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 and services, biodevices, genetic tests and precision animal health technology. For 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.

We have approximately 300 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.

A summary of our 2022 performance compared with the comparable 2021 period follows:


					% Change
	Three Months Ended					Related to
	September 30,					Foreign
(MILLIONS OF DOLLARS)	2022		2021		Total	Exchange	Operational(a)
Revenue	$	2,002	$	1,990	1	(4)	5
Net income attributable to Zoetis	529		552		(4)	(10)	6
Adjusted net income(a)	566		597		(5)	(7)	2


					% Change
	Nine Months Ended					Related to
	September 30,					Foreign
(MILLIONS OF DOLLARS)	2022		2021		Total	Exchange	Operational(a)
Revenue	$	6,040	$	5,809	4	(3)	7
Net income attributable to Zoetis	1,653		1,623		2	(9)	11
Adjusted net income(a)	1,758		1,766		—	(6)	6

(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 2021 Annual Report on Form 10-K. Set forth below are updates to certain of the factors disclosed in our 2021 Form 10-K.

Global Supply Chain Disruption

We continue to experience supply chain challenges for certain products. Our global manufacturing network team remains committed to addressing specific issues with ongoing supply chain optimizations, controlled launches for new products in additional markets and customer coordination. However, some of these challenges are expected to continue throughout the remainder of 2022 and into 2023.

Russia’s Invasion of Ukraine

Russia’s invasion of Ukraine and the global response, including sanctions imposed by the United States and other countries, have increased global economic and political uncertainty. As we announced on March 16, 2022, our first concern remains the safety of our colleagues and their families in Ukraine. We have remained guided by our purpose to nurture the world and humankind by advancing care for animals. Our operations in Russia are focused on maintaining a supply of medicines and vaccines in compliance with any sanctions that are put in place. We do not directly source input materials or components from Russia and do not have any manufacturing plants in Russia or Ukraine. While we do expect sales in the affected regions to be impacted by this situation, Russia and Ukraine are not among our top 12 international markets and although we are unable to predict the

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impact of this crisis on the global economy or on our results of operations, we do not expect it to have a material adverse effect to our results or financial condition.

COVID-19 Update

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. 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 continuing decline in global macroeconomic conditions, global supply chain disruption, Russia’s invasion of Ukraine, the impact of the COVID-19 pandemic, variability in distributor inventory stocking levels as a result of expected demand and promotional activities, weather patterns, herd management decisions, regulatory actions, inflation, 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 been, 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, 2022, approximately 43% 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 Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese yuan, euro 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, 2022, approximately 57% of our total revenue was in U.S. dollars. Our year-over-year total revenue growth was unfavorably impacted by approximately 3% from changes in foreign currency values relative to the U.S. dollar.

We have accounted for operations in Venezuela and Argentina as highly inflationary since the date the prior three-year cumulative inflation rate surpassed 100%. Effective in the second quarter of 2022, we have accounted for operations in Turkey as highly inflationary, as the prior three-year cumulative inflation rate exceeded 100%. Revenue, earnings and balances of underlying net assets of our operations in these three markets are not material to our results of operations or financial position.

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

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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.

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 Ended							Nine Months Ended
	September 30,						%	September 30,						%
(MILLIONS OF DOLLARS)	2022			2021			Change	2022			2021			Change
Revenue	$	2,002		$	1,990		1	$	6,040		$	5,809		4
Costs and expenses:
Cost of sales	607			586			4	1,801			1,703			6
% of revenue	30.3		%	29.4		%		29.8		%	29.3		%
Selling, general and administrative expenses	501			504			(1)	1,495			1,408			6
% of revenue	25		%	25		%		25		%	24		%
Research and development expenses	134			132			2	391			370			6
% of revenue	7		%	7		%		6		%	6		%
Amortization of intangible assets	37			40			(8)	115			121			(5)
Restructuring charges and certain acquisition-related costs	6			9			(33)	9			39			(77)
Interest expense, net of capitalized interest	53			56			(5)	159			170			(6)
Other (income)/deductions—net	(3)			4			*	6			16			(63)
Income before provision for taxes on income	667			659			1	2,064			1,982			4
% of revenue	33		%	33		%		34		%	34		%
Provision for taxes on income	139			107			30	413			361			14
Effective tax rate	20.8		%	16.2		%		20.0		%	18.2		%
Net income before allocation to noncontrolling interests	528			552			(4)	1,651			1,621			2
Less: Net loss attributable to noncontrolling interests	(1)			—			*	(2)			(2)			—
Net income attributable to Zoetis Inc.	$	529		$	552		(4)	$	1,653		$	1,623		2
% of revenue	26		%	28		%		27		%	28		%

*Calculation not meaningful

Revenue

Three months ended September 30, 2022 vs. three months ended September 30, 2021

Total revenue increased by $12 million, or 1%, in the three months ended September 30, 2022, compared with the three months ended September 30, 2021, an increase of $100 million, or 5%, on an operational basis. Operational revenue growth was comprised primarily of the following:

volume growth from new products of approximately 4%;
price growth of approximately 1%; and
volume growth from key dermatology products of approximately 1%,

partially offset by:

volume decrease from other in-line products of approximately 1%.

