XML 35 R17.htm IDEA: XBRL DOCUMENT v3.20.4
Financial Instruments
 12 Months Ended
Dec. 31, 2020
Debt Disclosure [Abstract]  
Financial Instruments
A. Debt
Credit Facilities
In December 2016, we entered into an amended and restated revolving credit agreement with a syndicate of banks providing for a multi-year $1.0 billion senior unsecured revolving credit facility (the credit facility). In December 2018, the maturity for the amended and restated credit facility was extended through December 2023. Subject to certain conditions, we have the right to increase the credit facility to up to $1.5 billion. The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio (the ratio of consolidated net debt as of the end of the period to consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA) for such period) of 3.50:1. Upon entering into a material acquisition, the maximum total leverage ratio increases to 4.00:1, and extends until the fourth full consecutive fiscal quarter ended immediately following the consummation of a material acquisition. The credit facility also contains a clause which adds back to Adjusted Consolidated EBITDA, any operational efficiency restructuring charge (defined as charges recorded by the company during the period commencing on October 1, 2016 and ending December 31, 2019, related to operational efficiency initiatives), provided that for any twelve-month period such charges added back to Adjusted Consolidated EBITDA shall not exceed $100 million in the aggregate.
The credit facility also contains a financial covenant requiring that we maintain a minimum interest coverage ratio (the ratio of EBITDA at the end of the period to interest expense for such period) of 3.50:1. In addition, the credit facility contains other customary covenants.
We were in compliance with all financial covenants as of December 31, 2020 and December 31, 2019. There were no amounts drawn under the credit facility as of December 31, 2020 or December 31, 2019.
We have additional lines of credit and other credit arrangements with a group of banks and other financial intermediaries for general corporate purposes. We maintain cash and cash equivalent balances in excess of our outstanding short-term borrowings. As of December 31, 2020, we had access to $79 million of lines of credit which expire at various times through 2021, and are generally renewed annually. As of December 31, 2020 we had $4 million of borrowings outstanding related to these facilities and did not have any borrowings outstanding related to these facilities as of December 31, 2019.
Commercial Paper Program
In February 2013, we entered into a commercial paper program with a capacity of up to $1.0 billion. As of December 31, 2020 and 2019, there was no commercial paper outstanding under this program.
Senior Notes and Other Long-Term Debt
On May 12, 2020, we issued $1.25 billion aggregate principal amount of our senior notes (2020 senior notes), with an original issue discount of $10 million. These notes are comprised of $750 million aggregate principal amount of 2.000% 2020 senior notes due 2030 and $500 million aggregate principal amount of 3.000% senior notes due 2050. On October 13, 2020, the net proceeds were used to repay the $500 million aggregate principal amount of 3.450% 2015 senior notes due 2020 and the remainder will be used for general corporate purposes.
On August 20, 2018, we issued $1.5 billion aggregate principal amount of our senior notes (2018 senior notes), with an original issue discount of $4 million. On September 12, 2017, we issued $1.25 billion aggregate principal amount of our senior notes (2017 senior notes), with an original issue discount of $7 million. On November 13, 2015, we issued $1.25 billion aggregate principal amount of our senior notes (2015 senior notes), with an original issue discount of $2 million. On January 28, 2013, we issued $3.65 billion aggregate principal amount of our senior notes (the 2013 senior notes offering) in a private placement, with an original issue discount of $10 million.
The 2013, 2015, 2017, 2018 and 2020 senior notes are governed by an indenture and supplemental indenture (collectively, the indenture) between us and Deutsche Bank Trust Company Americas, as trustee. The indenture contains certain covenants, including limitations on our and certain of our subsidiaries' ability to incur liens or engage in sale-leaseback transactions. The indenture also contains restrictions on our ability to consolidate,
merge or sell substantially all of our assets. In addition, the indenture contains other customary terms, including certain events of default, upon the occurrence of which the 2013, 2015, 2017, 2018 and 2020 senior notes may be declared immediately due and payable.
