3 million
net discrete tax expense recorded in the second quarter of 2016, related to changes in uncertain tax positions due to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium, partially offset by a revaluation of the company's deferred tax assets and liabilities using the Belgium tax rates expected to be in place going forward as a result of the decision.
|
•
|
a
$38 million
net discrete tax expense recorded in the first half of 2016, related to changes in uncertain tax positions due to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium, partially offset by a revaluation of the company's deferred tax assets and liabilities using the Belgium tax rates expected to be in place going forward as a result of the decision;
|
•
|
changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items;
|
•
|
a
$7 million
and
$5 million
discrete tax benefit recorded in the first half of 2017 and 2016, respectively, related to the excess tax benefits for share-based payments recognized as a component of
Provision for taxes on income
; and
|
•
|
a
$3 million
and
$10 million
discrete tax benefit recorded in the first quarter of 2017 and 2016, respectively, related to a revaluation of deferred taxes as a result of a change in statutory tax rates.
|
B.
|
Deferred Taxes
|
C.
|
Tax Contingencies
|
8.
|
Financial Instruments
|
A.
|
Debt
|
|
|
July 2,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
||
1.875% 2013 senior notes due 2018
|
|
$
|
750
|
|
|
$
|
750
|
|
3.450% 2015 senior notes due 2020
|
|
500
|
|
|
500
|
|
||
3.250% 2013 senior notes due 2023
|
|
1,350
|
|
|
1,350
|
|
||
4.500% 2015 senior notes due 2025
|
|
750
|
|
|
750
|
|
||
4.700% 2013 senior notes due 2043
|
|
1,150
|
|
|
1,150
|
|
||
|
|
4,500
|
|
|
4,500
|
|
||
Unamortized debt discount / debt issuance costs
|
|
(31
|
)
|
|
(32
|
)
|
||
Less current portion of long-term debt
|
|
(750
|
)
|
|
—
|
|
||
Long-term debt, net of discount and issuance costs
|
|
$
|
3,719
|
|
|
$
|
4,468
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|||||||||||
(MILLIONS OF DOLLARS)
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2021
|
|
|
Total
|
|
||||||
Maturities
|
|
$
|
750
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
3,250
|
|
|
$
|
4,500
|
|
B.
|
Derivative Financial Instruments
|
|
|
Fair Value of Derivatives
|
||||||
|
|
July 2,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
Balance Sheet Location
|
2017
|
|
|
2016
|
|
||
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
||||
Foreign currency forward-exchange contracts
|
Other current assets
|
$
|
6
|
|
|
$
|
12
|
|
Foreign currency forward-exchange contracts
|
Other current liabilities
|
(8
|
)
|
|
(8
|
)
|
||
Total derivatives not designated as hedging instruments
|
|
(2
|
)
|
|
4
|
|
||
|
|
|
|
|
||||
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
||||
Interest rate swap contracts
|
Other current assets
|
14
|
|
|
17
|
|
||
Total derivatives designated as hedging instruments
|
|
14
|
|
|
17
|
|
||
|
|
|
|
|
||||
Total derivatives
|
|
$
|
12
|
|
|
$
|
21
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Foreign currency forward-exchange contracts
|
|
$
|
7
|
|
|
$
|
(13
|
)
|
|
$
|
(22
|
)
|
|
$
|
(12
|
)
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Interest rate swaps
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
9.
|
Inventories
|
|
|
July 2,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
||
Finished goods
|
|
$
|
784
|
|
|
$
|
799
|
|
Work-in-process
|
|
534
|
|
|
499
|
|
||
Raw materials and supplies
|
|
180
|
|
|
204
|
|
||
Inventories
|
|
$
|
1,498
|
|
|
$
|
1,502
|
|
10.
|
Goodwill and Other Intangible Assets
|
A.
|
Goodwill
|
(MILLIONS OF DOLLARS)
|
|
U.S.
|
|
|
International
|
|
|
Total
|
|
|||
Balance, December 31, 2016
|
|
$
|
661
|
|
|
$
|
820
|
|
|
$
|
1,481
|
|
Additions
(a)
|
|
5
|
|
|
5
|
|
|
10
|
|
|||
Other
(b)
|
|
—
|
|
|
4
|
|
|
4
|
|
|||
Balance, July 2, 2017
|
|
$
|
666
|
|
|
$
|
829
|
|
|
$
|
1,495
|
|
(a)
|
Represents the consolidation of a European livestock monitoring company, a variable interest entity of which Zoetis is the primary beneficiary.
|
(b)
|
Includes adjustments for foreign currency translation, partially offset by the reclassification of
$3 million
to
Assets Held for Sale
relating to our manufacturing site in Guarulhos, Brazil. For additional information, see
Note 4. Acquisitions and Divestitures: Assets Held for Sale
.
|
B.
|
Other Intangible Assets
|
|
|
As of July 2, 2017
|
|
As of December 31, 2016
|
||||||||||||||||||||
|
|
|
|
|
|
Identifiable
|
|
|
|
|
|
|
Identifiable
|
|
||||||||||
|
|
Gross
|
|
|
|
|
Intangible Assets
|
|
|
Gross
|
|
|
|
|
Intangible Assets
|
|
||||||||
|
|
Carrying
|
|
|
Accumulated
|
|
|
Less Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Less Accumulated
|
|
||||||
(MILLIONS OF DOLLARS)
|
|
Amount
|
|
|
Amortization
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amortization
|
|
||||||
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Developed technology rights
(a)(b)
|
|
$
|
1,167
|
|
|
$
|
(385
|
)
|
|
$
|
782
|
|
|
$
|
1,064
|
|
|
$
|
(342
|
)
|
|
$
|
722
|
|
Brands
|
|
213
|
|
|
(138
|
)
|
|
75
|
|
|
213
|
|
|
(132
|
)
|
|
81
|
|
||||||
Trademarks and trade names
|
|
62
|
|
|
(46
|
)
|
|
16
|
|
|
62
|
|
|
(44
|
)
|
|
18
|
|
||||||
Other
|
|
225
|
|
|
(137
|
)
|
|
88
|
|
|
222
|
|
|
(130
|
)
|
|
92
|
|
||||||
Total finite-lived intangible assets
|
|
1,667
|
|
|
(706
|
)
|
|
961
|
|
|
1,561
|
|
|
(648
|
)
|
|
913
|
|
||||||
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Brands
|
|
37
|
|
|
—
|
|
|
37
|
|
|
37
|
|
|
—
|
|
|
37
|
|
||||||
Trademarks and trade names
|
|
67
|
|
|
—
|
|
|
67
|
|
|
66
|
|
|
—
|
|
|
66
|
|
||||||
In-process research and development
(b)
|
|
137
|
|
|
—
|
|
|
137
|
|
|
204
|
|
|
—
|
|
|
204
|
|
||||||
Product rights
|
|
8
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
—
|
|
|
8
|
|
||||||
Total indefinite-lived intangible assets
|
|
249
|
|
|
—
|
|
|
249
|
|
|
315
|
|
|
—
|
|
|
315
|
|
||||||
Identifiable intangible assets
|
|
$
|
1,916
|
|
|
$
|
(706
|
)
|
|
$
|
1,210
|
|
|
$
|
1,876
|
|
|
$
|
(648
|
)
|
|
$
|
1,228
|
|
(a)
|
Includes the consolidation of a European livestock monitoring company, a variable interest entity of which Zoetis is the primary beneficiary, and intangible assets associated with the purchase of a Norwegian fish vaccination company, both during the first quarter of 2017.
