Zoetis Reports Fourth Quarter and Full Year 2020 Results

ZOETIS INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME(a)

(UNAUDITED)

(millions of dollars, except per share data)

Fourth Quarter

Full Year

2020

2019

% Change

2020

2019

% Change

Revenue

$

1,807

$

1,674

8

$

6,675

$

6,260

7

Costs and expenses:

Cost of sales

601

530

13

2,057

1,992

3

Selling, general and administrative expenses

520

472

10

1,726

1,638

5

Research and development expenses

133

132

1

463

457

1

Amortization of intangible assets

40

40

—

160

155

3

Restructuring charges and certain acquisition-related costs

3

18

(83)

25

51

(51)

Interest expense

58

56

4

231

223

4

Other (income)/deductions–net

32

(11

)

*

17

(57

)

*

Income before provision for taxes on income

420

437

(4)

1,996

1,801

11

Provision for taxes on income

62

53

17

360

301

20

Net income before allocation to noncontrolling interests

358

384

(7)

1,636

1,500

9

Less: Net loss attributable to noncontrolling interests

(1

)

—

*

(2

)

—

*

Net income attributable to Zoetis

$

359

$

384

(7)

$

1,638

$

1,500

9

Earnings per share—basic

$

0.75

$

0.81

(7)

$

3.44

$

3.14

10

Earnings per share—diluted

$

0.75

$

0.80

(6)

$

3.42

$

3.11

10

Weighted-average shares used to calculate earnings per share

Basic

475.6

476.4

475.5

478.1

Diluted

478.7

480.2

478.6

481.8

(a)

The Condensed Consolidated Statements of Income present the three and twelve months ended December 31, 2020 and 2019. Subsidiaries operating outside the U.S. are included for the three and twelve months ended November 30, 2020 and 2019.

* Calculation not meaningful.

ZOETIS INC.

RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION

CERTAIN LINE ITEMS

(UNAUDITED)

(millions of dollars, except per share data)

Quarter Ended December 31, 2020

GAAP
Reported(a)

Purchase
Accounting
Adjustments

Acquisition-
Related
Costs(1)

Certain
Significant
Items(2)

Non-GAAP
Adjusted(b)

Cost of sales

$

601

$

(2

)

$

—

$

(15

)

$

584

Gross profit

1,206

2

—

15

1,223

Selling, general and administrative expenses

520

(7

)

—

(2

)

511

Research and development expenses

133

—

—

—

133

Amortization of intangible assets

40

(34

)

—

—

6

Restructuring charges and certain acquisition-related costs

3

—

(3

)

—

—

Other (income)/deductions–net

32

—

—

(22

)

10

Income before provision for taxes on income

420

43

3

39

505

Provision for taxes on income

62

9

(1

)

(2

)

68

Net income attributable to Zoetis

359

34

4

41

438

Earnings per common share attributable to Zoetis–diluted

0.75

0.07

0.01

0.08

0.91

Quarter Ended December 31, 2019

GAAP
Reported(a)

Purchase
Accounting
Adjustments

Acquisition-
Related
Costs(1)

Certain
Significant
Items(2)

Non-GAAP
Adjusted(b)

Cost of sales

$

530

$

(2

)

$

—

$

(1

)

$

527

Gross profit

1,144

2

—

1

1,147

Selling, general and administrative expenses

472

(18

)

—

(2

)

452

Research and development expenses

132

(1

)

—

—

131

Amortization of intangible assets

40

(34

)

—

—

6

Restructuring charges and certain acquisition-related costs

18

—

(10

)

(8

)

—

Other (income)/deductions–net

(11

)

—

—

—

(11

)

Income before provision for taxes on income

437

55

10

11

513

Provision for taxes on income

53

19

1

—

73

Net income attributable to Zoetis

384

36

9

11

440

Earnings per common share attributable to Zoetis–diluted

0.80

0.08

0.02

0.02

0.92

(a)

The Condensed Consolidated Statements of Income present the quarter ended December 31, 2020 and 2019. Subsidiaries operating outside the U.S. are included for the quarter ended November 30, 2020 and 2019.

