Zoetis(ZTS) - 2023 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Financial Statements The company presents unaudited condensed consolidated financial statements showing revenue growth and a decrease in cash Condensed Consolidated Statements of Income The company reports a 6% quarterly revenue increase to $2.18 billion and a 27% rise in net income to $671 million Q2 & H1 2023 Financial Performance (in millions, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | % Change | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $2,180 | $2,052 | 6.2% | $4,180 | $4,038 | 3.5% | | Income before taxes | $872 | $670 | 30.1% | $1,569 | $1,397 | 12.3% | | Net income attributable to Zoetis | $671 | $529 | 26.8% | $1,223 | $1,124 | 8.8% | | Diluted EPS | $1.45 | $1.12 | 29.5% | $2.64 | $2.38 | 10.9% | | Dividends declared per share | $0.375 | $0.325 | 15.4% | $0.750 | $0.650 | 15.4% | Condensed Consolidated Balance Sheets Total assets decreased to $13.75 billion, primarily due to a significant reduction in cash and cash equivalents Balance Sheet Comparison (in millions) | Account | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $6,183 | $7,506 | | Cash and cash equivalents | $1,717 | $3,581 | | Inventories | $2,701 | $2,345 | | Total Assets | $13,749 | $14,925 | | Total Current Liabilities | $1,769 | $3,167 | | Current portion of long-term debt | $0 | $1,350 | | Total Liabilities | $9,128 | $10,522 | | Total Equity | $4,621 | $4,403 | Condensed Consolidated Statements of Cash Flows Operating cash flow increased while a large debt repayment drove a significant use of cash in financing activities Cash Flow Summary for Six Months Ended June 30 (in millions) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $732 | $645 | | Net cash used in investing activities | ($296) | ($321) | | Capital expenditures | ($389) | ($261) | | Proceeds from sale of business | $93 | $0 | | Net cash used in financing activities | ($2,296) | ($1,155) | | Principal payments on long-term debt | ($1,350) | $0 | | Purchases of treasury stock | ($607) | ($812) | | Net decrease in cash and cash equivalents | ($1,864) | ($833) | Notes to Condensed Consolidated Financial Statements Notes detail strong companion animal product growth, a business sale, debt repayment, and a subsequent acquisition - Revenue from companion animal products grew 9% in Q2 2023 to $1.49 billion, while livestock revenue was flat at $671 million[24][25] - In Q2 2023, the company sold a majority interest in its pet insurance business, Pumpkin Insurance Services, for net cash proceeds of $93 million, recognizing a pre-tax gain of $101 million[29] - On February 1, 2023, the company redeemed in full its $1.35 billion 3.250% senior notes due 2023 upon maturity[40] - Subsequent to the quarter end, on August 3, 2023, Zoetis acquired PetMedix Ltd for upfront cash consideration of approximately $111 million[69] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 9% operational revenue growth driven by companion animal products, price increases, and volume gains Q2 2023 Revenue Growth Drivers | Driver | Contribution to Operational Growth | | :--- | :--- | | Price Growth | ~4% | | Volume Growth (Other in-line products) | ~2% | | Volume Growth (New products) | ~2% | | Volume Growth (Key dermatology) | ~1% | | Total Operational Growth | ~9% | - U.S. companion animal revenue growth was driven by the key dermatology portfolio, Solensia (for OA pain), and small animal vaccines[99][100] Adjusted Net Income Reconciliation (Q2 2023 vs Q2 2022, in millions) | Description | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | GAAP reported net income | $671 | $529 | | Purchase accounting adjustments | $34 | $31 | | Acquisition-related costs | $3 | $1 | | Certain significant items | ($56) | $6 | | Non-GAAP adjusted net income | $652 | $567 | - Net cash used in financing activities for H1 2023 was $2.30 billion, primarily due to the $1.35 billion repayment of senior notes and $607 million in treasury stock purchases[124] Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposure from foreign exchange and interest rates has not materially changed since year-end 2022 - There have been no material changes in the company's market risk exposure related to interest rates and foreign exchange since the year-ended December 31, 2022[135] Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - As of June 30, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures are effective[136] - No material changes to the company's internal control over financial reporting were identified during the most recent fiscal quarter[137] PART II — OTHER INFORMATION Legal Proceedings The company reports ongoing legal matters related to an environmental claim in Brazil and a tax case in the EU - The company is involved in an environmental proceeding in Ulianopolis, Brazil, regarding waste disposal, with the matter currently in the environmental assessment phase[60][61] - The company is awaiting a decision from the EU General Court regarding the Belgium "excess profit" tax scheme after a hearing on February 15, 2023[62] Risk Factors No material changes to the risk factors disclosed in the 2022 Annual Report on Form 10-K are reported - No material changes have occurred to the risk factors disclosed in the company's 2022 Annual Report on Form 10-K[139] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1.88 million shares in Q2 2023, with $2.0 billion remaining under its repurchase authorization Share Repurchases for Q2 2023 | Period | Total Shares Purchased (Program) | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2023 | 407,184 | $171.81 | | May 2023 | 759,092 | $176.77 | | June 2023 | 713,942 | $166.32 | | Total Q2 | 1,880,218 | $171.73 | - As of June 30, 2023, $2.0 billion remained under the company's $3.5 billion share repurchase authorization from December 2021[140] Other Information Two company executives adopted pre-arranged Rule 10b5-1 trading plans for future sales of company stock - In June 2023, executives Roxanne Lagano and Heidi Chen adopted Rule 10b5-1 trading plans for the sale of up to 10,807 and 9,905 shares, respectively[143] Exhibits This section lists all exhibits filed with the Form 10-Q, including required CEO and CFO certifications - Key exhibits filed include CEO/CFO certifications under Sarbanes-Oxley and corporate governance documents[144]