|
(b)
|
In the first quarter of 2017, certain intangible assets, acquired in 2015 as part of the Pharmaq acquisition, were placed into service.
|
C.
|
Amortization
|
11.
|
Benefit Plans
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Service cost
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
4
|
|
Interest cost
|
|
—
|
|
|
1
|
|
|
1
|
|
|
2
|
|
||||
Expected return on plan assets
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
||||
Amortization of net actuarial loss
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
||||
Curtailment and settlement (gain)/loss
|
|
—
|
|
|
(1
|
)
|
|
1
|
|
|
(1
|
)
|
||||
Net periodic benefit cost
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
4
|
|
12.
|
Share-Based Payments
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Stock options / stock appreciation rights
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
5
|
|
RSUs / DSUs
|
|
7
|
|
|
6
|
|
|
13
|
|
|
12
|
|
||||
PSUs
|
|
2
|
|
|
1
|
|
|
4
|
|
|
2
|
|
||||
Share-based compensation expense—total
(a)(b)
|
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
22
|
|
|
$
|
19
|
|
13.
|
Stockholders' Equity
|
(b)
|
Includes the issuance of shares of common stock and the reissuance of shares from treasury stock in connection with the vesting of employee share-based awards. Treasury stock also includes the reacquisition of shares associated with the vesting of employee share-based awards to satisfy tax withholding requirements. For additional information regarding share-based compensation, see
Note 12. Share-Based Payments
.
|
|
|
|
|
Currency Translation
|
|
|
|
|
|
|||||||
|
|
Derivatives
|
|
|
Adjustment
|
|
|
Benefit Plans
|
|
|
Accumulated Other
|
|
||||
|
|
Net Unrealized
|
|
|
Net Unrealized
|
|
|
Actuarial
|
|
|
Comprehensive
|
|
||||
(MILLIONS OF DOLLARS)
|
|
Gains/(Losses)
|
|
|
Gains/(Losses)
|
|
|
Gains/(Losses)
|
|
|
Loss
|
|
||||
Balance, December 31, 2015
|
|
$
|
(2
|
)
|
|
$
|
(604
|
)
|
|
$
|
(16
|
)
|
|
$
|
(622
|
)
|
Other comprehensive (loss)/income, net of tax
|
|
(3
|
)
|
|
66
|
|
|
3
|
|
|
66
|
|
||||
Divestiture of noncontrolling interest
(a)
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
||||
Balance, July 3, 2016
|
|
$
|
(5
|
)
|
|
$
|
(536
|
)
|
|
$
|
(13
|
)
|
|
$
|
(554
|
)
|
|
|
|
|
|
|
|
|
|
||||||||
Balance, December 31, 2016
|
|
$
|
8
|
|
|
$
|
(583
|
)
|
|
$
|
(23
|
)
|
|
$
|
(598
|
)
|
Other comprehensive income, net of tax
|
|
(1
|
)
|
|
56
|
|
|
1
|
|
|
56
|
|
||||
Balance, July 2, 2017
|
|
$
|
7
|
|
|
$
|
(527
|
)
|
|
$
|
(22
|
)
|
|
$
|
(542
|
)
|
14.
|
Earnings per Share
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Numerator
|
|
|
|
|
|
|
|
|
||||||||
Net income before allocation to noncontrolling interests
|
|
$
|
247
|
|
|
$
|
224
|
|
|
$
|
486
|
|
|
$
|
428
|
|
Less: net income attributable to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
||||
Net income attributable to Zoetis Inc.
|
|
$
|
247
|
|
|
$
|
224
|
|
|
$
|
485
|
|
|
$
|
428
|
|
Denominator
|
|
|
|
|
|
|
|
|
||||||||
Weighted-average common shares outstanding
|
|
490.8
|
|
|
496.3
|
|
|
491.6
|
|
|
496.9
|
|
||||
Common stock equivalents: stock options, RSUs, PSUs and DSUs
|
|
3.2
|
|
|
2.5
|
|
|
3.0
|
|
|
2.3
|
|
||||
Weighted-average common and potential dilutive shares outstanding
|
|
494.0
|
|
|
498.8
|
|
|
494.6
|
|
|
499.2
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Earnings per share attributable to Zoetis Inc. stockholders—basic
|
|
$
|
0.50
|
|
|
$
|
0.45
|
|
|
$
|
0.99
|
|
|
$
|
0.86
|
|
Earnings per share attributable to Zoetis Inc. stockholders—diluted
|
|
$
|
0.50
|
|
|
$
|
0.45
|
|
|
$
|
0.98
|
|
|
$
|
0.86
|
|
15.
|
Commitments and Contingencies
|
A.
|
Legal Proceedings
|
•
|
Product liability and other product-related litigation, which can include injury, consumer, off-label promotion, antitrust and breach of contract claims.
|
•
|
Commercial and other matters, which can include product-pricing claims and environmental claims and proceedings.
|
•
|
Patent litigation, which typically involves challenges to the coverage and/or validity of our patents or those of third parties on various products or processes.
|
•
|
Government investigations, which can involve regulation by national, state and local government agencies in the United States and in other countries.
|
B.
|
Guarantees and Indemnifications
|
16.
|
Segment and Other Revenue Information
|
A.
|
Segment Information
|
•
|
Other business activities
includes our Client Supply Services (CSS) contract manufacturing results, as well as expenses associated with our dedicated veterinary medicine research and development organization, research alliances, U.S. regulatory affairs and other operations focused on the development of our products. Other R&D-related costs associated with non-U.S. market and regulatory activities are generally included in the international commercial segment.
|
•
|
Corporate
, which is responsible for platform functions such as business technology, facilities, legal, finance, human resources, business development, and communications, among others. These costs also include compensation costs, certain procurement costs, and other miscellaneous operating expenses not charged to our operating segments, as well as interest income and expense.
|
•
|
Certain transactions and events such as (i)
Purchase accounting adjustments
, where we incur expenses associated with the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment; (ii)
Acquisition-related activities
, where we incur costs associated with acquiring and integrating newly acquired businesses, such as transaction costs and integration costs; and (iii)
Certain significant items
, which comprise substantive, unusual items that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis, such as certain costs related to becoming an independent public company, restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition, certain asset impairment charges, certain legal and commercial settlements and the impact of divestiture-related gains and losses.
|
•
|
Other unallocated
includes (i) certain overhead expenses associated with our global manufacturing operations not charged to our operating segments; (ii) certain costs associated with business technology and finance that specifically support our global manufacturing operations; (iii) certain supply chain and global logistics costs; and (iv) certain procurement costs.
|
|
|
Earnings
|
|
Depreciation and Amortization
(a)
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Three months ended
|
|
|
|
|
|
|
|
|
||||||||
U.S.