(b)

Non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS are not, and should not be viewed as, substitutes for U.S. GAAP net income and its components and diluted EPS. Despite the importance of these measures to management in goal setting and performance measurement, non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS are non-GAAP financial measures that have no standardized meaning prescribed by U.S. GAAP and, therefore, have limits in their usefulness to investors. Because of the non-standardized definitions, non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS (unlike U.S. GAAP net income and its components and diluted EPS) may not be comparable to the calculation of similar measures of other companies. Non-GAAP adjusted net income and its components, and non-GAAP adjusted diluted EPS are presented solely to permit investors to more fully understand how management assesses performance.

See Notes to Reconciliation of GAAP Reported to Non-GAAP Adjusted Information for notes (1) and (2).

ZOETIS INC.

RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION

CERTAIN LINE ITEMS

(UNAUDITED)

(millions of dollars, except per share data)

Twelve Months Ended December 31, 2020

GAAP
Reported(a)

Purchase
Accounting
Adjustments

Acquisition-
Related
Costs(1)

Certain
Significant
Items(2)

Non-GAAP
Adjusted(b)

Cost of sales

$

2,057

$

(8

)

$

—

$

(19

)

$

2,030

Gross profit

4,618

8

—

19

4,645

Selling, general and administrative expenses

1,726

(54

)

—

(13

)

1,659

Research and development expenses

463

(1

)

—

—

462

Amortization of intangible assets

160

(135

)

—

—

25

Restructuring charges and certain acquisition-related costs

25

—

(18

)

(7

)

—

Other (income)/deductions–net

17

—

—

(4

)

13

Income before provision for taxes on income

1,996

198

18

43

2,255

Provision for taxes on income

360

56

(1

)

(2

)

413

Net income attributable to Zoetis

1,638

142

19

45

1,844

Earnings per common share attributable to Zoetis–diluted

3.42

0.30

0.04

0.09

3.85

Twelve Months Ended December 31, 2019

GAAP
Reported(a)

Purchase
Accounting
Adjustments

Acquisition-
Related
Costs(1)

Certain
Significant
Items(2)

Non-GAAP
Adjusted(b)

Cost of sales

$

1,992

$

(24

)

$

—

$

(77

)

$

1,891

Gross profit

4,268

24

—

77

4,369

Selling, general and administrative expenses

1,638

(72

)

—

(2

)

1,564

Research and development expenses

457

(2

)

—

—

455

Amortization of intangible assets

155

(136

)

—

—

19

Restructuring charges and certain acquisition-related costs

51

—

(43

)

(8

)

—

Other (income)/deductions–net

(57

)

—

—

20

(37

)

Income before provision for taxes on income

1,801

234

43

67

2,145

Provision for taxes on income

301

78

7

4

390

Net income attributable to Zoetis

1,500

156

36

63

1,755

Earnings per common share attributable to Zoetis–diluted

3.11

0.32

0.08

0.13

3.64

(a)

The Condensed Consolidated Statements of Income present the twelve months ended December 31, 2020 and 2019. Subsidiaries operating outside the U.S. are included for the twelve months ended November 30, 2020 and 2019.

(b)

Non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS are not, and should not be viewed as, substitutes for U.S. generally accepted accounting principles (GAAP) net income and its components and diluted EPS. Despite the importance of these measures to management in goal setting and performance measurement, non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS are non-GAAP financial measures that have no standardized meaning prescribed by U.S. GAAP and, therefore, have limits in their usefulness to investors. Because of the non-standardized definitions, non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS (unlike U.S. GAAP net income and its components and diluted EPS) may not be comparable to the calculation of similar measures of other companies. Non-GAAP adjusted net income and its components, and non-GAAP adjusted diluted EPS are presented solely to permit investors to more fully understand how management assesses performance.