Foreign exchange decreased reported revenue growth by approximately 4%.

Nine months ended September 30, 2022 vs. nine months ended September 30, 2021

Total revenue increased by $231 million, or 4%, in the nine months ended September 30, 2022, compared with the nine months ended September 30, 2021, an increase of $429 million, or 7%, on an operational basis. Operational revenue growth was comprised primarily of the following:

volume growth from new products of approximately 5%;
price growth of approximately 2%; and
volume growth from key dermatology products of approximately 2%,

partially offset by:

volume decrease from other in-line products of approximately 2%.

Foreign exchange decreased reported revenue growth by approximately 3%.

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Costs and Expenses


Cost of sales
	Three Months Ended							Nine Months Ended
	September 30,						%	September 30,						%
(MILLIONS OF DOLLARS)	2022			2021			Change	2022			2021			Change
Cost of sales	$	607		$	586		4	$	1,801		$	1,703		6
% of revenue	30.3		%	29.4		%		29.8		%	29.3		%

Three months ended September 30, 2022 vs. three months ended September 30, 2021

Cost of sales as a percentage of revenue was 30.3% in the three months ended September 30, 2022, compared with 29.4% in the three months ended September 30, 2021. The increase was primarily as a result of:

unfavorable manufacturing and other costs;
unfavorable foreign exchange;
inventory obsolescence, scrap and other charges; and
higher freight and import costs,

partially offset by:

favorable product mix; and
price increases.

Nine months ended September 30, 2022 vs. nine months ended September 30, 2021

Cost of sales as a percentage of revenue was 29.8% in the nine months ended September 30, 2022, compared with 29.3% in the nine months ended September 30, 2021. The increase was primarily as a result of:

unfavorable manufacturing and other costs;
higher freight and import costs;
unfavorable foreign exchange; and
inventory obsolescence, scrap and other charges,

partially offset by:

favorable product mix; and
price increases.


Selling, general and administrative expenses
	Three Months Ended							Nine Months Ended
	September 30,						%	September 30,						%
(MILLIONS OF DOLLARS)	2022			2021			Change	2022			2021			Change
Selling, general and administrative expenses	$	501		$	504		(1)	$	1,495		$	1,408		6
% of revenue	25		%	25		%		25		%	24		%

Three months ended September 30, 2022 vs. three months ended September 30, 2021

SG&A expenses decreased by $3 million, or 1%, in the three months ended September 30, 2022, compared with the three months ended September 30, 2021, primarily as a result of:

favorable foreign exchange; and
charitable contributions in the prior year,

partially offset by:

higher travel and entertainment expenses;
higher freight and logistics costs; and
investments in information technology.

Nine months ended September 30, 2022 vs. nine months ended September 30, 2021

SG&A expenses increased by $87 million, or 6%, in the nine months ended September 30, 2022, compared with the nine months ended September 30, 2021, primarily as a result of:

higher travel and entertainment expenses;
an increase in investments to support revenue growth;
higher freight and logistics costs;
investments in information technology;
an increase in certain compensation-related costs primarily due to additional headcount; and
higher bad debt reserves for accounts receivables,

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partially offset by:

favorable foreign exchange; and
charitable contributions in the prior year.


Research and development expenses
	Three Months Ended							Nine Months Ended
	September 30,						%	September 30,						%
(MILLIONS OF DOLLARS)	2022			2021			Change	2022			2021			Change
Research and development expenses	$	134		$	132		2	$	391		$	370		6
% of revenue	7		%	7		%		6		%	6		%

Three months ended September 30, 2022 vs. three months ended September 30, 2021

R&D expenses increased by $2 million, or 2%, in the three months ended September 30, 2022, compared with the three months ended September 30, 2021, primarily as a result of:

an increase in certain compensation-related costs to support innovation;
higher other operating costs; and
higher travel and entertainment expenses,

partially offset by:

lower spending on project investments; and
favorable foreign exchange.

Nine months ended September 30, 2022 vs. nine months ended September 30, 2021

R&D expenses increased by $21 million, or 6%, in the nine months ended September 30, 2022, compared with the nine months ended September 30, 2021, primarily as a result of:

an increase in certain compensation-related costs to support innovation;
higher other operating costs; and
increased spending driven by project investments,

partially offset by:

favorable foreign exchange.


Amortization of intangible assets
	Three Months Ended					Nine Months Ended
	September 30,				%	September 30,				%
(MILLIONS OF DOLLARS)	2022		2021		Change	2022		2021		Change
Amortization of intangible assets	$	37	$	40	(8)	$	115	$	121	(5)

Amortization of intangible assets decreased in the three and nine months ended September 30, 2022 versus the comparable prior year periods primarily due to assets that became fully amortized in the current year.