|
|
|
|
|
|
|
|
|
||||||||
Revenue
|
|
$
|
623
|
|
|
$
|
594
|
|
|
|
|
|
||||
Cost of sales
|
|
134
|
|
|
134
|
|
|
|
|
|
||||||
Gross profit
|
|
489
|
|
|
460
|
|
|
|
|
|
||||||
Gross margin
|
|
78.5
|
%
|
|
77.4
|
%
|
|
|
|
|
||||||
Operating expenses
|
|
113
|
|
|
100
|
|
|
|
|
|
||||||
Other (income)/deductions
|
|
—
|
|
|
—
|
|
|
|
|
|
||||||
U.S. Earnings
|
|
376
|
|
|
360
|
|
|
$
|
7
|
|
|
$
|
7
|
|
||
|
|
|
|
|
|
|
|
|
||||||||
International
|
|
|
|
|
|
|
|
|
||||||||
Revenue
(b)
|
|
634
|
|
|
602
|
|
|
|
|
|
||||||
Cost of sales
|
|
219
|
|
|
201
|
|
|
|
|
|
||||||
Gross profit
|
|
415
|
|
|
401
|
|
|
|
|
|
||||||
Gross margin
|
|
65.5
|
%
|
|
66.6
|
%
|
|
|
|
|
||||||
Operating expenses
|
|
126
|
|
|
124
|
|
|
|
|
|
||||||
Other (income)/deductions
|
|
2
|
|
|
1
|
|
|
|
|
|
||||||
International Earnings
|
|
287
|
|
|
276
|
|
|
11
|
|
|
11
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total operating segments
|
|
663
|
|
|
636
|
|
|
18
|
|
|
18
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Other business activities
|
|
(73
|
)
|
|
(74
|
)
|
|
6
|
|
|
6
|
|
||||
Reconciling Items:
|
|
|
|
|
|
|
|
|
||||||||
Corporate
|
|
(151
|
)
|
|
(171
|
)
|
|
13
|
|
|
12
|
|
||||
Purchase accounting adjustments
|
|
(21
|
)
|
|
(28
|
)
|
|
21
|
|
|
21
|
|
||||
Acquisition-related costs
|
|
(2
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
||||
Certain significant items
(c)
|
|
1
|
|
|
4
|
|
|
—
|
|
|
2
|
|
||||
Other unallocated
|
|
(72
|
)
|
|
(33
|
)
|
|
1
|
|
|
1
|
|
||||
Total Earnings
(d)
|
|
$
|
345
|
|
|
$
|
332
|
|
|
$
|
59
|
|
|
$
|
60
|
|
|
|
Earnings
|
|
Depreciation and Amortization
(a)
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Six months ended
|
|
|
|
|
|
|
|
|
||||||||
U.S.
|
|
|
|
|
|
|
|
|
||||||||
Revenue
|
|
$
|
1,228
|
|
|
$
|
1,176
|
|
|
|
|
|
||||
Cost of sales
|
|
271
|
|
|
265
|
|
|
|
|
|
||||||
Gross profit
|
|
957
|
|
|
911
|
|
|
|
|
|
||||||
Gross margin
|
|
77.9
|
%
|
|
77.5
|
%
|
|
|
|
|
||||||
Operating expenses
|
|
209
|
|
|
192
|
|
|
|
|
|
||||||
Other (income)/deductions
|
|
—
|
|
|
—
|
|
|
|
|
|
||||||
U.S. Earnings
|
|
748
|
|
|
719
|
|
|
$
|
14
|
|
|
$
|
13
|
|
||
|
|
|
|
|
|
|
|
|
||||||||
International
|
|
|
|
|
|
|
|
|
||||||||
Revenue
(b)
|
|
1,249
|
|
|
1,169
|
|
|
|
|
|
||||||
Cost of sales
|
|
432
|
|
|
397
|
|
|
|
|
|
||||||
Gross profit
|
|
817
|
|
|
772
|
|
|
|
|
|
||||||
Gross margin
|
|
65.4
|
%
|
|
66.0
|
%
|
|
|
|
|
||||||
Operating expenses
|
|
240
|
|
|
233
|
|
|
|
|
|
||||||
Other (income)/deductions
|
|
(1
|
)
|
|
3
|
|
|
|
|
|
||||||
International Earnings
|
|
578
|
|
|
536
|
|
|
22
|
|
|
22
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total operating segments
|
|
1,326
|
|
|
1,255
|
|
|
36
|
|
|
35
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Other business activities
|
|
(147
|
)
|
|
(148
|
)
|
|
12
|
|
|
12
|
|
||||
Reconciling Items:
|
|
|
|
|
|
|
|
|
||||||||
Corporate
|
|
(294
|
)
|
|
(340
|
)
|
|
25
|
|
|
22
|
|
||||
Purchase accounting adjustments
|
|
(43
|
)
|
|
(54
|
)
|
|
43
|
|
|
43
|
|
||||
Acquisition-related costs
|
|
(2
|
)
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
||||
Certain significant items
(c)
|
|
(3
|
)
|
|
17
|
|
|
2
|
|
|
3
|
|
||||
Other unallocated
|
|
(155
|
)
|
|
(63
|
)
|
|
3
|
|
|
2
|
|
||||
Total Earnings
(d)
|
|
$
|
682
|
|
|
$
|
664
|
|
|
$
|
121
|
|
|
$
|
117
|
|
(a)
|
Certain production facilities are shared. Depreciation and amortization is allocated to the reportable operating segments based on estimates of where the benefits of the related assets are realized.
|
(b)
|
Revenue denominated in euros was
$155 million
and
$303 million
for the
three and six months ended
July 2, 2017
, respectively, and
$158 million
and
$312 million
for the
three and six months ended
July 3, 2016
, respectively
.
|
(c)
|
For the
three months ended
July 2, 2017
,
Certain significant items
primarily includes: (i) a reversal of previously accrued employee termination costs of
$3 million
, exit costs of
$1 million
, accelerated depreciation of
$1 million
, consulting fees of
$1 million
, and a net loss on sales of certain manufacturing sites and products of
$2 million
related to our operational efficiency initiative and supply network strategy, (ii) charges of
$1 million
associated with changes to our operating model, and (iii) income of
$4 million
related to an insurance recovery from commercial settlements in Mexico recorded in 2014 and 2016.
|
(d)
|
Defined as income before provision for taxes on income.
|
B.
|
Other Revenue Information
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Livestock:
|
|
|
|
|
|
|
|
|
||||||||
Cattle
|
|
$
|
382
|
|
|
$
|
366
|
|
|
$
|
768
|
|
|
$
|
743
|
|
Swine
|
|
148
|
|
|
150
|
|
|
308
|
|
|
296
|
|
||||
Poultry
|
|
122
|
|
|
118
|
|
|
238
|
|
|
240
|
|
||||
Fish
|
|
19
|
|
|
22
|
|
|
40
|
|
|
39
|
|
||||
Other
|
|
18
|
|
|
17
|
|
|
38
|
|
|
38
|
|
||||
|
|
689
|
|
|
673
|
|
|
1,392
|
|
|
1,356
|
|
||||
Companion Animal:
|
|
|
|
|
|
|
|
|
||||||||
Horses
|
|
35
|
|
|
36
|
|
|
70
|
|
|
75
|
|
||||
Dogs and Cats
|
|
533
|
|
|
487
|
|
|
1,015
|
|
|
914
|
|
||||
|
|
568
|
|
|
523
|
|
|
1,085
|
|
|
989
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Contract Manufacturing
|
|
12
|
|
|
12
|
|
|
23
|
|
|
25
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total revenue
|
|
$
|
1,269
|
|
|
$
|
1,208
|
|
|
$
|
2,500
|
|
|
$
|
2,370
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Anti-infectives
|
|
$
|
278
|
|
|
$
|
272
|
|
|
$
|
546
|
|
|
$
|
563
|
|
Vaccines
|
|
324
|
|
|
310
|
|
|
643
|
|
|
611
|
|
||||
Parasiticides
|
|
206
|
|
|
189
|
|
|
390
|
|
|
334
|
|
||||
Medicated feed additives
|
|
121
|
|
|
128
|
|
|
244
|
|
|
266
|
|
||||
Other pharmaceuticals
|
|
282
|
|
|
248
|
|
|
554
|
|
|
469
|
|
||||
Other non-pharmaceuticals
|
|
46
|
|
|
49
|
|
|
100
|
|
|
102
|
|
||||
Contract manufacturing
|
|
12
|
|
|
12
|
|
|
23
|
|
|
25
|
|
||||
Total revenue
|
|
$
|
1,269
|
|
|
$
|
1,208
|
|
|
$
|
2,500
|
|
|
$
|
2,370
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
||||
Revenue
|
|
$
|
1,269
|
|
|
$
|
1,208
|
|
|
5
|
|
$
|
2,500
|
|
|
$
|
2,370
|
|
|
5
|
|
Net income attributable to Zoetis
|
|
247
|
|
|
224
|
|
|
10
|
|
485
|
|
|
428
|
|
|
13
|
|
||||
Adjusted net income
(a)
|
|
261
|
|
|
246
|
|
|
6
|
|
522
|
|
|
485
|
|
|
8
|
|
(a)
|
Adjusted net income is a non-GAAP financial measure. See the "Adjusted net income" section of this Management's Discussion and Analysis (MD&A) for more information.