See Notes to Reconciliation of GAAP Reported to Non-GAAP Adjusted Information for notes (1) and (2).

ZOETIS INC.

NOTES TO RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION

CERTAIN LINE ITEMS

(UNAUDITED)

(millions of dollars)

(1) Acquisition-related costs include the following:

Fourth Quarter

Full Year

2020

2019

2020

2019

Integration costs(a)

$

2

$

5

$

17

$

18

Restructuring charges(b)

1

5

1

25

Total acquisition-related costs—pre-tax

3

10

18

43

Income taxes(c)

(1

)

1

(1

)

7

Total acquisition-related costs—net of tax

$

4

$

9

$

19

$

36

(a) 

Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and the integration of systems and processes. Included in Restructuring charges and certain acquisition-related costs.

(b) 

Represents employee termination costs, included in Restructuring charges and certain acquisition-related costs.

(c) 

Included in Provision for taxes on income. Income taxes include the tax effect of the associated pre-tax amounts, calculated by determining the jurisdictional location of the pre-tax amounts and applying that jurisdiction's applicable tax rate. For the twelve months ended December 31, 2020, also includes a tax charge related to a remeasurement of deferred taxes resulting from the integration of acquired businesses.

(2) Certain significant items include the following:

Fourth Quarter

Full Year

2020

2019

2020

2019

Operational efficiency initiative(a)

$

—

$

—

$

(18

)

$

(20

)

Supply network strategy(b)

—

—

4

7

Other restructuring charges and cost-reduction/productivity initiatives(c)

—

8

7

8

Certain asset impairment charges(d)

37

—

37

—

Other(e)

2

3

13

72

Total certain significant items—pre-tax

39

11

43

67

Income taxes(f)

(2

)

—

(2

)

4

Total certain significant items—net of tax

$

41

$

11

$

45

$

63

(a) 

Represents a net gain resulting from net cash proceeds received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites, included in Other (income)/deductions-net.

(b) 

Represents consulting fees, included in Cost of sales, related to cost-reduction and productivity initiatives.

(c) 

Represents employee termination costs incurred as a result of the CEO transition and other cost-reduction and productivity initiatives, included in Restructuring charges and certain acquisition-related costs.

(d)

For the quarter and twelve months ended December 31, 2020, primarily represents asset impairment charges related to:

• Developed technology rights in our precision livestock farming and aquatic health businesses, included in Other (income)/deductions-net;
• Inventory in our precision livestock farming business, included in Cost of sales; and
• Property, plant and equipment in our precision livestock farming business, included in Other (income)/deductions-net.

(e)

For the quarter and twelve months ended December 31, 2020, primarily represents the modification of share-based compensation related to CEO transition costs, included in Selling, general and administrative expenses. For the twelve months ended December 31, 2019, represents a change in estimate related to inventory costing, included in Cost of sales.

(f)

Included in Provision for taxes on income. Income taxes include the tax effect of the associated pre-tax amounts, calculated by determining the jurisdictional location of the pre-tax amounts and applying that jurisdiction's applicable tax rate. For the quarter and twelve months ended December 31, 2020, also includes a tax charge related to changes in valuation allowance related to impairments of acquired businesses.

ZOETIS INC.

ADJUSTED SELECTED COSTS AND EXPENSES(a)

(UNAUDITED)

(millions of dollars)

Fourth Quarter

% Change

2020

2019

Total

Foreign
Exchange

Operational(b)

Adjusted cost of sales

$

584

$

527

11%

—%

11%

As a percent of revenue

32.3

%

31.5

%

NA

NA

NA

Adjusted SG&A expenses

511

452

13%

—%

13%

Adjusted R&D expenses

133

131

2%

2%

—%

Adjusted net income attributable to Zoetis

438

440

—%

(3)%

3%

Full Year

% Change

2020

2019

Total

Foreign
Exchange

Operational(b)