Restructuring charges and certain acquisition-related costs
	Three Months Ended					Nine Months Ended
	September 30,				%	September 30,				%
(MILLIONS OF DOLLARS)	2022		2021		Change	2022		2021		Change
Restructuring charges and certain acquisition-related costs	$	6	$	9	(33)	$	9	$	39	(77)

Three months ended September 30, 2022 vs. three months ended September 30, 2021

Restructuring charges and certain acquisition-related costs were $6 million and $9 million in the three months ended September 30, 2022 and 2021, respectively. Restructuring charges and certain acquisition-related costs in the three months ended September 30, 2022 primarily consisted of employee termination and exit costs associated with cost-reduction and productivity initiatives in certain international markets and asset impairment charges related to the consolidation of manufacturing sites in China. 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.

Nine months ended September 30, 2022 vs. nine months ended September 30, 2021

Restructuring charges and certain acquisition-related costs were $9 million and $39 million in the nine months ended September 30, 2022 and 2021, respectively. Restructuring charges and certain acquisition-related costs in the nine months ended September 30, 2022 primarily consisted of employee termination and exit costs associated with cost-reduction and productivity initiatives in certain international markets, integration costs related to recent acquisitions and asset impairment charges related to the consolidation of manufacturing sites in China. Restructuring charges and certain acquisition-related costs in the nine months ended September 30, 2021 primarily consisted of employee termination costs associated with our

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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.


Interest expense, net of capitalized interest
	Three Months Ended					Nine Months Ended
	September 30,				%	September 30,				%
(MILLIONS OF DOLLARS)	2022		2021		Change	2022		2021		Change
Interest expense, net of capitalized interest	$	53	$	56	(5)	$	159	$	170	(6)

Interest expense, net of capitalized interest, decreased in the three and nine months ended September 30, 2022 versus the comparable prior year periods. The decreases were primarily as a result of the redemption, upon maturity, of the $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, as well as higher gains on foreign exchange derivative instruments as compared to the prior year periods.


Other (income)/deductions—net
	Three Months Ended					Nine Months Ended
	September 30,				%	September 30,				%
(MILLIONS OF DOLLARS)	2022		2021		Change	2022		2021		Change
Other (income)/deductions—net	$	(3)	$	4	*	$	6	$	16	(63)

*Calculation not meaningful

The change in Other (income)/deductions—net in the three and nine months ended September 30, 2022 versus the comparable prior year periods was primarily as a result of higher interest income, partially offset by higher foreign currency losses in the current year periods.


Provision for taxes on income
	Three Months Ended							Nine Months Ended
	September 30,						%	September 30,						%
(MILLIONS OF DOLLARS)	2022			2021			Change	2022			2021			Change
Provision for taxes on income	$	139		$	107		30	$	413		$	361		14
Effective tax rate	20.8		%	16.2		%		20.0		%	18.2		%

Three months ended September 30, 2022 vs. three months ended September 30, 2021

Our effective tax rate was 20.8% for the three months ended September 30, 2022, compared with 16.2% for the three months ended September 30, 2021. The higher effective tax rate for the three months ended September 30, 2022 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 included a tax benefit related to foreign-derived intangible income.

Nine months ended September 30, 2022 vs. nine months ended September 30, 2021

Our effective tax rate was 20.0% for the nine months ended September 30, 2022, compared with 18.2% for the nine months ended September 30, 2021. The higher effective tax rate for the nine months ended September 30, 2022 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 included a tax benefit related to foreign-derived intangible income.

On August 16, 2022, the U.S. Inflation Reduction Act of 2022 (the “IRA”) was enacted which, among other changes, implements a 15% alternative minimum tax on financial statement income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. The alternative minimum tax and excise tax are effective in taxable years beginning after December 31, 2022 and the incentives to promote clean energy have various different effective dates. We do not currently expect the IRA to have a material impact on our financial results, including our annual estimated effective tax rate, when it becomes effective. We will continue to evaluate its impact as further information becomes available and as additional guidance is provided by the U.S. Department of Treasury and the Internal Revenue Service.