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
||||
Revenue
|
|
$
|
1,269
|
|
|
$
|
1,208
|
|
|
5
|
|
|
$
|
2,500
|
|
|
$
|
2,370
|
|
|
5
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Cost of sales
(a)
|
|
440
|
|
|
399
|
|
|
10
|
|
|
883
|
|
|
788
|
|
|
12
|
|
||||
% of revenue
|
|
35
|
%
|
|
33
|
%
|
|
|
|
35
|
%
|
|
33
|
%
|
|
|
||||||
Selling, general and administrative expenses
(a)
|
|
336
|
|
|
343
|
|
|
(2
|
)
|
|
645
|
|
|
658
|
|
|
(2
|
)
|
||||
% of revenue
|
|
26
|
%
|
|
28
|
%
|
|
|
|
26
|
%
|
|
28
|
%
|
|
|
||||||
Research and development expenses
(a)
|
|
86
|
|
|
88
|
|
|
(2
|
)
|
|
176
|
|
|
178
|
|
|
(1
|
)
|
||||
% of revenue
|
|
7
|
%
|
|
7
|
%
|
|
|
|
7
|
%
|
|
8
|
%
|
|
|
||||||
Amortization of intangible assets
(a)
|
|
23
|
|
|
22
|
|
|
5
|
|
|
45
|
|
|
43
|
|
|
5
|
|
||||
Restructuring charges/(reversals) and certain acquisition-related costs
|
|
—
|
|
|
(21
|
)
|
|
(100
|
)
|
|
(1
|
)
|
|
(19
|
)
|
|
(95
|
)
|
||||
Interest expense, net of capitalized interest
|
|
41
|
|
|
41
|
|
|
—
|
|
|
82
|
|
|
84
|
|
|
(2
|
)
|
||||
Other (income)/deductions—net
|
|
(2
|
)
|
|
4
|
|
|
*
|
|
|
(12
|
)
|
|
(26
|
)
|
|
(54
|
)
|
||||
Income before provision for taxes on income
|
|
345
|
|
|
332
|
|
|
4
|
|
|
682
|
|
|
664
|
|
|
3
|
|
||||
% of revenue
|
|
27
|
%
|
|
27
|
%
|
|
|
|
27
|
%
|
|
28
|
%
|
|
|
||||||
Provision for taxes on income
|
|
98
|
|
|
108
|
|
|
(9
|
)
|
|
196
|
|
|
236
|
|
|
(17
|
)
|
||||
Effective tax rate
|
|
28.4
|
%
|
|
32.5
|
%
|
|
|
|
28.7
|
%
|
|
35.5
|
%
|
|
|
||||||
Net income before allocation to noncontrolling interests
|
|
247
|
|
|
224
|
|
|
10
|
|
|
486
|
|
|
428
|
|
|
14
|
|
||||
Less: Net income attributable to noncontrolling interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
||||
Net income attributable to Zoetis
|
|
$
|
247
|
|
|
$
|
224
|
|
|
10
|
|
|
$
|
485
|
|
|
$
|
428
|
|
|
13
|
|
% of revenue
|
|
19
|
%
|
|
19
|
%
|
|
|
|
19
|
%
|
|
18
|
%
|
|
|
(a)
|
Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in
Amortization of intangible assets
as these intangible assets benefit multiple business functions. Amortization expense related to finite-lived acquired intangible assets that are associated with a single function is included in
Cost of sales
,
Selling, general and administrative expenses
or
Research and development expenses
, as appropriate.
|
•
|
increased sales of our dermatology portfolio and new product launches, which contributed approximately 6%; and
|
•
|
growth of our in-line products, which contributed approximately 1%, due to increased volume,
|
•
|
our product rationalizations as part of the operational efficiency initiative, which resulted in a decline of approximately 1%.
|
•
|
increased sales of our dermatology portfolio and new product launches, which contributed approximately 6%; and
|
•
|
growth of our in-line products, which contributed approximately 1%, due to price increases,
|
•
|
our product rationalizations as part of the operational efficiency initiative, which resulted in a decline of approximately 1%.
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
2017
|
|
|
2016
|
|
|
Change
|
||||
Cost of sales
|
|
$
|
440
|
|
|
$
|
399
|
|
|
10
|
|
$
|
883
|
|
|
$
|
788
|
|
|
12
|
% of revenue
|
|
34.7
|
%
|
|
33.0
|
%
|
|
|
|
35.3
|
%
|
|
33.2
|
%
|
|
|
•
|
the timing of the recognition of certain manufacturing and supply costs (while we expect these costs to be elevated in the first half of the year, we anticipate improvement in cost of sales as a percentage of revenue in the second half, compared with 2016);
|
•
|
an increase in sales volume;
|
•
|
unfavorable foreign exchange; and
|
•
|
an increase in inventory obsolescence, scrap and other charges,
|
•
|
the nonrecurrence of charges reflecting fair value adjustments to inventory related to the acquisition of Pharmaq.
|
•
|
the timing of the recognition of certain manufacturing and supply costs (while we expect these costs to be elevated in the first half of the year, we anticipate improvement in cost of sales as a percentage of revenue in the second half, compared with 2016);
|
•
|
an increase in sales volume;
|
•
|
unfavorable foreign exchange; and
|
•
|
an increase in inventory obsolescence, scrap and other charges,
|
•
|
the nonrecurrence of charges reflecting fair value adjustments to inventory related to the acquisition of Pharmaq.
|
•
|
a decline in certain compensation-related expenses;
|
•
|
lower bad debt expense; and
|
•
|
a reduction in the amount of additional costs related to becoming an independent public company,
|
•
|
higher advertising and promotional spending associated with new products and Apoquel
®
.
|
•
|
a reduction in the amount of additional costs related to becoming an independent public company;
|
•
|
a decline in certain compensation-related expenses;
|
•
|
a reduction in the general and administrative expenses driven by our operational efficiency initiative;
|
•
|
lower bad debt expense; and
|
•
|
favorable foreign exchange,
|
•
|
higher advertising and promotional spending associated with new products and Apoquel
®
.
|
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
||||
Research and development expenses
|
|
$
|
86
|
|
|
$
|
88
|
|
|
(2
|
)
|
|
$
|
176
|
|
|
$
|
178
|
|
|
(1
|
)
|
% of revenue
|
|
7
|
%
|
|
7
|
%
|
|
|
|
7
|
%
|
|
8
|
%
|
|
|
•
|
a reduction in research and development expenses driven by our operational efficiency initiative; and
|
•
|
certain compensation-related expenses,
|
•
|
the inclusion of the veterinary diagnostics business acquired in 2016; and
|
•
|
timing of laboratory supply purchases.
|
•
|
a reduction in research and development expenses driven by our operational efficiency initiative,
|
•
|
the inclusion of the veterinary diagnostics business acquired in 2016; and
|
•
|
increased variable expenses due to project spending.