Pursuant to the indenture, we are able to redeem the 2013, 2015, 2017 and 2020 senior notes and the 2018 fixed rate senior notes or any series, in whole or in part, at any time by paying a “make whole” premium, plus accrued and unpaid interest to, but excluding, the date of redemption. The 2018 floating rate senior notes are not redeemable at our option prior to their maturity date. Pursuant to our tax matters agreement with Pfizer, we will not be permitted to redeem the 2013 senior notes due 2023 pursuant to this optional redemption provision, except under limited circumstances. Upon the occurrence of a change of control of us and a downgrade of the 2013, 2015, 2017, 2018 and 2020 senior notes below an investment grade rating by each of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, we are, in certain circumstances, required to make an offer to repurchase all of the outstanding 2013, 2015, 2017, 2018 and 2020 senior notes at a price equal to 101% of the aggregate principal amount of the 2013, 2015, 2017, 2018 and 2020 senior notes together with accrued and unpaid interest to, but excluding, the date of repurchase.
The components of our long-term debt are as follows:
As of December 31,
(MILLIONS OF DOLLARS)20202019
3.450% 2015 senior notes due 2020$— $500 
2018 floating rate (three-month USD LIBOR plus 0.44%) senior notes due 2021300 300 
3.250% 2018 senior notes due 2021300 300 
3.250% 2013 senior notes due 20231,350 1,350 
4.500% 2015 senior notes due 2025750 750 
3.000% 2017 senior notes due 2027750 750 
3.900% 2018 senior notes due 2028500 500 
2.000% 2020 senior notes due 2030750 — 
4.700% 2013 senior notes due 20431,150 1,150 
3.950% 2017 senior notes due 2047500 500 
4.450% 2018 senior notes due 2048400 400 
3.000% 2020 senior notes due 2050500 — 
7,250 6,500 
Unamortized debt discount / debt issuance costs(66)(51)
Less current portion of long-term debt600 500 
Cumulative fair value adjustment for interest rate swap contracts11 (2)
Long-term debt, net of discount and issuance costs$6,595 $5,947 
The fair value of our long-term debt was $7,835 million and $6,587 million as of December 31, 2020, and December 31, 2019, respectively, and has been determined using a third-party matrix-pricing model that uses significant inputs derived from, or corroborated by, observable market data and Zoetis’ credit rating (Level 2 inputs). See Note 3. Significant Accounting Policies— Fair Value.
The principal amount of debt outstanding as of December 31, 2020, matures in the following years:
After
(MILLIONS OF DOLLARS)202120222023202420252025Total
Maturities$600 $— $1,350 $— $750 $4,550 $7,250 
Interest Expense
Interest expense, net of capitalized interest, was $231 million for 2020, $223 million for 2019 and $206 million for 2018. Capitalized interest expense was $17 million for 2020, $13 million for 2019, and $9 million for 2018.
B. Investments
As part of the acquisition of Abaxis, we acquired short and long-term investments in debt securities (see Note 5. Acquisitions and Divestitures). These investments were classified as available-for-sale securities and, therefore, are measured at fair value at each reporting date. The changes in fair value are recognized in Accumulated other comprehensive income/(loss). We utilized Level 2 inputs such as observable quoted prices for similar assets and liabilities in active markets and observable quoted prices for identical or similar assets in markets that are not very active. See Note 3. Significant Accounting Policies— Fair Value.
At December 31, 2019, all of the available-for-sale securities had been sold or matured. The net gains/(losses) were immaterial to our financial results for 2019.
C. Derivative Financial Instruments
Foreign Exchange Risk
A significant portion of our revenue, earnings and net investment in foreign affiliates is exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk, in part, through operational means, including managing same-currency revenue in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. Depending on market conditions, foreign exchange risk is also managed through the use of various derivative financial instruments. These derivative financial instruments serve to manage the exposure of our net investment in certain foreign operations to changes in foreign exchange rates and protect net income against the impact of translation into U.S. dollars of certain foreign exchange-denominated transactions.