Adjusted cost of sales

$

2,030

$

1,891

7%

(1)%

8%

As a percent of revenue

30.4

%

30.2

%

NA

NA

NA

Adjusted SG&A expenses

1,659

1,564

6%

(1)%

7%

Adjusted R&D expenses

462

455

2%

—%

2%

Adjusted net income attributable to Zoetis

1,844

1,755

5%

(5)%

10%

(a) 

Adjusted cost of sales, adjusted selling, general, and administrative (SG&A) expenses, adjusted research and development (R&D) expenses, and adjusted net income attributable to Zoetis (non-GAAP financial measures) are defined as the corresponding reported U.S. GAAP income statement line items excluding purchase accounting adjustments, acquisition-related costs, and certain significant items. These adjusted income statement line item measures are not, and should not be viewed as, substitutes for the corresponding U.S. GAAP line items. The corresponding U.S. GAAP line items and reconciliations of reported to adjusted information are provided in Condensed Consolidated Statements of Income and Reconciliation of GAAP Reported to Non-GAAP Adjusted Information.

(b) 

Operational growth (a non-GAAP financial measure) is defined as growth excluding the impact of foreign exchange.

ZOETIS INC.

2021 GUIDANCE

Selected Line Items
(millions of dollars, except per share amounts)

Full Year 2021

Revenue

$7,400 to $7,550

Operational growth(a)

9% to 11%

Adjusted cost of sales as a percentage of revenue(b)

Approximately 30%

Adjusted SG&A expenses(b)

$1,775 to $1,850

Adjusted R&D expenses(b)

$500 to $520

Adjusted interest expense and other (income)/deductions-net(b)

Approximately $260

Effective tax rate on adjusted income(b)

Approximately 20%

Adjusted diluted EPS(b)

$4.36 to $4.46

Adjusted net income(b)

$2,080 to $2,130

Operational growth(a)(c)

9% to 12%

Certain significant items and acquisition-related costs(d)

$15 - $25

The guidance reflects foreign exchange rates as of late January 2021.

Reconciliations of 2021 reported guidance to 2021 adjusted guidance follows:

(millions of dollars, except per share amounts)

Reported

Certain significant

items and

acquisition-related

costs(d)

Purchase

accounting

Adjusted(b)

Cost of sales as a percentage of revenue

~ 30.3%

~ (0.2%)

~ (0.1%)

~ 30%

SG&A expenses

$1,820 to $1,895

~ $(45)

$1,775 to $1,850

R&D expenses

$501 to $521

~ $(1)

$500 to $520

Interest expense and other (income)/deductions

~ $260

~ $260

Effective tax rate

~ 20%

~ 20%

Diluted EPS

$4.02 to $4.14

$0.03 to $0.05

~ $0.29

$4.36 to $4.46

Net income attributable to Zoetis

$1,915 to $1,975

$15 to $25

~ $140

$2,080 to $2,130

Operational growth (a non-GAAP financial measure) excludes the impact of foreign exchange.

(b) 

Adjusted net income and its components and adjusted diluted EPS are defined as reported U.S. GAAP net income and its components and reported diluted EPS excluding purchase accounting adjustments, acquisition-related costs and certain significant items. Adjusted cost of sales, adjusted SG&A expenses, adjusted R&D expenses, and adjusted interest expense and other (income)/deductions are income statement line items prepared on the same basis, and, therefore, components of the overall adjusted income measure. Despite the importance of these measures to management in goal setting and performance measurement, adjusted net income and its components and adjusted diluted EPS are non-GAAP financial measures that have no standardized meaning prescribed by U.S. GAAP and, therefore, have limits in their usefulness to investors. Because of the non-standardized definitions, adjusted net income and its components and adjusted diluted EPS (unlike U.S. GAAP net income and its components and diluted EPS) may not be comparable to the calculation of similar measures of other companies. Adjusted net income and its components and adjusted diluted EPS are presented solely to permit investors to more fully understand how management assesses performance. Adjusted net income and its components and adjusted diluted EPS are not, and should not be viewed as, substitutes for U.S. GAAP net income and its components and diluted EPS.