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
2017
|
|
|
2016
|
|
|
Change
|
||||
Amortization of intangible assets
|
|
$
|
23
|
|
|
$
|
22
|
|
|
5
|
|
$
|
45
|
|
|
$
|
43
|
|
|
5
|
Interest expense, net of capitalized interest
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
||||
Interest expense, net of capitalized interest
|
|
$
|
41
|
|
|
$
|
41
|
|
|
—
|
|
$
|
82
|
|
|
$
|
84
|
|
|
(2
|
)
|
Other (income)/deductions—net
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
||||
Other (income)/deductions—net
|
|
$
|
(2
|
)
|
|
$
|
4
|
|
|
*
|
|
$
|
(12
|
)
|
|
$
|
(26
|
)
|
|
(54
|
)
|
•
|
an insurance recovery of $4 million related to commercial settlements in Mexico recorded in 2014 and 2016; and
|
•
|
a net loss of $2 million for the three months ended July 2, 2017 compared to a net loss of $6 million for the three months ended July 3, 2016, related to divestitures as part of our operational efficiency initiative,
|
•
|
lower income associated with certain state business employment tax incentive credits.
|
•
|
a net gain of $27 million in the first half of 2016 compared to a net loss of $2 million in the first half of 2017, related to divestitures as part of our operational efficiency initiative; and
|
•
|
lower income associated with certain state business employment tax incentive credits,
|
•
|
an insurance recovery of $4 million related to commercial settlements in Mexico in 2014 and 2016;
|
•
|
lower foreign currency losses, primarily driven by costs related to hedging and exposures to certain emerging market currencies; and
|
•
|
a settlement refund and reimbursement of legal fees related to costs incurred by Pharmaq prior to the acquisition in 2015.
|
Provision for taxes on income
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
||||
Provision for taxes on income
|
|
$
|
98
|
|
|
$
|
108
|
|
|
(9
|
)
|
|
$
|
196
|
|
|
$
|
236
|
|
|
(17
|
)
|
Effective tax rate
|
|
28.4
|
%
|
|
32.5
|
%
|
|
|
|
28.7
|
%
|
|
35.5
|
%
|
|
|
•
|
changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items;
|
•
|
a
$2 million
discrete tax benefit related to the excess tax benefits for share-based payments recognized as a component of
Provision for taxes on income;
and
|
•
|
a
$3 million
net discrete tax expense recorded in the second quarter of 2016, related to changes in uncertain tax positions due to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium, partially offset by a revaluation of the company's deferred tax assets and liabilities using the Belgium tax rates expected to be in place going forward as a result of the decision.
|
•
|
a
$38 million
net discrete tax expense recorded in the first half of 2016, related to changes in uncertain tax positions due to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium, partially offset by a revaluation of the company's deferred tax assets and liabilities using the Belgium tax rates expected to be in place going forward as a result of the decision;
|
•
|
changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items;
|
•
|
a
$7 million
and
$5 million
discrete tax benefit recorded in the first half of 2017 and 2016, respectively, related to the excess tax benefits for share-based payments recognized as a component of
Provision for taxes on income
; and
|
•
|
a
$3 million
and
$10 million
discrete tax benefit recorded in the first quarter of 2017 and 2016, respectively, related to a revaluation of deferred taxes as a result of a change in statutory tax rates.
|
|
|
|
|
% Change
|
||||||||||||
|
|
Three Months Ended
|
|
|
|
Related to
|
||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
|
|
Foreign
|
|
|
|
|||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Total
|
|
Exchange
|
|
|
Operational
|
|
||
U.S.
|
|
|
|
|
|
|
|
|
|
|
||||||
Livestock
|
|
$
|
269
|
|
|
$
|
262
|
|
|
3
|
|
—
|
|
|
3
|
|
Companion animal
|
|
354
|
|
|
332
|
|
|
7
|
|
—
|
|
|
7
|
|
||
|
|
623
|
|
|
594
|
|
|
5
|
|
—
|
|
|
5
|
|
||
International
|
|
|
|
|
|
|
|
|
|
|
||||||
Livestock
|
|
420
|
|
|
411
|
|
|
2
|
|
(1
|
)
|
|
3
|
|
||
Companion animal
|
|
214
|
|
|
191
|
|
|
12
|
|
(3
|
)
|
|
15
|
|
||
|
|
634
|
|
|
602
|
|
|
5
|
|
(2
|
)
|
|
7
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||||||
Total
|
|
|
|
|
|
|
|
|
|
|
||||||
Livestock
|
|
689
|
|
|
673
|
|
|
2
|
|
(1
|
)
|
|
3
|
|
||
Companion animal
|
|
568
|
|
|
523
|
|
|
9
|
|
(1
|
)
|
|
10
|
|
||
Contract manufacturing
|
|
12
|
|
|
12
|
|
|
—
|
|
3
|
|
|
(3
|
)
|
||
|
|
$
|
1,269
|
|
|
$
|
1,208
|
|
|
5
|
|
(1
|
)
|
|
6
|
|
|
|
|
|
% Change
|
|||||||||||||
|
|
Six Months Ended
|
|
|
|
Related to
|
|||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
|
|
Foreign
|
|
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Total
|
|
|
Exchange
|
|
|
Operational
|
|
||
U.S.
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
$
|
551
|
|
|
$
|
550
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Companion animal
|
|
677
|
|
|
626
|
|
|
8
|
|
|
—
|
|
|
8
|
|
||
|
|
1,228
|
|
|
1,176
|
|
|
4
|
|
|
—
|
|
|
4
|
|
||
International
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
841
|
|
|
806
|
|
|
4
|
|
|
(1
|
)
|
|
5
|
|
||
Companion animal
|
|
408
|
|
|
363
|
|
|
12
|
|
|
(3
|
)
|
|
15
|
|
||
|
|
1,249
|
|
|
1,169
|
|
|
7
|
|
|
(1
|
)
|
|
8
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total
|
|
|
|
|
|
|
|
|
|
|
|||||||
Livestock
|
|
1,392
|
|
|
1,356
|
|
|
3
|
|
|
—
|
|
|
3
|
|
||
Companion animal
|
|
1,085
|
|
|
989
|
|
|
10
|
|
|
—
|
|
|
10
|
|
||
Contract manufacturing
|
|
23
|
|
|
25
|
|
|
(8
|
)
|
|
(2
|
)
|
|
(6
|
)
|
||
|
|
$
|
2,500
|
|
|
$
|
2,370
|
|
|
5
|
|
|
(1
|
)
|
|
6
|
|
|
|
|
|
% Change
|
||||||||||||
|
|
Three Months Ended
|
|
|
|
Related to
|
||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
|
|
Foreign
|
|
|
|
|||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Total
|
|
|
Exchange
|
|
|
Operational
|
||
U.S.
