Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview of our business

Zoetis is a global leader in the animal health industry, focused on the discovery, development, manufacture and commercialization of medicines, vaccines, diagnostic products, biodevices, genetic tests and precision livestock farming technology. For nearly 70 years, we have been innovating ways to predict, prevent, detect, and treat animal illness, and continue to stand by those raising and caring for animals worldwide - from livestock farmers to veterinarians and pet owners.

We manage our operations through two geographic operating segments: the United States (U.S.) and International. Within each of these operating segments, we offer a diversified product portfolio for both companion animal and livestock customers in order to capitalize on local and regional trends and customer needs. See Notes to Condensed Consolidated Financial Statements — Note 16. Segment Information.

We directly market our products to veterinarians and livestock producers located in approximately 45 countries across North America, Europe, Africa, Asia, Australia and South America, and are a market leader in nearly all of the major regions in which we operate. Through our efforts to establish an early and direct presence in many emerging markets, such as Brazil, Chile, China and Mexico, we believe we are one of the largest animal health medicines and vaccines businesses as measured by revenue across emerging markets as a whole. In markets where we do not have a direct commercial presence, we generally contract with distributors that provide logistics and sales and marketing support for our products.

We believe our investments in one of the industry’s largest sales organizations, including our extensive network of technical and veterinary operations specialists, our high-quality manufacturing and reliability of supply, and our long track record of developing products that meet customer needs, has led to enduring and valued relationships with our customers. Our research and development (R&D) efforts enable us to deliver innovative products to address unmet needs and evolve our product lines so they remain relevant for our customers.

Our products include over 300 products and product lines that we sell in over 100 countries for the prediction, prevention, detection and treatment of diseases and conditions that affect various companion animal and livestock species. The diversity of our product portfolio and our global operations provides stability to our overall business. For instance, in livestock, impacts on our revenue that may result from disease outbreaks or weather conditions in a particular market or region are often offset by increased sales in other regions from exports and other species as consumers shift to other proteins.

Beginning in the first quarter of 2021, certain costs associated with information technology that specifically support our global manufacturing operations, which were previously reported in Other unallocated, are now reported in Corporate. In addition, in the first quarter of 2021, the company realigned certain management responsibilities. These changes did not impact the determination of our operating segments, however they resulted in the reallocation of certain costs between segments. These changes primarily include the following: (i) certain diagnostics costs, which were previously reported in Corporate, are now reported in our U.S. results; and (ii) certain other miscellaneous costs, which were previously reported in our U.S. results, are now reported in Corporate.

Certain reclassifications of prior year information have been made to conform to the current year's presentation.

A summary of our 2021 performance compared with the comparable 2020 period follows:

% Change
Three Months EndedRelated to
September 30,Foreign
(MILLIONS OF DOLLARS)20212020TotalExchangeOperational(a)
Revenue$1,990$1,78611110
Net income attributable to Zoetis55247915510
Adjusted net income(a)59752414410
% Change
Nine Months EndedRelated to
September 30,Foreign
(MILLIONS OF DOLLARS)20212020TotalExchangeOperational(a)
Revenue$5,809$4,86819217
Net income attributable to Zoetis1,6231,27927324
Adjusted net income(a)1,7661,40626323

(a) Operational growth and adjusted net income are non-GAAP financial measures. See the Non-GAAP financial measures section of this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) for more information.

Our operating environment

For a description of our operating environment, including factors which could materially affect our business, financial condition, or future results, see "Our Operating Environment" in the MD&A of our 2020 Annual Report on Form 10-K. Set forth below are updates to certain of the factors disclosed in our 2020 Form 10-K.

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Uncertainty Relating to COVID-19

We continue to closely monitor the impact of the coronavirus (COVID-19) pandemic and the resulting global recession on all aspects of our business across geographies, including how it has and may continue to impact our customers, workforce, suppliers and vendors. Although we are unable to fully predict the impact that the COVID-19 pandemic will ultimately have on our future financial position and operating results, we continue to monitor the potential effects, including impacts on our supply chain, the effect on customer demand, and changes to our operations. We cannot predict the impact that the COVID-19 pandemic will have on our customers, vendors and suppliers; however, any material effect on these parties could adversely impact us.

The situation surrounding COVID-19 remains fluid, and we will continue to actively monitor the situation and may take actions that alter our business operations that we determine are in the best interests of our workforce, customers, vendors, suppliers, and other stakeholders, or as required by federal, state, or local authorities.

For further information regarding the impact of COVID-19 on the Company, see Item 1A, Risk Factors in this Quarterly Report on Form 10-Q.

Quarterly Variability of Financial Results

Our quarterly financial results are subject to variability related to a number of factors including but not limited to: the impact of the COVID-19 pandemic discussed above, weather patterns, herd management decisions, economic conditions, regulatory actions, competitive dynamics, disease outbreaks, product and geographic mix, timing of price increases and timing of investment decisions.

Disease Outbreaks

Sales of our livestock products have in the past, and may in the future be, adversely affected by the outbreak of disease carried by animals. Outbreaks of disease may reduce regional or global sales of particular animal-derived food products or result in reduced exports of such products, either due to heightened export restrictions or import prohibitions, which may reduce demand for our products. Also, the outbreak of any highly contagious disease near our main production sites could require us to immediately halt production of our products at such sites or force us to incur substantial expenses in procuring raw materials or products elsewhere. Alternatively, sales of products that treat specific disease outbreaks may increase.

Foreign Exchange Rates

Significant portions of our revenue and costs are exposed to changes in foreign exchange rates. Our products are sold in more than 100 countries and, as a result, our revenue is influenced by changes in foreign exchange rates. For the nine months ended September 30, 2021, approximately 44% of our revenue was denominated in foreign currencies. 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. As we operate in multiple foreign currencies, including the euro, Chinese yuan, Brazilian real, Australian dollar, British pound, Canadian dollar and other currencies, changes in those currencies relative to the U.S. dollar will impact our revenue, cost of goods and expenses, and consequently, net income. Exchange rate fluctuations may also have an impact beyond our reported financial results and directly impact operations. These fluctuations may affect the ability to buy and sell our goods and services between markets impacted by significant exchange rate variances. For the nine months ended September 30, 2021, approximately 56% of our total revenue was in U.S. dollars. Our year-over-year total revenue growth was favorably impacted by approximately 2% from changes in foreign currency values relative to the U.S. dollar.

Non-GAAP financial measures

We report information in accordance with U.S. generally accepted accounting principles (GAAP). Management also measures performance using non-GAAP financial measures that may exclude certain amounts from the most directly comparable GAAP financial measure. Despite the importance of these measures to management in goal setting and performance measurement, non-GAAP financial measures have no standardized meaning prescribed by U.S. GAAP and, therefore, have limits in their usefulness to investors and may not be comparable to the calculation of similar measures of other companies. We present certain identified non-GAAP measures solely to provide investors with useful information to more fully understand how management assesses performance.

