10-QPeriod: Q3 FY2019

Zoetis Inc. Quarterly Report for Q3 Ended Aug 6, 2019

Filed August 6, 2019For Securities:ZTS

Summary

Zoetis Inc. reported a solid performance for the second quarter and first half of 2019, demonstrating revenue growth driven by a combination of price increases, volume growth from in-line products (particularly dermatology), and contributions from the Abaxis acquisition. While overall net income saw a slight decline year-over-year for both periods, this was largely due to an unfavorable comparison with the prior year's tax benefits and the impact of new tax provisions like GILTI. Adjusted net income, which excludes certain non-recurring items and purchase accounting adjustments, showed robust growth, underscoring the underlying strength of the company's core operations. The company continues to expand its global reach, with both the U.S. and International segments contributing to revenue growth, although the International segment experienced an unfavorable foreign exchange impact. Investment in Research and Development remains strong, supporting future innovation. Management's proactive approach to managing foreign exchange risk and a healthy balance sheet, including ample cash reserves and undrawn credit facilities, position Zoetis favorably amidst a dynamic market.

Financial Highlights

54 data points
Beta

Revenue

$1.58B

69.8% Gross Margin

Net Income

$433.00M

27.3% Net Margin

EPS (Diluted)

$0.90

Total Assets

$11.27B

Cash & Equivalents

$1.81B

Free Cash Flow

$378.00M

Financial Statements
Beta
Revenue$1.58B
Cost of Revenue$479.00M
Gross Profit$1.10B
SG&A Expenses$391.00M
Operating Expenses$1.05B
Interest Expense$56.00M
Net Income$433.00M
EPS (Basic)$0.91
EPS (Diluted)$0.90
Shares Outstanding (Basic)477.80M
Shares Outstanding (Diluted)481.50M

Key Highlights

  • 1Total revenue increased by 9% to $1.55 billion for the three months ended June 30, 2019, and by 8% to $3.00 billion for the six months ended June 30, 2019, compared to the prior year periods.
  • 2Operational revenue growth, excluding foreign exchange impacts, was particularly strong at 14% for the quarter and 12% for the six months, driven by the Abaxis acquisition, price increases, and volume growth in key product lines.
  • 3Net income attributable to Zoetis Inc. decreased by 3% to $371 million for the quarter and by 7% to $683 million for the six months, primarily due to unfavorable tax impacts compared to the prior year.
  • 4Adjusted net income, a non-GAAP measure, demonstrated strong growth, increasing by 16% to $436 million for the quarter and by 16% to $860 million for the six months, indicating healthy underlying operational performance.
  • 5The company reported an effective tax rate of 18.5% for the quarter and 18.3% for the six months, compared to 12.6% and 14.3% respectively in the prior year, largely due to tax law changes and the absence of significant prior-year tax benefits.
  • 6Cash and cash equivalents increased to $1.76 billion as of June 30, 2019, from $1.60 billion as of December 31, 2018, supported by strong operating cash flows.
  • 7The acquisition of Abaxis contributed significantly to revenue growth and was well-integrated, enhancing the company's diagnostics capabilities.

Frequently Asked Questions

Revenue growth in the second quarter of 2019 was primarily driven by the acquisition of Abaxis, which contributed approximately 5% to the growth. This was supplemented by increased volume from in-line products (especially key dermatology products), price increases, and volume growth from new products.

The reported decrease in net income was primarily due to unfavorable year-over-year comparisons. The second quarter and first half of 2018 benefited from significant discrete tax benefits related to the Tax Cuts and Jobs Act. Additionally, the impact of new tax provisions like GILTI in 2019 and changes in the jurisdictional mix of earnings contributed to a higher effective tax rate in the current periods.

Zoetis maintains a strong liquidity position, with $1.76 billion in cash and cash equivalents as of June 30, 2019. The company has a $1.0 billion revolving credit facility, none of which was drawn as of the reporting date. Long-term debt primarily consists of senior notes, and the company was in compliance with all financial covenants. The company also has active share repurchase programs.

The acquisition of Abaxis, completed in July 2018, has been a significant contributor to Zoetis' revenue growth, particularly in the diagnostics segment. It added approximately 5% to revenue growth in both the second quarter and the first half of 2019. The integration of Abaxis also resulted in increased amortization of intangible assets and acquisition-related costs, which are detailed in the financial statements.