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenue
|
|
$
|
623
|
|
|
$
|
594
|
|
|
5
|
|
|
—
|
|
|
5
|
Cost of Sales
|
|
134
|
|
|
134
|
|
|
—
|
|
|
—
|
|
|
—
|
||
Gross Profit
|
|
489
|
|
|
460
|
|
|
6
|
|
|
—
|
|
|
6
|
||
Gross Margin
|
|
78.5
|
%
|
|
77.4
|
%
|
|
|
|
|
|
|
||||
Operating Expenses
|
|
113
|
|
|
100
|
|
|
13
|
|
|
—
|
|
|
13
|
||
Other (income)/deductions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
||
U.S. Earnings
|
|
376
|
|
|
360
|
|
|
4
|
|
|
—
|
|
|
4
|
||
|
|
|
|
|
|
|
|
|
|
|
||||||
International
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenue
|
|
634
|
|
|
602
|
|
|
5
|
|
|
(2
|
)
|
|
7
|
||
Cost of Sales
|
|
219
|
|
|
201
|
|
|
9
|
|
|
1
|
|
|
8
|
||
Gross Profit
|
|
415
|
|
|
401
|
|
|
3
|
|
|
(3
|
)
|
|
6
|
||
Gross Margin
|
|
65.5
|
%
|
|
66.6
|
%
|
|
|
|
|
|
|
||||
Operating Expenses
|
|
126
|
|
|
124
|
|
|
2
|
|
|
(1
|
)
|
|
3
|
||
Other (income)/deductions
|
|
2
|
|
|
1
|
|
|
*
|
|
|
*
|
|
|
*
|
||
International Earnings
|
|
287
|
|
|
276
|
|
|
4
|
|
|
(3
|
)
|
|
7
|
||
|
|
|
|
|
|
|
|
|
|
|
||||||
Total operating segments
|
|
663
|
|
|
636
|
|
|
4
|
|
|
(2
|
)
|
|
6
|
||
Other business activities
|
|
(73
|
)
|
|
(74
|
)
|
|
(1
|
)
|
|
|
|
|
|||
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate
|
|
(151
|
)
|
|
(171
|
)
|
|
(12
|
)
|
|
|
|
|
|||
Purchase accounting adjustments
|
|
(21
|
)
|
|
(28
|
)
|
|
(25
|
)
|
|
|
|
|
|||
Acquisition-related costs
|
|
(2
|
)
|
|
(2
|
)
|
|
—
|
|
|
|
|
|
|||
Certain significant items
|
|
1
|
|
|
4
|
|
|
(75
|
)
|
|
|
|
|
|||
Other unallocated
|
|
(72
|
)
|
|
(33
|
)
|
|
*
|
|
|
|
|
|
|||
Income before provision for taxes on income
|
|
$
|
345
|
|
|
$
|
332
|
|
|
4
|
|
|
|
|
|
|
|
|
|
% Change
|
||||||||||||
|
|
Six Months Ended
|
|
|
|
Related to
|
||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
|
|
Foreign
|
|
|
|
|||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Total
|
|
|
Exchange
|
|
|
Operational
|
||
U.S.
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenue
|
|
$
|
1,228
|
|
|
$
|
1,176
|
|
|
4
|
|
|
—
|
|
|
4
|
Cost of Sales
|
|
271
|
|
|
265
|
|
|
2
|
|
|
—
|
|
|
2
|
||
Gross Profit
|
|
957
|
|
|
911
|
|
|
5
|
|
|
—
|
|
|
5
|
||
Gross Margin
|
|
77.9
|
%
|
|
77.5
|
%
|
|
|
|
|
|
|
||||
Operating Expenses
|
|
209
|
|
|
192
|
|
|
9
|
|
|
—
|
|
|
9
|
||
Other (income)/deductions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
||
U.S. Earnings
|
|
748
|
|
|
719
|
|
|
4
|
|
|
—
|
|
|
4
|
||
|
|
|
|
|
|
|
|
|
|
|
||||||
International
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenue
|
|
1,249
|
|
|
1,169
|
|
|
7
|
|
|
(1
|
)
|
|
8
|
||
Cost of Sales
|
|
432
|
|
|
397
|
|
|
9
|
|
|
1
|
|
|
8
|
||
Gross Profit
|
|
817
|
|
|
772
|
|
|
6
|
|
|
(1
|
)
|
|
7
|
||
Gross Margin
|
|
65.4
|
%
|
|
66.0
|
%
|
|
|
|
|
|
|
||||
Operating Expenses
|
|
240
|
|
|
233
|
|
|
3
|
|
|
(1
|
)
|
|
4
|
||
Other (income)/deductions
|
|
(1
|
)
|
|
3
|
|
|
*
|
|
|
*
|
|
|
*
|
||
International Earnings
|
|
578
|
|
|
536
|
|
|
8
|
|
|
(2
|
)
|
|
10
|
||
|
|
|
|
|
|
|
|
|
|
|
||||||
Total operating segments
|
|
1,326
|
|
|
1,255
|
|
|
6
|
|
|
(1
|
)
|
|
7
|
||
Other business activities
|
|
(147
|
)
|
|
(148
|
)
|
|
(1
|
)
|
|
|
|
|
|||
Reconciling Items:
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate
|
|
(294
|
)
|
|
(340
|
)
|
|
(14
|
)
|
|
|
|
|
|||
Purchase accounting adjustments
|
|
(43
|
)
|
|
(54
|
)
|
|
(20
|
)
|
|
|
|
|
|||
Acquisition-related costs
|
|
(2
|
)
|
|
(3
|
)
|
|
(33
|
)
|
|
|
|
|
|||
Certain significant items
|
|
(3
|
)
|
|
17
|
|
|
*
|
|
|
|
|
|
|||
Other unallocated
|
|
(155
|
)
|
|
(63
|
)
|
|
*
|
|
|
|
|
|
|||
Income before provision for taxes on income
|
|
$
|
682
|
|
|
$
|
664
|
|
|
3
|
|
|
|
|
|
•
|
Livestock revenue growth was driven primarily by increased sales of cattle and poultry products. Growth was partially offset by lower sales of swine products due to competition. In addition, certain medicated feed additive products for both cattle and swine were negatively impacted by livestock producers' implementation of the Veterinary Feed Directive, and we expect this trend to continue for the remainder of 2017.
|
•
|
Companion animal revenue growth was driven by increased sales in our dermatology portfolio, in addition to several other new product launches. Growth was partially offset by lower sales of our pain products due to competition and timing of promotional campaigns.
|
•
|
Livestock growth was driven primarily by increased sales of cattle and swine products. In cattle, growth was due to higher sales in Brazil and other Latin American markets, with increased demand in Brazil as a result of field force expansion, while swine was driven by growth in China. Growth was partially offset by product rationalizations as a result of our operational efficiency initiative.
|
•
|
Companion animal revenue growth resulted primarily from increased sales of Apoquel
®
, in addition to new product launches, primarily Simparica
®
.
|
•
|
Livestock revenue increased due to higher sales of poultry and cattle products. Sales of cattle products were partially offset by lower disease risk and incidence in the feedlot sector due to mild weather and heavier animals earlier in the year. Certain medicated feed additive products for both cattle and swine were negatively impacted by livestock producers’ implementation of the Veterinary Feed Directive, and we expect this trend to continue for the remainder of 2017.
|
•
|
Companion animal revenue growth was driven primarily by our dermatology portfolio, in addition to new product launches, particularly Simparica
®
. Growth was tempered by the prior year’s initial sales of other products into expanded distribution relationships, as well as lower sales of our pain products due to competition
.
|
•
|
Livestock growth was driven primarily by increased sales of swine products in China, new product launches across a variety of markets, and cattle products in Brazil. Growth was partially offset by product rationalizations, primarily impacting poultry and swine product sales.
|
•
|
Companion animal revenue growth resulted primarily from increased sales of Apoquel
®
, in addition to new product launches, primarily Simparica
®
. Sales also benefited from increased demand for our vaccines portfolio in China due to field force expansions and increasing medicalization rates.
|
•
|
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, stand-up costs, 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.
|
•
|
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.