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Operating Segment Results

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


					% Change
	Three Months Ended					Related to
	September 30,					Foreign
(MILLIONS OF DOLLARS)	2022		2021		Total	Exchange	Operational
U.S.
Companion animal	$	819	$	775	6	—	6
Livestock	271		290		(7)	—	(7)
	1,090		1,065		2	—	2
International
Companion animal	452		427		6	(11)	17
Livestock	437		477		(8)	(8)	—
	889		904		(2)	(10)	8
Total
Companion animal	1,271		1,202		6	(4)	10
Livestock	708		767		(8)	(5)	(3)
Contract manufacturing & human health	23		21		10	(5)	15
	$	2,002	$	1,990	1	(4)	5


					% Change
	Nine Months Ended					Related to
	September 30,					Foreign
(MILLIONS OF DOLLARS)	2022		2021		Total	Exchange	Operational
U.S.
Companion animal	$	2,488	$	2,227	12	—	12
Livestock	713		775		(8)	—	(8)
	3,201		3,002		7	—	7
International
Companion animal	1,412		1,280		10	(8)	18
Livestock	1,368		1,470		(7)	(6)	(1)
	2,780		2,750		1	(7)	8
Total
Companion animal	3,900		3,507		11	(3)	14
Livestock	2,081		2,245		(7)	(4)	(3)
Contract manufacturing & human health	59		57		4	(1)	5
	$	6,040	$	5,809	4	(3)	7

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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 Ended							Related to
	September 30,							Foreign
(MILLIONS OF DOLLARS)	2022			2021			Total	Exchange	Operational
U.S.
Revenue	$	1,090		$	1,065		2	—	2
Cost of Sales	204			199			3	—	3
Gross Profit	886			866			2	—	2
Gross Margin	81.3		%	81.3		%
Operating Expenses	206			183			13	—	13
Other (income)/deductions-net	1			—			*	*	*
U.S. Earnings	679			683			(1)	—	(1)

International
Revenue	889			904			(2)	(10)	8
Cost of Sales	256			273			(6)	(7)	1
Gross Profit	633			631			—	(11)	11
Gross Margin	71.2		%	69.8		%
Operating Expenses	150			152			(1)	(10)	9
Other (income)/deductions-net	(3)			(4)			(25)	(5)	(20)
International Earnings	486			483			1	(11)	12

Total operating segments	1,165			1,166			—	(5)	5

Other business activities	(106)			(106)			—
Reconciling Items:
Corporate	(245)			(252)			(3)
Purchase accounting adjustments	(40)			(45)			(11)
Acquisition-related costs	(1)			(1)			—
Certain significant items	(6)			(12)			(50)
Other unallocated	(100)			(91)			10
Total Earnings	$	667		$	659		1

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							% Change
	Nine Months Ended							Related to
	September 30,							Foreign
(MILLIONS OF DOLLARS)	2022			2021			Total	Exchange	Operational
U.S.
Revenue	$	3,201		$	3,002		7	—	7
Cost of Sales	587			575			2	—	2
Gross Profit	2,614			2,427			8	—	8
Gross Margin	81.7		%	80.8		%
Operating Expenses	578			484			19	—	19
Other (income)/deductions-net	(6)			2			*	*	*
U.S. Earnings	2,042			1,941			5	—	5

International
Revenue	2,780			2,750			1	(7)	8
Cost of Sales	809			833			(3)	(5)	2
Gross Profit	1,971			1,917			3	(8)	11
Gross Margin	70.9		%	69.7		%
Operating Expenses	456			429			6	(7)	13
Other (income)/deductions-net	(5)			(4)			25	(12)	37
International Earnings	1,520			1,492			2	(9)	11

Total operating segments	3,562			3,433			4	(4)	8

Other business activities	(315)			(301)			5
Reconciling Items:
Corporate	(771)			(744)			4
Purchase accounting adjustments	(120)			(133)			(10)
Acquisition-related costs	(4)			(8)			(50)
Certain significant items	(10)			(44)			(77)
Other unallocated	(278)			(221)			26
Total Earnings	$	2,064		$	1,982		4

Calculation not meaningful.

Three months ended September 30, 2022 vs. three months ended September 30, 2021

U.S. operating segment

U.S. segment revenue increased by $25 million, or 2%, in the three months ended September 30, 2022, compared with the three months ended September 30, 2021, reflecting an increase of $44 million in companion animal products, partially offset by a decrease of $19 million in livestock products.

Companion animal revenue growth was driven by increased sales of parasiticides, primarily Simparica Trio®. The key dermatology portfolio also contributed to growth across both the Apoquel® and Cytopoint® brands, as well as small animal vaccines, partially offset by declines in small animal diagnostics.
Livestock revenue declined due to cattle, poultry and swine. Sales of cattle products declined as a result of generic competition, primarily for Draxxin®. Sales of products in our poultry portfolio declined due to the expanded use of lower cost alternatives and generic competition for Zoamix®, our alternative to antibiotics in medicated feed additives. Sales of swine products decreased primarily as a result of increased competition for vaccines.

U.S. segment earnings decreased by $4 million, or 1%, in the three months ended September 30, 2022, compared with the three months ended September 30, 2021, primarily due to higher operating expenses and cost of sales, partially offset by revenue growth.

International operating segment

International segment revenue decreased by $15 million, or 2%, in the three months ended September 30, 2022, compared with the three months ended September 30, 2021. Operational revenue increased by $73 million, or 8%, driven by growth of approximately $74 million in companion animal products, partially offset by a decrease of approximately $1 million in livestock products. Growth in the quarter across species was impacted by lower sales due to the war in Ukraine.

