Zoetis(ZTS) - 2024 Q4 - Annual Report

Part I Business Overview Zoetis is a global leader in the animal health industry, providing a diverse portfolio of products and services for companion animals and livestock Overview and Operating Segments Zoetis is a global leader in animal health, focusing on medicines, vaccines, and diagnostics for eight core species, operating in U.S. and International segments - Zoetis is a global leader in the animal health industry, commercializing products across eight core species and seven major product categories[8] 2024 Revenue by Operating Segment | Operating Segment | Revenue (in millions) | Percentage of Total Revenue | | :--- | :--- | :--- | | United States (U.S.) | $5,074 | 55% | | International | $4,102 | 44% | 2024 Revenue Breakdown for Key Markets | Market | Revenue (in millions) | Companion Animal % | Livestock % | | :--- | :--- | :--- | :--- | | United States | $5,074 | 80% | 20% | | Total International | $4,102 | 54% | 46% | | Australia | $319 | 53% | 47% | | Brazil | $414 | 41% | 59% | | Canada | $277 | 62% | 38% | | China | $270 | 69% | 31% | | United Kingdom | $314 | 78% | 22% | Products Zoetis's product portfolio is primarily composed of companion animal products (68% of revenue) and livestock products (31%), with top five lines contributing 41% of total revenue - Companion animal products represented approximately 68% of revenue, while livestock products represented approximately 31% for the year ended December 31, 2024[16][17] - The top two product lines, Simparica/Simparica Trio and Apoquel/Apoquel Chewable, contributed approximately 15% and 11% of revenue, respectively. The top five product lines contributed approximately 41% of revenue in 2024[27] - In 2024, the company divested its medicated feed additive product portfolio[19] - Key product categories include parasiticides, vaccines, dermatology, anti-infectives, pain and sedation, other pharmaceuticals, and animal health diagnostics[21] Operations and Strategy Zoetis operates globally in over 100 countries with 44% of 2024 revenue from international operations, supported by 4,050 sales specialists and a network of 22 manufacturing sites and over 110 CMOs - International operations accounted for 44% of total revenue for the year ended December 31, 2024, with products sold in over 100 countries[30] - The sales organization consists of approximately 4,050 employees as of December 31, 2024, who visit customers directly[33] - Sales to the company's largest customer, a U.S. veterinary distributor, represented approximately 14% of total revenue for 2024[36] - The global manufacturing network consists of 22 company-operated sites and over 110 third-party contract manufacturing organizations (CMOs)[42][45] Research and Development Zoetis invested $686 million in R&D in 2024, employing 1,600 people to manage over 300 programs focused on new product development and lifecycle innovation R&D Expenses (2022-2024) | Year | R&D Expense (in millions) | | :--- | :--- | | 2024 | $686 | | 2023 | $614 | | 2022 | $539 | - As of December 31, 2024, Zoetis employed approximately 1,600 people in its global R&D operations[41] - R&D efforts comprise more than 300 programs, focusing on both new product development and product lifecycle innovation[38] Competition and Intellectual Property Zoetis, the largest animal health company, faces intense competition from major players and generics, protecting its portfolio with approximately 5,500 granted patents despite key product patent expirations - Primary competitors include Boehringer Ingelheim Animal Health, Merck Animal Health, Elanco Animal Health, and IDEXX Laboratories[50] - The company holds approximately 5,500 granted patents and has 1,450 pending patent applications across more than 50 countries[54] - Patents for the active ingredient in Draxxin (tulathromycin) have expired in most major markets, leading to generic competition and a negative impact on sales[56] - Patents for the active ingredient of Excede/Naxcel (ceftiofur) have expired, with formulation patents expiring in the U.S. in July 2024[56] - The active ingredient patent for Cerenia has expired globally, and generic injectable versions are marketed in Europe, Canada, and Australia, with U.S. approval being pursued by competitors[56] Regulatory Environment Zoetis's products are extensively regulated by agencies like the FDA, USDA, and EPA in the U.S., and EMA, MARA, and MAPA internationally, also adhering to global data privacy laws like GDPR - In the U.S., animal health products are regulated by the FDA (pharmaceuticals), USDA (biologicals), and EPA (pesticides)[60][63][65] - Key international regulatory bodies include the EMA in the EU, VMD in the