All derivative financial instruments used to manage foreign currency risk are measured at fair value and are reported as assets or liabilities on the Consolidated Balance Sheets. The derivative financial instruments primarily offset exposures in the Australian dollar, British pound, Canadian dollar, Chinese yuan, euro, and Japanese yen. Changes in fair value are reported in earnings or in Accumulated other comprehensive income/(loss), depending on the nature and purpose of the financial instrument, as follows:
•For foreign exchange contracts not designated as hedging instruments, we recognize the gains and losses on forward-exchange contracts that are used to offset the same foreign currency assets or liabilities immediately into earnings along with the earnings impact of the items they generally offset. These contracts essentially take the opposite currency position of that reflected in the month-end balance sheet to counterbalance the effect of any currency movement. The vast majority of the foreign exchange derivative financial instruments mature within 60 days and all mature within three years.
•For cross-currency interest rate swaps, which are designated as a hedge against our net investment in foreign operations, changes in the fair value are deferred as a component of cumulative translation adjustment within Accumulated other comprehensive loss and reclassified into earnings when the foreign investment is sold or substantially liquidated. Gains and losses excluded from the assessment of hedge effectiveness are recognized in earnings (Interest expense—net of capitalized interest). The cash flows from these contracts are reflected within the investing section of our Consolidated Statements of Cash Flows. The cross-currency interest rate swap contracts have varying maturities of up to six years.
Interest Rate Risk
The company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rates and to reduce its overall cost of borrowing.
•In anticipation of issuing fixed-rate debt, we may use forward-starting interest rate swaps that are designated as cash flow hedges to hedge against changes in interest rates that could impact expected future issuances of debt. Unrealized gains or losses on the forward-starting interest rate swaps are reported in Accumulated other comprehensive loss and are recognized in earnings over the life of the future fixed-rate notes. When the company discontinues hedge accounting because it is no longer probable that an anticipated transaction will occur within the originally expected period of execution, or within an additional two-month period thereafter, changes to fair value accumulated in other comprehensive income are recognized immediately in earnings. During 2020, we entered into treasury lock trades with an aggregate notional value of $600 million. We designated these treasury locks as cash flow hedges against interest rate exposure related to the issuance of fixed-rate debt in the second quarter of 2020. Of the aggregate notional value of $600 million, four treasury locks with a total notional amount of $425 million were designated as hedges against the ten-year fixed rate debt maturing in 2030, and two treasury locks with a total notional amount of $175 million were designated as hedges against the thirty-year note maturing in 2050. Upon issuance of our 2020 senior notes, we terminated the treasury locks and paid $6 million in cash to the counterparties for settlement. The settlement amount, which represents the fair value of the contracts at the time of termination, was recorded in Accumulated other comprehensive loss, and will be amortized into income over the life of the 2020 senior notes. For the twelve months ended December 31, 2020, we entered into interest rate swaps having an effective date and mandatory termination date in March 2023. We designated these swaps as cash flow hedges against interest rate exposure related principally to the anticipated future issuance of fixed-rate debt to be used primarily to refinance our 3.250% 2013 senior notes due 2023 and a forward-starting interest rate swap, having an effective date and mandatory termination date in March 2026, to hedge against interest rate exposure related principally to the anticipated future issuance of fixed-rate debt to be used primarily to refinance our 4.500% 2015 senior notes due 2025.
•We may use fixed-to-floating interest rate swaps that are designated as fair value hedges to hedge against changes in the fair value of certain fixed-rate debt attributable to changes in the benchmark LIBOR rate. These derivative instruments effectively convert a portion of the company’s long-term debt from fixed rate to floating rate debt based on three-month LIBOR plus a spread. Gains or losses on the fixed to floating interest rate swaps due to changes in LIBOR are recorded in Interest expense, net of capitalized interest. Changes in the fair value of the fixed-to-floating interest rate swaps are offset by changes in the fair value of the underlying fixed rate debt. As of December 31, 2020, we had an outstanding fixed-to-floating interest rate swap which corresponds to a portion of the 3.900% 2018 senior notes due 2028.