Operational Growth

We believe that it is important to not only understand overall revenue and earnings growth, but also “operational growth.” Operational growth is a non-GAAP financial measure defined as revenue or earnings growth excluding the impact of foreign exchange. This measure provides information on the change in revenue and earnings as if foreign currency exchange rates had not changed between the current and prior periods to facilitate a period-to-period comparison. We believe this non-GAAP measure provides a useful comparison to previous periods for the company and investors, but should not be viewed as a substitute for U.S. GAAP reported growth.

Adjusted Net Income and Adjusted Earnings Per Share

Adjusted net income and the corresponding adjusted earnings per share (EPS) are non-GAAP financial measures of performance used by management. We believe these financial measures are useful supplemental information to investors when considered together with our U.S. GAAP financial measures. We report adjusted net income to portray the results of our major operations, and the discovery, development, manufacture and commercialization of our products, prior to considering certain income statement elements. We define adjusted net income and adjusted EPS as net income attributable to Zoetis and EPS before the impact of purchase accounting adjustments, acquisition-related costs and certain significant items.

We recognize that, as an internal measure of performance, the adjusted net income and adjusted EPS measures have limitations, and we do not restrict our performance management process solely to these metrics. A limitation of the adjusted net income and adjusted EPS measures is that they provide a view of our operations without including all events during a period, such as the effects of an acquisition or amortization of purchased intangibles, and do not provide a comparable view of our performance to other companies. The adjusted net income and adjusted EPS measures are not, and should not be viewed as, a substitute for U.S. GAAP reported net income and reported EPS. See the Adjusted Net Income section below for more information.

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Analysis of the condensed consolidated statements of income

The following discussion and analysis of our statements of income should be read along with our condensed consolidated financial statements and the notes thereto included elsewhere in Part I— Item 1 of this Quarterly Report on Form 10-Q.

Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20212020Change20212020Change
Revenue$1,990$1,78611$5,809$4,86819
Costs and expenses:
Cost of sales58654671,7031,45617
% of revenue29.4%30.6%29.3%29.9%
Selling, general and administrative expenses504424191,4081,20617
% of revenue25%24%24%25%
Research and development expenses1321121837033012
% of revenue7%6%6%7%
Amortization of intangible assets4040—1211201
Restructuring charges and certain acquisition-related costs9580392277
Interest expense, net of capitalized interest5662(10)170173(2)
Other (income)/deductions—net4—*16(15)*
Income before provision for taxes on income659597101,9821,57626
% of revenue33%33%34%32%
Provision for taxes on income107118(9)36129821
Effective tax rate16.2%19.8%18.2%18.9%
Net income before allocation to noncontrolling interests552479151,6211,27827
Less: Net loss attributable to noncontrolling interests———(2)(1)*
Net income attributable to Zoetis Inc.$552$47915$1,623$1,27927
% of revenue28%27%28%26%

*Calculation not meaningful

Revenue

Three months ended September 30, 2021 vs. three months ended September 30, 2020

Total revenue increased by $204 million, or 11%, in the three months ended September 30, 2021, compared with the three months ended September 30, 2020, an increase of $176 million, or 10%, on an operational basis. Operational revenue growth was comprised primarily of the following:

  • volume growth from new products of approximately 5%;

  • volume growth from in-line products, including key dermatology products, of approximately 3%; and

  • price growth of approximately 2%.

Foreign exchange increased reported revenue growth by approximately 1%.

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

Total revenue increased by $941 million, or 19%, in the nine months ended September 30, 2021, compared with the nine months ended September 30, 2020, an increase of $843 million, or 17%, on an operational basis. Operational revenue growth was comprised primarily of the following:

  • volume growth from in-line products, including key dermatology products, of approximately 11%;

  • volume growth from new products of approximately 5%; and

  • price growth of approximately 1%.

Foreign exchange increased reported revenue growth by approximately 2%.

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Costs and Expenses

Cost of sales
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20212020Change20212020Change
Cost of sales$586$5467$1,703$1,45617
% of revenue29.4%30.6%29.3%29.9%

Three months ended September 30, 2021 vs. three months ended September 30, 2020

Cost of sales as a percentage of revenue was 29.4% in the three months ended September 30, 2021 compared with 30.6% in the three months ended September 30, 2020. The decrease was primarily as a result of:

  • favorable product mix;

  • favorable foreign exchange;

  • lower inventory obsolescence, scrap and other charges; and

  • price growth,

partially offset by:

  • unfavorable manufacturing and other costs; and

  • higher freight and import costs.

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

Cost of sales as a percentage of revenue was 29.3% in the nine months ended September 30, 2021 compared with 29.9% in the nine months ended September 30, 2020. The decrease was primarily as a result of:

  • favorable product mix;

  • lower inventory obsolescence, scrap and other charges;

  • price growth; and

  • favorable foreign exchange,

partially offset by:

  • unfavorable manufacturing costs and other costs; and

  • higher freight and import costs.

Selling, general and administrative expenses
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20212020Change20212020Change
Selling, general and administrative expenses$504$42419$1,408$1,20617
% of revenue25%24%24%25%

Three months ended September 30, 2021 vs. three months ended September 30, 2020

SG&A expenses increased by $80 million, or 19%, in the three months ended September 30, 2021, compared with the three months ended September 30, 2020, primarily as a result of:

  • an increase in certain compensation-related costs;

  • investments to support revenue growth;

  • higher freight and logistics costs;

  • higher travel and entertainment due to a reduction in COVID-19 related restrictions; and

  • unfavorable foreign exchange,

partially offset by:

  • the reduced impact of certain significant items and purchase accounting adjustments.

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

SG&A expenses increased by $202 million, or 17%, in the nine months ended September 30, 2021, compared with the nine months ended September 30, 2020, primarily as a result of:

  • an increase in certain compensation-related costs;

  • investments to support revenue growth;

  • unfavorable foreign exchange; and

  • higher freight and logistics costs,

partially offset by:

  • the reduced impact of purchase accounting adjustments and certain significant items; and

  • lower travel and entertainment expenses as a result of decreases in travel and events related to the COVID-19 pandemic.

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Research and development expenses
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20212020Change20212020Change
Research and development expenses$132$11218$370$33012
% of revenue7%6%6%7%

Three months ended September 30, 2021 vs. three months ended September 30, 2020

R&D expenses increased by $20 million, or 18%, in the three months ended September 30, 2021, compared with the three months ended September 30, 2020, primarily as a result of:

  • increased spending driven by project investments;

  • increase in certain compensation-related costs to support innovation; and

  • unfavorable foreign exchange.

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

R&D expenses increased by $40 million, or 12%, in the nine months ended September 30, 2021, compared with the nine months ended September 30, 2020, primarily as a result of:

  • an increase in certain compensation-related costs to support innovation;

  • increased spending driven by project investments; and

  • unfavorable foreign exchange.

partially offset by:

  • lower travel and entertainment expenses as a result of decreases in travel and events related to the COVID-19 pandemic.
Amortization of intangible assets
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20212020Change20212020Change
Amortization of intangible assets$40$40—$121$1201
Restructuring charges and certain acquisition-related costs
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20212020Change20212020Change
Restructuring charges and certain acquisition-related costs$9$580$39$2277

*Calculation not meaningful

Our acquisition-related costs primarily relate to restructuring charges for employees, assets and activities that will not continue in the future, as well as integration costs. Net restructuring charges are primarily related to asset impairment charges, employee termination costs and exit costs. Our integration costs are generally comprised of consulting costs related to the integration of systems and processes, as well as product transfer costs.

