10-QPeriod: Q1 FY2019

Zoetis Inc. Quarterly Report for Q1 Ended Mar 31, 2019

Filed May 2, 2019For Securities:ZTS

Summary

Zoetis Inc. reported solid financial results for the first quarter of 2019, with total revenue increasing by 7% to $1,455 million, compared to $1,366 million in the prior year period. On an operational basis, excluding the impact of foreign exchange, revenue grew by 11%. This growth was primarily driven by the acquisition of Abaxis contributing 5% to revenue, alongside price increases of 4%, and volume growth from in-line and new products. Net income attributable to Zoetis Inc. decreased by 11% to $312 million, or $0.65 per diluted share, compared to $352 million, or $0.72 per diluted share, in the first quarter of 2018. This decrease was influenced by higher costs, including a significant increase in the amortization of intangible assets related to the Abaxis acquisition and higher interest expenses from recent debt issuances. Despite the year-over-year net income decline, the company demonstrated strong operational performance and continues to invest in growth initiatives, including research and development.

Financial Highlights

52 data points
Beta

Revenue

$1.46B

64.4% Gross Margin

Net Income

$312.00M

21.4% Net Margin

EPS (Diluted)

$0.65

Total Assets

$10.88B

Cash & Equivalents

$1.73B

Free Cash Flow

$326.00M

Financial Statements
Beta
Revenue$1.46B
Cost of Revenue$518.00M
Gross Profit$937.00M
SG&A Expenses$369.00M
Operating Expenses$1.07B
Interest Expense$56.00M
Net Income$312.00M
EPS (Basic)$0.65
EPS (Diluted)$0.65
Shares Outstanding (Basic)479.60M
Shares Outstanding (Diluted)483.10M

Key Highlights

  • 1Total revenue increased 7% to $1,455 million, with 11% operational growth, driven by the Abaxis acquisition and price increases.
  • 2Net income attributable to Zoetis Inc. decreased 11% to $312 million ($0.65/share), impacted by higher amortization and interest expenses.
  • 3Cost of Sales as a percentage of revenue increased to 35.6% from 32.7%, primarily due to Abaxis integration and inventory costing adjustments.
  • 4Amortization of intangible assets surged 65% due to the Abaxis acquisition's intangible assets recognized at fair value.
  • 5Interest expense increased 19% reflecting the impact of the $1.5 billion senior notes issuance in August 2018.
  • 6The company's effective tax rate increased to 18.1% from 16.1%, mainly due to the new GILTI tax provision.
  • 7Cash and cash equivalents increased to $1,728 million, demonstrating a strong liquidity position.

Frequently Asked Questions

Zoetis' revenue growth was primarily driven by the acquisition of Abaxis, which contributed approximately 5% to revenue. Additionally, price increases accounted for about 4% of growth, with further contributions from increased volumes of in-line products (notably dermatology) and new products. These positive drivers were partially offset by unfavorable foreign exchange movements, which decreased reported revenue growth by approximately 4%.

The decrease in net income was primarily due to increased costs and expenses. Key factors include a significant 65% increase in amortization of intangible assets, largely attributed to the Abaxis acquisition and the associated fair value adjustments. Interest expense also rose by 19% due to the senior notes issued in August 2018. Additionally, cost of sales as a percentage of revenue increased, impacting gross margins.

The acquisition of Abaxis, completed in July 2018, significantly impacted the first quarter 2019 results. It contributed to revenue growth and increased costs, including amortization of intangible assets and selling, general, and administrative expenses. The integration of Abaxis also led to increased restructuring and acquisition-related costs.

Zoetis maintained a strong liquidity position, with cash and cash equivalents increasing to $1,728 million at the end of the quarter. The company also reported a healthy working capital of $3,297 million and a current ratio of 4.05:1, indicating its ability to meet short-term obligations. The company was in compliance with its financial covenants under its credit facility.