(c) 

We do not provide a reconciliation of forward-looking non-GAAP adjusted net income operational growth to the most directly comparable U.S. GAAP reported financial measure because we are unable to calculate with reasonable certainty the foreign exchange impact of unusual gains and losses, acquisition-related expenses, potential future asset impairments and other certain significant items, without unreasonable effort. The foreign exchange impacts of these items are uncertain, depend on various factors, and could have a material impact on U.S. GAAP reported results for the guidance period.

(d) 

Primarily includes certain nonrecurring costs related to acquisitions and other charges.

ZOETIS INC.

CONSOLIDATED REVENUE BY SEGMENT(a) AND SPECIES

(UNAUDITED)

(millions of dollars)

Fourth Quarter

% Change

2020

2019

Total

Foreign

Exchange

Operational(b)

Revenue:

Companion Animal

$

978

$

784

25

%

—

%

25

%

Livestock

806

868

(7)

%

(2)

%

(5)

%

Contract Manufacturing & Human Health

23

22

5

%

6

%

(1)

%

Total Revenue

$

1,807

$

1,674

8

%

(1)

%

9

%

U.S.

Companion Animal

$

634

$

489

30

%

—

%

30

%

Livestock

318

372

(15)

%

—

%

(15)

%

Total U.S. Revenue

$

952

$

861

11

%

—

%

11

%

International

Companion Animal

$

344

$

295

17

%

—

%

17

%

Livestock

488

496

(2)

%

(4)

%

2

%

Total International Revenue

$

832

$

791

5

%

(2)

%

7

%

Companion Animal:

Dogs and Cats

$

913

$

719

27

%

—

%

27

%

Horses

65

65

—

%

—

%

—

%

Total Companion Animal Revenue

$

978

$

784

25

%

—

%

25

%

Livestock:

Cattle

$

451

$

506

(11)

%

(3)

%

(8)

%

Swine

167

162

3

%

—

%

3

%

Poultry

125

142

(12)

%

(2)

%

(10)

%

Fish

47

44

7

%

—

%

7

%

Sheep and other

16

14

14

%

1

%

13

%

Total Livestock Revenue

$

806

$

868

(7)

%

(2)

%

(5)

%

(a) 

For a description of each segment, see Zoetis' most recent Annual Report on Form 10-K.

(b) 

Operational revenue growth (a non-GAAP financial measure) is defined as revenue growth excluding the impact of foreign exchange.

ZOETIS INC.

CONSOLIDATED REVENUE BY SEGMENT(a) AND SPECIES

(UNAUDITED)

(millions of dollars)

Full Year

% Change

2020

2019

Total

Foreign

Exchange

Operational(b)

Revenue:

Companion Animal

$

3,652

$

3,145

16

%

(1)

%

17

%

Livestock

2,940

3,030

(3)

%

(3)

%

—

%

Contract Manufacturing & Human Health

83

85

(2)

%

1

%

(3)

%

Total Revenue

$

6,675

$

6,260

7

%

(2)

%

9

%

U.S.

Companion Animal

$

2,391

$

1,984

21

%

—

%

21

%

Livestock

1,166

1,219

(4)

%

—

%

(4)

%

Total U.S. Revenue

$

3,557

$

3,203

11

%

—

%

11

%

International

Companion Animal

$

1,261

$

1,161

9

%

(3)

%

12

%

Livestock

1,774

1,811

(2)

%

(5)

%

3

%

Total International Revenue

$

3,035

$

2,972

2

%

(5)

%

7

%

Companion Animal:

Dogs and Cats

3,437

2,950

17

%

(1)

%

18

%

Horses

215

195

10

%

(1)

%

11

%

Total Companion Animal Revenue

$

3,652

$

3,145

16

%

(1)

%

17

%

Livestock:

Cattle

$

1,558

$

1,654

(6)

%

(4)

%

(2)

%

Swine

621

611

2

%

(2)

%

4

%

Poultry

537

559

(4)

%

(3)

%

(1)

%

Fish

148

134

10

%

(3)

%

13

%

Sheep and other

76

72

6

%

(2)

%

8

%

Total Livestock Revenue

$

2,940

$

3,030

(3)

%

(3)

%

—

%

(a) 

For a description of each segment, see Zoetis' most recent Annual Report on Form 10-K.