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
||||
GAAP reported net income attributable to Zoetis
|
|
$
|
247
|
|
|
$
|
224
|
|
|
10
|
|
|
$
|
485
|
|
|
$
|
428
|
|
|
13
|
|
Purchase accounting adjustments—net of tax
|
|
15
|
|
|
18
|
|
|
(17
|
)
|
|
34
|
|
|
27
|
|
|
26
|
|
||||
Acquisition-related costs—net of tax
|
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
4
|
|
|
(75
|
)
|
||||
Certain significant items—net of tax
|
|
(2
|
)
|
|
3
|
|
|
*
|
|
|
2
|
|
|
26
|
|
|
(92
|
)
|
||||
Non-GAAP adjusted net income
(a)
|
|
$
|
261
|
|
|
$
|
246
|
|
|
6
|
|
|
$
|
522
|
|
|
$
|
485
|
|
|
8
|
|
(a)
|
The effective tax rate on adjusted pretax income is
28.9%
and
31.3%
for the
three months ended
July 2, 2017
and
July 3, 2016
, respectively. The lower effective tax rate for the
three months ended
July 2, 2017
, compared with the
three months ended
July 3, 2016
, was primarily attributable to 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 tax benefit recorded in the second quarter of 2017 related to the excess tax benefits for share-based payments recognized as a component of
Provision for taxes on income
.
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
||||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
||||
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
||||
Earnings per share—diluted
(a)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
GAAP reported EPS attributable to Zoetis—diluted
|
|
$
|
0.50
|
|
|
$
|
0.45
|
|
|
11
|
|
|
$
|
0.98
|
|
|
$
|
0.86
|
|
|
14
|
|
Purchase accounting adjustments—net of tax
|
|
0.03
|
|
|
0.04
|
|
|
(25
|
)
|
|
0.07
|
|
|
0.05
|
|
|
40
|
|
||||
Acquisition-related costs—net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.01
|
|
|
(100
|
)
|
||||
Certain significant items—net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.01
|
|
|
0.05
|
|
|
(80
|
)
|
||||
Non-GAAP adjusted EPS—diluted
|
|
$
|
0.53
|
|
|
$
|
0.49
|
|
|
8
|
|
|
$
|
1.06
|
|
|
$
|
0.97
|
|
|
9
|
|
(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, RSUs, PSUs and DSUs.
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Interest expense, net of capitalized interest
|
|
$
|
41
|
|
|
$
|
41
|
|
|
$
|
82
|
|
|
$
|
84
|
|
Interest income
|
|
3
|
|
|
2
|
|
|
5
|
|
|
4
|
|
||||
Income taxes
|
|
106
|
|
|
112
|
|
|
207
|
|
|
219
|
|
||||
Depreciation
|
|
33
|
|
|
32
|
|
|
67
|
|
|
62
|
|
||||
Amortization
|
|
5
|
|
|
5
|
|
|
9
|
|
|
9
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Purchase accounting adjustments:
|
|
|
|
|
|
|
|
|
||||||||
Amortization and depreciation
(a)
|
|
$
|
20
|
|
|
$
|
20
|
|
|
$
|
40
|
|
|
$
|
39
|
|
Cost of sales
(b)
|
|
1
|
|
|
8
|
|
|
3
|
|
|
15
|
|
||||
Total purchase accounting adjustments—pre-tax
|
|
21
|
|
|
28
|
|
|
43
|
|
|
54
|
|
||||
Income taxes
(c)
|
|
6
|
|
|
10
|
|
|
9
|
|
|
27
|
|
||||
Total purchase accounting adjustments—net of tax
|
|
15
|
|
|
18
|
|
|
34
|
|
|
27
|
|
||||
Acquisition-related costs:
|
|
|
|
|
|
|
|
|
||||||||
Integration costs
|
|
2
|
|
|
2
|
|
|
2
|
|
|
2
|
|
||||
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||
Total acquisition-related costs—pre-tax
|
|
2
|
|
|
2
|
|
|
2
|
|
|
3
|
|
||||
Income taxes
(c)
|
|
1
|
|
|
1
|
|
|
1
|
|
|
(1
|
)
|
||||
Total acquisition-related costs—net of tax
|
|
1
|
|
|
1
|
|
|
1
|
|
|
4
|
|
||||
Certain significant items:
|
|
|
|
|
|
|
|
|
||||||||
Operational efficiency initiative
(d)
|
|
6
|
|
|
(17
|
)
|
|
5
|
|
|
(45
|
)
|
||||
Supply network strategy
(e)
|
|
(4
|
)
|
|
8
|
|
|
(1
|
)
|
|
11
|
|
||||
Other restructuring charges and cost-reduction/productivity initiatives
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
||||
Stand-up costs
(f)
|
|
—
|
|
|
5
|
|
|
—
|
|
|
17
|
|
||||
Other
(g)
|
|
(3
|
)
|
|
1
|
|
|
(1
|
)
|
|
1
|
|
||||
Total certain significant items—pre-tax
|
|
(1
|
)
|
|
(4
|
)
|
|
3
|
|
|
(17
|
)
|
||||
Income taxes
(c)
|
|
1
|
|
|
(7
|
)
|
|
1
|
|
|
(43
|
)
|
||||
Total certain significant items—net of tax
|
|
(2
|
)
|
|
3
|
|
|
2
|
|
|
26
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax
|
|
$
|
14
|
|
|
$
|
22
|
|
|
$
|
37
|
|
|
$
|
57
|
|
(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.
|
(d)
|
For the
three months ended July 2, 2017
, represents employee termination costs of $2 million, exit costs $1 million, consulting fees of $1 million, and
a net loss related to sales of certain manufacturing sites and products of $2 million. For the six months ended
July 2, 2017
, represents employee termination costs of $1 million, exit costs of $1 million, consulting fees of $1 million,
and
a net loss related to sales of certain manufacturing sites and products of $2 million.
|
(e)
|
For the three months ended
July 2, 2017
, represents accelerated depreciation of $1 million, and a reversal of previously accrued employee terminations costs of $5 million. For the
six months ended July 2, 2017
, represents accelerated depreciation of $2 million, consulting fees of $2 million, and a reversal of previously accrued employee terminations costs of $5 million.
|
(f)
|
Certain nonrecurring costs related to becoming an independent public company, such as the creation of standalone systems and infrastructure, site separation, new branding (including changes to the manufacturing process for required new packaging), and certain legal registration and patent assignment costs.
|
(g)
|
For the three months ended July 2, 2017, represents costs associated with changes to our operating model of $1 million, and income of $4 million related to an insurance recovery from commercial settlements in Mexico recorded in 2014 and 2016. For the six months ended July 2, 2017, represents costs associated with changes to our operating model of $3 million, and income of $4 million related to an insurance recovery from commercial settlements in Mexico recorded in 2014 and 2016. For the three and six months ended July 3, 2016, represents costs associated with changes to our operating model.