U.K., MARA in China, MAPA in Brazil, and APVMA in Australia[70][71][72][73][74] - The company is subject to global data privacy laws, such as the EU's GDPR, which require enhanced handling of personal data[70][78] Human Capital and Environmental Zoetis employed approximately 13,800 people worldwide in 2024, achieving 86% employee engagement and incurring $28 million in environmental-related expenditures - As of December 31, 2024, the company had approximately 13,800 employees worldwide (~6,700 in the U.S. and ~7,100 internationally)[81] - The employee engagement rate was 86% in 2024, and the global voluntary attrition rate was stable at 8%[84][87] 2024 Environmental Expenditures | Category | Expenditure (in millions) | | :--- | :--- | | Environmental-related capital expenditures | ~$5 | | Other environmental-related expenditures | ~$23 | Risk Factors The company faces diverse risks including intense competition, product dependence, manufacturing issues, extensive regulation, substantial indebtedness, and cybersecurity threats - The animal health industry is highly competitive, with pressure from large pharmaceutical companies, standalone businesses, and lower-priced generic alternatives[117] - The company's results are dependent on its top-selling products. The top five product lines contributed approximately 41% of revenue in 2024, making them a significant concentration risk[118] - Manufacturing problems, such as supply chain disruptions or quality control failures at one of the 22 manufacturing sites or over 110 CMOs, could cause inventory shortages and recalls[153] - The business is subject to substantial regulation from agencies like the FDA, USDA, and EPA, and failure to comply can result in fines, production shutdowns, and product withdrawals[164] - As of December 31, 2024, the company had approximately $6.7 billion of total unsecured indebtedness, which could make it difficult to satisfy obligations and limit operational flexibility[204] - Cyberattacks pose a significant risk due to the company's reliance on complex IT systems, with potential for data breaches, disclosure of confidential information, and operational disruptions[182] Cybersecurity Zoetis implements a 'Defense in Depth' cybersecurity program aligned with NIST, overseen by the Board, with regular assessments and a 24/7 SOC - The company's cybersecurity program is aligned to the NIST Cybersecurity Framework (CSF) and uses a "Defense in Depth" security approach[217] - An independent third party conducts comprehensive assessments of the cybersecurity program approximately every 18 months[217] - The Board of Directors, through the Audit Committee, oversees the company's enterprise risk management and information security program. The CISO presents updates at least annually to the full Board[223][225] Properties Zoetis operates approximately 184 owned and leased properties globally, totaling 11.4 million square feet, with the largest site in Kalamazoo, Michigan, supporting R&D and manufacturing - The company has approximately 184 properties totaling 11.4 million square feet worldwide[226] - The largest facility is an owned site in Kalamazoo, Michigan, which comprises approximately 1.6 million square feet for R&D and manufacturing[226] Legal Proceedings Zoetis is involved in various legal proceedings, including product liability and intellectual property claims, which management believes are unlikely to have a material adverse effect - The company is subject to claims and litigation in the ordinary course of business, including product liability, competition law, and patent litigation[228] - Management believes the likelihood of a material adverse effect from current legal proceedings is remote, but acknowledges that litigation is inherently unpredictable[229] Part II Market for Common Equity and Shareholder Matters Zoetis common stock is listed on the NYSE, with a new $6 billion share repurchase authorization approved in August 2024, and dividends declared at the Board's discretion - In August 2024, the Board of Directors authorized a new multi-year share repurchase program of up to $6 billion. As of December 31, 2024, $5.6 billion remained under this authorization[236] Issuer Purchases of Equity Securities (Q4 2024) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Oct 1 - Oct 31, 2024 | 406,138 | $187.74 | | Nov 1 - Nov 30, 2024 | 1,235,190 | $175.49 | | Dec 1 - Dec 31, 2024 | 1,475,700 | $175.85 | | Total | 3,117,028 | $177.26 | - The declaration and payment of dividends are at the discretion of the Board of Directors and depend on financial condition, operating results, and other factors[239] Management's Discussion and Analysis (MD&A) In 2024, Zoetis reported $9.26 billion in revenue, an 8% increase, with net income rising 6% to $2.49 billion, driven by strong U.S. segment growth and improved cost of sales Results of Operations Zoetis achieved $9.26 billion in revenue in 2024, an 8% increase, with net income of $2.49 billion, driven by companion animal products and improved cost of sales Financial Performance Summary (2022-2024) | (MILLIONS OF DOLLARS) | 2024 | 2023 | 2022 | % Change 24/23 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $9,256 | $8,544 | $8,080 | 8% | | Net income attributable to Zoetis | $2,486 | $2,344 | $2,114 | 6% | | Adjusted net income (a) | $2,693 | $2,457 | $2,297 | 10% | - Operational revenue growth of 11% in 2024 was primarily driven by price growth of approximately 6%, volume growth from new products of 3%, and volume growth from key dermatology products of 2%[314] - Cost of sales as a percentage of revenue decreased from 30.0% in 2023 to 29.4% in 2024, mainly due to price increases, favorable product mix, and lower freight costs[316] - R&D expenses increased by 12% to $686 million in 2024, driven by higher project investments and compensation-related costs[321] Operating Segment Results In 2024, the U.S. segment revenue grew 11% to $5.07 billion, while the International segment revenue increased 5% (10% operationally) to $4.10 billion, both driven by companion animal products - U.S. Segment: Revenue grew 11% to $5,074 million. Companion animal revenue increased 15%, driven by Simparica Trio, OA pain products (Librela, Solensia), and dermatology products. Livestock revenue declined 1%. Segment earnings increased 17% to $3,336 million[335][336][341] - International Segment: Revenue grew 5% (10% operationally) to $4,102 million. Companion animal operational revenue grew 13%, while livestock operational revenue grew 8%. Foreign exchange had a negative impact of 5% ($210 million). Segment earnings increased 4% (11% operationally) to $2,118 million[337][338][341] Non-GAAP Financial Measures Management uses non-GAAP measures like 'operational growth' and 'adjusted net income' to assess core performance, with adjusted net income increasing 10% to $2.69 billion in 2024 Reconciliation of GAAP Net Income to Non-GAAP Adjusted Net Income | (MILLIONS OF DOLLARS) | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | GAAP reported net income attributable to Zoetis | $2,486 | $2,344 | 6% | | Purchase accounting adjustments—net of tax | 109 | 127 | (14%) | | Acquisition and divestiture-related costs—net of tax | 14 | 7 | * | | Certain significant items—net of tax | 84 | (21) | * | | Non-GAAP adjusted net income | $2,693 | $2,457 | 10% | Reconciliation of GAAP Diluted EPS to Non-GAAP Adjusted Diluted EPS | | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | GAAP reported EPS attributable to Zoetis—diluted | $5.47 | $5.07 | 8% | | Purchase accounting adjustments—net of tax | 0.24 | 0.28 | (14%) | | Acquisition and divestiture-related costs—net of tax | 0.03 | 0.02 | 50% | | Certain significant items—net of tax | 0.18 | (0.05) | * | | Non-GAAP adjusted EPS—diluted | $5.92 | $5.32 | 11% | Liquidity and Capital Resources Zoetis maintained strong liquidity in 2024 with $1.99 billion in cash, generating $2.95 billion from operations, and managing $6.57 billion in debt, supported by a $1.0 billion undrawn credit facility Selected Liquidity Measures (as of Dec 31) | (MILLIONS OF DOLLARS) | 2024 | 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,987 | $2,041 | | Working capital | $2,574 | $4,454 | | Long-term debt (including current portion) | $6,570 | $6,564 | - Net cash provided by operating activities increased to $2,953 million in 2024 from $2,353 million in 2023, primarily due to higher net income and favorable changes in working capital[377] - The company has a $1.0 billion senior unsecured revolving credit facility expiring in December 2027, which was undrawn as of December 31, 2024[382][551] - During 2024, 10.4 million shares were repurchased for $1.8 billion[397] Quantitative and Qualitative Disclosures About Market Risk Zoetis is exposed to foreign exchange and interest rate risks, hedging with derivatives, with a 10% USD change impacting CTA by $91 million and a 100-basis point SOFR increase raising interest expense by $3 million - The company's primary net foreign currency exposures are the Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese renminbi, and euro[405] - A hypothetical 10% change in the U.S. dollar against all other currencies would change the amount recorded in cumulative translation adjustment (CTA) related to net investment hedges by approximately $91 million[407] - The company's outstanding debt is predominantly fixed-rate. However, interest