For additional information regarding restructuring charges and acquisition-related costs, see Notes to Condensed Consolidated Financial Statements— Note 6. Restructuring Charges and Other Costs Associated with Acquisitions, Cost-Reduction and Productivity Initiatives.

Three months ended September 30, 2021 vs. three months ended September 30, 2020

Restructuring charges and certain acquisition-related costs were $9 million and $5 million in the three months ended September 30, 2021 and 2020, respectively. Restructuring charges and certain acquisition-related costs in the three months ended September 30, 2021 primarily consisted of employee termination costs associated with the realignment of our international operations. Restructuring charges and certain acquisition-related costs in the three months ended September 30, 2020 consisted of employee termination costs related to other cost-reduction and productivity initiatives and integration costs related to acquisitions.

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

Restructuring charges and certain acquisition-related costs were $39 million and $22 million in the nine months ended September 30, 2021 and 2020, respectively. Restructuring charges and certain acquisition-related costs in the nine months ended September 30, 2021 primarily consisted of employee termination costs associated with our international operations and other costs associated with cost-reduction and productivity initiatives, asset impairment charges related to the consolidation of manufacturing sites in China and integration costs related to recent acquisitions. Restructuring charges and certain acquisition-related costs in the nine months ended September 30, 2020 consisted of integration costs related to acquisitions, restructuring charges related to CEO transition-related costs and employee termination costs related to other cost-reduction and productivity initiatives.

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Interest expense, net of capitalized interest
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20212020Change20212020Change
Interest expense, net of capitalized interest$56$62(10)$170$173(2)

Three months ended September 30, 2021 vs. three months ended September 30, 2020

Interest expense, net of capitalized interest, decreased by 10% in the three months ended September 30, 2021, compared with the three months ended September 30, 2020, primarily as a result of the redemption of $500 million aggregate principal amount of our senior notes in October 2020, as well as the redemption of our $300 million aggregate principal amount of our 2018 floating rate senior notes and the $300 million aggregate principal amount of our 2018 senior notes in August 2021.

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

Interest expense, net of capitalized interest, decreased by 2% in the nine months ended September 30, 2021, compared with the nine months ended September 30, 2020, primarily as a result of the redemption of $500 million aggregate principal amount of our senior notes in October 2020, as well as the redemption of our $300 million aggregate principal amount of our 2018 floating rate senior notes and the $300 million aggregate principal amount of our 2018 senior notes in August 2021, partially offset by the issuance of $1.25 billion aggregate principal amount of our senior notes in May 2020 and lower gains on cross-currency interest rate swaps as compared to the prior year period.

Other (income)/deductions—net
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20212020Change20212020Change
Other (income)/deductions—net$4$—*$16$(15)*

*Calculation not meaningful

Three months ended September 30, 2021 vs. three months ended September 30, 2020

The change in Other (income)/deductions—net is primarily as a result of higher foreign currency losses and asset impairment charges related to a dairy product termination.

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

The change in Other (income)/deductions—net is primarily as a result of a net gain of $17 million related to a cash payment received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites in the prior year period, higher foreign currency losses, lower interest income, asset impairment charges related to a dairy product termination and a net loss related to the sale of certain assets of our poultry automation business located in the U.S. and Canada, partially offset by an impairment of an equity investment and asset impairment charges incurred in the prior year period.

Provision for taxes on income
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20212020Change20212020Change
Provision for taxes on income$107$118(9)$361$29821
Effective tax rate16.2%19.8%18.2%18.9%

Three months ended September 30, 2021 vs. three months ended September 30, 2020

Our effective tax rate was 16.2% for the three months ended September 30, 2021, compared with 19.8% for the three months ended September 30, 2020. The lower effective tax rate for the three months ended September 30, 2021, was primarily attributable to:

  • changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions, operating fluctuations in the normal course of business and the impact of non-deductible items and non-taxable items. In addition, the three months ended September 30, 2021 includes a tax benefit related to foreign-derived intangible income; and

  • a $4 million discrete tax benefit recorded in the three months ended September 30, 2021, related to the effective settlement of certain issues with tax authorities.

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

Our effective tax rate was 18.2% for the nine months ended September 30, 2021, compared with 18.9% for the nine months ended September 30, 2020. The lower effective tax rate for the nine months ended September 30, 2021 was primarily attributable to:

  • changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions, operating fluctuations in the normal course of business and the impact of non-deductible items and non-taxable items. In addition, the nine months ended September 30, 2021 includes a tax benefit related to foreign-derived intangible income; and

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  • a $4 million discrete tax benefit recorded in the nine months ended September 30, 2021, related to the effective settlement of certain issues with tax authorities,

partially offset by:

  • a $21 million and a $29 million discrete tax benefit recorded in the nine months ended September 30, 2021 and 2020, respectively, related to the excess tax benefits for share-based payments; and

  • a $7 million discrete tax benefit recorded in the nine months ended September 30, 2020, related to a remeasurement of deferred taxes resulting from the integration of acquired businesses.

Operating Segment Results

On a global basis, the mix of revenue between companion animal and livestock products was as follows:

% Change
Three Months EndedRelated to
September 30,Foreign
(MILLIONS OF DOLLARS)20212020TotalExchangeOperational
U.S.
Companion animal$775$66417—17
Livestock290332(13)—(13)
1,0659967—7
International
Companion animal42733129524
Livestock477436927
90476718414
Total
Companion animal1,20299521219
Livestock767768—2(2)
Contract manufacturing & human health2123(9)—(9)
$1,990$1,78611110
% Change
Nine Months EndedRelated to
September 30,Foreign
(MILLIONS OF DOLLARS)20212020TotalExchangeOperational
U.S.
Companion animal$2,227$1,75727—27
Livestock775848(9)—(9)
3,0022,60515—15
International
Companion animal1,28091740733
Livestock1,4701,28614311
2,7502,20325520
Total
Companion animal3,5072,67431229
Livestock2,2452,134523
Contract manufacturing & human health5760(5)1(6)
$5,809$4,86819217

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Earnings by segment and the operational and foreign exchange changes versus the comparable prior year period were as follows:

% Change
Three Months EndedRelated to
September 30,Foreign
(MILLIONS OF DOLLARS)20212020TotalExchangeOperational
U.S.:
Revenue$1,065$9967—7
Cost of Sales1991943—3
Gross Profit8668028—8
Gross Margin81.3%80.5%
Operating Expenses18315717—17
Other (income)/deductions-net——***
U.S. Earnings6836456—6
International:
Revenue90476718414
Cost of Sales27324511(1)12
Gross Profit63152221516
Gross Margin69.8%68.1%
Operating Expenses15212225421
Other (income)/deductions-net(4)—***
International Earnings48340021615
Total operating segments1,1661,0451239
Other business activities(106)(87)22
Reconciling Items:
Corporate(252)(222)14
Purchase accounting adjustments(45)(48)(6)
Acquisition-related costs(1)(1)—
Certain significant items(12)(9)33
Other unallocated(91)(81)12
Total Earnings$659$59710
% Change
Nine Months EndedRelated to
September 30,Foreign
(MILLIONS OF DOLLARS)20212020TotalExchangeOperational
U.S.:
Revenue$3,002$2,60515—15
Cost of Sales57551512—12
Gross Profit2,4272,09016—16
Gross Margin80.8%80.2%
Operating Expenses48441816—16
Other (income)/deductions-net24(50)—(50)
U.S. Earnings1,9411,66816—16
International:
Revenue2,7502,20325520
Cost of Sales83369720218
Gross Profit1,9171,50627522
Gross Margin69.7%68.4%
Operating Expenses42936418513
Other (income)/deductions-net(4)1***
International Earnings1,4921,14131625
Total operating segments3,4332,80922220
Other business activities(301)(264)14
Reconciling Items:
Corporate(744)(603)23
Purchase accounting adjustments(133)(155)(14)
Acquisition-related costs(8)(15)(47)
Certain significant items(44)(4)*
Other unallocated(221)(192)15
Total Earnings$1,982$1,57626
  • Calculation not meaningful.

Three months ended September 30, 2021 vs. three months ended September 30, 2020

U.S. operating segment

U.S. segment revenue increased by $69 million, or 7%, in the three months ended September 30, 2021, compared with the three months ended September 30, 2020, reflecting an increase of approximately $111 million in companion animal products, partially offset by a decrease of approximately $42 million in livestock products.

  • Companion animal revenue growth was driven primarily by increased sales of parasiticides, including Simparica Trio®, our new triple combination parasiticide. In-line products growth benefited from increased sales of our key dermatology portfolio.

  • Livestock revenue declined primarily due to decreased sales in cattle, poultry and swine. Cattle product sales declined as a result of increased generic competition and last year's earlier cattle run now expected to occur in the fourth quarter this year, as well as challenges in the beef and dairy end-markets due to rising input costs. The poultry portfolio declined as a result of smaller flock sizes reducing disease pressure, the expanded use of lower cost alternatives and generic competition. Swine product sales declined primarily due to pricing pressures on our anti-infective and vaccine portfolio.

U.S. segment earnings increased by $38 million, or 6%, in the three months ended September 30, 2021, compared with the three months ended September 30, 2020, primarily due to revenue and gross margin growth, partially offset by higher operating expenses.

International operating segment

International segment revenue increased by $137 million, or 18%, in the three months ended September 30, 2021, compared with the three months ended September 30, 2020. Operational revenue increased by $109 million, or 14%, driven by growth of approximately $80 million in companion animal products and $29 million in livestock products.

  • Companion animal operational revenue growth was driven primarily by increased sales across the broader in-line portfolio, including our key dermatology portfolio, which benefited from increased pet ownership and standards of care. Growth also resulted from sales of our parasiticide products, including the Simparica® and Revolution®/Stronghold® franchises. The recent launches of our monoclonal antibody (mAb) therapies, Librela® and Solensia® also contributed to growth.

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  • Livestock operational revenue growth was driven by increased sales in cattle, fish, swine and poultry. Cattle product sales increased due to key account penetration, favorable export market conditions in Brazil and favorable conditions in other emerging markets. Growth in the fish portfolio resulted primarily from increased sales of the Alpha Flux® sea lice treatment product and an increase in vaccine sales in key salmon markets. Sales of both swine and poultry products grew as a result of key account growth and market expansion across parts of Asia, Brazil and Russia.

  • Additionally, International segment revenue was favorably impacted by foreign exchange which increased revenue by approximately $28 million, or 4%, primarily driven by the euro, Chinese yuan, British pound and Canadian dollar, partially offset by the Argentinian peso.

International segment earnings increased by $83 million, or 21%, in the three months ended September 30, 2021, compared with the three months ended September 30, 2020. Operational earnings growth was $60 million, or 15%, primarily due to revenue and gross margin growth, partially offset by higher operating expenses.

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

U.S. operating segment

U.S. segment revenue increased by $397 million, or 15%, in the nine months ended September 30, 2021, compared with the nine months ended September 30, 2020, reflecting an increase of approximately $470 million in companion animal products, partially offset by a decrease of approximately $73 million in livestock products.

  • Companion animal revenue growth was driven primarily by increased sales of parasiticides, including Simparica Trio, as well as the ProHeart and Revolution/Stronghold franchises. In-line product growth benefited from increased sales of our key dermatology portfolio, diagnostics products and vaccines.

  • Livestock revenue declined due to poultry, cattle and swine. The poultry portfolio declined as a result of the expanded use of lower cost alternatives, smaller flock sizes reducing disease pressure, as well as generic competition. Cattle product sales declined as a result of increased generic competition and challenges in the beef and dairy end-markets due to rising input costs, as well as last year's earlier fall cattle run now expected to occur in the fourth quarter this year. The decline in swine product sales was primarily due to pricing pressures on our anti-infective and vaccine portfolio and a non-recurring government purchase in the prior year.

U.S. segment earnings increased by $273 million, or 16%, in the nine months ended September 30, 2021, compared with the nine months ended September 30, 2020, primarily due to revenue and gross margin growth, partially offset by higher operating expenses.

International operating segment

International segment revenue increased by $547 million, or 25%, in the nine months ended September 30, 2021, compared with the nine months ended September 30, 2020. Operational revenue increased by $449 million, or 20%, driven by growth of approximately $306 million in companion animal products and $143 million in livestock products.

  • Companion animal operational revenue growth was driven primarily by increased sales of our parasiticide products, including the Simparica and Revolution/Stronghold franchises. Also contributing to growth were our key dermatology portfolio, vaccine products and diagnostic products, as well as the recent launches of our mAb therapies, Librela and Solensia. Growth across the broader in-line portfolio benefited from increased pet ownership and standards of care.

  • Livestock operational revenue growth was primarily driven by increased sales in cattle, swine and fish. Growth in cattle product sales was mainly due to the effect of marketing campaigns, key account penetration and favorable export market conditions in Brazil and favorable conditions in other emerging markets. Sales of swine products grew as a result of expanding production in the wake of African Swine Fever in China in the first half of the year. Fish growth was due to an increase in sales of the Alpha Flux sea lice treatment product, an increase in vaccine sales in key salmon markets and the recent acquisition of Fish Vet Group.

  • Additionally, International segment revenue was favorably impacted by foreign exchange which increased revenue by approximately $98 million, or 5%, primarily driven by the euro, Australian dollar, Chinese yuan and Canadian dollar, partially offset by the Brazilian real and Argentinian peso.

International segment earnings increased by $351 million, or 31%, in the nine months ended September 30, 2021, compared with the nine months ended September 30, 2020. Operational earnings growth was $283 million, or 25%, primarily due to revenue and gross margin growth, partially offset by higher operating expenses.

Other business activities

Other business activities includes our Client Supply Services (CSS) contract manufacturing results, our human health business and expenses associated with our dedicated veterinary medicine research and development organization, research alliances, U.S. regulatory affairs and other operations focused on the development of our products. Other R&D-related costs associated with non-U.S. market and regulatory activities are generally included in the International segment.