(b) 

Operational revenue growth (a non-GAAP financial measure) is defined as revenue growth excluding the impact of foreign exchange.

ZOETIS INC.

CONSOLIDATED REVENUE BY KEY INTERNATIONAL MARKETS

(UNAUDITED)

(millions of dollars)

Fourth Quarter

% Change

2020

2019

Total

Foreign

Exchange

Operational(a)

Total International

$

832.8

$

791.6

5

%

(2)

%

7

%

Australia

53.4

46.4

15

%

6

%

9

%

Brazil

77.0

86.9

(11)

%

(29)

%

18

%

Canada

66.1

64.9

2

%

—

%

2

%

Chile

28.3

26.5

7

%

(3)

%

10

%

China

68.0

44.4

53

%

8

%

45

%

France

35.3

33.7

5

%

7

%

(2)

%

Germany

46.5

42.6

9

%

7

%

2

%

Italy

27.8

30.1

(8)

%

6

%

(14)

%

Japan

43.9

40.5

8

%

3

%

5

%

Mexico

32.2

29.4

10

%

(9)

%

19

%

Spain

29.5

28.2

5

%

8

%

(3)

%

United Kingdom

52.5

52.7

—

%

4

%

(4)

%

Other Developed

105.9

100.7

5

%

4

%

1

%

Other Emerging

166.4

164.6

1

%

(6)

%

7

%

Full Year

% Change

2020

2019

Total

Foreign

Exchange

Operational(a)

Total International

$

3,035.4

$

2,972.2

2

%

(5)

%

7

%

Australia

207.2

195.9

6

%

(2)

%

8

%

Brazil

258.3

293.0

(12)

%

(26)

%

14

%

Canada

209.8

206.4

2

%

(1)

%

3

%

Chile

100.1

90.9

10

%

(5)

%

15

%

China

265.7

200.1

33

%

(1)

%

34

%

France

117.7

116.7

1

%

1

%

—

%

Germany

158.6

153.3

3

%

1

%

2

%

Italy

90.5

112.0

(19)

%

1

%

(20)

%

Japan

177.2

158.1

12

%

2

%

10

%

Mexico

115.8

116.6

(1)

%

(10)

%

9

%

Spain

112.2

114.4

(2)

%

1

%

(3)

%

United Kingdom

177.9

198.1

(10)

%

1

%

(11)

%

Other Developed

388.2

370.1

5

%

—

%

5

%

Other Emerging

656.2

646.6

1

%

(7)

%

8

%

(a)

Operational revenue growth (a non-GAAP financial measure) is defined as revenue growth excluding the impact of foreign exchange.

ZOETIS INC.

SEGMENT(a) EARNINGS

(UNAUDITED)

(millions of dollars)

Fourth Quarter

% Change

2020

2019

Total

Foreign

Exchange

Operational(b)

U.S.:

Revenue

$

952

$

861

11

%

—

%

11

%

Cost of sales

194

187

4

%

—

%

4

%

Gross profit

758

674

12

%

—

%

12

%

Gross margin

79.6

%

78.3

%

Operating expenses

184

176

5

%

—

%

5

%

Other (income)/deductions-net

3

—

U.S. Earnings

$

571

$

498

15

%

—

%

15

%

International:

Revenue

$

832

$

791

5

%

(2)

%

7

%

Cost of sales

274

263

4

%

(6)

%

10

%

Gross profit

558

528

6

%

—

%

6

%

Gross margin

67.1

%

66.8

%

Operating expenses

146

148

(1)

%

—

%

(1)

%

Other (income)/deductions-net

6

—

International Earnings

$

406

$

380