Companion animal operational revenue growth resulted from increased sales of our recently launched monoclonal antibody (mAb) products for osteoarthritis pain, Librela® and Solensia®, as well as the key dermatology portfolio across both the Apoquel and Cytopoint brands and small animal vaccines. Simparica Trio also contributed to growth in the quarter.
Livestock revenue declined due to lower sales of swine and cattle products, partially offset by increased sales in fish, sheep and poultry products. Sales of swine products decreased in the quarter due to supply constraints across international markets, as well as lower sales across

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Europe due to reduced exports to China and higher input costs for producers. Sales of cattle products declined primarily due to supply constraints and market conditions in Brazil, partially offset by favorable market conditions and price in key and emerging markets, including Australia, Argentina, China and Canada. Growth in our fish portfolio was primarily the result of increased sales of vaccines across key salmon markets, including Norway and Chile. Sales of sheep products grew as a result of favorable market conditions and new product launches in Australia. Sales of poultry products grew due to strong results in Latin America.

Additionally, International segment revenue was unfavorably impacted by foreign exchange which decreased revenue by approximately $88 million, or 10%, primarily driven by the euro, British pound, Japanese yen, Turkish lira and Australian dollar.

International segment earnings increased by $3 million, or 1%, in the three months ended September 30, 2022, compared with the three months ended September 30, 2021. Operational earnings growth was $57 million, or 12%, primarily due to revenue and gross margin growth, partially offset by higher operating expenses.

Nine months ended September 30, 2022 vs. nine months ended September 30, 2021

U.S. operating segment

U.S. segment revenue increased by $199 million, or 7%, in the nine months ended September 30, 2022, compared with the nine months ended September 30, 2021, reflecting an increase of $261 million in companion animal products, partially offset by a decrease of $62 million in livestock products.

Companion animal revenue growth was driven primarily by increased sales of parasiticides, primarily Simparica Trio. In-line product growth benefited from increased sales of our key dermatology portfolio and vaccines, partially offset by declines in small animal diagnostics.
Livestock revenue declined due to cattle and poultry, partially offset by growth in swine. Sales of cattle products declined as a result of generic competition for Draxxin and unfavorable conditions in beef and dairy markets, including increased input costs and dry weather conditions. Sales of products in our poultry portfolio declined due to the expanded use of lower cost alternatives resulting from reduced disease pressure from smaller flock sizes and generic competition for Zoamix, the company's alternative to antibiotics in medicated feed additives. Sales of swine products grew slightly as a result of favorable market conditions for producers and increased disease prevalence.

U.S. segment earnings increased by $101 million, or 5%, in the nine months ended September 30, 2022, compared with the nine months ended September 30, 2021, primarily due to revenue and gross margin growth, partially offset by higher operating expenses.

International operating segment

International segment revenue increased by $30 million, or 1%, in the nine months ended September 30, 2022, compared with the nine months ended September 30, 2021. Operational revenue increased by $227 million, or 8%, driven by growth of approximately $237 million in companion animal products, partially offset by a decrease of approximately $10 million in livestock products. Growth across species was impacted by lower sales due to the war in Ukraine.

Companion animal operational revenue growth was driven primarily by increased sales of our key dermatology portfolio, the recent launches of our mAb products, Librela and Solensia, and growth in the Simparica franchise. Growth across the broader in-line portfolio benefited from increased pet ownership and standards of care.
Livestock operational revenue declined due to decreased sales of swine products, partially offset by increased sales of fish, cattle and sheep products. Sales of swine products decreased due to lower pork prices and COVID-related lockdowns in China, which temporarily impacted our supply chain in the market, as well as a difficult comparative period versus the prior year. Swine was also impacted by supply constraints across other international markets, as well as lower sales across Europe due to reduced exports to China and higher input costs for producers. Growth in our fish portfolio was primarily the result of increased sales of vaccines across key salmon markets, including Chile and Norway. Sales of cattle products grew due to favorable market conditions and price in key and emerging markets, including Australia, Turkey, Argentina and China, partially offset by supply constraints and market conditions in Brazil. Sales of sheep products grew as a result of favorable market conditions and new product launches in Australia.
Additionally, International segment revenue was unfavorably impacted by foreign exchange which decreased revenue by approximately $197 million, or 7%, primarily driven by the euro, Turkish lira, Japanese yen, Australian dollar and British pound.

International segment earnings increased by $28 million, or 2%, in the nine months ended September 30, 2022, compared with the nine months ended September 30, 2021. Operational earnings growth was $160 million, or 11%, 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 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, 2022 vs. three months ended September 30, 2021

In the three months ended September 30, 2022, Other business activities was flat compared with the three months ended September 30, 2021, reflecting an increase in R&D costs due to an increase in certain compensation-related costs to support innovation and facility costs, offset by favorable foreign exchange.