Three months ended September 30, 2021 vs. three months ended September 30, 2020

Other business activities net loss increased by $19 million in the three months ended September 30, 2021, compared with the three months ended September 30, 2020, reflecting an increase in R&D costs due to an increase in project investments, certain compensation-related costs and unfavorable foreign exchange.

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

Other business activities net loss increased by $37 million in the nine months ended September 30, 2021, compared with the nine months ended September 30, 2020, reflecting an increase in R&D costs due to an increase in certain compensation-related costs, an increase in project investments and unfavorable foreign exchange, partially offset by lower travel and entertainment expenses as a result of decreases in travel and events related to the COVID-19 pandemic.

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Reconciling items

Reconciling items include certain costs that are not allocated to our operating segments results, such as costs associated with the following:

  • Corporate*,* which includes certain costs associated with information technology, facilities, legal, finance, human resources, business development and communications, among others. These costs also include certain compensation costs, certain procurement costs, and other miscellaneous operating expenses that are not charged to our operating segments, as well as interest income and expense;

  • Certain transactions and events such as (i) Purchase accounting adjustments, which includes expenses associated with the amortization of fair value adjustments to inventory, intangible assets, and property, plant and equipment; (ii) Acquisition-related activities, which includes costs for acquisition and integration; and (iii) Certain significant items, which includes non-acquisition-related restructuring charges, certain asset impairment charges, certain legal and commercial settlements, and costs associated with cost reduction/productivity initiatives; and

  • Other unallocated, which includes (i) certain overhead expenses associated with our global manufacturing operations not charged to our operating segments; (ii) certain costs associated with finance that specifically support our global manufacturing operations; (iii) certain supply chain and global logistics costs; and (iv) certain procurement costs.

Three months ended September 30, 2021 vs. three months ended September 30, 2020

Corporate expenses increased by $30 million, or 14%, in the three months ended September 30, 2021, compared with the three months ended September 30, 2020, primarily due to an increase in certain compensation-related costs and investments in information technology, partially offset by lower interest expense.

Other unallocated expenses increased by $10 million, or 12%, in the three months ended September 30, 2021, compared with the three months ended September 30, 2020, primarily due to higher manufacturing costs and higher freight charges, partially offset by lower inventory obsolescence, scrap and other charges.

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

Corporate expenses increased by $141 million, or 23%, in the nine months ended September 30, 2021, compared with the nine months ended September 30, 2020, primarily due to an increase in certain compensation-related costs, investments in information technology, unfavorable foreign exchange and lower interest income, partially offset by lower interest expense.

Other unallocated expenses increased by $29 million, or 15%, in the nine months ended September 30, 2021, compared with the nine months ended September 30, 2020, primarily due to higher manufacturing costs, higher freight charges and unfavorable foreign exchange, partially offset by lower inventory obsolescence, scrap and other charges.

See Notes to Condensed Consolidated Financial Statements—Note 16. Segment Information for further information.

Adjusted net income

General description of adjusted net income (a non-GAAP financial measure)

Adjusted net income is an alternative view of performance used by management, and we believe that investors’ understanding of our performance is enhanced by disclosing this performance measure. The adjusted net income measure is an important internal measurement for us. Additionally, we measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how the adjusted net income measure is utilized:

  • senior management receives a monthly analysis of our operating results that is prepared on an adjusted net income basis;

  • our annual budgets are prepared on an adjusted net income basis; and

  • other goal setting and performance measurements.

Purchase accounting adjustments

Adjusted net income is calculated prior to considering certain significant purchase accounting impacts that result from business combinations and net asset acquisitions. These impacts, primarily associated with the acquisition of Abaxis (acquired in July 2018), the Pharmaq business (acquired in November 2015), certain assets of Abbott Animal Health (acquired in February 2015), King Animal Health (KAH) (acquired in 2011), Fort Dodge Animal Health (FDAH) (acquired in 2009), and Pharmacia Animal Health business (acquired in 2003), include amortization related to the increase in fair value of the acquired finite-lived intangible assets and depreciation related to the increase/decrease to fair value of the acquired fixed assets. Therefore, the adjusted net income measure includes the revenue earned upon the sale of the acquired products without considering the aforementioned significant charges.

While certain purchase accounting adjustments can occur through 20 or more years, this presentation provides an alternative view of our performance that is used by management to internally assess business performance. We believe the elimination of amortization attributable to acquired intangible assets provides management and investors an alternative view of our business results by providing a degree of parity to internally developed intangible assets for which R&D costs previously have been expensed.

A completely accurate comparison of internally developed intangible assets and acquired intangible assets cannot be achieved through adjusted net income. These components of adjusted net income are derived solely from the impact of the items listed above. We have not factored in the impact of any other differences in experience that might have occurred if we had discovered and developed those intangible assets on our own, and this approach does not intend to be representative of the results that would have occurred in those circumstances. For example, our R&D costs in total, and in the periods presented, may have been different; our speed to commercialization and resulting revenue, if any, may have been different; or our costs to manufacture may have been different. In addition, our marketing efforts may have been received differently by our customers. As such, in total, there can be no assurance that our adjusted net income amounts would have been the same as presented had we discovered and developed the acquired intangible assets.

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Acquisition-related costs

Adjusted net income is calculated prior to considering transaction and integration costs associated with significant business combinations or net asset acquisitions because these costs are unique to each transaction and represent costs that were incurred to acquire and integrate certain businesses as a result of the acquisition decision. We have made no adjustments for the resulting synergies.

We believe that viewing income prior to considering these charges provides investors with a useful additional perspective because the significant costs incurred in a business combination result primarily from the need to eliminate duplicate assets, activities or employees––a natural result of acquiring a fully integrated set of activities. For this reason, we believe that the costs incurred to convert disparate systems, to close duplicative facilities or to eliminate duplicate positions (for example, in the context of a business combination) can be viewed differently from those costs incurred in the ordinary course of business.

The integration costs associated with a business combination may occur over several years, with the more significant impacts generally ending within three years of the transaction. Because of the need for certain external approvals for some actions, the span of time needed to achieve certain restructuring and integration activities can be lengthy. For example, due to the regulated nature of the animal health medicines, vaccines and diagnostics business, the closure of excess facilities can take several years, as all manufacturing changes are subject to extensive validation and testing and must be approved by the U.S. Food and Drug Administration and/or other regulatory authorities.

Certain significant items

Adjusted net income is calculated excluding certain significant items. Certain significant items represent substantive, unusual items that are evaluated on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual nature. Unusual, in this context, may represent items that are not part of our ongoing business; items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis; items that would be nonrecurring; or items that relate to products that we no longer sell. While not all-inclusive, examples of items that could be included as certain significant items would be costs related to a major non-acquisition-related restructuring charge and associated implementation costs for a program that is specific in nature with a defined term, such as those related to our non-acquisition-related cost-reduction and productivity initiatives; amounts related to disposals of products or facilities that do not qualify as discontinued operations as defined by U.S. GAAP; certain intangible asset impairments; adjustments related to the resolution of certain tax positions; significant currency devaluation; the impact of adopting certain significant, event-driven tax legislation; or charges related to legal matters. See Notes to Condensed Consolidated Financial Statements— Note 15. Commitments and Contingencies. Our normal, ongoing defense costs or settlements of and accruals on legal matters made in the normal course of our business would not be considered certain significant items.

