10-QPeriod: Q2 FY2018

Zoetis Inc. Quarterly Report for Q2 Ended Jun 30, 2018

Filed August 2, 2018For Securities:ZTS

Summary

Zoetis Inc. reported strong financial performance for the second quarter and the first half of 2018, demonstrating robust revenue growth and improved profitability. Total revenue increased by 12% in the second quarter and 11% for the first half of the year, driven by solid volume increases in both in-line and new products, particularly in the companion animal segment. The company also benefited from favorable foreign exchange movements, contributing to the reported growth. Profitability saw a significant boost, with net income attributable to Zoetis Inc. rising 55% for the quarter and 52% for the half-year. This was driven by higher revenues, improved cost of sales as a percentage of revenue due to manufacturing efficiencies and favorable foreign exchange, and a substantially lower effective tax rate resulting from the Tax Cuts and Jobs Act of 2017. Key operational drivers included strong performance in the companion animal segment, particularly in dermatology products and new offerings like Simparica®, across both U.S. and international markets. The international segment showed impressive growth, with a 15% revenue increase in the quarter and 16% for the half-year, fueled by both companion and livestock product sales. The company's effective tax rate dropped significantly due to the lower U.S. federal corporate tax rate and a beneficial tax adjustment, contributing to the substantial net income growth. Zoetis continues to invest in research and development, with R&D expenses increasing by 19% for the quarter, supporting future innovation.

Financial Highlights

52 data points
Beta

Revenue

$1.42B

68.4% Gross Margin

Net Income

$382.00M

27.0% Net Margin

EPS (Diluted)

$0.79

Total Assets

$8.60B

Cash & Equivalents

$1.56B

Free Cash Flow

$194.00M

Financial Statements
Beta
Revenue$1.42B
Cost of Revenue$447.00M
Gross Profit$968.00M
SG&A Expenses$359.00M
Operating Expenses$973.00M
Interest Expense$46.00M
Net Income$382.00M
EPS (Basic)$0.79
EPS (Diluted)$0.79
Shares Outstanding (Basic)483.80M
Shares Outstanding (Diluted)487.50M

Key Highlights

  • 1Strong revenue growth: Total revenue increased by 12% for the second quarter of 2018 and 11% for the first six months, driven by a 9% and 8% operational growth respectively, primarily from increased volume in key product lines.
  • 2Significant net income improvement: Net income attributable to Zoetis Inc. surged by 55% in the second quarter and 52% in the first half, showcasing enhanced profitability.
  • 3Lower effective tax rate: The effective tax rate decreased significantly from 28.4% in Q2 2017 to 12.6% in Q2 2018, and from 28.7% to 14.3% for the six-month period, largely due to the Tax Cuts and Jobs Act of 2017.
  • 4Companion Animal segment strength: The companion animal business continues to be a key growth driver, with revenue up 15% in the U.S. and 24% internationally for the quarter, bolstered by dermatology products and new offerings.
  • 5International market expansion: The International segment delivered robust performance with revenue up 15% in the quarter and 16% year-to-date, demonstrating successful global market penetration.
  • 6Increased R&D investment: Research and development expenses rose by 19% in the quarter and 13% year-to-date, reflecting Zoetis' commitment to innovation and future product development.
  • 7Improved Cost of Sales Efficiency: Cost of sales as a percentage of revenue decreased significantly, indicating improved manufacturing efficiencies and favorable foreign exchange impacts.

Frequently Asked Questions

The substantial increase in net income was primarily driven by strong revenue growth across both U.S. and international segments, improved gross margins due to cost efficiencies and favorable foreign exchange, and a significantly lower effective tax rate. The Tax Cuts and Jobs Act of 2017, which reduced the U.S. federal corporate tax rate, along with a beneficial tax adjustment related to the one-time mandatory deemed repatriation tax, substantially lowered the company's tax expense.

Both segments showed strong growth, but the International segment outpaced the U.S. in percentage terms. U.S. segment revenue grew by 9%, primarily driven by companion animal products. International segment revenue increased by 15%, also led by companion animal products but with significant contributions from livestock as well. The international segment benefited more from foreign currency tailwinds.

The Tax Cuts and Jobs Act significantly lowered Zoetis' effective tax rate. For the second quarter of 2018, the rate was 12.6% compared to 28.4% in the prior year. This reduction in tax expense, along with a discrete tax benefit from a measurement-period adjustment related to the repatriation tax, contributed substantially to the increase in net income. The company is still finalizing some aspects of the tax law's impact within the allowed measurement period.

Zoetis increased its R&D expenses by 19% in the second quarter and 13% year-to-date. This investment is attributed to increased headcount, project investments, unfavorable foreign exchange, higher compensation costs, and the inclusion of the Irish biologic therapeutics business acquired in 2017, demonstrating a continued focus on innovation and pipeline development.