Nine months ended September 30, 2022 vs. nine months ended September 30, 2021

Other business activities net loss increased by $14 million in the nine months ended September 30, 2022, compared with the nine months ended September 30, 2021, reflecting an increase in R&D costs due to an increase in certain compensation-related costs to support innovation, increase in facility costs and an increase in project investments, partially offset by favorable foreign exchange and higher earnings in our human health business.

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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, 2022 vs. three months ended September 30, 2021

Corporate expenses decreased by $7 million, or 3%, in the three months ended September 30, 2022, compared with the three months ended September 30, 2021, primarily due to lower compensation-related costs and favorable interest expense and higher interest income, as well as charitable contributions in the prior year, partially offset by unfavorable foreign exchange and investments in information technology.

Other unallocated expenses increased by $9 million, or 10%, in the three months ended September 30, 2022, compared with the three months ended September 30, 2021, primarily due to higher manufacturing costs and freight charges, partially offset by favorable foreign exchange.

Nine months ended September 30, 2022 vs. nine months ended September 30, 2021

Corporate expenses increased by $27 million, or 4%, in the nine months ended September 30, 2022, compared with the nine months ended September 30, 2021, primarily due to unfavorable foreign exchange and investments in information technology, partially offset by lower compensation-related costs and interest expense, as well as higher interest income and charitable contributions in the prior year.

Other unallocated expenses increased by $57 million, or 26%, in the nine months ended September 30, 2022, compared with the nine months ended September 30, 2021, primarily due to higher manufacturing costs and freight charges, partially offset by favorable foreign exchange.

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 certain acquisitions, 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.

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.

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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 asset impairments; adjustments related to the resolution of certain tax positions; significant currency devaluation; the impact of adopting certain significant, event-driven tax legislation; costs related to our CEO transition in fiscal 2020; 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 Ended					Nine Months Ended
	September 30,				%	September 30,				%
(MILLIONS OF DOLLARS)	2022		2021		Change	2022		2021		Change
GAAP reported net income attributable to Zoetis	$	529	$	552	(4)	$	1,653	$	1,623	2
Purchase accounting adjustments—net of tax	31		35		(11)	92		103		(11)
Acquisition-related costs—net of tax	1		1		—	3		7		(57)
Certain significant items—net of tax	5		9		(44)	10		33		(70)
Non-GAAP adjusted net income(a)	$	566	$	597	(5)	$	1,758	$	1,766	—

*Calculation not meaningful.

(a) The effective tax rate on adjusted pretax income was 20.9% and 16.7% for the three months ended September 30, 2022 and 2021, respectively. The higher effective tax rate for the three months ended September 30, 2022, compared with 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, 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 included a tax benefit related to foreign-derived intangible income.

The effective tax rate on adjusted pretax income was 20.1% and 18.6% for the nine months ended September 30, 2022 and 2021, respectively. The higher effective tax rate for the nine months ended September 30, 2022, compared with 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, 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 included a tax benefit related to foreign-derived intangible income.

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


	Three Months Ended					Nine Months Ended
	September 30,				%	September 30,				%
	2022		2021		Change	2022		2021		Change
Earnings per share—diluted(a):
GAAP reported EPS attributable to Zoetis —diluted	$	1.13	$	1.16	(3)	$	3.51	$	3.40	3
Purchase accounting adjustments—net of tax	0.07		0.07		—	0.20		0.22		(9)
Acquisition-related costs—net of tax	—		—		*	—		0.01		*
Certain significant items—net of tax	0.01		0.02		(50)	0.02		0.07		(71)
Non-GAAP adjusted EPS—diluted	$	1.21	$	1.25	(3)	$	3.73	$	3.70	1

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.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2022		2021		2022		2021
Interest expense, net of capitalized interest	$	53	$	56	$	159	$	170
Interest income	13		1		20		4
Income taxes	149		120		442		403
Depreciation	66		56		195		171
Amortization	9		9		31		27

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2022		2021		2022		2021
Purchase accounting adjustments:
Amortization and depreciation	$	40	$	45	$	120	$	133


Total purchase accounting adjustments—pre-tax	40		45		120		133
Income taxes(a)	9		10		28		30
Total purchase accounting adjustments—net of tax	31		35		92		103
Acquisition-related costs:

Integration costs	1		1		4		6
Restructuring costs	—		—		—		2


Total acquisition-related costs—pre-tax	1		1		4		8
Income taxes(a)	—		—		1		1
Total acquisition-related costs—net of tax	1		1		3		7
Certain significant items:


Other restructuring charges and cost-reduction/productivity initiatives(b)	4		7		7		22
Certain asset impairment charges(c)	2		5		6		19


Net loss on sale of assets	—		—		—		3
Other	—		—		(3)		—
Total certain significant items—pre-tax	6		12		10		44
Income taxes(a)	1		3		—		11
Total certain significant items—net of tax	5		9		10		33
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax	$	37	$	45	$	105	$	143

(a) 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 tax benefits related to a deferred adjustment as a result of a change in tax basis for the nine months ended September 30, 2022 and a remeasurement of deferred taxes as a result of changes in statutory tax rates for the three and nine months ended September 30, 2022 and 2021.