Reconciliation

A reconciliation of net income, as reported under U.S. GAAP, to adjusted net income follows:

Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20212020Change20212020Change
GAAP reported net income attributable to Zoetis$552$47915$1,623$1,27927
Purchase accounting adjustments—net of tax3537(5)103108(5)
Acquisition-related costs—net of tax11—715(53)
Certain significant items—net of tax9729334*
Non-GAAP adjusted net income(a)$597$52414$1,766$1,40626

*Calculation not meaningful.

(a) The effective tax rate on adjusted pretax income is 16.7% and 20.0% for the three months ended September 30, 2021 and 2020, respectively. The lower effective tax rate for the three months ended September 30, 2021, compared with the three months ended September 30, 2020, was primarily attributable to (i) changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings, repatriation costs, operating fluctuations in the normal course of business and the impact of non-deductible and non-taxable items. In addition, the three months ended September 30, 2021 includes a tax benefit related to foreign-derived intangible income, and (ii) a $4 million discrete tax benefit recorded in the three months ended September 30, 2021, related to the effective settlement of certain issues with tax authorities.

The effective tax rate on adjusted pretax income is 18.6% and 19.7% for the nine months ended September 30, 2021 and 2020, respectively. The lower effective tax rate for the nine months ended September 30, 2021, compared with the nine months ended September 30, 2020, was primarily attributable to (i) changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings, repatriation costs, operating fluctuations in the normal course of business and the impact of non-deductible and non-taxable items. In addition, the nine months ended September 30, 2021 includes a tax benefit related to foreign-derived intangible income, and (ii) a $4 million discrete tax benefit recorded in the nine months ended September 30, 2021, related to the effective settlement of certain issues with tax authorities, partially offset by a $21 million and $29 million discrete tax benefit recorded in the nine months ended September 30, 2021 and 2020, respectively, related to the excess tax benefits for share-based payments.

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A reconciliation of reported diluted earnings per share (EPS), as reported under U.S. GAAP, to non-GAAP adjusted diluted EPS follows:

Three Months EndedNine Months Ended
September 30,%September 30,%
20212020Change20212020Change
Earnings per share—diluted(a):
GAAP reported EPS attributable to Zoetis —diluted$1.16$1.0016$3.40$2.6727
Purchase accounting adjustments—net of tax0.070.08(13)0.220.23(4)
Acquisition-related costs—net of tax——*0.010.03(67)
Certain significant items—net of tax0.020.02—0.070.01*
Non-GAAP adjusted EPS—diluted$1.25$1.1014$3.70$2.9426
  • Calculation not meaningful.

(a) Diluted earnings per share was computed using the weighted-average common shares outstanding during the period plus the common stock equivalents related to stock options, restricted stock units, performance-vesting restricted stock units and deferred stock units.

Adjusted net income includes the following charges for each of the periods presented:

Three Months EndedNine Months Ended
September 30,September 30,
(MILLIONS OF DOLLARS)2021202020212020
Interest expense, net of capitalized interest$56$62$170$173
Interest income1149
Income taxes120131403345
Depreciation5653171148
Amortization9102729

Adjusted net income, as shown above, excludes the following items:

Three Months EndedNine Months Ended
September 30,September 30,
(MILLIONS OF DOLLARS)2021202020212020
Purchase accounting adjustments:
Amortization and depreciation(a)$45$48$133$155
Total purchase accounting adjustments—pre-tax4548133155
Income taxes(b)10113047
Total purchase accounting adjustments—net of tax3537103108
Acquisition-related costs:
Integration costs13615
Restructuring costs—(2)2—
Total acquisition-related costs—pre-tax11815
Income taxes(b)——1—
Total acquisition-related costs—net of tax11715
Certain significant items:
Operational efficiency initiative(c)—(1)—(18)
Supply network strategy(d)—124
Other restructuring charges and cost-reduction/productivity initiatives(e)74207
Certain asset impairment charges(f)5—19—
Net loss on sale of assets(g)——3—
Other(h)—5—11
Total certain significant items—pre-tax129444
Income taxes(b)3211—
Total certain significant items—net of tax97334
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax$45$45$143$127

(a) Amortization and depreciation expenses related to Purchase accounting adjustments with respect to identifiable intangible assets and property, plant and equipment.

(b) 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.

Income taxes in Purchase accounting adjustments also includes a tax benefit related to a remeasurement of deferred taxes resulting from the integration of acquired businesses for the nine months ended September 30, 2020, in addition to a tax benefit related to a remeasurement of deferred taxes as a result of changes in statutory tax rates, for the nine months ended September 30, 2021 and 2020.

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Income taxes in Acquisition-related costs also includes a tax charge related to a remeasurement of deferred taxes resulting from the integration of acquired businesses for the nine months ended September 30, 2020.

(c) For the nine months ended September 30, 2020, represents a net gain resulting from a cash payment received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites.

(d) Represents product transfer costs related to cost-reduction and productivity initiatives.

(e) For the three months ended September 30, 2021, primarily represents employee termination costs associated with the realignment of our international operations. For the nine months ended September 30, 2021 primarily represents employee termination costs associated with our international operations and other costs associated with cost-reduction and productivity initiatives.

For the three and nine months ended September 30, 2020, represents employee termination costs incurred as a result of the CEO transition.

(f) For the three months ended September 30, 2021, primarily represents asset impairment charges related to a dairy product termination. For the nine months ended September 30, 2021, primarily represents asset impairment charges related to the consolidation of manufacturing sites in China and a dairy product termination.

(g) Represents a net loss related to the sale of certain assets of our poultry automation business located in the U.S. and Canada.

(h) For the three and nine months ended September 30, 2020, primarily represents CEO transition-related costs.

The classification of the above items excluded from adjusted net income are as follows:

Three Months EndedNine Months Ended
September 30,September 30,
(MILLIONS OF DOLLARS)2021202020212020
Cost of sales:
Purchase accounting adjustments$2$2$5$6
Inventory write-offs1—2—
Consulting fees—1—4
Other——5—
Total Cost of sales331210
Selling, general & administrative expenses:
Purchase accounting adjustments8122347
Other—5—11
Total Selling, general & administrative expenses8172358
Research & development expenses:
Purchase accounting adjustments——11
Total Research & development expenses——11
Amortization of intangible assets:
Purchase accounting adjustments3534104101
Total Amortization of intangible assets3534104101
Restructuring charges and certain acquisition-related costs:
Integration costs13615
Employee termination costs72177
Asset impairments——13—
Exit costs1—3—
Total Restructuring charges and certain acquisition-related costs953922
Other (income)/deductions—net:
Net (gain)/loss on sale of assets—(1)3(18)
Asset impairments3—3—
Total Other (income)/deductions—net3(1)6(18)
Provision for taxes on income13134247
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax$45$45$143$127

Analysis of the condensed consolidated statements of comprehensive income

Substantially all changes in other comprehensive income for the periods presented are related to foreign currency translation adjustments. These changes result from the strengthening or weakening of the U.S. dollar as compared to the currencies in the countries in which we do business. The gains and losses associated with these changes are deferred on the balance sheet in Accumulated other comprehensive loss until realized.