|
|
|
Three Months Ended
|
|
Six Months Ended
|
||||||||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
||||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
||||
Cost of sales:
|
|
|
|
|
|
|
|
|
||||||||
Purchase accounting adjustments
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
3
|
|
|
$
|
15
|
|
Accelerated depreciation
|
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
||||
Consulting fees
|
|
—
|
|
|
1
|
|
|
2
|
|
|
3
|
|
||||
Stand-up costs
|
|
—
|
|
|
1
|
|
|
—
|
|
|
2
|
|
||||
Other
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
||||
Total Cost of sales
|
|
3
|
|
|
11
|
|
|
8
|
|
|
22
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Selling, general & administrative expenses:
|
|
|
|
|
|
|
|
|
||||||||
Purchase accounting adjustments
|
|
2
|
|
|
2
|
|
|
3
|
|
|
3
|
|
||||
Accelerated depreciation
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
||||
Consulting fees
|
|
1
|
|
|
4
|
|
|
1
|
|
|
7
|
|
||||
Stand-up costs
|
|
—
|
|
|
4
|
|
|
—
|
|
|
15
|
|
||||
Other
|
|
—
|
|
|
1
|
|
|
2
|
|
|
1
|
|
||||
Total Selling, general & administrative expenses
|
|
3
|
|
|
12
|
|
|
6
|
|
|
27
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Research & development expenses:
|
|
|
|
|
|
|
|
|
||||||||
Purchase accounting adjustments
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
||||
Total Research & development expenses
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Amortization of intangible assets:
|
|
|
|
|
|
|
|
|
||||||||
Purchase accounting adjustments
|
|
18
|
|
|
18
|
|
|
36
|
|
|
35
|
|
||||
Total Amortization of intangible assets
|
|
18
|
|
|
18
|
|
|
36
|
|
|
35
|
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Restructuring (reversals)/ charges and certain acquisition-related costs:
|
|
|
|
|
|
|
|
|
||||||||
Integration costs
|
|
2
|
|
|
2
|
|
|
2
|
|
|
2
|
|
||||
Employee termination costs
|
|
(3
|
)
|
|
(24
|
)
|
|
(4
|
)
|
|
(23
|
)
|
||||
Exit costs
|
|
1
|
|
|
1
|
|
|
1
|
|
|
2
|
|
||||
Total Restructuring (reversals)/ charges and certain acquisition-related costs
|
|
—
|
|
|
(21
|
)
|
|
(1
|
)
|
|
(19
|
)
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Other (income)/deductions—net:
|
|
|
|
|
|
|
|
|
||||||||
Net loss/(gain) on sale of assets
|
|
2
|
|
|
6
|
|
|
2
|
|
|
(27
|
)
|
||||
Acquisition-related costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
||||
Other
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
||||
Total Other (income)/deductions—net
|
|
(2
|
)
|
|
6
|
|
|
(2
|
)
|
|
(26
|
)
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Provision for taxes on income
|
|
8
|
|
|
4
|
|
|
11
|
|
|
(17
|
)
|
||||
|
|
|
|
|
|
|
|
|
||||||||
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax
|
|
$
|
14
|
|
|
$
|
22
|
|
|
$
|
37
|
|
|
$
|
57
|
|
|
|
Six Months Ended
|
|
|
|||||||
|
|
July 2,
|
|
|
July 3,
|
|
|
%
|
|
||
(MILLIONS OF DOLLARS)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
||
Net cash provided by (used in):
|
|
|
|
|
|
|
|||||
Operating activities
|
|
$
|
299
|
|
|
$
|
188
|
|
|
59
|
|
Investing activities
|
|
(88
|
)
|
|
(31
|
)
|
|
*
|
|
||
Financing activities
|
|
(240
|
)
|
|
(651
|
)
|
|
(63
|
)
|
||
Effect of exchange-rate changes on cash and cash equivalents
|
|
7
|
|
|
(2
|
)
|
|
*
|
|
||
Net decrease in cash and cash equivalents
|
|
$
|
(22
|
)
|
|
$
|
(496
|
)
|
|
(96
|
)
|
|
July 2,
|
|
|
December 31,
|
|
||
(MILLIONS OF DOLLARS)
|
2017
|
|
|
2016
|
|
||
Cash and cash equivalents
|
$
|
705
|
|
|
$
|
727
|
|
Accounts receivable, net
(a)
|
975
|
|
|
913
|
|
||
Short-term borrowings
|
100
|
|
|
—
|
|
||
Current portion of long-term debt
|
750
|
|
|
—
|
|
||
Long-term debt
|
3,719
|
|
|
4,468
|
|
||
Working capital
|
1,800
|
|
|
2,273
|
|
||
Ratio of current assets to current liabilities
|
2.01:1
|
|
|
3.03:1
|
|
(a)
|
Accounts receivable are usually collected over a period of 60 to 90 days
.
For the six months ended
July 2, 2017
, compared with
December 31, 2016
, 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.
|
Description
|
Principal Amount
|
Interest Rate
|
Terms
|
2013 Senior Note due 2018
(a)
|
$750 million
|
1.875%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2018
|
2015 Senior Note due 2020
|
$500 million
|
3.450%
|
Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2020
|
2013 Senior Note due 2023
|
$1,350 million
|
3.250%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2023
|
2015 Senior Note due 2025
|
$750 million
|
4.500%
|
Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2025
|
2013 Senior Note due 2043
|
$1,150 million
|
4.700%
|
Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2043
|
(a)
|
We entered into interest rate swaps which are designated as cash flow hedges against interest rate exposure related principally to the anticipated future issuance of fixed-rate debt to be used primarily to refinance our
1.875%
2013 senior note due in 2018. See Notes to Condensed Consolidated Financial Statements—
Note 8B. Financial Instruments: Derivative Financial Instruments
—
Interest Rate Risk.
|
(MILLIONS OF DOLLARS)
|
Total
|
2017
|
2018 - 2019
|
2020 - 2021
|
Thereafter
|
||||||||||
Purchase obligation
|
$
|
65
|
|
$
|
9
|
|
$
|
23
|
|
$
|
33
|
|
$
|
—
|
|
•
|
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;
|
•
|
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;
|
•
|
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;
|
•
|
the possible impact of competing products, including generic alternatives, on our products and our ability to compete against such products;
|
•
|
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.
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Item 4.
|
Controls and Procedures
|
Item 1.
|
Legal Proceedings
|
Item 1A.
|
Risk Factors
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
|
Issuer Purchases of Equity Securities
|
|||
|
Total Number of Shares Purchased
(a)
|
Average Price Paid Per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Programs
(b)
|
Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
|
April 3 - April 30, 2017
|
650,736
|
$53.39
|
643,780
|
$1,340,810,236
|
May 1 - May 28, 2017
|
720,946
|
$58.58
|
719,971
|
$1,298,619,801
|
May 29 - July 2, 2017
|
773,245
|
$62.63
|
772,520
|
$1,250,227,170
|
|
2,144,927
|
$58.46
|
2,136,271
|
$1,250,227,170
|
(a)
|
The company repurchased 8,656 shares during the three-month period ended
July 2, 2017
, that were not part of the publicly announced share repurchase authorization. These shares were reacquired from employees to satisfy tax withholding requirements on the vesting of restricted shares from equity-based awards.
|
(b)
|
In December 2016, the company's Board of Directors authorized the repurchase of up to $1.5 billion of our outstanding common stock.
|
Item 3.
|
Defaults Upon Senior Securities
|
Item 4.
|
Mine Safety Disclosures
|
Item 5.
|
Other Information
|
Item 6.
|
Exhibits
|
|
Zoetis Inc.
|
|
|
|
|
August 8, 2017
|
By:
|
/S/ JUAN RAMÓN ALAIX
|
|
|
Juan Ramón Alaix
|
|
|
Chief Executive Officer and Director
|
|
|
|
August 8, 2017
|
By:
|
/S/ GLENN DAVID
|
|
|
Glenn David
|
|
|
Executive Vice President and
|
|
|
Chief Financial Officer
|
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