Income taxes in Certain significant items also includes tax expense related to changes in valuation allowances for the nine months ended September 30, 2022.

(b) For the three and nine months ended September 30, 2022, primarily represents employee termination and exit costs associated with cost-reduction and productivity initiatives in certain international markets, as well as product transfer costs.

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.

(c) For the three and nine months ended September 30, 2022, represents inventory and certain asset impairment charges primarily related to the consolidation of manufacturing sites in China.

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.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2022		2021		2022		2021
Cost of sales:
Purchase accounting adjustments	$	1	$	2	$	3	$	5

Inventory write-offs	—		1		4		2


Other	1		—		4		5
Total Cost of sales	2		3		11		12

Selling, general & administrative expenses:
Purchase accounting adjustments	8		8		22		23




Total Selling, general & administrative expenses	8		8		22		23

Research & development expenses:
Purchase accounting adjustments	—		—		—		1
Total Research & development expenses	—		—		—		1

Amortization of intangible assets:
Purchase accounting adjustments	31		35		95		104
Total Amortization of intangible assets	31		35		95		104

Restructuring charges and certain acquisition-related costs:

Integration costs	1		1		4		6
Employee termination costs	2		7		2		17
Asset impairments	2		—		2		13
Exit costs	1		1		1		3
Total Restructuring charges and certain acquisition-related costs	6		9		9		39

Other (income)/deductions—net:
Net loss on sale of assets	—		—		—		3

Asset impairments	—		3		—		3
Other	—		—		(3)		—
Total Other (income)/deductions—net	—		3		(3)		6

Provision for taxes on income	10		13		29		42

Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax	$	37	$	45	$	105	$	143

Analysis of the condensed consolidated statements of comprehensive income

Changes in other comprehensive income for the periods presented are primarily related to foreign currency translation adjustments and unrealized gains/(losses) on derivative instruments. The foreign currency translation adjustment 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. Unrealized gains/(losses) on the changes in the fair value of derivative instruments are recorded within Accumulated other comprehensive income/(loss) and reclassified into earnings depending on the nature and purpose of the financial instrument, as described in Note 9. Financial Instruments of the Notes to Condensed Consolidated Financial Statements.

Analysis of the condensed consolidated balance sheets

September 30, 2022 vs. December 31, 2021

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.

Inventories increased primarily as a result of the build-up of certain products and materials for increased demand, new product launches and to mitigate potential supply constraints, as well as the timing of material purchases and product shipments.

Other current assets increased primarily due to the mark-to-market adjustment of derivative instruments, collateral posted related to derivative contracts and the reclassification of derivative instruments maturing within one year from Other noncurrent assets.

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

The increase in Operating lease right of use assets and Operating lease liabilities reflect assets and liabilities established through new and amended lease obligations, partially offset by lease amortization and payments.

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Identifiable intangible assets, less accumulated amortization decreased primarily as a result of amortization expense and the impact of foreign exchange, partially offset by intangible asset additions from acquisitions.

Other noncurrent assets increased primarily due to the mark-to-market adjustment of derivative instruments and the reclassification of collateral received related to derivative contracts to Other current liabilities, partially offset by the reclassification of derivative instruments maturing within one year to Other current assets.

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

Accrued compensation and related items decreased due to the payments of 2021 annual incentive bonuses and savings plan contributions to eligible employees, as well as payments for sales incentive bonuses, partially offset by the accrual of 2022 annual incentive bonuses and savings plan contributions to eligible employees, sales incentive bonus accrual and the timing of the payment of payroll taxes.

Other current liabilities increased primarily due to collateral received related to derivative contracts during the period and a reclassification of collateral received from Other noncurrent assets.

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.

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)	2022		2021		Change
Net cash provided by (used in):
Operating activities	$	1,171	$	1,534	(24)
Investing activities	(445)		(316)		41
Financing activities	(1,684)		(1,548)		9
Effect of exchange-rate changes on cash and cash equivalents	(20)		—		*
Net decrease in cash and cash equivalents	$	(978)	$	(330)	*

*Calculation not meaningful.

Operating activities

Nine months ended September 30, 2022 vs. nine months ended September 30, 2021

Net cash provided by operating activities was $1,171 million for the nine months ended September 30, 2022, and $1,534 million for the nine months ended September 30, 2021. The decrease in operating cash flows was primarily attributable to the timing of receipts and payments in the ordinary course of business and the inventory build-up of certain products for increased demand and to mitigate potential supply constraints, partially offset by higher net income as adjusted by non-cash items.