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Analysis of the condensed consolidated balance sheets

September 30, 2021 vs. December 31, 2020

For a discussion about the changes in Cash and cash equivalents, Short-term borrowings, and Long-term debt, net of discount and issuance costs, see “Analysis of financial condition, liquidity and capital resources” below.

Accounts Receivable, less allowance for doubtful accounts increased as a result of higher sales in the period and the timing of customer payments, partially offset by rebate credits issued to customers.

Inventories increased as a result of the build-up of certain products for increased demand and new product launches, partially offset by timing of shipments and higher sales than anticipated for certain products.

Property, plant and equipment, less accumulated depreciation increased primarily as a result of capital spending, partially offset by depreciation expense.

Identifiable intangible assets, less accumulated amortization decreased primarily as a result of amortization expense.

Accounts payable decreased as a result of the timing of vendor payments.

Accrued expenses increased as a result of increases in accrued contract rebates, accrued third-party inventory and other expenses, partially offset by the timing of payments for accrued interest.

Accrued compensation and related items increased primarily due to the accrual of 2021 annual incentive bonuses and savings plan contributions to eligible employees, as well as a higher sales incentive bonus accrual, partially offset by the payment of 2020 annual incentive bonuses and savings plan contributions to eligible employees.

The net changes in Noncurrent deferred tax assets, Noncurrent deferred tax liabilities, Income taxes payable and Other taxes payable primarily reflect adjustments to the accrual for the income tax provision, the timing of income tax payments, the tax impact of various acquisitions and the impact of the remeasurement of deferred taxes as a result of changes in tax rates.

Other current liabilities and Other noncurrent liabilities decreased primarily due to the mark-to-market adjustments of derivative instruments and a decrease in deferred compensation related to net investment activity.

For an analysis of the changes in Total Equity, see the Condensed Consolidated Statements of Equity and Notes to Condensed Consolidated Financial Statements— Note 13. Stockholders' Equity.

Analysis of the condensed consolidated statements of cash flows

Nine Months Ended
September 30,%
(MILLIONS OF DOLLARS)20212020Change
Net cash provided by (used in):
Operating activities$1,534$1,4089
Investing activities(316)(395)(20)
Financing activities(1,548)720*
Effect of exchange-rate changes on cash and cash equivalents—(13)*
Net (decrease)/increase in cash and cash equivalents$(330)$1,720*

*Calculation not meaningful.

Operating activities

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

Net cash provided by operating activities was $1,534 million for the nine months ended September 30, 2021, and $1,408 million for the nine months ended September 30, 2020. The increase in operating cash flows was primarily attributable to higher cash earnings, partially offset by the timing of receipts and payments in the ordinary course of business.

Investing activities

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

Our net cash used in investing activities was $316 million for the nine months ended September 30, 2021, compared with net cash used in investing activities of $395 million for the nine months ended September 30, 2020. The net cash used in investing activities for 2021 was primarily due to capital expenditures and acquisitions, partially offset by net proceeds from cross-currency interest rate swaps. The net cash used in investing activities for 2020 was primarily due to capital expenditures, acquisitions and net payments for cross-currency interest rate swaps, partially offset by proceeds from the sale of assets, including a cash payment received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites.

Financing activities

Nine months ended September 30, 2021 vs. nine months ended September 30, 2020

Our net cash used in financing activities was $1,548 million for the nine months ended September 30, 2021, compared with net cash provided by financing activities of $720 million for the nine months ended September 30, 2020. The net cash used in financing activities for 2021 was primarily attributable to the repayment of the $300 million aggregate principal amount of our 2018 floating rate senior notes due 2021 and the $300 million aggregate principal amount of our 2018 senior notes due 2021, the purchase of treasury shares, the payment of dividends and taxes paid on

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withholding shares, partially offset by proceeds in connection with the issuance of common stock under our equity incentive plan. The net cash provided by financing activities for 2020 was primarily attributable to the proceeds received from the issuance of senior notes in May 2020 and net proceeds in connection with the issuance of common stock under our equity incentive plan, partially offset by the payment of dividends and the purchase of treasury shares.

Analysis of financial condition, liquidity and capital resources

While we believe our cash and cash equivalents on hand, our operating cash flows and our existing financing arrangements will be sufficient to support our future cash needs, this may be subject to the environment in which we operate. Risks to our ability to meet future funding requirements include global economic conditions described in the following paragraph.

Global financial markets may be impacted by macroeconomic, business and financial volatility. As markets change, we will continue to monitor our liquidity position, but there can be no assurance that a challenging economic environment or an economic downturn will not impact our liquidity or our ability to obtain future financing.

Selected measures of liquidity and capital resources

Certain relevant measures of our liquidity and capital resources follow:

September 30,December 31,
(MILLIONS OF DOLLARS)20212020
Cash and cash equivalents$3,274$3,604
Accounts receivable, net(a)1,1521,013
Short-term borrowings—4
Current portion of long-term debt—600
Long-term debt, net of discount and issuance costs6,5926,595
Working capital5,2114,441
Ratio of current assets to current liabilities4.54:13.05:1

(a) Accounts receivable are usually collected over a period of 45 to 75 days*.* For the nine months ended September 30, 2021, compared with December 31, 2020, the number of days that accounts receivables are outstanding remained within this range. We regularly monitor our accounts receivable for collectability, particularly in markets where economic conditions remain uncertain. We believe that our allowance for doubtful accounts is appropriate. Our assessment is based on such factors as past due aging, historical and expected collection patterns, the financial condition of our customers, the robust nature of our credit and collection practices and the economic environment.

For additional information about the sources and uses of our funds, see the Analysis of the condensed consolidated balance sheets and Analysis of the condensed consolidated statements of cash flows sections of this MD&A.

Credit facility and other lines of credit

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 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 September 30, 2021 and December 31, 2020. There were no amounts drawn under the credit facility as of September 30, 2021 or December 31, 2020.

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 September 30, 2021, we had access to $71 million of lines of credit which expire at various times through 2021 and are generally renewed annually. There were no borrowings outstanding related to these facilities as of September 30, 2021 and $4 million of borrowings outstanding related to these facilities as of December 31, 2020.

Domestic and international short-term funds

Many of our operations are conducted outside the U.S. The amount of funds held in the U.S. will fluctuate due to the timing of receipts and payments in the ordinary course of business and due to other reasons, such as business development activities. As part of our ongoing liquidity assessments, we regularly monitor the mix of U.S. and international cash flows (both inflows and outflows). Actual repatriation of overseas funds can result in additional U.S. and local income taxes, such as U.S. state income taxes, local withholding taxes, and taxes on currency gains and losses.