rate swaps effectively convert a portion of this debt to a variable rate based on SOFR. A 100-basis point increase in SOFR would increase annual interest expense by approximately $3 million[410][411] Financial Statements and Supplementary Data This section presents Zoetis's audited consolidated financial statements for 2024, including the auditor's unqualified opinion and critical audit matters regarding tax benefits and rebate accruals Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on Zoetis's 2024 financial statements and internal controls, highlighting critical audit matters for unrecognized tax benefits and U.S. segment rebate accruals - KPMG LLP issued an unqualified opinion, stating the financial statements are presented fairly in all material respects[419] - A critical audit matter was the evaluation of gross unrecognized tax benefits of $213 million, which required complex judgment and specialized tax skills to assess[424][425] - A second critical audit matter was assessing the U.S. segment's rebate accrual, due to the variety of programs and challenging auditor judgment required to estimate the accrual[427][428] Consolidated Financial Statements The 2024 consolidated financial statements show $9.256 billion in revenue, $2.486 billion in net income, $14.237 billion in total assets, and $2.953 billion in cash from operations Consolidated Statement of Income (Year Ended Dec 31, 2024) | (MILLIONS OF DOLLARS) | Amount | | :--- | :--- | | Revenue | $9,256 | | Income before provision for taxes on income | $3,133 | | Net income attributable to Zoetis Inc. | $2,486 | | Diluted Earnings per share | $5.47 | Consolidated Balance Sheet (As of Dec 31, 2024) | (MILLIONS OF DOLLARS) | Amount | | :--- | :--- | | Total current assets | $5,986 | | Total assets | $14,237 | | Total current liabilities | $3,412 | | Total liabilities | $9,467 | | Total Zoetis Inc. equity | $4,770 | Consolidated Statement of Cash Flows (Year Ended Dec 31, 2024) | (MILLIONS OF DOLLARS) | Amount | | :--- | :--- | | Net cash provided by operating activities | $2,953 | | Net cash used in investing activities | ($315) | | Net cash used in financing activities | ($2,660) | | Net decrease in cash and cash equivalents | ($54) | Selected Notes to Consolidated Financial Statements The notes detail revenue disaggregation, the 2024 divestiture of medicated feed additive portfolio for $292 million, a contested IRS audit for $450 million, and $6.65 billion in outstanding long-term debt - On October 31, 2024, the company completed the divestiture of its medicated feed additive product portfolio to Phibro Animal Health for net proceeds of $292 million, resulting in a pre-tax loss of $25 million[525] - The IRS is auditing tax years 2017-2018 and has proposed adjustments related to the one-time mandatory deemed repatriation tax. The proposed additional tax liability is approximately $450 million, which Zoetis disagrees with and is protesting[547][548] - As of December 31, 2024, the company had $6.65 billion in principal amount of senior notes outstanding, with maturities ranging from 2025 to 2050[558][560] - Sales to the largest customer, a U.S. veterinary distributor, accounted for approximately 14% of total revenue in 2024[521] Controls and Procedures Management, including the CEO and CFO, concluded that Zoetis's disclosure controls and internal control over financial reporting were effective as of December 31, 2024, a conclusion affirmed by KPMG LLP - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[650] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2024, a conclusion audited and affirmed by KPMG LLP[651] Part III Directors, Executive Officers, Corporate Governance, and Other Matters This section incorporates by reference information from the company's 2025 Proxy Statement regarding directors, executive officers, corporate governance, executive compensation, security ownership, and principal accountant fees - Information regarding directors, executive officers, corporate governance (Item 10), executive compensation (Item 11), security ownership (Item 12), certain relationships and director independence (Item 13), and principal accountant fees (Item 14) is incorporated by reference from the registrant's 2025 Proxy Statement[4][657][658][659][660][662] Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Form 10-K, including key corporate documents and debt agreements, many incorporated by reference - This section provides a comprehensive index of all exhibits filed with or incorporated by reference into the Form 10-K, including the Restated Certificate of Incorporation, Amended and Restated By-laws, various debt indentures, and management compensation plans[667][669][670]