Investing activities

Nine months ended September 30, 2022 vs. nine months ended September 30, 2021

Our net cash used in investing activities was $445 million for the nine months ended September 30, 2022, compared with net cash used in investing activities of $316 million for the nine months ended September 30, 2021. The net cash used in investing activities for 2022 was primarily due to capital expenditures and acquisitions, partially offset by net proceeds from interest rate swaps. The net cash used in investing activities for 2021 was primarily due to capital expenditures and acquisitions.

Financing activities

Nine months ended September 30, 2022 vs. nine months ended September 30, 2021

Our net cash used in financing activities was $1,684 million for the nine months ended September 30, 2022, compared with net cash used in financing activities of $1,548 million for the nine months ended September 30, 2021. The net cash used in financing activities for 2022 was primarily attributable to the purchase of treasury shares, the payment of dividends and taxes paid on withholding shares, partially offset by proceeds in connection with the issuance of common stock under our equity incentive plan. 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 withholding shares, partially offset by proceeds in connection with the issuance of common stock under our equity incentive plan.

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 cash needs for the next twelve months and beyond, this may be subject to the environment in which we operate. Risks to our meeting 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. While we do not anticipate it, 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.

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Selected measures of liquidity and capital resources

Certain relevant measures of our liquidity and capital resources follow:


	September 30,		December 31,
(MILLIONS OF DOLLARS)	2022		2021
Cash and cash equivalents	$	2,507	$	3,485
Accounts receivable, net(a)	1,189		1,133
Short-term borrowings	3		—
Current portion of long-term debt	1,350		—
Long-term debt, net of discount and issuance costs	5,210		6,592
Working capital	3,671		5,133
Ratio of current assets to current liabilities	2.27:1		3.86:1

(a) Accounts receivable are usually collected over a period of 45 to 75 days*.* For the nine months ended September 30, 2022 compared with December 31, 2021, the number of days that accounts receivables were 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, 2022 and December 31, 2021. There were no amounts drawn under the credit facility as of September 30, 2022 or December 31, 2021.

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, 2022, we had access to $50 million of lines of credit which expire at various times and are generally renewed annually. There were $3 million of borrowings outstanding related to these facilities as of September 30, 2022 and and no borrowings outstanding related to these facilities as of December 31, 2021.

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.

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 is being 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 offering) in a private placement, with an original issue discount of $10 million.

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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. 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:


Description	Principal Amount	Interest Rate	Terms
2013 Senior Notes due 2023	$1,350 million	3.250%	Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2023
2015 Senior Notes due 2025	$750 million	4.500%	Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2025
2017 Senior Notes due 2027	$750 million	3.000%	Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2027
2018 Senior Notes due 2028	$500 million	3.900%	Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2028
2020 Senior Notes due 2030	$750 million	2.000%	Interest due semi annually, not subject to amortization, aggregate principal due on May 15, 2030
2013 Senior Notes due 2043	$1,150 million	4.700%	Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2043
2017 Senior Notes due 2047	$500 million	3.950%	Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2047
2018 Senior Notes due 2048	$400 million	4.450%	Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2048
2020 Senior Notes due 2050	$500 million	3.000%	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.

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
	Paper	Long-term Debt		Date of
Name of Rating Agency	Rating	Rating	Outlook	Last Action
Moody’s	P-2	Baa1	Stable	August 2017
S&P	A-2	BBB	Stable	December 2016

Share Repurchase Program

In December 2018, our Board of Directors authorized a $2.0 billion share repurchase program. This program was completed as of June 30, 2022. In December 2021, our Board of Directors authorized an additional $3.5 billion share repurchase program. As of September 30, 2022, there was approximately $3.0 billion 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. During the first nine months of 2022, approximately 6.7 million shares were repurchased for $1.2 billion.

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, 2022 and December 31, 2021, recorded amounts for the estimated fair value of these indemnifications are not significant.

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New accounting standards

Recently Issued Accounting Standards Not Adopted as of September 30, 2022

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 future actions, business plans or prospects, prospective products, product approvals or products under development, product and supply chain disruptions, the impact of the COVID-19 pandemic, 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 continuing decline in global economic conditions, including the current crisis in Ukraine, and inflation;
the impact of the COVID-19 global pandemic on our business, global supply chain, customers and workforce;
a cyber-attack, information security breach or other misappropriation of our data;
unanticipated safety, quality or efficacy concerns or issues about our 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 or delays in the development or commercialization of new products;
consolidation of our customers and distributors;
changes in the distribution channel for companion animal products;
the economic, political, legal and business environment of the foreign jurisdictions in which we do business;
failure to successfully acquire businesses, license rights or products, integrate businesses, form and manage alliances or divest businesses;
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;
increased regulation or decreased governmental support relating to the raising, processing or consumption of food-producing animals;
fluctuations in foreign exchange rates and potential currency controls;
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;
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 or 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. 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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