Global economic conditions

Challenging economic conditions in recent years have not had, nor do we anticipate that it will have, a significant impact on our liquidity. Due to our operating cash flows, financial assets, access to capital markets and available lines of credit and revolving credit agreements, we continue to believe that we have the ability to meet our liquidity needs for the foreseeable future. As markets change, we continue to monitor our liquidity position. There can be no assurance that a challenging economic environment or an economic downturn would not impact our ability to obtain financing in the future.

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Debt

On August 20, 2021, we redeemed, upon maturity, the $300 million aggregate principal amount of our 2018 floating rate senior notes due 2021 and the $300 million aggregate principal amount of our 2018 senior notes due 2021.

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% 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 our 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 (2013 senior notes) 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 lease-back 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, 2018 and 2020 senior notes of 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. 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 follow:

DescriptionPrincipal AmountInterest RateTerms
2013 Senior Notes due 2023$1,350 million3.250%Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2023
2015 Senior Notes due 2025$750 million4.500%Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2025
2017 Senior Notes due 2027$750 million3.000%Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2027
2018 Senior Notes due 2028$500 million3.900%Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2028
2020 Senior Notes due 2030$750 million2.000%Interest due semi annually, not subject to amortization, aggregate principal due on May 15, 2030
2013 Senior Notes due 2043$1,150 million4.700%Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2043
2017 Senior Notes due 2047$500 million3.950%Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2047
2018 Senior Notes due 2048$400 million4.450%Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2048
2020 Senior Notes due 2050$500 million3.000%Interest due semi annually, not subject to amortization, aggregate principal due on May 15, 2050

Credit Ratings

Two major corporate debt-rating organizations, Moody's and S&P, assign ratings to our short-term and long-term debt. A security rating is not a recommendation to buy, sell or hold securities and the rating is subject to revision or withdrawal at any time by the rating organization. Each rating should be evaluated independently of any other rating.

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The following table provides the current ratings assigned by these rating agencies to our commercial paper and senior unsecured non-credit-enhanced long-term debt:

Commercial
PaperLong-term DebtDate of
Name of Rating AgencyRatingRatingOutlookLast Action
Moody’sP-2Baa1StableAugust 2017
S&PA-2BBBStableDecember 2016

Share Repurchase Program

In December 2018, the company's Board of Directors authorized a $2.0 billion share repurchase program. As of September 30, 2021, there was approximately $879 million remaining under this authorization. Purchases of Zoetis shares may be made at the discretion of management, depending on market conditions and business needs. Share repurchases may be executed through various means, including open market or privately negotiated transactions. The company temporarily suspended share repurchases beginning in the second quarter of 2020. In January 2021, the company resumed share repurchases under its share repurchase program. During the first nine months of 2021, approximately 3.1 million shares were repurchased.

Off-balance sheet arrangements

In the ordinary course of business and in connection with the sale of assets and businesses, we may indemnify our counterparties against certain liabilities that may arise in connection with a transaction or that are related to activities prior to a transaction. These indemnifications typically pertain to environmental, tax, employee and/or product-related matters, and patent-infringement claims. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications are generally subject to threshold amounts, specified claim periods and other restrictions and limitations. Historically, we have not paid significant amounts under these provisions and, as of September 30, 2021, or December 31, 2020, recorded amounts for the estimated fair value of these indemnifications are not significant.

New accounting standards

Recently Issued Accounting Standards Not Adopted as of September 30, 2021

A description of recently issued accounting standards is contained in Note 3. Accounting Standards of the Notes to Condensed Consolidated Financial Statements.

Forward-looking statements and factors that may affect future results

This report contains “forward-looking” statements. We generally identify forward-looking statements by using words such as “anticipate,” “estimate,” “could,” “expect,” “intend,” “project,” “plan,” “predict,” “believe,” “seek,” “continue,” “outlook,” “objective,” “target,” “may,” “might,” “will,” “should,” “can have,” “likely” or the negative version of these words or comparable words or by using future dates in connection with any discussion of future performance, actions or events.

In particular, forward-looking statements include statements relating to the impact of the COVID-19 pandemic, our 2021 financial guidance, future actions, business plans or prospects, prospective products, product approvals or products under development, product supply disruptions, R&D costs, timing and likelihood of success, future operating or financial performance, future results of current and anticipated products and services, strategies, sales efforts, expenses, production efficiencies, production margins, anticipated timing of generic market entries, integration of acquired businesses, interest rates, tax rates, changes in tax regimes and laws, foreign exchange rates, growth in emerging markets, the outcome of contingencies, such as legal proceedings, plans related to share repurchases and dividends, government regulation and financial results. These statements are not guarantees of future performance, actions or events. Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, and are based on assumptions that could prove to be inaccurate. Among the factors that could cause actual results to differ materially from past results and future plans and projected future results are the following:

  • the impact of the COVID-19 pandemic on our business, supply chain, customers and workforce;

  • unanticipated safety, quality or efficacy concerns about our products;

  • issues with any of our top products;

  • failure of our R&D, acquisition and licensing efforts to generate new products and product lifecycle innovations;

  • the possible impact and timing of competing products, including generic alternatives, on our products and our ability to compete against such products;

  • disruptive innovations and advances in medical practices and technologies;

  • difficulties and delays in the development or commercialization of new products;

  • consolidation of our customers and distributors;

  • changes in the distribution channel for companion animal products;

  • failure to successfully acquire businesses, license rights or products, integrate businesses, form and manage alliances or divest businesses;

  • acquiring or implementing new business lines or offering new products and services;

  • restrictions and bans on the use of and consumer preferences regarding antibacterials in food-producing animals;

  • perceived adverse effects linked to the consumption of food derived from animals that utilize our products or animals generally;

  • adverse global economic conditions;

  • increased regulation or decreased governmental support relating to the raising, processing or consumption of food-producing animals;

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  • fluctuations in foreign exchange rates and potential currency controls;

  • changes in tax laws and regulations;

  • legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental concerns, commercial disputes and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products;

  • failure to protect our intellectual property rights or to operate our business without infringing the intellectual property rights of others;

  • product launch delays, inventory shortages, recalls or unanticipated costs caused by manufacturing problems and capacity imbalances;

  • an outbreak of infectious disease carried by animals;

  • adverse weather conditions and the availability of natural resources;

  • the impact of climate change;

  • the economic, political, legal and business environment of the foreign jurisdictions in which we do business;

  • a cyber-attack, information security breach or other misappropriation of our data;

  • quarterly fluctuations in demand and costs;

  • governmental laws and regulations affecting domestic and foreign operations, including without limitation, tax obligations and changes affecting the tax treatment by the U.S. of income earned outside the U.S. that may result from pending and possible future proposals; and

  • governmental laws and regulations affecting our interactions with veterinary healthcare providers.

However, there may also be other risks that we are unable to predict at this time. These risks or uncertainties may cause actual results to differ materially from those contemplated by a forward-looking statement. Such risks and uncertainties may be amplified by the COVID-19 pandemic and its impact on the global economy and our business. You should not put undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they are made. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law or by the rules and regulations of the SEC. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q and 8-K reports and our other filings with the SEC. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the above to be a complete discussion of all potential risks or uncertainties.

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