During 2018, we entered into forward starting interest rate swaps with an aggregate notional value of $350 million. In addition, we entered into treasury lock trades with an aggregate notional value of $350 million. We designated these swaps and treasury locks (contracts) as cash flow hedges against interest rate exposure related principally to the issuance of fixed-rate debt to be used primarily to fund the acquisition of Abaxis in 2018 and to refinance our 1.875% 2013 senior notes due 2018. Upon issuance of our 2018 senior notes, we terminated the contracts we entered into in 2018 and paid $2 million in cash to the counterparties for settlement. In addition, in previous years we had entered into various forward-starting interest rate swap contracts that were designated as cash flow hedges and that were terminated upon issuance of fixed-rate notes. The settlement amounts, which represent the fair value of the contracts at the time of termination, were recorded in Accumulated other comprehensive loss, and will be amortized into income over the life of the 2018 senior notes.
Outstanding Positions
The aggregate notional amount of derivative instruments are as follows:
Notional
As of December 31,
(MILLIONS)20202019
Foreign currency forward-exchange contracts$1,633 $1,364 
Cross-currency interest rate swap contracts (in foreign currency):
   euro650 650 
   Danish krone600 600 
   Swiss franc25 25 
Forward-starting interest rate swaps $550 $250 
Fixed-to-floating interest rate swap contracts$150 $150 
Fair Value of Derivative Instruments
The classification and fair values of derivative instruments are as follows:
Fair Value of Derivatives
As of December 31,
(MILLIONS OF DOLLARS)Balance Sheet Location20202019
Derivatives Not Designated as Hedging Instruments:
   Foreign currency forward-exchange contractsOther current assets$10 $7 
   Foreign currency forward-exchange contractsOther current liabilities (16)(5)
Total derivatives not designated as hedging instruments(6)2 
Derivatives Designated as Hedging Instruments:
   Forward starting interest rate swap contractsOther non-current assets$6 $5 
   Forward starting interest rate swap contractsOther non-current liabilities(17)(1)
   Cross-currency interest rate swap contracts Other current assets2 4 
   Cross-currency interest rate swap contractsOther non-current assets5 20 
   Cross-currency interest rate swap contractsOther current liabilities(21)(3)
   Fixed to floating interest rate swap contractsOther non-current assets/(liabilities)11 (2)
Total derivatives designated as hedging instruments(14)23 
Total derivatives$(20)$25 
The company’s cross-currency interest rate swaps are subject to master netting arrangements to mitigate credit risk by permitting net settlement of transactions with the same counterparty. We may also enter into collateral security arrangements with certain of our counterparties to exchange cash collateral when the net fair value of certain derivative instruments fluctuates from contractually established thresholds. At December 31, 2020, there was $8 million of collateral received related to the long-term cross-currency interest rate swaps.
We use a market approach in valuing financial instruments on a recurring basis. Our derivative financial instruments are measured at fair value on a recurring basis using Level 2 inputs in the calculation of fair value. See Note 3. Significant Accounting Policies— Fair Value.
The amounts of net losses on derivative instruments not designated as hedging instruments, recorded in Other (income)/deductions - net, are as follows:
Year Ended December 31,
(MILLIONS OF DOLLARS)20202019
Foreign currency forward-exchange contracts$(2)$— 
These amounts were substantially offset in Other (income)/deductions—net by the effect of changing exchange rates on the underlying foreign currency exposures.
The amounts of unrecognized net (losses)/gains on interest rate swap contracts, recorded, net of tax, in Accumulated other comprehensive income/(loss), are as follows:
Year Ended December 31,
(MILLIONS OF DOLLARS)20202019
Forward starting interest rate swap contracts$(11)$3 
Cross-currency interest rate swap contracts$(58)$12 
Gains on interest rate swap contracts, recognized within Interest expense, net of capitalized interest, are as follows:
Year Ended December 31,
(MILLIONS OF DOLLARS)20202019
Cross-currency interest rate swap contracts$18 $19 
The net amount of deferred gains/(losses) related to derivative instruments designated as cash flow hedges that is expected to be reclassified from Accumulated other comprehensive loss into earnings over the next 12 months is insignificant.